<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 1996
REGISTRATION NO. 333-10911
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EL PASO NATURAL GAS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 4922 74-0608280
(STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(IRS EMPLOYER
IDENTIFICATION NUMBER)
ONE PAUL KAYSER CENTER
100 NORTH STANTON STREET
EL PASO, TEXAS 79901
(915) 541-2600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRITTON WHITE, JR.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
EL PASO NATURAL GAS COMPANY
ONE PAUL KAYSER CENTER
100 NORTH STANTON STREET
EL PASO, TEXAS 79901
(915) 541-3839
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPY TO:
THEODORE R. TETZLAFF
GENERAL COUNSEL
TENNECO INC.
1275 KING STREET
GREENWICH, CONNECTICUT 06831
(203) 863-1144
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
---------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
PRELIMINARY COPIES - SUBJECT TO COMPLETION - NOVEMBER 1, 1996
DANA G. MEAD Tenneco
Chairman and 1275 King Street
Chief Executive OfficerGreenwich, Connecticut 06831
LOGO
[LOGO OF TENNECO INC. APPEARS HERE]
November 6, 1996
Dear Tenneco Shareowner:
I invite you to attend a Special Meeting of Tenneco Shareowners on Tuesday,
December 10, 1996, at 10:00 a.m., local time, at Tenneco's executive offices
at 1275 King Street, Greenwich, Connecticut. At this important meeting, you
will be asked to approve a very significant reorganization, through which
Tenneco will be divided and Tenneco Shareowners will receive stock in three
separate, publicly traded companies: (i) New Tenneco Inc., which will be spun-
off, renamed Tenneco Inc., and consist of Tenneco's Automotive and Packaging
businesses and its Administrative Services business, (ii) Newport News
Shipbuilding Inc., which will be spun-off and consist of Tenneco's current
Shipbuilding business, and (iii) El Paso Natural Gas Company, which will
include Tenneco Energy as a subsidiary following the merger included as part
of the reorganization.
As a Tenneco Common Shareowner, after the reorganization is completed you
will receive:
. One share of New Tenneco for every share of your current Tenneco shares.
. One share of Newport News for every five shares of your current Tenneco
shares.
. Shares in El Paso Natural Gas Company, which will be allocated based on a
formula more fully described in the attached Joint Proxy Statement--
Prospectus.
Tenneco Preferred Shareowners (other than the holders of one or more new
series of junior preferred stock to be issued prior to the Merger) will
receive common shares of El Paso Natural Gas Company.
The Spin-Offs and Merger have been structured to be tax-free for federal
income tax purposes to Tenneco and its Shareowners. These transactions are
contingent upon Tenneco Shareowner approval and the receipt of a favorable
ruling from the IRS.
THE TENNECO BOARD HAS DETERMINED THAT THE TRANSACTION IS IN THE BEST
INTERESTS OF ITS SHAREOWNERS. THE BOARD HAS APPROVED THE TRANSACTION AND
RECOMMENDS THAT SHAREOWNERS APPROVE THE TRANSACTION BY EXECUTING AND RETURNING
THE ENCLOSED PROXY.
For the past few years, Tenneco has been undergoing a corporate
transformation from a diversified industrial corporation to a global
manufacturing company focused on its Automotive and Packaging businesses. This
process has produced a number of important milestones allowing Tenneco to
focus its strategic actions to maximize shareowner value--which has culminated
in the reorganization you are being asked to approve at this special
Shareowners meeting.
This reorganization will enable the management of each of the three
businesses of the company to concentrate its attention and financial resources
on its respective core businesses and permit investors to make more focused
investment decisions based on the specific attributes of each business in its
respective industry. It will create a powerful New Tenneco--global
manufacturing in Automotive and Packaging with a strong balance sheet, high
growth potential, leading market positions and products, higher profitability,
and with a great potential for value creation. Going forward this New Tenneco
will have market leadership positions in these businesses with proven products
and unparalleled brand equity worldwide. It will have a unique opportunity to
take advantage of powerful demographic and economic trends worldwide--i.e. to
take advantage of current industry consolidation trend in the automotive parts
industry where both Walker and Monroe are already leaders, and in the
packaging industry where many of Tenneco's products, such as Hefty(R) and One
Zip(R) are also leaders along with its other innovative products.
<PAGE>
In Newport News Shipbuilding the Tenneco Shareowner will own the nation's
largest and most profitable privately owned shipyard; the only one capable of
building the Navy's nuclear powered aircraft carriers, the only non-Naval
shipyard capable of refueling and overhauling the Navy's nuclear powered
aircraft carriers, and one of only two shipyards capable of building the
Navy's nuclear powered submarines.
With the merger of Tenneco Energy and El Paso, you will have an investment
in one of the nation's largest natural gas companies, with coast-to-coast
access to all of the nation's major markets, critical mass in non-regulated
operations and an expanded international presence.
The purpose of the Special Meeting is to approve and adopt the definitive
agreements providing for the Merger and the Spin-Offs and to approve certain
related actions. The Merger and the Spin-Offs are distinct parts of one
combined Transaction that you are being asked to approve as a whole. Please
read carefully the enclosed Joint Proxy Statement--Prospectus for a more
complete description of the terms of the proposed transaction.
This is the key event in the five-year long transformation of Tenneco from
an unfocused, slow growth conglomerate into a set of highly focused businesses
with substantial prospects for growth and value creation.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the enclosed proxy card and return it as promptly as possible in the
enclosed envelope. If you attend the Special Meeting in person, you may, if
you wish, vote personally even if you have previously returned your proxy.
I appreciate your support in this important event.
Sincerely,
/s/ Dana G. Mead
Dana G. Mead
Chairman and Chief Executive Officer
<PAGE>
PRELIMINARY COPIES - SUBJECT TO COMPLETION - NOVEMBER 1, 1996
TENNECO INC.
1275 KING STREET
GREENWICH, CONNECTICUT 06831
(203) 863-1000
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 10, 1996
TO THE STOCKHOLDERS OF TENNECO INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Tenneco
Inc., a Delaware corporation ("Tenneco"), will be held on December 10, 1996 at
10:00 a.m., local time (EST), at Tenneco's executive offices at 1275 King
Street, Greenwich, Connecticut, for the following purposes:
I. To consider and vote upon a single, unified proposal relating to the
proposed reorganization of Tenneco (the "Transaction"):
A. to approve and adopt the Distribution Agreement, dated as of November
1, 1996, as such may be amended, supplemented or modified from time to time
(the "Distribution Agreement"), among Tenneco, New Tenneco Inc., a Delaware
corporation and newly formed wholly owned subsidiary of Tenneco ("New
Tenneco"), and Newport News Shipbuilding Inc., a Delaware corporation
(formerly known as Tenneco InterAmerica Inc.) and wholly owned subsidiary
of Tenneco ("Newport News"), pursuant to which (i) Tenneco and its
subsidiaries will undertake various intercompany transfers and
distributions designed to restructure, divide and separate their existing
businesses and assets so that the assets, liabilities and operations of (A)
their automotive parts, packaging and administrative services businesses
are owned and operated by New Tenneco, and (B) their shipbuilding business
are owned and operated by Newport News, and (ii) Tenneco will subsequently
distribute (the "Distributions") pro rata to holders of Tenneco common
stock, par value $5.00 per share (the "Tenneco Common Stock"), all of the
outstanding common stock, $.01 par value per share, of New Tenneco and all
of the outstanding common stock, $.01 par value per share, of Newport News;
B. to approve and adopt the Amended and Restated Agreement and Plan of
Merger, dated as of June 19, 1996, as such may be amended, supplemented or
modified from time to time (the "Merger Agreement"), among El Paso Natural
Gas Company, a Delaware corporation ("El Paso"), El Paso Merger Company, a
Delaware corporation and an indirect wholly owned subsidiary of El Paso
("El Paso Subsidiary"), and Tenneco pursuant to which (i) El Paso
Subsidiary will be merged with and into Tenneco (the "Merger"), which will
then (as a result of the Distributions) consist only of Tenneco's remaining
active businesses, including the transportation and marketing of natural
gas, and its discontinued operations, and (ii) shares of Tenneco stock
(other than certain preferred shares held by holders entitled to demand and
who properly demand appraisal of such shares and shares of one or more new
series of Tenneco junior preferred stock to be issued prior to the Merger)
will be converted into the right to receive shares of El Paso common stock,
par value $3.00 per share, and possibly, in the case of holders of Tenneco
Common Stock, depositary shares representing interests in shares of a new
series of El Paso preferred stock, pursuant to formulas set forth in the
Merger Agreement and described more fully in the Joint Proxy Statement-
Prospectus that accompanies this Notice;
C. to approve the transactions contemplated by the Merger Agreement and
the Distribution Agreement; and
D. to approve an amendment (the "Charter Amendment") to the Certificate
of Incorporation of Tenneco, as amended, which will eliminate the rights,
powers and preferences of the junior preferred stock of Tenneco specified
therein.
