<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-30443
20,000,000 SECURITIES
HOUSTON INDUSTRIES INCORPORATED
7% AUTOMATIC COMMON EXCHANGE SECURITIES DUE JULY 1, 2000
(SUBJECT TO EXCHANGE INTO SHARES OF COMMON STOCK OF TIME WARNER INC.)
---------------
Each of the 7% Automatic Common Exchange Securities due July 1, 2000 (each,
a "Security") of Houston Industries Incorporated (the "Company") being offered
hereby will be issued with a face amount of $45.9375 (the "Face Amount" or the
"Initial Price"), which amount is equal to the last sale price of the common
stock (the "Time Warner Common Stock") of Time Warner Inc. ("Time Warner") on
July 9, 1997 as reported on the New York Stock Exchange. The Securities will
mature on July 1, 2000 (the "Stated Maturity"). Interest on the Securities, at
the rate of 7% of the Face Amount per annum, is payable quarterly in arrears
on each January 1, April 1, July 1 and October 1, beginning October 1, 1997.
The Securities will be represented by one or more global Securities registered
in the name of the nominee of The Depository Trust Company ("DTC"). Beneficial
interests in the global Securities will be shown on, and transfers thereof
will be effected only through, records maintained by DTC and its participants.
Except as described herein, Securities in definitive form will not be issued.
See "Description of the Securities--Book-Entry Only Issuance".
At maturity (including as a result of acceleration or otherwise,
"Maturity"), the principal amount of each Security will be mandatorily
exchanged by the Company for a number of shares of Time Warner Common Stock
(or, at the Company's option, which may be exercised with respect to any or
all of the shares of Time Warner Common Stock deliverable upon exchange of the
Securities, cash with an equal value) at the Exchange Rate, plus any accrued
and unpaid interest up to Maturity. The Exchange Rate is equal to, subject to
certain adjustments, (a) if the Maturity Price is greater than or equal to
$55.5844 per share of Time Warner Common Stock (the "Threshold Appreciation
Price"), .8264 shares of Time Warner Common Stock per Security, (b) if the
Maturity Price is less than the Threshold Appreciation Price but is greater
than the Initial Price, a fractional share of Time Warner Common Stock per
Security so that the value thereof (determined at the Maturity Price) equals
the Initial Price and (c) if the Maturity Price is less than or equal to the
Initial Price, one share of Time Warner Common Stock per Security. The
"Maturity Price" means the average of the Volume Weighted Average Prices (as
defined herein) per share of Time Warner Common Stock for the 20 Trading Days
ending two Business Days (as defined herein) prior to Maturity. Accordingly,
holders of the Securities will not necessarily receive an amount equal to the
Face Amount thereof. The Securities will be unsecured obligations of the
Company and will rank pari passu with all of its other unsecured and
unsubordinated indebtedness. Time Warner will have no obligations with respect
to the Securities. See "Description of the Securities".
The Securities are subject to redemption, at the option of the Company, in
whole (but not in part) following the occurrence of a Tax Redemption Event (as
defined herein), at the Tax Redemption Price (as defined herein), together
with accrued and unpaid interest to but excluding the date of redemption (the
"Redemption Date"). See "Description of the Securities--Redemption".
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN CONSIDERATIONS RELEVANT
TO AN INVESTMENT IN THE SECURITIES.
The Time Warner Common Stock is listed on the New York Stock Exchange
("NYSE"). The Securities have been approved for listing on the NYSE, subject
to official notice of issuance.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO THE
OFFERING PRICE(1) DISCOUNT(2) COMPANY(1)(3)
----------------- ------------ ---------------
<S> <C> <C> <C>
Per Security..................... $45.9375 $1.38 $44.5575
Total(4)......................... $918,750,000 $27,600,000 $891,150,000
</TABLE>
- -------
(1)Plus accrued interest, if any, from July 15, 1997.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3)Before deducting expenses payable by the Company, estimated to be $860,000.
(4) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 2,909,040 Securities at the initial public offering
price per Security, less the underwriting discount, solely to cover over-
allotments. If such over-allotment option is exercised in full, the total
initial public offering price, underwriting discount and proceeds to the
Company will be $1,052,384,025, $31,614,475 and $1,020,769,550,
respectively. See "Underwriting".
---------------
The Securities offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
Securities will be ready for delivery in book-entry form only through the
facilities of DTC in New York, New York, on or about July 15, 1997, against
payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
---------------
The date of this Prospectus is July 9, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES AND
THE TIME WARNER COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-
COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID,
IN CONNECTION WITH THIS OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING".
----------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located
at 7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and
Suite 1400, Citicorp Center, 14th Floor, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can also be obtained at prescribed
rates by writing the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549. Such material may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov. The Company's Common Stock is listed on the New York,
Chicago and London Stock Exchanges. Reports, proxy statements and other
information concerning the Company can be inspected and copied at the offices
of the NYSE at 20 Broad Street, New York, New York 10005 and at the offices of
The Chicago Stock Exchange, 440 South LaSalle Street, Chicago, Illinois 60605.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Securities. This Prospectus does not contain all
the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the
Securities, reference is made to the Registration Statement and the exhibits
and the financial statements, notes and schedules filed as a part thereof or
incorporated by reference therein, which may be inspected at the public
reference facilities of the Commission at the addresses set forth above or
through the Commission's home page on the Internet. Statements made in this
Prospectus concerning the contents of any documents referred to herein are not
necessarily complete, and in each instance are qualified in all respects by
reference to the copy of such document filed as an exhibit to the Registration
Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company (File No. 1-7629) with the
Commission are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1996;
(2) The Company's Quarterly Report on Form 10-Q for its quarterly period
ended March 31, 1997; and
(3) The Company's Current Report on Form 8-K dated February 5, 1997.
Each document or report filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the
termination of any offering of the Securities made by this Prospectus shall be
deemed to be incorporated by reference into this Prospectus and to be a part
of this Prospectus from the
2
<PAGE>
date of filing of such document. Any statement contained herein, or in any
document all or a portion of which is incorporated or deemed to be
incorporated by reference herein, shall be deemed to be modified or superseded
for purposes of the Registration Statement and this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
the Registration Statement or this Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the foregoing documents incorporated by reference herein
(other than exhibits not specifically incorporated by reference into the texts
of such documents). Requests for such documents should be directed to:
Corporate Secretary, Houston Industries Incorporated, 1111 Louisiana, Houston,
Texas 77002, telephone number (713) 207-3000.
3
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus. It is not intended to be complete and is qualified in its entirety
by the more detailed information contained elsewhere in this Prospectus.
Capitalized terms which are not defined in this summary are used as defined
elsewhere in this Prospectus.
HOUSTON INDUSTRIES INCORPORATED
The Company is a holding company operating principally in the electric
utility business. Houston Lighting & Power Company ("HL&P") is the principal
subsidiary of the Company and is engaged in the generation, transmission,
distribution and sale of electric energy. HL&P is the nation's tenth-largest
electric utility in terms of kilowatt-hour sales. HL&P's service area covers a
5,000-square mile area on the Texas Gulf Coast, including Houston (the nation's
fourth largest city). HL&P serves approximately 1.5 million residential,
commercial and industrial customers. The business and operations of HL&P
historically have accounted for substantially all of the Company's consolidated
income from continuing operations and common stock equity. Houston Industries
Energy, Inc., a wholly owned subsidiary of the Company ("HI Energy"),
participates primarily in the development and acquisition of foreign
independent power projects and the privatization of foreign generating and
distribution facilities. In August 1996, the Company entered into an agreement
to acquire NorAm Energy Corp. ("NorAm"), a Houston-based company which has
natural gas pipeline, marketing and distribution operations and provides a
variety of energy services. Closing of the NorAm acquisition is pending certain
regulatory approvals. See "Houston Industries Incorporated--The NorAm Merger".
For a description of the Company's securities holdings in Time Warner, see
"Houston Industries Incorporated".
TIME WARNER INC.
According to publicly available documents, Time Warner, together with its
consolidated and unconsolidated subsidiaries, is one of the world's leading
media and entertainment companies. Time Warner classifies its business
interests in four fundamental areas: Entertainment, consisting principally of
interests in recorded music and music publishing, filmed entertainment,
television production, television broadcasting and theme parks; Cable Networks,
consisting principally of interests in cable television programming and sports
franchises; Publishing, consisting principally of interests in magazine
publishing, book publishing and direct marketing; and Cable, consisting
principally of interests in cable television systems. Time Warner is a holding
company that derives its operating income and cash flow from its investments in
its direct subsidiaries Time Warner Companies, Inc. and Turner Broadcasting
System, Inc. Time Warner will have no obligations with respect to the
Securities.
THE SECURITIES OFFERING
SECURITIES OFFERED.................. 20,000,000 Securities.
FACE AMOUNT......................... $45.9375 per Security.
STATED MATURITY..................... July 1, 2000.
INTEREST RATE....................... 7% per annum, or $3.216 per Security per
annum, payable quarterly in arrears.
INTEREST PAYMENT DATES.............. January 1, April 1, July 1 and October 1,
beginning October 1, 1997.
EXCHANGE AT MATURITY................ At Maturity, the principal amount of each
Security will be mandatorily exchanged by
the Company for a
4
<PAGE>
number of shares of Time Warner Common
Stock (or, at the Company's option, which
may be exercised with respect to any or
all of the shares of Time Warner Common
Stock deliverable upon exchange of the
outstanding Securities, cash with an
equal value) at the Exchange Rate, plus
any accrued and unpaid interest up to
Maturity. The Exchange Rate is equal to,
subject to certain adjustments, (a) if
the Maturity Price is greater than or
equal to the Threshold Appreciation
Price, .8264 shares of Time Warner Common
Stock per Security, (b) if the Maturity
Price is less than the Threshold
Appreciation Price but is greater than
the Initial Price, a fractional share of
Time Warner Common Stock per Security so
that the value thereof (determined at the
Maturity Price) equals the Initial Price
and (c) if the Maturity Price is less
than or equal to the Initial Price, one
share of Time Warner Common Stock per
Security. The "Maturity Price" means the
average of the Volume Weighted Average
Prices per share of Time Warner Common
Stock for the 20 Trading Days ending two
Business Days prior to Maturity.
Accordingly, holders of the Securities
will not necessarily receive an amount
equal to the Face Amount thereof. The
Securities are not exchangeable for
shares of Time Warner Common Stock at the
option of the holder. No fractional
shares of Time Warner Common Stock will
be delivered at Maturity. See
"Description of the Securities--General",
"--Maturity; Exchange Rate" and "--
Fractional Shares".
OPTIONAL REDEMPTION................. The Securities are subject to redemption,
at the option of the Company, in whole
(but not in part) following the
occurrence of a Tax Redemption Event, at
the Tax Redemption Price, together with
accrued and unpaid interest to but
excluding the Redemption Date, upon not
less than five Business Days' nor more
than 45 calendar days' notice. "Tax
Redemption Event" is defined under "Risk
Factors--Tax Event Redemption". The "Tax
Redemption Price" will be one hundred and
five percent (105%) of the greater of (i)
the average of the Closing Prices (as
defined herein) of the Securities over
the five Trading Days immediately
preceding the day on which the notice of
redemption (the "Redemption Notice") is
released on the PR Newswire and (ii) the
Closing Price of the Securities on the
Trading Day immediately preceding the day
on which the Redemption Notice is
released on the PR Newswire. The Tax
Redemption Price may be paid in cash or
shares of Time Warner Common Stock or a
combination of both as specified in the
Redemption Notice. To the extent that the
Company
5
<PAGE>
chooses to pay the Tax Redemption Price
in shares of Time Warner Common Stock,
the Company will deliver per each such
Security the number of shares of Time
Warner Common Stock which equals the
quotient of (i) the Tax Redemption Price
per Security and (ii) the average of the
Volume Weighted Average Prices of Time
Warner Common Stock for the five Trading
Days immediately preceding the date on
which the Redemption Notice is released
on the PR Newswire.
RANKING............................. The Securities will be unsecured
obligations of the Company and will rank
pari passu with all of its other
unsecured and unsubordinated
indebtedness.
RELATIONSHIP OF SECURITIES TO TIME
WARNER COMMON STOCK................ The Securities will bear interest at 7%
per annum, a yield in excess of the 0.78%
current dividend yield of the Time Warner
Common Stock based on the Initial Price
of $45.9375, and the most recent $0.09
per share quarterly dividend payable on
the Time Warner Common Stock. However,
the opportunity for equity appreciation
afforded by an investment in the
Securities is less than the opportunity
for equity appreciation afforded by an
investment in Time Warner Common Stock
because the amount receivable by a holder
of a Security upon exchange at Maturity
(based on the Maturity Price) will only
exceed the Face Amount of such Security
if the Maturity Price exceeds the
Threshold Appreciation Price (which
represents an appreciation of 21.00% over
the Initial Price). Moreover, holders of
the Securities will only be entitled to
receive upon exchange at Maturity 82.64%
(the percentage equal to the Initial
Price divided by the Threshold
Appreciation Price) of any appreciation
of the value of the Time Warner Common
Stock in excess of the Threshold
Appreciation Price. Holders of the
Securities will not be entitled to any
rights with respect to the Series D
Convertible Preferred Stock, par value
$0.10 per share, of Time Warner (the
"Series D Time Warner Preferred Stock")
or the Time Warner Common Stock into
which such shares are convertible
(including, without limitation, voting
rights and rights to receive any
dividends or other distributions in
respect thereof) until such time, if any,
as the Company shall have converted the
Series D Time Warner Preferred Stock into
Time Warner Common Stock and exchanged
shares of Time Warner Common Stock for
Securities at Maturity and unless the
applicable record date, if any, for the
exercise of such rights occurs after such
exchange.
6
<PAGE>
PROPOSED NEW YORK STOCK EXCHANGE
SYMBOL.............................. HXT.
