<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 30, 2000
REGISTRATION NO. 333-42580
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
AZURIX CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4941 76-0589114
(State or other jurisdiction of 4952 (I.R.S. Employer
incorporation or organization) (Primary Standard Industrial Identification Number)
Classification Code Number)
</TABLE>
JOHN C. ALE
EXECUTIVE DIRECTOR AND GENERAL COUNSEL
AZURIX CORP.
333 CLAY STREET, SUITE 1000
HOUSTON, TEXAS 77002
(713) 646-6001
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices and agent for service)
Copy to:
SHELLEY A. BARBER
VINSON & ELKINS L.L.P.
2300 FIRST CITY TOWER
1001 FANNIN STREET
HOUSTON, TEXAS 77002-6760
(713) 758-2222
(713) 758-2346 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable following the effectiveness of this Registration
Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
AZURIX CORP.
OFFER TO EXCHANGE
<TABLE>
<S> <C> <C>
$240,000,000 10 3/8% Series B L100,000,000 10 3/8% Series B $200,000,000 10 3/4% Series B
Senior Dollar Notes due 2007 Senior Sterling Notes due Senior Dollar Notes due 2010
for any and all outstanding 2007 for any and all for any and all outstanding
10 3/8% Series A Senior outstanding 10 3/8% Series A 10 3/4% Series A Senior
Dollar Notes due 2007 Senior Sterling Notes due Dollar Notes due 2010
2007
</TABLE>
---------------------
THE NEW NOTES:
- TERMS: The new notes will be freely tradeable and otherwise substantially
identical to the old notes.
- MATURITY: The new 7-year notes will mature on February 15, 2007, and the new
10-year notes will mature on February 15, 2010.
- INTEREST: We will pay interest on the new notes on February 15 and August 15
of each year, commencing February 15, 2001.
- INTEREST ACCRUAL: Interest on the new notes will accrue from the most recent
date to which interest has been paid on the old notes.
- RANKING: Each series of the new notes will be unsecured and will be senior in
right of payment to all of our subordinated indebtedness. Each series of the
new notes will rank equally in right of payment with all of our existing and
future indebtedness that is not by its terms subordinated to the new notes.
- LISTING: We have applied to list the new sterling notes on the Luxembourg
Stock Exchange.
THE EXCHANGE OFFER:
- THREE OFFERS: The exchange offer consists of three separate offers, each
independent of the others, to exchange new notes for old notes of the same
tenor, rate and currency.
- EXPIRATION: 5:00 p.m., New York City time, on September 29, 2000, unless
otherwise extended.
- CONDITIONS: The exchange offer is not conditioned upon any minimum aggregate
principal amount of old notes being tendered.
- TENDERED NOTES: All old notes that are validly tendered and not validly
withdrawn will be exchanged for an equal principal amount of new notes that
are registered under the Securities Act of 1933.
- WITHDRAWAL: Tenders of old notes may be withdrawn at any time prior to the
expiration of the exchange offer.
- TAX CONSEQUENCES: The exchange of old notes for new notes will not be a
taxable event for U.S. federal income tax purposes.
---------------------
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 7 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NEW NOTES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this prospectus is August 30, 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Forward-Looking Statements.................................. i
Where You Can Find More Information......................... ii
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Use of Proceeds............................................. 19
Capitalization.............................................. 20
Selected Historical Consolidated Financial Data............. 22
Currency Exchange Rates..................................... 25
Azurix...................................................... 26
The Exchange Offer.......................................... 27
Description of the New Notes................................ 37
United States Federal Income Tax Considerations............. 75
Plan of Distribution........................................ 81
Notice to European Residents................................ 83
Listing and General Information............................. 84
Legal Matters............................................... 84
Experts..................................................... 85
</TABLE>
---------------------
THIS PROSPECTUS IS PART OF A REGISTRATION STATEMENT THAT WE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. YOU SHOULD RELY ONLY ON THE INFORMATION
PROVIDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED
ANY PERSON TO PROVIDE YOU WITH INFORMATION OTHER THAN THAT PROVIDED IN THIS
PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH ADDITIONAL OR
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE ON THE FRONT OF
THIS DOCUMENT AND THAT ANY INFORMATION INCORPORATED BY REFERENCE IS ACCURATE
ONLY AS OF THE DATE OF THE DOCUMENT INCORPORATED BY REFERENCE.
---------------------
FORWARD-LOOKING STATEMENTS
This prospectus, including the information incorporated by reference,
includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Although we believe our expectations reflected in these forward-looking
statements are based on reasonable assumptions, we cannot assure you that these
assumptions will prove to have been correct. Important factors that could cause
actual results to differ materially from the expectations reflected in these
forward-looking statements include, among other things:
- political developments in foreign countries;
- our ability to enter new water and wastewater markets in the United
States and in other jurisdictions;
- the timing and extent of deregulation of water resource markets in the
United States and in other countries;
- regulatory developments in the United States and in other countries,
including tax and environmental legislation and regulation;
- the timing and extent of efforts by governments to privatize water and
wastewater industries;
- the timing and extent of changes in non-U.S. currencies and interest
rates;
- the extent of success in securing new service contracts, acquiring water
and wastewater assets and developing and managing water resources;
i
<PAGE> 4
- our ability to access the debt and equity markets during periods covered
by the forward-looking statements;
- regulatory developments affecting the purchase and sale of water
resources;
- acceptance and utilization by buyers and sellers of an internet
marketplace for water transfers;
- our ability to enter into, and retain, strategic relationships with
governmental and quasi-governmental agencies;
- increased competition and technological changes in the internet-based
marketplace;
- our ability to hire and train, in a highly competitive market,
individuals highly skilled in the internet and e-commerce;
- the accuracy of our assessment of risks related to acquisitions, projects
and contracts, and whether these risks materialize;
- the timing and success of efforts to develop international water and
wastewater infrastructure projects;
- the ability of counterparties to financial risk management instruments
and other contracts with us to meet their financial commitments to us;
and
- other factors discussed elsewhere in this prospectus and in our other
filings with the Securities and Exchange Commission.
We use words like "anticipate," "believe," "estimate," "intend," "project,"
"plan," "expect" and similar expressions to help identify forward-looking
statements in this prospectus.
For additional factors that could affect the validity of our
forward-looking statements, you should read "Risk Factors" beginning on page 7.
In light of these and other risks, uncertainties and assumptions, the actual
events or results may be very different from those expressed or implied in the
forward-looking statements in this prospectus or may not occur. We have no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
---------------------
WHERE YOU CAN FIND MORE INFORMATION
This prospectus incorporates important business and financial information
about us that we have not included in or delivered with this prospectus. This
information is available without charge upon written or oral request. You should
make any request, either in writing or by telephone, to Norma A. Tidrow,
Corporate Secretary at the address listed below. To ensure timely delivery, you
should request the information no later than September 22, 2000.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 and, in accordance therewith, are required to file current reports
on Form 8-K, quarterly reports on Form 10-Q, annual reports on Form 10-K, proxy
statements and other information with the Securities and Exchange Commission.
Reports, proxy statements and other information filed by us with the Commission
pursuant to the informational requirements of the Securities Exchange Act of
1934 may be inspected and copied at the public reference facilities maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such information may be obtained at prescribed rates by writing to the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549. Information on the operation of the Public Reference Section may be
obtained by calling the Commission at (800) 732-0330. The Commission also
maintains a website (http://www.sec.gov) that contains reports, proxy statements
and other information regarding registrants, including us, that file
electronically with the Commission. Our common stock is listed on the New York
Stock Exchange under the symbol "AZX" and, as a result, the periodic reports,
proxy statements and other information filed by us with the Commission can be
ii
<PAGE> 5
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005. Copies of our reports, proxy statements and other
information also will be made available free of charge at the office of our
agent, Banque Generale du Luxembourg in Luxembourg.
We are incorporating by reference information that we file with the
Commission, which means that we are disclosing important information to you by
referring you to those documents. The information we incorporate by reference is
an important part of this prospectus, and later information that we file with
the Commission automatically will update and supersede this information. We
incorporate by reference our annual report on Form 10-K for the year ended
December 31, 1999, our quarterly reports on Form 10-Q for the quarters ended
March 31, 2000 and June 30, 2000, our current reports on Form 8-K filed February
15, 2000 and January 28, 2000, and any future filings we make with the
Commission under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act until the offering made by this prospectus terminates.
You may request a copy of these filings (other than an exhibit to those
filings unless we have specifically incorporated that exhibit by reference into
the filing), without charge, by writing or telephoning us at the following
address:
Azurix Corp.
333 Clay Street, Suite 1000
Houston, Texas 77002
Attention: Norma A. Tidrow
Corporate Secretary
Telephone: (713) 646-6001
---------------------
The new notes may not be offered or sold in or into the United Kingdom,
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses (or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom for the purposes of
the Public Offers of Securities Regulations 1995), and this prospectus may only
be issued or passed on to persons in the United Kingdom if such persons are of a
kind described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or if such persons are persons to whom
this prospectus may otherwise lawfully be issued or passed on.
---------------------
INTERESTS IN THE NEW NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY
FORM. WE EXPECT THAT THE NEW NOTES OF EACH SERIES EXCHANGED WILL BE ISSUED IN
THE FORM OF TWO OR MORE GLOBAL NOTES (THE "GLOBAL NOTES"). DOLLAR-DENOMINATED
GLOBAL NOTES WILL BE DEPOSITED WITH A CUSTODIAN FOR THE DEPOSITARY TRUST COMPANY
("DTC") AND REGISTERED IN THE NAME OF CEDE & CO., ITS NOMINEE. TRANSFERS OF
INTERESTS IN THE DOLLAR-DENOMINATED GLOBAL NOTES ("DOLLAR BOOK-ENTRY INTERESTS")
WILL BE EFFECTED THROUGH RECORDS MAINTAINED BY DTC AND ITS PARTICIPANTS,
INCLUDING THE EUROCLEAR SYSTEM ("EUROCLEAR") AND CLEARSTREAM BANKING
("CLEARSTREAM"), FORMERLY KNOWN AS CEDELBANK. THE STERLING-DENOMINATED GLOBAL
NOTE WILL BE DEPOSITED WITH A COMMON DEPOSITARY FOR EUROCLEAR. TRANSFERS OF
INTERESTS IN THE STERLING-DENOMINATED GLOBAL NOTE ("STERLING BOOK-ENTRY
INTERESTS") WILL BE EFFECTED THROUGH RECORDS MAINTAINED BY EUROCLEAR AND ITS
PARTICIPANTS. TRANSFERS OF STERLING BOOK-ENTRY INTERESTS MAY NOT BE MADE THROUGH
CLEARSTREAM. AFTER THE INITIAL ISSUANCE OF THE GLOBAL NOTES, THE NEW NOTES WILL
BE ISSUED IN DEFINITIVE REGISTERED FORM IN MINIMUM DENOMINATIONS OF $1,000 OR
L1,000, AS APPLICABLE, AND INTEGRAL MULTIPLES THEREOF, ONLY UNDER THE
CIRCUMSTANCES DESCRIBED IN THE SECTION "DESCRIPTION OF THE NEW NOTES -- FORM OF
NEW NOTES."
iii
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus but does
not contain all of the information that is important to you. To understand all
of the terms of the exchange offer and to attain a more complete understanding
of our business and financial situation, you should read carefully this entire
prospectus, including the information incorporated by reference. In this
prospectus, the term "old notes" refers to the Series A senior notes issued on
February 18, 2000, and the term "new notes" refers to the Series B senior notes
offered in the exchange offer.
AZURIX CORP.
We are a global water company engaged in the business of owning, operating
and managing water and wastewater assets, providing water and wastewater-related
services and developing and managing water resources. Enron Corp., one of the
world's leading integrated natural gas and electricity companies, formed us on
January 29, 1998 to pursue opportunities in the global water industry. Enron and
Marlin Water Trust each own a 50% voting interest in Atlantic Water Trust, which
currently owns approximately 67% of our common stock, with public stockholders
owning the remainder.
Our shares are listed on the New York Stock Exchange under the symbol
"AZX."
RECENT DEVELOPMENTS
On August 25, 2000, we announced that Rebecca P. Mark resigned as our
chairman and chief executive officer. In connection with Ms. Mark's resignation,
John L. Garrison, president and chief operating officer, was elected president
and chief executive officer and Herbert S. Winokur, Jr., currently a member of
our board of directors, was elected interim chairman of the board of directors.
We also announced that we are going to conduct a thorough review of all of our
businesses, our cost structure and our strategy to determine how best to improve
our financial performance and to maximize shareholder value.
OUR PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 333 Clay Street, Houston,
Texas 77002 (telephone number (713) 646-6001).
SUMMARY OF THE EXCHANGE OFFER
On February 18, 2000, we completed the private offering of the old notes.
We entered into a registration rights agreement at the time of the private
offering in which we agreed to complete an offer to exchange the old notes for
new notes that would be registered under the Securities Act and that otherwise
would be substantially identical to the old notes. By means of this prospectus,
we are offering you the right to exchange your old notes for these new notes.
You should read the discussion under the headings "-- Summary of Terms of
the New Notes" beginning on page 4 and "Description of the New Notes" beginning
on page 37 for further information regarding the new notes.
We have summarized the terms of the exchange offer below. You should read
the discussion under the headings "The Exchange Offer" beginning on page 27 and
"Plan of Distribution" beginning on page 81 for further information regarding
the exchange offer and resale of the new notes.
The Exchange Offer......... The exchange offer consists of three separate
offers, each independent of the others, to exchange
new notes for old notes of the same tenor, rate and
currency. We are offering to exchange:
- up to $240 million aggregate principal amount of
new 7-year dollar notes for up to $240 million
aggregate principal amount of old 7-year
1
<PAGE> 7
dollar notes;
- up to L100 million aggregate principal amount
of new 7-year sterling notes for up to L100
million aggregate principal amount of old
7-year sterling notes; and
- up to $200 million aggregate principal amount of
new 10-year dollar notes for up to $200 million
aggregate principal amount of old 10-year dollar
notes.
Old dollar notes and old sterling notes may be
exchanged only in integral multiples of $1,000 and
L1,000, respectively.
Expiration Date............ The exchange offer will expire at 5:00 p.m., New
York City time, on September 29, 2000, or such
later date and time to which we extend it.
Withdrawal of Tenders...... You may withdraw your tender of old notes at any
time prior to the expiration date. We will return
to you, without charge, promptly after the
expiration or termination of the exchange offer any
old notes that you tendered but that were not
accepted for exchange.
Conditions to the Exchange
Offer...................... We will not be required to accept old notes for
exchange if the exchange offer would violate
applicable United States federal law.
The exchange offer is not conditioned upon any
minimum aggregate principal amount of old notes
being tendered. Please read the section "The
Exchange Offer -- Conditions to the Exchange Offer"
on page 30 for more information regarding the
conditions to the exchange offer.
Procedures for Tendering
Old Notes.................. If your old notes are held through DTC and you wish
to participate in the exchange offer, you may do so
through the automated tender offer program of DTC.
If your old notes are held through Euroclear or
Clearstream and you wish to participate in the
exchange offer, you may do so through the standard
transfer procedures of Euroclear or Clearstream. If
you tender under DTC's ATOP program or through the
standard transfer procedures of Euroclear or
Clearstream, you will agree to be bound by the
letter of transmittal that we are providing with
this prospectus as though you had signed the letter
of transmittal. By signing or agreeing to be bound
by the letter of transmittal, you will represent to
us that, among other things:
- any new notes that you receive will be acquired
in the ordinary course of your business;
- you have no arrangement or understanding with
any person or entity to participate in the
distribution of the new notes;
- if you are not a broker-dealer, you are not
engaged in and do not intend to engage in the
distribution of the new notes;
- if you are a broker-dealer that will receive
new notes for your own account in exchange for
old notes that were acquired as a result of
market-making activities, you will deliver a
prospectus, as required by law, in connection
with any resale of such new notes; and
- you are not our "affiliate," as defined in Rule
405 of the Securities Act of 1933, or, if you
are our affiliate, you will comply with any
2
<PAGE> 8
applicable registration and prospectus delivery
requirements of the Securities Act of 1933.
Special Procedures for
Beneficial Owners.......... If you own a beneficial interest in old notes that
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee,
and you wish to tender the old notes in the
exchange offer, you should contact the registered
holder promptly and instruct the registered holder
to tender on your behalf.
Guaranteed Delivery
Procedures................. If you wish to tender your old notes and cannot
comply, prior to the expiration date, with the
applicable procedures under the automated tender
offer program of DTC or the standard transfer
procedures of Euroclear or Clearstream, you must
tender your old notes according to the guaranteed
delivery procedures described in "The Exchange
Offer -- Guaranteed Delivery Procedures" beginning
on page 34.
U.S. Federal Income Tax
Considerations........... The exchange of old notes for new notes in the
exchange offer will not be a taxable event for U.S.
federal income tax purposes. Please read "United
States Federal Income Tax Considerations" on page
75.
Use of Proceeds............ We will not receive any cash proceeds from the
issuance of new notes.
THE EXCHANGE AGENT
We have appointed The Chase Manhattan Bank as exchange agent for the
exchange offer. Please direct questions and requests for assistance, requests
for additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery to The Chase Manhattan Bank,
attention Gary Jones, (713) 216-6577. If you are not tendering under DTC's
automated tender offer program or the standard transfer procedures of Euroclear
or Clearstream, you should send the letter of transmittal and any other required
documents to the exchange agent as follows:
<TABLE>
<S> <C>
For Delivery by Mail: For Delivery by Hand or For Overnight
The Chase Manhattan Bank Delivery Only:
Attention: Frank Ivins -- Registered Bond The Chase Manhattan Bank
Events Attention: Frank Ivins -- Registered Bond
Personal & Confidential Events
P. O. Box 2320 Personal & Confidential
Dallas, Texas 75221-2320 2001 Bryan Street, 9th Floor
Facsimile Transmission (214) 468-6494 Dallas, Texas 75201
(for eligible institutions only) Confirm by Telephone: (214) 468-6464
</TABLE>
3
<PAGE> 9
SUMMARY OF TERMS OF THE NEW NOTES
The new notes will be freely tradeable and otherwise substantially
identical to the old notes. The new notes will not have registration rights or
provisions for additional interest. The new notes will evidence the same debt as
the old notes, and the old notes and the new notes will be governed by the same
indenture.
Issuer..................... Azurix Corp. As used in this section, "-- Summary
of Terms of the New Notes," the terms "Azurix,"
"we," "our" and "us" refer solely to Azurix Corp.
and not to any of its subsidiaries.
Notes Offered.............. $240,000,000 principal amount of 10 3/8% Series B
Senior Notes due 2007, referred to as new 7-year
dollar notes.
L100,000,000 principal amount of 10 3/8% Series B
Senior Notes due 2007, referred to as new 7-year
sterling notes or new sterling notes.
$200,000,000 principal amount of 10 3/4% Series B
Senior Notes due 2010, referred to as new 10-year
dollar notes.
We sometimes refer to the new 7-year dollar notes
and the new 10-year dollar notes together as the
new dollar notes. We sometimes refer to the new
7-year dollar notes and the new 7-year sterling
notes together as the new 7-year notes. We
sometimes refer to the new 7-year dollar notes, the
new 7-year sterling notes and the new 10-year
dollar notes together as the new notes. We also
sometimes use corresponding references in relation
to the old notes.
Maturities................. February 15, 2007 for the new 7-year dollar notes.
February 15, 2007 for the new 7-year sterling
notes.
February 15, 2010 for the new 10-year dollar notes.
Interest Payment Dates..... February 15 and August 15 of each year, commencing
February 15, 2001.
Ranking.................... Each series of the new notes:
- will be general, unsecured obligations of
Azurix;
- will rank equally in right of payment with the
other series of new notes and with all existing
and future unsecured senior debt of Azurix; and
- will effectively rank subordinate to any
secured debt Azurix is permitted by the terms
of the indenture to, and does, issue.
As of June 30, 2000, Azurix had approximately
$707.2 million of unsecured senior indebtedness
outstanding, including the old notes but excluding
guarantees of subsidiaries' obligations and
reimbursement obligations for letters of credit
that, if drawn, would have totaled approximately
$0.3 million. Azurix had no secured indebtedness
outstanding. As of June 30, 2000, Azurix was the
guarantor of reimbursement obligations for letters
of credit for subsidiaries that, if drawn, would
have totaled approximately $49.9 million and Azurix
had warranty and advance payment obligations and
bond performance obligations for subsidiaries of
approximately $88.2 million.
Subordination Risk Related
to Our Holding Company
Structure................ Azurix is a holding company whose ability to pay
principal of, premium, if any, and interest on the
new notes will depend upon the receipt of
sufficient funds from its current and future
subsidiaries. Certain of our subsidiaries have
incurred substantial indebtedness and are expected
to
4
<PAGE> 10
incur additional indebtedness in the future. Their
ability to distribute funds to us in the form of
dividends, management fees and expense
reimbursements, principal, interest, loans or
otherwise is restricted, and may in the future be
restricted, by the terms of their subsidiary
financing arrangements and regulatory schemes. Our
right to receive any assets of any of our
subsidiaries upon liquidation or reorganization,
and the consequent right of the holders of the new
notes to participate in the distribution of, or to
realize proceeds from, those assets will be
effectively subordinated to the claims of the
creditors of our subsidiaries. As of June 30, 2000,
approximately $1,046.6 million of outstanding
indebtedness of Azurix's subsidiaries would have
been effectively senior to the new notes, excluding
intercompany indebtedness and amounts secured by
cash or cash equivalents, none of which is
guaranteed by Azurix. As of June 30, 2000, our
subsidiaries had approximately $7.5 million of
letters of credit outstanding that, if drawn, would
be subject to reimbursement obligations. Please
read "Risk Factors -- Risks Related to the New
Notes" for more information about this risk.
Optional Redemption........ On or after February 15, 2005, we may redeem some
or all of the new 10-year dollar notes at any time
at the redemption prices listed in this prospectus
under the heading "Description of New
Notes -- Optional Redemption -- New 10-Year Dollar
Notes," plus accrued and unpaid interest to the
date of redemption.
In addition, we may redeem some or all of:
- the new 10-year dollar notes, at any time
before February 15, 2005;
- the new 7-year sterling notes, at any time; and
- the new 7-year dollar notes, at any time;
at the make-whole redemption price described in
this prospectus under the heading "Description of
the New Notes -- Optional Redemption -- New 10-Year
Dollar Notes and New 7-Year Notes," plus accrued
and unpaid interest to the date of redemption.
In addition, prior to February 15, 2003, we may
redeem up to 35% of the principal amount of each
series of the new notes originally issued out of
the proceeds of public equity offerings, at the
respective redemption prices described in this
prospectus under the heading "Description of the
New Notes -- Optional Redemption -- New 10-Year
Dollar Notes and New 7-Year Notes," plus accrued
and unpaid interest thereon to the date of
redemption.
Change of Control.......... Upon the occurrence of specific change of control
events affecting Azurix, you will have the right to
require Azurix to repurchase your new notes at a
repurchase price equal to 101% of the principal
amount of the new notes, plus accrued and unpaid
interest to the date of repurchase. For more
information about this right and the definition of
change of control, please read "Description of the
New Notes -- Repurchase of New Notes at the Option
of Holders -- Change of Control."
Important Covenants........ The indenture under which the new notes will be
issued contains covenants for your benefit which,
among other things and subject to exceptions that
are described in detail later in this prospectus,
restrict our ability to:
- incur additional debt or permit our
subsidiaries to do so;
- pay dividends and make other distributions;
5
<PAGE> 11
- incur liens to secure debt;
- sell assets;
- enter into sale/leaseback transactions or
permit our subsidiaries to do so;
- create payment restrictions affecting our
subsidiaries;
- engage in transactions with affiliates or
permit our subsidiaries to do so; and
- merge or consolidate with or into, or sell or
otherwise transfer our properties and assets as
an entirety to, another entity.
For more information about these and other
covenants, please read "Description of the New
Notes -- Repurchase of New Notes at the Option of
Holders -- Limitations on Asset Sales" and
"-- Important Covenants."
Listing.................... We have applied to list the new sterling notes on
the Luxembourg Stock Exchange. We cannot assure you
that the new sterling notes will be admitted for
listing on the Luxembourg Stock Exchange or, if
they are listed, that the listing will occur by the
closing of the exchange offer or be maintained
thereafter. No application has been or will be made
to list the new dollar notes on the Luxembourg
Stock Exchange.
Form of New Notes.......... The new notes will initially be represented by
global notes in registered form.
The global notes representing the new dollar notes
will be deposited with the trustee for the new
notes as custodian for DTC and registered in the
name of Cede & Co., as nominee of DTC. Ownership
interests in the dollar global notes will be
limited to participants in DTC or persons that may
hold interests through those participants. Dollar
book-entry interests will be shown on, and
transfers thereof will be effected only through,
records maintained in book-entry form by DTC and
its participants.
The global note representing the new sterling notes
will be deposited with a common depositary for
Euroclear or its nominee. Ownership of interests in
the sterling global note will be limited to
participants in Euroclear or persons that may hold
interests through those participants. Sterling
book-entry interests will be shown on, and
transfers thereof will be effected only through,
records maintained in book-entry form by Euroclear
and its participants.
Definitive new notes may be issued under limited
circumstances.
In this prospectus, we sometimes refer to the
dollar book-entry interests and the sterling
book-entry interests collectively as the
"book-entry interests."
Exchange Offer;
Registration Rights........ We will pay additional amounts to holders of the
old notes as liquidated damages if we do not comply
with our obligations under the registration rights
agreement. Please read "The Exchange
Offer -- Purpose and Effect of the Exchange Offer."
6
<PAGE> 12
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information contained in this prospectus before deciding to invest
in the new notes.
RISKS RELATED TO THE NEW NOTES
OUR ABILITY TO SATISFY OUR DEBT OBLIGATIONS, INCLUDING THE NEW NOTES, WILL
DEPEND UPON OUR FUTURE GROWTH, OUR OPERATING PERFORMANCE AND OUR ABILITY TO
REFINANCE OUR DEBT.
Our business requires substantial capital. As a result, we now have, and
after this offering will continue to have, substantial amounts of outstanding
debt, interest expense and principal repayment obligations under our credit
facilities and the notes. At June 30, 2000, our total debt was approximately
$1.8 billion on a consolidated basis, excluding amounts secured by cash or cash
equivalents. At June 30, 2000, we had $35.8 million of debt maturing during the
remainder of 2000, $295.4 million maturing in 2001 and $128.6 million maturing
in 2002, in each case excluding amounts secured by cash or cash equivalents or
payable under credit facilities that, provided conditions are met, permit them
to be reborrowed beyond those dates. All amounts outstanding under our credit
agreement with Enron must be repaid within 90 days following the date that (1)
Enron and its affiliates do not own or have the power to vote at least one-third
of our capital stock ordinarily entitled to vote for the election of directors
and (2) fewer than one-third of our directors are persons who are officers,
directors or employees of Enron or its affiliates. The revolving credit facility
of our subsidiary, Azurix Europe Ltd., allows its banks to terminate that
facility prior to its expiration date if they conclude that there has been a
material adverse change in Azurix Europe's financial condition. At June 30,
2000, approximately $306.4 million of our debt was secured by collateral.
Subject to the limitations contained in our credit facilities and the indenture
governing the new notes, we and our subsidiaries may incur substantial
additional debt to finance our acquisitions, investments, projects and capital
expenditures.
Our existing and future debt could have important consequences to note
holders, such as:
- making it more difficult for us to satisfy our obligations with respect
to the new notes and our other debt;
- limiting our ability to use operating cash flow in other areas of our
business because we must dedicate a substantial portion of these funds to
fund debt service;
- limiting our ability to obtain additional financing to fund our strategy,
working capital, capital expenditures, debt service requirements or for
other purposes;
- limiting our ability to react to changing market conditions, changes in
our industry and adverse economic conditions; and
- increasing our vulnerability to interest rate increases because
borrowings under our credit facilities are typically at variable interest
rates.
Our ability to pay interest on the new notes and to satisfy our other debt
obligations will depend in part on our future growth, our future operating
performance and our ability to refinance our debt when necessary. Each of these
factors depends on economic, financial, competitive and other factors beyond our
control. If we do not generate sufficient cash from future operations to make
scheduled payments on the new notes or to meet our other obligations, we will
need to refinance our debt, reduce or delay capital expenditures, obtain
additional financing, sell assets or liquidate Azurix. Further, because
approximately $460 million of our debt, excluding amounts secured by cash or
cash equivalents, must be repaid by December 31, 2002, we must complete
refinancings or we will be forced to pursue an alternative strategy to meet
principal obligations. In the past, we have borrowed under various credit
facilities to meet some of our interest obligations, and we expect to borrow to
meet interest obligations in the future as well. We cannot assure you that our
business will generate sufficient cash flow, or that we will be able to obtain
adequate funding, to satisfy our debt service requirements over the terms of the
new notes.
7
<PAGE> 13
WE ARE A HOLDING COMPANY, AND SO OUR ABILITY TO SATISFY OUR DEBT OBLIGATIONS,
INCLUDING THE NEW NOTES, WILL DEPEND IN LARGE PART ON CASH FLOWS MADE AVAILABLE
FROM OUR SUBSIDIARIES. THOSE DISTRIBUTIONS MAY BE SUBJECT TO SUBSTANTIAL
RESTRICTIONS.
We are a holding company and conduct substantially all of our operations
through our subsidiaries. Substantially all of our assets consist of equity in
our subsidiaries. Our ability to make payments on the new notes will depend on
our receiving sufficient funds from our current and future subsidiaries, not all
of which are wholly owned. Our subsidiaries are separate legal entities and,
because they will not guarantee the new notes, they will have no obligation to
make payments on the new notes or to make funds available for that purpose.
Certain of our subsidiaries have incurred substantial indebtedness and are
expected to incur additional indebtedness in the future. Their ability to
distribute funds to us in the form of dividends, management fees and expense
reimbursements, principal, interest, loans or otherwise is restricted, and may
in the future be restricted, by the terms of their subsidiary financing
arrangements and regulatory schemes. Subject to restrictions described in this
prospectus, the indenture governing the new notes permits us or our subsidiaries
to incur additional secured debt or to pledge assets to secure new and existing
debt. The indenture also permits us and our subsidiaries to agree with the
lenders to limit the ability of our subsidiaries to make distributions, loans,
other payments or asset transfers to us.
We derive a substantial majority of our consolidated operating cash flow
from the operations of our largest subsidiary, Wessex Water Services Ltd., a
United Kingdom company indirectly owned by Azurix Europe, and will continue to
do so until our other investments begin to generate significant cash flow.
Operating revenues from Wessex are unavailable for distribution to us due to a
number of legal and practical restrictions, including the operating and
financing requirements of Wessex, the financing requirements of intermediate
companies, regulatory restrictions imposed on Wessex under the terms of its
license, changes in the rates that Wessex may charge its customers and other
restrictions on Wessex's ability to pay dividends to its shareholders. In
addition, Azurix Europe is prevented by covenants contained in the Azurix Europe
credit facility from paying dividends to us.
THE NEW NOTES WILL BE EFFECTIVELY SUBORDINATED TO OUR FUTURE SECURED DEBT AND
STRUCTURALLY SUBORDINATED TO THE EXISTING AND FUTURE DEBT OF OUR SUBSIDIARIES.
The new notes will not be secured by any of our assets or the assets of our
subsidiaries. As a result, the new notes will be effectively subordinated to any
of our secured debt to the extent of the security. For example, if we were to
pledge some of our assets to secure debt and we were subsequently to become
insolvent, our secured lenders generally would be entitled to exercise remedies
available to secured lenders with respect to pledged assets.
Further, our subsidiaries will not guarantee the new notes. As a result,
the new notes will be structurally subordinated to the current and future debt
of our subsidiaries. Regardless of whether a subsidiary pledges assets to secure
its debt, if we became insolvent or were liquidated, creditors of our
subsidiaries would generally be entitled to payment of their claims from the
assets of those subsidiaries before any remaining assets are made available to
us for payment on the new notes, except to the extent that we may have a claim
as a creditor to our subsidiaries. In addition to this structural subordination,
the obligations of Azurix Europe under its revolving credit facility are secured
by a pledge of all of Azurix Europe's assets, including the capital stock of
Wessex Water Ltd., the immediate parent of Wessex Water Services. If Azurix
Europe were to become insolvent or were to be liquidated, or if payment under
the Azurix Europe credit facility were to be accelerated, the lenders under the
Azurix Europe credit facility would be entitled to exercise the remedies
available to a secured lender with respect to the pledged assets and would have
preference to those assets over other creditors of Azurix Europe and Azurix,
including holders of the new notes.
RESTRICTIONS IN OUR DEBT AGREEMENTS COULD LIMIT OUR GROWTH AND OUR ABILITY TO
RESPOND TO CHANGING CONDITIONS.
Some of the debt agreements to which we or our subsidiaries are a party,
including the indenture governing the new notes and the Azurix Europe credit
facility and Wessex's credit facilities, contain
8
<PAGE> 14
covenants that could restrict our future business operations. These operating
and financial covenants could hinder our flexibility in planning for, and
reacting to, changes in our business. For example, the covenants contained in
the Azurix Europe credit facility require Wessex to meet financial tests and
restrict Azurix Europe from paying dividends to us. In addition, the pledge of
Wessex Water Ltd.'s capital stock as security for the Azurix Europe credit
facility could limit our ability to obtain additional financing at the Azurix
level for working capital, capital expenditures, acquisitions, general corporate
and other purposes. The Azurix Europe credit facility also allows the banks to
terminate the facility prior to its expiration date if they conclude there has
been a material and adverse change in Azurix Europe's financial condition. The
covenants contained in the indenture restrict our ability to incur additional
debt, pay dividends, incur liens, sell assets, enter into sale/leaseback
transactions, enter into transactions with our affiliates and merge or
consolidate.
Our ability to satisfy these covenants and the other requirements imposed
by our credit facilities and the indenture could be adversely affected by events
beyond our control. An event of default under our credit agreements or the
occurrence of a change of control or an event of default under the indenture, if
not cured or waived, could permit acceleration of the relevant debt and
acceleration of debt and other obligations under other instruments. We are not
certain whether we would have, or be able to obtain, sufficient funds to make
these accelerated payments, including payments on the new notes. Please read
"Description of the New Notes -- Events of Default and Remedies."