<PAGE>
II. To transact such other business, including, without limitation, the
adjournment of the Special Meeting (including an adjournment of the Special
Meeting to obtain a quorum, solicit additional votes in favor of proposal I
and/or allow for the fulfillment of certain conditions precedent to the
Transaction), as may properly come before the Special Meeting or any
adjournments or postponements thereof.
As described more fully in the accompanying Joint Proxy Statement-
Prospectus, in the Merger Tenneco stockholders would receive El Paso equity
securities valued at approximately $4.35 per share of Tenneco Common Stock
(based on recent trading prices for the El Paso Common Stock), $115 per share
of Tenneco Cumulative $7.40 Preferred Stock and $115 per share of Tenneco
$4.50 Cumulative Preferred Stock. This would result in approximately 34% of
the El Paso Common Stock being held by former Tenneco stockholders immediately
after the Merger (based on assumptions described in the accompanying Joint
Proxy Statement-Prospectus).
The Distributions, Merger and Charter Amendment will each be voted upon
together as part of the Transaction and will not be effected unless the
Transaction is approved at the Special Meeting (although Tenneco may elect
subsequently to proceed with one or more of the transactions included in the
Transaction which do not require stockholder approval if the Transaction is
not approved).
The Board of Directors of Tenneco has fixed the close of business on
November 6, 1996 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting and any adjournments
or postponements thereof. A list of such stockholders will be available for
examination at the offices of Tenneco, located at 1275 King Street, Greenwich,
Connecticut, for a period of at least ten days prior to the Special Meeting.
A proxy and a Joint Proxy Statement-Prospectus (including as appendices
Information Statements regarding New Tenneco and Newport News) containing more
detailed information with respect to the matters to be considered at the
Special Meeting accompany this notice. A copy of the Distribution Agreement
and Merger Agreement in effect as of the date hereof are attached to the Joint
Proxy Statement-Prospectus as Appendices A and B, respectively.
By Order of the Board of Directors,
Karl A. Stewart
Secretary
Greenwich, Connecticut
November 6, 1996
IMPORTANT
All stockholders are cordially invited to attend the Special Meeting in
person.
Whether or not you plan to attend the Special Meeting in person, in order to
assure your representation at the meeting, you are urged to complete, sign and
date the enclosed proxy card, which is being solicited by the Board of
Directors, and promptly return it in the self-addressed return envelope
enclosed for that purpose. The envelope requires no postage if mailed in the
United States. Any stockholder who signs and sends in a proxy card pursuant
hereto may revoke it at any time prior to the vote at the Special Meeting by
following the procedures set forth in the accompanying Joint Proxy Statement--
Prospectus.
DO NOT SEND ANY STOCK
CERTIFICATES AT THIS TIME.
<PAGE>
PRELIMINARY COPIES - SUBJECT TO COMPLETION - NOVEMBER 1, 1996
[LETTERHEAD OF EL PASO NATURAL GAS COMPANY APPEARS HERE]
, 1996
To the Stockholders of El Paso Natural Gas Company:
You are cordially invited to attend a Special Meeting of Stockholders of El
Paso Natural Gas Company ("El Paso") to be held on Monday, December 9, 1996 at
10:00 a.m. local time (MST) at The Sheraton Crescent Hotel, 2620 West Dunlap
Avenue, Phoenix, Arizona. At this important meeting, you will be asked to
approve the issuance by El Paso (the "Stock Issuance") of up to 23,894,862
shares of El Paso's common stock, par value $3.00 per share (the "El Paso
Common Stock"). The El Paso Common Stock will be issued in connection with the
transactions contemplated by the Amended and Restated Agreement and Plan of
Merger, dated as of June 19, 1996, as such may be amended from time to time
(the "Merger Agreement"), among El Paso, El Paso Merger Company, and Tenneco
Inc. ("Tenneco"). Pursuant to the Merger Agreement, Tenneco will distribute to
its common stockholders its automotive/packaging and shipbuilding businesses.
Following these distributions, an indirect wholly owned subsidiary of El Paso
will merge (the "Merger") with Tenneco, which at that time will consist of
Tenneco's remaining active and discontinued operations and businesses,
including the transportation and marketing of natural gas. As a result of the
Merger, El Paso will own 100% of the common equity and approximately 75% of
the combined equity value of Tenneco.
The consideration to be paid by El Paso in the Merger consists of (i) the
retention of approximately $2.65 billion of debt and preferred stock
obligations by Tenneco following the Merger, subject to certain adjustments,
(ii) the retention of liabilities related to certain discontinued businesses
of Tenneco estimated by El Paso at approximately $600 million, and (iii) the
issuance of El Paso equity securities valued at approximately $912 million
(based on a closing sales on the NYSE of $48.50 per share of El Paso Common
Stock on October 31, 1996, subject to the formulas set forth in the Merger
Agreement.
If the Stock Issuance is approved by El Paso's stockholders, existing common
stockholders and preferred stockholders of Tenneco (other than the holders of
one or more new series of junior preferred stock of Tenneco to be issued prior
to the Merger) will receive in the Merger on a tax-free basis shares of El
Paso Common Stock in exchange for their shares of Tenneco stock. If the Stock
Issuance is not approved by the stockholders of El Paso, the Merger is still
expected to be consummated, but existing common stockholders and preferred
stockholders of Tenneco (other than the holders of Tenneco junior preferred
stock issued prior to the Merger) will receive an aggregate of 7,000,000
shares of El Paso Common Stock plus depositary shares representing interests
in shares of a new series of preferred stock of El Paso.
The combination of El Paso and Tenneco's energy business will create one of
the nation's largest natural gas companies, with combined volumes of
approximately 18.4 billion cubic feet of gas per day, and will dramatically
expand the size and geographic scope of El Paso's operations. This transaction
will create a coast-to-coast pipeline system with access to all of the
nation's major markets and supply basins, providing diversification and
reducing El Paso's dependence on the California market, adding critical mass
to El Paso's expanding non-regulated operations, and positioning El Paso to
participate in the emerging deregulation of the United States electric
industry. In addition, the transaction will expand El Paso's international
operations and provide opportunities for further international growth.
Your Board of Directors has carefully considered the terms of the proposed
Merger and the effects of the Merger on the business and prospects of El Paso.
The investment banking firm of Donaldson, Lufkin & Jenrette has provided the
Board with an opinion, dated June 27, 1996, that, based upon the assumptions
and other matters set forth therein, the consideration to be paid by El Paso
pursuant to the Merger is fair to El Paso and its common stockholders from a
financial point of view.
<PAGE>
BASED ON THE FOREGOING, THE EL PASO BOARD HAS DETERMINED THAT THE MERGER IS
IN THE BEST INTERESTS OF EL PASO AND ITS STOCKHOLDERS. THE EL PASO BOARD HAS
APPROVED THE MERGER AND RECOMMENDS THAT STOCKHOLDERS APPROVE THE STOCK
ISSUANCE BY EXECUTING AND RETURNING THE ENCLOSED PROXY.
The enclosed Joint Proxy Statement-Prospectus contains detailed information
concerning the terms of the proposed transaction. WE URGE YOU TO READ THE
JOINT PROXY STATEMENT-PROSPECTUS CAREFULLY.
Whether or not you plan to attend the Special Meeting, please complete, sign
and date the enclosed proxy card and return it as promptly as possible in the
enclosed envelope. If you attend the Special Meeting in person, you may, if
you wish, vote personally on all matters brought before the Special Meeting
even if you have previously returned your proxy.
Your interest and participation are appreciated.
Sincerely,
/s/ William A. Wise
William A. Wise
Chairman of the Board
and Chief Executive Officer
<PAGE>
PRELIMINARY COPIES - SUBJECT TO COMPLETION - NOVEMBER 1, 1996
EL PASO NATURAL GAS COMPANY
ONE PAUL KAYSER CENTER
100 NORTH STANTON STREET
EL PASO, TEXAS 79901
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 9, 1996
TO THE STOCKHOLDERS OF EL PASO NATURAL GAS COMPANY:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of El Paso
Natural Gas Company, a Delaware corporation ("El Paso"), will be held on
December 9, 1996 at 10:00 a.m. local time (MST) at The Sheraton Crescent
Hotel, 2620 West Dunlap Avenue, Phoenix, Arizona for the following purposes:
1. To consider and vote upon the proposed issuance by El Paso (the "Stock
Issuance") of up to 23,894,862 shares of El Paso's common stock, par value
$3.00 per share (the "El Paso Common Stock"), or such greater number of
shares of El Paso Common Stock as may be required under the Merger
Agreement (as defined below), in connection with the transactions
contemplated by the Amended and Restated Agreement and Plan of Merger,
dated as of June 19, 1996, as such may be amended from time to time (the
"Merger Agreement"), among El Paso, El Paso Merger Company, a Delaware
corporation and an indirect wholly owned subsidiary of El Paso ("El Paso
Subsidiary"), and Tenneco Inc., a Delaware corporation ("Tenneco"),
pursuant to which El Paso Subsidiary will be merged with and into Tenneco
(the "Merger"); and
2. To transact such other business, including, without limitation, the
adjournment of the Special Meeting (including an adjournment of the Special
Meeting to obtain a quorum, to solicit additional votes in favor of
proposal 1 and/or to allow for the fulfillment of certain conditions
precedent to the Merger), as may properly come before the Special Meeting
or any adjournments or postponements thereof.