USE OF PROCEEDS..................... The net proceeds received from the sale
of the Securities will be added to the
Company's general corporate funds and
will be used to retire outstanding
commercial paper and for general
corporate purposes. See "Use of
Proceeds".
7
<PAGE>
RISK FACTORS
As described in more detail below, the trading price of the Securities may
vary considerably prior to Maturity due to fluctuations in the price of Time
Warner Common Stock (which may occur due to, among other factors, changes in
Time Warner's financial condition, results of operations or prospects) and, to
a lesser extent, changes in the Company's financial condition, results of
operations or prospects, fluctuations in interest rates and other factors that
are difficult to predict and beyond the Company's control.
COMPARISON TO OTHER DEBT SECURITIES; RELATIONSHIP OF SECURITIES TO TIME WARNER
COMMON STOCK
The terms of the Securities differ from those of ordinary debt securities in
that the value of the Time Warner Common Stock (or, at the Company's option,
the amount of cash) that a holder of a Security will receive upon mandatory
exchange of the principal amount thereof at Maturity is not fixed, but is
based on the price of Time Warner Common Stock. See "Description of the
Securities--Maturity; Exchange Rate". There can be no assurance that the value
of the Time Warner Common Stock (or, at the Company's option, the amount of
cash) (based on the Maturity Price) received by the holder upon exchange will
be equal to or greater than the Face Amount of the Security because the price
of Time Warner Common Stock is subject to market fluctuations. For example, if
the Maturity Price is less than the Initial Price, the value of the Time
Warner Common Stock (or, at the Company's option, the amount of cash) (based
on the Maturity Price) received upon exchange will be less than the Face
Amount paid for the Security, in which case an investment in Securities will
result in a loss. The Securities are not principal protected and, accordingly,
investors in the Securities may lose their entire investment.
In addition, the opportunity for equity appreciation afforded by an
investment in the Securities is less than the opportunity for equity
appreciation afforded by an investment in Time Warner Common Stock because the
amount receivable by a holder of a Security upon exchange at Maturity (based
on the Maturity Price) will only exceed the Face Amount of such Security if
the Maturity Price exceeds the Threshold Appreciation Price (which represents
an appreciation of 21.00% over the Initial Price). Moreover, holders of the
Securities will only be entitled to receive upon exchange at Maturity 82.64%
(the percentage equal to the Initial Price divided by the Threshold
Appreciation Price) of any appreciation of the value of Time Warner Common
Stock in excess of the Threshold Appreciation Price. Because the price of the
Time Warner Common Stock is subject to market fluctuations, the value of the
Time Warner Common Stock (or, at the Company's option, the amount of cash)
(based on the Maturity Price) received by a holder of a Security upon exchange
at Maturity, determined as described herein, may be more or less than the Face
Amount of the Security.
At Maturity, holders of the Securities will automatically receive shares of
Time Warner Common Stock unless the Company exercises its option to deliver
cash in lieu thereof. Such option, if exercised, may be exercised with respect
to any or all of the shares of Time Warner Common Stock otherwise deliverable
upon exchange of the outstanding Securities.
It is anticipated that the trading prices of the Securities in the secondary
market will be directly affected by the trading prices of Time Warner Common
Stock in the secondary market. It is impossible to predict whether the price
of Time Warner Common Stock will rise or fall. Trading prices of Time Warner
Common Stock will be influenced by Time Warner's operating results and by
economic, financial and other factors and market conditions that can affect
the capital markets generally, including the level of, and fluctuations in,
the trading prices of stocks generally and sales of substantial amounts of
Time Warner Common Stock in the market subsequent to the offering of the
Securities or the perception that such sales could occur.
The amount of Time Warner Common Stock (or, at the Company's option, the
amount of cash) receivable at Maturity will be based on the Maturity Price.
The Maturity Price is based on the average of the Volume Weighted Average
Prices of Time Warner Common Stock for the 20 Trading Days ending two Business
Days prior to Maturity. As a result, holders of the Securities may receive
less than the Face Amount of the Securities, even though the market price of
Time Warner Common Stock exceeds the Threshold Appreciation Price for
substantial periods of time prior to the determination of the Maturity Price.
8
<PAGE>
The Indenture relating to the Securities does not contain any restriction on
the ability of the Company to sell, pledge or otherwise convey all or any
portion of the Series D Time Warner Preferred Stock held by it or the Time
Warner Common Stock into which such Preferred Stock is convertible, and no
such shares of Series D Time Warner Preferred Stock or Time Warner Common
Stock (together, the "Time Warner Stock") will be pledged or otherwise held in
escrow for exchange at Maturity. Consequently, in the event of a bankruptcy,
insolvency or liquidation of the Company, any Time Warner Stock owned by the
Company will be subject to the claims of the creditors of the Company. In
addition, as described herein, the Company will have the option, exercisable
in its sole discretion, to satisfy its obligations pursuant to the mandatory
exchange of the Securities at Maturity by delivering to holders of the
Securities either the specified number of shares of Time Warner Common Stock
or cash with an equal value or a combination of both. There can be no
assurance that the Company will elect at Maturity to deliver shares of Time
Warner Common Stock.
Holders of the Securities will not be entitled to any rights with respect to
the Series D Time Warner Preferred Stock or the Time Warner Common Stock into
which such shares are convertible (including, without limitation, voting
rights and rights to receive any dividends or other distributions in respect
thereof) until such time, if any, as the Company shall have converted the
Series D Time Warner Preferred Stock into Time Warner Common Stock and
exchanged shares of Time Warner Common Stock for Securities at Maturity and
unless the applicable record date, if any, for the exercise of such rights
occurs after such date. For example, in the event that an amendment is
proposed to the Certificate of Incorporation or Bylaws of Time Warner and the
record date for determining the stockholders of record entitled to vote on
such amendment occurs prior to such exchange, holders of the Securities will
not be entitled to vote on such amendment, and the Company would be entitled
to vote on the amendment without notifying or taking into account the
interests of the holders of the Securities.
NO AFFILIATION BETWEEN THE COMPANY AND TIME WARNER; NO RESPONSIBILITY FOR TIME
WARNER DISCLOSURE
As of the date of this Prospectus, the Company owns 11,000,000 shares of
Series D Time Warner Preferred Stock, with sole voting and investment power
over all such shares. Each share of Series D Time Warner Preferred Stock is
convertible, subject to certain anti-dilution adjustments, into 2.08264 shares
of Time Warner Common Stock. Each share of Series D Time Warner Preferred
Stock is entitled to two votes (voting together with the holders of the Time
Warner Common Stock as a single class). In May 1997, the Company disposed of
the 1,000,000 shares of Time Warner Common Stock. The Company is a minority
investor in, and is not affiliated with, Time Warner. As such, it has no
ability to control, directly or indirectly, the affairs or management of Time
Warner.
The information contained in this Prospectus concerning Time Warner has come
solely from information made publicly available by Time Warner. See "Time
Warner Inc." Neither the Company nor any Underwriter has participated in the
preparation of Time Warner's publicly available documents or has made any "due
diligence" inquiry into the accuracy or completeness of the information
provided therein. Neither the Company nor any Underwriter assumes any
responsibility for the accuracy or completeness of such information and there
can be no assurance as to the accuracy or completeness of such information.
Investors are urged to make their own investigation into the business and
affairs of Time Warner. The Company does not intend to, and is under no
obligation to, provide information to the holders of the Securities with
respect to future developments in the business and affairs of Time Warner.
Time Warner has no obligations with respect to the Securities and is under
no obligation to take the needs of the Company or of holders of the Securities
into consideration for any reason. Time Warner will not receive any of the
proceeds of the offering of the Securities made hereby and is not responsible
for, and has not participated in, the determination or calculation of the
amount receivable by holders of the Securities at Maturity. Time Warner is not
involved with the administration or trading of the Securities and has no
obligations with respect to the amount receivable by holders of the Securities
at Maturity.
Except for the Stockholder's Agreement described under "Relationship Between
the Company and Time Warner--Contractual Arrangements" and the 90-day lock-up
agreement described under "Underwriting", there are no restrictions on the
Company's ability to sell shares of Series D Time Warner Preferred Stock or
the shares of Time Warner Common Stock into which it is convertible. Sales of
Time Warner Stock by the
9
<PAGE>
Company may adversely affect the price of Time Warner Common Stock and the
value of the Securities. Such sales may be made during the period during which
the Maturity Price is calculated and may adversely affect the Maturity Price.
The Company may make a substantial profit from its sales of Time Warner Stock
while investors in the Securities may lose some or all of their investment.
DILUTION OF TIME WARNER COMMON STOCK
The amount that holders of the Securities are entitled to receive upon the
mandatory exchange thereof at Maturity is subject to adjustment for certain
events arising from stock splits and combinations, stock dividends and certain
other actions of Time Warner that affect Time Warner's capital structure. See
"Description of the Securities--Anti-Dilution Adjustments". Such amount to be
received by such holders upon exchange at Maturity is not adjusted for certain
other events, such as an issuer tender or exchange offer at a premium to the
market price or a third party tender or exchange offer for shares of Time
Warner Common Stock, and offerings of Time Warner Common Stock for cash or in
connection with acquisitions, that may adversely affect the price of the Time
Warner Common Stock and the trading price of the Securities. There can be no
assurance that Time Warner will not make offerings of Time Warner Common Stock
or take other action in the future that may adversely affect the trading price
of the Securities.
TAX EVENT REDEMPTION
Upon the occurrence of a Tax Redemption Event, the Company will have the
right to redeem the Securities, as a whole and not in part, at the Tax
Redemption Price, together with accrued and unpaid interest to but excluding
the Redemption Date, upon not less than five Business Days' nor more than 45
calendar days' notice. A "Tax Redemption Event" will occur if the Internal
Revenue Service promulgates Treasury regulations (the "Regulations") under
proposed Section 1259 of the Internal Revenue Code of 1986, as amended (the
"Code"), (which, if enacted, would require immediate recognition of gain with
respect to "constructive sales" of certain appreciated financial positions),
and, in the opinion of Baker & Botts, L.L.P, or other nationally recognized
legal counsel experienced in such matters, (i) as a result of the promulgation
of the Regulations, the Company will be required to recognize gain with
respect to all or a portion of the Time Warner Stock held by the Company in an
amount equal to the difference between the fair market value of such stock and
the Company's basis in such stock, and (ii) such gain recognition may be
deferred to a later taxable year if the Company redeems the Securities.
The "Tax Redemption Price" means one hundred and five percent (105%) of the
greater of (i) the average of the Closing Prices of the Securities over the
five Trading Days immediately preceding the day on which the Redemption Notice
is released on the PR Newswire and (ii) the Closing Price of the Securities on
the Trading Day immediately preceding the day on which the Redemption Notice
is released on the PR Newswire. The Tax Redemption Price may be paid in cash
or shares of Time Warner Common Stock or a combination of both as specified in
the Redemption Notice. To the extent that the Company chooses to pay the Tax
Redemption Price in shares of Time Warner Common Stock, the Company will
deliver per each such Security the number of shares of Time Warner Common
Stock which equals the quotient of (i) the Tax Redemption Price per Security
and (ii) the average of the Volume Weighted Average Prices of Time Warner
Common Stock for the five Trading Days immediately preceding the date on which
the Redemption Notice is released on the PR Newswire.
On June 26, 1997, the House of Representatives approved a bill entitled "The
Revenue Reconciliation Act of 1997" (the "House Bill"), and on June 27, 1997,
the Senate approved a companion, though not identical, bill with the same
title (the "Senate Bill"). Each bill contains a provision that, if enacted,
would require a taxpayer to recognize taxable gain at the time of a
"constructive sale" with respect to any appreciated position in stock entered
into after June 8, 1997. Under each Bill a "constructive sale" will be deemed
to occur with respect to an appreciated position in stock if the owner engages
in certain specified transactions which generally eliminate substantially all
risk of loss and all opportunity for gain with respect to such position. The
Company does not
10
<PAGE>
believe the issuance of the Securities will constitute a "constructive sale"
under either Bill because under the terms of the Securities the Company will
retain the dividends and an opportunity for gain with respect to the
underlying Time Warner Stock. The report accompanying the Senate Bill
addresses the treatment of "collar" transactions which, as in the case of the
Securities, imposes some limits on the owner's risk of loss and opportunity
for gain with respect to the underlying appreciated position in stock. The
Senate report further indicates that the determination regarding whether the
terms of a particular "collar" constitute a constructive sale will be made in
the Regulations that generally would be applicable only on a prospective
basis. If the Regulations are issued instead with an effective date provision
that applies to "collar" transactions entered into prior to the date of the
Regulations and if the Regulations would treat the issuance of the Securities
as a constructive sale of the Time Warner Stock, a "Tax Redemption Event" will
be deemed to have occurred that will permit the Company to redeem the
Securities if such redemption would avoid the constructive sale of the Time
Warner Stock. See "Description of the Securities--Redemption." See also
"Certain United States Federal Income Tax Considerations--Possible Tax Law
Changes".
The Company is unable to predict whether the House Bill or the Senate Bill
will be enacted or, if enacted, what form the Regulations will ultimately
take. As a result, there can be no assurance that a Tax Redemption Event will
not occur.
UNCERTAINTY OF FEDERAL INCOME TAX CONSEQUENCES
Neither the Internal Revenue Service nor any court has decided how the
Securities or similar securities should be treated for United States federal
income tax purposes. As a result, significant aspects of their tax treatment
are uncertain. The Company will not ask the Internal Revenue Service to rule
on how the Securities should be treated. The Internal Revenue Service may
disagree with the description of tax consequences of owning the Securities
that is described under "Certain United States Federal Income Tax
Considerations".
POSSIBLE ILLIQUIDITY OF THE SECONDARY MARKET
It is not possible to predict how the Securities will trade in the secondary
market or whether such market will be liquid or illiquid. The Securities are
new securities and there is currently no secondary market for the Securities.