ALTHOUGH THE OCCURRENCE OF SPECIFIC CHANGE OF CONTROL EVENTS AFFECTING US WILL
PERMIT YOU TO REQUIRE US TO REPURCHASE YOUR NEW NOTES, WE MAY NOT BE ABLE TO
REPURCHASE YOUR NEW NOTES.
Upon the occurrence of specific change of control events affecting us, you
will have the right to require us to repurchase your new notes at 101% of their
principal amount, plus accrued and unpaid interest. Our ability to repurchase
your new notes upon such a change of control event would be limited by our
access to funds at the time and the terms of our debt agreements. Upon a change
of control event, we may be required immediately to repay the outstanding
principal, any accrued interest on and any other amounts owed by us under our
credit facilities. The source of funds for these repayments would be our
available cash or cash generated from other sources. However, we cannot assure
you that we will have sufficient funds available upon a change of control to
make any required repurchases of tendered new notes. Please read "Description of
the New Notes -- Repurchase of New Notes at the Option of Holders -- Change of
Control."
HOLDERS OF BOOK-ENTRY INTERESTS WILL NEED TO ACT THROUGH DEPOSITARIES.
Unless and until new notes in definitive registered form are issued in
exchange for dollar book-entry interests or sterling book-entry interests,
owners of such book-entry interests will not be considered owners or holders of
new notes. (We sometimes refer to dollar book-entry interests and sterling
book-entry interests together as book-entry interests.) DTC (or its nominee)
will be the sole holder of the global notes representing the new dollar notes,
and a common depositary for Euroclear (or its nominee) will be the sole holder
of the global notes representing the new sterling notes. After payment to the
relevant depositary, we will have no responsibility for the relevant depositary
to make such payments to the owners of book-entry interests. Accordingly, if you
own a book-entry interest, you must rely on the procedures of DTC and Euroclear
or, if you are not a participant in DTC or Euroclear, as applicable, on the
procedures of the participant through which you own your interest, to exercise
any rights and obligations of a holder under the indenture.
Unlike the holders of the new notes themselves, owners of book-entry
interests will not have the direct right to act upon our solicitations for
consents or requests for waivers or other actions from holders of the new notes.
Instead, if you own a book-entry interest, you will be permitted to act only to
the extent you have received appropriate proxies to do so from DTC or Euroclear,
as applicable. We cannot assure you that procedures implemented for the granting
of such proxies will be sufficient to enable you to vote on any requested
actions on a timely basis.
Similarly, upon the occurrence of an event of default under the indenture
for the new notes, unless and until definitive registered new notes are issued
in respect of all book-entry interests, if you own a book-entry interest, you
will be restricted to acting through DTC or Euroclear, as applicable. We cannot
assure you that
9
<PAGE> 15
the procedures to be implemented through DTC or Euroclear, as applicable, will
be adequate to ensure the timely exercise of remedies under the new notes.
Please read "Description of the New Notes -- Form of New Notes" and "-- Action
by Owners of Book-Entry Interests."
A TRADING MARKET FOR THE NEW NOTES MAY NOT DEVELOP.
There has not been an established trading market for the new notes. We have
applied to list the new sterling notes on the Luxembourg Stock Exchange. We
cannot assure you that the new sterling notes will be admitted for listing on
the Luxembourg Stock Exchange or, if so listed, that the listing will occur by
the closing of this exchange offer or be maintained thereafter. Other than an
application for listing of the new sterling notes on the Luxembourg Exchange, no
application has been, or will be, made to list the new notes on any securities
exchange or for quotation through the National Association of Securities Dealers
Automated Quotation System.
The liquidity of any market for the new notes will depend upon the number
of holders of the new notes, our performance, the market for similar securities,
the interest of securities dealers in making a market in the new notes and other
factors. A liquid trading market may not develop for the new notes.
RISKS RELATED TO OUR BUSINESS
WE HAVE A SHORT OPERATING HISTORY. OUR FUTURE FINANCIAL OR OPERATING RESULTS ARE
DIFFICULT TO FORECAST AND MAY BE MATERIALLY DIFFERENT FROM THOSE PRESENTED IN
THIS PROSPECTUS, WHICH COULD ADVERSELY AFFECT YOUR INVESTMENT IN THE NEW NOTES.
We were formed in January 1998 and, therefore, have a short operating
history. We acquired Wessex and our interest in a 95-year concession in the
Province of Mendoza, Argentina in late 1998 and our other assets in 1999 and
2000. As a consequence, there is limited historical information available
regarding our businesses. Our limited operating history and the unpredictable
results of our business strategy make it difficult to forecast our future
operating results.
WATER AND WASTEWATER COMPANIES FACE PRICE, COMPETITION AND OTHER REGULATIONS
THAT COULD REDUCE OUR OPERATING REVENUES.
Governments generally regulate the prices that water and wastewater
companies may charge their customers and the competitive environment in which
they operate. Regulatory regimes vary from country to country and at times can
give great discretion to the regulatory authority. Moreover, the regulatory
authorities in countries where we currently operate, or may operate in the
future, could change, as could the regulations they promulgate. These changes
could cause reductions in our operating revenues.
For example, in the United Kingdom, the Director General of Water Services
recently completed a periodic review of the price limits for water and
wastewater companies in England and Wales for the period from April 1, 2000
through March 31, 2005. In setting price limits, the Director must act in the
manner he considers best calculated to ensure that water companies are able to
finance the proper carrying out of their functions, in particular by securing a
reasonable return on their capital. On November 25, 1999, the Director announced
a determination of a 12.0% price cut for Wessex for 2000-2001, before adjustment
for inflation. The announcement included level prices through March 2003 with
annual price increases in 2003-2004 of 3.8% and in 2004-2005 of 4.7%, before
adjustment for inflation. Wessex's regulated operating revenues represented
approximately 70% of Azurix's total operating revenues for the year ended
December 31, 1999. The outcome of the periodic review is expected to reduce
Wessex's regulated operating revenues from 1999-2000 to 2000-2001 by 12%, before
adjustment for inflation (or by approximately 10% after adjustments for
inflation and other factors), and thus materially reduce our cash flow and
earnings. In addition, two new regulations under the Water Industry Act 1991, as
amended by the Water Industry Act 1999, became effective in April 2000. The
purposes of these regulations are to protect vulnerable groups, such as low
income and large families, from high charges for metered water, to prevent
disconnection of domestic customers and other protected premises for non-payment
and to require charging schemes to be approved annually.
10
<PAGE> 16
Regulation of the water industry in England and Wales is changing rapidly.
Some of these changes stem from the efforts of the U.K. Government and the
Director General of Water Services to increase competition in the United
Kingdom. The Director has announced a future work program that includes new
initiatives to extend competition. These and other initiatives to introduce
competition which are currently being considered include lowering the threshold
for inset appointments, time limiting inset appointments and allowing premises
to be combined to meet the consumption limit for a large user inset; promoting
competition in new connections; extending the obligation on companies to allow
connections to their water mains from outside their areas in response to
requests by non-residential customers as well as residential customers
(currently, water and wastewater companies are only obliged to make such
supplies outside their areas when requested by residential customers);
facilitating common carriage, for example, by developing access codes to set out
fair terms for common carriage using others' networks with the requirement that
access prices be set in a manner which is consistent with the Competition Act
1998 and the Water Industry Act 1991; time limiting abstraction licenses and
liberalizing trade in abstraction licenses; removing water companies' monopolies
in making connections to water mains; increasing competitive tendering;
encouraging partnership arrangements between customers and suppliers; reducing
tariffs for large users; simplifying licenses to permit companies that
historically have provided a full range of vertically integrated services to
focus on separate elements of the supply chain; and using the new competition
law powers under the Competition Act 1998 to prevent abuses of a dominant
position and anti-competitive behavior. However, until market competition has
developed, comparative competition (i.e., comparison of the regulated business
to other similar businesses) will still be used in the regulation of the water
industry, in particular in the periodic review process and in assessing the
effects of mergers between water companies. The U.K. Government intends to
publish a draft Water Bill in the fall of 2000 that will primarily cover reform
of the water abstraction regime and increase consumer protection. In addition,
the Department of the Environment, Trade and the Regions published a
consultation paper in April 2000 on ways to increase competition in the water
industry in England and Wales. The results of the consultation will be published
in the fall of 2000 and, if the consultation concludes that new legislation is
needed (for example, if it is decided that a license is needed for water
suppliers to supply through common carriage), such legislation will be
introduced into the Bill. In addition, a new Director General of Water Services
took office July 31, 2000. We cannot predict what changes, if any, the new
Director will make or the U.K. Government will adopt to promote competition.
WE FACE SIGNIFICANT COMPETITION.
Participants in the global water industry must compete with each other when
bidding or negotiating for concessions, contracts and other projects. We face
significant competition from companies larger than we are, companies with longer
operating histories and greater experience in securing water and wastewater
projects than we have and other new entrants to the global water industry.
According to their published data, our two largest competitors, Compagnie
Generale des Eaux, a subsidiary of Vivendi Environment, and Suez-Lyonnaise des
Eaux, serve aggregate populations of 100 million and 154 million for water and
wastewater, respectively, whereas our operations serve an aggregate population
of 8.3 million for water and 7.6 million for wastewater. Our limited operating
history may make it difficult for us to qualify for, or be successful in,
bidding against these more experienced competitors. We may be at a disadvantage
in competing for concessions, contracts and other projects when we have no
history operating in a particular country or region, or when we have no history
operating a water or wastewater facility or system comparable in size to the
facility or system being privatized or built. Further, our competitors may be
able to obtain capital at a lower cost and be willing to bid more aggressively
than we can, which would give them an advantage in bidding on projects and other
competitive situations.
Although Wessex has a virtual monopoly within its service region in the
United Kingdom, companies may apply to the industry regulator for an "inset
appointment" to serve particular areas or customers within Wessex's or any other
licensee's service area. This creates some limited direct competition. One inset
appointment was granted within Wessex's territory resulting from the
privatization of water supply services formerly provided by the Ministry of
Defence. Wessex chose not to pursue this project because of unacceptable
contract terms. Historically, very few inset appointments have been granted in
England and Wales, although a number of applications are currently being
considered and a number of inset appointments
11
<PAGE> 17
have been recently approved. This will likely change in the future as the inset
appointment threshold for large users has been lowered in England (and is likely
to be lowered similarly in Wales) which will increase the number of large users
that are able to qualify for inset appointments and the Director General of
Water Services is seeking a further reduction in the threshold and an extension
of the categories of sites which will qualify for inset appointments. An
increased source of competition may arise out of the UK Government's new policy
concerning the inland waterways which encourages the development of a national
grid of water for the transfer and supply of water via the canal network.
The boards of several water companies in England and Wales recently have
announced consideration of a strategy that separates asset ownership from
operations. In some cases, the companies are proposing a new form of corporate
structure and ownership of the regulated business in conjunction with the
introduction of a greater proportion of debt financing. A number of ownership
structures have been suggested, amongst them mutual trusts, not-for-profit
companies limited by guarantee, companies registered with the Registrar of
Friendly Societies and companies with a thin layer of participating shares.
Wessex has publicly supported the concept of these new structures. The Director
has consulted on issues arising from such structures, and taken into
consideration responses from bodies such as the Drinking Water Inspectorate and
the Environment Agency. The Director has raised concerns about these proposals
and has indicated the issues to be addressed to deal with these concerns. These
concerns include ensuring that customers' interests are protected and benefits
for customers are demonstrated; the separation of ownership from operation of
the assets and the maintenance of incentives for efficiency; constitutional
arrangements; procurement of services; the maintenance of comparative
competition; financing and risk implications. There are also significant
concerns about the drinking water quality and environmental standards
implications of the proposals. If brought about, the proposed changes in
structures will significantly alter the competitive environment of the water
industry in England and Wales, although we cannot predict how such changes will
affect our business.
OUR ABILITY TO SERVICE DEBT AND PROSPECTS FOR GROWTH ARE HIGHLY DEPENDENT ON OUR
SUCCESSFULLY OBTAINING CONTRACTS, COMPLETING ACQUISITIONS AND DEVELOPING
PROJECTS, AND WE MAY NOT BE ABLE TO OBTAIN CONTRACTS, COMPLETE ACQUISITIONS AND
DEVELOP PROJECTS SUCCESSFULLY.
We may not be able to obtain contracts, complete acquisitions of water and
wastewater assets and develop projects successfully because these transactions
involve many complexities. These complexities include, among other things,
negotiation of satisfactory water supply and wastewater treatment services
agreements with local governments and industrial customers, receipt of required
governmental consents and permits and obtaining financing for our operations,
acquisitions and projects. In addition, in evaluating and negotiating water
service projects and contracts, we may encounter difficulties in determining the
status and condition of existing systems or developing accurate forecasts of
material factors such as the rate of population growth, particularly in
developing countries.
In privatization transactions, we are unable to predict with certainty the
timing of a privatization or the commitment level of a government to completing
a privatization. Most privatizations are competitively bid, and there is no
assurance as to what proportion of the projects on which we bid we ultimately
will acquire. At the time of our formation we put in place a business
development effort with associated general, administrative and operating
expenses. To the extent we are unsuccessful in completing acquisitions and
development projects, these expenses will not be absorbed by income associated
with those acquisitions and development projects and will decrease our net
income.
FAILURE TO IDENTIFY AND ASSESS ACCURATELY THE RISKS RELATED TO AN ACQUISITION OR
TRANSACTION COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
In evaluating potential transactions, we make assumptions and projections
based on the potential for increased returns, future regulatory and rate case
changes and the engineering, operations, financing, economic, structuring,
insurance, tax, environmental, legal and accounting risks relating to each
transaction.
12
<PAGE> 18
Forecasts, estimates and information provided by local governments and other
sources used to bid for public tenders can prove to be materially inaccurate or
incomplete, resulting in projections for capital expenditures to improve or
build water systems that are below what is ultimately required. If the
assumptions on which we base our decision to acquire assets, develop a project
or provide a service prove to be incorrect in any material respect, either
because of inaccurate or incomplete information provided by the other party or
parties to the transaction or because of a failure by us to accurately identify
or assess the risks or capital requirements related to a proposed transaction or
otherwise, then our operating results, including earnings, could be materially
adversely affected. Although we attempt to identify and take into account all
risks associated with a particular transaction, we cannot assure you that we
will identify all the risks related to a transaction or completely manage those
we do identify.
BECAUSE OUR BUSINESS REQUIRES SUBSTANTIAL CAPITAL, DIFFICULTY FINANCING OUR
OPERATIONS, ACQUISITIONS AND PROJECTS COULD LIMIT OUR GROWTH AND OUR ABILITY TO
SATISFY OUR DEBT OBLIGATIONS.
With respect to our existing businesses, we expect to incur capital
expenditures of approximately $1.7 billion over the years 2000 through 2004,
approximately $300 million of which we expect to incur in 2000. In connection
with Wessex's recent periodic review of price limits, the Director has estimated
that the cost of the capital expenditures that Wessex will be required to make
over the years 2000 through 2004 will be approximately L764 ($1,155.9) million.
The concession agreement governing our water and wastewater concession in Buenos
Aires, Argentina, requires our subsidiary Azurix Buenos Aires, S.A. to expand
water and wastewater services to various regions within the concession area over
the term of the agreement. We estimate that this expansion and other obligations
under the concession agreement will require approximately $300 million to $400
million in capital expenditures over the next five years. We intend to finance
our projected capital expenditures for our existing businesses principally with
internally generated funds and proceeds under existing long-term and short-term
borrowing arrangements and future financing arrangements.
The water and wastewater assets and projects in which we may invest may
also require substantial capital expenditures, especially early in the life of
our investments. We intend to finance our investments and projects using various
techniques and instruments such as debt financing, project financing and equity
transactions. We expect to engage in leveraged transactions, and we may pledge
all or substantially all of our assets. For example, the capital stock of Wessex
Water Ltd. is pledged as security for the Azurix Europe credit facility.
There is a risk that financing may not be readily available to finance our
operations, acquire water and wastewater assets or develop projects. Our ability
to arrange financing will be affected by general economic and capital market
conditions, credit availability from banks or other lenders and the risks
inherent in particular concessions, projects or countries. In particular
projects, we may have a co-owner with limited resources or that may default on
its obligations to contribute capital to a project. We are currently evaluating
various financing strategies to raise additional capital to further support the
capital needs of our existing businesses and future acquisitions and development
projects. Our inability to secure such additional financing arrangements could
limit our growth and our ability to satisfy our debt obligations.
Enron is not obligated to provide additional financial support to Azurix
for any capital expenditures or investments.
IF WE DO NOT HAVE OPERATIONAL CONTROL, OUR OPERATING REVENUES AND EARNINGS COULD
BE REDUCED.
We may invest in water and wastewater projects and assets in which we do
not own a majority of the project or assets. In addition, we may invest in or
own projects and assets with partners, co-venturers and other parties, including
governmental entities. Some jurisdictions require participation of employees or
other stakeholders in company management. In these cases, major decisions may
require the consent of other equity owners or stakeholders.
We may also invest in projects and assets where we do not serve as
operator. For example, we do not have operational control of the concession in
Mendoza, Argentina in which we own a 32.1% interest. In these cases, our ability
to direct the outcome of matters with respect to the operations of the project
or assets could be
13
<PAGE> 19
limited. A lack of operational control in a project could materially and
adversely affect our interest in the project and, as a result, our operating
revenues and earnings from the project.
IF WE ENCOUNTER PROBLEMS INTEGRATING ACQUISITIONS AND MANAGING OUR GROWTH, OUR
FINANCIAL RESULTS AND YOUR INVESTMENT IN THE NEW NOTES COULD BE MATERIALLY
ADVERSELY AFFECTED.
We intend to grow in part through acquisitions of water and wastewater
assets. Since our inception in 1998, we have completed acquisitions aggregating
over $3 billion. Because we are pursuing acquisitions in different parts of the
world and because we are pursuing a number of opportunities simultaneously, we
may encounter unforeseen expenses, difficulties, complications and delays,
including difficulties in staffing and providing operational and management
oversight. As we expand our operations through acquisitions, we may encounter
difficulties integrating such acquisitions and successfully managing the growth
of a portfolio of water and wastewater assets that is diverse both with respect
to types of assets and their location. We cannot assure you that our current
management, personnel and other corporate infrastructure will be adequate to
manage our growth or that our systems, procedures and controls will be adequate
to support our expanding operations. To the extent we encounter problems in
integrating acquisitions and managing our growth, our financial results and your
investment in the new notes could be materially adversely affected.
ENVIRONMENTAL AND HEALTH FACTORS AND CHANGES IN REGULATIONS COULD INCREASE OUR
COSTS OR OUR LIABILITIES.
Changes in environmental, health and other regulations applying to the
water supply or wastewater treatment services industry or new, revised or
inconsistent interpretations of these regulations may adversely affect our
financial condition and results of operations. Water companies are subject to
water quality risks related to contamination of drinking water supplies or
environmental danger from effluent discharges. The occurrence of these or other
risks could have a material adverse effect on our financial position and results
of operations.
In addition, many countries in which we plan to do business have recently
developed, or are in the process of developing, new regulatory and legal
structures that regulate the delivery of drinking water and wastewater services
and accommodate private and foreign-owned water businesses. In some instances,
these regulatory and legal structures and their interpretation and application
by administrative agencies are relatively new and incomplete. The interpretation
of existing rules can be expected to evolve over time and may have an
unpredictable impact on our business. We anticipate future changes in, or
decisions affecting, regulatory regimes that will serve to expand or tighten
regulatory controls. Some of these changes or decisions could have a material
adverse effect on our financial position and results of operations.
In our industrial services business, we may handle hazardous substances in
addition to biological waste. Stringent environmental laws provide for serious
penalties and sometimes impose strict liability on those who handle these
substances or find them on their property. Accordingly, if we handle hazardous
substances in our industrial services business in the future, there is a risk
that we will incur significant liabilities and expenses. Although we maintain
insurance against many of these risks, we cannot be certain that insurance
proceeds received under our policies would adequately cover all liabilities we
may incur.
LIABILITY FOR WATER SUPPLY CONTAMINATION COULD RESULT IN MATERIAL LOSSES AND
COSTS.
Our business, in particular the supply of water to end-users, is subject to
risks of contamination of the water supply, which could result in disease or
even death or otherwise endanger the public health. As a result of
contamination, we could be subject to civil, criminal or regulatory enforcement
actions, private suits and cleanup obligations, which could have a material
adverse effect on our financial condition and results of operations. Drinking
water contamination can be caused by, among other things, wastewater effluent,
stormwater runoff from farms and industrial sites, materials used in the
construction or rehabilitation of water supply pipes, harmful nitrates
attributable to modern farming practices and various other pathogens from a
variety of sources entering the drinking water supply. Accordingly, we cannot
assure you that our water supply will remain at all times free of contaminants.
Although we maintain insurance against many of these risks, we
14
<PAGE> 20
cannot be certain that insurance proceeds received under our policies would
adequately cover all liabilities we may incur.
During April 2000, residents of the city of Bahia Blanca, Argentina and
surrounding areas began noticing unpleasant taste and odor in their water
supply, which is provided by Azurix Buenos Aires. The taste and odor were traced
to a substance released by algae that had grown to higher than normal levels in
a reservoir operated by an agency of the Province of Buenos Aires and that had
entered the local water supply. On becoming aware of the cause of the unpleasant
taste and odor, Azurix Buenos Aires instituted measures that have restored the
taste and odor to acceptable levels. Tests performed by government officials as
well as Azurix Buenos Aires have shown that there were no harmful biological or
toxic substances in the water supply and the provincial officials have stated
publicly that there was no danger to public health. However, algae continue to
be present in the reservoir, and therefore issues of taste, odor and color may
recur.
Before the situation was corrected, at the request of government officials,
Azurix Buenos Aires acquired water from other sources for delivery in trucks and
bottles to residents in Bahia Blanca. Azurix Buenos Aires has agreed with the
provincial regulatory agency not to bill residential customers for water
services for a 50-day period during which the taste and odor of supplied water
were allegedly unsatisfactory, although the regulatory agency has approved
billing industrial customers for water and all customers for wastewater services
during this time. Azurix's second quarter 2000 results of operations include
$3.3 million of operations and maintenance expense and $0.6 million of general
and administrative expense that were incurred in responding to this situation,
in addition to forgoing approximately $1.5 million in revenues for the 50-day
period. Azurix also incurred $0.2 million of related capital expenditures. Under
the concession contract, the provincial regulatory agency may impose penalties;
however, none have been assessed as of this date.
POLITICAL AND ECONOMIC CHANGES IN COUNTRIES IN WHICH WE OPERATE COULD ADVERSELY
AFFECT OUR OPERATING RESULTS.
The success of our strategy in many countries will depend on a political
and economic environment that will accommodate foreign investment and project
development. Our operations will be subject to political and economic risks,
including risks of war, terrorism, expropriation, nationalization, renegotiation
or nullification of existing contracts, changes in rates and methods of
taxation, implementation of subsidies or other protections for disadvantaged
groups and foreign exchange controls or governmental restrictions on the
repatriation of hard currency. You should be aware that we operate in countries
whose economies differ in many respects from the economies of the United States,
Canada and most Western European countries, including their structure, levels of
capital reinvestment, growth rate, governmental involvement, resource
allocation, self-sufficiency, rate of inflation and balance of payments
position. In many of these countries, the government retains significant control
over the economy. Thus, there is a risk that future government actions,
especially with respect to nationally important facilities such as water
systems, could have a material adverse effect on our financial condition and
results of operations.
WORK STOPPAGES AND OTHER LABOR RELATIONS MATTERS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS.
We are subject to a risk of work stoppages and other labor relations
matters because we have invested and will invest in the future in assets and
projects utilizing a workforce that in many cases will be unionized. All or a
portion of the work forces at almost all of our operating subsidiaries are
represented by unions. Our ability to obtain an adequate return on an investment
will often depend on our success in optimizing the labor force through voluntary
and sometimes involuntary staff reductions. There is a risk that layoffs, where
implemented, could trigger community or union problems. We cannot assure you
that issues with our labor forces will be resolved favorably to us, or that we
will not experience work stoppages. Work stoppages could not only materially and
adversely affect our operations and revenues, but also, in some cases, lead to
defaults or termination events under concession, operating or other contracts.
We are in the process of negotiating the collective bargaining agreement
for our concession in the Province of Buenos Aires, Argentina. Although we
expect to conclude a contract in due course on satisfactory terms, we cannot
assure you that we will be able to do so. Although there have been no work
stoppages at this concession to date, we cannot assure you that none will occur.
15
<PAGE> 21
CHANGES IN CURRENCY EXCHANGE RATES, LIMITATIONS ON SENDING FUNDS OUT OF A
FOREIGN COUNTRY AND FOREIGN CURRENCY RESTRICTIONS OR SHORTAGES COULD ADVERSELY
AFFECT OUR OPERATING RESULTS.
Because we conduct operations outside the United States, limitations on the
right to convert currency or to take it out of a foreign country and the
capacity of currency exchange markets may adversely affect our ability to
repatriate profits, and changes in exchange rates may adversely affect the U.S.
dollar equivalent of the profits to be repatriated. For the year ended December
31, 1998, 100% of our operating revenues were non-U.S. dollar denominated. For
the year ended December 31, 1999, 83.4% of our operating revenues were non-U.S.
dollar denominated. In 1998 and 1999, most of the operating revenues were in
pounds sterling. Legal restrictions or shortages in currencies in countries
outside the United States may prevent us from converting sufficient local
currency to enable us to comply with our currency payment obligations not
denominated in local currency or to meet our operating needs and debt service
requirements.
OPERATING IN COUNTRIES WITHOUT ADEQUATE REVENUE COLLECTION SYSTEMS COULD REDUCE
OUR OPERATING REVENUES.
We may operate in countries without established or well-enforced revenue
collection mechanisms for water supply and wastewater treatment services or
encounter other difficulties in the collection process. For example, we did not
receive complete billing and customer records when we took over our concession
in Buenos Aires, which has impeded collection efforts and adversely affected our
operating income derived from this concession to date. Also, customers in some
countries may not be able or willing to pay for water services. This could have
a material adverse effect on our financial condition and results of operations.
We cannot assure you that government subsidies or taxes and other concessions
will sufficiently compensate private parties that provide these services for the
economic consequences of such conditions. Where initially available, there is a
risk that such subsidies and concessions could be reduced or eliminated before
reliable revenue sources and collection mechanisms can be established.
INTERACTION OF DIFFERENT TAX JURISDICTIONS COULD LOWER OUR RETURNS AND DIRECTLY
AFFECT OUR BUSINESS STRATEGY.
In the United States, if our operating revenues from future U.S. operations
do not exceed the expenses we incur in the United States in supporting our
worldwide operations, the potential tax benefits associated with these expenses
may not be realizable. If these amounts were determined to not be realizable
within specified expiration periods in accordance with applicable U.S.
accounting and tax regulations, the impact could materially reduce future
consolidated net earnings. The future realization of these tax benefits in the
U.S. could therefore have a direct impact on our strategic emphasis in expanding
our U.S. operating base.
In addition, tax laws in various countries treat differently the taxability
of various aspects of income and gain and the deductibility of expenses and
losses. Income earned in one jurisdiction also may be taxable in another,
including the United States. Although in many instances U.S. tax laws will
permit us to credit amounts paid in taxes in other countries against our U.S.
tax obligations, the rules allowing credits are complex and do not allow credits
in many circumstances. Moreover, if we incur expenses in one jurisdiction that
benefit a project in another, they may not be deductible against income in the
jurisdiction where the expenses were incurred.
OPERATING IN COUNTRIES WITH UNDEVELOPED LEGAL SYSTEMS COULD ADVERSELY AFFECT OUR
BUSINESS BECAUSE WE MAY ENCOUNTER DIFFICULTIES ENFORCING OUR CONTRACTUAL RIGHTS.
Developing countries in which we may pursue opportunities may not have well
established legal systems and may lack a well-developed, consolidated body of
laws governing foreign investment enterprises. The uncertainty of the legal
environment in these countries could make it difficult for us to enforce our
rights, or those of our operating companies, under agreements relating to our
operations. In addition, the administration of laws and regulations by
government agencies in such countries may be subject to considerable
discrimination or prejudice against foreigners or private investors. As these
legal systems develop, foreign investors may be adversely affected by new laws
and changes to existing laws. In addition, in countries where adequate laws and
well-developed legal systems do exist, it may not be possible to obtain swift
and equitable enforcement of such laws.
16
<PAGE> 22
OUR SUCCESS DEPENDS ON KEY MEMBERS OF OUR MANAGEMENT, THE LOSS OF WHOM COULD
DISRUPT OUR BUSINESS OPERATIONS.
We depend on the continued employment of key management personnel we have
brought in from Enron, Wessex and other multinational companies. We have entered
into employment agreements with these executives. If these officers resign or
become unable to continue in their present role and if they are not adequately
replaced, our business operations could be materially adversely affected. We do
not believe that the recent resignation of our former Chairman and Chief
Executive Officer will materially adversely affect our business.
CHANGES IN OUR RELATIONSHIP WITH ENRON COULD INCREASE OUR COSTS BECAUSE WE RELY
ON ENRON FOR CORPORATE STAFF AND SUPPORT SERVICES.
We have entered into an agreement with Enron pursuant to which Enron
provides various corporate staff and support services to us. These services
include information technology, office space, building maintenance, security and
other office services, as well as employee development, training and maintenance
of compensation and other benefits programs. We also may utilize Enron's
regulatory affairs, marketing affairs, treasury and risk assessment and control
departments. Our services agreement with Enron is for an indefinite term, but
may be terminated on 180 days' notice. We currently have a sublease arrangement,
and intend to enter into a sublease agreement, with Enron providing for the use
of office space in Houston, Texas.
If the services agreement is terminated or if we are unable to enter into
the related sublease with Enron, we expect that we would be able to arrange
alternate suppliers for all the services important to our business. We expect
that these services would be available from third parties at costs similar to
those we pay Enron.
OUR BUSINESS OPPORTUNITIES COULD BE LIMITED BECAUSE ENRON AND ITS AFFILIATES MAY
COMPETE WITH AZURIX IN WATER-RELATED ACTIVITIES AND BECAUSE AZURIX MAY ONLY
ENGAGE IN ACTIVITIES GENERALLY IDENTIFIED IN THIS PROSPECTUS, INCIDENTAL
ACTIVITIES AND OTHER ACTIVITIES AS ATLANTIC WATER TRUST OR ENRON MAY APPROVE.
Enron and Azurix have entered into an agreement that limits the scope of
Azurix's business and provides that Enron and its affiliates may engage in
water-related businesses, even if those businesses have a competitive impact on
Azurix. In general, Enron is permitted to engage in any business whatsoever,
including water, wastewater and other businesses competing with Azurix, and may
compete in public tenders against Azurix, provided the business is conducted and
opportunities are identified and developed through Enron's own personnel and not
through Azurix. If an opportunity in the water industry is presented to a person
who is an officer or director of both Enron and Azurix, the opportunity must
first be offered to Azurix, unless water constitutes a minority of the fair
market value of the opportunity, as determined by that officer or director in
good faith based on information available at the time. Azurix has agreed to
indemnify Enron and its officers, directors and employees against any claim that
Enron's pursuit of any water business was a breach of any duty owed by Enron to
Azurix, provided Enron has followed the rules described above. Were Enron to
decide to pursue activities in the water or wastewater industry, its size,
access to capital and experience in developing products and markets could make
it a strong competitor.
The agreement requires Azurix to limit its purpose, in its certificate of
incorporation, to the businesses generally identified in this prospectus,
activities incidental to those businesses and such other businesses as Enron may
approve in its sole discretion. Azurix has agreed not to amend its certificate
of incorporation to expand its purpose clause without Enron's prior written
consent. The agreement thus limits our ability to pursue potentially profitable
activities that are not primarily in the water and wastewater sector, even
though those opportunities come to our attention on account of our activities in
water and wastewater. For example, some jurisdictions may choose to privatize
their water and wastewater and other utility assets together. As a result of
this agreement, we would need Enron's consent to pursue the privatization if the
water and wastewater assets were not expected to represent a majority of the
value.
17
<PAGE> 23
The agreement restricts Enron and Azurix from taking action to restrict
each others' businesses to cause either of them to violate any law or to subject
them to regulation under the U.S. Public Utility Holding Company Act of 1935.
The agreement expires on the first date on which Enron and its affiliates do not
individually or collectively, directly or indirectly, own or have the power to
vote at least one-third of the shares of Azurix ordinarily entitled to vote for
the election of directors, and fewer than one-third of the directors of Azurix
are persons who are employees, officers or directors of Enron or any affiliate
of Enron.
THROUGH ATLANTIC WATER TRUST, ENRON AND MARLIN WATER TRUST WILL CONTROL THE
OUTCOME OF STOCKHOLDER VOTING AND MAY EXERCISE THIS VOTING POWER IN A MANNER
ADVERSE TO YOUR INTERESTS AS A HOLDER OF THE NEW NOTES.
Atlantic Water Trust currently owns approximately 67% of our outstanding
common stock. Each of Enron and Marlin Water Trust owns a 50% voting interest in
Atlantic Water Trust. To date, Enron has appointed all of the directors of
Atlantic Water Trust and Azurix, although Marlin Water Trust at any time has the
right to elect or replace half of the directors of Atlantic Water Trust. As long
as Atlantic Water Trust owns a majority of our outstanding voting stock, Marlin
Water Trust has the right to direct Atlantic Water Trust to elect or replace a
percentage of Azurix's directors equal to 50% minus the percentage of
outstanding voting stock held by persons other than Atlantic Water Trust, Enron
and its affiliates. Furthermore, Marlin Water Trust, with the consent of the
holders of a majority of our outstanding voting stock held by persons other than
Atlantic Water Trust, Enron and its affiliates, has the right to direct Atlantic
Water Trust to elect or replace half of Azurix's directors. In each case, Marlin
Water Trust's right to designate directors shall be reduced by the number of
directors that may be elected by preferred stock entitled to elect directors as
a class. Enron has the right to direct Atlantic Water Trust to elect or replace
the other half of Azurix's directors. In all other circumstances, the board of
directors of Atlantic Water Trust will direct the voting of Atlantic Water
Trust's Azurix shares. As a result, Enron and Marlin Water Trust have the
ability to exert significant influence over the policies, management and affairs
of Azurix and control the outcome of corporate actions requiring stockholder
approval, including the approval of transactions involving a change in control
of Azurix. Enron and Marlin Water Trust's interests may differ from those of
Azurix's other stockholders and holders of the new notes. As a result, Enron and
Marlin Water Trust may vote Azurix stock in a manner adverse to other
stockholders and holders of the new notes. Marlin Water Trust, or the trustee
under its senior notes indenture, may be required to cause Atlantic Water Trust
to sell shares of our common stock owned by Atlantic Water Trust if the senior
notes of Marlin Water Trust have not been repaid on or before December 15, 2001
or if specified events occur.
OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO ENRON
DIRECTORS OR OFFICERS.
Currently, all of our directors are also directors or officers of Enron, a
situation that may create conflicts of interest. The directors and officers of
Enron have fiduciary duties to manage Enron, including its investments in
subsidiaries and affiliates such as Azurix, in a manner beneficial to Enron and
its stockholders. Similarly, the directors and officers of Azurix have fiduciary
duties to manage Azurix in a manner beneficial to Azurix and its stockholders.
In some circumstances, the duties of these directors and officers of Enron may
conflict with their duties as directors of Azurix. In addition, other conflicts
of interest exist and may arise in the future as a result of the extensive
relationships between Enron and Azurix.
18
<PAGE> 24
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes.
In consideration for issuing the new notes, the terms of which are substantially
identical to the terms of the old notes, we will receive in exchange a like
principal amount of old notes. The old notes surrendered in exchange for the new
notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the new notes will not result in any change in our capitalization.
The net proceeds from the offering of the old notes, after deducting
initial purchasers' discounts and commissions and expenses, were $583.3 million.
Of this amount, $150.0 million was used to pay down the Azurix revolving credit
facility, $386.0 million was used to pay down the Azurix Europe revolving credit
facility and $18.1 million was used to pay down amounts outstanding under the
credit agreement with Enron. In addition, $11.5 million was used to pay accrued
interest on the three credit facilities. The remaining proceeds were available
for general corporate purposes.
19
<PAGE> 25
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000. You
should read this table in conjunction with our consolidated financial
statements, related notes and other financial information we have incorporated
by reference in this prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 2000
----------------
(IN MILLIONS)
<S> <C>
Cash and cash equivalents................................... $ 24.2
========
Restricted cash and cash equivalents(1)..................... $ 96.8
========
Short-term debt(2):
Azurix Europe credit facility(3).......................... $ 134.3
Acquisition loan notes.................................... 89.8
Other..................................................... 18.6
--------
Total short-term debt............................. 242.7
--------
Current maturities of long-term debt(2)..................... 32.9
--------
Long-term debt -- affiliates(4)............................. 226.4
--------
Long-term debt(2):
Amounts reclassified from short-term debt(5).............. 54.5
Senior unsecured bonds.................................... 449.2
European Investment Bank credit facilities................ 201.6
Capital lease obligations................................. 49.2
Senior notes.............................................. 591.3
Other..................................................... 4.3
--------
Total long-term debt.............................. 1,350.1
--------
Stockholders' equity(6):
Preferred stock, $0.01 par value; 50,000,000 shares
authorized............................................. --
Common stock, $0.01 par value; 500,000,000 shares
authorized; 117,269,896 shares issued and
outstanding............................................ 1.2
Additional paid-in capital................................ 1,972.5
Retained earnings......................................... 62.3
Unearned compensation..................................... (0.3)
Accumulated other comprehensive loss...................... (181.7)
--------
Total stockholders' equity........................ 1,854.0
--------
Less: Restricted cash and cash equivalents(1)............... (96.8)
--------
Total capitalization.............................. $3,609.3
========
</TABLE>
---------------
(1) Represents cash on deposit in a cash collateral account that partially
secures borrowings under the Azurix Europe credit facility, which is
classified on Azurix's consolidated balance sheet at June 30, 2000 as
"Restricted cash and cash equivalents."
(2) All amounts outstanding are obligations of Azurix's subsidiaries, excluding
the senior notes and approximately $1.2 million and $0.2 million of capital
lease obligations and current maturities of long-term debt, respectively.
(3) The amount outstanding has been borrowed for a period of less than 12
months. The facility terminates on May 10, 2002, but contains a subjective
material adverse change clause that enables the facility to be terminated
before expiration. As a result, amounts outstanding under this facility have
been classified as short-term debt.
(4) Represents amounts outstanding under the loan to Azurix Europe from Bristol
Water Trust, a wholly owned subsidiary of Atlantic Water Trust, the credit
agreement between Azurix and Enron and the loan to Azurix from Atlantic
Water Trust.
20
<PAGE> 26
(5) Reflects borrowings under Wessex committed bank credit facilities due within
one year that have been reclassified to long-term debt because Azurix has
the ability and intent to reborrow these amounts beyond one year under these
facilities.
(6) Outstanding shares do not include shares of common stock reserved for
issuance under Azurix's stock plan. As of June 30, 2000, there were
outstanding options to purchase approximately 10,828,282 shares of common
stock.
21
<PAGE> 27
SELECTED HISTORICAL
CONSOLIDATED FINANCIAL DATA
The tables on the following page present selected historical consolidated
financial data for Azurix and for Wessex, the predecessor of Azurix, for the
periods and dates indicated.
The historical financial data for Azurix are derived from Azurix's audited
consolidated financial statements and unaudited interim financial statements,
incorporated by reference herein, and include the impact of the Wessex
acquisition from the date of acquisition. The historical financial data for the
six months ended June 30, 1999 and 2000 are derived from financial statements
that are unaudited but include all adjustments, consisting of normal recurring
adjustments, that Azurix considers necessary for a fair presentation of its
financial position and results of operations for the period. The results for the
six months ended June 30, 2000 are not necessarily indicative of the results for
the full year. All of Azurix's 1998 results of operations occurred in the fourth
quarter of 1998, subsequent to the acquisition of Wessex. The historical balance
sheet data for Wessex as of March 31, 1998 and the historical income statement
and other financial data for the years ended March 31, 1997 and 1998 and for the
six months ended October 2, 1998 are derived from Wessex's audited consolidated
financial statements. The historical income statement and other financial data
for the year ended March 31, 1996 and the historical balance sheet data for
Wessex as of March 31, 1996 and 1997 are derived from unaudited financial
statements prepared in accordance with U.S. generally accepted accounting
principles that were derived from Wessex's audited financial statements prepared
in accordance with U.K. generally accepted accounting principles.
This information should be read in conjunction with "Capitalization"
contained herein, and our consolidated financial statements, related notes and
other financial information we have incorporated by reference in this
prospectus.
22
<PAGE> 28
<TABLE>
AZURIX
WESSEX (PREDECESSOR COMPANY) -------------------------------------------------
---------------------------------------- SIX SIX
SIX MONTHS JANUARY 29, YEAR MONTHS MONTHS
YEAR ENDED MARCH 31, ENDED 1998 TO ENDED ENDED ENDED
--------------------------- OCTOBER 2, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1998 1998 1998 1999 1999 2000
------- ------- ------- ---------- ------------ ------------ -------- --------
(IN MILLIONS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues.......... $ 376.8 $ 403.1 $ 436.6 $ 233.8 $ 119.7 $ 618.0 $ 248.2 $ 383.8
Operations and maintenance
expense................... 106.6 102.4 110.9 61.7 31.6 224.7 68.7 174.0
General and administrative
expense................... 27.4 32.2 29.1 36.4 20.3 117.8 55.2 71.3
Depreciation and
amortization.............. 53.7 58.0 64.3 35.2 22.2 104.8 47.4 62.5
Restructuring charge........ -- -- -- -- -- 34.2 -- --
Operating income............ 189.1 210.5 232.3 100.5 45.6 136.5 76.9 76.0
Equity in earnings (loss) of
affiliates(1)............. 14.1 14.7 13.3 5.8 (0.8) 2.0 0.5 3.2
Interest expense (income),
net....................... (16.9) (10.2) 8.6 6.1 15.1 73.6 30.3 58.0
Other expense............... -- -- -- -- 1.2 -- -- --
Income before minority
interest, income tax and
utility tax and
extraordinary item........ 220.1 235.4 237.0 100.2 28.5 64.9 47.1 21.2
Minority interest........... -- -- -- -- -- (1.1) -- (1.2)
Income tax expense.......... 79.7 82.4 58.0 28.4 18.3 21.5 10.8 8.0
Utility tax expense(2)...... -- -- 162.3 -- -- -- -- --
Income before extraordinary
item...................... 140.4 153.0 16.7 71.8 10.2 44.5 36.3 14.4
Extraordinary loss, net of
tax....................... -- -- -- -- -- 6.8 6.8 --
Net income.................. 140.4 153.0 16.7 71.8 10.2 37.7 29.5 14.4
Preference share
dividends................. 8.0 13.5 15.1 7.7 -- -- -- --
Net income available to
common stockholders....... 132.4 139.5 1.6 64.1 10.2 37.7 29.5 14.4
Basic earnings per common
share before extraordinary
item(3)................... 0.62 0.65 0.01 0.30 0.10 0.41 0.36 0.12
Basic earnings per common
share(3).................. 0.62 0.65 0.01 0.30 0.10 0.34 0.29 0.12
Diluted earnings per common
share before extraordinary
item(3)................... 0.51 0.55 0.01 0.30 0.10 0.41 0.36 0.12
Diluted earnings per common
share(3).................. 0.51 0.55 0.01 0.30 0.10 0.34 0.29 0.12
Dividends declared per
common share(4)........... 0.25 0.26 0.31 0.23 -- -- -- --
OTHER FINANCIAL DATA:
EBITDA(5) (unaudited)....... $ 256.9 $ 283.2 $ 309.9 $ 141.5 $ 65.8 $ 277.5 $ 124.8 $ 141.7
Ratio of earnings to fixed
charges(6) (unaudited).... 6.9x 6.0x 5.8x 4.6x 3.0x 1.5x 2.1x 1.1x
Net cash provided by
operating activities(7)... 240.5 246.3 125.0 132.2 4.4 158.3 47.7 31.7
Net cash used in investing
activities................ (159.4) (97.8) (195.0) (108.4) (1,982.6) (1,076.8) (715.5) (216.5)
Net cash (used in) provided
by financing activities... (54.6) (373.0) 6.8 (23.6) 1,977.5 940.0 693.7 187.2
</TABLE>
23
<PAGE> 29
<TABLE>
WESSEX (PREDECESSOR COMPANY)
------------------------------
AZURIX
AT MARCH 31, -----------------------------------------------
------------------------------ AT DECEMBER 31, AT DECEMBER 31, AT JUNE 30,
1996 1997 1998 1998 1999 2000
-------- -------- -------- --------------- --------------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(8).......... $ 228.3 $ (95.5) $ (307.0) $ (129.6) $ (239.6) $ (200.4)
Total assets................ 2,252.7 2,258.0 2,372.3 3,358.3 4,850.4 4,477.8
Long-term liabilities....... 473.3 483.4 482.3 1,451.4 1,956.4 2,051.8
Redeemable preference
shares.................... 235.3 254.7 259.0 -- -- --
Stockholders' equity........ 1,354.4 1,251.5 1,229.5 1,645.5 1,941.8 1,854.0
</TABLE>
---------------
(1) Equity in earnings of affiliates for all periods presented for Wessex is
related primarily to Wessex's interest in UK Waste, which was sold in
November 1998.
(2) The year ended March 31, 1998 includes a windfall tax of $162.3 million,
which has been described by the U.K. Government as a one-time tax. Excluding
the effect of this tax, for the year ended March 31, 1998, Wessex's net
income, basic earnings per common share and diluted earnings per common
share would have been $179.0 million, $0.78 per common share and $0.77 per
common share, respectively.
(3) Basic and diluted earnings per common share amounts for Wessex are based on
the historical average ordinary shares of Wessex and average ordinary shares
of Wessex plus the share effect of the potential conversion to ordinary
shares of its dilutive securities, respectively.
(4) Wessex shareholders were given the option to elect dividends declared to be
paid in cash or the issuance of additional ordinary shares. Of the dividends
declared per share for the years ended March 31, 1996, 1997 and 1998 and for
the six months ended October 2, 1998, shareholders elected stock dividends
equal to $0.01, $0.02, $0.05 and $0.18 per share, respectively.
(5) EBITDA for any relevant period presented above is defined as net income
before extraordinary loss, net interest expense (income), income tax,
utility tax, depreciation and amortization, restructuring charge and
minority interest. EBITDA is not a measure recognized by generally accepted
accounting principles and should not be considered in isolation or as a
substitute for operating profit, as an indicator of liquidity or as a
substitute for net cash provided by operating activities. This method may
not be comparable to the EBITDA calculations of other entities.
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of the sum of pretax income from continuing operations before
minority interests in consolidated subsidiaries and income or loss from
equity investees, fixed charges, amortization of capitalized interest and
distributed income of equity investees, less interest capitalized and
preference security dividend requirements of consolidated subsidiaries.
Fixed charges consist of interest expense plus capitalized interest,
amortized expenses related to indebtedness and preference security dividend
requirements of consolidated subsidiaries. A schedule setting forth the
computation of the ratios of earnings to fixed charges is filed as Exhibit
12.1 to the registration statement of which this prospectus is a part.
(7) Cash used in operating activities for the six months ended June 30, 2000
includes the initial payment of $28.1 million of interest on senior
unsecured bonds issued by Wessex in March 1999. Interest payments on these
bonds are made annually in March of each year.
(8) The working capital deficit of $200.4 million at June 30, 2000 consisted
primarily of borrowings outstanding under, or secured by, the Azurix Europe
credit facility totaling $224.0 million. The Azurix Europe credit facility
terminates May 10, 2002 and contains a provision permitting banks, with
two-thirds or more of the commitments, to terminate the facility at an
earlier time if, in their reasonable opinion, changes have occurred
resulting in a material adverse effect on the borrower's ability to repay
the outstanding debt. Azurix has no knowledge of the lenders' intent to
exercise this right; however, the existence of this provision requires
amounts outstanding under the facility to be classified as short term debt
under generally accepted accounting principles. In addition, $34.6 million
of the working capital deficit at June 30, 2000 is related to funds received
in advance of providing services and does not require the use of cash.
24
<PAGE> 30
CURRENCY EXCHANGE RATES
In this prospectus, references to "U.S. dollars," "dollars," "U.S.$" and
"$" are to currency of the United States of America, references to "pounds
sterling," "L," "sterling," "pence" and "p" are to currency of the United
Kingdom, references to "pesos" are to currency of Mexico, references to
"Canadian dollars" and "CN$" are to currency of Canada and references to
"Brazilian real" and "R$" are to currency of Brazil. Balance sheet information
included in this prospectus has been translated from the applicable foreign
currencies to U.S. dollars using the current exchange rates in effect at the
balance sheet date. Income statement information included in this prospectus has
been translated from the applicable foreign currencies to U.S. dollars using the
weighted average exchange rate during the period or, where known or
determinable, at the rate on the date of the transaction for significant items.
Except as described above, and unless otherwise stated in this prospectus, and
solely for the convenience of the reader, some pounds sterling amounts have been
translated to U.S. dollar amounts at the noon buying rate in The City of New
York for cable transfers in pounds sterling as certified for customs purposes by
the Federal Reserve Bank of New York on June 30, 2000, which was $1.513 per
L1.00; some peso amounts have been translated to U.S. dollar amounts at the noon
buying rate in The City of New York for cable transfers in pesos as certified
for customs purposes by the Federal Reserve Bank of New York on June 30, 2000,
which was $0.1016 per 1.00 peso; some Canadian dollar amounts have been
translated to U.S. dollar amounts at the noon buying rate in The City of New
York for cable transfers in Canadian dollars as certified for customs purposes
by the Federal Reserve Bank of New York on June 30, 2000, which was $0.6758 per
CN$1.00; and some Brazilian real amounts have been translated to U.S. dollar
amounts at the noon buying rate in the City of New York for cable transfers in
Brazilian real as certified for customs purposes by the Federal Reserve Bank of
New York on June 30, 2000, which was $0.5543 per R$1.00. Such translations
should not be construed as representations that such U.S. dollar amounts
actually represent such foreign currency amounts or vice versa, or that such
foreign currency amounts could be or could have been converted into U.S. dollars
at the rate indicated or at any other rate.
25
<PAGE> 31
AZURIX
We are a global water company engaged in the business of owning, operating
and managing water and wastewater assets, providing water and wastewater-related
services and developing and managing water resources. We are a holding company
and conduct substantially all of our operations through our subsidiaries. Enron
formed us on January 29, 1998 to pursue opportunities in the global water
industry. Enron and Marlin Water Trust each own a 50% voting interest in
Atlantic Water Trust, which currently owns approximately 67% of our common
stock, with public stockholders owning the remainder.
Our largest asset is Wessex Water Ltd, a water and wastewater company based
in southwestern England, which we acquired in October 1998 for $2.4 billion. Our
second largest asset is a 30-year water and wastewater concession in the
Province of Buenos Aires, Argentina, which we acquired as of July 1, 1999 for
$438.6 million. Our asset portfolio also includes the following:
- interests in long-term water and wastewater concessions in the Province
of Mendoza, Argentina and in Cancun, Mexico;
- Azurix North America, a water and wastewater services company, with
operations in nine U.S. states and five Canadian provinces;
- a 49% interest in Industrias del Agua, S.A. de C.V., a company that
provides water and wastewater-related services in a portion of Mexico
City, Mexico and participates in water and wastewater projects elsewhere
in Mexico;
- Azurix Brasil RDM Ltda., a water and wastewater services company, that
provides water drilling, water supply and water and wastewater treatment
services in Brazil;
- Lurgi Bamag GmbH, a water and wastewater engineering services company
with offices in Germany, Brazil, Egypt and the United Kingdom;
- property in Madera County, California, on which we expect to develop the
Madera Water Bank Project, a ground water storage project; and
- Azurix Industrial Operations Corp., formerly Baker Hughes Industrial
Services, Inc., an industrial water and wastewater operations and
engineering support company primarily serving customers in the refinery
and petrochemical market, which we acquired in June 2000.
As of December 31, 1999, concessions in which we own interests and water
and wastewater systems that we operate served an aggregate population of
approximately 8.3 million for water and approximately 7.6 million for
wastewater. The businesses in our asset portfolio employed approximately 5,700
individuals worldwide as of June 30, 2000.
We are selectively pursuing additional water and wastewater opportunities
throughout the world, primarily in those areas where we have existing
operations, including North America, Europe and Latin America. These
opportunities may include both contracts for services and acquisitions of
assets. In the near term, we intend to focus more on service contract
opportunities and our existing assets. We also are investing in innovative ways
to provide new services, reduce costs and increase efficiencies in the global
water industry, including by utilizing information technology to deliver
e-business solutions in the areas of procurement, engineering and design, water
supply and storage and billing and collections. The timing, size and success of
any of these potential transactions cannot be predicted. The completion of any
one of these transactions could have a significant impact on our business.
On August 25, 2000, we announced that Rebecca P. Mark resigned as our
chairman and chief executive officer. In connection with Ms. Mark's resignation,
John L. Garrison, president and chief operating officer, was elected president
and chief executive officer and Herbert S. Winokur, Jr., currently a member of
our board of directors, was elected interim chairman of the board of directors.
We also announced that we are going to conduct a thorough review of all of our
businesses, our cost structure and our strategy to determine how best to improve
our financial performance and to maximize shareholder value.
Our shares are listed on the New York Stock Exchange under the symbol
"AZX."
Additional information concerning us is included in our reports and other
documents incorporated by reference in this prospectus.
26
<PAGE> 32
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the issuance of the old notes, we entered into a
registration rights agreement. Under the registration rights agreement, we
agreed to:
- file an exchange offer registration statement with the Commission on or
prior to 180 days after the original issuance of the old notes, February
18, 2000, which we did;
- use our best efforts to have the exchange offer registration statement
declared effective by the Commission on or prior to 240 days after the
original issuance of the old notes, which we also did; and
- commence the exchange offer and keep it open for at least 20 business
days and use our best efforts to issue on the earliest practicable date
after the date on which the exchange offer registration statement is
declared effective by the Commission, but in no event later than 30
business days thereafter, the new notes in exchange for all old notes
tendered prior thereto in the exchange offer, unless the exchange offer
would not be permitted by applicable law or Commission policy.
The registration statement of which this prospectus is a part functions as
the exchange offer registration statement. We are offering, pursuant to this
prospectus, the holders of old notes who are not prohibited by any law from
participating in this exchange offer the opportunity to exchange their old notes
for new notes registered under the Securities Act that are substantially
identical to the old notes, except that the new notes will not contain terms
with respect to transfer restrictions, registration rights and liquidated
damages. Following the completion of the exchange offer (except as set forth in
this section "-- Purpose and Effect of the Exchange Offer"), holders of old
notes not tendered will not have any further registration rights and the
original notes will continue to be subject to restrictions on transfer.
Under limited circumstances, we will use our best efforts to file a shelf
registration statement with the Commission on or prior to 30 days after the
filing obligation arises, and to cause the shelf registration statement to be
declared effective by the Commission on or prior to 120 days after the
obligation arises and keep the statement effective for up to two years after the
original issuance of the old notes.
We will file a shelf registration statement with the Commission if:
- we are not permitted to consummate the exchange offer because the
exchange offer is not permitted by applicable law;
- any holder of the old notes notifies us within 20 days following the
consummation of the exchange offer that it is prohibited by law or
Commission policy from participating in the exchange offer;
- any holder of old notes notifies us within 20 days following the
consummation of the exchange offer that it may not resell the exchange
notes acquired by it in the exchange offer to the public without
delivering a prospectus and this prospectus is not appropriate or
available for such resales; or
- any holder of old notes notifies us within 20 days following consummation
of the exchange offer that it is a broker-dealer and that it owns old
notes acquired directly from us or one of our affiliates.
We will pay liquidated damages to each holder of our old notes in an amount
equal to $.05 per week per $1,000 principal amount of old dollar notes and L.05
per week per L1,000 principal amount of old sterling notes, with respect to the
first 90-day period immediately following the occurrence of certain events of
default under the registration rights agreement. An event of registration
default occurs if:
- we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for that
filing;
- any of these registration statements is not declared effective by the
Commission on or prior to the date specified for effectiveness;
27
<PAGE> 33
- we fail to consummate the exchange offer within 30 business days, or
longer if required by federal securities laws, of the date specified for
effectiveness with respect to the exchange offer registration statement;
or
- subject to certain exceptions, the shelf registration statement or the
exchange offer registration statement is declared effective but
thereafter ceases to be effective or usable in connection with resales of
old notes during the periods specified in the registration rights
agreement.
The amount of the liquidated damages will increase by an additional $.05
per week per $1,000 principal amount of old dollar notes and L0.05 per week per
L1,000 principal amount of old sterling notes with respect to each subsequent
90-day period until all registration defaults have been cured, up to a maximum
amount of liquidated damages for all registration defaults of $.20 per week per
$1,000 principal amount of old dollar notes and L0.20 per week per L1,000
principal amount of old sterling notes.
All accrued liquidated damages will be paid by Azurix on each interest
payment date immediately following the applicable registration default to
holders of old notes by wire transfer to the accounts specified by them or by
mailing checks to their registered addresses if no such accounts have been
specified.
Following the cure of all registration defaults, the accrual of liquidated
damages will cease.
To exchange your old notes for transferable new notes in the exchange
offer, you will be required to make the following representations to us:
- any new notes will be acquired in the ordinary course of your business;
- you have no arrangement or understanding with any person or entity to
participate in the distribution of the new notes;
- if you are not a broker-dealer, you are not engaged in and do not intend
to engage in the distribution of the new notes;
- if you are a broker-dealer that will receive new notes for your own
account in exchange for old notes that were acquired as a result of
market-making activities or other trading activities, you will deliver a
prospectus, as required by law, in connection with any resale of such new
notes; and
- you are not our "affiliate," as defined in Rule 405 of the Securities
Act, or, if you are our affiliate, you will comply with any applicable
registration and prospectus delivery requirements of the Securities Act.
In addition, we may require you to deliver information to be used in
connection with the shelf registration statement in order to have your notes
included in the shelf registration statement and benefit from the provisions
regarding liquidated damages described in the preceding paragraphs. A holder who
sells old notes under the shelf registration statement generally will be
required to be named as a selling securityholder in the related prospectus and
to deliver a prospectus to purchasers. Such a holder will also be subject to the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the registration rights agreement
that are applicable to such a holder, including indemnification obligations.
The above summary of the registration rights agreement contains all of its
material terms. A copy of the full registration rights agreement, however, has
been filed with the Commission and is incorporated by reference into this
registration statement and is filed as an exhibit hereto.
RESALE OF NEW NOTES
Based on interpretations of the Commission staff in no-action letters
issued to third parties, we believe that new notes issued under the exchange
offer may be offered for resale, resold and otherwise transferred by you without
compliance with the registration and prospectus delivery provisions of the
Securities Act, if:
- you are not our "affiliate," within the meaning of Rule 405 under the
Securities Act;
- such new notes are acquired in the ordinary course of your business; and
28
<PAGE> 34
- you do not intend to participate in the distribution of such new notes.
If you tender your old notes in the exchange offer with the intention of
participating in any manner in a distribution of the new notes, you
- may not rely on such interpretations by the Commission staff; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act containing the selling security
holder's information required by Item 507 of Regulation S-K under the Securities
Act. This prospectus may be used for an offer to resell, resale or other
retransfer of new notes only as specifically described in this prospectus. Only
broker-dealers that acquired the old notes as a result of market-making
activities or other trading activities may participate in the exchange offer.
Each broker-dealer that receives new notes for its own account in exchange for
old notes, where such old notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of the new notes.
Please read "Plan of Distribution" for more details regarding the transfer of
new notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept for exchange any old notes
properly tendered and not withdrawn prior to the expiration date. We will issue
$1,000 principal amount of new 7-year dollar notes in exchange for each $1,000
principal amount of old 7-year dollar notes, $1,000 principal amount of new
10-year dollar notes in exchange for each $1,000 principal amount of old 10-year
dollar notes and L1,000 principal amount of new sterling notes in exchange for
each L1,000 principal amount of old sterling notes surrendered under the
exchange offer. Old dollar notes or sterling notes may be tendered only in
integral multiples of $1,000 or L1,000, respectively.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of old notes being tendered for exchange.
As of the date of this prospectus, $240 million aggregate principal amount
of the old 7-year dollar notes, $200 million aggregate principal amount of the
old 10-year dollar notes and L100 million aggregate principal amount of the old
sterling notes are outstanding. This prospectus and the letter of transmittal
are being sent to all registered holders of old notes. There will be no fixed
record date for determining registered holders of old notes entitled to
participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the provisions
of the registration rights agreement, the applicable requirements of the
Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules and
regulations of the SEC. Old notes that are not tendered for exchange in the
exchange offer will remain outstanding and continue to accrue interest and will
be entitled to the rights and benefits such holders have under the indenture
relating to the notes.
We will be deemed to have accepted for exchange properly tendered old notes
when we have given oral or written notice of the acceptance to the exchange
agent. The exchange agent will act as agent for the tendering holders for the
purposes of receiving the new notes from us.
If you tender old notes in the exchange offer, you will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes. We
will pay all charges and expenses, other than certain applicable taxes described
below, in connecting with the exchange offer. It is important that you read
"-- Fees and Expenses" for more details regarding fees and expenses incurred in
the exchange offer.
We will return any old notes that we do not accept for exchange for any
reason without expense to their tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
29
<PAGE> 35
EXPIRATION DATE
The exchange offer in relation to each series of old notes will expire at
5:00 p.m., New York City time, on September 29, 2000, unless, in our sole
discretion, we extend it. We may extend the exchange offer in relation to one
series of old notes without extending it in relation to the other series.
EXTENSIONS, DELAYS IN ACCEPTANCE, TERMINATION OR AMENDMENT
We expressly reserve the right, at any time or various times, to extend the
period of time during which the exchange offer is open. We may delay acceptance
of any old notes by giving oral or written notice of such extension to their
holders. During any such extensions, all old notes previously tendered will
remain subject to the exchange offer, and we may accept them for exchange.
In order to extend the exchange offer, we will notify the exchange agent
orally or in writing of any extension. We will notify the registered holders of
affected old notes of the extension no later than 9:00 a.m., New York City time,
on the business day after the previously scheduled expiration date.
If any of the conditions described below under "-- Conditions to the
Exchange Offer" have not been satisfied, we reserve the right, in our sole
discretion
- to delay accepting for exchange any old notes;
- to extend the exchange offer; or
- to terminate the exchange offer;
by giving oral or written notice of such delay, extension or termination to the
exchange agent. Subject to the terms of the registration rights agreement, we
also reserve the right to amend the terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of affected old notes. If we amend the exchange offer in a
manner that we determine to constitute a material change, we will promptly
disclose such amendment by means of a prospectus supplement. The supplement will
be distributed to the registered holders of the affected old notes. Depending
upon the significance of the amendment and the manner of disclosure to the
registered holders, we will extend the exchange offer if the exchange offer
would otherwise expire during such period.
CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, we will not be required to
accept for exchange, or exchange any new notes for, any old notes, and we may
terminate the exchange offer as provided in this prospectus before accepting any
old notes for exchange, if in our reasonable judgment the exchange offer, or the
making of any exchange by a holder of old notes, would violate applicable law or
any applicable interpretation of the staff of the Commission.
In addition, we will not be obligated to accept for exchange the old notes
of any holder that has not made to us the representations described under
"-- Purpose and Effect of the Exchange Offer" and such other representations as
may be reasonably necessary under applicable Commission rules, regulations or
interpretations to make available to us an appropriate form for registration of
the new notes under the Securities Act.
We expressly reserve the right to amend or terminate the exchange offer,
and to reject for exchange any old notes not previously accepted for exchange,
upon the occurrence of any of the conditions to the exchange offer specified
above. We will give oral or written notice of any extension, amendment,
non-acceptance or termination to the holders of the old notes as promptly as
practicable.
These conditions are for our sole benefit, and we may assert them or waive
them in whole or in part at any time or at various times in our sole discretion.
If we fail at any time to exercise any of these rights, this failure
30
<PAGE> 36
will not mean that we have waived our rights. Each such right will be deemed an
ongoing right that we may assert at any time or at various times.
In addition, we will not accept for exchange any old notes tendered, and
will not issue new notes in exchange for any such old notes, if at such time any
stop order has been threatened or is in effect with respect to the registration
statement of which this prospectus constitutes a part or the qualification of
the indenture relating to the notes under the Trust Indenture Act of 1939.
PROCEDURES FOR TENDERING
How to Tender Generally
Only a holder of old notes may tender such old notes in the exchange offer.
To tender old notes in the exchange offer, a holder must:
- complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal;
- have the signature on the letter of transmittal guaranteed if the letter
of transmittal so requires;
- mail or deliver such letter of transmittal or facsimile to the exchange
agent prior to the expiration date; and
- comply with the automated tender offer program procedures of DTC or the
standard transfer procedures of Euroclear or Clearstream, as applicable,
described below.
In addition, one of the following must apply:
- the exchange agent must receive old notes along with the letter of
transmittal;
- the exchange agent must receive, prior to the expiration date, a timely
confirmation of book-entry transfer of such old notes into the exchange
agent's account at DTC or at Euroclear or Clearstream, as applicable,
according to the procedure for book-entry transfer described below or a
properly transmitted agent's message; or
- the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at its
address provided above under "Prospectus Summary -- The Exchange Agent" prior to
the expiration date.
The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between the holder and us in accordance with the
terms and subject to the conditions described in this prospectus and in the
letter of transmittal.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT YOUR ELECTION AND RISK. RATHER
THAN MAIL THESE ITEMS, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND DELIVERY
SERVICE. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO ASSURE DELIVERY TO
THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. YOU SHOULD NOT SEND THE LETTER OF
TRANSMITTAL OR OLD NOTES TO US. YOU MAY REQUEST THAT YOUR BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR OTHER NOMINEES TO EFFECT THE ABOVE
TRANSACTIONS FOR YOU.
How to Tender if You Are a Beneficial Owner
If you beneficially own old notes that are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and you wish to
tender those notes, you should contact the registered holder promptly and
instruct it to tender on your behalf. If you are a beneficial owner and wish to
tender on your own
31
<PAGE> 37
behalf, you must, prior to completing and executing the letter of transmittal
and delivering your old notes, either:
- make appropriate arrangements to register ownership of the old notes in
your name; or
- obtain a properly completed bond power from the registered holder of old
notes.
The transfer of registered ownership may take considerable time and may not
be completed prior to the expiration date.
Signatures and Signature Guarantees
You must have signatures on a letter of transmittal or a notice of
withdrawal (as described below) guaranteed by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an "eligible guarantor institution,"
within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934,
that is a member of one of the recognized signature guarantee programs
identified in the letter of transmittal, unless the old notes are tendered:
- by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal; or
- for the account of a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an eligible guarantor institution.
When You Need Endorsements or Bond Powers
If the letter of transmittal is signed by a person other than the
registered holder of any old notes, the old notes must be endorsed or
accompanied by a properly completed bond power. The bond power must be signed by
the registered holder as the registered holder's name appears on the old notes,
and a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States, or an eligible
guarantor institution must guarantee the signature on the bond power.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. Unless waived by us, they should also
submit evidence satisfactory to us of their authority to deliver the letter of
transmittal.
Tendering Through DTC's Automated Tender Offer Program or Euroclear's or
Clearstream's Standard Transfer Procedures
To tender old notes in the exchange offer, the registered holder of the
notes must transfer the old notes into the exchange agent's account in
accordance with DTC's ATOP procedures or Euroclear's or Clearstream's standard
transfer procedures. Instead of physically completing and signing the letter of
transmittal and delivering it to the exchange agent, a computer-generated
message, in which the holder of old notes acknowledges and agrees to be bound by
the terms of the letter of transmittal, must be transmitted by DTC, Euroclear or
Clearstream, as the case may be, on behalf of a holder and received by the
exchange agent prior to 5:00 p.m., New York City time, on the expiration date.