Under the rules of the New York Stock Exchange, Inc., on which the El Paso
Common Stock is listed, the Stock Issuance must be approved by the
stockholders of El Paso. If the Stock Issuance is approved by El Paso's
stockholders, common stockholders and preferred stockholders of Tenneco (other
than holders of one or more new series of Tenneco junior preferred stock to be
issued between the date hereof and the Merger) will receive in the Merger on a
tax-free basis shares of El Paso Common Stock in exchange for their shares of
Tenneco stock pursuant to formulas set forth in the Merger Agreement and
described more fully in the Joint Proxy Statement-Prospectus which accompanies
this Notice. If the Stock Issuance is not approved by the stockholders of El
Paso, the Merger is still expected to be consummated, but common stockholders
and preferred stockholders of Tenneco (other than holders of the new series of
Tenneco junior preferred stock) will receive an aggregate of 7,000,000 shares
of El Paso Common Stock plus depositary shares representing interests in
shares of a new series of preferred stock of El Paso, in each case pursuant to
formulas set forth in the Merger Agreement and described more fully in the
Joint Proxy Statement-Prospectus.
The Board of Directors of El Paso has fixed the close of business on
November 6, 1996 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting and any adjournments
or postponements thereof. A list of such stockholders will be available for
examination, during ordinary business hours, at the location of the Special
Meeting, for a period of at least ten days prior to the Special Meeting.
<PAGE>
A proxy card and a Joint Proxy Statement-Prospectus containing more detailed
information with respect to the matters to be considered at the Special
Meeting accompany this notice. Whether or not you plan to attend the Special
Meeting, please complete, date, sign and return the enclosed proxy card in
order for all of your shares of El Paso Common Stock to be voted by proxy. A
copy of the Merger Agreement in effect as of the date hereof is attached to
the Joint Proxy Statement-Prospectus as Appendix B.
By Order of the Board of Directors,
/s/ Stacy J. James
Stacy J. James
Corporate Secretary
El Paso, Texas
November 6, 1996
IMPORTANT
All stockholders are cordially invited to attend the
Special Meeting in person.
Whether or not you plan to attend the Special Meeting
in person, in order to assure your representation at the
meeting, you are urged to complete, sign and date the
enclosed proxy card, which is being solicited by the
Board of Directors, and promptly return it in the self-
addressed return envelope enclosed for that purpose. The
envelope requires no postage if mailed in the United
States. Any stockholder who signs and sends in a proxy
card pursuant hereto may revoke it at any time prior to
the vote at the Special Meeting by following the
procedures set forth in the accompanying Joint Proxy
Statement-Prospectus.
<PAGE>
PRELIMINARY COPIES - SUBJECT TO COMPLETION - NOVEMBER 1, 1996
TENNECO INC.
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 10, 1996
----------------
EL PASO NATURAL GAS COMPANY
PROXY STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 9, 1996
PROSPECTUS
----------------
This Joint Proxy Statement-Prospectus is being furnished to the stockholders
of Tenneco Inc., a Delaware corporation ("Tenneco"), and to the stockholders
of El Paso Natural Gas Company, a Delaware corporation ("El Paso"), in
connection with the solicitation of proxies by the Boards of Directors of
Tenneco and El Paso for use at the respective meetings of stockholders of
Tenneco and El Paso, and at any adjournments or postponements thereof
(respectively, the "Tenneco Special Meeting" and the "El Paso Special
Meeting").
The Tenneco Special Meeting will be held on December 10, 1996 at the time
and place and for the purposes specified in the accompanying Notice. See "THE
TENNECO SPECIAL MEETING." At the Tenneco Special Meeting, holders of record as
of the close of business on November 6, 1996 (the "Tenneco Record Date") of
the currently outstanding classes of Tenneco capital stock will, to the extent
and as described more fully herein, consider and vote upon:
(1) a single unified proposal relating to the proposed reorganization of
Tenneco (the "Transaction") to: (a) approve and adopt the Distribution
Agreement, dated as of November 1, 1996, as such may be amended,
supplemented or modified from time to time (the "Distribution Agreement"),
among Tenneco, New Tenneco Inc., a Delaware corporation and newly formed,
wholly owned subsidiary of Tenneco ("New Tenneco"), and Newport News
Shipbuilding Inc., a Delaware corporation and wholly owned subsidiary of
Tenneco ("Newport News"), pursuant to which, among other things, Tenneco
will spin-off (the "Distributions") to holders of common stock, par value
$5.00 per share, of Tenneco (the "Tenneco Common Stock") (i) New Tenneco,
which will hold the assets, liabilities and operations of Tenneco's
automotive parts, packaging and administrative services businesses, and
(ii) Newport News, which will hold the assets, liabilities and operations
of Tenneco's shipbuilding business; (b) approve and adopt the Amended and
Restated Agreement and Plan of Merger, dated as of June 19, 1996, as such
may be amended, supplemented or modified from time to time (the "Merger
Agreement"), among El Paso, El Paso Merger Company, an indirect wholly
owned subsidiary of El Paso ("El Paso Subsidiary"), and Tenneco, pursuant
to which (i) El Paso Subsidiary will be merged (the "Merger") with and into
Tenneco, and (ii) shares of Tenneco Stock (as defined) will be converted
into the right to receive El Paso equity securities pursuant to formulas
set forth in the Merger Agreement and more fully described herein; (c)
approve the transactions
(continued on next page)
----------------
THE NEW TENNECO INFORMATION STATEMENT AND THE NEWPORT NEWS INFORMATION
STATEMENT (EACH AS DEFINED) ARE ATTACHED HERETO AS APPENDICES C AND D. SEE
"RISK FACTORS" HEREIN, BEGINNING AT PAGE 42, FOR MATTERS THAT SHOULD BE
CONSIDERED WITH RESPECT TO THE TRANSACTION AND THE SECURITIES OF EL PASO, NEW
TENNECO AND NEWPORT NEWS ISSUABLE IN CONNECTION THEREWITH.
----------------
THE SECURITIES TO BE ISSUED IN THE DISTRIBUTIONS AND THE MERGER HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT-
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
THE DATE OF THIS JOINT PROXY STATEMENT-PROSPECTUS IS , 1996.
<PAGE>
(continued from front cover)
contemplated by the Merger Agreement and the Distribution Agreement; and
(d) approve an amendment (the "Charter Amendment") to Tenneco's Certificate
of Incorporation to eliminate the rights, powers and preferences of
Tenneco's junior preferred stock specified therein; and
(2) such other business, including, without limitation, the adjournment
of the meeting (including an adjournment to obtain a quorum, solicit
additional votes in favor of proposal (1) and/or allow for the fulfillment
of certain conditions precedent to the Transaction), as may properly come
before the Tenneco Special Meeting.
The El Paso Special Meeting will be held on December 9, 1996 at the time and
place and for the purposes specified in the accompanying Notice. See "THE EL
PASO SPECIAL MEETING." At the El Paso Special Meeting, holders of record as of
the close of business on November 6, 1996 (the "El Paso Record Date") of
outstanding shares of Common Stock, par value $3.00 per share, of El Paso (the
"El Paso Common Stock"), will consider and vote upon the proposed issuance by
El Paso (the "Stock Issuance") of up to 23,894,862 shares of El Paso Common
Stock or such greater number of shares as may be required in connection with
the transactions contemplated by the Merger Agreement.
In the Distributions, record holders of Tenneco Common Stock will receive
one share of New Tenneco common stock for each share of Tenneco Common Stock
held and one share of Newport News common stock for every five shares of
Tenneco Common Stock held, with cash in lieu of fractional shares. Application
has been made to list the New Tenneco common stock and Newport News common
stock on the New York Stock Exchange (the "NYSE"). See "THE DISTRIBUTIONS."
The Merger is expected to be consummated promptly following the
Distributions. At the time of the Merger, Tenneco will consist only of the
remaining assets, liabilities and operations of Tenneco and its subsidiaries
other than those of New Tenneco and Newport News, including the transmission
and marketing of natural gas. Tenneco will survive the Merger, with 100% of
its common equity and approximately 75% of its combined equity value at that
time held indirectly by El Paso (and the remainder held by the holders of one
or more new series of Tenneco junior preferred stock to be issued between the
date hereof and the Merger). See "THE NPS ISSUANCE." The Merger Agreement
provides for (i) the retention by Tenneco after the Merger of approximately
$2.65 billion of debt and preferred stock obligations, subject to certain
adjustments described herein, (ii) the retention by Tenneco after the Merger
of liabilities related to discontinued businesses of Tenneco (estimated by El
Paso to be approximately $600 million), and (iii) the issuance of El Paso
equity securities to holders of Tenneco Stock in the Merger valued at an
aggregate of $750 million (the "Equity Consideration"), subject to the effect
of a "collar" on the market price of El Paso Common Stock described below. See
"THE MERGER."