The Company has been advised by the Representatives of the Underwriters that
they intend to make a market in the Securities but they are not obligated to
do so and may discontinue such market making at any time without notice. There
can be no assurance that a secondary market will develop or, if a secondary
market does develop, that it will provide the holders of the Securities with
liquidity of investment or that it will continue for the life of the
Securities.
The Securities have been approved for listing on the NYSE, subject to
official notice of issuance. However, there can be no assurance that the
Securities will not later be delisted or that trading in the Securities on the
NYSE will not be suspended. If the Securities are not listed or traded on any
securities exchange or trading market, or if trading of the Securities is
suspended, pricing information for the Securities may be more difficult to
obtain, and the liquidity of the Securities may be adversely affected.
RANKING OF THE SECURITIES; STATUS OF COMPANY AS A HOLDING COMPANY
The Securities will be unsecured obligations of the Company and will rank
pari passu with all of its other unsecured and unsubordinated indebtedness. At
March 31, 1997, the Company had $1.5 billion of outstanding indebtedness that
would rank pari passu with the Securities. The Company is a holding company,
the only significant assets (as of the date of this Prospectus) of which are
the 11,000,000 shares of Series D Time Warner Preferred Stock and the shares
of capital stock of the Company's subsidiaries. The Securities will be
structurally subordinated to all of the indebtedness of the Company's
subsidiaries. At March 31, 1997, the Company's subsidiaries had $3.0 billion
of outstanding indebtedness. Upon consummation of the Merger (as defined
herein), the Securities will become an obligation of Houston (as defined
herein) and will rank pari passu with all of Houston's other unsecured and
unsubordinated indebtedness, and will be structurally subordinated to all
existing
11
<PAGE>
and future liabilities and obligations of Houston's subsidiaries. Assuming
that the Merger had been consummated on March 31, 1997, as of such date
Houston would have had $1.9 billion of outstanding unsecured indebtedness
ranking pari passu with the Securities and $2.6 billion of outstanding secured
indebtedness, and the subsidiaries of Houston would have had $2.9 billion of
outstanding indebtedness. It is anticipated that the indebtedness to be
incurred by a subsidiary of Houston to fund the cash portion of the Merger
consideration (estimated to be approximately $1.3 billion) will be secured by
liens or first priority security interests in the common stock of NorAm and
certain of Houston's subsidiaries. See "Houston Industries Incorporated--The
NorAm Merger".
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in documents incorporated by reference
into this Prospectus may be considered forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, that are based on management's beliefs, as well as assumptions made by,
and information currently available to, management. When used in these
documents, words such as "anticipate," "estimate," "expect," "objective,"
"projection," "forecast," "goal," or similar words are intended to identify
forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
Such statements are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated, projected or expected. Important factors
that could cause future results to differ include the effects of competition,
legislative and regulatory changes, fluctuations in the weather and changes in
the economy.
12
<PAGE>
HOUSTON INDUSTRIES INCORPORATED
The Company is a holding company operating principally in the electric
utility business. Based on the intrastate operations of HL&P and the
exemptions applicable to affiliates of HI Energy, the Company is currently
exempt from regulation as a "registered" holding company under the Public
Utility Holding Company Act of 1935, as amended ("1935 Act"), except with
respect to the acquisition of voting securities of other domestic public
utility companies and utility holding companies.
In connection with the sale of the Company's cable television subsidiary in
July 1995, the Company received 1,000,000 shares of Time Warner Common Stock
and 11,000,000 shares of Series D Time Warner Preferred Stock. During 1996,
the Company received $41.6 million in dividends attributable to these
securities. In May 1997, the Company disposed of the 1,000,000 shares of Time
Warner Common Stock.
The Company's executive offices are located at Houston Industries Plaza,
1111 Louisiana, Houston, Texas 77002 (telephone number 713-207-3000).
HL&P
HL&P is the principal subsidiary of the Company and is engaged in the
generation, transmission, distribution and sale of electric energy. HL&P's
service area covers a 5,000 square mile area on the Texas Gulf Coast,
including Houston (the nation's fourth largest city). HL&P serves
approximately 1.5 million residential, commercial and industrial customers.
The business and operations of HL&P historically have accounted for
substantially all of the Company's consolidated income from continuing
operations and common stock equity. Following consummation of the Merger, it
is anticipated that HL&P's electric utility operations and business will
continue to account for the predominant portion of the consolidated income
from continuing operations and common stock equity of Houston (as defined
under "The NorAm Merger" below).
HI ENERGY
HI Energy participates primarily in the development and acquisition of
foreign independent power projects and the privatization of foreign generating
and distribution facilities. As of March 31, 1997, HI Energy's investment in
those projects totaled approximately $587 million. Since March 31, 1997 (to
the date of this Prospectus), HI Energy has invested approximately $192
million in additional projects.
THE NORAM MERGER
In December 1996, the shareholders of the Company and NorAm approved an
Agreement and Plan of Merger ("Merger Agreement") pursuant to which the
Company will merge into HL&P, and NorAm will merge into a subsidiary of the
Company ("Merger Sub"). NorAm is principally engaged in the distribution and
transmission of natural gas, including the gathering, storage and marketing of
natural gas. Upon consummation of the mergers (collectively, the "Merger"),
HL&P, the surviving corporation of the Company/HL&P merger, will be renamed
"Houston Industries Incorporated" ("Houston") and will continue to conduct
HL&P's electric utility business under HL&P's name. Merger Sub, the surviving
corporation of the NorAm/Merger Sub merger, will be renamed "NorAm Energy
Corp." and will continue to conduct NorAm's natural gas distribution and
transmission business under NorAm's name. As a result of the Merger, NorAm
will become a wholly owned subsidiary of Houston. The Merger Agreement also
provides for alternative merger structures in certain circumstances. The
closing of the Merger is subject to the satisfaction or waiver of various
conditions precedent, including the obtaining of all required governmental
authorizations and consents.
Consideration for the purchase of NorAm shares will be a combination of cash
and shares of Houston common stock. The transaction is valued at $4.1 billion,
consisting of $2.5 billion for NorAm's common stock and equivalents and $1.6
billion of NorAm debt. As a consequence of the Merger, the Securities will
become an obligation of Houston and will rank pari passu with all of Houston's
other unsecured and unsubordinated
13
<PAGE>
indebtedness, and will be structurally subordinated to all existing and future
liabilities and obligations of Houston's subsidiaries. Assuming that the
Merger had been consummated on March 31, 1997, as of such date Houston would
have had $1.9 billion of outstanding unsecured indebtedness ranking pari passu
with the Securities and $2.6 billion of outstanding secured indebtedness, and
the subsidiaries of Houston would have had $2.9 billion of outstanding
indebtedness. It is anticipated that the indebtedness to be incurred by a
subsidiary of Houston to fund the cash portion of the Merger consideration
(estimated to be approximately $1.3 billion) will be secured by liens or first
priority security interests in the common stock of NorAm and certain of
Houston's subsidiaries.
Absent repeal of the Public Utility Holding Company Act of 1935, as amended
(the "1935 Act"), the alternative merger structure referenced above would
merge NorAm into Houston rather than into Merger Sub and would be relied on
only if a currently pending application with the Commission for an order
granting Houston an exemption from regulation under the 1935 Act was not
obtained. Under such circumstances, new filings to obtain various state and
municipal regulatory approvals would be required to be obtained, with
resulting delay. If the Merger had been consummated using this merger
structure on March 31, 1997, as of such date substantially all of the
indebtedness of Houston and its subsidiaries would have been incurred by
Houston ($3.2 billion of outstanding unsecured indebtedness ranking pari passu
with the Securities and $2.8 billion of outstanding secured indebtedness). In
addition, Houston would have incurred indebtedness to fund the cash portion of
the Merger consideration (estimated to be approximately $1.3 billion).
14
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected financial data for the five years ended December 31, 1996 have
been derived from the audited consolidated financial statements of the
Company. The selected financial data for the three months ended March 31, 1997
and 1996 have been derived from the unaudited consolidated condensed financial
statements of the Company and reflect all adjustments (consisting only of
adjustments of a normal recurring nature) that in the opinion of management of
the Company are necessary for a fair presentation of the results of such
periods. The unaudited results of operations for the three months ended March
31, 1997 are not necessarily indicative of results expected for the year
ending December 31, 1997 because of the seasonal nature of the Company's
business. This summary is qualified in its entirety by the detailed
information and financial statements included in the documents incorporated
herein by reference. See "Incorporation of Certain Documents by Reference".
The Company is a party to the Merger Agreement among the Company, HL&P, NorAm
and Merger Sub. For more information regarding the Merger, see "Houston
Industries Incorporated--The NorAm Merger". No adjustment has been made to
reflect the potential impact of the Merger. Such transaction contemplates the
issuance of approximately $1.2 billion of common stock and approximately $1.3
billion of acquisition debt. In addition, as of March 31, 1997, NorAm had
approximately $1.6 billion of indebtedness. On July 6, 1995, the Company
closed the sale of its cable television operations, which operations have been
accounted for as discontinued operations.
<TABLE>
<CAPTION>
AS OF AND FOR THE
QUARTER ENDED AS OF AND FOR THE
MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (1)............ $878,101 $823,507 $4,095,277 $3,729,271 $3,752,573 $4,083,238 $3,857,932
-------- -------- ---------- ---------- ---------- ---------- ----------
Income from continuing
operations before
cumulative effect of
change in accounting
(2).................... $ 59,620 $(16,740) $ 404,944 $ 397,400 $ 423,985 $ 440,531 $ 370,031
Gain on sale of cable
television subsidiary.. 708,124
Loss from discontinued
operations............. (16,524) (24,495) (29,544)
Cumulative effect of
change in accounting
(3).................... (8,200) 94,180
-------- -------- ---------- ---------- ---------- ---------- ----------
Net income (2).......... $ 59,620 $(16,740) $ 404,944 $1,105,524 $ 399,261 $ 416,036 $ 434,667
======== ======== ========== ========== ========== ========== ==========
Earnings per common
share (4):
Continuing operations
before cumulative
effect of change in
accounting (2)....... $ 0.26 $ (0.07) $ 1.66 $ 1.60 $ 1.72 $ 1.69 $ 1.43
Gain on sale of cable
television
subsidiary........... 2.86
Loss from discontinued
operations........... (.07) (.09) (.11)
Cumulative effect of
change in accounting
(3).................. (.03) .36
-------- -------- ---------- ---------- ---------- ---------- ----------
Earnings per common
share (2).............. $ 0.26 $ (0.07) $ 1.66 $ 4.46 $ 1.62 $ 1.60 $ 1.68
======== ======== ========== ========== ========== ========== ==========
Cash dividends declared
per common share (4)
(5).................... $ 0.375 $ 0.375 $ 1.50 $ 1.50 $ 1.50 $ 1.875 $ 1.49
Dividend pay-out ratio
from continuing
operations (10)........ 147% (557)% 89% 94% 87% 89% 104%
Return on average common
equity (6) (7) (10).... 1.56% (0.41)% 10.2% 29.5% 12.0% 12.7% 13.3%
- ----------------------------------------------------------------------------------------------------------
Book value per common
share (2) (4).......... $ 16.31 $ 16.18 $ 16.41 $ 16.61 $ 13.64 $ 12.53 $ 12.68
Market price per common
share (4).............. $ 20.88 $ 21.63 $ 22.63 $ 24.25 $ 17.82 $ 23.82 $ 22.94
Market price as a
percent of book value
(2).................... 128% 134% 138% 146% 131% 190% 181%
</TABLE>
(table continued on following page)
15
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total common stock
equity................. $ 3,814,240 $ 4,022,165 $ 3,827,961 $ 4,123,563 $ 3,369,248 $ 3,273,997 $ 3,284,713
Total assets of
continuing operations.. $12,220,139 $11,713,835 $12,287,857 $11,819,606 $10,784,095 $10,867,581 $11,075,897
Net assets of
discontinued
operations............. 618,982 487,026 231,252
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Assets.......... $12,220,139 $11,713,835 $12,287,857 $11,819,606 $11,403,077 $11,354,607 $11,307,149
=========== =========== =========== =========== =========== =========== ===========
Long-term obligations
including current
maturities--continuing
operations (8)......... $ 3,089,634 $ 3,522,106 $ 3,280,113 $ 3,768,928 $ 3,905,518 $ 3,950,576 $ 4,244,077
Long-term obligations
including current
maturities included in
net assets of
discontinued
operations............. 504,580 514,964 740,453
Short-term indebtedness. $ 1,439,622 $ 292,728 $ 1,337,872 $ 6,300 $ 423,291 $ 591,385 $ 564,249
Capitalization from
continuing operations:
Common stock equity... 53% 51% 53% 50% 44% 43% 42%
Cumulative preferred
stock of HL&P and
HL&P obligated
mandatorily
redeemable securities
of subsidiary trusts
(including current
maturities).......... 5% 5% 2% 5% 7% 7% 7%
Long-term debt
(including current
maturities).......... 42% 44% 45% 45% 49% 50% 51%
- --------------------------------------------------------------------------------------------------------------------
Capital expenditures:
HL&P electric capital
and nuclear fuel
expenditures
(excluding AFUDC)
(9).................. $ 43,284 $ 69,456 $ 314,934 $ 296,635 $ 412,899 $ 329,016 $ 337,082
Non-regulated electric
power project
expenditures and
advances (excluding
capitalized
interest)............ 19,443 3,731 493,179 49,835 7,087 35,796 1,625
Cable television
additions and other
cable-related
investments--
discontinued......... 47,601 84,071 61,856 45,233
Corporate headquarters
expenditures
(excluding
capitalized interest)
(9).................. 3,666 5,308 89,627 44,250 26,034
</TABLE>
- --------
(1) Reflects a reclassification of HI Energy's equity income from Other-Income
(Expense) to Revenues.