The tender by a holder of old notes will constitute an agreement between
such holder and us:
- to be bound by the terms of the letter of transmittal or, in the case of
a message transmitted by DTC , Euroclear or Clearstream, as the case may
be, relating to guaranteed delivery, that such holder has received and
agrees to be bound by the applicable notice of guaranteed delivery; and
- that the agreement may be enforced against such holder.
32
<PAGE> 38
Determinations Under the Exchange Offer
We will determine in our sole discretion all questions as to the validity,
form, eligibility, time of receipt, acceptance of tendered old notes and
withdrawal of tendered old notes. Our determination will be final and binding.
We reserve the absolute right to reject any old notes not properly tendered or
any old notes our acceptance of which would, in the opinion of our counsel, be
unlawful. We also reserve the right to waive any defect, irregularities or
conditions of tender as to particular old notes. Our interpretation of the terms
and conditions of the exchange offer, including the instructions in the letter
of transmittal, will be final and binding on all parties. Unless waived, all
defects or irregularities in connection with tenders of old notes must be cured
within such time as we shall determine. Although we intend to notify holders of
defects or irregularities with respect to tenders of old notes, neither we, the
exchange agent nor any other person will incur any liability for failure to give
such notification. Tenders of old notes will not be deemed made until such
defects or irregularities have been cured or waived. Any old notes received by
the exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned to the tendering
holder, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
When We Will Issue New Notes
In all cases, we will issue new notes for old notes that we have accepted
for exchange under the exchange offer only after the exchange agent timely
receives:
- old notes or a timely book-entry confirmation of such old notes into the
exchange agent's account at DTC, Euroclear or Clearstream, as the case
may be; and
- a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message
transmitted by DTC, Euroclear or Clearstream, as the case may be, and
received by the exchange agent forming part of the book-entry
confirmation.
Return of Old Notes Not Accepted or Excepted
If we do not accept any tendered old notes for exchange for any reason
described in the terms and conditions of the exchange offer, or if old notes are
submitted for a greater principal amount than the holder desires to exchange,
the unaccepted or non-exchanged old notes will be returned without expense to
their tendering holder. In the case of old notes tendered by book-entry transfer
into the exchange agent's account at DTC, Euroclear or Clearstream according to
the procedures described below, such non-exchanged old notes will be credited to
an account maintained with DTC, Euroclear or Clearstream. These actions will
occur as promptly as practicable after the expiration or termination of the
exchange offer.
Your Representations to Us
By signing or agreeing to be bound by the letter of transmittal, you will
be making the representations to us listed under "-- Purpose and Effect of the
Exchange Offer."
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the old notes of each series at DTC, Euroclear or Clearstream, as the case
may be, for purposes of the exchange offer promptly after the date of this
prospectus. Any financial institution participating in DTC's, Euroclear's or
Clearstream's system, as the case may be, may make book-entry delivery of old
notes by causing DTC, Euroclear or Clearstream to transfer such old notes into
the exchange agent's account at DTC, Euroclear or Clearstream in accordance with
DTC's, Euroclear's or Clearstream's procedures for transfer. Holders of old
notes who are unable to deliver confirmation of the book-entry tender of their
old notes into the exchange agent's account at DTC, Euroclear or Clearstream, as
applicable, or all other documents required by the letter of transmittal to the
exchange agent on or prior to the expiration date must tender their old notes
according to the guaranteed delivery procedures described below.
33
<PAGE> 39
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your old notes but your old notes are not immediately
available or you cannot deliver your old notes, the letter of transmittal or any
other required documents to the exchange agent or comply with the applicable
procedures under DTC's automated tender offer program or Euroclear's or
Clearstream's standard transfer procedures prior to the expiration date, you may
tender if:
- the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or
correspondent in the United States, or an eligible guarantor institution;
- prior to the expiration date, the exchange agent receives from such
member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., commercial bank or
trust company having an office or correspondent in the United States, or
eligible guarantor institution either a properly completed and duly
executed notice of guaranteed delivery by facsimile transmission, mail or
hand delivery or a properly transmitted agent's message and notice of
guaranteed delivery:
- setting forth your name and address, the registered number(s) of your
old notes and the principal amount of old notes tendered;
- stating that the tender is being made thereby; and
- guaranteeing that, within three New York Stock Exchange trading days
after the expiration date, the letter of transmittal or facsimile
thereof, together with the old notes or a book-entry confirmation, and
any other documents required by the letter of transmittal will be
deposited by the eligible guarantor institution with the exchange agent;
and
- the exchange agent receives such properly completed and executed letter
of transmittal or facsimile thereof, as well as all tendered old notes in
proper form for transfer or a book-entry confirmation, and all other
documents required by the letter of transmittal, within three New York
Stock Exchange trading days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent you if you wish to tender your old notes according to the guaranteed
delivery procedures described above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw your
tender at any time prior to the expiration date.
For a withdrawal to be effective:
- the exchange agent must receive a written notice of withdrawal at one of
the addressees listed above under "Prospectus Summary -- The Exchange
Agent;" or
- you must comply with the appropriate procedures of DTC's automated tender
offer program system or Euroclear's or Clearstream's standard transfer
procedures.
Any notice of withdrawal must:
- specify the name of the person who tendered the old notes to be
withdrawn; and
- identify the old notes to be withdrawn, including the principal amount of
such old notes.
If old notes have been tendered under the procedures for book-entry
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC, Euroclear or Clearstream to be credited with the
withdrawn old notes and otherwise comply with the procedures of DTC, Euroclear
or Clearstream.
34
<PAGE> 40
We will determine all questions as to the validity, form, eligibility and
time of receipt of notice of withdrawal, and our determination shall be final
and binding on all parties. We will deem any old notes so withdrawn not to have
been validly tendered for exchange for purposes of the exchange offer.
Any old notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder or, in the case of old notes tendered by book-entry transfer into the
exchange agent's account at DTC, Euroclear or Clearstream according to the
procedures described above, such old notes will be credited to an account
maintained with DTC, Euroclear or Clearstream for the old notes. This return or
crediting will take place as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. You may retender properly withdrawn
old notes by following one of the procedures described under "-- Procedures for
Tendering" above at any time on or prior to the expiration date.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail; however, we may make additional solicitation by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or other soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses.
We will pay the cash expenses to be incurred in connection with the
exchange offer. They include:
- Securities Exchange Commission registration fees;
- fees and expenses of the exchange agent and trustee;
- accounting and legal fees and printing costs; and
- related fees and expenses.
We will pay all transfer taxes, if any, applicable to the exchange of old
notes under the exchange offer. The tendering holder, however, will be required
to pay any transfer taxes, whether imposed on the registered holder or any other
person, if:
- certificates representing old notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of old notes
tendered;
- tendered old notes are registered in the name of any person other than
the person signing the letter of transmittal; or
- a transfer tax is imposed for any reason other than the exchange of old
notes under the exchange offer.
If satisfactory evidence of payment of any transfer taxes payable by a note
holder is not submitted with the letter of transmittal, the amount of such
transfer taxes will be billed directly to that tendering holder.
TRANSFER TAXES
If you tender your old notes for exchange, you will not be required to pay
any transfer taxes. However, if you instruct us to register new notes in the
name of, or request that old notes not tendered or not accepted in the exchange
offer be returned to, a person other than you, in your capacity as the
registered tendering holder, you will be required to pay any applicable transfer
tax.
35
<PAGE> 41
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange your old notes for new notes under the exchange
offer, you will remain subject to the existing restrictions on transfer of the
old notes.
In general, you may not offer or sell the old notes unless they are
registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register resales of the old notes under the Securities Act. Based on
interpretations of the Commission staff, you may offer for resale, resell or
otherwise transfer new notes issued in the exchange offer without compliance
with the registration and prospectus delivery provisions of the Securities Act,
if:
- you are not our "affiliate," within the meaning of Rule 405 under the
Securities Act;
- you acquired the new notes in the ordinary course of your business; and
- you have no arrangement or understanding with respect to the distribution
of the new notes to be acquired in the exchange offer.
If you tender your old notes in the exchange offer for the purpose of
participating in a distribution of the new notes, you:
- cannot rely on the applicable interpretations of the Commission; and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
ACCOUNTING TREATMENT
We will record the new notes of each series in our accounting records at
the same carrying value as the old notes of the same series, which is the
aggregate principal amount of the old notes of the same series, as reflected in
our accounting records on the date of exchange. Accordingly, we will not
recognize any gain or loss for accounting purposes in connection with the
exchange offer. The amount of cost incurred by us to effect the exchange offer
will be amortized to interest expense over the life of the notes.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered old notes in open market or
privately negotiated transactions, through subsequent exchange offers or
otherwise. We have no present plans to acquire any old notes that are not
tendered in the exchange offer or to file a registration statement to permit
resales of any untendered old notes.
36
<PAGE> 42
DESCRIPTION OF THE NEW NOTES
You cannot understand this description of the new notes without first
reading and understanding the definitions of the defined terms that are used in
this description. You can find the definitions of terms used in this description
under the subheading "-- Important Definitions" beginning on page 61 of this
prospectus. As used in this section "Description of the New Notes," the term
"Azurix" refers solely to Azurix Corp. and not to any of its subsidiaries, and
the terms "notes" and "new notes" are used interchangeably. Azurix will issue
the new notes under an indenture, dated February 18, 2000, between itself and
The Chase Manhattan Bank, as successor trustee to Chase Bank of Texas, National
Association, which is the same indenture under which the old notes were issued.
The terms of the new notes include those stated in the indenture and those made
part of the indenture by reference to the Trust Indenture Act of 1939, as
amended.
The old notes of a series and the new notes of that series issued in the
exchange offer will together constitute a separate single class of debt
securities under the indenture. If the exchange offer for notes of a series is
consummated, holders of old notes of that series who do not exchange their old
notes for new notes of that series in the exchange offer will vote together with
holders of that series of new notes for all relevant purposes under the
indenture. Accordingly, in determining whether the required holders have given
any notice, consent or waiver or taken any other action permitted under the
indenture, any old notes that remain outstanding after the exchange offer will
be aggregated with the applicable series of new notes and the holders of those
old notes and new notes will vote together as a single series. All references in
this summary description of the notes to specified percentages in aggregate
principal amount of the outstanding notes of a series means, at any time after
the exchange offer for notes of that series is consummated, the percentages in
aggregate principal amount of the applicable old notes and new notes then
outstanding.
The following description is a summary of the material provisions of the
new notes and the indenture and does not purport to be complete. We urge you to
read the indenture because it, and not this description, defines your rights as
holders of the new notes. The indenture is incorporated by reference into this
registration statement and filed as an exhibit to our 1999 Annual Report on Form
10-K.
BRIEF DESCRIPTION OF THE NEW NOTES
The notes will be issued in three series:
- 10 3/8% dollar-denominated Senior Notes due 2007;
- 10 3/8% sterling-denominated Senior Notes due 2007; and
- 10 3/4% dollar-denominated Senior Notes due 2010.
The notes of each series:
- will be general, unsecured obligations of Azurix only and not guaranteed
by any of its subsidiaries and
- will be equal in right of payment with the other series of notes and with
all existing and future unsecured senior indebtedness of Azurix.
As of June 30, 2000, Azurix had approximately $707.2 million of unsecured
senior indebtedness outstanding, including the old notes but excluding
guarantees of subsidiaries' obligations and reimbursement obligations for
letters of credit that, if drawn, would have totaled approximately $0.3 million.
Azurix had no secured indebtedness outstanding. As of June 30, 2000, Azurix was
the guarantor of reimbursement obligations for letters of credit for
subsidiaries that, if drawn, would have totaled approximately $49.9 million and
Azurix had warranty and advance payment obligations and bond performance
obligations for subsidiaries of approximately $88.2 million.
HOLDING COMPANY STRUCTURE
Azurix's ability to pay principal of, premium, if any, and interest on the
notes will be dependent upon the receipt of sufficient funds from its current
and future subsidiaries. The subsidiaries of Azurix have incurred
37
<PAGE> 43
substantial indebtedness and are expected to incur additional indebtedness in
the future. Their ability to distribute funds to Azurix in the form of
dividends, management fees and expense reimbursements, principal, interest,
loans or otherwise is restricted, and may in the future be restricted, by the
terms of their subsidiary financing arrangements and regulatory schemes. As of
June 30, 2000, approximately $1,046.6 million of outstanding indebtedness of
Azurix's subsidiaries would have been effectively senior to the notes, excluding
intercompany indebtedness and amounts secured by cash or cash equivalents, none
of which is guaranteed by Azurix.
PRINCIPAL, MATURITY AND INTEREST
The notes consist of:
- 7-year dollar notes, which will mature on February 15, 2007;
- 7-year sterling notes, which will mature on February 15, 2007; and
- 10-year dollar notes, which will mature on February 15, 2010.
Each series of the notes will be payable at its final maturity.
The indenture, however, will allow Azurix to issue in the future (1) up to
$50 million principal amount of additional 7-year dollar notes, (2) up to the
sterling equivalent of $50 million principal amount of additional 7-year
sterling notes and (3) up to $50 million principal amount of additional 10-year
dollar notes. All future issuances of notes will be subject to the debt
incurrence limitations described under "-- Important Covenants -- Limitations on
Debt." Any additional notes Azurix issues in the future in a private placement
may be exchanged for an equal amount of exchange notes, which shall have
substantially the same terms, including the same interest rates and interest
payment dates, as the notes of the applicable series offered in this offering.
Any additional notes that Azurix may issue under the indenture shall be a part
of the same series as the notes of the applicable series offered in this
offering.
Interest on the new notes will accrue at the rate of 10 3/8% per annum on
the 7-year dollar notes, 10 3/8% per annum on the 7-year sterling notes and
10 3/4% per annum on the 10-year dollar notes, and in each case, will be payable
semi-annually in arrears on February 15 and August 15, commencing on February
15, 2001. Azurix will make each interest payment to the holders of record of
each series of the new notes at the close of business on the immediately
preceding February 1 and August 1.
Interest on the notes will accrue from August 15, 2000, the most recent
date to which interest has been paid on the old notes. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months. Interest on
overdue principal and, to the extent permitted by applicable law, on overdue
installments of interest shall accrue at the coupon rate applicable to the
notes.
Interest paid to a non-U.S. holder of notes may be subject to withholding
by Euroclear or DTC unless such holder provides a completed IRS Form W-8BEN.
PAYING AGENTS AND REGISTRARS FOR THE NEW NOTES
Azurix will maintain one or more paying agents (the "Paying Agents") (i) in
New York City for all series of the notes and (ii) in Luxembourg for the
sterling notes, for so long as required by the rules of the Luxembourg Stock
Exchange. The initial Paying Agents are The Chase Manhattan Bank in New York and
Chase Manhattan Bank Luxembourg S.A. in Luxembourg.
Azurix will also maintain one or more registrars and transfer agents (the
"Registrars") (i) in New York City for all series of the notes and (ii) in
Luxembourg for the sterling notes, for so long as required by the rules of the
Luxembourg Stock Exchange. The initial Registrars are The Chase Manhattan Bank
in New York and Chase Manhattan Bank Luxembourg S.A. in Luxembourg. The
Registrars will maintain a register reflecting ownership and transfers of notes
outstanding from time to time.
Azurix may change the Paying Agents or the Registrars without prior notice
to the Holders.
38
<PAGE> 44
METHODS OF RECEIVING PAYMENTS ON THE NEW NOTES
Principal of, premium, if any, and interest on the dollar notes will be
payable at the corporate trust office or agency of the Paying Agent in New York
City maintained for such purposes. Azurix will pay such amounts in money of the
United States that at the time of payment is legal tender for payment of public
and private debts. Principal of, premium, if any, and interest and Liquidated
Damages, if any, on the sterling notes will be payable at the corporate trust
office or agency of the Paying Agents in New York City and Luxembourg maintained
for such purposes. Azurix will pay such amounts in money of the United Kingdom
that at the time of payment is legal tender for payment of public and private
debts. All payments on the Global Notes will be made by check or by transfer of
immediately available funds to an account of the Holder of the Global Notes in
accordance with instructions given by the Holder. In addition, interest on
Definitive Registered Notes (as defined under "-- Form of New Notes" below) may
be paid by check mailed to the person entitled thereto as shown on the register
for such Definitive Registered Notes.
NOTICES
All notices to holders of notes shall be deemed to have been duly given
upon (1) the mailing by first-class mail, postage prepaid, of such notices to
Holders at their registered addresses as recorded in the note register and (2)
publication in a leading daily newspaper with general circulation in Luxembourg
(which is expected to be the Luxemburger Wort) or, if the sterling notes are not
listed on the Luxembourg Stock Exchange and not practicable, in a leading daily
English-language newspaper having general circulation in Europe previously
approved by the trustee. Any notice referred to in (2) above shall be deemed to
have been given on the date of such publication or, if published more than once
or on different dates, on the first date on which publication is made in the
manner required in the newspaper or in one of the newspapers referred to above.
For notes that are represented by Global Notes held on behalf of Euroclear or
DTC, notices may be given by delivery of the relevant notices to Euroclear or
DTC for communication in substitution for the aforesaid publication. If, and for
so long as, any sterling notes are listed on the Luxembourg Stock Exchange and
the rules and regulations of the Luxembourg Stock Exchange so require, any such
notice shall also be published in a leading daily newspaper of general
circulation in Luxembourg. Such publication is expected to be the Luxemburger
Wort.
FORM OF NEW NOTES
The new notes of each series issued on the consummation of the exchange
offer will be issued in the form of Global Notes. Dollar notes will be issued in
denominations of $1,000 principal amount and integral multiples thereof.
Sterling notes will be issued in denominations of L1,000 principal amount and
integral multiples thereof.
Each series of new dollar notes will initially be represented by one or
more Global Notes (the "Dollar Global Notes"). The Dollar Global Notes will be
deposited with the trustee as custodian for DTC (together with Euroclear, the
"Depositaries") and registered in the name of Cede & Co., as nominee of DTC.
Ownership interests in a Dollar Global Note may be held through organizations,
including Euroclear and Clearstream, that are participants in DTC. Dollar
Book-Entry Interests will be shown on, and transfers thereof will be effected
only through, records maintained in book-entry form by DTC and its participants.
Please read "-- Transfer and Exchange" below.
New Sterling notes will initially be represented by one Global Note (the
"Sterling Global Note"). The Sterling Global Note will be deposited with a
common depositary for Euroclear or its nominee. Investors may hold their
interests in the Sterling Global Note directly through Euroclear or indirectly
through organizations which are participants in Euroclear. Sterling Book-Entry
Interests will be shown on, and transfers thereof will be effected only through,
records maintained in book-entry form by Euroclear and its participants.
Transfers of Sterling Book-Entry Interests may not be made through Clearstream.
Please read "-- Transfer and Exchange" below.
39
<PAGE> 45
Under the terms of the indenture, owners of Dollar Book-Entry Interests
will receive Definitive Registered Notes of the same series:
(1) if DTC notifies Azurix that it is unwilling or unable to continue
to act as depositary or ceases to be a clearing agency registered under the
Exchange Act and, in either case, a successor depositary is not appointed
by Azurix within 120 days;
(2) if DTC so requests following an Event of Default under the
indenture; or
(3) in whole (but not in part) at any time if Azurix in its sole
discretion determines that the Dollar Global Note should be exchanged for
Definitive Registered Notes.
Under the terms of the indenture, owners of Sterling Book-Entry Interests
will receive Definitive Registered Notes:
(1) if Euroclear notifies Azurix that it is unwilling or unable to
continue to act as depositary and a successor depositary is not appointed
by Azurix within 120 days;
(2) if Euroclear so requests following an Event of Default under the
indenture; or
(3) in whole (but not in part) at any time if Azurix in its sole
discretion determines that the Sterling Global Note should be exchanged for
Definitive Registered Notes.
Upon the occurrence of an event described in clauses (1)-(3) of each of the
two preceding paragraphs, a Registrar will issue Definitive Registered Notes,
registered in the name or names and issued in any approved denominations,
requested by or on behalf of DTC or Euroclear, as applicable (in accordance with
their respective customary procedures and based upon directions received from
participants reflecting the beneficial ownership of Book-Entry Interests).
If Definitive Registered Notes are issued and such notes are then listed on
the Luxembourg Stock Exchange, transfers of such notes will have to be cleared
through a clearing system or a method approved by the rules and regulations of
the Luxembourg Stock Exchange in order to continue to be listed on the
Luxembourg Stock Exchange.
To the extent permitted by law, Azurix, any Subsidiary Guarantor, the
trustee, the Paying Agents and the Registrars shall be entitled to treat the
Holder of any note as the absolute owner thereof.
No service charge shall be made to a Holder for any registration of
transfer or exchange, but Azurix may require payment of a sum sufficient to
cover any stamp or transfer tax, duty or governmental charge payable in
connection therewith, subject to certain exceptions. Azurix will not impose any
fees or other charges in respect of the notes; however, holders of the
Book-Entry Interests may incur fees normally payable in respect of the
maintenance and operation of accounts in DTC, Euroclear and Clearstream.
TRANSFER AND EXCHANGE
The Global Notes may be transferred only to a successor to the relevant
Depositary.
Book-Entry Interests will not be held in definitive form.
All transfers of Book-Entry Interests between participants in DTC,
participants in Euroclear or, in the case of Dollar Book-Entry Interests only,
participants in Clearstream will be effected by DTC, Euroclear or, in the case
of Dollar Book-Entry Interests only, Clearstream pursuant to customary
procedures and subject to the applicable rules and procedures established by
DTC, Euroclear or Clearstream and their respective participants.
In the circumstances described under "-- Form of New Notes" above,
Book-Entry Interests in a Global Note may be exchanged by the owner thereof for
Definitive Registered Notes of the same series in denominations of $1,000 or
L1,000 principal amount, as applicable, and integral multiples thereof upon
receipt by a Registrar of instructions relating thereto and any certificates and
other documentation required by the
40
<PAGE> 46
indenture. It is expected that such instructions will be based upon directions
received by DTC, Euroclear or, in the case of Dollar Book-Entry Interests,
Clearstream, as applicable, from the participant which owns the relevant
Book-Entry Interests.
Dollar notes issued as Definitive Registered Notes may be transferred, upon
surrender for registration of transfer of such note at the office or agency
maintained for such purpose in New York City, in whole or in part, in
denominations of $1,000 in principal amount or integral multiples thereof and
sterling notes issued as Definitive Registered Notes may be transferred, upon
surrender for registration of transfer of such note at the office or agency
maintained for such purpose in New York City or Luxembourg, in whole or in part,
in denominations of L1,000 in principal amount or integral multiples thereof, in
each case to persons who take delivery thereof in the form of Definitive
Registered Notes of the same series or in the form of Book-Entry Interests in a
Global Note of the same series. In the case of a transfer of only a portion of a
Definitive Registered Note, a new Definitive Registered Note of the same series
will be issued to the transferee in respect of the principal amount of the
portion so transferred and a further new Definitive Registered Note of the same
series in respect of the balance of the principal amount not so transferred
shall be issued to the transferor, in each case at the office or agency
maintained for such purpose in New York City or, in the case of the sterling
notes, Luxembourg. In connection with any transfer of notes, the indenture will
require the transferor to, among other things, furnish appropriate endorsements
and transfer documents, to furnish certain certificates and to pay any taxes,
duties and governmental charges in connection with such transfer.
Notwithstanding the foregoing, Azurix is not required to register the
transfer of any Definitive Registered Notes:
(1) for a period of 15 calendar days prior to any date fixed for the
redemption of the notes;
(2) for a period of 15 calendar days immediately prior to the date
fixed for selection of notes to be redeemed in part;
(3) for a period of 15 calendar days prior to any interest payment
date; or
(4) which the Holder has tendered (and not withdrawn) for repurchase
in connection with a Change of Control Offer or an Asset Sale Offer (as
such terms are defined below under "-- Repurchase of Notes at the Option of
Holders").
Any such transfer will be made without charge to the Holder, other than any
taxes, duties and governmental charges payable in connection with such transfer.
REDEMPTION OF GLOBAL NOTES
In the event any Global Note (or any portion thereof) is redeemed, the
relevant Depositary will redeem an equal amount of the Book-Entry Interests in
such Global Note from the amount received by it in respect of the redemption of
such Global Note. The redemption price payable in connection with the redemption
of such Book-Entry Interests will be equal to the amount received by the
relevant Depositary in connection with the redemption of such Global Note (or
any portion thereof). Azurix understands that under existing practices of DTC
and Euroclear and, in the case of Dollar Book-Entry Interests only, Clearstream,
if fewer than all of the notes are to be redeemed at any time, DTC and Euroclear
and, in the case of Dollar Book-Entry Interests only, Clearstream will credit
their respective participants' accounts on a proportionate basis (with
adjustments to prevent fractions) or by lot or on such other basis as they deem
fair and appropriate; provided, however, that no Dollar Book-Entry Interest of
less than $1,000 principal amount or Sterling Book-Entry Interest of less than
L1,000 principal amount may be redeemed in part.
PAYMENTS ON GLOBAL NOTES
Payments of any amounts owing in respect of the Global Notes (including
principal, premium, if any, and interest) will be made by Azurix in U.S.
dollars, in the case of Dollar Global Notes, and pounds sterling, in the case of
the Sterling Global Note, to the relevant Paying Agent. The relevant Paying
Agent will, in turn, make
41
<PAGE> 47
payments to DTC or the common depositary for Euroclear, as applicable, which
will distribute such payments to participants in accordance with its procedures.
Under the terms of the indenture, Azurix, any Subsidiary Guarantor, the
trustee, the Paying Agents and the Registrars will treat the registered holder
of the Global Notes (e.g., DTC (or its nominee) and the common depositary (or
its nominee)) as the owner thereof for the purpose of receiving payments and for
all other purposes. Consequently, none of such persons has or will have any
responsibility or liability for:
(1) any aspect of the records of DTC, Euroclear, Clearstream or any
participant or indirect participant relating to or payments made on account
of a Book-Entry Interest or for maintaining, supervising or reviewing any
of the records of DTC, Euroclear, Clearstream or any participant or
indirect participant relating to our payments made on account of a
Book-Entry Interest; or
(2) DTC, Euroclear, Clearstream or any participant or indirect
participant.
Payments by participants to owners of Book-Entry Interests held through
participants are the responsibility of such participants, as is now the case
with securities held for the accounts of customers registered in "street name."
ACTION BY OWNERS OF BOOK-ENTRY INTERESTS
DTC and Euroclear have advised Azurix that they will take any action
permitted to be taken by a holder of notes (including the tender of notes for
repurchase as described above) only at the direction of one or more participants
to whose account the Book-Entry Interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of notes as to
which such participant or participants has or have given such direction. The
relevant Depositary will not exercise any discretion in the granting of
consents, waivers or the taking of any other action in respect of the Global
Notes. However, if there is an Event of Default under the notes, each Depositary
reserves the right to exchange the Global Notes for Definitive Registered Notes
in certificated form, and to distribute such notes to its participants.
INFORMATION CONCERNING DTC, EUROCLEAR AND CLEARSTREAM
Azurix understands as follows with respect to DTC, Euroclear and
Clearstream:
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities of its participants and to facilitate the
clearance and settlement of transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. DTC participants include securities brokers and dealers (including
the Initial Purchasers), banks, trust companies, clearing corporations and
certain other organizations, some of whom (and/or their representatives) own
DTC. Access to the DTC book-entry system is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and certain banks, the ability of an owner of a
Book-Entry Interest to pledge such interest to persons of entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be limited by the lack of a definitive certificate for such
interest. The laws of some states require that certain persons take physical
delivery of securities in definitive form. Consequently, the ability to transfer
Book-Entry Interests to such persons may be limited. In addition, beneficial
owners of Book-Entry Interests through the DTC system will receive distributions
attributable to the Global Notes only through DTC participants.
Euroclear and Clearstream each hold securities for their customers and
facilitate the clearance and settlement of securities transactions by electronic
book-entry transfer between their respective account holders. Euroclear and
Clearstream provide various services including safekeeping, administration,
clearance
42
<PAGE> 48
and settlement of internationally traded securities and securities lending and
borrowing. Euroclear and Clearstream also deal with domestic securities markets
in several countries through established depositary and custodial relationships.
Euroclear and Clearstream have established an electronic bridge between their
two systems across which their respective participants may settle trades with
each other, but only in dollar-denominated notes.
Euroclear and Clearstream customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks trust companies
and clearing corporations. Indirect access to Euroclear and Clearstream is
available to other institutions that clear through or maintain a custodian
relationship with an account holder of either system.
SETTLEMENT UNDER THE BOOK-ENTRY SYSTEM
The Dollar Book-Entry Interests will trade in DTC's system, and secondary
market trading activity in such Book-Entry Interests will therefore settle in
same-day funds. The Sterling Book-Entry Interests will trade through
participants of Euroclear, and will settle in same-day funds.
Since the purchase determines the place of delivery, it is important to
establish at the time of trading of any Book-Entry Interests where both the
purchaser's and seller's accounts are located to ensure that settlement can be
made on the desired dates.
CHANGE OF CURRENCY OF NEW 7-YEAR STERLING NOTES
If the United Kingdom adopts the euro, the euro will replace pounds
sterling as the legal tender in the United Kingdom and result in the effective
redenomination of the sterling notes into euros and the regulations of the
European Commission relating to the euro shall apply to the sterling notes.
Under those circumstances, neither Azurix nor any holder of sterling notes is
entitled to early redemption, rescission, notice or repudiation of the terms and
conditions of such notes or the indenture or to raise other defenses or to
request any compensation claim. Azurix will notify Holders of sterling notes of
the rate of such conversion and will provide a copy of such notice to the
Luxembourg Stock Exchange. Such notice will also be published in a leading daily
newspaper of general circulation in Luxembourg (which is expected to be the
Luxemburger Wort).
OPTIONAL REDEMPTION
New 10-Year Dollar Notes
The 10-year dollar notes may be redeemed in whole or in part at Azurix's
option at any time on or after February 15, 2005, upon not less than 30 nor more
than 60 days' prior notice, at the following redemption prices (expressed as
percentages of the principal amount thereof), together, in each case, with
accrued and unpaid interest thereon to the date of redemption, if redeemed
during the 12-month period beginning on February 15 of each year below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2005........................................................ 105.375%
2006........................................................ 103.583%
2007........................................................ 101.792%
2008 and thereafter......................................... 100.000%
</TABLE>
New 10-Year Dollar Notes and New 7-Year Notes
The 10-year dollar notes may be redeemed in whole or in part at Azurix's
option at any time prior to February 15, 2005, and the 7-year dollar notes may
be redeemed in whole or in part at Azurix's option at any time prior to
maturity, in either case upon not less than 30 nor more than 60 days' prior
notice, at a redemption price equal to the then outstanding principal amount of
the notes being redeemed plus accrued and unpaid interest thereon to the date of
redemption plus a premium equal to the excess of (i) the present value at the
time of redemption of (x) in the case of the 10-year dollar notes, the principal
amount of the 10-year dollar notes being redeemed, plus premium thereon
applicable to 10-year dollar notes redeemable at the option of
43
<PAGE> 49
Azurix on February 15, 2005, and any required interest payments due on the
10-year dollar notes being redeemed through February 15, 2005, and (y) in the
case of the 7-year dollar notes, the principal amount of the 7-year dollar notes
being redeemed and any required interest payments due on the 7-year dollar notes
being redeemed through Stated Maturity, in either case computed using a discount
rate equal to the applicable Treasury Rate plus 50 basis points over (ii) the
then outstanding principal amount of the notes being redeemed.
The 7-year sterling notes may be redeemed in whole or in part at Azurix's
option at any time prior to maturity, upon not less than 30 nor more than 60
days' prior notice, at a redemption price equal to the then outstanding
principal amount of the notes being redeemed plus accrued and unpaid interest
thereon to the date of redemption plus a premium equal to the excess of (i) the
present value at the time of redemption of the principal amount of the 7-year
sterling notes being redeemed and any required interest payments due on the
7-year sterling notes being redeemed through Stated Maturity, computed using a
discount rate equal to the Gilt Rate plus 50 basis points over (ii) the then
outstanding principal amount of the notes being redeemed.
In addition, prior to February 15, 2003, Azurix may on any one or more
occasions redeem up to 35% of the aggregate principal amount of the notes of
each series originally issued under the indenture at a redemption price of (x)
in the case of the 10-year dollar notes, 110.750% of the principal amount
thereof, (y) in the case of the 7-year dollar notes, 110.375% of the principal
amount thereof, and (z) in the case of the 7-year sterling notes, 110.375% of
the principal amount thereof, in each case plus accrued and unpaid interest
thereon to the redemption date, with all or part of the net cash proceeds of one
or more Public Equity Offerings; provided, however, that
(1) at least 65% in aggregate principal amount of the notes of the
applicable series originally issued under the indenture remains outstanding
immediately after the occurrence of such redemption (excluding notes held
by Azurix and its Subsidiaries); and
(2) the redemption must occur within 60 days of the closing of such
Public Equity Offering.
In the case of any partial redemption, selection of notes for redemption
will be made by the trustee in compliance with the requirements of any
securities exchange on which the notes are listed or, in the absence of such
requirement or, if the notes are not so listed, on a pro rata basis, by lot or
by such other method as the trustee shall deem to be fair and appropriate.
So long as the sterling notes may be listed on the Luxembourg Stock
Exchange and the rules of the Luxembourg Stock Exchange so require, Azurix will
give notice to such exchange of any redemption of the sterling notes, and it
will, once in each year in which there has been a partial redemption of the
sterling notes, cause to be published in a leading daily newspaper of general
circulation in Luxembourg (which is expected to be the Luxemburger Wort) a
notice specifying the aggregate principal amount of sterling notes outstanding
and a list of the sterling notes called for redemption but not surrendered.
REPURCHASE OF NEW NOTES AT THE OPTION OF HOLDERS
Change of Control
If a Change of Control occurs with respect to notes of any series, each
Holder of the notes of such series shall have the right to require Azurix to
repurchase the Holder's notes. The repurchase price shall be payable in cash and
shall be equal to 101% of the principal amount of notes repurchased plus accrued
and unpaid interest thereon to the date of repurchase.