In all events, the holders of Tenneco's $7.40 Cumulative Preferred Stock, no
par value (the "$7.40 Preferred Stock"), and $4.50 Cumulative Preferred Stock,
no par value (the "$4.50 Preferred Stock," and, together with the $7.40
Preferred Stock, the "Tenneco Preferred Stock"), will be entitled to receive
in the Merger a number of shares of El Paso Common Stock having a value equal
to $115 (such value to be based on the closing price of El Paso Common Stock
on the NYSE on the day prior to the vote at the Tenneco Special Meeting,
hereinafter referred to as the "Pre-Meeting El Paso Common Price") for each
share of their Tenneco Preferred Stock. This will provide approximately $45.0
million and $92.5 million of the Equity Consideration to the holders of the
$7.40 Preferred Stock and $4.50 Preferred Stock, respectively (based on the
number of such shares outstanding on October 28, 1996). The Tenneco Common
Stock and Tenneco Preferred Stock are sometimes collectively referred to
herein as the "Tenneco Stock."
The balance of the Equity Consideration of approximately $612.5 million (or
$3.58 per share, based on the number of shares of Tenneco Common Stock
outstanding on October 28, 1996) will be allocated and paid to the holders of
Tenneco Common Stock in the Merger, subject to the effect of the collar on the
average market prices of El Paso Common Stock. Based on recent trading prices
(as described more fully herein), this collar would cause the total
consideration issuable to holders of Tenneco Common Stock in the Merger to
equal approximately $744 million (or $4.35 per share). The form of such
payment, however, will depend on whether the Stock Issuance is approved at the
El Paso Special Meeting.
If the Stock Issuance is approved, holders of Tenneco Common Stock will
receive only El Paso Common Stock in the Merger in respect of their shares.
The number of such shares of El Paso Common Stock will be equal, in the
aggregate, to the balance of the Equity Consideration of approximately $612.5
million, divided by the average of the per share closing prices on the NYSE of
El Paso Common Stock (the "Average El Paso Common Price," as described more
fully herein) during the period of 20 consecutive trading days ending two days
prior to the effective time of the Merger (the "Merger Effective Time"),
subject, however to a collar on that price of $31.3875 to $38.3625, inclusive
(the "Collar"). The Collar provides that if the Average El Paso Common Price
is greater than $38.3625, the number of shares of El Paso Common Stock issued
to holders of
2
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(continued from front cover)
Tenneco Common Stock will nonetheless be based on a price of $38.3625, and if
the Average El Paso Common Price is less than $31.3875, the number of shares
of El Paso Common Stock issued to holders of Tenneco Common Stock will
nonetheless be based on a price of $31.3875. If the Stock Issuance is approved
(based on various assumptions described more fully herein), holders of Tenneco
Common Stock will be entitled to receive between .114 (if the Average El Paso
Common Price is less than or equal to $31.3875) and .093 (if the Average El
Paso Common Price is greater than or equal to $38.3625) shares of El Paso
Common Stock per share of Tenneco Common Stock converted in the Merger, with a
market value that will depend on the market price of the El Paso Common Stock
on such date.
If the Stock Issuance is not approved, the Merger is still expected to be
consummated but El Paso will issue to the holders of Tenneco Stock 7,000,000
shares of El Paso Common Stock, with the balance of the equity consideration
to consist of depositary shares (the "El Paso Preferred Depositary Shares"),
each representing a one twenty-fifth fractional interest in a whole share of a
new series of El Paso voting preferred stock (the "El Paso Preferred Stock").
In such case, the holders of Tenneco Preferred Stock will receive shares of El
Paso Common Stock as described above, and holders of Tenneco Common Stock will
receive (i) a number of shares of El Paso Common Stock equal to 7,000,000 less
the number of such shares issued to holders of Tenneco Preferred Stock, and
(ii) El Paso Preferred Depositary Shares representing interests in that number
of shares of El Paso Preferred Stock which has an aggregate liquidation
preference equal to the value of the additional shares of El Paso Common Stock
that would have been issued to the holders of Tenneco Common Stock if the
Stock Issuance had been approved (such valuation being based on the Average El
Paso Common Price but not subject to the Collar). Each whole share of El Paso
Preferred Stock would entitle the holder thereof to 15 votes on each matter
submitted to a vote at any meeting of El Paso's stockholders, entitle the
holder to a liquidation preference of $1,000 (plus accrued and unpaid
dividends), bear dividends at a rate that would be adjustable quarterly in a
manner designed, to the extent practicable, to cause the market price of 25 El
Paso Preferred Depositary shares to equal $1,000 (subject to a minimum rate of
6% and a maximum rate of 10% per year) and be subject to redemption at the
liquidation preference of $1,000 (plus any accrued and unpaid dividends) at
any time after the fifth anniversary of the Merger. See "RISK FACTORS--Risks
Relating to the Transaction--No Current Market for El Paso Preferred
Depositary Shares" and "DESCRIPTION OF EL PASO PREFERRED STOCK AND DEPOSITARY
SHARES."
In any event, holders of Tenneco Stock will receive cash in lieu of
fractional shares, if any, in the Merger. Under Delaware law, holders of $4.50
Preferred Stock and, under certain circumstances, the Tenneco junior preferred
stock to be issued prior to the Merger, will have appraisal rights in
connection with the Merger, although holders of more than 75% of the $4.50
Preferred Stock have agreed to waive such rights pursuant to a Voting
Agreement and Irrevocable Proxy to be entered into with Tenneco. See "THE
TRANSACTION--Background of the Transaction" and "THE MERGER--Appraisal
Rights."
After giving effect to the Collar, holders of Tenneco Common Stock will
likely receive El Paso equity securities that have an aggregate market value
as of the Merger Effective Time which is more or less than $612.5 million if
the Average El Paso Common Price is above or below the Collar, respectively.
Furthermore, because the consideration to be received by Tenneco stockholders
will be fixed based upon the average of closing prices of the El Paso Common
Stock determined prior to the Merger Effective Time, the market value of such
consideration upon receipt may be more or less than such pre-Merger price or
prices. See "RISK FACTORS."
For the 20 trading days ended October 28, 1996, the average per share
closing price of the El Paso Common Stock on the NYSE was $46.6000. Based on
that price and the number of shares outstanding on October 28, 1996 (and
assuming approval of the Stock Issuance), holders of Tenneco Stock would
receive shares of El Paso Common Stock in the Merger representing
approximately 34% of the total number of such shares outstanding immediately
thereafter. For a table showing how changes in the Average El Paso Common
Price impact the number and value of shares to be received by holders of
Tenneco Common Stock in the Merger, and how changes in the Pre-Meeting El Paso
Common Price effect the number of shares to be received by holders of Tenneco
Preferred Stock, see "THE TRANSACTION--Consideration to Tenneco Stockholders."
Beginning on November 6, 1996, Tenneco stockholders can obtain the average per
share closing price of the El Paso Common Stock on the NYSE for the most
recent 20 trading-day period by calling El Paso's transfer agent, The First
National Bank of Boston, at 1-800-736-3001.
For a more complete description of the terms of the Transaction, see "THE
TRANSACTION," "THE NPS ISSUANCE," "THE DISTRIBUTIONS," "DEBT AND CASH
REALIGNMENT," "CORPORATE RESTRUCTURING TRANSACTIONS," "THE MERGER" and "THE
CHARTER AMENDMENT."
This Joint Proxy Statement-Prospectus also constitutes a prospectus of El
Paso with respect to the shares of El Paso Common Stock and the El Paso
Preferred Depositary Shares (including the underlying El Paso Preferred Stock)
issuable upon consummation of the Merger. El Paso Common Stock is currently
listed and traded on the NYSE and application has been made to list on the
NYSE the additional shares of El Paso Common Stock and the El Paso Preferred
Depositary Shares, if any, issuable in the Merger.
3
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This Joint Proxy Statement-Prospectus, the attached Notices of Special
Meeting, and the enclosed proxy are first being mailed to Tenneco and El Paso
stockholders on or about November 6, 1996.
AVAILABLE INFORMATION
El Paso has filed with the Securities and Exchange Commission (the "SEC") a
registration statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
El Paso Common Stock, El Paso Preferred Stock and El Paso Preferred Depositary
Shares issuable in connection with the Merger. As permitted by the rules and
regulations of the SEC, this Joint Proxy Statement-Prospectus does not contain
all of the information set forth in the Registration Statement or the exhibits
thereto. For further information, reference is hereby made to such
Registration Statement and exhibits. Statements contained herein concerning
provisions of documents are necessarily summaries of the documents, and each
statement is qualified in its entirety by reference to the copy of the
applicable document filed with the SEC. All information concerning El Paso and
its affiliates (including El Paso Subsidiary) contained or incorporated by
reference in this Joint Proxy Statement-Prospectus has been furnished by El
Paso, and all information concerning Tenneco, New Tenneco, Newport News and
their respective affiliates contained or incorporated by reference in this
Joint Proxy Statement-Prospectus has been furnished by Tenneco.