(2) The Company adopted Statement of Position (SOP) 93-6, "Employers'
Accounting for Employee Stock Ownership Plans," effective January 1, 1994,
which had the effect of reducing net income while increasing earnings per
share. SOP 93-6 is effective only with respect to financial statements for
periods after January 1, 1994, and no restatement was permitted for prior
periods.
(3) The 1994 cumulative effect relates to the change in accounting for post-
employment benefits. The 1992 cumulative effect relates to the change in
accounting for revenues.
(4) All common share data reflect a two-for-one common stock dividend
distribution in December 1995.
(5) Year ended December 31, 1993 includes five quarterly dividends of $.375
per share due to a change in the timing of the Company's Board of
Directors' declaration of dividends. Dividend payout was $1.50 per share
for 1993.
(6) The return on average common equity for 1995 includes the gain on the sale
of the Company's cable television subsidiary. The return on average common
equity excluding the gain was 11.7%.
(7) The calculation of return on average common equity has been changed from a
13-month average to a beginning plus ending balance formula. Prior years
have been restated for consistent presentation.
(8) Includes Cumulative Preferred Stock subject to mandatory redemption but
excludes HL&P Obligated Mandatorily Redeemable Securities of Subsidiary
Trusts.
(9) During 1995 and 1996, HL&P made payments toward the purchase of its
corporate headquarters building. Such payments are not reflected in the
Company's electric capital and nuclear fuel expenditures because they are
affiliate transactions eliminated upon consolidation.
(10) The Company believes that the ratios for the three-month periods are not
necessarily indicative of the ratios for the twelve-month periods due to
the seasonal nature of the Company's business and the recording of a $62
million after-tax charge to 1996 first quarter earnings.
16
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratios of earnings from
continuing operations to fixed charges for each of the periods indicated:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------- ------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings from continuing
operations to fixed charges before
cumulative effect of change in accounting
(1)...................................... 1.92 0.68 2.76 2.71 2.89 2.78 2.29
</TABLE>
- --------
(1) Earnings were insufficient to cover fixed charges by $26.7 million for the
three months ended March 31, 1996. The Company believes that the ratios
for the three-month periods are not necessarily indicative of the ratios
for the twelve-month periods due to the seasonal nature of the Company's
business and the recording of a $62 million after-tax charge to 1996 first
quarter earnings.
USE OF PROCEEDS
The net proceeds received from the sale of the Securities of approximately
$890 million will be added to the Company's general corporate funds and will
be used to retire outstanding commercial paper with interest rates expected to
range from 5.5% to 6% and maturities expected to range from 1 day to 45 days
and for general corporate purposes. As of the date of this Prospectus, the
Company had outstanding commercial paper of $1.1 billion, the proceeds of
which were used for general corporate purposes, including the repurchase of
the Company's common stock, the repayment of certain of the Company's long-
term indebtedness and contributions or loans to HI Energy for the funding of
investments and acquisitions.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 and as adjusted to give effect to the consummation of the offering of
20,000,000 Securities at an Initial Price of $45.9375 (the last sale price of
the Time Warner Common Stock on July 9, 1997). No adjustment has been made to
reflect the potential impact of the Merger. Such transaction contemplates the
issuance of approximately $1.2 billion of common stock and the issuance of
approximately $1.3 billion of acquisition debt. In addition, as of March 31,
1997, NorAm had approximately $1.6 billion of indebtedness. The following data
should be read in conjunction with the financial statements and notes thereto
of the Company incorporated herein by reference. See "Incorporation of Certain
Documents by Reference".
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------
AS
ACTUAL ADJUSTED
---------- ----------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Common stock equity:
Common stock; no par value........................... $2,449,778 $2,449,778
Treasury stock....................................... (361,196) (361,196)
Unearned ESOP shares................................. (243,796) (243,796)
Retained earnings.................................... 1,969,454 1,969,454
---------- ----------
Total common stock equity.......................... 3,814,240 3,814,240
---------- ----------
Cumulative preferred stock of subsidiary (excluding
current portion), no par value, not subject to
mandatory redemption.................................. 9,740 9,740
---------- ----------
HL&P obligated mandatorily redeemable securities of
subsidiary trusts holding solely subordinated
debentures of HL&P.................................... 340,810 340,810
---------- ----------
Long-term debt (excluding current maturities):
Securities offered hereby............................ 918,750
Debentures........................................... 349,144 349,144
HL&P first mortgage bonds............................ 2,552,349 2,552,349
HL&P pollution control revenue bonds................. 123,000 123,000
Other................................................ 2,087 2,087
---------- ----------
Total long-term debt............................... 3,026,580 3,945,330
---------- ----------
Short-term debt and current portion of long-term debt
and preferred stock:
Notes payable........................................ 1,439,622 548,472
Current portion of long-term debt and preferred
stock............................................... 63,054 63,054
---------- ----------
Total short-term debt and current portion of long-
term debt and preferred stock..................... 1,502,676 611,526
---------- ----------
Total Capitalization............................... $8,694,046 $8,721,646
========== ==========
</TABLE>
18
<PAGE>
RELATIONSHIP BETWEEN THE COMPANY AND TIME WARNER
OWNERSHIP OF TIME WARNER STOCK
In connection with the sale of the Company's cable television subsidiary in
July 1995, the Company received 1,000,000 shares of Time Warner Common Stock
and 11,000,000 shares of Series D Time Warner Preferred Stock. Each share of
Series D Time Warner Preferred Stock is convertible, subject to certain anti-
dilution adjustments, into 2.08264 shares of Time Warner Common Stock. Each
share of Series D Time Warner Preferred Stock is entitled to two votes (voting
together with the holders of the Time Warner Common Stock as a single class).
In May 1997, the Company disposed of the 1,000,000 shares of Time Warner
Common Stock.
CONTRACTUAL ARRANGEMENTS
In connection with the sale of the Company's cable television subsidiary to
Time Warner in July 1995, the Company entered into a Stockholder's Agreement
dated as of July 6, 1995 with Time Warner (as amended by a Letter Agreement
dated November 18, 1996 among Time Warner Inc., Time Warner Companies, Inc.,
TW/KBLCOM INC. and the Company, the "Stockholder's Agreement"). The
Stockholder's Agreement, with limited exceptions, prohibits the Company and
its affiliates and associates, from acquiring securities of Time Warner and
from taking certain actions in relation to Time Warner or its assets. The
Stockholder's Agreement also prohibits the Company (and its affiliates and
associates) from disposing of or agreeing to dispose of any securities of Time
Warner or any rights or options to acquire such securities without the prior
written consent of Time Warner unless such disposition (i) is made to a person
or entity that, to the knowledge of the senior executives of the Company, does
not (at the time the Company agrees to make such disposition or acquires the
right to make such disposition) beneficially own, directly or indirectly, more
than 5% of the aggregate voting power of all shares of voting capital stock of
Time Warner that vote together as a single class on matters on which holders
of Time Warner Common Stock are entitled to vote, (ii) is made pursuant to a
firm commitment underwritten offering designed to effect a broad distribution,
(iii) complies with the volume and manner of sale provisions of Rule 144 under
the Securities Act in effect as of the date of the Letter Agreement or (iv) is
made pursuant to certain other exceptions to the general prohibition. The
Stockholder's Agreement does not prohibit the offering of the Securities nor
does it require that Time Warner consent to the offering of the Securities.
TIME WARNER INC.
According to publicly available documents, Time Warner, together with its
consolidated and unconsolidated subsidiaries, is one of the world's leading
media and entertainment companies. Time Warner classifies its business
interests in four fundamental areas: Entertainment, consisting principally of
interests in recorded music and music publishing, filmed entertainment,
television production, television broadcasting and theme parks; Cable
Networks, consisting principally of interests in cable television programming
and sports franchises; Publishing, consisting principally of interests in
magazine publishing, book publishing and direct marketing; and Cable,
consisting principally of interests in cable television systems. Time Warner
is a holding company that derives its operating income and cash flow from its
investments in its direct subsidiaries, Time Warner Companies, Inc. and Turner
Broadcasting System, Inc. Time Warner is subject to the informational
requirements of the Exchange Act. Accordingly, Time Warner files reports,
proxy statements and other information with the Commission under Commission
File Number 1-12259. Copies of Time Warner's registration statements, reports,
proxy statements and other information may be inspected and copied at certain
offices of the Commission at the addresses listed under "Available
Information" and through the Commission's home page on the Internet.
THIS PROSPECTUS RELATES ONLY TO THE SECURITIES OFFERED HEREBY AND DOES NOT
RELATE TO THE TIME WARNER COMMON STOCK OR THE SERIES D TIME WARNER PREFERRED
STOCK. ALL DISCLOSURES CONTAINED IN THIS PROSPECTUS REGARDING TIME WARNER ARE
DERIVED FROM THE PUBLICLY AVAILABLE DOCUMENTS DESCRIBED IN THE PRECEDING
PARAGRAPH. THE COMPANY AND THE UNDERWRITERS HAVE NOT
19
<PAGE>
PARTICIPATED IN THE PREPARATION OF SUCH DOCUMENTS AND HAVE NOT MADE ANY DUE
DILIGENCE INQUIRY WITH RESPECT TO THE INFORMATION PROVIDED THEREIN AND NEITHER
THE COMPANY NOR ANY UNDERWRITER ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY OR
COMPLETENESS OF SUCH INFORMATION. THE COMPANY IS UNDER NO OBLIGATION TO PROVIDE
HOLDERS OF THE SECURITIES WITH SUPPLEMENTAL INFORMATION REGARDING FUTURE
DEVELOPMENTS AFFECTING TIME WARNER. THERE CAN BE NO ASSURANCE THAT ALL EVENTS
OCCURRING PRIOR TO THE DATE HEREOF (INCLUDING EVENTS THAT WOULD AFFECT THE
ACCURACY OR COMPLETENESS OF THE PUBLICLY AVAILABLE DOCUMENTS DESCRIBED IN THE
PRECEDING PARAGRAPH) THAT WOULD AFFECT THE TRADING PRICE OF THE TIME WARNER
COMMON STOCK HAVE BEEN PUBLICLY DISCLOSED. BECAUSE THE AMOUNT RECEIVABLE BY A
HOLDER OF A SECURITY UPON EXCHANGE AT MATURITY IS RELATED TO THE TRADING PRICE
OF THE TIME WARNER COMMON STOCK, SUCH EVENTS, IF ANY, WOULD MOST LIKELY ALSO
AFFECT THE TRADING PRICE OF THE SECURITIES. INVESTORS ARE URGED TO CONDUCT
THEIR OWN INVESTIGATION INTO THE BUSINESS AND AFFAIRS OF TIME WARNER.
PRICE RANGE OF TIME WARNER COMMON STOCK AND CASH DIVIDENDS
The principal market for the Time Warner Common Stock is the NYSE. The Time
Warner Common Stock is also listed for trading on the Pacific and London Stock
Exchanges. The following table sets forth, for the periods indicated, the high
and low sale prices per share for the Time Warner Common Stock, as reported on
the NYSE Composite Tape, and the amount of cash dividends paid per share.
<TABLE>
<CAPTION>
PRICE RANGE
-------------- CASH
HIGH LOW DIVIDENDS
------ ----- ---------
<S> <C> <C> <C>
1994
First Quarter........... $ 44 1/4 $ 36 5/8 $.08
Second Quarter.......... 40 5/8 34 1/2 .09
Third Quarter........... 38 3/4 34 .09
Fourth Quarter.......... 37 3/4 31 1/2 .09
1995
First Quarter........... $ 39 1/4 $33 5/8 $.09
Second Quarter.......... 43 1/2 34 1/4 .09
Third Quarter........... 45 5/8 38 7/8 .09
Fourth Quarter.......... 41 1/4 35 3/4 .09
1996
First Quarter........... $ 45 1/4 $37 1/4 $.09
Second Quarter.......... 42 7/8 38 1/8 .09
Third Quarter........... 39 7/8 29 3/4 .09
Fourth Quarter.......... 42 1/4 36 1/2 .09
1997
First Quarter........... $ 45 $36 3/8 $.09
Second Quarter.......... 50 3/4 40 3/8 .09
Third Quarter (through
July 9, 1997).......... 48 1/2 45 3/4
</TABLE>
The last reported sale price of the Time Warner Common Stock on July 9, 1997
as reported on the NYSE Composite Tape was $45 15/16.
As of January 31, 1997, there were approximately 26,000 record holders of the
Time Warner Common Stock.
20
<PAGE>
DESCRIPTION OF THE SECURITIES
The Securities will be issued under an Indenture, to be dated as of July 15,
1997 (the "Indenture"), between the Company and The First National Bank of
Chicago, as Trustee (the "Trustee"), a copy of which is filed as an exhibit to
the Registration Statement of which this Prospectus is a part. The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject, and is qualified in its entirety by reference, to all the
provisions of the Indenture and the Securities, including the definitions
therein of certain terms. Wherever particular defined terms of the Indenture
are referred to herein, such defined terms are incorporated by reference into
this Prospectus.
GENERAL
The Securities will be unsecured obligations of the Company and will rank
pari passu with all other unsecured and unsubordinated indebtedness of the
Company. As of the date of this Prospectus, the Company's assets consist
primarily of the stock of its subsidiaries and 11,000,000 shares of Series D
Time Warner Preferred Stock, and the Company conducts no substantial business
or operations itself. Accordingly, the right of the Company, and hence the
right of the creditors of the Company (including the holders of the
Securities), to participate in any distribution of assets of any subsidiary of
the Company upon its liquidation or reorganization will be subject to the
prior claims of creditors of such subsidiaries, except to the extent that
claims of the Company itself as a creditor of such subsidiaries may be
recognized. See "Risk Factors--Ranking of the Securities; Status of Company as
a Holding Company".