The Change of Control provisions will not necessarily afford protection to
Holders, including protection against an adverse effect on the value of the
notes, in the event that Azurix or its Subsidiaries Incur additional Debt,
whether through recapitalizations or otherwise. In addition, the Change of
Control provisions can be modified or amended under the indenture upon the
approval of Holders of a majority in aggregate principal amount of the
outstanding notes.
44
<PAGE> 50
Within 30 days following any Change of Control, Azurix shall give notice to
each Holder, as described under "-- Notices" above, with a copy to the trustee
stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require Azurix to repurchase such Holder's notes at a repurchase
price in cash equal to 101% of the principal amount thereof plus accrued
and unpaid interest thereon and Liquidated Damages, if any, to the date of
repurchase;
(2) the circumstances and relevant facts regarding such Change of
Control, including information with respect to pro forma historical income,
cash flow and capitalization after giving effect to such Change of Control;
(3) the repurchase date, which shall be a Business Day and be not
earlier than 30 days or later than 60 days from the date such notice is
mailed;
(4) that interest on any note not tendered will continue to accrue;
(5) that interest on any note accepted for payment in a repurchase
shall cease to accrue after the repurchase date;
(6) that Holders electing to have a note repurchased will be required
to surrender the note (if the notes are not in book-entry form), with the
form entitled "Option of Holder to Elect Purchase" on the reverse of the
note completed, to a Paying Agent at the address specified in the notice
prior to the close of business on the repurchase date;
(7) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day, or such shorter periods as may be required by applicable law,
preceding the repurchase date, a telegram, facsimile transmission or letter
setting forth the name of the Holder, the principal amount of notes the
Holder delivered for repurchase, and a statement that such Holder is
withdrawing his election to have such notes repurchased; and
(8) that Holders which elect to have their notes repurchased only in
part will be issued another note in a principal amount equal to the
unpurchased portion of the notes surrendered.
On the repurchase date, Azurix shall:
(1) accept for payment notes or portions thereof tendered pursuant to
the Change of Control;
(2) deposit with a Paying Agent money sufficient to pay the repurchase
price of all notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to a Paying Agent notes so
accepted together with an Officers' Certificate identifying the notes or
portions thereof tendered to Azurix.
A Paying Agent shall promptly pay to the Holders of the notes so accepted
an amount equal to the repurchase price, and promptly return to such Holders
another note in a principal amount equal to any unpurchased portion of the notes
surrendered. Azurix will publicly announce the results of any repurchases of
notes upon a Change of Control on or as soon as practicable after the repurchase
date.
Azurix will comply with all applicable tender offer rules, including
without limitation Rule 14e-1 under the Exchange Act, in connection with any
repurchases of notes upon a Change of Control or pursuant to an Asset Sale Offer
(as defined below).
Azurix's ability to repurchase any notes upon a Change of Control would be
limited by its access to funds at the time and the terms of its debt agreements.
Upon a Change of Control, Azurix may be required immediately to repay the
outstanding principal, any accrued interest on and any other amounts owed by it
under its credit facilities. The source of funds for these repayments would be
Azurix's available cash or cash generated from other sources. However, Azurix
cannot assure you that it will have sufficient funds available upon a Change of
Control to make any required repurchases of tendered notes.
45
<PAGE> 51
Limitations on Asset Sales
Azurix will not, and will not permit any of its Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) Azurix (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Capital Stock issued or sold or otherwise
disposed of;
(2) such fair market value is determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a Board
resolution; and
(3) at least 75% of the consideration therefor received by Azurix or
such Restricted Subsidiary is in the form of cash. For purposes of this
provision, each of the following shall be deemed to be cash:
(A) any liabilities (as shown on Azurix's or such Restricted
Subsidiary's most recent balance sheet) of Azurix or any Restricted
Subsidiary (other than contingent liabilities and liabilities that are
by their terms subordinated to the notes or any Subsidiary Guarantee)
that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases Azurix or such Restricted
Subsidiary from further liability;
(B) any securities, notes or other obligations received by Azurix
or any such Restricted Subsidiary from such transferee that are
converted within 90 days by Azurix or such Restricted Subsidiary into
cash (to the extent of the cash received in that conversion); and
(C) Voting Stock of another Person engaged in a Permitted Business,
provided that, after giving effect to the receipt of such Voting Stock,
the aggregate book value, as determined in accordance with GAAP, of all
such Voting Stock owned by Azurix and its Restricted Subsidiaries,
excluding the Voting Stock of any Restricted Subsidiary, represents less
than 15% of Consolidated Total Assets of Azurix.
Within 365 days after the Asset Sale, Azurix or any Restricted Subsidiary
may apply such Net Proceeds at its option:
(1) to repay Senior Debt of Azurix or any Restricted Subsidiary (and
to correspondingly permanently reduce commitments with respect thereto in
the case of revolving borrowings), including to repurchase any notes;
(2) to acquire all or substantially all of the assets of, or any
Voting Stock of, another Person engaged in a Permitted Business, provided
that, after giving effect to the acquisition of such Voting Stock, the
aggregate book value, as determined in accordance with GAAP, of all such
Voting Stock owned by Azurix and its Restricted Subsidiaries, excluding the
Voting Stock of any Restricted Subsidiary, represents less than 15% of
Consolidated Total Assets of Azurix;
(3) to make a capital expenditure; or
(4) to acquire other long-term assets that are used or useful in a
Permitted Business.
Pending the final application of any such Net Proceeds, Azurix or any
Restricted Subsidiary may temporarily reduce revolving credit borrowings or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds $25.0 million, Azurix will make a
pro rata offer (an "Asset Sale Offer") to all holders of notes and all holders
of other Senior Debt of Azurix that is pari passu with the notes containing
provisions similar to those set forth in the indenture with respect to offers to
purchase or redeem with the proceeds of sales of assets to purchase the maximum
principal amount of notes and such other Senior Debt that may be purchased out
of the Excess Proceeds. The offer price in any Asset Sale Offer will be equal to
100% of principal amount plus accrued and
46
<PAGE> 52
unpaid interest thereon and Liquidated Damages, if any, to the date of purchase,
and will be payable in cash. If any Excess Proceeds remain after consummation of
an Asset Sale Offer, Azurix may use such Excess Proceeds for any purpose not
otherwise prohibited by the indenture. If the aggregate principal amount of
notes and such other Senior Debt tendered into such Asset Sale Offer exceeds the
amount of Excess Proceeds, the trustee shall select the notes and such other
Senior Debt to be purchased on a pro rata basis. Upon completion of each Asset
Sale Offer, the amount of Excess Proceeds shall be reset at zero.
To the extent that any or all of the Net Proceeds of any Foreign Asset Sale
is prohibited or delayed by applicable local law from being repatriated to the
United States, the portion of such Net Proceeds so affected shall not be
required to be applied at the time provided above, but may be retained by the
applicable Restricted Subsidiary so long, but only so long, as the applicable
local law will not permit repatriation to the United States. Azurix will agree
promptly to take or cause the applicable Subsidiary to promptly take all
commercially reasonable actions required by the applicable local law to permit
such repatriation. Once such repatriation of any of such affected Net Proceeds
is permitted under the applicable local law, such repatriation shall be promptly
effected and such repatriated Net Proceeds will be applied in the manner set
forth in this provision as if such Foreign Asset Sale had occurred on the date
of such repatriation.
To the extent that the Board of Directors determines, in good faith, that
repatriation of any or all of the Net Proceeds of any Foreign Asset Sale would
have a material adverse tax consequence to Azurix, the Net Proceeds so affected
need not be repatriated to the United States by the applicable Restricted
Subsidiary for so long as such material adverse tax consequence would continue.
IMPORTANT COVENANTS
Unless waived or amended, the covenants in the indenture, including the
ones summarized below, will be applicable so long as any of the notes are
outstanding. These covenants are for your benefit and, among other things,
restrict our ability, with exceptions that are described below, to:
- incur additional debt or permit our subsidiaries to do so;
- pay dividends and make other distributions;
- incur liens to secure debt;
- sell assets or permit our subsidiaries to do so;
- enter into sale/leaseback transactions or permit our subsidiaries to do
so;
- create payment restrictions affecting subsidiaries;
- enter into transactions with Affiliates or permit our subsidiaries to do
so; and
- merge or consolidate with or into, or sell or otherwise transfer our
properties and assets as an entirety to, another entity.
Whenever the covenants or default provisions or definitions in the
indenture refer to an amount in U.S. dollars, that amount will be deemed to
refer to the U.S. Dollar Equivalent of the amount of any obligation denominated
in any other currency or currencies, including composite currencies.
The U.S. Dollar Equivalent of pounds sterling or any other determination of
U.S. Dollar Equivalent for any purpose under the indenture will be determined as
of a date of determination as otherwise described in the definition of "U.S.
Dollar Equivalent" under "-- Important Definitions" and, in any case, no
subsequent change in the U.S. Dollar Equivalent after the applicable date of
determination will cause such determination to be modified.
Limitations on Debt
Azurix will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, Incur any Debt, including Acquisition Debt; provided, however
that Azurix may Incur Debt, and any Restricted Subsidiary
47
<PAGE> 53
may Incur Acquisition Debt, if, after giving effect to the Incurrence of such
Debt and the receipt and application of the proceeds therefrom, the Fixed Charge
Ratio of Azurix would be equal to or greater than 2.0 to 1.
Despite the preceding paragraph, Azurix, and to the extent set forth below,
the Restricted Subsidiaries, may Incur each and all of the following:
(1) Debt of Azurix Incurred under Permitted Working Capital Facilities
in an aggregate principal amount (together with the maximum amount of
letter of credit reimbursement obligations thereunder) at any one time
outstanding not to exceed (A) the greater of (i) $200 million and (ii) 5%
of Consolidated Total Assets of Azurix, plus (B) Debt of Azurix, the
proceeds of which are used to refinance Debt Incurred pursuant to clause
(3) of this covenant, less (C) the aggregate amount of all Net Proceeds of
Asset Sales applied by Azurix to repay any such Debt pursuant to the
covenant described above under the caption "-- Repurchase of Notes at the
Option of Holders -- Limitations on Asset Sales;"
(2) Debt of any Restricted Subsidiary Incurred under Permitted Working
Capital Facilities in an aggregate principal amount (together with the
maximum amount of letter of credit reimbursement obligations thereunder) at
any one time outstanding for all Restricted Subsidiaries under this clause
(2) not to exceed (A) the greater of (i) $100 million and (ii) 50% of the
amount determined pursuant to sub-clause (A) of the preceding clause (1),
less (B) the aggregate amount of all Net Proceeds of Asset Sales applied by
such Restricted Subsidiary to repay any such Debt pursuant to the covenant
described above under the caption "-- Repurchase of Notes at the Option of
Holders -- Limitations on Asset Sales;"
(3) Debt of any Restricted Subsidiary Incurred under the Azurix Europe
Credit Facility in an aggregate principal amount at any one time
outstanding not to exceed (A) the U.S. Dollar Equivalent of L425.0 million
less (B) Debt of Azurix or any Restricted Subsidiary, the proceeds of which
are used to refinance Debt Incurred under the Azurix Europe Credit
Facility, less (C) the aggregate amount of all Net Proceeds of Asset Sales
applied by such Restricted Subsidiary to repay any such Debt pursuant to
the covenant described above under the caption "-- Repurchase of Notes at
the Option of Holders -- Limitations on Asset Sales;"
(4) Debt issued in exchange for, or the proceeds of which are used to
refinance, outstanding notes in the amount originally issued under the
indenture, or other Debt of Azurix or any Restricted Subsidiary Incurred
other than pursuant to clauses (1), (2), (3), (5), (7) and (11) hereof, in
each case in an amount -- or, if such new Debt provides for an amount less
than the principal amount thereof to be due and payable upon a declaration
of acceleration thereof, with an original issue price -- not to exceed the
amount so exchanged or refinanced (plus accrued interest, prepayment
premiums, and fees and expenses related to such exchange or refinancing),
the amount so exchanged or refinanced being equal to the lesser of:
(A) the principal amount or involuntary liquidation preference of
the Debt so exchanged or refinanced and
(B) if the Debt being exchanged or refinanced was issued with an
original issue discount, the accreted value thereof, as determined in
accordance with GAAP, at the time of such refinancing;
provided that (x) if the Debt being exchanged or refinanced was issued by
Azurix and is Subordinated Debt, such new Debt of Azurix shall be
subordinated to the notes at least to the same extent as the Debt being
refinanced, (y) if the Debt being exchanged or refinanced was issued by a
Restricted Subsidiary, the new Debt shall be Non-Recourse to Azurix to no
lesser extent than the Debt to be exchanged or refinanced and shall be
Non-Recourse to any other Restricted Subsidiary to no lesser extent than
the Debt to be exchanged or refinanced, and (z) the Average Life of the new
Debt shall be equal to or greater than the Average Life of the Debt to be
exchanged or refinanced;
48
<PAGE> 54
(5) Debt of Azurix owing to and held by any of its Restricted
Subsidiaries, or Debt of a Restricted Subsidiary owing to and held by
Azurix or any other Restricted Subsidiary, provided that in each case:
(A) any transfer of the Debt Incurred under this clause (5) by a
Restricted Subsidiary other than to Azurix or another Restricted
Subsidiary; and
(B) the occurrence of any transaction that results in a Restricted
Subsidiary holding Debt Incurred under this clause (5) ceasing to be a
Restricted Subsidiary,
will be deemed to be an Incurrence of such Debt not in compliance with this
clause (5);
(6) Debt Incurred by any Restricted Subsidiary which is Non-Recourse
to Azurix and is Non-Recourse to any other Restricted Subsidiary, provided
that any event that causes such Debt to cease to be Non-Recourse to Azurix
or any other Restricted Subsidiary will be deemed to be an Incurrence of
such Debt not in compliance with this clause (6);
(7) Debt of Azurix or any Restricted Subsidiary in an aggregate
principal amount not to exceed $100 million at any one time outstanding;
(8) Debt of Azurix or any Restricted Subsidiary in respect of Currency
Protection Agreements or Interest Rate Protection Agreements;
(9) Debt of Azurix or any Restricted Subsidiary arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from guarantees or letters of credit, surety bonds
or performance bonds securing any obligations of Azurix or any Restricted
Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary;
(10) Debt of Azurix or any Restricted Subsidiary outstanding as of the
date of original issuance of the notes;
(11) Debt of Azurix or any Restricted Subsidiary to the extent its
principal is secured by a Lien on cash or cash equivalents in an equivalent
amount, provided that any event that causes such cash or cash equivalents
to be released from such Lien (other than to repay such Debt) shall be
deemed to be an Incurrence of such Debt not in compliance with this clause
(11) to the extent of the principal amount of the Debt previously so
secured;
(12) Debt of a Restricted Subsidiary that does not own any Capital
Stock of any other Restricted Subsidiary or any other material assets and
that engages only in the business of Incurring Debt and lending the
proceeds thereof to other Restricted Subsidiaries or other Persons in which
Azurix beneficially owns Capital Stock, and any Guarantee by any other
Restricted Subsidiary of any such Debt (but only to the extent such other
Restricted Subsidiary has obtained the proceeds of that Debt), provided
that any such Restricted Subsidiary that receives such proceeds could Incur
such Debt pursuant to the provisions of this covenant other than pursuant
to clause (5); and
(13) Debt of Azurix pursuant to the old notes of any series issued on
the Issue Date, together with any new notes issued pursuant to this
prospectus in exchange for old notes issued on the Issue Date or in
exchange for any additional old notes of such series issued after the Issue
Date in compliance with the indenture.
For purposes of determining compliance with this covenant, in the event
that an item of Debt meets the criteria of more than one of the types of Debt
described in the above clauses, Azurix, in its sole discretion, shall classify
such item of Debt and only be required to include the amount and type of such
Debt in one of such clauses.
49
<PAGE> 55
Restricted Payments
Azurix will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, make any Restricted Payment after the date of the original
issuance of the notes if at the time of such Restricted Payment and after giving
effect thereto:
(1) an Event of Default or an event that, after the giving of notice
or lapse of time or both, would become an Event of Default shall have
occurred and be continuing;
(2) Azurix could not Incur at least $1 of Debt under the covenant
described in the first paragraph of "-- Limitations on Debt" above;
(3) the aggregate amount of all Restricted Payments made by Azurix and
its Restricted Subsidiaries -- the amount so made, if other than in cash,
to be determined in good faith by the Board of Directors, as evidenced by a
Board resolution -- after the date of original issuance of the notes shall
exceed the sum, without duplication, of:
(A)$10 million plus 50% of the Net Income of Azurix and its
consolidated Restricted Subsidiaries for the period, taken as one
accounting period, beginning on January 1, 2000 and ending on the last
day of the fiscal quarter immediately prior to the date of such
calculation; provided that if Net Income for such period is less than
zero, then minus 100% of the amount of such net loss; plus
(B) the aggregate net proceeds, including the fair market value of
proceeds other than cash, as determined in good faith by the Board of
Directors, received by Azurix from and after the Issue Date from (i) the
contribution to the common equity capital of Azurix or (ii) the issuance
and sale other than to a Restricted Subsidiary of its Capital
Stock -- excluding Redeemable Stock, but including Capital Stock other
than Redeemable Stock issued upon conversion of, or in exchange for,
Redeemable Stock or securities other than its Capital Stock -- and
warrants, options and rights to purchase its Capital Stock other than
Redeemable Stock, but excluding (a) the net proceeds from the issuance,
sale, exchange, conversion or other disposition of its Capital Stock
convertible -- whether at the option of Azurix or the holder thereof or
upon the happening of any event -- into (x) any security other than its
Capital Stock or (y) its Redeemable Stock or (b) net proceeds consisting
of evidences of Debt or securities other than Capital Stock; plus
(C) any amount previously included as a Restricted Payment on
account of an obligation by Azurix or any Restricted Subsidiary to make
a Restricted Payment which has not actually been made by Azurix or any
Restricted Subsidiary and which is no longer required to be made by
Azurix or any Restricted Subsidiary;
provided that the foregoing clause (3) shall not prevent the payment of any
dividend within 60 days after the date of its declaration if such dividend could
have been paid on the date of its declaration without violation of the
provisions of the "-- Restricted Payments" covenant.
The indenture defines Restricted Payments to exclude Permitted Payments.
Restricted Payments do not include the making of investments in unconsolidated
businesses and Joint Ventures. Please read "-- Important Definitions" below.
Limitations on Liens
Azurix may not Incur any Debt which is secured, directly or indirectly,
with, nor will Azurix grant or cause or suffer to exist, a Lien on the Property
of Azurix now owned or hereafter acquired to secure any Debt of Azurix unless
contemporaneous therewith or prior thereto the notes are equally and ratably
secured.
50
<PAGE> 56
Despite the preceding sentence, Azurix may grant or cause or suffer to
exist, each and all of the following Liens on its Property, whether now owned or
hereafter acquired:
(1) Liens securing Debt, which Liens were existing on the Property of
any entity at the time such Property is acquired by Azurix, whether by
merger, consolidation, purchase of assets or otherwise, provided that such
Liens:
(A) are not created, incurred or assumed in contemplation of such
Property being acquired by Azurix, and
(B) do not extend to any other Property of Azurix;
(2) Liens securing any other Debt required to be equally and ratably
secured as a result of the Incurrence of such Debt;
(3) Liens on the Capital Stock held by Azurix in any Subsidiary or in
any Joint Venture in which Azurix is or becomes a partner, shareholder,
member or other participant, which Liens are (A) granted in respect of the
Capital Stock of a Restricted Subsidiary to secure Debt Incurred in
compliance with the covenant described under "-- Limitations on Debt"
above, (B) granted in respect of the Capital Stock of an Unrestricted
Subsidiary, or (C) granted in good faith in connection with the financing
of the acquisition of such Capital Stock, provided that in the case of this
clause (C) the management of Azurix determines in good faith, as evidenced
by an Officers' Certificate, that such Liens are required in order to
effect such financing and are not materially more restrictive, taken as a
whole, than Liens, taken as a whole, customarily accepted -- or in the
absence of any industry custom, reasonably acceptable -- in substantially
Non-Recourse project financing;
(4) Liens existing on the date of the original issuance of the old
notes;
(5) purchase money Liens incurred to secure Debt Incurred by Azurix as
permitted by the covenant described under "-- Limitations on Debt," which
Debt finances the purchase price of Property acquired in the ordinary
course of business or the cost of any improvements or construction with
respect to such Property, and which Liens will not cover any Property other
than that being purchased, improved or constructed;
(6) Liens on any Property of Azurix securing obligations pursuant to
Permitted Working Capital Facilities of Azurix Incurred in compliance with
the covenant described under "-- Limitations on Debt;"
(7) Liens incurred in connection with Capitalized Lease Obligations,
Currency Protection Agreements or Interest Rate Protection Agreements
Incurred by Azurix as permitted by the covenant described under
"-- Limitations on Debt;" and
(8) Liens in respect of extensions, renewals, refunding or refinancing
of any Debt secured by any of the Liens referred to in clauses (1) through
(7) above, provided that the Liens in connection with such renewal,
extension, refunding or refinancing shall be limited to all or part of the
specific Property which was subject to the original Lien.
Limitations on Sale/Leaseback Transactions
For so long as any of the notes remain outstanding, Azurix shall not, nor
will it permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction unless:
(1) such transaction involves a lease for a term, including renewals,
of not more than three years; or
(2) such transaction is between Azurix or a Restricted Subsidiary, on
the one hand, and another Restricted Subsidiary on the other hand; or
(3) (A) Azurix would be entitled to Incur Debt secured by a Lien on
the Property involved in such transaction at least equal in amount to the
Attributable Debt with respect to such Sale/ Leaseback Transaction, without
equally and ratably securing the notes, pursuant to the covenant described
under "-- Limitations on Liens;" and
51
<PAGE> 57
(B) Azurix or a Restricted Subsidiary receives consideration at the
time of such Sale/ Leaseback Transaction at least equal to the fair market
value of the Property sold or otherwise disposed of, as determined in good
faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board resolution; and
(C) Azurix or a Restricted Subsidiary within 365 days following the
date of such Sale/ Leaseback Transaction, regardless of whether such sale
or transfer may have been made by Azurix or such Restricted Subsidiary, as
the case may be, applies, in the case of a sale or transfer for cash, an
amount equal to the Net Cash Proceeds thereof and, in the case of a sale or
transfer otherwise than for cash, an amount equal to the fair value of the
Property so leased at the time of entering into such arrangement, as
determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a Board resolution, to a use permitted
by the covenant described under "-- Repurchase of Notes at the Option of
Holders -- Limitations on Asset Sales."
To the extent that any or all of the Net Cash Proceeds of any Foreign
Sale/Leaseback Transaction is prohibited or delayed by applicable local law from
being repatriated to the United States, the portion of such Net Cash Proceeds so
affected shall not be required to be applied at the time provided above, but may
be retained by the applicable Restricted Subsidiary so long, but only so long,
as the applicable local law will not permit repatriation to the United States.
Azurix will agree to promptly take or cause the applicable Subsidiary to
promptly take all commercially reasonable actions required by the applicable
local law to permit such repatriation. Once such repatriation of any of such
affected Net Cash Proceeds is permitted under the applicable local law, such
repatriation shall be promptly effected and such repatriated Net Cash Proceeds
will be applied in the manner set forth in this provision as if such Foreign
Sale/Leaseback Transaction had occurred on the date of such repatriation.
To the extent that the Board of Directors determines, in good faith, that
repatriation of any or all of the Net Cash Proceeds of any Foreign
Sale/Leaseback Transaction would have a material adverse tax consequence to
Azurix, the Net Cash Proceeds so affected need not be repatriated to the United
States by the applicable Restricted Subsidiary for so long as such material
adverse tax consequence would continue.
Dividends and Other Payment Restrictions Affecting Subsidiaries
Azurix will not, and will not permit any Restricted Subsidiary to, create
or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by
Azurix directly or indirectly,
(2) make payments in respect of any Debt owed to Azurix or any other
Restricted Subsidiary,
(3) make loans or advances to Azurix or any other Restricted
Subsidiary or
(4) transfer any of its Property to Azurix or any other Restricted
Subsidiary,
other than, in the case of clauses (1) through (4), those encumbrances and
restrictions created or existing:
(A) on the Issue Date;
(B) pursuant to the indenture;
(C) in connection with the creation of any Permitted Working Capital
Facility or the Incurrence of any Debt permitted under clauses (3), (4),
(5) and (6) of the second paragraph of the covenant described under
"-- Limitations on Debt;"
(D) in connection with the execution and delivery of contracts to
which such Restricted Subsidiary is a party in connection with, or as a
condition to, the negotiation, procurement or award of a concession from a
governmental body;
52
<PAGE> 58
(E) pursuant to applicable law, rules or regulations or orders or
ruling of governmental authorities;
(F) customary provisions in Joint Venture agreements;
(G) pursuant to customary non-assignment provisions in leases or other
contracts entered into in the ordinary course of business of Azurix or any
Subsidiary;
(H) pursuant to an agreement entered into for the sale or disposition
of all or substantially all of the Capital Stock or assets of any
Subsidiary or Joint Venture that apply pending the closing of such sale or
disposition;
(I) in the form of Liens which are not prohibited by the covenant
described under "-- Limitations on Liens" and that contain customary
limitations on the transfer of collateral;
(J) any agreement or other instrument of a Person acquired by Azurix
or any Restricted Subsidiary in existence at the time of such acquisition
which was not created in contemplation of the acquisition, which
encumbrance or restriction is not applicable to any other Person, or the
Properties of any other Person, other than the Person, or the Property of
the Person, so acquired; and
(K) any agreement that extends, renews, refinances or replaces an
agreement containing encumbrances or restrictions in compliance with the
foregoing limitations, if the terms and conditions of those encumbrances or
restrictions are not, taken as a whole, materially less favorable to the
Holders than those under or pursuant to the agreement so extended, renewed,
refinanced or replaced.
Limitations on Issuances of Guarantees by Restricted Subsidiaries
Azurix will not cause or permit any of its Restricted Subsidiaries,
directly or indirectly, to Guarantee the payment of any Debt of Azurix unless
(1) such Restricted Subsidiary shall become a Subsidiary Guarantor by
simultaneously executing and delivering a supplemental indenture to the
indenture providing for the Guarantee of the payment of the notes by such
Restricted Subsidiary, and (2) such Restricted Subsidiary waives and will not in
any matter whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against Azurix or
any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee of the notes. If the other Debt of
Azurix so Guaranteed is pari passu with the notes, then the Guarantee of that
Debt shall be pari passu with or subordinated to the Subsidiary Guarantee. If
the other Debt of Azurix so Guaranteed is subordinated to the notes, then the
Guarantee of that Debt shall be subordinated to the Subsidiary Guarantee at
least to the same extent that the other Debt of Azurix so Guaranteed is
subordinated to the notes.
Notwithstanding the previous paragraph, any Restricted Subsidiary issuing a
Subsidiary Guarantee of the notes under this covenant will be automatically and
unconditionally released and discharged from its obligations under such
Subsidiary Guarantee upon the release or discharge of the Guarantee of the other
Debt of Azurix that resulted in the creation of such Subsidiary Guarantee,
except a discharge or release by, or as a result of, any payment under the
Guarantee of such other Debt by such Restricted Subsidiary.
All payments made by any Subsidiary Guarantor, if any, under or with
respect to its Subsidiary Guarantee, if any, will be made free and clear of and
without withholding or deduction for or on account of any present or future tax,
duty, levy, impost, assessment or other governmental charge (including
penalties, interest and other liabilities related thereto) imposed or levied by
or on behalf of the government of the United Kingdom or any other jurisdiction
in which a Subsidiary Guarantor, if any, is incorporated or of any prefecture or
territory thereof or by any authority or agency therein or thereof having power
to tax (hereinafter, "Taxes"), unless such Subsidiary Guarantor, if any, is
required to withhold or deduct Taxes by law, regulation or governmental policy
or by the interpretation or administration thereof. If any Subsidiary Guarantor
is required to withhold or deduct any amount for or on account of Taxes from any
payment made under or with respect to any Subsidiary Guarantee, such Subsidiary
Guarantor will pay such additional amounts ("Additional Amounts") as may be
necessary so that the net amount received by each Holder (including Additional
Amounts) after such withholding or deduction will not be less than the amount
the Holder would have received if such Taxes had not been withheld or deducted;
provided, however, that no Additional Amounts will
53
<PAGE> 59
be payable with respect to a payment made to a Holder and no reimbursement shall
be made to a Holder for Taxes paid by such Holder (each such Holder, an
"Excluded Holder") with respect to any Tax imposed, levied, payable or due (1)
by reason of the Holder's or beneficial owner's present or former connection
with the United Kingdom or any other jurisdiction in which a Subsidiary
Guarantor is incorporated or any prefecture or territory thereof, other than
through the mere receipt or holding of notes or by reason of the receipt of
payments thereunder; (2) by reason of the failure of the Holder or beneficial
owner of notes to satisfy any certification, identification, information or
other reporting requirements which the Holder or such beneficial owner is
legally required to satisfy, whether imposed by statute, treaty, regulation,
administrative practice or otherwise, as a precondition to exemption from, or
reduction in the rate of deduction or withholding of, Taxes; or (3) by reason of
the presentation (where presentation is required in order to receive payment) of
such notes for payment more than 30 days after the date such payment became due
and payable or was duly provided for under the terms of the notes, whichever is
later.
The obligation of any Subsidiary Guarantor to pay Additional Amounts or to
reimburse a Holder for Taxes paid by such Holder in respect of Taxes shall not
apply with respect to: (x) any estate, inheritance, gift, sales, transfer,
personal property or similar Taxes; (y) any Tax which is payable otherwise than
by deduction or withholding from payments made under or with respect to any
Subsidiary Guarantee; or (z) Taxes imposed on or with respect to any payment by
any Subsidiary Guarantor to the Holder or beneficial owner if such Holder or
beneficial owner is a fiduciary or partnership or person other than the sole
beneficial owner of such payment to the extent that such Taxes would not have
been imposed on a beneficiary or settlor with respect to such fiduciary, a
member of such partnership or the beneficial owner of such payment had such
beneficiary, settlor, member or beneficial owner been the Holder of such note.
Such Subsidiary Guarantor will also (1) make such withholding or deduction
compelled by applicable law and (2) remit the full amount deducted or withheld
to the relevant authority in accordance with applicable law. Such Subsidiary
Guarantor will, upon written request of a Holder, furnish to each such Holder
certified copies of tax receipts evidencing the payment of any Taxes by such
Subsidiary Guarantor in such form as provided in the normal course by the taxing
authority imposing such Taxes and as is reasonably available to such Subsidiary
Guarantor, within 60 days after the later of the date of receipt of such written
request and the date of receipt of such evidence. If notwithstanding such
Subsidiary Guarantor's efforts to obtain such receipts, the same are not
obtainable, such Subsidiary Guarantor will promptly provide such Holder with
other evidence reasonably satisfactory to such Holder of such payments by such
Subsidiary Guarantor. The indenture will further provide that, if any Subsidiary
Guarantor conducts business in any jurisdiction (the "Taxing Jurisdiction")
other than the jurisdiction under which such Subsidiary Guarantor is
incorporated, in a manner which causes Holders to be liable for taxes on
payments under any Subsidiary Guarantee for which they would not have been so
liable but for such conduct of business in the Taxing Jurisdiction, the
provision of the notes described above shall be considered to apply to such
Holders as if references in such provision to "Taxes" included taxes imposed by
way of deduction or withholding by such Taxing Jurisdiction and references to
Excluded Holder shall be deemed to include Holders or beneficial owners having a
present or former connection with such Taxing Jurisdiction or any state,
prefecture or territory thereof. Such Subsidiary Guarantor will, upon written
request of any Holder (other than an Excluded Holder), reimburse each such
Holder for the amount of (1) any Taxes so levied or imposed and paid by such
Holder as a result of payments made under or with respect to the notes and (2)
any Taxes so levied or imposed with respect to any reimbursement under the
foregoing clause (1) and paid by such Holder so that the net amount received by
such Holder (net of payments made under or with respect to the notes) after such
reimbursement will not be less than the net amount the Holder would have
received if Taxes on such reimbursement had not been imposed.
At least 30 days prior to each date on which any payment under or with
respect to any Subsidiary Guarantee is due and payable, if any Subsidiary
Guarantor will pay Additional Amounts with respect to such payment (unless such
obligation to pay Additional Amounts arises after the 30th day prior to the date
on which payment under or with respect to the notes is due and payable, in which
case it shall be promptly thereafter), such Subsidiary Guarantor will deliver to
the trustee an officers' certificate stating the fact that such Additional
Amounts will be payable and the amounts so payable and will set forth such other
information
54
<PAGE> 60
necessary to enable the trustee to pay such Additional Amounts to Holders on the
payment date. Whenever in the indenture or in this "Description of New Notes"
there is mentioned, in any context, the payment of principal, interest, if any,
or any other amount payable under or with respect to any note, such mention
shall be deemed to include mention of the payment of Additional Amounts to the
extent that, in such context, Additional Amounts are, were or would be payable
in respect thereof.
Each Subsidiary Guarantor may consolidate with or merge into or sell or
otherwise dispose of all or substantially all of its Properties to Azurix or
another Subsidiary Guarantor without limitation, except to the extent any such
transaction is subject to the covenant described under "-- Mergers,
Consolidations and Sale of Assets" covenant. Each Subsidiary Guarantor may
consolidate with or merge into or sell all or substantially all of its
Properties to a Person other than Azurix or another Subsidiary Guarantor,
whether or not Affiliated with the Subsidiary Guarantor, provided that:
(1) if the surviving Person is not the Subsidiary Guarantor, the
surviving Person agrees to assume the Subsidiary Guarantor's Guarantee of
the notes and all its obligations pursuant to the indenture, except to the
extent the following paragraph would result in the release of such
Guarantee;
(2) such transaction does not violate any of the covenants described
under "-- Important Covenants;" and
(3) no Default or Event of Default has occurred and is continuing, nor
will such transaction result in a Default or an Event of Default
immediately thereafter that is continuing.