A Registration Statement on Form 10 has been filed by each of New Tenneco
(the "New Tenneco Registration Statement") and Newport News (the "Newport News
Registration Statement") to register their respective shares of common stock
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The information statement regarding New Tenneco filed as part of the New
Tenneco Registration Statement (the "New Tenneco Information Statement") is
attached hereto as Appendix C. The information statement regarding Newport
News filed as part of the Newport News Registration Statement (the "Newport
News Information Statement") is attached hereto as Appendix D.
El Paso and Tenneco are (and, upon the effectiveness of the New Tenneco
Registration Statement and Newport News Registration Statement, New Tenneco
and Newport News will be) subject to the informational requirements of the
Exchange Act, and, in accordance therewith, file (or will file) reports, proxy
statements and other information with the SEC.
The Registration Statement and exhibits thereto filed by El Paso, and the
reports, proxy statements, and other information filed with the SEC by El
Paso, Tenneco, New Tenneco and Newport News can be inspected and copied at the
public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W. Washington, DC 20549, and at the SEC's Regional Offices located
at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials may be obtained by mail, at prescribed rates, from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549 or accessed electronically on the SEC's Web site at
(http://www.sec.gov). The El Paso Common Stock, Tenneco Common Stock and $7.40
Preferred Stock are listed on the NYSE, and reports and other information
concerning El Paso and Tenneco can be inspected at the NYSE, 20 Broad Street,
New York, New York 10005.
----------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS JOINT PROXY
STATEMENT-PROSPECTUS (WHICH INCLUDES THE MATERIALS APPENDED HERETO) OTHER THAN
THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY EL PASO, EL PASO SUBSIDIARY, TENNECO, NEW
TENNECO OR NEWPORT NEWS. THIS JOINT PROXY STATEMENT-PROSPECTUS (WHICH INCLUDES
THE MATERIALS APPENDED HERETO) DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED HEREBY, NOR DOES
IT CONSTITUTE THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN
OFFER OR PROXY SOLICITATION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT-PROSPECTUS (WHICH INCLUDES THE MATERIALS APPENDED HERETO) NOR ANY
DISTRIBUTION OF SECURITIES AS CONTEMPLATED HEREIN SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF EL PASO, EL PASO SUBSIDIARY, TENNECO, NEW TENNECO OR NEWPORT NEWS
SINCE THE DATE HEREOF, OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
4
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
THIS JOINT PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WITH RESPECT TO EL PASO AND TENNECO THAT ARE NOT PRESENTED HEREIN OR DELIVERED
HEREWITH. DOCUMENTS RELATING TO EL PASO (EXCLUDING EXHIBITS THERETO, UNLESS
SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS)
ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS JOINT PROXY STATEMENT-PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL
REQUEST TO NORMA F. DUNN, VICE PRESIDENT, INVESTOR AND PUBLIC RELATIONS, EL
PASO NATURAL GAS COMPANY, ONE PAUL KAYSER CENTER, 100 NORTH STANTON STREET, EL
PASO, TEXAS 79901, TELEPHONE (915) 541-2600. DOCUMENTS RELATING TO TENNECO
(EXCLUDING EXHIBITS THERETO, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT-PROSPECTUS
IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO KARL A. STEWART, VICE PRESIDENT
AND SECRETARY, TENNECO INC., 1275 KING STREET, GREENWICH, CONNECTICUT 06831,
TELEPHONE (203) 863-1000. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS
PRIOR TO THE EL PASO SPECIAL MEETING, ANY REQUEST SHOULD BE MADE BY DECEMBER 2,
1996. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE TENNECO
SPECIAL MEETING, ANY REQUEST SHOULD BE MADE BY DECEMBER 3, 1996.
The following documents filed by El Paso with the SEC (File No. 1-2700) are
incorporated by reference into this Joint Proxy Statement-Prospectus:
1.El Paso's Annual Report on Form 10-K for the fiscal year ended December
31, 1995 (the "El Paso Form 10-K");
2. El Paso's Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996, as amended by El Paso's Form 10-Q/A filed May 15, 1996, and
for the quarterly period ended June 30, 1996;
3.The portions of El Paso's definitive Proxy Statement for the Annual
Meeting of Stockholders held on April 30, 1996 that have been incorporated
by reference into the El Paso Form 10-K;
4. El Paso's Current Reports on Form 8-K dated May 2, 1996, June 28, 1996
and October 22, 1996; and
5.El Paso's Registration Statement on Form 8-A filed with respect to the
El Paso Common Stock, as amended to date.
The following documents filed by Tenneco with the SEC (File No. 1-9864) are
incorporated by reference into this Joint Proxy Statement-Prospectus:
1.Tenneco's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, as amended by Tenneco's Form 10-K/A dated August 27, 1996 (the
"Tenneco Form 10-K");
2. Tenneco's Quarterly Reports on Form 10-Q for the quarterly periods
ended March 31, 1996 and June 30, 1996;
3. The portions of Tenneco's definitive Proxy Statement for the Annual
Meeting of Stockholders held on May 14, 1996 that have been incorporated by
reference into the Tenneco Form 10-K; and
4. Tenneco's Current Reports on Form 8-K dated November 17, 1995,
February 2, 1996, March 21, 1996, June 6, 1996 and June 19, 1996.
All documents filed by El Paso or Tenneco pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the
date of the Tenneco Special Meeting and El Paso Special Meeting shall be deemed
to be incorporated by reference herein and to be part hereof from the date any
such document is filed.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Joint Proxy Statement-Prospectus to the extent that a
statement contained herein, or in any other subsequently filed document that is
also incorporated or 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
this Joint Proxy Statement-Prospectus. Subject to the foregoing, all
information appearing in this Joint Proxy Statement-Prospectus is qualified in
its entirety by the information appearing in the documents incorporated herein
by reference.
5
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TABLE OF CONTENTS
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AVAILABLE INFORMATION..................................................... 4
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE......................... 5
TABLE OF CONTENTS......................................................... 6
SUMMARY OF JOINT PROXY STATEMENT-PROSPECTUS .............................. 9
RECENT DEVELOPMENTS....................................................... 39
RISK FACTORS.............................................................. 42
Risks Relating to the Transaction....................................... 42
Risks Relating to El Paso and Tenneco Energy............................ 47
Risks Relating to New Tenneco........................................... 53
Risks Relating to Newport News.......................................... 53
Safe Harbor Disclosure: Forward-Looking Statements and Associated Risks. 59
THE TENNECO SPECIAL MEETING............................................... 60
General................................................................. 60
Purpose of the Tenneco Special Meeting.................................. 60
Record Date; Shares Entitled to Vote; Quorum............................ 60
Votes Required; Effect of Abstentions and Non-Votes..................... 60
Voting and Revocation of Proxies........................................ 61
Solicitation of Proxies................................................. 62
Appraisal Rights........................................................ 62
Adjournment of the Tenneco Special Meeting.............................. 62
Tenneco Junior Preferred Stockholders Written Consent................... 62
THE EL PASO SPECIAL MEETING............................................... 62
General................................................................. 62
Purpose of the El Paso Special Meeting.................................. 63
Record Date; Shares Entitled to Vote; Quorum............................ 63
Votes Required; Effect of Abstentions and Non-Votes..................... 63
Voting and Revocation of Proxies........................................ 64
Solicitation of Proxies................................................. 64
Adjournment of the El Paso Special Meeting.............................. 64
THE TRANSACTION........................................................... 65
Structure of the Transaction............................................ 65
Consideration to Tenneco Stockholders................................... 65
Background of the Transaction........................................... 68
Reasons for the Transaction; Recommendations of the Boards of Directors. 70
Opinions of Financial Advisors.......................................... 74
Interests of Certain Persons in the Transaction......................... 81
Expenses................................................................ 82
THE DISTRIBUTIONS......................................................... 83
Manner of Distribution.................................................. 83
Certain Other Pre-Distribution Transactions............................. 84
Relationship Among Tenneco, New Tenneco and Newport News After the
Distributions.......................................................... 84
Conditions to Consummation of the Distributions......................... 89
Amendment or Termination of the Distributions........................... 89
Trading of New Tenneco Common Stock and Newport News Common Stock....... 89
The Industrial Distribution............................................. 90
The Shipbuilding Distribution........................................... 105
THE NPS ISSUANCE ......................................................... 116
DEBT AND CASH REALIGNMENT................................................. 116
Debt Realignment........................................................ 117
Capital Expenditure Adjustment.......................................... 119
Cash Realignment........................................................ 119
CORPORATE RESTRUCTURING TRANSACTIONS...................................... 119
THE MERGER................................................................ 121
Closing of the Merger................................................... 121
</TABLE>
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Conversion of Shares.................................................... 121
Final Dividends on Tenneco Stock........................................ 124
Effects of the Merger................................................... 124
Certain Other Pre-Merger Transactions................................... 125
No Solicitation......................................................... 125
Certain Covenants....................................................... 126
Employee Benefits....................................................... 128
Representations and Warranties.......................................... 129
Conditions Precedent.................................................... 129
Amendment or Termination of the Merger Agreement........................ 131
Waiver.................................................................. 132
Termination Fee ........................................................ 132