The aggregate number of Securities to be issued will be limited to the
22,909,040 Securities being offered hereby (including the Underwriters' over-
allotment option). The Securities, each in denominations of $45.9375, will be
evidenced by one or more global securities (the "Global Securities"), in fully
registered form, without coupons, deposited with a custodian for, and
registered in the name of a nominee of, DTC. See "--Book-Entry Only Issuance"
below.
INTEREST
Each Security, which will be issued with a Face Amount of $45.9375, will
bear interest at the annual rate of 7% on the Face Amount of the Security (or
$3.216 per annum) from July 15, 1997, or from the most recent Interest Payment
Date (as defined below) to which interest has been paid or duly provided for
until the principal amount thereof is exchanged at Maturity pursuant to the
terms of the Securities. Interest on the Securities will be payable quarterly
in arrears on each January 1, April 1, July 1 and October 1, commencing
October 1, 1997 (each, an "Interest Payment Date"), to the persons in whose
names the Securities are registered as of the close of business on the
preceding December 15, March 15, June 15 or September 15, as the case may be
(each a "Regular Record Date"). (Sections 301 and 307) Interest on the
Securities will be computed on the basis of a 360-day year of twelve 30-day
months. (Section 310) If an Interest Payment Date falls on a day that is not a
Business Day, the interest payment to be made on such Interest Payment Date
will be made on the next succeeding Business Day with the same force and
effect as if made on such Interest Payment Date, and no additional interest
will accrue as a result of such delayed payment. (Section 113)
Interest on the Securities will be payable, and delivery of Time Warner
Common Stock (or, at the option of the Company, cash with an equal value or a
combination of both) in exchange for the Securities at Maturity will be made
upon surrender of such Securities, at the office of the Trustee at One First
National Plaza, Suite 0126, Chicago, Illinois 60670-0126. See "--Book-Entry
Only Issuance" for a description of the manner in which payments will be made
on Global Securities.
MATURITY; EXCHANGE RATE
The Securities will mature on July 1, 2000. At Maturity (including as a
result of acceleration or otherwise), the principal amount of each Security
will be mandatorily exchanged by the Company for a number
21
<PAGE>
of shares of Time Warner Common Stock (or, at the Company's option, which may
be exercised with respect to any or all of the shares of Time Warner Common
Stock deliverable upon exchange of the outstanding Securities, cash with an
equal value) at the Exchange Rate, plus any accrued and unpaid interest up to
Maturity. The "Exchange Rate" is equal to, subject to adjustment as a result
of certain dilution events, (a) if the Maturity Price per share of Time Warner
Common Stock is greater than or equal to the Threshold Appreciation Price,
.8264 shares of Time Warner Common Stock per Security, (b) if the Maturity
Price is less than the Threshold Appreciation Price but is greater than the
Initial Price, a fractional share of Time Warner Common Stock per Security so
that the value thereof (determined at the Maturity Price) is equal to the
Initial Price and (c) if the Maturity Price is less than or equal to the
Initial Price, one share of Time Warner Common Stock per Security. No
fractional shares of Time Warner Common Stock will be delivered at Maturity as
provided below under "--Fractional Shares".
The Company may, at its option, in lieu of delivering shares of Time Warner
Common Stock, deliver cash in an amount equal to the value of such number of
shares of Time Warner Common Stock at the Maturity Price. Such option, if
exercised, may be exercised with respect to any or all of the shares of Time
Warner Common Stock otherwise deliverable upon exchange of the outstanding
Securities. On or prior to the twenty-fifth Business Day prior to Maturity,
the Company will notify the Trustee and publish a notice in a newspaper of
national circulation published at least five days a week stating whether the
principal amount of each Security will be exchanged for shares of Time Warner
Common Stock or cash or both. If the Company elects to deliver shares of Time
Warner Common Stock, holders of the Securities will be responsible for the
payment of any and all brokerage costs upon the subsequent sale of such stock.
If less than all of the outstanding Securities are to be exchanged for Time
Warner Common Stock, the Securities to be exchanged for Time Warner Common
Stock will be selected by the Trustee from the outstanding Securities by lot
or pro rata (as nearly as may be) or by any other method determined by the
Trustee in its sole discretion to be equitable.
Notwithstanding the foregoing, (i) in the case of certain dilution events,
the Exchange Rate will be subject to adjustment and (ii) in the case of
certain other events, the consideration received by holders of the Securities
at Maturity will be shares of Time Warner Common Stock, other securities
and/or cash. See "--Anti-Dilution Adjustments".
NO RESTRICTIONS ON COMPANY'S ABILITY TO TRANSFER TIME WARNER STOCK
Although the Stockholder's Agreement restricts the ability of the Company to
sell or otherwise dispose of shares of Time Warner Stock and the Company has
agreed with the Underwriters not to sell or otherwise dispose of shares of
Time Warner Stock within 90 days of the date of this Prospectus without the
prior written consent of Goldman, Sachs & Co., the Indenture does not contain
any restriction on the ability of the Company to sell, pledge or otherwise
convey all or any portion of the Series D Time Warner Preferred Stock held by
it or the Time Warner Common Stock into which such Preferred Stock is
convertible, and no such shares of Time Warner Stock will be pledged or
otherwise held in escrow for exchange at Maturity. Consequently, in the event
of a bankruptcy, insolvency or liquidation of the Company, any Time Warner
Stock owned by the Company will be subject to the claims of the creditors of
the Company. In addition, as described herein, the Company will have the
option, exercisable in its sole discretion, to satisfy its obligations
pursuant to the mandatory exchange for the principal amount of the Securities
at Maturity by delivering to holders of the Securities either the specified
number of shares of Time Warner Common Stock or cash with an equal value or a
combination of both. There can be no assurance that the Company will elect at
Maturity to deliver Time Warner Common Stock. Consequently, holders of the
Securities will not be entitled to any rights with respect to the Series D
Time Warner Preferred Stock or the Time Warner Common Stock into which such
shares are convertible (including, without limitation, voting rights and
rights to receive any dividends or other distributions in respect thereof)
until such time, if any, as the Company shall have converted the Series D Time
Warner Preferred Stock into Time Warner Common Stock and exchanged shares of
Time Warner Common Stock for Securities at Maturity and, unless the applicable
record date, if any, for the exercise of such rights occurs after such date.
22
<PAGE>
DEFINITIONS
"Business Day" means any day that is not a Saturday or Sunday or a day on
which banking institutions or trust companies in New York, New York or Houston,
Texas are authorized or obligated by law or executive order to close.
"Calculation Agent" means The First National Bank of Chicago, or any
successor Calculation Agent selected in accordance with the terms of the
Indenture.
"Closing Price" means, on any date of determination, the closing sale price
(or, if no closing price is reported, the last reported sale price) of such
security on the NYSE on such date or, if such security is not listed for
trading on the NYSE on any such date, as reported in the composite transactions
for the principal national securities exchange on which such security is so
listed, or if such security is not so listed on a United States national
securities exchange, as reported by the Nasdaq National Market, or, if such
security is not so reported, the last quoted bid price for such security in the
over-the-counter market as reported by the National Quotation Bureau or similar
organization, or, if such bid price is not available, the market value of such
security on such date as determined by a nationally recognized independent
investment banking firm retained for this purpose by the Company.
"Face Amount" and "Initial Price" mean $45.9375.
"Maturity Price" means the average of the Volume Weighted Average Prices per
share of Time Warner Common Stock for the 20 Trading Days ending two Business
Days prior to Maturity.
"Threshold Appreciation Price" means $55.5844.
"Trading Day" means, with respect to any security, any day on which (A)
trading in the security is not suspended on any national securities exchange or
association or over-the-counter market at the close of business and (B) such
security has traded at least once on the national securities exchange or
association or over-the-counter market that is the primary market for the
trading of such security.
"Volume Weighted Average Price" means, with respect to any security, the
display designated as page Volume at Price on the Bloomberg Financial Service
(or such page as may replace the Volume at Price page on that service for the
purpose of displaying daily volume and weighted trading prices of equity
securities) or, if such service does not then publish daily volume and weighted
trading prices of such security, such other page and service selected by the
Calculation Agent that reports daily volume and weighted trading prices of such
security or, if the Calculation Agent does not select another page or service,
the Closing Price of such security.
All determinations made by the Calculation Agent will be at the sole
discretion of the Calculation Agent and, in the absence of manifest error, will
be conclusive for all purposes and binding on the Company and the holders of
the Securities, and the Calculation Agent will have no liability therefor. The
Calculation Agent will provide information as to any adjustments to the
Exchange Rate upon written request by any holder of the Securities.
23
<PAGE>
HYPOTHETICAL EXCHANGE RATES
For illustrative purposes only, the following chart shows the number of
shares of Time Warner Common Stock or the amount of cash that a holder of
Securities would receive for each Security at various Maturity Prices. The
table assumes that there will be no dilution adjustments to the Exchange Rate
as described below. There can be no assurance that the Maturity Price will be
within the range set forth below. Given the Initial Price of $45.9375 and the
Threshold Appreciation Price of $55.5844, a holder of the Securities would
receive at Maturity the following number of shares of the Time Warner Common
Stock or amount of cash (if the Company elects to settle the Securities in
cash) per Security:
<TABLE>
<CAPTION>
MATURITY PRICE OF NUMBER OF SHARES
TIME WARNER OF TIME WARNER AMOUNT OF
COMMON STOCK COMMON STOCK CASH
----------------- ---------------- ---------
<S> <C> <C>
$40.00 1.0000 $40.00
45.9375 1.0000 45.9375
50.00 0.9188 45.9375
55.5844 0.8264 45.9375
60.00 0.8264 49.5840
</TABLE>
FRACTIONAL SHARES
No fractional shares of Time Warner Common Stock, and/or other securities if
a Spin-Off or a Reorganization Event (each, as defined below under "--Anti-
Dilution Adjustments--Dividends and Other Distributions" and "--Consolidation,
Merger or Sale of Assets", respectively) has occurred prior to Maturity, will
be issued if the Company exchanges the Securities for shares of Time Warner
Common Stock and/or such securities. If more than one Security shall be
surrendered for exchange at one time by the same holder, the number of full
shares of Time Warner Common Stock and/or such other securities which will be
delivered upon exchange will be computed on the basis of the aggregate number
of Securities so surrendered at Maturity. In lieu of any fractional share or
security otherwise issuable in respect of all Securities of any holder which
are exchanged at Maturity, such holder shall be entitled to receive an amount
in cash equal to the value of such fractional share or security at the
Maturity Price (or similarly calculated average price for a security other
than Time Warner Common Stock) or in the case of redemption, at the average of
the Volume Weighted Average Prices of Time Warner Common Stock (or of such
other security) for the five Trading Days immediately preceding the date on
which the Redemption Notice is released on the PR Newswire.
REDEMPTION
Upon the occurrence of a Tax Redemption Event, the Company will have the
right to redeem the Securities, as a whole and not in part, at the Tax
Redemption Price, together with accrued and unpaid interest to but excluding
the Redemption Date, upon not less than five Business Days' nor more than 45
calendar days' notice. In order to exercise this redemption right, the Company
must release the Redemption Notice on the PR Newswire prior to 9:00 a.m.
Eastern Standard Time on any Trading Day no later than 30 calendar days
following the promulgation of the Regulations. The Redemption Notice must be
given no later than the next Business Day following the date on which the
Redemption Notice is released on the PR Newswire, by publication in The Wall
Street Journal, or, if The Wall Street Journal is not then published, a
similar publication selected by the Calculation Agent, and, if the Securities
at such time are in registered certificated form, the Redemption Notice must
be placed in the mail to each holder of Securities no later than the next
Business Day following the date on which the Redemption Notice is released on
the PR Newswire. A Redemption Notice will be deemed given upon release of the
Redemption Notice through the PR Newswire, even if the Company does not comply
with its publication and mailing of notice obligations.
A "Tax Redemption Event" will occur if the Internal Revenue Service
promulgates the Regulations under proposed Section 1259 of the Code (which, if
enacted, would require immediate recognition of gain with respect to
"constructive sales" of certain appreciated financial positions) and, in the
opinion of Baker & Botts, L.L.P,
24
<PAGE>
or other nationally recognized legal counsel experienced in such matters, (i)
as a result of the promulgation of the Regulations, the Company will be
required to recognize gain with respect to all or a portion of the Time Warner
Stock held by the Company in an amount equal to the difference between the
fair market value of such stock and the Company's basis in such stock, and
(ii) such gain recognition may be deferred to a later taxable year if the
Company redeems the Securities.
The "Tax Redemption Price" means one hundred and five percent (105%) of the
greater of (i) the average of the Closing Prices of the Securities over the
five Trading Days immediately preceding the day on which the Redemption Notice
is released on the PR Newswire and (ii) the Closing Price of the Securities on
the Trading Day immediately preceding the day on which the Redemption Notice
is released on the PR Newswire. The Tax Redemption Price may be paid in cash
or shares of Time Warner Common Stock or a combination of both as specified in
the Redemption Notice. To the extent that the Company chooses to pay the Tax
Redemption Price in shares of Time Warner Common Stock, the Company will
deliver per each such Security, subject to adjustment as described below under
"--Anti-Dilution Adjustments--Dividends and Other Distributions" if a Spin-Off
or under "--Anti-Dilution Adjustments--Consolidation, Merger or Sale of
Assets" if a Reorganization Event, has occurred prior to the Redemption Date,
the number of shares of Time Warner Common Stock which equals the quotient of
(i) the Tax Redemption Price per Security and (ii) the average of the Volume
Weighted Average Prices of Time Warner Common Stock for the five Trading Days
immediately preceding the date on which the Redemption Notice is released on
the PR Newswire.