Upon the sale or other disposition, by merger or otherwise, of a Subsidiary
Guarantor or all or substantially all of its Properties to a Person other than
Azurix or another Subsidiary Guarantor and pursuant to a transaction that is
otherwise in compliance with the indenture, including as described in the
foregoing paragraph, the Subsidiary Guarantor shall be deemed released from its
Guarantee of the notes and the related obligations set forth in the indenture.
Prior to providing any guarantee of the notes under this covenant, Azurix
will perform, or cause its subsidiaries to perform, all procedures under the
U.K. Companies Act necessary to ensure that such guarantee complies with the
applicable restrictions on providing financial assistance under the U.K.
Companies Act.
Limitation on Investment Company Status
Azurix will not, directly or indirectly, take any action or engage in any
transaction that would result in Azurix's being required to register as an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
Mergers, Consolidations and Sales of Assets
Azurix will not consolidate with, merge with or into, or transfer all or
substantially all of its assets, in one transaction or a series of related
transactions, or permit any of its Restricted Subsidiaries to enter into one
transaction or a series of related transactions that, in the aggregate, would
result in a transfer of all or substantially all of the assets of Azurix and its
Restricted Subsidiaries on a consolidated basis, to, any Person unless:
(1) Azurix shall be the continuing Person, or, if Azurix is not the
continuing Person, the Person formed by such consolidation or into which
Azurix is merged or to which such assets of Azurix or its Restricted
Subsidiaries are transferred shall:
(A) be a Person organized and existing under the laws of the United
States or any State thereof or the District of Columbia, provided that
such Person shall be a corporation formed under such laws unless, at or
prior to the time of such consolidation, merger or transfer, such a
corporation shall, by execution and delivery of a supplemental indenture
in compliance with the indenture, become a co-obligor in respect of the
notes and the indenture; and
(B) expressly assume in writing all the obligations of Azurix under
the indenture and the notes;
55
<PAGE> 61
(2) immediately after giving effect to such transaction, no Event of
Default or event or condition which through the giving of notice or lapse
of time or both would become an Event of Default shall have occurred and be
continuing; and
(3) immediately after giving effect to such transaction on a pro forma
basis, Azurix or the continuing Person would be able to Incur at least $1
of Debt under the first paragraph of the "-- Limitations on Debt" covenant
described above.
If a transaction does not have as one of its purposes the evasion of the
limitations imposed by the covenant described in this paragraph, then clause (3)
of this covenant shall not prohibit a transaction, the principal purpose of
which is, as determined in good faith by the Board of Directors and evidenced by
a Board resolution, to change the state of incorporation of Azurix.
Transactions with Affiliates
Azurix will not, and will not permit any of its Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make any contract, agreement, understanding, loan, advance or Guarantee with,
or for the benefit of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable
to Azurix or its Restricted Subsidiary than those that would have been
obtained in a comparable transaction by Azurix or its Restricted Subsidiary
with an unrelated Person and
(2) Azurix delivers to the Trustee with respect to any Affiliate
Transaction or any series of related Affiliate Transactions involving
aggregate consideration in excess of $25 million:
(A) a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that the Affiliate Transaction complies
with this covenant and that the Affiliate Transaction has been approved
by a majority of the disinterested members of the Board of Directors or,
in the absence of any disinterested members of the Board of Directors,
by all members of the Board of Directors; or
(B) an opinion as to the fairness to Azurix or the relevant
Restricted Subsidiary, as the case may be, of the Affiliate Transaction
from a financial point of view issued by a nationally recognized expert
in evaluating the fairness of such transactions.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment or indemnification agreement, or employee or
director loan, compensation or benefit arrangements, entered into by Azurix
or any of its Restricted Subsidiaries in the ordinary course of business;
(2) transactions between or among Azurix or its Restricted
Subsidiaries on the one hand, and Enron and its Affiliates on the other
hand under agreements described in this prospectus, and any extension,
renewal or modification thereof, provided that the extension, renewal or
modification is not materially less favorable to holders of notes than
under the agreement so described;
(3) transactions permitted by the covenant described above under the
caption "-- Restricted Payments;"
(4) payments of reasonable directors' fees to Persons who are not
otherwise Affiliates of Azurix or its Restricted Subsidiaries; and
(5) any transaction between Azurix and a Restricted Subsidiary or
Joint Venture or between a Restricted Subsidiary and another Restricted
Subsidiary or Joint Venture.
56
<PAGE> 62
REPORTS
Whether or not required by the Securities and Exchange Commission, so long
as any notes are outstanding, Azurix will file a copy of all of the information
and reports referred to below with the Securities and Exchange Commission for
public availability within the time periods specified in the Securities and
Exchange Commission's rules and regulations, unless the Securities and Exchange
Commission will not accept such a filing, and Azurix will furnish the Trustee
for delivery to the Holders upon request:
- all quarterly and annual financial information that would be required to
be contained in a filing with the Securities and Exchange Commission on
Forms 10-Q and 10-K if Azurix were required to file such Forms, including
a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only,
a report on the annual financial statements by Azurix's certified
independent accountants; and
- all current reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if Azurix were required to
file such reports.
In addition, whether or not required by the Securities and Exchange
Commission, Azurix will make such information available to securities analysts
and prospective investors in the notes upon request.
MODIFICATION OF THE INDENTURE
With the consent of the Holders of not less than a majority in aggregate
principal amount of the outstanding notes of each series affected thereby,
Azurix and the trustee may modify the indenture or any supplemental indenture or
the rights of the Holders of the notes of such series. However, in addition, no
modification shall:
(1) without the consent of the Holder of each of the notes of any
series so affected:
(A) extend the final maturity of any of the notes of such series,
(B) reduce the principal amount thereof,
(C) reduce the rate or extend the time of payment of interest
thereon,
(D) change the currency of payment, except as described under
"-- Change of Currency of New 7-Year Sterling Notes,"
(E) reduce any amount payable on redemption thereof (other than
provisions relating to the covenant described above under "-- Repurchase
of New Notes at the Option of Holders -- Change of Control"),
(F) release any Subsidiary Guarantor from its Subsidiary Guarantee
except as permitted by the indenture, or
(G) impair or affect the right of any Holder to institute suit for
the payment thereof; or
(2) without the consent of the Holders of all outstanding notes of any
series, reduce the percentage of outstanding notes of such series which is
required for any such modification.
In addition, without the consent of any Holder, Azurix and the trustee may
amend the indenture:
(1) to cure any ambiguity, defect or inconsistency;
(2) to add or release any Subsidiary Guarantor pursuant to the terms
of the indenture;
(3) to provide for uncertificated notes in addition to or in place of
certificated notes;
(4) to provide for the assumption of Azurix's obligations to Holders
in the case of a merger or consolidation;
(5) to make any change that would provide any additional rights or
benefits to the holders of notes;
57
<PAGE> 63
(6) to add any additional Events of Default;
(7) to appoint a successor trustee;
(8) to secure the notes;
(9) to comply with requirements of the Commission in order to effect
or maintain the qualification of the indenture under the Trust Indenture
Act; or
(10) to facilitate any change of currency of the sterling notes as
described under "-- Change of Currency of New 7-Year Sterling Notes" above.
EVENTS OF DEFAULT AND REMEDIES
Each of the following will be an Event of Default with respect to notes of
any series:
(1) default as to the payment of principal, the Change of Control or
Asset Sale Offer purchase price, or premium, if any, when due on any note
of such series;
(2) default as to the payment of interest on any note of such series
30 days after payment is due;
(3) default on any other Debt of Azurix or any Significant Subsidiary
if either:
(A) such default results from failure to pay principal of such Debt
in excess of $25 million at Stated Maturity of such Debt, or
(B) as a result of such default, the maturity of such Debt has been
accelerated, so that the same shall be or becomes due and payable prior
to the date on which the same would otherwise have become due and
payable and such acceleration shall not be rescinded or annulled within
30 days, and the principal amount of such Debt, together with the
principal amount of any other Debt of Azurix or any Significant
Subsidiary in default, or the maturity of which has been accelerated,
aggregates $25 million or more;
provided that the trustee shall not be charged with knowledge of any
such default unless written notice thereof shall have been given to the
trustee by Azurix, by the holder or an agent of the holder of any such
defaulted Debt, by the trustee then acting under any indenture or other
instrument under which such default shall have occurred, or by the
Holders of at least 25% in aggregate principal amount of the notes of
such series at the time outstanding; and provided further that if such
default shall be remedied or cured by Azurix or the Significant
Subsidiary or waived by the holder of such indebtedness, then the Event
of Default under the indenture shall be deemed likewise to have been
remedied, cured or waived without further action on the part of the
trustee, any Holder or any other person;
(4) default in the performance, or breach, of any other of the
covenants or agreements applicable to notes of such series contained in the
indenture and the notes of such series and such failure continues for 30
days after written notice is given to Azurix by the trustee or the Holders
of at least 25% in aggregate principal amount of the outstanding notes of
such series, as provided in the indenture, provided that notice need not be
given, and an Event of Default shall occur, 30 days after breach of the
covenants described under "-- Repurchase of New Notes at the Option of
Holders -- Change of Control," "-- Repurchase of New Notes at the Option of
Holders -- Limitations on Asset Sales," "-- Important Covenants
-- Restricted Payments" and "-- Important Covenants -- Mergers,
Consolidations and Sales of Assets;"
(5) the entry by a court of one or more judgments or orders against
Azurix or any Significant Subsidiary for the payment of money which in the
aggregate exceeds $25 million, excluding the amount thereof covered by
insurance or by a bond written by third parties, and which judgments or
orders have not been vacated, discharged or satisfied or stayed pending
appeal within 30 days from the entry thereof; and
58
<PAGE> 64
(6) events specified in the indenture involving bankruptcy, insolvency
or reorganization of Azurix or any Significant Subsidiary.
If an Event of Default, other than an event of bankruptcy, insolvency or
reorganization of Azurix or any Significant Subsidiary, shall have occurred and
be continuing, either the trustee or the Holders of not less than 25% in
aggregate principal amount of the outstanding notes of such series may declare
the aggregate principal of all notes of such series to be due and payable
immediately. Upon some conditions specified in the indenture, such declaration
may be annulled and the Holders of a majority in principal amount of the then
outstanding notes of such series may waive past defaults with respect to notes
of such series except, unless theretofore cured, a default in payment of
principal of, or Change of Control or Asset Sale Offer purchase price or
premium, if any, or interest on the notes. If an Event of Default due to the
bankruptcy, insolvency or reorganization of Azurix or any Significant Subsidiary
occurs, all unpaid principal, premium, if any, and interest with respect to the
notes of each series then outstanding will become immediately due and payable.
The Holders of a majority in aggregate principal amount of the then
outstanding notes of any series shall have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the trustee
with respect to the notes of such series, subject to limitations specified in
the indenture with respect to notes of such series, if the holders of notes of
such series shall have offered to the trustee reasonable indemnity against
expenses and liabilities.
Azurix is required to file annually with the trustee a written statement as
to compliance with the principal covenants contained in the indenture.
If the trustee considers it in the interest of Holders to do so, it may
withhold notice to the Holders of any default, except in payment of principal
of, premium, if any, the Change of Control or Asset Sale Offer purchase price or
interest on the notes.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of Azurix or any Subsidiary Guarantor, as such, shall have any
liability for any obligations of Azurix or any Subsidiary Guarantor under the
notes, any Subsidiary Guarantee and the indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each Holder by
accepting a note waives and releases all such liability as part of the
consideration for issuance of the notes. This waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Azurix, may, at its option and at any time, elect to have all of the
obligations discharged of itself and any Subsidiary Guarantor with respect to
the outstanding notes ("Legal Defeasance") except for, among other matters,
obligations:
(1) to register the transfer or exchange of the notes;
(2) to replace stolen, lost or mutilated notes;
(3) to maintain paying agencies; and
(4) to hold monies for payment in trust.
In addition, Azurix may, at its option and at any time, elect to have the
obligations of Azurix released with respect to the covenants described in clause
(3) under "-- Important Covenants -- Mergers, Consolidations and Sales of
Assets" and all of the other covenants described herein under "-- Important
Covenants," and clause (4) under "-- Events of Default and Remedies" with
respect to the covenants described therein ("Covenant Defeasance"). In the event
Covenant Defeasance occurs, clauses (3) and (5) under "-- Events of Default and
Remedies" shall not be deemed to be Events of Default under the indenture.
59
<PAGE> 65
In order to exercise either Legal Defeasance or Covenant Defeasance, the
following must occur as applicable:
(1) Azurix has deposited with the trustee, in trust, money and/or (x)
in the case of the dollar notes, U.S. Government Obligations, and (y) in
the case of the sterling notes, U.K. Government Obligations, that through
the payment of interest and principal in respect thereof in accordance with
their terms will provide money in an amount sufficient to pay the principal
of, premium, if any, and accrued interest, if any, on the notes, on the
Stated Maturity of such payments in accordance with the terms of the
indenture and the notes;
(2) in the case of Legal Defeasance, Azurix has delivered to the
trustee:
(A) either (x) an Opinion of Counsel to the effect that Holders
will not recognize income, gain or loss for federal income tax purposes
as a result of Azurix's exercise of its option under the "Defeasance"
provision of the indenture and will be subject to federal income tax on
the same amount and in the same manner and at the same times as would
have been the case if such Legal Defeasance had not occurred, which
Opinion of Counsel must be based upon a ruling of the Internal Revenue
Service to the same effect or a change in applicable federal income tax
law or related treasury regulations after the date of the indenture or
(y) a ruling directed to the trustee received from the Internal Revenue
Service to the same effect as the Opinion of Counsel described in (x)
above,
(B) in the case of the sterling notes, an Opinion of Counsel in the
United Kingdom or a ruling of the Inland Revenue of the United Kingdom
to the effect that the holders of notes will not recognize income, gain
or loss for United Kingdom income tax or other tax purposes as a result
of such termination and will be subject to United Kingdom income tax and
other tax on the same amounts, in the same manner and at the same times
as would have been the case had such Legal Defeasance not occurred (and
for purposes of such opinion, such United Kingdom counsel shall assume
that holders of notes include holders who are not resident in the United
Kingdom) and
(C) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and
after the 123rd day following the deposit, the trust fund will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(3) in the case of Covenant Defeasance, Azurix has delivered to the
trustee an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and
after the 123rd day following the deposit, the trust fund will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally,
(4) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending
on the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which Azurix is a party or by which Azurix
is bound,
(5) if at such time the notes are listed on a national securities
exchange, Azurix has delivered to the trustee an Opinion of Counsel to the
effect that the notes will not be delisted as a result of such deposit,
defeasance and discharge, and
(6) in the case of Covenant Defeasance, Azurix has delivered to the
trustee an Opinion of Counsel in the United States and, in the case of the
sterling notes, in the United Kingdom, to the effect that, among other
things, the holders of notes will not recognize income, gain or loss for
United States federal income tax purposes and, in the case of the sterling
notes, United Kingdom income tax purposes as a result of such deposit and
defeasance of the covenants included in the definition of Covenant
Defeasance and Events of Default and will be subject to United States
federal income tax and, in the case of the
60
<PAGE> 66
sterling notes, United Kingdom income tax purposes on the same amounts and
in the same manner and at the same times as would have been the case if
such deposit and defeasance had not occurred.
Legal Defeasance and Covenant Defeasance will not occur until the 123rd day
after the deposit referred to above has been made.
If Azurix exercises its option to omit compliance with the covenants and
provisions of the indenture with respect to the notes as described above and the
notes are declared due and payable because of the occurrence of an Event of
Default that remains applicable, the amount of money, U.S. Government
Obligations and/or U.K. Government Obligations on deposit with the trustee will
be sufficient to pay amounts due on the notes at the time of their Stated
Maturity, but may not be sufficient to pay amounts due on the notes at the time
of acceleration resulting from such Event of Default. Azurix will, however,
remain liable for such payments.
CONCERNING THE TRUSTEE
The Chase Manhattan Bank is the trustee under the indenture. The Chase
Manhattan Bank provides commercial banking services to Azurix in the ordinary
course of business.
The indenture provides that if an Event of Default occurs (and is not
cured), the trustee will be required, in the exercise of its power, to use the
degree of care of a prudent man in the conduct of his own affairs. Subject to
such provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request of any Holder of notes,
unless such Holder shall have offered to the trustee security and indemnity
satisfactory to the trustee against any loss, liability or expense and then only
to the extent required by the terms of the indenture.
The indenture and the provisions of the Trust Indenture Act incorporated by
reference into the indenture contain limitations on the rights of the trustee,
should it become a creditor of Azurix, to obtain payment of claims or to realize
on certain property received by it in respect of any such claims, as security or
otherwise. The indenture will permit the trustee to engage in other
transactions. If the trustee acquires any conflicting interest as defined in the
Trust Indenture Act it must eliminate such conflict, apply to the Commission for
permission to continue as trustee or resign.
GOVERNING LAW
The indenture and the notes are governed by, and construed in accordance
with, the laws of the State of New York.
IMPORTANT DEFINITIONS
Set forth below is a summary of the defined terms used in this description.
Reference is made to the indenture for the full definitions of all such terms as
well as any other capitalized terms used herein for which no definition is
provided.
"Acquisition Debt" is defined to mean Debt of any Person existing at the
time such Person became a Restricted Subsidiary -- or such Person is merged into
Azurix or one of its Restricted Subsidiaries -- or assumed in connection with
the acquisition of assets from any such Person, other than assets acquired in
the ordinary course of business, including Debt Incurred in connection with, or
in contemplation of, such Person becoming a Restricted Subsidiary -- but
excluding Debt of such Person which is extinguished, retired or repaid in
connection with such Person becoming a Restricted Subsidiary.
"Adjusted Consolidated Net Income" is defined to mean for any period, for
Azurix, the aggregate Net Income of Azurix and its Restricted Subsidiaries for
such period determined on a consolidated basis in conformity with GAAP; provided
that the following items shall be excluded in computing Adjusted Consolidated
Net Income without duplication:
(1) the Net Income of any Unrestricted Subsidiary, or any other
Person, other than a Restricted Subsidiary, in which any third Person has a
joint interest, except to the extent of the amount of dividends
61
<PAGE> 67
or other distributions actually paid in cash to Azurix or any of its
Restricted Subsidiaries during such period by such Unrestricted Subsidiary
or other Person, which dividends and distributions shall be included in
such computation;
(2) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to the covenant described in clause
(3)(A) or (3)(B) of the first paragraph of "-- Important Covenants
-- Restricted Payments" above -- and in such case, except to the extent
includable pursuant to clause (1) above -- Net Income, if positive, of a
Person accrued prior to the date it becomes a Restricted Subsidiary or is
merged into or consolidated with Azurix or any of its Restricted
Subsidiaries or all or substantially all of the Properties of such Person
are acquired by Azurix or any of its Restricted Subsidiaries;
(3) any gains or losses on an after-tax basis attributable to the sale
or other disposition of assets (including the sale or disposition of the
Capital Stock of any Person) which are not sold or disposed of in the
ordinary course of business; and
(4) the cumulative effect of a change in accounting principles.
"Affiliate" of any Person is defined to mean any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person. For the purposes of this definition, "control,"
including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with," when used with respect to any Person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise. For purposes of the
provisions described under "Important Covenants -- Transactions with Affiliates"
only, "Affiliate" shall also mean any beneficial owner (as defined in Rules
13d-3 and 13d-5 under the Exchange Act) of Capital Stock representing 10% or
more of the total voting power of the Voting Stock (on a fully diluted basis) of
Azurix or of rights or warrants to purchase such Capital Stock (whether or not
currently exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof.
"Asset Acquisition" is defined to mean:
(1) an investment by Azurix or any of its Subsidiaries in any other
Person pursuant to which such Person shall become a Subsidiary of Azurix or
any of its Subsidiaries or shall be merged into or consolidated with Azurix
or any of its Subsidiaries or
(2) an acquisition by Azurix or any of its Subsidiaries of the
Property of any Person other than Azurix or any of its Subsidiaries that
constitutes substantially all of an operating unit or business of such
Person.
"Asset Disposition" is defined to mean the sale or other disposition by
Azurix or any of its Subsidiaries, other than to Azurix or another Subsidiary of
Azurix, of (1) all or substantially all of the Capital Stock of any Subsidiary
of Azurix or (2) all or substantially all of the Property that constitutes an
operating unit or business of Azurix or any of its Subsidiaries.
"Asset Sale" is defined to mean:
(1) the sale, lease, conveyance or other transfer (which has the
effect of a disposition and is not for the purpose of creating a Lien),
including, without limitation, by way of merger, consolidation or
combination, of any assets or rights, other than leases of assets or sales
of inventory in the ordinary course of business; provided, however, that
the transfer of all or substantially all of the assets of Azurix, in one
transaction or a series of related transactions, will be governed by the
provisions of the indenture described above under the caption
"-- Repurchase of New Notes at the Option of Holders -- Change of Control,"
and/or the provisions described above under the caption "-- Mergers,
Consolidations and Sales of Assets" and not by the provisions of the
indenture described above under "-- Repurchase of New Notes at the Option
of Holders -- Limitation on Asset Sales;" and
62
<PAGE> 68
(2) the issuance of Capital Stock by any of the Restricted
Subsidiaries or the sale by Azurix or any Restricted Subsidiary, including,
without limitation, by way of merger, consolidation or combination, of
Capital Stock in any of its Subsidiaries; provided, however, that any such
sale that constitutes the transfer of all or substantially all of the
assets of Azurix, in one transaction or a series of related transactions,
will be governed by the provisions of the indenture described in the
proviso to the preceding clause (1).
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) a transfer of cash or cash equivalents;
(2) any single transaction or series of related transactions that: (a)
involves assets having a fair market value of less than or equal to $10
million; or (b) results in net proceeds to Azurix and its Restricted
Subsidiaries of less than or equal to $10 million;
(3) a transfer of assets between or among Azurix and its Restricted
Subsidiaries;
(4) an issuance of Capital Stock by a Restricted Subsidiary to Azurix
or to another Restricted Subsidiary; and
(5) any exchange by Azurix or any Restricted Subsidiary of any assets
for similar assets used or useful in any Permitted Business held by another
Person, provided that the fair market value of the assets exchanged by
Azurix or such Restricted Subsidiary is reasonably equivalent to the fair
market value of the assets to be received by Azurix or such Restricted
Subsidiary.
"Attributable Debt" in respect of a Sale/Leaseback Transaction is defined
to mean, as of the time of determination, the present value discounted at the
interest rate assumed in making calculations in accordance with GAAP of the
total obligations of the lessee for rental payments during the remaining term of
the lease included in such Sale/Leaseback Transaction, including any period for
which such lease has been extended.
"Attributable Value" is defined to mean, as to a Capitalized Lease
Obligation under which any Person is at the time liable and at any date as of
which the amount thereof is to be determined, the capitalized amount thereof
that would appear on the face of a balance sheet of such Person in accordance
with GAAP.
"Average Life" is defined to mean, at any date of determination with
respect to any Debt security or Preferred Stock, the quotient obtained by
dividing (1) the sum of the product of (A) the number of years from such date of
determination to the dates of each successive scheduled principal or involuntary
liquidation value payment of such Debt security or Preferred Stock,
respectively, multiplied by (B) the amount of such principal or involuntary
liquidation value payment by (2) the sum of all such principal or involuntary
liquidation value payments.
"Azurix Europe" is defined to mean Azurix Europe Limited, a company
incorporated in England and Wales and a wholly owned subsidiary of Azurix, and
its successors.
"Azurix Europe Credit Facility" is defined to mean the revolving credit
facility, dated as of May 10, 1999, among Azurix Europe and Chase Manhattan Plc
and Westdeutsche Landesbank Girozentrale, as arrangers, Westdeutsche Landesbank
Girozentrale, as facility agent, and Chase Manhattan Trustees Limited, as
security agent, as the same may be amended, modified, supplemented, extended,
restated, replaced, renewed or refinanced from time to time.
"Board of Directors" is defined to mean either the Board of Directors of
Azurix or any committee of such Board duly authorized to act on behalf of such
Board.
"Business Day" is defined to mean a day which in the city, or in any of the
cities, if more than one, where amounts are payable in respect of the notes is
neither a legal holiday nor a day on which banking institutions are authorized
or required by law or regulation to close.
"Capital Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents however designated,
whether voting or non-voting, of, or interests in, the
63
<PAGE> 69
equity of such Person which are outstanding or issued on or after the date of
the indenture, including, without limitation, all Common Stock and Preferred
Stock and partnership and joint venture interests of such Person.
"Capitalized Lease" is defined to mean, as applied to any Person, any lease
of any Property of which the discounted present value of the rental obligations
of such Person as lessee, in conformity with GAAP, is required to be capitalized
on the balance sheet of such Person.
"Capitalized Lease Obligation" is defined to mean an obligation that is
required to be classified and accounted for as a capitalized lease for financial
reporting purposes in accordance with GAAP, and the amount of Debt represented
by such obligation shall be the capitalized amount of such obligation determined
in accordance with GAAP, and the Stated Maturity thereof shall be the date of
the last payment of rent or any other amount due under such lease prior to the
first date such lease may be terminated without penalty.
"Change of Control" is defined to mean the occurrence of one or more of the
following events:
(1) any "person," as such term is used in Sections 13(d) and 14(d) of
the Exchange Act, other than one or more Permitted Holders, is or becomes
the "beneficial owner," as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time, directly or indirectly, of more than 50% of the total voting power of
the Voting Stock of Azurix;
(2) there shall be consummated any consolidation or merger of Azurix
in which Azurix is not the continuing or surviving Person or pursuant to
which the Common Stock of Azurix would be converted into cash, securities
or other property, other than a merger or consolidation of Azurix with or
into a Permitted Holder or in which the holders of the Capital Stock of
Azurix outstanding immediately prior to the consolidation or merger hold,
directly or indirectly, at least a majority of the Capital Stock of the
surviving Person immediately after such consolidation or merger;
(3) during any two-year period, individuals who at the beginning of
such period constituted the Board of Directors -- together with any new
directors elected by such Board of Directors or nominated for election by
the stockholders of Azurix by a vote of at least a majority of the
directors of Azurix then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved -- cease for any reason to constitute a majority of
the Board of Directors then in office; or
(4) the approval by the holders of Capital Stock of Azurix of any plan
or proposal for the liquidation or dissolution of Azurix (whether or not
otherwise in compliance with the indenture).
"Commission" or "SEC" is defined to mean the Securities and Exchange
Commission, as from time to time constituted, created under the Exchange Act,
or, if at any time after the execution of the indenture such Commission is not
existing and performing the duties now assigned to it under the Trust Indenture
Act, then the body performing such duties at such time.
"Common Stock" is defined to mean with respect to any Person, Capital Stock
of such Person that does not rank prior, as to the payment of dividends or as to
the distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such Person, to shares of Capital Stock of any
other class of such Person.
"Consolidated EBITDA" of Azurix for any period is defined to mean Adjusted
Consolidated Net Income plus:
(1) income taxes, excluding income taxes -- either positive or
negative -- attributable to extraordinary and non-recurring gains or losses
but including state franchise taxes accounted for as income taxes in
accordance with GAAP, all determined on a consolidated basis for Azurix and
its Restricted Subsidiaries in accordance with GAAP,
(2) Consolidated Interest Expense,
64
<PAGE> 70
(3) depreciation and amortization expense, all determined on a
consolidated basis for Azurix and its Restricted Subsidiaries in accordance
with GAAP, and
(4) all other non-cash items reducing Adjusted Consolidated Net Income
(except accruals for or reserves against future cash expenses) for such
period, all determined on a consolidated basis for Azurix and its
Restricted Subsidiaries in accordance with GAAP,
minus all non-cash items increasing Adjusted Consolidated Net Income during such
period; provided, however, that income tax expense, depreciation and
amortization expense and any other non-cash item of any Restricted Subsidiary
shall be included in computing Consolidated EBITDA only to the extent (and in
the same proportion) that the Net Income of the Restricted Subsidiary was
included in Adjusted Consolidated Net Income.
"Consolidated Fixed Charges" is defined to mean, for any period, the
aggregate of:
(1) Consolidated Interest Expense,
(2) to the extent not included in clause (1), the interest component
of Capitalized Leases, determined on a consolidated basis for Azurix and
its Restricted Subsidiaries in accordance with GAAP and
(3) cash dividends due whether or not declared on the Preferred Stock
of any Restricted Subsidiary and any Redeemable Stock of Azurix.
"Consolidated Interest Expense" of Azurix is defined to mean, for any
period, (A) the sum of (x) aggregate interest expense in respect of Debt of
Azurix and its Restricted Subsidiaries determined on a consolidated basis in
accordance with GAAP, including, without limitation, amortization of original
issue discount and non-cash interest payments or accruals, imputed interest
related to Sale/Leaseback Transactions, and all commissions, discounts, other
fees and charges owed with respect to letters of credit and bankers' acceptance
financings and net costs associated with Interest Rate Protection Agreements,
(y) to the extent not included in clause (x) or clause (2) of the definition of
Consolidated Fixed Charges, any amounts paid during such period in respect of
such interest expense, commissions, discounts, other fees and charges that have
been capitalized, and (z) any interest expense on Debt of another Person that is
Guaranteed by Azurix or one of its Restricted Subsidiaries or secured by a Lien
on assets of Azurix or one of its Restricted Subsidiaries (whether or not such
Guarantee or Lien is called upon), provided that Consolidated Interest Expense
in respect of a Guarantee by Azurix or any of its Restricted Subsidiaries of
Debt of another Person will be equal to the commissions, discounts, other fees
and charges that would be due with respect to a hypothetical letter of credit
issued under a bank credit agreement that can be drawn by the beneficiary
thereof in the amount of the Debt so Guaranteed if (i) neither Azurix nor any
Restricted Subsidiary is actually making directly or indirectly interest
payments on such Debt and (ii) GAAP does not require Azurix on an unconsolidated
basis to record such Debt as a liability of Azurix, less (B) the interest income
of Azurix and its Restricted Subsidiaries determined on a consolidated basis in
accordance with GAAP to the extent such income is attributable to cash or cash
equivalents that are subject to a Lien securing Debt of Azurix or any Restricted
Subsidiary.
"Consolidated Total Assets" of Azurix is defined to mean, as of any date
the aggregate of total assets of Azurix and its Restricted Subsidiaries as would
be shown on a consolidated balance sheet of Azurix and its Restricted
Subsidiaries prepared as of such date in accordance with GAAP.
"Currency Protection Agreement" is defined to mean with respect to any
Person any foreign exchange contract, currency swap agreement or other similar
agreement or arrangement designed to protect such Person or any of its
Subsidiaries against fluctuations in currency values to or under which such
Person or any of its Subsidiaries is a party or a beneficiary on the date of the
indenture or becomes a party or a beneficiary thereafter.
65
<PAGE> 71
"Debt" is defined to mean, with respect to any Person at any date of
determination without duplication:
(1) all indebtedness of such Person for borrowed money,
(2) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments,
(3) all obligations of such Person in respect of letters of credit or
bankers' acceptances or other similar instruments or reimbursement
obligations with respect thereto, other than standby and documentary
letters of credit, bankers' acceptances and performance or surety bonds
issued in the ordinary course of business and not in support of
indebtedness for borrowed money, to the extent not drawn,
(4) all obligations of such Person to pay the deferred purchase price
of property or services, except Trade Payables,
(5) the Attributable Value of all obligations of such Person as lessee
under Capitalized Leases,
(6) all Debt of others secured by a Lien on any asset of such Person,
whether or not such Debt is assumed by such Person; provided that, for
purposes of determining the amount of any Debt of the type described in
this clause, if recourse with respect to such Debt is limited to such
asset, the amount of such Debt shall be limited to the lesser of the fair
market value of such asset or the amount of such Debt,
(7) all Debt of others Guaranteed by such Person to the extent such
Debt is Guaranteed by such Person,
(8) all Redeemable Stock valued at the greater of its voluntary or
involuntary liquidation preference plus accrued and unpaid dividends and
(9) to the extent not otherwise included in this definition, all
obligations of such Person under Currency Protection Agreements and
Interest Rate Protection Agreements.
"Enron" is defined to mean Enron Corp., an Oregon corporation, and its
successors.
"Exchange Act" is defined to mean the Securities Exchange Act of 1934, as
amended.
"Fixed Charge Ratio" is defined to mean the ratio, on a pro forma basis, of
(1) the aggregate amount of Consolidated EBITDA for the Reference Period
immediately prior to the date of the transaction giving rise to the need to
calculate the Fixed Charge Ratio (the "Transaction Date") to (2) the aggregate
Consolidated Fixed Charges during such Reference Period; provided that for
purposes of such computation, in calculating Consolidated EBITDA and
Consolidated Fixed Charges:
(A) the Incurrence of the Debt giving rise to the need to calculate
the Fixed Charge Ratio and the application of the proceeds therefrom shall
be assumed to have occurred on the first day of the Reference Period,
(B) Asset Dispositions and Asset Acquisitions which occur during the
Reference Period or subsequent to the Reference Period and prior to the
Transaction Date -- but including any Asset Acquisition to be made with the
Debt Incurred pursuant to (1) above -- shall be assumed to have occurred on
the first day of the Reference Period,
(C) the Incurrence of any Debt during the Reference Period or
subsequent to the Reference Period and prior to the Transaction Date and
the application of the proceeds therefrom shall be assumed to have occurred
on the first day of such Reference Period,
(D) Consolidated Interest Expense attributable to any Debt, whether
existing or being Incurred, computed on a pro forma basis and bearing a
floating interest rate shall be computed as if the rate in effect on the
date of computation had been the applicable rate for the entire period
unless Azurix or any of its Restricted Subsidiaries is a party to an
Interest Rate Protection Agreement, which shall remain in effect for the
twelve month period after the Transaction Date, which has the effect of
fixing the interest rate on the date of computation, in which case such
rate whether higher or lower shall be used, and
66
<PAGE> 72
(E) there shall be excluded from Consolidated Fixed Charges any
Consolidated Fixed Charges related to any amount of Debt which was
outstanding during or subsequent to the Reference Period but is not
outstanding on the Transaction Date, except for Consolidated Fixed Charges
actually incurred with respect to Debt borrowed, as adjusted pursuant to
clause (D), (x) under a revolving credit or similar arrangement to the
extent the commitment thereunder remains in effect on the Transaction Date
or (y) pursuant to the covenant described in clause (1) in the second
paragraph of "-- Important Covenants -- Limitations on Debt" above.