Consulting Arrangement.................................................. 132
Regulatory Approvals.................................................... 132
Appraisal Rights........................................................ 133
Restrictions on Resale of El Paso Stock................................. 136
THE CHARTER AMENDMENT..................................................... 136
DESCRIPTION OF THE TENNECO JUNIOR PREFERRED STOCK......................... 137
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 138
Tax Rulings and Opinions................................................ 139
The Distributions....................................................... 141
The Merger.............................................................. 142
Possible Future Legislation............................................. 143
Back-up Withholding Requirements........................................ 145
SELECTED FINANCIAL DATA................................................... 146
Tenneco and Consolidated Subsidiaries Consolidated Selected Financial
Information............................................................ 146
El Paso Selected Financial Data......................................... 148
Tenneco Energy Combined Selected Financial Data......................... 149
New Tenneco Combined Selected Financial Data............................ 150
Newport News Combined Selected Financial Data........................... 151
INFORMATION CONCERNING TENNECO............................................ 152
INFORMATION CONCERNING THE ENERGY BUSINESS TO BE MERGED................... 152
General................................................................. 152
Interstate Pipeline Operations.......................................... 152
Gas Marketing, Intrastate Pipelines and Related Services................ 157
International, Power Generation and Ventures............................ 157
Discontinued and Other Operations....................................... 158
Employees............................................................... 158
Properties.............................................................. 158
Operation of the Energy Business After the Merger....................... 159
Environmental Matters................................................... 159
Legal Proceedings....................................................... 162
Tenneco Credit Facility................................................. 162
Management After the Transaction........................................ 163
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Energy Business................................... 164
UNAUDITED PRO FORMA FINANCIAL INFORMATION................................. 173
Unaudited Pro Forma Combined Financial Statements of El Paso and Tenneco
Energy................................................................. 173
Unaudited Pro Forma Combined Financial Statements of New Tenneco........ 190
Unaudited Pro Forma Combined Financial Statements of Newport News....... 196
</TABLE>
7
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COMPARISON OF RIGHTS OF STOCKHOLDERS OF TENNECO, NEW TENNECO AND
NEWPORT NEWS....................................................... 200
INFORMATION CONCERNING EL PASO...................................... 205
DESCRIPTION OF EL PASO PREFERRED STOCK AND DEPOSITARY SHARES........ 205
COMPARISON OF RIGHTS OF STOCKHOLDERS OF TENNECO AND EL PASO......... 209
BENEFICIAL OWNERSHIP................................................ 219
ACCOUNTING TREATMENT................................................ 220
LEGAL MATTERS....................................................... 220
EXPERTS............................................................. 220
STOCKHOLDER PROPOSALS............................................... 221
INDEX OF CERTAIN DEFINED TERMS...................................... 222
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE................. F-1
Distribution Agreement.............................................. Appendix A
Merger Agreement.................................................... Appendix B
New Tenneco Information Statement................................... Appendix C
Newport News Information Statement.................................. Appendix D
Appraisal Rights.................................................... Appendix E
Lazard Opinion...................................................... Appendix F
DLJ Opinion......................................................... Appendix G
The Charter Amendment............................................... Appendix H
</TABLE>
8
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SUMMARY OF JOINT PROXY STATEMENT-PROSPECTUS
The following summary is not intended to be complete and is qualified in its
entirety by reference to the more detailed information included or
incorporated by reference in this Joint Proxy Statement-Prospectus, and the
Appendices hereto, including, but not limited to the Distribution Agreement
and the Merger Agreement (as currently in effect) set forth as Appendix A and
Appendix B hereto, respectively. Stockholders are urged to read carefully this
Joint Proxy Statement-Prospectus, the Appendices hereto and the documents
incorporated by reference in their entirety. Unless the context otherwise
requires, as used herein (i) the term "New Tenneco" refers to (A) New Tenneco
Inc. (to be renamed Tenneco Inc. upon consummation of the Merger) and its
subsidiaries, for all periods after consummation of the Distributions, and (B)
the entities through which Tenneco and its subsidiaries operated the
Industrial Business (as defined), for all periods prior to consummation of the
Distributions, and (ii) the term "Newport News" refers to (A) Newport News
Shipbuilding Inc. (formerly known as Tenneco InterAmerica Inc.) and its
subsidiaries (including Newport News Shipbuilding and Dry Dock Company), for
periods after consummation of the Distributions, and (B) Newport News
Shipbuilding and Dry Dock Company and its subsidiaries, through which Tenneco
and its subsidiaries operated the Shipbuilding Business (as defined), for
periods prior to consummation of the Distributions. Capitalized terms that are
used but not defined in this summary are defined elsewhere in this Joint Proxy
Statement-Prospectus. See "INDEX OF CERTAIN DEFINED TERMS."
THE COMPANIES
EL PASO
El Paso is a Delaware corporation which was incorporated in 1928. In
recognition of changes in the natural gas industry and the manner in which El
Paso manages its businesses, and in order to facilitate a more detailed
understanding of the various activities in which it engages, El Paso began
doing business under the name El Paso Energy Corporation (effective April 22,
1996) and has segregated its business activities into three business segments:
(i) natural gas transmission, (ii) field and merchant services, and (iii)
corporate and other.
The natural gas transmission segment includes one of the nation's largest
mainline natural gas transmission systems, connecting natural gas supply
regions in New Mexico, Texas, Oklahoma, and Colorado to markets in California,
Nevada, Arizona, New Mexico, Texas, and northern Mexico. The transmission
system consists of approximately 10,000 miles of pipeline and is connected to
one of the most prolific supply basins in the nation, the San Juan Basin of
northern New Mexico and southern Colorado. The field and merchant services
segment provides field services, including gathering, products extraction,
dehydration, purification and compression. In addition, the field and merchant
services segment purchases, markets and trades natural gas, natural gas
liquids, power and other energy commodities, and provides risk management
activities associated with these commodities. This segment has approximately
7,900 miles of gathering lines and 64,000 horsepower of compression located in
the San Juan, Anadarko, and Permian Basins, and in East Texas and Louisiana.
The corporate and other segment includes El Paso Energy International, through
which El Paso conducts its international activities, and other corporate
activities.
El Paso's principal executive offices are located at One Paul Kayser Center,
100 North Stanton Street, El Paso, Texas 79901, and its telephone number at
that address is (915) 541-2600. For further information concerning
El Paso, see "--Summary Historical and Pro Forma Combined Consolidated
Financial Data of El Paso," "AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE," "SELECTED FINANCIAL DATA--El Paso Selected
Financial Data," and "INFORMATION CONCERNING EL PASO."
EL PASO SUBSIDIARY
El Paso Subsidiary, a direct wholly owned subsidiary of El Paso Energy
Corporation and an indirect wholly owned subsidiary of El Paso, was formed by
El Paso solely for the purpose of effecting the Merger. El Paso Subsidiary's
principal executive offices are located at One Paul Kayser Center, 100 North
Stanton Street, El Paso, Texas 79901 and its telephone number at that location
is (915) 541-2600.
9
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TENNECO
Tenneco is a diversified industrial company conducting all of its operations
through its subsidiaries. The major businesses of Tenneco presently consist of
(i) interstate and intrastate transportation and marketing of natural gas, (ii)
the manufacture and sale of automotive exhaust and ride control systems, (iii)
the manufacture and sale of packaging materials, cartons, containers and
specialty packaging products for consumer, institutional and industrial
markets, and (iv) the design, construction, repair and overhauling of ships
(primarily nuclear-powered aircraft carriers and submarines for the United
States Navy).
In 1987, Tenneco was incorporated in Delaware and acquired all of the
outstanding shares of Tennessee Gas Pipeline Company (which at the time was
named Tenneco Inc.). Tenneco's principal executive offices are located at 1275
King Street, Greenwich, Connecticut 06831 and its telephone number at that
address is (203) 863-1000. For further information concerning Tenneco, see "--
Summary Consolidated Financial Data of Tenneco," "AVAILABLE INFORMATION,"
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE," "SELECTED FINANCIAL DATA--
Tenneco and Consolidated Subsidiaries Consolidated Selected Financial
Information," and "INFORMATION CONCERNING TENNECO."
TENNECO ENERGY BUSINESS TO BE MERGED
General. Under the terms of the Merger, El Paso Subsidiary will be merged
with and into Tenneco, which will then consist only of the assets, liabilities
and operations of Tenneco and its subsidiaries other than those of New Tenneco
or Newport News, including the transmission and marketing of natural gas
(collectively, the "Energy Business" or "Tenneco Energy"). Following the
Merger, Tenneco will change its name to "El Paso Tennessee Pipeline Co."
The Energy Business as presently conducted consists principally of the
interstate transportation of natural gas, as well as certain other related
business operations not generally subject to regulation by the Federal Energy
Regulatory Commission (the "FERC"), such as gas marketing, intrastate pipeline
operations, international pipelines and power generation, domestic power
generation operations and oil and gas ventures. The Energy Business also
includes certain assets and liabilities of Tenneco and its subsidiaries that do
not relate to the Industrial Business or the Shipbuilding Business, including
those business operations that have been discontinued or sold. See "RISK
FACTORS--Risks Relating to El Paso and Tenneco Energy--Liabilities of Tenneco
Energy for Discontinued Businesses."