ANTI-DILUTION ADJUSTMENTS
GENERAL
The Exchange Rate will be subject to adjustment as described below to the
extent that any of the events requiring such adjustment occur during the
period commencing on the date of this Prospectus and ending on the second
Business Day prior to Maturity. No adjustments to the Exchange Rate will be
made other than those specified below. Such adjustments do not cover all
events that could affect the Exchange Rate, including, without limitation, an
issuer tender or exchange offer at a premium to the market price or a third
party tender or exchange offer for shares of Time Warner Common Stock, and
offerings of Time Warner Common Stock for cash or in connection with
acquisitions. See "Risk Factors--Dilution of Time Warner Common Stock".
No adjustments to the Exchange Rate will be required unless such adjustment
would require a change of at least 1% in the Exchange Rate; provided, however,
that any adjustments which by reason of the foregoing are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All adjustments to the Exchange Rate will be calculated to the
nearest 1/10,000th of a share of Time Warner Common Stock (or if there is not
a nearest 1/10,000th of a share to the next lower 1/10,000th of a share).
The Company is required, within ten Business Days following the occurrence
of an event that requires an adjustment to the Exchange Rate or the occurrence
of a Spin-Off (as defined under "--Dividends and Other Distributions" below)
or a Reorganization Event (as defined under "--Consolidation, Merger or Sale
of Assets" below) (or, in any case, if the Company is not aware of such
occurrence, as soon as practicable after becoming so aware), to provide
written notice to the Calculation Agent and the Trustee and to the holders of
the Securities of the occurrence of such event and a statement in reasonable
detail setting forth the method by which the adjustment to the Exchange Rate
was determined or the change in the consideration to be received by the
holders of the Securities following a Spin-Off (if the Company elects to
exercise its Delivery of Spin-Off Securities Option (as described below under
"--Dividends and Other Distributions")) or a Reorganization Event and setting
forth the revised Exchange Rate or consideration. In connection with a Spin-
Off, such notice shall also include a statement by the Company as to whether
it has elected to exercise its Delivery of Spin-Off Securities Option.
For purposes of the following anti-dilution provisions, all references to
Time Warner Common Stock include any capital stock of Time Warner received
upon reclassification of the common stock, par value $0.01 per share, of Time
Warner.
25
<PAGE>
In the case of any adjustment to the Exchange Rate as a result of an event
described under "--Stock Splits", "--Stock Dividends", "--Rights and Warrants"
or "--Dividends and Other Distributions" (other than in a case where the
Company has elected to exercise its Delivery of Spin-Off Securities Option), a
similar adjustment will also be made to the Maturity Price as such term is
used throughout the definition of Exchange Rate. The required adjustment to
the Maturity Price shall be made at Maturity by multiplying the Maturity Price
by the cumulative number or fraction determined pursuant to the Exchange Rate
adjustment procedure described under such captions.
For purposes of clarity, it is intended that the adjustments for stock
splits, reverse stock splits, stock dividends, cash dividends and other
distributions described below are meant to apply only if such events actually
occur.
STOCK SPLITS
If the Time Warner Common Stock is subject to a stock split or reverse stock
split, then at the opening of business on the first day on which the Time
Warner Common Stock trades without the right to receive the Common Stock
resulting from such stock split or reverse stock split, the Exchange Rate will
be adjusted by multiplying such Exchange Rate by a fraction, the numerator of
which will be the number of shares of Time Warner Common Stock outstanding at
the close of business on the record date for holders of Time Warner Common
Stock entitled to such split plus or minus the number of shares resulting from
such stock split or reverse stock split and the denominator of which will be
the number of shares of Time Warner Common Stock outstanding at the close of
business on such record date.
STOCK DIVIDENDS
If the Time Warner Common Stock is subject to a stock dividend that is given
ratably to all holders of shares of Time Warner Common Stock, then at the
opening of business on the first day on which the Time Warner Common Stock
trades without the right to receive such dividend (the "ex-dividend date"),
the Exchange Rate will be adjusted by multiplying such Exchange Rate by a
fraction, the numerator of which will be the number of shares of Time Warner
Common Stock outstanding at the opening of business on such ex-dividend date
plus the number of shares constituting such stock dividend and the denominator
of which will be the number of shares of Time Warner Common Stock outstanding
at the opening of business on such ex-dividend date.
RIGHTS AND WARRANTS
If Time Warner issues rights or warrants to all holders of Time Warner
Common Stock to subscribe for or purchase shares of Time Warner Common Stock
(other than rights to purchase shares of Time Warner Common Stock pursuant to
a plan for the reinvestment of dividends or interest) at an exercise price per
share less than the Closing Price of the Time Warner Common Stock on the
record date for determining the holders of Time Warner Common Stock entitled
to receive such rights and warrants and the expiration date of such rights or
warrants precedes the second Business Day prior to Maturity of the Securities,
then the Exchange Rate will be adjusted by multiplying such Exchange Rate by a
fraction, the numerator of which will be the number of shares of Time Warner
Common Stock outstanding at the close of business on such record date, plus
the number of additional shares of Time Warner Common Stock offered for
subscription or purchase pursuant to such rights or warrants and the
denominator of which will be the number of shares of Time Warner Common Stock
outstanding at the close of business on such record date, plus the number of
additional shares of Time Warner Common Stock which the aggregate offering
price of the total number of shares of Time Warner Common Stock so offered for
subscription or purchase pursuant to such rights or warrants would purchase at
the Closing Price of the Time Warner Common Stock on such record date, which
will be determined by multiplying such total number of shares offered by the
exercise price of such rights or warrants and dividing the product so obtained
by such Closing Price. To the extent that shares of Time Warner Common Stock
are not delivered after the expiration of such rights or warrants, the
Exchange Rate shall be readjusted to the Exchange Rate which would then be in
26
<PAGE>
effect had such adjustments for the issuance of such rights or warrants been
made upon the basis of delivery of only the number of shares of Time Warner
Common Stock actually delivered.
DIVIDENDS AND OTHER DISTRIBUTIONS
There will be no adjustments to the Exchange Rate to reflect cash dividends
or other distributions paid with respect to Time Warner Common Stock other
than Extraordinary Dividends. A dividend or other distribution with respect to
Time Warner Common Stock will be deemed to be an "Extraordinary Dividend" (i)
if such dividend or other distribution is of securities ("Spin-Off
Securities") of an issuer other than Time Warner (a "Spin-Off") or (ii) if
such dividend or other distribution exceeds the immediately preceding non-
Extraordinary Dividend for Time Warner Common Stock by an amount equal to at
least 10% of the Closing Price of Time Warner Common Stock on the first
Business Day immediately preceding the date on which Time Warner Common Stock
trades without the right to receive such Extraordinary Dividend (the "ex-
dividend date"). If an Extraordinary Dividend occurs with respect to Time
Warner Common Stock, the Exchange Rate will be adjusted at the opening of
business on the ex-dividend date by multiplying such Exchange Rate by a
fraction, the numerator of which will be the Closing Price of Time Warner
Common Stock on the Business Day immediately preceding such ex-dividend date
and the denominator of which will be the difference between such Closing Price
and the Extraordinary Dividend Amount. The "Extraordinary Dividend Amount"
with respect to an Extraordinary Dividend for Time Warner Common Stock will
equal (i) in the case of cash dividends or other distributions that constitute
quarterly dividends, the amount per share of such Extraordinary Dividend minus
the amount per share of the immediately preceding non-Extraordinary Dividend
for Time Warner Common Stock or (ii) in the case of cash dividends or other
distributions that do not constitute quarterly dividends, the amount per share
of such Extraordinary Dividend. To the extent an Extraordinary Dividend is not
paid in cash, the value of the non-cash component will be determined by the
Board of Directors of the Company, whose determination will be conclusive and
described in a resolution adopted with respect thereto.
Notwithstanding the foregoing, in the case of a Spin-Off, the Company may,
at its option, in lieu of adjusting the Exchange Rate as described in the
immediately preceding paragraph, adjust the Exchange Rate used to determine
the amount payable upon exchange at Maturity for each Security to provide that
each holder of Securities will receive at Maturity, in addition to the amount
of Time Warner Common Stock deliverable (or cash in lieu thereof), an amount
of Spin-Off Securities equal to the product of the Exchange Rate (as otherwise
in effect at Maturity) and the amount of Spin-Off Securities issued per share
of Time Warner Common Stock in the Spin-Off, so that the Maturity Price will
take into account both the value of the Spin-Off Securities (as described
below) and the value of the Time Warner Common Stock delivered upon exchange
of the Securities (the "Delivery of Spin-Off Securities Option"); provided,
however, that the Company may, at its option, in lieu of delivering an amount
of Spin-Off Securities to the holders of the Securities at Maturity, deliver
cash in an amount equal to the value of such amount of Spin-Off Securities. In
order for the Company to exercise the Delivery of Spin-Off Securities Option,
the Company must issue a press release through the PR Newswire prior to the
opening of business on the ex-dividend date with respect to such Spin-Off that
it elects to deliver Spin-Off Securities in lieu of adjusting the Exchange
Rate as described in the immediately preceding paragraph. For purposes of
delivering cash in lieu of delivering Spin-Off Securities at Maturity, or, if
the Company elects to deliver Spin-Off Securities at Maturity, for purposes of
valuing the Spin-Off Securities delivered at Maturity, the value of the Spin-
Off Securities would be an amount equal to the average of the Volume Weighted
Average Prices per share or security of such Spin-Off Securities for the 20
Trading Days ending two Business Days prior to Maturity. If the Company elects
to exercise its Delivery of Spin-Off Securities Option and to deliver Spin-Off
Securities at Maturity, holders of the Securities will be responsible for the
payment of any and all brokerage and other transaction costs upon any
subsequent sale of the Spin-Off Securities.
CONSOLIDATION, MERGER OR SALE OF ASSETS
In the event of (A) any consolidation or merger of Time Warner, or any
surviving entity or subsequent surviving entity of Time Warner (a "Time Warner
Successor"), with or into another entity (other than a merger or consolidation
in which Time Warner is the continuing corporation and in which the Time
Warner Common
27
<PAGE>
Stock outstanding immediately prior to the merger or consolidation is not
exchanged for cash, securities or other property of Time Warner or another
entity), (B) any sale, transfer, lease or conveyance to another corporation of
the property of Time Warner or any Time Warner Successor as an entirety or
substantially as an entirety, (C) any statutory exchange of securities of Time
Warner or any Time Warner Successor with another corporation (other than in
connection with a merger or acquisition) or (D) any liquidation, dissolution
or winding up of Time Warner or any Time Warner Successor (any such event
described in clause (A), (B), (C) or (D), a "Reorganization Event"), the
Exchange Rate used to determine the amount payable upon exchange at Maturity
for each Security will be adjusted to provide that each holder of Securities
will receive at Maturity for each Security cash in an amount equal to (a) if
the Transaction Value (as defined below) is greater than or equal to the
Threshold Appreciation Price, .8264 multiplied by the Transaction Value, (b)
if the Transaction Value is less than the Threshold Appreciation Price but
greater than the Initial Price, the Initial Price and (c) if the Transaction
Value is less than or equal to the Initial Price, the Transaction Value.
"Transaction Value" means (i) for any cash received by the Company in any such
Reorganization Event, an amount equal to the product of (A) the Exchange Rate
(in effect immediately prior to the Reorganization Event) and (B) the amount
of cash received per share of Time Warner Common Stock, (ii) for any property
other than cash or securities received by the Company in any such
Reorganization Event, an amount equal to the product of (A) the Exchange Rate
(in effect immediately prior to the Reorganization Event) and (B) the then-
current market value of such property received per share of Time Warner Common
Stock as determined by a nationally recognized independent investment banking
firm retained for this purpose by the Company and (iii) for any securities
received by the Company in any such Reorganization Event, an amount equal to
the product of (A) the Exchange Rate (in effect immediately prior to the
Reorganization Event) and (B) the average of the Volume Weighted Average
Prices per share of such securities on the 20 Trading Days ending two Business
Days prior to Maturity multiplied by the number of such securities received
for each share of Time Warner Common Stock.
Notwithstanding the foregoing, the Company may, at its option, in lieu of
delivering cash as described above, deliver (a) an amount of cash equal to (i)
the Exchange Rate (adjusted as described above) times (ii) the amount of cash,
if any, received by the Company per share of Time Warner Common Stock in such
Reorganization Event plus (b) property in an amount equal to (i) the Exchange
Rate (as so adjusted) times (ii) the amount of property, if any, received by
the Company per share of Time Warner Common Stock in such Reorganization Event
plus (c) securities in a number or amount, as applicable, equal to (i) the
Exchange Rate (as so adjusted) times (ii) the number or amount, as applicable,
of securities, if any, received by the Company in such Reorganization Event
per share of Time Warner Common Stock. If the Company elects to deliver
securities or other property, holders of the Securities will be responsible
for the payment of any and all brokerage and other transaction costs upon any
subsequent sale of such securities or other property.
The amount of cash and/or the kind and number of securities into which the
Securities shall be exchangeable after a Spin-Off (if the Company elects to
exercise its Delivery of Spin-Off Securities Option) or a Reorganization Event
shall be subject to adjustment following the date of such Spin-Off or
Reorganization Event, as the case may be, in the same manner and upon the
occurrence of the same type of events described under this caption "Anti-
Dilution Adjustments" with respect to Time Warner Common Stock.
EVENTS OF DEFAULT
Each of the following will constitute an Event of Default under the
Indenture with respect to the Securities: (a) failure to exchange the
Securities for Common Stock or pay the principal amount of or any premium of
any Security when due; (b) failure to pay any interest on any Security when
due, continued for 30 days; (c) failure to perform in any material respect any
other covenant of the Company in the Indenture, continued for 90 days after
written notice has been given by the Trustee, or the holders of at least 25%
in Face Amount of the outstanding Securities, as provided in the Indenture;
and (d) certain events in bankruptcy, insolvency or reorganization involving
the Company. (Section 501)
If an Event of Default (other than an Event of Default described in clause
(d) above) with respect to the Securities shall occur and be continuing,
either the Trustee or the holders of not less than 25% in aggregate Face
Amount of the outstanding Securities by notice as provided in the Indenture
may declare the principal amount of
28
<PAGE>
the Securities to be due and payable immediately. If an Event of Default
described in clause (d) above with respect to the Securities shall occur, the
principal amount of the Securities will automatically, and without any action
by the Trustee or any holder, become immediately due and payable. After any
such acceleration, but before a judgment or decree based on acceleration, the
holders of a majority in aggregate Face Amount of the outstanding Securities
may, under certain circumstances, rescind and annul such acceleration if all
Events of Default, other than the non-payment of accelerated principal, have
been cured or waived as provided in the Indenture. (Section 502)
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders, unless such
holders shall have offered to the Trustee reasonable security or indemnity.