For the purpose of making this computation, Asset Dispositions and Asset
Acquisitions which have been made by any Person which has become a Restricted
Subsidiary or been merged with or into Azurix or any Restricted Subsidiary
during the Reference Period, or subsequent to the Reference Period and prior to
the Transaction Date, shall be calculated on a pro forma basis, including all of
the calculations referred to in clauses (A) through (E) above assuming such
Asset Dispositions or Asset Acquisitions occurred on the first day of the
Reference Period.
"Foreign Asset Sale" is defined to mean an Asset Sale in respect of the
Capital Stock or assets of a Foreign Subsidiary or a Foreign Joint Venture to
the extent that the proceeds of such Asset Sale are received by a Person subject
in respect of such proceeds to the tax laws of a jurisdiction other than the
United States of America or any State thereof or the District of Columbia.
"Foreign Joint Venture" is defined to mean a Joint Venture organized under
the laws of a jurisdiction other than the United States of America or a State
thereof or the District of Columbia with significant operations or assets
outside the United States of America or a State thereof or the District of
Columbia.
"Foreign Sale/Leaseback Transaction" is defined to mean a Sale/Leaseback
Transaction in respect of the Capital Stock or assets of a Foreign Subsidiary or
a Foreign Joint Venture to the extent that the proceeds of such Sale/Leaseback
Transaction are received by a Person subject in respect of such proceeds to the
tax laws of a jurisdiction other than the United States of America or any State
thereof or the District of Columbia.
"Foreign Subsidiary" is defined to mean a Subsidiary that is organized
under the laws of a jurisdiction other than the United States of America or a
State thereof or the District of Columbia with significant operations or assets
outside the United States of America or a State thereof or the District of
Columbia.
"GAAP" is defined to mean generally accepted accounting principles in the
United States applied on a basis consistent with the principles, methods,
procedures and practices employed in the preparation of Azurix's audited
financial statements, including, without limitation, those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
"Gilt Rate" is defined to mean the yield to maturity at the time of
computation of United Kingdom government securities with a constant maturity as
compiled by the Office for National Statistics and published in the most recent
financial statistics that have become publicly available at least two business
days in London prior to the date fixed for redemption, most nearly equal to then
remaining years to the Stated Maturity of the sterling notes; provided that if
the number of years to the Stated Maturity of the sterling notes is not equal to
the constant maturity of a United Kingdom government security for which a weekly
average yield is given, the Gilt Rate shall be obtained by linear interpolation,
calculated to the nearest one-twelfth of a year, from the weekly average yields
of United Kingdom government securities for which such yields are given except
that if the number of years to the Stated Maturity of the sterling notes is less
than one year, the weekly average yield on actually traded United Kingdom
government securities adjusted to a constant maturity of one year shall be used.
67
<PAGE> 73
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Debt or other obligation of
any other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay or advance or supply funds for the purchase or
payment of such Debt or other obligation of such other Person, whether
arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, or to
take-or-pay, or to maintain financial statement conditions or otherwise, or
(2) entered into for purposes of assuring in any other manner the
obligee of such Debt or other obligation of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Holder," "holder of notes" and other similar terms are defined to mean the
registered holder of any note.
"Incur" is defined to mean with respect to any Debt, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such Debt;
provided that neither the accrual of interest, whether such interest is payable
in cash or kind, nor the accretion of original issue discount shall be
considered an Incurrence of Debt.
"Initial Purchasers" is defined to mean Donaldson, Lufkin & Jenrette
Securities Corporation, Donaldson, Lufkin & Jenrette International, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch International, Chase
Securities Inc., Chase Manhattan International Limited, Credit Suisse First
Boston Corporation and Credit Suisse First Boston (Europe) Limited.
"Interest Rate Protection Agreement" is defined to mean, with respect to
any Person, any interest rate protection agreement, interest rate future
agreement, interest rate option agreement, interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement, interest rate hedge
agreement or other similar agreement or arrangement designed to protect such
Person or any of its Subsidiaries against fluctuations in interest rates to or
under which such Person or any of its Subsidiaries is a party or a beneficiary
on the date of the indenture or becomes a party or a beneficiary thereafter.
"Issue Date" is defined to mean the first date on which the old notes were
issued under the indenture, February 18, 2000.
"Joint Venture" is defined to mean a joint venture, partnership or other
similar arrangement, whether in corporate, partnership or other legal form;
provided that, as to any such arrangement in corporate form, such corporation
shall not, as to any Person of which such corporation is a Subsidiary, be
considered to be a Joint Venture to which such Person is a party.
"Lien" is defined to mean, with respect to any Property, any mortgage,
lien, pledge, charge, security interest or encumbrance of any kind in respect of
such Property; provided, however, that the term "Lien" shall not mean any
easements, rights-of-way, restrictions and other similar encumbrances and
encumbrances consisting of zoning restrictions, leases, subleases, licenses,
sublicenses, restrictions on the use of property or defects in the title
thereto. For purposes of the indenture, Azurix shall be deemed to own subject to
a Lien any Property which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, Capitalized Lease or
other title retention agreement relating to such Property.
"Net Cash Proceeds" from a Sale/Leaseback Transaction is defined to mean
cash payments received -- including any cash payments received by way of a
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, including any cash received upon sale or
disposition of such note or receivable, excluding any other consideration
received in the form of assumption by the acquiring Person of Debt or other
obligations relating to the Property disposed of in such Sale/Leaseback
Transaction, as the case may be, or received in any other noncash form
-- therefrom, in each case, net of all legal, title and
68
<PAGE> 74
recording tax expenses, commissions and other fees and expenses incurred or
payable, and all federal, state, provincial, foreign and local taxes required to
be accrued as a liability under GAAP:
(1) as a consequence of such Sale/Leaseback Transaction,
(2) as a result of the repayment of any Debt in any jurisdiction other
than the jurisdiction where the Property disposed of was located or
(3) as a result of any repatriation to the United States of any
proceeds of such Sale/Leaseback Transaction, as the case may be,
and in each case net of a reasonable reserve for the after-tax cost of any
indemnification payments, whether fixed or contingent, attributable to seller's
indemnities to the purchaser undertaken by Azurix or any of its Restricted
Subsidiaries in connection with such Sale/Leaseback Transaction, as the case may
be, but excluding any payments, which by the terms of the indemnities will not,
under any circumstances, be made prior to the latest Stated Maturity of the
outstanding notes, and net of all payments made on any Debt which is secured by
such Property, in accordance with the terms of any Lien upon or with respect to
such Property or which must by its terms or by applicable law be repaid out of
the proceeds from such Sale/Leaseback Transaction, as the case may be, and net
of all distributions and other payments made to holders of minority interests in
Restricted Subsidiaries or Joint Ventures as a result of such Sale/ Leaseback
Transaction, as the case may be.
"Net Income" of any Person for any period is defined to mean the net income
(loss) of such Person for such period, determined in accordance with GAAP,
except that both extraordinary gains and losses and non-recurring gains and
losses shall be excluded.
"Net Proceeds" is defined to mean the aggregate cash proceeds received by
Azurix or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale, including, without limitation,
legal, accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof, including all federal, state, provincial, foreign and local
taxes required to be accrued as a liability under GAAP as a result of any
repatriation to the United States of any proceeds of such Asset Sale, as the
case may be, and in each case net of a reasonable reserve for the after-tax cost
of any indemnification payments, whether fixed or contingent, attributable to
seller's indemnities to the purchaser undertaken by Azurix or any of its
Restricted Subsidiaries in connection with such Asset Sale, as the case may be,
but excluding any payments, which by the terms of the indemnities will not,
under any circumstances, be made prior to the latest Stated Maturity of the
outstanding notes, and net of all payments made on any Debt which is secured by
any Property included in such Asset Sale, in accordance with the terms of any
Lien upon or with respect to such Property or which must by its terms or by
applicable law be repaid out of the proceeds from such Asset Sale, as the case
may be, and net of all distributions and other payments made to holders of
minority interests in Restricted Subsidiaries or Joint Ventures as a result of
such Asset Sale, as the case may be; in each case after taking into account any
available tax credits or deductions and any tax sharing arrangements.
"Non-Recourse" to a Person as applied to any Debt or portion thereof is
defined to mean that such Person is not, directly or indirectly, liable to make
any payments with respect to such Debt or portion thereof, that no Guarantee of
such Debt or portion thereof has been made by such Person other than a Guarantee
limited in recourse to the Capital Stock of the Person incurring such Debt -- or
any shareholder, partner, member or participant of such Person -- and that such
Debt or portion thereof is not secured by a Lien on any asset of such Person
other than the Capital Stock of the Person incurring such Debt -- or any
shareholder, partner, member or participant of such Person -- or of the Person
whose obligations were Guaranteed, provided that for purposes of this definition
the status of a Subsidiary as a general partner of a partnership or Joint
Venture shall not, without more, cause such Person to be, directly or
indirectly, liable to make payments with respect to such Debt or constitute a
Guarantee of such Debt for purposes of determining whether Debt is Non-Recourse.
69
<PAGE> 75
"Officers' Certificate" is defined to mean a certificate signed by
(1) the Chairman of the Board of Directors or any Vice Chairman, any
Executive Director, the Managing Director, Finance or the Treasurer of
Azurix, any officer designated as either the "principal financial officer"
or the "principal accounting officer" in the most recent periodic report
filed by Azurix pursuant to Section 13 of the Exchange Act or any other
financial or accounting officer that the Board of Directors may designate
for purposes of signing such a certificate, and
(2) the Secretary or any Deputy or Assistant Secretary of Azurix and
delivered to the trustee.
Each such certificate shall comply with Section 314 of the Trust Indenture Act
and include the statements provided for in the indenture if and to the extent
required thereby.
"Opinion of Counsel" is defined to mean an opinion in writing signed by
legal counsel satisfactory to the trustee, who may be an employee of or counsel
to Azurix. Each such opinion shall comply with Section 314 of the Trust
Indenture Act and include the statements provided for in the indenture, if and
to the extent required thereby.
"Permitted Business" is defined to mean any business of Azurix and its
Restricted Subsidiaries conducted on the date of original issuance of the old
notes, or proposed to be conducted as described in this prospectus, and any
business related, ancillary or complementary thereto.
"Permitted Holders" is defined to mean (i) Enron, and any Affiliate of
Enron that is controlled by, or under common control with, Enron, and (ii)
Atlantic Water Trust, a Delaware business trust, and its successors and assigns,
but only so long as Enron is the beneficial owner, as defined in Rules 13d-3 and
13d-5 under the Exchange Act, of at least 50% of the Voting Stock of the
successors and assigns of Atlantic Water Trust.
"Permitted Payments" is defined to mean with respect to Azurix or any of
its Restricted Subsidiaries:
(1) any dividend on shares of Capital Stock paid solely in shares of
Capital Stock, other than Redeemable Stock, or in options, warrants or
other rights to purchase Capital Stock, other than Redeemable Stock;
(2) any dividend or other distribution payable to Azurix by any of its
Restricted Subsidiaries or by a Restricted Subsidiary to another Restricted
Subsidiary or by a Restricted Subsidiary to the holders of its Capital
Stock on a pro rata basis;
(3) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of Azurix or any Restricted
Subsidiary, or any option, warrant or other right to purchase shares of
Capital Stock of Azurix or any Restricted Subsidiary, with additional
shares of, or out of the proceeds of a substantially contemporaneous
issuance of, Capital Stock other than Redeemable Stock, unless the
redemption provisions of such Redeemable Stock prohibit the redemption
thereof prior to the date on which the Capital Stock to be acquired or
retired was by its terms required to be redeemed; and
(4) any defeasance, redemption, repurchase or other acquisition or
retirement for value of any Debt which by its terms ranks subordinate in
right of payment to the notes with the proceeds from the issuance of:
(A) Debt which is also subordinate to the notes at least to the
extent and in the manner as the Debt to be defeased, redeemed,
repurchased or otherwise acquired or retired is subordinate in right of
payment to the notes; provided that such subordinated Debt provides for
no payments of principal by way of sinking fund, mandatory redemption or
otherwise including defeasance by Azurix -- including, without
limitation, at the option of the holder thereof other than an option
given to a holder pursuant to a "change of control" covenant which is no
more favorable to the holders of such Debt than the provisions contained
in the "-- Change of Control" covenant described above and such Debt
provides that Azurix will not repurchase such Debt pursuant to such
provisions prior to Azurix's repurchase of the notes required to be
repurchased by Azurix pursuant to the covenant
70
<PAGE> 76
described under "-- Repurchase of New Notes at the Option of
Holders -- Change of Control" above -- prior to, or in an amount greater
than, any Stated Maturity of the Debt being replaced and the proceeds of
such subordinated Debt are utilized for such purpose within 45 days of
issuance or
(B) Capital Stock, other than Redeemable Stock of Azurix or any
Restricted Subsidiary.
"Permitted Working Capital Facilities" is defined to mean one or more
credit agreements providing for the extension of credit to Azurix and/or its
Restricted Subsidiaries for working capital or general corporate purposes,
including the financing of the costs and expenses of acquisitions and any
amendment, supplement, refinancing, renewal, repayment or extension thereof.
"Person" is defined to mean an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"Preferred Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations or other equivalents however designated,
whether voting or non-voting, of preferred or preference stock of such Person
which is outstanding or issued on or after the date of original issuance of the
old notes.
"Property" of any Person is defined to mean all types of real, personal,
tangible, intangible or mixed property owned by such Person whether or not
included in the most recent consolidated balance sheet of such Person under
GAAP.
"Public Equity Offering" is defined to mean any underwritten public
offering of Common Stock of Azurix pursuant to a registration statement that has
been declared effective by the Commission under the Securities Act, other than a
registration statement on Form S-8.
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that is:
(1) redeemable, whether by its terms or upon the occurrence of any
event, prior to the latest Stated Maturity of the outstanding notes,
(2) redeemable or repurchasable by the issuer at the option of the
holder of such class or series of Capital Stock, whether by its terms or
upon the occurrence of any event, at any time prior to the latest Stated
Maturity of the outstanding notes or
(3) convertible into or exchangeable for Capital Stock referred to in
clause (1) or (2) above or Debt having a scheduled maturity prior to the
latest Stated Maturity of the outstanding notes;
provided that any Capital Stock that would not constitute Redeemable Stock but
for provisions thereof giving holders thereof the right to require Azurix to
repurchase or redeem such Capital Stock upon the occurrence of a "change of
control" occurring prior to the latest Stated Maturity of the outstanding notes
shall not constitute Redeemable Stock if the "change of control" provision
applicable to such Capital Stock is no more favorable to the holders of such
Capital Stock than the provisions contained in the covenant described in
"-- Repurchase of New Notes at the Option of Holders -- Change of Control" above
and such Capital Stock specifically provides that Azurix will not repurchase or
redeem any such Capital Stock pursuant to such provisions prior to Azurix's
repurchase of the notes required to be repurchased by Azurix under the covenant
described in "-- Repurchase of New Notes at the Option of Holders -- Change of
Control" above.
"Reference Period" is defined to mean the most recent four complete fiscal
quarters for which financial information is available preceding the date of a
transaction giving rise to the need to make a financial calculation.
"Restricted Payment" is defined to mean, with respect to any Person:
(1) any dividend or other distribution on any shares of such Person's
Capital Stock;
(2) any payment on account of the purchase, redemption, acquisition or
retirement for value of such Person's Capital Stock; and
71
<PAGE> 77
(3) any defeasance, redemption, repurchase or other acquisition or
retirement for value prior to the Stated Maturity of any Debt ranking
subordinate in right of payment to the notes.
Notwithstanding the foregoing, "Restricted Payment" shall not include any
Permitted Payment.
"Restricted Subsidiary" is defined to mean any Subsidiary of Azurix that is
not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" is defined to mean any arrangement with any
Person pursuant to which Azurix or any of its Restricted Subsidiaries leases any
Property that has been or is to be sold or transferred by Azurix or its
Restricted Subsidiaries to such Person, other than any such transaction executed
by the time of, or within 12 months after the latest of, the acquisition, the
completion of construction, development or improvement, or the commencement of
commercial operation of the Property subject to such leasing transaction.
"Securities Act" is defined to mean the Securities Act of 1933, as amended.
"Senior Debt" is defined to mean any Debt of a Person other than
Subordinated Debt.
"Significant Subsidiary" of a Person is defined to mean, as of any date,
any Subsidiary, or two or more Subsidiaries taken together, which constitute a
"significant subsidiary" of such Person as that term is defined in the
regulations promulgated under the Exchange Act, as in effect as of the date of
the indenture.
"Stated Maturity" is defined to mean, with respect to any debt security or
any installment of interest thereon, the date specified in such debt security as
the fixed date on which any principal of such debt security or any such
installment of interest is due and payable.
"Subordinated Debt" is defined to mean Debt of Azurix that is expressly
subordinated to the notes in contractual right of payment.
"Subsidiary" is defined to mean, with respect to any Person, any
corporation or other entity (i) of which a majority of the Voting Stock is at
the time directly or indirectly owned by such Person or (ii) the accounts of
which are consolidated with those of such other Person in accordance with GAAP.
"Subsidiary Guarantees" is defined to mean the joint and several Guarantees
of the notes issuable by the Subsidiary Guarantors in accordance with the
requirements of the indenture.
"Subsidiary Guarantor" is defined to mean, unless released from their
Guarantees of the notes as permitted by the indenture, any Restricted Subsidiary
that becomes a guarantor of the notes in compliance with the provisions of the
indenture and executes a supplemental indenture in which such Restricted
Subsidiary agrees to be bound by the terms of the indenture.
"Trade Payables" is defined to mean, with respect to any Person, any
accounts payable or any other indebtedness or monetary obligation to trade
creditors created, assumed or Guaranteed by such Person or any of its
Subsidiaries arising in the ordinary course of business in connection with the
acquisition of goods or services.
"Treasury Rate" is defined to mean the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity -- as
compiled and published in the most recent Federal Reserve Statistical Release
H.15(519) that has become publicly available at least two business days prior to
the date fixed for redemption, or if such Statistical Release is no longer
published, any publicly available source of similar market data -- most nearly
equal to the then remaining years to (1) Stated Maturity, in the case of the
7-year dollar notes, or (2) February 15, 2005, in the case of the 10-year dollar
notes; provided that if the number of years to (1) Stated Maturity, in the case
of the 7-year dollar notes, or (2) February 15, 2005, in the case of the 10-year
dollar notes, is not equal to the constant maturity of a United States Treasury
security for which a weekly average yield is given, the Treasury Rate shall be
obtained by linear interpolation, calculated to the nearest one-twelfth of a
year, from the weekly average yields of United States Treasury securities for
which such yields are given except that if the number of years to (1) Stated
Maturity, in the case of the 7-year dollar notes, or (2) February 15, 2005, in
the case of the 10-year dollar notes, is less than one year, the weekly
72
<PAGE> 78
average yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
"Trust Indenture Act" is defined to mean the Trust Indenture Act of 1939,
as amended.
"U.K. Government Obligations" is defined to mean securities which are (1)
direct obligations of the United Kingdom for the payment of which its full faith
and credit is pledged or (2) obligations of a Person controlled or supervised by
and acting as an agency or instrumentality of the United Kingdom, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United Kingdom, which, in either case are not callable or redeemable at the
option of the issuer thereof.
"Unrestricted Subsidiary" is defined to mean (i) each Subsidiary of Azurix
that has been designated as such by written action of the Board of Directors as
provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board
of Directors may designate any Subsidiary of Azurix (including any newly
acquired or newly formed Subsidiary of Azurix) to be an Unrestricted Subsidiary
provided that:
(1) the Subsidiary to be so designated or any of its Subsidiaries does
not own any Capital Stock or Debt of, or own or hold any Lien on any
Property of, Azurix or any Restricted Subsidiary of Azurix that is not a
Subsidiary of the Subsidiary to be so designated;
(2) no Event of Default or event that, after the giving of notice or
lapse of time or both, would become an Event of Default shall have occurred
and be continuing at the time of or after giving effect to the designation;
and
(3) Azurix could Incur at least $1 of Debt under the covenant
described in the first paragraph of "-- Important Covenants -- Limitations
on Debt" above after giving effect to the designation.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that (x) immediately after giving
effect to such designation no Event of Default or event that, after the giving
of notice or lapse of time or both, would become an Event of Default shall have
occurred and be continuing and (y) all Debt of such Unrestricted Subsidiary
outstanding immediately following such designation, as if such Debt had been
Incurred at such time, would have been permitted to be Incurred under the first
paragraph of the covenant described in "Important Covenants -- Limitations on
Debt." Any such designation by the Board of Directors shall be evidenced to the
Holders of the notes by promptly delivering to the trustee a copy of the Board
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complies with the foregoing provisions.
"U.S. Dollar Equivalent" means, with respect to any monetary amount in a
currency other than the U.S. dollar, at or as of any time for the determination
thereof, the amount of U.S. dollars obtained by converting such foreign currency
involved in such computation into U.S. dollars at the spot rate for the purchase
of U.S. dollars with the applicable foreign currency as quoted by Reuters (or,
if Reuters ceases to provide such spot quotations, by any other reputable
service as is providing such spot quotations, as selected by Azurix) at
approximately 11:00 a.m. (New York City time) on the date not more than two
Business Days prior to such determination.
"U.S. Government Obligations" is defined to mean securities which are (1)
direct obligations of the United States for the payment of which its full faith
and credit is pledged or (2) obligations of a Person controlled or supervised by
and acting as an agency or instrumentality of the United States, the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States, which, in either case are not callable or redeemable at the
option of the issuer thereof, and shall also include a depository receipt issued
by a bank or trust company as custodian with respect to any such U.S. Government
Obligations or a specific payment of interest on or principal of any such U.S.
Government Obligation held by such custodian for the account of the holder of a
depository receipt, provided that, except as required by law, such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depository receipt from any amount received by the custodian in respect of
the U.S. Government Obligation or the specific payment of interest on or
principal of the U.S. Government Obligation evidenced by such depository
receipt.
73
<PAGE> 79
"Voting Stock" is defined to mean, with respect to any Person, Capital
Stock of any class or kind ordinarily having the power to vote for the election
of directors, or persons fulfilling similar responsibilities, of such Person.
74
<PAGE> 80
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material United States federal income
considerations relating to the exchange of new notes for old notes and the
ownership and disposition of the notes and represents the opinion of our
counsel, Vinson & Elkins L.L.P. on these matters. This summary is based on the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury Regulations promulgated or proposed thereunder ("Treasury
Regulations"), judicial authority and current administrative rulings and
practice, all of which are subject to change, possibly on a retroactive basis.
This summary deals only with holders that will hold notes as capital assets, and
does not address tax considerations applicable to investors that may be subject
to special tax rules such as banks, tax-exempt organizations, insurance
companies, dealers in securities or currencies, persons that will hold notes as
a position in a hedging, straddle or conversion transaction, or persons that
have a functional currency other than the U.S. dollar. In addition, it does not
deal with holders other than original purchasers, except where otherwise
specifically noted. INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES
FEDERAL TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES
ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR
UNDER ANY APPLICABLE TAX TREATY.
U.S. HOLDERS
As used herein, a "U.S. Holder" is a beneficial owner of notes that is: (1)
an individual who is a citizen or resident of the United States; (2) a
corporation or partnership created or organized in the United States or under
the laws of the United States or of any State thereof (including the District of
Columbia); (3) an estate the income of which is subject to U.S. federal income
tax regardless of its source; or (4) a trust subject to the primary supervision
of a United States court and the control of one or more United States persons.
EXCHANGE OF NEW NOTES FOR OLD NOTES
Because the new notes are identical in all material respects to the old
notes, an exchange of new notes for old Notes should not produce, for federal
income tax purposes, recognizable gain or loss to either Azurix or a U.S. Holder
of an old note. The U.S. Holder will have an initial adjusted tax basis and a
holding period in the new note equal to its adjusted tax basis and holding
period in the old note exchanged therefor.
PAYMENTS OF INTEREST
General. Stated interest paid on each note held by a U.S. Holder will
generally be taxable in accordance with the U.S. Holder's method of accounting
for federal income tax purposes. Special rules governing the treatment of market
discount and amortizable premium are described below. The notes are not expected
to be issued with "original issue discount" for United States federal income tax
purposes.
7-Year Sterling Notes. A U.S. Holder who uses the cash method of accounting
for federal income tax purposes and who receives interest on a note in pounds
sterling will be required to include in income the U.S. dollar value of such
pounds sterling. The U.S. dollar value will be determined using the spot rate in
effect on the date such payment is received, regardless of whether the payment
is in fact converted to U.S. dollars at that time. No exchange gain or loss will
be recognized by such holder if the pounds sterling are converted to U.S.
dollars on the date received. The U.S. federal income tax consequences of the
conversion of pounds sterling into U.S. dollars are described below. Please read
"-- Exchange of Foreign Currencies."
A U.S. Holder who uses the accrual method of accounting for federal income
tax purposes, or who is otherwise required to accrue interest prior to receipt,
will be required to include in income the U.S. dollar value of the amount of
interest income accrued, or otherwise required to be taken into account, with
respect to a note in a taxable year. The U.S. dollar value of the accrued income
will be determined by translating that income at the average rate of exchange
for the relevant interest accrual period, or with respect to an accrual period
that spans two taxable years, at the average rate for the portion of the accrual
period within the taxable year. The average rate of exchange for an interest
accrual period, or portion thereof, is the simple average of
75
<PAGE> 81
the spot exchange rates for each business day of the period, or another average
that is reasonably derived and consistently applied.
An accrual basis U.S. Holder may elect, however, to translate the accrued
interest income using the spot rate of exchange in effect on the last day of the
accrual period or, with respect to the earlier taxable year portion of an
accrual period that spans two taxable years, using the spot rate of exchange in
effect on the last day of the taxable year. In addition, if the last day of an
accrual period is within five business days of the receipt, or payment, of the
accrued interest, a U.S. Holder may elect to translate such interest using the
spot rate of exchange in effect on the date of receipt or payment. The above
election must be made in a statement filed with the U.S. Holder's tax return and
will apply to other debt obligations held by the U.S. Holder at the beginning of
the first taxable year in which the election applies or acquired thereafter and
may not be changed without the consent of the Internal Revenue Service. Whether
or not such election is made, a U.S. Holder may recognize exchange gain or loss
with respect to accrued interest income on the date such interest income is
received.
The exchange gain or loss will be treated as ordinary income or loss. The
amount of ordinary income or loss recognized will equal the difference, if any,
between the U.S. dollar value of the pounds sterling received, determined using
the spot rate in effect on the date the payment is received, and the U.S. dollar
value of the interest income that has accrued during the interest accrual
period, as determined above. No additional exchange gain or loss will be
recognized by the holder if the pounds sterling are converted to U.S. dollars on
the date received. The U.S. federal income tax consequences of the conversion of
pounds sterling into U.S. dollars are described below. Please read "-- Exchange
of Foreign Currencies."
MARKET DISCOUNT
If a U.S. Holder purchases a note, other than in the offering, for less
than the stated redemption price of the note at maturity, the difference is
considered market discount, unless such difference is de minimis, i.e., less
than one-fourth of one percent of the stated redemption price of the note at
maturity multiplied by the number of complete years remaining to maturity. Under
the market discount rules, any gain realized by the U.S. Holder on a taxable
disposition of a note having market discount, as well as any partial principal
payment made with respect to such a note, will be treated as ordinary income to
the extent of the then accrued market discount of the note.
Any market discount will accrue ratably from the date of acquisition to the
maturity date of the note, unless the U.S. Holder elects, irrevocably, to accrue
market discount on a constant interest rate method under which marginally less
market discount would accrue in early years and marginally greater amounts would
accrue in later years. The election to accrue market discount on a constant
interest rate method is irrevocable but may be made separately as to each note
held by the holder.
Accrual of market discount will not cause the accrued amounts to be
included currently in a U.S. Holder's taxable income, in the absence of a
disposition of, or principal payment on, the note. A U.S. Holder of such a note
is generally required to defer the deduction of all or a portion of the interest
expense on any indebtedness incurred or continued to purchase or carry the note
until the deferred income is realized. A U.S. Holder may elect to currently
include market discount in income as it accrues on either a ratable or constant
interest rate method. In such event, interest expense relating to the
acquisition of a note which would otherwise be deferred would be currently
deductible to the extent otherwise permitted by the Code. The election to
include market discount in income currently, once made, applies to all market
discount obligations acquired by such U.S. Holder on or after the first day of
the first taxable year to which the election applies and all subsequent years
unless revoked with the consent of the IRS.
If a U.S. Holder elects to include market discount in income currently, the
amount of market discount with respect to 7-Year Sterling Notes will be
determined for any accrual period in pounds sterling and then translated into
U.S. dollars on the basis of the average rate in effect during such accrual
period. Exchange gain or loss realized with respect to such accrued market
discount is determined in accordance with the rules relating to accrued interest
described above. The amount of accrued market discount (other than market
discount currently includible in income) taken into account upon receipt of any
partial principal payment or
76
<PAGE> 82
upon the sale, redemption or other taxable disposition of a note will be the
U.S. dollar value of such accrued market discount determined on the date of
receipt of such partial principal payment or on the date of such sale,
redemption or other taxable disposition.
AMORTIZABLE PREMIUM
If a U.S. Holder acquires a note for an amount which is greater than its
principal amount, such U.S. Holder will be considered to have purchased the note
with amortizable bond premium equal to the amount of such excess. The U.S.
Holder may elect to amortize the premium using a constant yield method over the
period from the acquisition date to the maturity date of the note. Amortized
amounts may be offset only against interest paid with respect to the note. Once
made, an election to amortize and offset interest on the note may be revoked
only with the consent of the IRS and will apply to all notes held by the U.S.
Holder on the first day of the taxable year to which the election relates and to
subsequent taxable years and to all notes subsequently acquired by such U.S.
Holder.
Any gain or loss realized on the sale, redemption or other taxable
disposition of a 7-Year Sterling Note with amortizable bond premium by a U.S.
Holder who has not elected to amortize such premium will be ordinary income or
loss to the extent attributable to fluctuations in currency exchange rates. If
such an election is made, amortizable bond premium taken into account on a
current basis will reduce interest income in pounds sterling. Exchange gain or
loss will be realized on such amortized bond premium with respect to any period
by treating the bond premium amortized in such period as a return of principal.
Please read "-- Sale, Redemption or Other Taxable Disposition of the Notes."
SALE, REDEMPTION OR OTHER TAXABLE DISPOSITION OF THE NOTES
General. The sale, redemption or certain other taxable dispositions of a
note will result in the recognition of gain or loss to the U.S. Holder in an
amount equal to the difference, if any, between (a) the amount realized upon the
disposition or redemption and (b) the U.S. Holder's adjusted tax basis in such
note. A U.S. Holder's tax basis for determining gain or loss on the disposition
or redemption of a note generally will be the cost of such note to such U.S.
Holder, increased by the amount of any market discount includible in such U.S.
Holder's gross income with respect to such note, and decreased by the amount of
any payments under the note that are part of its stated redemption price at
maturity and by the portion of any premium applied to reduce interest payments
as described above. Such gain or loss will be capital gain or loss (except to
the extent the gain represents market discount or accrued but unpaid interest on
the note not previously included in gross income, to which extent such gain
would be treated as ordinary income). In the case of an individual U.S. Holder,
such capital gain generally will be subject to a maximum federal tax rate of 20%
if the individual has held the note for more than one year and otherwise will be
short-term capital gain or loss. The deductibility of capital losses is subject
to certain limitations. Prospective investors should consult their own tax
advisors in this regard.
7-Year Sterling Notes. If a U.S. Holder receives foreign currency on a
sale, exchange or retirement, the amount realized will be based on the U.S.
dollar value of the foreign currency on the date of disposition assuming the
notes are not traded on an established securities market. A U.S. Holder's
adjusted tax basis in a note will equal the U.S. dollar cost of the note to the
holder on the date of purchase assuming the notes are not traded on an
established securities market. If a U.S. Holder purchases a note with previously
owned foreign currency, the holder will recognize ordinary income or loss in an
amount equal to the difference, if any, between the holder's tax basis in the
foreign currency and the U.S. dollar value of the foreign currency used to
purchase the note, determined on the date of purchase.
If the notes are traded on an established securities market, there is a
special rule for purchases and sales of those notes by a cash basis taxpayer
under which units of foreign currency paid or received are translated into U.S.
dollars at the spot rate on the settlement date of the purchase or sale. In that
case, no exchange gain or loss will result from currency fluctuations between
the trade date and the settlement of such a purchase or sale. An accrual basis
taxpayer may elect the same treatment required of cash basis taxpayers with
respect to
77
<PAGE> 83
purchases and sales of publicly traded notes, provided the election is applied
consistently. Such election cannot be changed without the consent of the
Internal Revenue Service.
Gain or loss realized by a U.S. Holder upon the sale, exchange or
retirement of a note that is attributable to fluctuations in the currency
exchange rates will be ordinary income or loss and generally will not be treated
as interest income or expense. Gain or loss attributable to fluctuations in
exchange rates will equal the difference between the U.S. dollar value of the
foreign currency principal amount of the note, determined on the date the
payment is received or the note is disposed of, and the U.S. dollar value of the
foreign currency principal amount of the note, determined on the date the U.S.
Holder acquired the note. The foreign currency gain or loss will be recognized
only to the extent of the total gain or loss realized by the U.S. Holder on the
sale, exchange or retirement of the note.
EXCHANGE OF FOREIGN CURRENCIES
A U.S. Holder will have a tax basis in any pounds sterling received, as
interest or on the sale, exchange, retirement or other disposition of a note,
equal to their U.S. dollar value at the time the interest is received or at the
time payment is received in consideration of the sale, exchange or retirement.