Tenneco Energy's principal interstate pipeline operations consist of the
pipeline systems of wholly owned subsidiaries Tennessee Gas Pipeline Company
("TGP"), Midwestern Gas Transmission Company and East Tennessee Natural Gas
Company. The interstate systems, which include approximately 16,300 miles of
pipeline, gathering lines and sales laterals, serve markets located primarily
in the Eastern United States. Tenneco Energy Resources Corporation, a wholly
owned subsidiary of Tenneco, and its subsidiaries operate approximately 1,300
miles of intrastate pipelines serving the Texas Gulf Coast and West Texas
markets. Its businesses include buying, selling, storing, processing and
transporting natural gas and price risk management services. Also, Tenneco
Energy is engaged in various international energy-related projects, invests in
oil and gas properties and finances independent producers engaged in
exploration and development projects. See "--Summary Historical and Pro Forma
Combined Consolidated Financial Data of El Paso," "--Summary Combined Financial
Data of Tenneco Energy," "SELECTED FINANCIAL DATA--Tenneco Energy Combined
Selected Financial Data," and "INFORMATION CONCERNING THE ENERGY BUSINESS TO BE
MERGED."
Operation After the Merger. El Paso is currently engaged in a comprehensive
review of the business and operations of the Energy Business. Following the
completion of such review and consummation of the Merger, El Paso plans to
integrate, for the most part, the operations of the Energy Business with those
of El Paso in order to increase operating and administrative efficiency through
consolidation and reengineering of facilities,
10
<PAGE>
workforce reductions and coordination of purchasing, sales and marketing
activities. El Paso anticipates that the complementary interstate and
intrastate pipeline operations and gas marketing activities of El Paso and the
Energy Business should provide the combined company with increased operating
flexibility and access to additional customers and markets. See "RISK FACTORS--
Risks Relating to El Paso and Tenneco Energy--Uncertainty Surrounding
Integration of Operations."
El Paso intends to undertake various transactions with respect to the Energy
Business (the "Refinancing Transactions") in order to reduce the amount of
Tenneco debt that would otherwise be outstanding after consummation of the
Transaction including (i) the monetization of certain assets of the Energy
Business for anticipated net proceeds of approximately $500 million, and (ii) a
public equity offering by El Paso of approximately $200 million and the use of
the net proceeds thereof to purchase a subordinated series of preferred stock
(the "Subordinated Tenneco Preferred Stock") from Tenneco. In addition, as
market conditions allow, El Paso may refinance Tenneco's remaining post-
Transaction debt through the sale of senior debt of Tenneco and/or TGP. See
"RISK FACTORS--Risks Relating to El Paso and Tenneco Energy--Consummation of
Refinancing Transactions," "INFORMATION CONCERNING THE ENERGY BUSINESS TO BE
MERGED--Operation of the Energy Business After the Merger" and "UNAUDITED PRO
FORMA FINANCIAL INFORMATION--Unaudited Pro Forma Combined Financial Statements
of El Paso and Tenneco Energy."
El Paso has reached, contingent upon consummation of the Merger and various
other conditions (including approval by the FERC), a preliminary understanding
with certain of TGP's customers regarding the customers' challenges to TGP's
ability to recover various gas supply realignment ("GSR") and other costs from
its customers (the "El Paso Preliminary GSR Understanding"). See "INFORMATION
CONCERNING THE ENERGY BUSINESS TO BE MERGED--Operation of the Energy Business
After the Merger--Proposed Post-Merger Resolution of GSR Transition Cost
Disputes."
NEW TENNECO
New Tenneco is a newly formed Delaware corporation which, upon completion of
the Transaction, will be renamed "Tenneco Inc." and will be an independent,
publicly held company. New Tenneco will own and operate, through its direct and
indirect subsidiaries, the assets of, and will assume the liabilities
associated with, Tenneco's automotive parts, packaging and administrative
services businesses (collectively, the "Industrial Business"). New Tenneco's
principal executive offices will be located at 1275 King Street, Greenwich,
Connecticut 06831, and its telephone number at that address will be
(203) 863-1000.
The automotive business of Tenneco ("Tenneco Automotive") is one of the
world's leading manufacturers of automotive exhaust and ride control systems
for both the original equipment market and the replacement market, or
aftermarket. Tenneco Automotive manufactures and markets its automotive exhaust
systems primarily under the Walker(R) brand name and its ride control systems
primarily under the Monroe(R) brand name. The packaging business of Tenneco
("Tenneco Packaging") is among the world's leading and most diversified
packaging companies, manufacturing packaging products for consumer,
institutional and industrial markets. The paperboard business group
manufactures corrugated containers, folding cartons and containerboard, has a
joint venture in recycled paperboard, and offers high value-added products such
as enhanced graphics packaging and displays and kraft honeycomb products. Its
specialty products group produces disposable aluminum, foam and clear plastic
food containers, molded fiber and pressed paperboard products, as well as
polyethylene bags and industrial stretch wrap. Tenneco Packaging's consumer
products include such recognized brand names as Hefty(R), Baggies(R) and E-Z
Foil(R). Tenneco's administrative services operations design, implement and
administer shared administrative service programs for the Tenneco businesses as
well as, on an "as requested" basis, for former Tenneco business entities. See
"--Summary Historical and Pro Forma Combined Financial Data of New Tenneco,"
"SELECTED FINANCIAL DATA--New Tenneco Combined Selected Financial Data," and
the New Tenneco Information Statement attached hereto as Appendix C.
NEWPORT NEWS
Newport News (formerly known as Tenneco InterAmerica Inc.) was incorporated
in Delaware in 1965 and operates through its subsidiaries a shipyard with over
100 years of experience in the shipbuilding business. Upon
11
<PAGE>
consummation of the Transaction, Newport News will become an independent,
publicly held company that will own and operate, through its direct and
indirect subsidiaries, substantially all of the assets of, and will assume
substantially all of the liabilities associated with, Tenneco's shipbuilding
business (the "Shipbuilding Business"), which consists primarily of (i) the
design, construction, repair and overhauling of nuclear-powered aircraft
carriers and submarines for the United States Navy, (ii) the overhaul and
repair of U.S. Navy and commercial vessels, and (iii) the refueling of nuclear-
powered ships. Newport News' principal executive offices will be located at
4101 Washington Avenue, Newport News, Virginia 23607, and its telephone number
at that address will be (757) 380-2000.
Newport News believes it currently is (i) the only shipyard capable of
building the Navy's nuclear powered aircraft carriers, (ii) the only non-
government-owned shipyard capable of refueling and overhauling the Navy's
nuclear powered aircraft carriers, and (iii) one of only two shipyards capable
of building nuclear powered submarines. With over 100 years of experience,
Newport News has developed a preeminent reputation through the construction of
264 naval ships and 542 merchant vessels including aircraft carriers,
submarines, guided missile cruisers, cargo ships, passenger cruise liners,
tankers, large crude carriers, liquefied gas carriers and tug boats. In
addition to these major vessels, Newport News has built barges, caisson ships,
car floats (ferries) and pilot boats. See "--Summary Historical and Pro Forma
Combined Financial Data of Newport News," "SELECTED FINANCIAL DATA--Newport
News Combined Selected Financial Data," and the Newport News Information
Statement attached hereto as Appendix D.
THE TRANSACTION
GENERAL
The Distributions, Merger and Charter Amendment are separate parts of the
Transaction, none of which will be consummated unless the Transaction as a
whole is approved at the Tenneco Special Meeting (although Tenneco may elect
subsequently to proceed with one or more of the transactions included in the
Transaction which do not require stockholder approval if the Transaction is not
approved). The following sets forth the principal transactions which constitute
parts of, and will be undertaken to consummate, the Transaction.
NPS Issuance. Tenneco will issue (the "NPS Issuance") in a registered public
offering shares of one or more new series of its junior preferred stock (the
"Tenneco Junior Preferred Stock") in an amount calculated, to the extent
possible, to have an aggregate value equal to approximately 25% of the total
value of all shares of Tenneco capital stock outstanding as of the Merger
Effective Time. Holders of Tenneco Junior Preferred Stock will have the right
to elect one-sixth of the Board of Directors of Tenneco. The proceeds (the "NPS
Issuance Proceeds") to Tenneco from the sale of the Tenneco Junior Preferred
Stock in the NPS Issuance (which are estimated to be $275 million) will, net of
underwriting commissions and other expenses, be used to repay certain existing
indebtedness of Tenneco and certain of its subsidiaries in connection with the
Debt Realignment (as defined).