(Section 603) Subject to such provisions for the indemnification of the Trustee
and certain other exceptions, the holders of a majority in aggregate Face
Amount of the outstanding Securities will have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee with respect
to the Securities. (Section 512)
No holder of any Security will have any right to institute any proceeding,
with respect to the Indenture, or for the appointment of a receiver or trustee,
or for any other remedy thereunder, unless (i) such holder has previously given
to the Trustee written notice of a continuing Event of Default; (ii) the
holders of not less than 25% in Face Amount of the outstanding Securities will
have made written request, and such holder or holders have offered reasonable
indemnity, to the Trustee to institute such proceeding as trustee; and (iii)
the Trustee has failed to institute such proceeding, and has not received from
the holders of a majority in aggregate Face Amount of the outstanding
Securities a direction inconsistent with such request, within 60 days after
such notice, request and offer. (Section 507) Notwithstanding these provisions,
the holder of any Security shall have the right, which is absolute and
unconditional, to receive payment of the principal of, premium of, if any, and
interest on such Security in accordance with the terms thereof and to institute
suit for the enforcement of any such payment, and such rights shall not be
impaired without the consent of such holder. (Section 508)
The Company will be required to furnish to the Trustee annually a statement
by certain of its officers as to whether or not the Company, to their
knowledge, is in default in the performance or observance of any of the terms,
provisions and conditions of the Indenture and, if so, specifying all such
known defaults. (Section 1004)
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company may not consolidate with or merge into, or convey, transfer or
lease its properties and assets substantially as an entirety to, any Person (a
"successor Person"), and may not permit any Person to merge into, or convey,
transfer or lease its properties and assets substantially as an entirety to,
the Company unless (i) the successor Person (if any) is a corporation,
partnership or trust organized and validly existing under the laws of any
domestic jurisdiction and assumes the Company's obligations on the Securities
and under the Indenture, (ii) immediately after giving effect to the
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have occurred and be
continuing and (iii) certain other conditions are met; provided, however, that
notwithstanding the foregoing, in order to consummate the Merger, (x) Houston
will assume the Company's obligations on the Securities and under the Indenture
by operation of law and will not be required to enter into an indenture
supplemental to the Indenture to expressly assume such obligations and (y) the
Company will only be required to deliver to the Trustee a certificate of one of
its executive officers to the effect that immediately after giving effect to
the Merger, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have occurred and be
continuing, and an opinion of counsel that when the Merger takes effect,
Houston, by operation of law, will be liable for the Company's obligations on
the Securities and under the Indenture. (Sections 801 and 802)
MODIFICATION AND WAIVER
From time to time the Company and the Trustee may, without the consent of the
holders of the Securities, enter into an indenture or indentures supplemental
to the Indenture for specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies; provided, however, that any such
action does not materially
29
<PAGE>
adversely affect the interest of the holders of the Securities. The Indenture
contains provisions permitting the Company and the Trustee, with the consent
of the holders of not less than a majority in Face Amount of the Securities,
to enter into an indenture or indentures supplemental thereto for the purpose
of adding any provisions to or changing in any manner or eliminating any
provisions of the Indenture or of modifying in any manner the rights of
holders of the Securities; provided, however, that no such supplemental
indenture may, without the consent of the holder of each outstanding Security
affected thereby, (a) change the Stated Maturity of, the principal of, the
premium of, if any, or any installment of interest on, any Security, (b)
reduce the Face Amount, or principal amount with respect to, or premium of, if
any, or interest on, any Security, (c) change the place or currency of payment
of the principal of, premium of, if any, or interest on, any Security, (d)
impair the right to institute suit for the enforcement of any payment on or
with respect to any Security, (e) reduce the percentage in Face Amount of
outstanding Securities, the consent of whose holders is required for
modification or amendment of the Indenture, (f) reduce the percentage in Face
Amount of outstanding Securities necessary for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults or (g)
modify such provisions with respect to modification and waiver except to
increase any such percentage or to provide that certain other provisions of
the Indenture cannot be modified or waived without the consent of the holder
of each Security affected thereby. (Section 902)
BOOK-ENTRY ONLY ISSUANCE
The Securities will be represented by one or more fully registered global
securities (collectively, the "Global Security"). The Global Security will be
deposited upon issuance with a custodian for The Depository Trust Company
("DTC") and registered in the name of DTC or a nominee of DTC (the "Global
Security Registered Owner"). Except as set forth below, the Global Security
may be transferred, in whole and not in part, only to another nominee of DTC
or to a successor of DTC or its nominee.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between the Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Underwriters), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interest and transfer
of ownership interest of each actual purchaser of each security held by or on
behalf of DTC are recorded on the records of the Participants and Indirect
Participants.
DTC has also advised the Company that pursuant to procedures established by
it, (i) upon deposit of the Global Security, DTC will credit the accounts of
Participants designated by the Underwriters with portions of the Face Amount
of the Global Securities and (ii) ownership of such interests in the Global
Security will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Security). The
laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Such laws may impair the ability
to transfer beneficial interests in a Global Security.
Except as described below, owners of interests in the Global Security will
not have Securities registered in their names, will not receive physical
delivery of Securities in definitive form and will not be considered the
registered owners or holders thereof under the Indenture for any purpose. As
long as DTC, or its nominee, is the registered owner of the Global Security,
DTC, or its nominee, as the case may be, will be considered the sole owner and
holder of the Securities represented by the Global Security for all purposes
under the Indenture and the Securities.
30
<PAGE>
Payment of principal and any interest on the Securities registered in the
name of the Global Security Registered Owner will be payable by the Trustee to
the Global Security Registered Owner in its capacity as the registered holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Securities, including the
Global Security, are registered as the owners thereof for the purpose of
receiving such payments and for any and all other purposes whatsoever.
(Section 308) Consequently, none of the Company, the Trustee or any agent of
the Company or the Trustee has or will have any responsibility or liability
for (i) any aspect of DTC's records or any Participant's records relating to
or payments made on account of beneficial ownership interests in the Global
Security, or for maintaining, supervising or reviewing any of DTC's records or
any Participant's records relating to the beneficial ownership interests in
the Global Security or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants. DTC has advised the Company that
its current practice, upon receipt of any payment in respect of securities
such as the Securities, is to credit the accounts of the relevant Participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in Face Amount of beneficial interests in the relevant
security as shown on the records of DTC, unless DTC has reason to believe it
will not receive payment on such payment date. Payments by the Participants
and the Indirect Participants to the beneficial owners of Securities will be
governed by standing instructions and customary practices and will be the
responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Trustee or the Company. Neither the Company
nor the Trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of the Securities, and the Company and
the Trustee may conclusively rely on and will be protected in relying on
instructions of the Global Security Registered Owner for all purposes.
The Global Security is exchangeable for definitive Securities in registered
certificated form only if (i) DTC (x) notifies the Company that it is
unwilling or unable to continue as the depositary for the Global Security and
the Company thereupon fails to appoint a successor depositary or (y) has
ceased to be a clearing agency registered under the Exchange Act, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of the Securities in definitive registered certificated
form or (iii) there shall have occurred and be continuing an Event of Default
or any event which after notice or lapse of time or both would be an Event of
Default with respect to the Securities. Upon issuance of Securities in
definitive registered certificated form, the Trustee is required to register
the Securities in the name of, and cause the Securities to be delivered to,
the Person or Persons (or the nominee thereof) identified as the beneficial
owners as DTC shall direct.
FORM, EXCHANGE AND TRANSFER
The Securities will be issuable only in fully registered form, without
coupons, each in denominations of $45.9375. (Section 302)
At the option of the holder, subject to the terms of the Indenture and the
limitations applicable to Global Securities, Securities will be exchangeable
for other Securities of any authorized denomination and of a like tenor and
aggregate Face Amount. (Section 305)
Subject to the terms of the Indenture and the limitations applicable to
Global Securities, Securities may be presented for exchange as provided above
or for registration of transfer (duly endorsed or with the form of transfer
endorsed thereon duly executed) at the office of the Security Registrar or at
the office of any transfer agent designated by the Company for such purpose.
No service charge will be made for any registration of transfer or exchange of
Securities, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith. Such
transfer or exchange will be effected upon the Security Registrar or such
transfer agent, as the case may be, being satisfied with the documents of
title and identity of the Person making the request. The Company has appointed
the Trustee as Security Registrar. (Section 1002)
31
<PAGE>
NOTICES
Notices to holders of Securities will be given by mail to the addresses of
such holders as they may appear in the Security Register except, in the case
of a redemption, notice will also be given by press release and publication.
(Sections 101 and 106)
TITLE
The Company, the Trustee and any agent of the Company or the Trustee may
treat the Person in whose name a Security is registered as the absolute owner
thereof (whether or not such Security may be overdue) for the purpose of
making payment and for all other purposes. (Section 308)
GOVERNING LAW
The Indenture and the Securities will be governed by, and construed in
accordance with, the law of the State of New York. (Section 112)
INFORMATION CONCERNING THE TRUSTEE
The Trustee shall have and be subject to all the duties and responsibilities
specified with respect to an indenture trustee under the Trust Indenture Act
of 1939, as amended. Subject to such provisions, the Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of the Securities, unless offered reasonable indemnity
by such holder against the costs, expenses and liabilities which might be
incurred thereby. The Trustee is not required to expend or risk its own funds
or otherwise incur personal financial liability in the performance of its
duties if the Trustee reasonably believes that repayment or adequate indemnity
is not reasonably assured to it.
The Trustee is a party to credit agreements under which the Company and
certain of its subsidiaries and entities in which the Company has an ownership
interest have bank lines of credit. The Trustee also serves as trustee for
certain pollution control bonds issued on behalf of HL&P. The Company and
certain of its subsidiaries and affiliates also maintain depositary and other
normal banking relationships with the Trustee.
32
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income tax
consequences resulting from the purchase, ownership and disposition of the
Securities. This summary only addresses the tax consequences to a person that
acquires the Securities on their original issuance at the Initial Price and
that is (i) an individual citizen or resident of the United States, (ii) a
corporation or partnership that is organized under the laws of the United
States or any state thereof or the District of Columbia, (iii) an estate the
income of which is subject to United States federal income taxation regardless
of its source, or (iv) a trust which is subject to the supervision of a court
within the United States and the control of a United States fiduciary (a
"United States Person"). This summary does not address all the possible tax
consequences that may be applicable to a particular holder in light of its
individual investment circumstances, nor does it address the tax consequences
to (i) persons that are not United States Persons, (ii) persons that may be
subject to special treatment under United States federal income tax law, such
as banks, insurance companies, thrift institutions, regulated investment
companies, real estate investment trusts, tax-exempt organizations, and
dealers in securities or currencies, (iii) persons that will hold the
Securities as part of a position in a "straddle" or as part of a "hedging",
"conversion" or other integrated investment transaction for federal income tax
purposes, (iv) persons whose functional currency is not the United States
dollar, (v) persons that do not hold the Securities as capital assets, or (vi)
persons that acquire a Security at other than the Initial Price.
The statements of law or legal conclusion set forth in this summary
constitute the opinion of Baker & Botts, L.L.P., counsel to the Company. This
summary is based upon the Code, Treasury Regulations, rulings and
pronouncements of the Internal Revenue Service ("IRS"), and judicial decisions
in effect on the date of this Prospectus, all of which are subject to change
at any time. No ruling has been or will be requested from the IRS with respect
to the correct tax treatment of the Securities. In addition, no existing
statutory, judicial or administrative authority directly addresses the
characterization of the Securities for U.S. federal income tax purposes. As a
result, significant uncertainty exists concerning the proper tax treatment of
the Securities. An opinion of counsel is not binding on the IRS, and there can
be no assurance that the IRS will agree with the conclusions expressed herein.
This summary does not include any description of the tax laws of any state or
local government, or of any foreign government, that may be applicable to the
Securities or holders thereof.
PERSONS CONSIDERING THE PURCHASE OF THE SECURITIES SHOULD CONSULT THEIR OWN
TAX ADVISORS CONCERNING THE APPLICATION OF THE UNITED STATES FEDERAL TAX LAWS
TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE
LAWS OF ANY OTHER TAXING JURISDICTION.
Pursuant to the terms of the Indenture, the Company and every holder of a
Security will be obligated (in the absence of an administrative determination
or judicial ruling to the contrary) to characterize a Security for all tax
purposes as a forward purchase contract to purchase Time Warner Common Stock
(and Spin-Off Securities, if any) at Maturity (including as a result of
acceleration or otherwise), under the terms of which contract (i) at the time
of issuance of the Security the holder deposits irrevocably with the Company a
fixed amount of cash equal to the purchase price of the Security to assure the
fulfillment of the holder's purchase obligation described in clause (iii)
below, which deposit will unconditionally and irrevocably be applied at
Maturity to satisfy such obligation, (ii) until Maturity the Company will be
obligated to pay interest on such deposit at a rate equal to the stated rate
of interest on the Security as compensation to the holder for the Company's
use of such cash deposit during the term of the Security, and (iii) at
Maturity such cash deposit unconditionally and irrevocably will be applied by
the Company in full satisfaction of the holder's obligation under the forward
purchase contract, and the Company will deliver to the holder the number of
shares of Time Warner Common Stock (and Spin-Off Securities, if any) that the
holder is entitled to receive at Maturity pursuant to the terms of the
Securities (subject to the Company's right to deliver cash in lieu of the
shares of Time Warner Common Stock (and Spin-Off Securities, if any)).