Any gain or loss realized by a U.S. Holder on a sale or other disposition of
pounds sterling, including their exchange for U.S. dollars or their use to
purchase notes, will be ordinary income or loss.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to interest
payments on the notes made to U.S. Holders other than certain exempt recipients
(such as corporations) and to proceeds realized by such holders on dispositions
of the notes. A 31% backup withholding tax will apply to such amounts only if
the U.S. Holder: (1) fails to furnish its social security or other taxpayer
identification number ("TIN") within a reasonable time after request therefor;
(2) furnishes an incorrect TIN; (3) fails to report properly interest or
dividend income; or (4) fails, under certain circumstances, to provide a
certified statement, signed under penalty of perjury, that the TIN provided is
its correct number and that it is not subject to backup withholding.
Backup withholding is not an additional tax. Any amount withheld from a
payment to a U.S. Holder under the backup withholding rules is allowable as a
refund or as a credit against such holder's federal income tax liability,
provided that the required information is furnished to the IRS. Furthermore,
certain penalties may be imposed by the IRS on a U.S. Holder who is required to
supply information but who does not do so in the proper manner.
NON-U.S. HOLDERS
The following is a general discussion of certain U.S. federal tax
consequences of the ownership and disposition of notes applicable to beneficial
owners that are not U.S. Holders ("Non-U.S. Holders") of the notes.
PAYMENTS OF INTEREST
Interest paid on the notes to a Non-U.S. Holder should qualify as
"portfolio interest" on which no withholding of U.S. income tax is imposed,
provided (1) such holder does not own, actually or constructively, 10% or more
of the total combined voting power of all classes of stock of Azurix, (2) such
holder is not a controlled foreign corporation within the meaning of section
957(a) of the Code that is related, directly or indirectly, to Azurix through
stock ownership, (3) such holder is not a bank that acquired the notes in
consideration for an extension of credit made pursuant to a loan agreement
entered into in the ordinary course of its business, (4) such amounts are not
considered payments of "contingent interest" as described in Section 871(h)(4)
and (5) either (a) the beneficial owner of the note certifies to Azurix or its
agent on IRS Form W-8BEN (or applicable substitute form) under penalties of
perjury that it is not a United States person and provides its name and address,
or (b) a securities clearing organization, bank, or other financial institution
that holds customers' securities in the ordinary course of its trade or business
(a "financial institution") and holds the note certifies to Azurix or its agent,
under penalties of perjury, that such statement has been received
78
<PAGE> 84
from the beneficial owner by it or by a financial institution between it and the
beneficial owner and furnishes the payor with a copy thereof.
If a Non-U.S. Holder of a note is engaged in trade or business in the
United States, and if interest on the note is effectively connected with the
conduct of such trade or business (or, in the case of an applicable tax treaty,
is attributable to a permanent establishment maintained in the United States by
the Non-U.S. Holder) the Non-U.S. Holder, although exempt from U.S. withholding
tax, will generally be subject to regular U.S. federal income tax on such
interest in the same manner as if it were a United States person. In order to
establish an exemption from U.S. withholding tax, such Non-U.S. Holder must
provide to Azurix or its agent a properly executed IRS Form W-8ECI (or
applicable substitute form). In addition to regular U.S. federal income tax, if
such Non-U.S. Holder is a foreign corporation, it may be subject to a U.S.
branch profits tax.
Treasury Regulations effective for payments after December 31, 2000 would
alter the procedures for claiming the benefit of an income tax treaty and change
the certification procedures relating to the receipt by intermediaries of
payments on behalf of a beneficial owner of a note. Specifically, these
regulations would require, in the case of notes held by a foreign partnership,
that (1) the certification described above be provided by the partners rather
than by the foreign partnership and (2) the partnership provide certain
information, including a U.S. taxpayer identification number.
SALE, REDEMPTION OR OTHER TAXABLE DISPOSITION OF THE NOTES
Generally, a Non-U.S. Holder of a note will not be subject to U.S. federal
income tax on gain realized on the sale, redemption or other disposition of a
note unless: (1) such gain or income is effectively connected with the conduct
of trade or business in the United States of the Non-U.S. Holder or, under an
applicable tax treaty, is attributable to a permanent establishment maintained
in the United States by the Non-U.S. Holder; (2) in the case of a Non-U.S.
Holder who is an individual, the Non-U.S. Holder is present in the United States
for 183 days or more in the taxable year of such sale and certain other
requirements are met; or (3) the Non-U.S. Holder is subject to tax pursuant to
the provisions of the Code applicable to certain former citizens and residents
of the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. information reporting and backup withholding tax (which is a
withholding tax imposed at the rate of 31% on certain payments to persons who
fail to furnish the information required under U.S. information reporting
requirements) will not apply to interest paid on the notes to a Non-U.S. Holder
provided the certification described under "Payments of Interest" above is
received and the payor does not have actual knowledge that the payee is a United
States person or an exemption has otherwise been established.
Payments of the proceeds from the sale by a Non-U.S. Holder of a note made
to or through a foreign office of a broker generally will not be subject to
information reporting or backup withholding. However, if the broker is (1) a
United States person, (2) a controlled foreign corporation for U.S. tax
purposes, or (3) a foreign person 50% or more of whose gross income is
effectively connected with a United States trade or business for a specified
three-year period, information reporting (but not backup withholding) may apply
to such payments, unless (a) such broker has documentary evidence in its records
that the beneficial owner is not a United States person and certain other
conditions are met or (b) the beneficial owner otherwise establishes an
exemption. Payments of the proceeds from the sale of a note to or through the
U.S. office of a broker are subject to information reporting and backup
withholding unless the holder or beneficial owner certifies as to its Non-U.S.
status or otherwise establishes an exemption from information reporting and
backup withholding. Backup withholding is not an additional tax. Rather, any
amounts withheld from a payment to a holder under the backup withholding rules
are allowed as a refund or a credit against such holder's U.S. federal income
tax, provided that the required information is furnished to the United States
Internal Revenue Service.
ESTATE TAX
A note owned (or previously transferred subject to certain retained rights
or powers) by an individual who is a Non-U.S. Holder at the time of death will
not be includible in the decedent's gross estate for United
79
<PAGE> 85
States federal estate tax purposes, provided that the Non-U.S. Holder did not at
the time of death actually or constructively own 10% or more of the combined
voting power of all classes of stock of Azurix entitled to vote, and provided
that, at the time of death, payments with respect to such note would not have
been effectively connected with the conduct by such Non-U.S. Holder of a trade
or business within the United States.
80
<PAGE> 86
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the SEC in no-action letters
issued to third parties, we believe that you may transfer new notes issued under
the exchange offer in exchange for the old notes if:
- you acquire the new notes in the ordinary course of your business;
- you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of such new notes; and
- you are not our "affiliate," as defined in Rule 405 of the Securities
Act.
Broker-dealers receiving new notes in the exchange offer will be subject to
a prospectus delivery requirement with respect to resales of the new notes.
We believe that you may not transfer new notes issued under the exchange
offer in exchange for the old notes if you are:
- our "affiliate" within the meaning of Rule 405 under the Securities Act;
or
- a broker-dealer that acquired old notes directly from us.
To date, the staff of the Commission has taken the position that
participating broker-dealers may fulfill their prospectus delivery requirements
with respect to transactions involving an exchange of securities such as this
exchange offer, other than a resale of an unsold allotment from the original
sale of the old notes, with the prospectus contained in the exchange offer
registration statement. In the registration rights agreement, we have agreed to
permit participating broker-dealers to use this prospectus in connection with
the resale of new notes. We have agreed that, for a period of up to one year
after the expiration of the exchange offer, we will make this prospectus, and
any amendment or supplement to this prospectus, available to any broker-dealer
that requests such documents in the letter of transmittal.
If you wish to exchange your old notes for new notes in the exchange offer,
you will be required to make representations to us as described in "The Exchange
Offer -- Purpose and Effect of the Exchange Offer" and "-- Procedures for
Tendering -- Your Representations to Us" in this prospectus and in the letter of
transmittal. In addition, if you are a broker-dealer who receives new notes for
your own account in exchange for old notes that were acquired by you as a result
of market-making activities or other trading activities, you will be required to
acknowledge that you will deliver a prospectus in connection with any resale by
you of such new notes.
We will not receive any proceeds from any sale of new notes by
broker-dealers. Broker-dealers who receive new notes for their own account in
the exchange offer may sell them from time to time in one or more transactions
in the over-the-counter market:
- in negotiated transactions;
- through the writing of options on the new notes or a combination of such
methods of resale;
- at market prices prevailing at the time of resale; and
- at prices related to such prevailing market prices or negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any broker-dealer or the purchasers of any new notes. Any broker-dealer
that resells new notes it received for its own account in the exchange offer and
any broker or dealer that participates in a distribution of such new notes may
be deemed to be an "underwriter" within the meaning of the Securities Act. Any
profit on any resale of new notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that by acknowledging that it
will deliver and by delivering a
81
<PAGE> 87
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any brokers or dealers. We will indemnify
holders of the old notes, including any broker-dealers, against certain
liabilities, including liabilities under the Securities Act, as provided in the
registration rights agreement.
82
<PAGE> 88
NOTICE TO EUROPEAN RESIDENTS
The notes may not be offered, sold, transferred, or delivered in or from
the Netherlands as part of their initial distribution, or at any time
thereafter, directly or indirectly, other than to banks, pension funds,
insurance companies, securities firms, investment institutions, central
governments, large international and supranational institutions and other
comparable entities, including, inter alia, treasuries and finance companies of
large enterprises that trade or invest in securities in the conduct of their
profession or trade. Individuals or legal entities who or that do not trade or
invest in securities in the conduct of their profession or trade may not
participate in the offering in the Netherlands and this document may not be
considered an offer or the prospect of an offer to any such individual or entity
to sell or exchange our notes.
In the United Kingdom, the notes will only be available for subscription
pursuant to the offering to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purposes of their businesses or otherwise in circumstances that do not,
and will not, constitute an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995. This document is
being distributed on the basis that each person in the United Kingdom to whom
this document is issued is a person who is of a kind described in Article 11(3)
of the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996 and, accordingly, by accepting delivery of this document the
recipient warrants and acknowledges that it is a person falling within that
Article.
In Italy, this document has not been submitted to the clearance procedure
of Commissione Nazionale per la Societa e la Borsa ("CONSOB") and, therefore,
the notes may not be offered, sold or delivered, nor may copies of this document
or of any other document relating to the notes be distributed, in Italy, except
to professional investors ("operatori qualificati"), as defined in Article 31.2
of CONSOB Regulation No. 11522 of July 1, 1998.
The notes may be offered and sold in the Federal Republic of Germany only
in accordance with the provisions of the Securities Sales Prospectus Act of the
Federal Republic of Germany (Wertpapier-Verkaufsprospektgesetz) and any other
applicable German law. Consequently, in Germany, the notes will only be
available to persons who by profession or by trade business buy or sell
securities for their own or a third party's account.
In France, the notes may not be directly or indirectly offered or sold to
the public, and offers and sales of the notes will only be made in France to
qualified investors or to a close circle of investors, in accordance with
Article 6-II of Ordinance no. 67-833 dated September 28, 1967, as amended, and
Decree no. 98-880 dated October 1, 1998. Accordingly, this document has not been
submitted to the Commission des Operations de Bourse. Neither this document nor
any other offering material may be distributed to the public in France.
Les titres ne pourront pas etre offerts ou vendus directement ou
indirectement au public en France et ne pourront l'etre qu'a des investisseurs
qualifies ou a un cercle restreint d'investisseurs au sens de l'Article 6-11 de
l'Ordonnance no. 67-833 du Septembre 28, 1967, telle que modifee, et du Decret
no. 98-880 du Octobre 1, 1998. Par consequent, ce prospectus n'a pas ete soumis
au visa de la Commission des Operations de Bourse. Ni ce document ni tout autre
document promotionnel ne pourront etre communiques au public en France.
The notes may not be offered or sold directly or indirectly by way of a
public offering in Belgium. Consequently, in Belgium, the notes will only be
available for subscription pursuant to the offering to registered Belgian credit
institutions, European Economic Area banks having a branch in Belgium,
registered Belgian stockbroking companies, investment funds registered with the
Belgian Banking and Finance Commission or insurance companies and pension funds
registered with the Belgian Insurance Control Authority, provided in each case
that these institutions are investing for their own account.
The notes may be offered and sold in the Republic of Ireland only to
persons in context of their trades, professions or occupations or otherwise in
circumstances that have not resulted, and will not result, in an offer to the
public in the Republic of Ireland to which the European Communities
(Transferable Securities and Stock Exchange) Regulations, 1992 of Ireland would
apply.
This document has not and will not be registered with the Swedish Financial
Supervisory Authority. Accordingly, this document may not be made available, nor
may the bonds otherwise be marketed and offered for sale, in Sweden under the
Financial Instruments Trading Act (1991:980).
83
<PAGE> 89
LISTING AND GENERAL INFORMATION
1. Application has been made to list the new sterling notes on the
Luxembourg Stock Exchange. Prior to the listing, the Certificate of
Incorporation and By-laws of Azurix and a legal notice (Notice Legale) relating
to the issuance of the new sterling notes will be deposited with the Chief
Registrar of the District Court of Luxembourg (Greffier en Chef du Tribunal
d'Arrondissement de et a Luxembourg), where such documents may be examined or
copies obtained upon request.
2. So long as the new sterling notes are listed on the Luxembourg Stock
Exchange and the rules and regulations of the Luxembourg Stock Exchange shall so
require, copies of the constituent documents of Azurix and the indenture
(including the forms of Global Notes and Definitive Registered Notes) will be
available for inspection at the offices of Banque Generale du Luxembourg in
Luxembourg, which we refer to as the Luxembourg Listing Agent. So long as the
new sterling notes are listed on the Luxembourg Stock Exchange and the rules and
regulations of the Luxembourg Stock Exchange shall so require, copies of any and
all annual and quarterly reports of Azurix may be obtained during normal
business hours on any weekday at the office of the Luxembourg Listing Agent.
Azurix's financial statements contained in such reports are prepared on a
consolidated basis and do not include non-consolidated financial statements.
3. The independent public accountants of Azurix are Arthur Andersen LLP.
4. Azurix has obtained all necessary consents, approvals and authorizations
in connection with the initial issuance of the new sterling notes other than the
approval of the listing of the new sterling notes on the Luxembourg Stock
Exchange. The issuance of the notes was authorized by resolutions adopted by the
Board of Directors of Azurix on January 21, 2000.
5. There has been no material adverse change in the financial position of
Azurix and its subsidiaries since December 31, 1999, the date of Azurix's most
recent audited consolidated financial statements, except as disclosed herein.
The fiscal year of Azurix is from January 1 to December 31 of each year.
6. Neither Azurix nor any of its subsidiaries is involved in any litigation
or arbitration proceedings relating to claims or amounts which are material in
the context of the issuance of the new sterling notes, nor so far as Azurix is
aware is any such litigation or arbitration pending or threatened.
7. Azurix has appointed Chase Manhattan Bank Luxembourg S.A. in Luxembourg
as its paying agent in Luxembourg for such time as is required in this
prospectus.
8. The Common Code for the sterling notes represented by the Sterling
Global Note is 011711162. The International Securities Identification Number,
which is referred to as ISIN, for the new sterling notes is XS0108064709 for the
Sterling Global Note. The new sterling notes are expected to clear through
Euroclear.
LEGAL MATTERS
The validity of the issuance of the new notes will be passed upon for us by
Vinson & Elkins L.L.P., Houston, Texas.
84
<PAGE> 90
EXPERTS
The consolidated financial statements and schedules for Azurix Corp. and
subsidiaries as of December 31, 1998 and 1999 and for the period from January
29, 1998 (Date of Inception) to December 31, 1998 and for the year ended
December 31, 1999, incorporated by reference in this prospectus and elsewhere in
the registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated by reference in this prospectus and elsewhere in this registration
statement in reliance upon the authority of said firm as experts in accounting
and auditing in giving said reports.
The consolidated statements of income, changes in stockholders' equity and
cash flows for Wessex Water Plc (now renamed Wessex Water Ltd) (predecessor
company) and subsidiaries for the period from April 1, 1998 to October 2, 1998,
incorporated by reference in this prospectus and elsewhere in this registration
statement, have been audited by Arthur Andersen, independent accountants, as
indicated in their reports with respect thereto, and are incorporated by
reference in this prospectus and elsewhere in this registration statement in
reliance upon the authority of said firm as Chartered Accountants and Registered
Auditors in the U.K. in giving said reports.
The consolidated financial statements for Wessex Water Plc (now renamed
Wessex Water Ltd) (predecessor company) as of March 31, 1998 and for the year
ended March 31, 1998, incorporated by reference in this prospectus to the Annual
Report on Form 10-K for the year ended December 31, 1999, have been so
incorporated in reliance on the report of PricewaterhouseCoopers, independent
accountants, given on the authority of that firm as experts in auditing and
accounting.
85
<PAGE> 91
PRINCIPAL OFFICE OF AZURIX
333 Clay Street, 10th Floor
Houston, Texas 77002
United States
AUDITORS OF AZURIX
Arthur Andersen LLP
711 Louisiana Street
Suite 1300
Houston, Texas 77002
United States
LEGAL ADVISORS
TO AZURIX
<TABLE>
<S> <C> <C>
Vinson & Elkins L.L.P. and Linklaters & Alliance
2300 First City Tower One Silk Street
1001 Fannin London EC2Y 8HQ
Houston, Texas 77002 United Kingdom
United States
</TABLE>
TRUSTEE
The Chase Manhattan Bank
600 Travis
Houston, Texas 77002
United States
<TABLE>
<S> <C>
NEW YORK PAYING AGENT, LUXEMBOURG PAYING AGENT,
REGISTRAR AND TRANSFER AGENT REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank Chase Manhattan Bank Luxembourg S.A.
55 Water Street 5, rue Plaitis
North Building, Room 234, Windows 20 and 21 L-2338 Luxembourg
New York, New York 10041 Luxembourg
United States
</TABLE>
LISTING AGENT
Banque Generale du Luxembourg
50, av. J.F. Kennedy
L-2951 Luxembourg
Luxembourg
<PAGE> 92
[AZURIX LOGO]
OFFER TO EXCHANGE
$240,000,000 10 3/8% Series B Senior Dollar Notes due 2007 for any and all
outstanding 10 3/8% Series A Senior Dollar Notes due 2007
L100,000,000 10 3/8% Series B Senior Sterling Notes due 2007 for any and
all outstanding 10 3/8% Series A Senior Sterling Notes due 2007
$200,000,000 10 3/4% Series B Senior Dollar Notes due 2010 for any and all
outstanding 10 3/4% Series A Senior Dollar Notes due 2010
-----------------
PROSPECTUS
-----------------
August 30, 2000
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (DGCL) provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise), against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
Azurix's certificate of incorporation and bylaws provide that
indemnification shall be to the fullest extent permitted by the DGCL for all
current or former directors or officers of Azurix.
As permitted by the DGCL, the certificate of incorporation provides that
directors of Azurix shall have no personal liability to Azurix or its
stockholders for monetary damages for a breach of fiduciary duty as a director,
except (1) for any breach of the director's duty of loyalty to Azurix or its
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, (3) under Section 174 of the
DGCL or (4) for any transaction from which a director derived an improper
personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following instruments and documents are included as Exhibits to this
Registration Statement. Exhibits incorporated by reference are so indicated by
parenthetical information.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.1 -- Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Registrant's Amendment
No. 2 to Registration Statement on Form S-1 (File No.
333-74739))
3.2 -- Restated Bylaws, as amended on December 13, 1999
(incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8 (File No.
333-92709))
</TABLE>
II-1
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
4.1 -- Indenture, dated February 18, 2000, between the
Registrant and Chase Bank of Texas, National Association,
as Trustee (incorporated by reference to Exhibit 4.1 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
4.2 -- Registration Rights Agreement, dated February 18, 2000,
by and among the Registrant and the Initial Purchasers
for the Dollar-Denominated Senior Notes and the Initial
Purchasers for the Sterling-Denominated Senior Notes
(incorporated by reference to Exhibit 4.2 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
4.3 -- Stock Restriction and Registration Rights Agreement,
dated June 9, 1999, between the Registrant and Atlantic
Water Trust (incorporated by reference to Exhibit 4.3 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
**5.1 -- Opinion of Vinson & Elkins L.L.P.
10.1 -- Instrument of Appointment as a Water and Sewerage
Undertaker, dated August 1989, as amended, of Wessex
Water Services Limited (incorporated by reference to
Exhibit 10.1 to the Registrant's Registration Statement
on Form S-1 (File No. 333-74739))
10.2 -- L425,000,000 Supplemental Agreement, dated February 25,
2000, for Azurix Europe Ltd arranged by Chase Manhattan
Plc and Westdeutsche Landesbank Girozentrale
(incorporated by reference to Exhibit 10.2 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.3 -- L73,000,000 Amended and Restated Credit Facility
Agreement, dated December 17, 1998, for Azurix Europe Ltd
and Bristol Water Trust (incorporated by reference to
Exhibit 10.3 to the Registrant's Registration Statement
on Form S-1 (File No. 333-74739))
10.4 -- Amended and Restated Trust Agreement of Atlantic Water
Trust, dated December 17, 1998 (incorporated by reference
to Exhibit 10.14 to the Registrant's Amendment No. 2 to
Registration Statement on Form S-1 (File No. 333-74739))
10.5 -- Trust Deed, dated March 30, 1999, among Wessex Water
Services Finance Plc, Wessex Water Services Limited and
Midland Bank Plc (incorporated by reference to Exhibit
10.15 to the Registrant's Amendment No. 2 to Registration
Statement on Form S-1 (File No. 333-74739))
10.6 -- Credit Agreement, dated May 1, 1999, between the
Registrant and Enron (incorporated by reference to
Exhibit 10.6 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1999)
10.7 -- First Amendment to Credit Agreement, dated January 4,
2000, between the Registrant and Enron (incorporated by
reference to Exhibit 10.7 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.8 -- Definitive Trust Deed and Rules of Wessex Water Executive
Pension Scheme, dated August 19, 1998 (incorporated by
reference to Exhibit 10.17 to the Registrant's Amendment
No. 2 to Registration Statement on Form S-1 (File No.
333-74739))
10.9 -- Concession Contract dated June 30, 1999, between the
Executive Authorities of the Province of Buenos Aires and
Azurix Buenos Aires S.A. (incorporated by reference to
Exhibit 2 to the Registrant's Amendment No. 1 to Current
Report on Form 8-K/A dated June 30, 1999)
*10.10 -- Azurix Corp. 1999 Stock Plan, as amended and restated
effective June 13, 2000
</TABLE>
II-2
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.11 -- Employment Agreement of Rebecca P. Mark, effective May 4,
1998, with Enron and First Amendment, effective February
1, 1999, with the Registrant and Enron (incorporated by
reference to Exhibit 10.9 to the Registrant's Amendment
No. 1 to Registration Statement on Form S-1 (File No.
333-74739))
10.12 -- Employment Agreement of Colin F. Skellett, dated February
24, 1995, and First Amendment, dated December 9, 1998,
with Wessex Water Plc (incorporated by reference to
Exhibit 10.13 to the Registrant's Amendment No. 1 to
Registration Statement on Form S-1 (File No. 333-74739))
10.13 -- Executive Employment Agreement of John L. Garrison, Jr.,
dated April 26, 1999, with the Registrant (incorporated
by reference to Exhibit 10.17 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1999).
*10.14 -- First Amendment to Executive Employment Agreement of John
L. Garrison, Jr., dated June 1, 2000, with the Registrant
10.15 -- Employment Agreement of Amanda K. Martin, effective
January 1, 1998, with the Registrant and Enron Capital &
Trade Resources Corp. and Second Amendment, dated March
15, 1999, with the Registrant (incorporated by reference
to Exhibit 10.11 to the Registrant's Amendment No. 1 to
Registration Statement on Form S-1 (File No. 333-74739))
10.16 -- Executive Employment Agreement of John C. Ale, effective
December 10, 1998, with the Registrant (incorporated by
reference to Exhibit 10.19 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.17 -- Severance Agreement of Rodney L. Gray, effective November
30, 1999 (incorporated by reference to Exhibit 10.20 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.18 -- Severance Agreement of Alex Kulpecz, dated November 30,
1999 (incorporated by reference to Exhibit 10.21 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.19 -- Severance Agreement of Edward N. Robinson, dated February
15, 2000 (incorporated by reference to Exhibit 10.22 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.20 -- Cost Sharing Agreement, effective January 1, 1999,
between the Registrant and Enron (incorporated by
reference to Exhibit 10.23 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.21 -- Services Agreement, dated May 1, 1999, between the
Registrant and Enron (incorporated by reference to
Exhibit 10.24 to the Registrant's Annual Report on From
10-K for the year ended December 31, 1999)
10.22 -- Non-Exclusive License Agreement, dated May 1, 1999,
between the Registrant and Enron (incorporated by
reference to Exhibit 10.25 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.23 -- Business Opportunity Agreement, dated June 9, 1999, among
the Registrant, Atlantic Water Trust and Enron
(incorporated by reference to Exhibit 10.26 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
**12.1 -- Statement Regarding Computation of Ratios of Earnings to
Fixed Charges
21 -- Subsidiaries of the Registrant (incorporated by reference
to Exhibit 21 of the Registrant's Form 10-K filed on
March 30, 2000 (File No. 001-15065))
**23.1 -- Consent of Arthur Andersen LLP
**23.2 -- Consent of Arthur Andersen
</TABLE>
II-3
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
**23.3 -- Consent of PricewaterhouseCoopers (independent
accountants)
24 -- Powers of Attorney (previously included on the signature
page of the registration statement)
*25.1 -- Statement of Eligibility of the Trustee
**99.1 -- Form of Letter of Transmittal
**99.2 -- Form of Letter to Clients
**99.3 -- Form of Letter to Registered Holders and DTC participants
**99.4 -- Form of Notice of Guaranteed Delivery
</TABLE>
---------------
* Indicates Exhibits previously filed.
** Indicates Exhibits filed herewith.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) under the Securities Act if,
in the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8 and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Exchange Act) that is
II-4
<PAGE> 97
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless, in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes to respond to requests to
respond to requests for information that is incorporated by reference into the
Prospectus pursuant to Item 4, 10(b), 11, or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(e) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, and that was not the subject of and
included in the Registration Statement when it became effective.
II-5
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on August 30, 2000.
AZURIX CORP.
By: /s/ JOHN L. GARRISON, JR.
----------------------------------
John L. Garrison, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN L. GARRISON, JR. President and Chief Executive August 30, 2000
----------------------------------------------------- Officer (Principal Executive
John L. Garrison, Jr. Officer)
* J. MICHAEL ANDERSON Managing Director and Chief August 30, 2000
----------------------------------------------------- Financial Officer (Principal
J. Michael Anderson Financial Officer)
* KENNETH R. BICKETT Vice President and Controller August 30, 2000
----------------------------------------------------- (Principal Accounting
Kenneth R. Bickett Officer)
* JOHN H. DUNCAN Director August 30, 2000
-----------------------------------------------------
John H. Duncan
* KENNETH L. LAY Director August 30, 2000
-----------------------------------------------------
Kenneth L. Lay
* JEFFREY K. SKILLING Director August 30, 2000
-----------------------------------------------------
Jeffrey K. Skilling
* JOSEPH W. SUTTON Director August 30, 2000
-----------------------------------------------------
Joseph W. Sutton
* JOHN L. WAKEHAM Director August 30, 2000
-----------------------------------------------------
John L. Wakeham
* HERBERT S. WINOKUR, JR. Director August 30, 2000
-----------------------------------------------------
Herbert S. Winokur, Jr.
</TABLE>
*By: /s/ J. MICHAEL ANDERSON
------------------------------
J. Michael Anderson
II-6
<PAGE> 99
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
3.1 -- Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Registrant's Amendment
No. 2 to Registration Statement on Form S-1 (File No.
333-74739))
3.2 -- Restated Bylaws, as amended on December 13, 1999
(incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8 (File No.
333-92709))
4.1 -- Indenture, dated February 18, 2000, between the
Registrant and Chase Bank of Texas, National Association,
as Trustee (incorporated by reference to Exhibit 4.1 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
4.2 -- Registration Rights Agreement, dated February 18, 2000,
by and among the Registrant and the Initial Purchasers
for the Dollar-Denominated Senior Notes and the Initial
Purchasers for the Sterling-Denominated Senior Notes
(incorporated by reference to Exhibit 4.2 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
4.3 -- Stock Restriction and Registration Rights Agreement,
dated June 9, 1999, between the Registrant and Atlantic
Water Trust (incorporated by reference to Exhibit 4.3 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
**5.1 -- Opinion of Vinson & Elkins L.L.P.
10.1 -- Instrument of Appointment as a Water and Sewerage
Undertaker, dated August 1989, as amended, of Wessex
Water Services Limited (incorporated by reference to
Exhibit 10.1 to the Registrant's Registration Statement
on Form S-1 (File No. 333-74739))
10.2 -- L425,000,000 Supplemental Agreement, dated February 25,
2000, for Azurix Europe Ltd arranged by Chase Manhattan
Plc and Westdeutsche Landesbank Girozentrale
(incorporated by reference to Exhibit 10.2 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.3 -- L73,000,000 Amended and Restated Credit Facility
Agreement, dated December 17, 1998, for Azurix Europe Ltd
and Bristol Water Trust (incorporated by reference to
Exhibit 10.3 to the Registrant's Registration Statement
on Form S-1 (File No. 333-74739))
10.4 -- Amended and Restated Trust Agreement of Atlantic Water
Trust, dated December 17, 1998 (incorporated by reference
to Exhibit 10.14 to the Registrant's Amendment No. 2 to
Registration Statement on Form S-1 (File No. 333-74739))
10.5 -- Trust Deed, dated March 30, 1999, among Wessex Water
Services Finance Plc, Wessex Water Services Limited and
Midland Bank Plc (incorporated by reference to Exhibit
10.15 to the Registrant's Amendment No. 2 to Registration
Statement on Form S-1 (File No. 333-74739))
10.6 -- Credit Agreement, dated May 1, 1999, between the
Registrant and Enron (incorporated by reference to
Exhibit 10.6 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1999)
10.7 -- First Amendment to Credit Agreement, dated January 4,
2000, between the Registrant and Enron (incorporated by
reference to Exhibit 10.7 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999)
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.8 -- Definitive Trust Deed and Rules of Wessex Water Executive
Pension Scheme, dated August 19, 1998 (incorporated by
reference to Exhibit 10.17 to the Registrant's Amendment
No. 2 to Registration Statement on Form S-1 (File No.
333-74739))
10.9 -- Concession Contract dated June 30, 1999, between the
Executive Authorities of the Province of Buenos Aires and
Azurix Buenos Aires S.A. (incorporated by reference to
Exhibit 2 to the Registrant's Amendment No. 1 to Current
Report on Form 8-K/A dated June 30, 1999)
*10.10 -- Azurix Corp. 1999 Stock Plan, as amended and restated
effective June 13, 2000
10.11 -- Employment Agreement of Rebecca P. Mark, effective May 4,
1998, with Enron and First Amendment, effective February
1, 1999, with the Registrant and Enron (incorporated by
reference to Exhibit 10.9 to the Registrant's Amendment
No. 1 to Registration Statement on Form S-1 (File No.
333-74739))
10.12 -- Employment Agreement of Colin F. Skellett, dated February
24, 1995, and First Amendment, dated December 9, 1998,
with Wessex Water Plc (incorporated by reference to
Exhibit 10.13 to the Registrant's Amendment No. 1 to
Registration Statement on Form S-1 (File No. 333-74739))
10.13 -- Executive Employment Agreement of John L. Garrison, Jr.,
dated April 26, 1999, with the Registrant (incorporated
by reference to Exhibit 10.17 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
1999).
*10.14 -- First Amendment to Executive Employment Agreement of John
L. Garrison, Jr., dated June 1, 2000, with the Registrant
10.15 -- Employment Agreement of Amanda K. Martin, effective
January 1, 1998, with the Registrant and Enron Capital &
Trade Resources Corp. and Second Amendment, dated March
15, 1999, with the Registrant (incorporated by reference
to Exhibit 10.11 to the Registrant's Amendment No. 1 to
Registration Statement on Form S-1 (File No. 333-74739))
10.16 -- Executive Employment Agreement of John C. Ale, effective
December 10, 1998, with the Registrant (incorporated by
reference to Exhibit 10.19 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.17 -- Severance Agreement of Rodney L. Gray, effective November
30, 1999 (incorporated by reference to Exhibit 10.20 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.18 -- Severance Agreement of Alex Kulpecz, dated November 30,
1999 (incorporated by reference to Exhibit 10.21 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.19 -- Severance Agreement of Edward N. Robinson, dated February
15, 2000 (incorporated by reference to Exhibit 10.22 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.20 -- Cost Sharing Agreement, effective January 1, 1999,
between the Registrant and Enron (incorporated by
reference to Exhibit 10.23 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999)
10.21 -- Services Agreement, dated May 1, 1999, between the
Registrant and Enron (incorporated by reference to
Exhibit 10.24 to the Registrant's Annual Report on From
10-K for the year ended December 31, 1999)
10.22 -- Non-Exclusive License Agreement, dated May 1, 1999,
between the Registrant and Enron (incorporated by
reference to Exhibit 10.25 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999)
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.23 -- Business Opportunity Agreement, dated June 9, 1999, among
the Registrant, Atlantic Water Trust and Enron
(incorporated by reference to Exhibit 10.26 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999)
**12.1 -- Statement Regarding Computation of Ratios of Earnings to
Fixed Charges
21 -- Subsidiaries of the Registrant (incorporated by reference
to Exhibit 21 of the Registrant's Form 10-K filed on
March 30, 2000 (File No. 001-15065))
**23.1 -- Consent of Arthur Andersen LLP
**23.2 -- Consent of Arthur Andersen
**23.3 -- Consent of PricewaterhouseCoopers (independent
accountants)
24 -- Powers of Attorney (previously included on the signature
page of the registration statement)
*25.1 -- Statement of Eligibility of the Trustee
**99.1 -- Form of Letter of Transmittal
**99.2 -- Form of Letter to Clients
**99.3 -- Form of Letter to Registered Holders and DTC participants
**99.4 -- Form of Notice of Guaranteed Delivery
</TABLE>
---------------------
* Indicates Exhibits previously filed.
** Indicates Exhibits filed herewith.