(Prospective investors should note that cash proceeds of this offering will
not be segregated by the Company during the term of the Security, but instead
will be commingled with the Company's other assets and applied in a manner
consistent with the "Use of Proceeds" discussion above.) Consistent with the
above
33
<PAGE>
characterization, (i) amounts paid to the Company in respect of the original
issue of a Security will be treated as allocable in their entirety to the
amount of the cash deposit attributable to such Security and (ii) amounts
denominated as interest that are payable with respect to the Security will be
characterized as interest payable on the amount of such deposit, includible
annually in the income of the holder as interest income in accordance with
such holder's method of accounting.
Under the above characterization of the Securities, a holder's tax basis in
a Security generally will equal the holder's cost for that Security. Upon the
sale or other taxable disposition of a Security, a holder generally will
recognize gain or loss equal to the difference between the amount realized on
the sale or other taxable disposition and the holder's tax basis in the
Security. Such gain or loss generally will be long-term capital gain or loss
if the holder has held the Security for more than one year at the time of
disposition.
Under the above characterization of the Securities, if the Company delivers
shares of Time Warner Common Stock (and Spin-Off Securities, if any) at
Maturity, a holder will recognize no gain or loss on the purchase of the
shares of Time Warner Common Stock (and Spin-Off Securities, if any) against
application of the monies received by the Company in respect of the
Securities. A holder will have a tax basis in such interest in the shares of
Time Warner Common Stock (and Spin-Off Securities, if any) equal to the
holder's tax basis in the Securities (less the portion of the tax basis of the
Securities allocable to any fractional interest in shares of Time Warner
Common Stock (and Spin-Off Securities, if any), as described in the next
sentence). A holder will recognize gain or loss (which will be short-term
capital gain or loss) with respect to cash received in lieu of a fractional
interest in a share of Time Warner Common Stock (and Spin-Off Securities, if
any) equal to the difference between the cash received for the fractional
interest and the portion of the basis of the Securities allocable to the
fractional interest. If the Company delivers cash to the holder at Maturity, a
holder will recognize capital gain or loss equal to any difference between the
cash received from the Company and the holder's tax basis in the Security at
that time. Such gain or loss generally will be long-term capital gain or loss
if the holder has held the Security for more than one year at Maturity. The
receipt of any accrued and unpaid interest at Maturity will be includible in
the income of the holder as ordinary interest income.
Due to the absence of authority as to the proper characterization of the
Securities, no assurance can be given that the IRS will accept, or that a
court will uphold, the characterization and tax treatment described above. In
particular, the IRS could seek to analyze the federal income tax consequences
of owning Securities under Treasury regulations promulgated in June 1996
governing contingent payment debt instruments (the "Contingent Payment
Regulations"). The Contingent Payment Regulations are complex, but very
generally apply the original issue discount rules of the Code to a contingent
payment debt instrument by requiring that original issue discount be accrued
every year at a "comparable yield" for the issuer of the instrument,
determined at the time of issuance of the obligation. In addition, the
Contingent Payment Regulations require that a projected payment schedule,
which results in such a "comparable yield," be determined, and the adjustments
to income accruals be made to account for differences between actual payments
and projected amounts. To the extent that the comparable yield as so
determined exceeds the interest actually paid on a contingent debt instrument,
the owner of that instrument will recognize ordinary interest income in excess
of the cash the owner receives. In addition, any gain realized on the sale,
exchange or redemption of a contingent payment debt instrument will be treated
as ordinary income. Any loss realized on such sale, exchange or redemption
will be treated as an ordinary loss to the extent the holder's original issue
discount inclusions with respect to the obligation exceed prior reversals of
such inclusions required by the adjustment mechanism described above. Any loss
realized in excess of such amount generally will be treated as a capital loss.
The Company believes that the Contingent Payment Regulations do not apply to
the Securities, because those Regulations apply only to debt instruments that
provide for contingent payments. The Securities are payable by the delivery of
shares of Time Warner Common Stock (and Spin-Off Securities, if any) (unless
the Company exercises its option to deliver cash to the holders at Maturity)
and provide economic returns that are based upon the value of the Time Warner
Common Stock (and Spin-Off Securities, if any) at Maturity. The Securities
therefore offer no assurance that a holder's investment will be returned to
the holder at Maturity.
34
<PAGE>
Accordingly, the Company believes that the Securities properly are
characterized for tax purposes, not as debt instruments, but as forward
purchase contracts in respect of which holders have deposited a fixed amount
of cash with the Company, on which interest is payable at a fixed rate. If,
however, the IRS were successfully to maintain that the Contingent Payment
Regulations applied to the Securities, then, among other matters, (i) gain
realized by a holder on the sale or other taxable disposition of a Security
would be characterized as ordinary income, rather than as short- or long-term
capital gain (depending on whether the Securities had been held for more than
one year at the time of such disposition) and (ii) a holder would recognize
ordinary income, or ordinary or capital loss (as the case may be, under the
rules of the Contingent Payment Regulations summarized above) on the receipt
of the shares of Time Warner Common Stock (and Spin-Off Securities, if any),
rather than capital gain or loss upon the ultimate sale of such Securities.
Even if the Contingent Payment Regulations do not apply to the Securities,
it is possible that the IRS could seek to characterize the Securities in a
manner that results in tax consequences to initial holders of the Securities
different from those reflected in the Indenture and described above. Under
alternative characterizations of the Securities, it is possible, for example,
that the Securities could be treated as including a forward contract and one
or more options.
NON-U.S. HOLDERS
The Company's payments made with respect to a Security to any holder who is
not a United States Person ("Non-U.S. Holder") will generally not be subject
to United States federal withholding tax (except as discussed below with
respect to backup withholding), provided that such holder complies with
applicable certification requirements.
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale, exchange or redemption
of a Security, unless (i) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States or (ii) in the case of a
Non-U.S. Holder who is a nonresident alien individual and holds the Security
as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year of the sale or other disposition and certain
other conditions are met.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, payments of principal, premium and interest with respect to a
Security, and the proceeds of a sale of a Security within the United States
(i) will be subject to information reporting and (ii) will be subject to
backup withholding at a rate of 31% if the holder fails to provide its
taxpayer identification number on IRS Form W-9, fails to establish an
exemption from backup withholding, or is otherwise subject to backup
withholding under Section 3406 of the Code. Any amounts withheld under the
backup withholding rules will be allowed as a refund or a credit against such
holder's U.S. federal income tax liability, provided the required information
is furnished to the IRS.
POSSIBLE TAX LAW CHANGES
On June 26, 1997, the House of Representatives approved a bill entitled "The
Revenue Reconciliation Act of 1997" (the "House Bill"), and on June 27, 1997,
the Senate approved a companion, though not identical, bill with the same
title (the "Senate Bill"). Each bill contains a provision that, if enacted,
would require a taxpayer to recognize taxable gain at the time of a
"constructive sale" with respect to any appreciated position in stock entered
into after June 8, 1997. Under each Bill a "constructive sale" will be deemed
to occur with respect to an appreciated position in stock if the owner engages
in certain specified transactions which generally eliminate substantially all
risk of loss and all opportunity for gain with respect to such position. The
Company does not believe the issuance of the Securities will constitute a
"constructive sale" under either Bill because under the terms of the
Securities the Company will retain the dividends and an opportunity for gain
with respect to the underlying Time Warner Stock. The report accompanying the
Senate Bill addresses the treatment of "collar"
35
<PAGE>
transactions which, as in the case of the Securities, imposes some limits on
the owner's risk of loss and opportunity for gain with respect to the
underlying appreciated position in stock. The Senate report further indicates
that the determination regarding whether the terms of a particular "collar"
constitute a constructive sale will be made in the Regulations that generally
would be applicable only on a prospective basis. If the Regulations are issued
instead with an effective date provision that applies to "collar" transactions
entered into prior to the date of the Regulations and if the Regulations would
treat the issuance of the Securities as a constructive sale of the Time Warner
Stock, a "Tax Redemption Event" will be deemed to have occurred that will
permit the Company to redeem the Securities if such redemption would avoid the
constructive sale of the Time Warner Stock. See "Description of the
Securities--Redemption".
36
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed that it will sell to each of the Underwriters named below
(the "Underwriters"), and each of such Underwriters, for whom Goldman, Sachs &
Co., Credit Suisse First Boston Corporation and Merrill Lynch, Pierce, Fenner &
Smith Incorporated are acting as representatives (the "Representatives"), has
severally agreed to purchase from the Company, the respective number of
Securities set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SECURITIES
----------- ----------
<S> <C>
Goldman, Sachs & Co. ......................................... 5,280,000
Credit Suisse First Boston Corporation........................ 5,280,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................. 5,280,000
George K. Baum & Company...................................... 200,000
CIBC Wood Gundy Securities Corp............................... 200,000
Chase Securities Inc.......................................... 420,000
EVEREN Securities, Inc........................................ 420,000
Lehman Brothers Inc........................................... 420,000
J.P. Morgan Securities Inc.................................... 420,000
Morgan Stanley & Co. Incorporated............................. 420,000
Smith Barney Inc.............................................. 420,000
Stephens Inc.................................................. 200,000
Stifel, Nicolaus & Company, Incorporated...................... 200,000
UBS Securities LLC............................................ 420,000
SBC Warburg Inc............................................... 420,000
----------
Total..................................................... 20,000,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Securities, if any
are taken.
The Underwriters propose to offer the Securities in part directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus, and in part to certain securities dealers at such price less a
concession of $0.83 per Security. The Underwriters may allow, and such dealers
may reallow, a concession not exceeding $0.10 per Security to certain brokers
and dealers. After the Securities are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to 2,909,040 additional
Securities solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of Securities to be purchased by each of them, as shown
in the foregoing table, bears to the 20,000,000 Securities offered.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the date
of this Prospectus, subject to certain exceptions set forth in the Underwriting
Agreement, they will not offer, sell, contract to sell or otherwise dispose of
any Time Warner Common Stock, any securities of Time Warner which are
substantially similar to shares of Time Warner Common Stock or any securities
which are convertible into or exchangeable for Time Warner Common Stock or such
substantially similar securities without the prior written consent of Goldman,
Sachs & Co.
In connection with the offering of the Securities, the Underwriters may
purchase and sell the Securities and shares of Time Warner Common Stock in the
open market. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with the offering.
37
<PAGE>
Stabilizing transactions consist of certain bids or purchases for the purpose
of preventing or retarding a decline in the market price of the Securities
and/or of the Time Warner Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of Securities than they are
required to purchase from the Company in the offering. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members or other broker-dealers in respect of the Securities sold in the
offering for their account may be reclaimed by the syndicate if such
Securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Securities and/or Time Warner Common Stock, which may be
higher than the price that might otherwise prevail in the open market; and
these activities, if commenced, may be discontinued at any time. These
transactions may be effected on the NYSE, in the over-the-counter market or
otherwise.
The Securities are a new issue of securities with no established trading
market. The Securities have been approved for listing on the NYSE, subject to
official notice of issuance. The initial public offering price for the
Securities is equal to the last sale price of the Time Warner Common Stock on
July 9, 1997, as reported on the NYSE. The Company has been advised by the
Representatives that they intend to make a market in the Securities but are
not obligated to do so and may discontinue market making at any time without
notice. No assurance can be given as to the liquidity of the trading market
for the Securities. See "Risk Factors--Possible Illiquidity of the Secondary
Market".
Each of the Representatives has provided investment banking and financial
advisory services to the Company, its subsidiaries or affiliates in the past,
for which they have received customary compensation and expense reimbursement,
and may do so again in the future.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
VALIDITY OF THE SECURITIES
The validity of the Securities will be passed upon for the Company by Baker
& Botts, L.L.P., Houston, Texas and for the Underwriters by Sullivan &
Cromwell, New York, New York. Sullivan & Cromwell will rely as to all matters
of Texas law upon the opinions of Baker & Botts, L.L.P. and Hugh Rice Kelly,
Esq., Executive Vice President, General Counsel and Corporate Secretary of the
Company. Certain legal matters will be passed upon for the Underwriters by
Dewey Ballantine, New York, New York. Certain legal matters will be passed
upon for the Company by Hugh Rice Kelly, Esq. Certain matters relating to
United States federal income tax considerations will be passed upon for the
Company by Baker & Botts, L.L.P. James A. Baker, III, a senior partner in the
law firm of Baker & Botts, L.L.P., is currently a director of the Company and
beneficial owner of 1,500 shares of the Company's common stock.
EXPERTS
The financial statements of the Company appearing in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, have been audited by
Deloitte & Touche LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
38
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DE-
SCRIBED IN THIS PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITA-
TION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information...................................................... 2
Incorporation of Certain Documents by Reference............................ 2
Prospectus Summary......................................................... 4
Risk Factors............................................................... 8
Houston Industries Incorporated............................................ 13
Selected Financial Information............................................. 15
Ratio of Earnings to Fixed Charges......................................... 17
Use of Proceeds............................................................ 17
Capitalization............................................................. 18
Relationship Between the Company and Time Warner........................... 19
Time Warner Inc. .......................................................... 19
Price Range of Time Warner Common Stock and Cash Dividends................. 20
Description of the Securities.............................................. 21
Certain United States Federal Income Tax Considerations.................... 33
Underwriting............................................................... 37
Validity of the Securities................................................. 38
Experts.................................................................... 38
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
20,000,000 SECURITIES
HOUSTON INDUSTRIES
INCORPORATED
7% AUTOMATIC
COMMON EXCHANGE SECURITIES
DUE JULY 1, 2000
-----------
PROSPECTUS
-----------
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