Debt Realignment. The indebtedness for money borrowed of Tenneco and certain
of its consolidated subsidiaries (the "Tenneco Energy Consolidated Debt," which
had a total book value of approximately $4,443 million at June 30, 1996) will
be restructured through a series of tender offers, exchange offers, payments,
redemptions, prepayments and defeasances involving Tenneco, New Tenneco and
Newport News (the "Debt Realignment"). The Debt Realignment is intended to
reduce the total amount of the Tenneco Energy Consolidated Debt to an amount
that, when added to the total amount of certain other liabilities and
obligations of Tenneco Energy outstanding as of the Merger Effective Time (as
so added, the "Actual Energy Debt Amount," described more fully herein), equals
$2.65 billion, less the NPS Issuance Proceeds and subject to certain other
adjustments described herein (the "Base Debt Amount"). If the Actual Energy
Debt Amount varies from the Base Debt Amount, the amount of such variance will
be accounted for in a post-Transaction cash payment (the "Debt Cash
Adjustment") (i) from New Tenneco to Tenneco, in the event the Actual Energy
Debt Amount exceeds the Base Debt Amount, or (ii) from Tenneco to New Tenneco,
in the event the Actual Energy
12
<PAGE>
Debt Amount is less than the Base Debt Amount. See "DEBT AND CASH REALIGNMENT."
If the Debt Realignment and the other components of the Transaction had been
consummated on June 30, 1996, on a pro forma basis, Tenneco, New Tenneco and
Newport News would have had indebtedness for money borrowed of approximately
$2,544 million ($1,844 million after giving effect to the Refinancing
Transactions as discussed elsewhere herein), $2,145 million and $614 million,
respectively. See "UNAUDITED PRO FORMA FINANCIAL INFORMATION."
Corporate Restructuring Transactions. Pursuant to the Distribution Agreement,
Tenneco and its subsidiaries will undertake various intercompany transfers and
distributions (collectively, the "Corporate Restructuring Transactions")
designed to restructure, divide and separate their existing businesses and
assets so that, upon consummation of the Distributions, the assets, liabilities
and operations of (i) the Industrial Business will be directly and indirectly
owned and operated by New Tenneco, and (ii) the Shipbuilding Business will be
directly and indirectly owned and operated by Newport News. See "CORPORATE
RESTRUCTURING TRANSACTIONS."
Cash Realignment. The total amount of cash and cash equivalents of Tenneco
and its consolidated subsidiaries (which, as of June 30, 1996, totalled
approximately $229 million) as of the Merger Effective Time will be allocated
$25.0 million to Tenneco (subject to certain adjustments), $5.0 million to
Newport News and the balance to New Tenneco (the "Cash Realignment"). See "DEBT
AND CASH REALIGNMENT."
The Charter Amendment. Prior to the Merger, Tenneco will file the Charter
Amendment to eliminate specified rights, powers and preferences of its junior
preferred stock (certain of which may be preserved or modified in the
certificates of designation for the Tenneco Junior Preferred Stock to be issued
in the NPS Issuance) contained in the Tenneco Certificate of Incorporation, as
amended (the "Tenneco Charter"). See "THE NPS ISSUANCE" and "THE CHARTER
AMENDMENT."
The Distributions. On the effective date of the Distributions (the
"Distribution Date"), Tenneco will distribute to all holders of Tenneco Common
Stock of record as of the close of business on a record date to be specified by
the Tenneco Board of Directors (the "Distribution Record Date," which Tenneco
presently estimates will be on or about the Distribution Date) (i) one share of
New Tenneco common stock, $.01 par value (the "New Tenneco Common Stock"), for
every share of Tenneco Common Stock held (the "Industrial Distribution"), and
(ii) one share of Newport News common stock, $.01 par value (the "Newport News
Common Stock"), for every five shares of Tenneco Common Stock held (the
"Shipbuilding Distribution"). Cash will be paid (without interest) in lieu of
fractional shares. See "THE DISTRIBUTIONS." For a discussion of the businesses
and operations of New Tenneco and Newport News and certain risks associated
therewith, see "RISK FACTORS--Risks Relating to New Tenneco," "RISK FACTORS--
Risks Relating to Newport News" and the captions entitled "The Industrial
Distribution" and "The Shipbuilding Distribution" under "THE DISTRIBUTIONS."
See also the New Tenneco Information Statement and Newport News Information
Statement attached hereto as Appendices C and D, respectively.
The Merger. El Paso Subsidiary will be merged with and into Tenneco, which
will then consist solely of the Energy Business. The consideration to be paid
by El Paso in the Merger consists of (i) the retention by Tenneco of any
outstanding Tenneco Energy Consolidated Debt as of the Merger Effective Time
(subject to the Debt Cash Adjustment) and Tenneco's obligations to the holders
of the Tenneco Junior Preferred Stock issued in the NPS Issuance, (ii) the
retention by Tenneco after the Merger of liabilities related to certain
discontinued businesses of Tenneco estimated by El Paso to be approximately
$600 million, and (iii) the issuance of El Paso equity securities with a value
equal to the Equity Consideration, as described below, to the holders of
Tenneco Stock (the "Tenneco Stockholders"). Tenneco will survive the Merger,
with 100% of its common equity and approximately 75% of its combined equity
value at that time held indirectly by El Paso (and the remainder held by the
holders of the Tenneco Junior Preferred Stock issued pursuant to the NPS
Issuance). See "THE MERGER."
13
<PAGE>
In general, the Merger consideration formulas are designed to yield an
aggregate Equity Consideration of $750 million to the holders of Tenneco Stock
if the Average El Paso Common Price is within the Collar. Based on the number
of shares of Tenneco Preferred Stock outstanding as of October 28, 1996, a
total of approximately $45.0 million and $92.5 million of the Equity
Consideration will be allocated and paid in the form of shares of El Paso
Common Stock to the holders of $7.40 Preferred Stock and $4.50 Preferred Stock,
respectively. These amounts are designed to ensure that the holders of Tenneco
Preferred Stock receive in the Merger El Paso Common Stock with a value (based
on the closing price on the NYSE of El Paso Common Stock on the day preceding
the vote at the Tenneco Special Meeting) equal to 115% of the liquidation
preference of their shares. This amount is fixed and is not subject to the
Collar.
The balance of the Equity Consideration of approximately $612.5 million (or
$3.58 per share, based on the number of shares outstanding as of October 28,
1996) will be allocated and paid to the holders of Tenneco Common Stock. The
form of payment, however, depends on whether the Stock Issuance is approved by
El Paso stockholders. If the Stock Issuance is approved, this amount will be
paid entirely in the form of El Paso Common Stock to holders of Tenneco Common
Stock, with the number of such shares issued to be based on the Average El Paso
Common Price after giving effect to the Collar. The Collar has the following
effects: (i) if the Average El Paso Common Price falls within the Collar (i.e.,
between $31.3875 and $38.3625, inclusive), the number of shares of El Paso
Common Stock issued to holders of Tenneco Common Stock will be based on that
price, (ii) if the Average El Paso Common Price is less than $31.3875 (the
"Minimum El Paso Price"), the number of such shares of El Paso Common Stock
will nonetheless be based on a per share price of $31.3875 and will likely have
an aggregate market value as of the Merger Effective Time which is less than
$612.5 million, and (iii) if the Average El Paso Common Price is more than
$38.3625 (the "Maximum El Paso Price"), the number of such shares will
nonetheless be based on a per share price of $38.3625 and will likely have an
aggregate market value as of the Merger Effective Time which is greater than
$612.5 million. See "RISK FACTORS--Risks Relating to the Transaction--
Consideration for Tenneco Common Stock in Merger May Vary Due to Collar."
If the Stock Issuance is not approved by El Paso's stockholders, El Paso will
issue only 7,000,000 shares of El Paso Common Stock, which will be issued first
to the holders of Tenneco Preferred Stock and then to the holders of Tenneco
Common Stock. The holders of Tenneco Common Stock will then receive El Paso
Preferred Depositary Shares in respect of that number of shares of El Paso
Preferred Stock that has an aggregate liquidation preference equal to the value
(based on the Average El Paso Common Price) of the additional consideration
which would have been received by holders of Tenneco Common Stock had the Stock
Issuance been approved. See "THE TRANSACTION--Consideration to Tenneco
Stockholders."
El Paso recognizes that a vote by stockholders against the Stock Issuance
could be interpreted either as a vote in opposition to the Merger or as
expressing a preference for issuing the El Paso Preferred Stock. However,
because the Board of Directors of El Paso previously determined that entering
into the Merger Agreement was in the best interests of El Paso and its
stockholders and the obligation of El Paso to consummate the Merger is not
conditioned upon El Paso stockholder approval, El Paso is contractually bound,
subject to the other terms of the Merger Agreement, to consummate the Merger
regardless of the outcome of the vote upon the Stock Issuance.
14
<PAGE>
The following chart shows the abbreviated corporate structure of Tenneco and
its subsidiaries immediately prior to the Transaction:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRE-TRANSACTION
TENNECO INC.
|
------------------------------------------------------------------------------------------------------------
| | | |
Various Automotive Tennessee Gas Pipeline Company ("TGP") Tenneco Various
and Packaging Pipeline division Credit Corporation Discontinued and
Subsidiaries Walker autoparts division ("TCC") Other Operations
Automotive HQ division
|
-----------------------------------------------------------------------------------------------------------
| | | |
Various Automotive and Tenneco Corporation Various Energy Tenneco
Packaging Subsidiaries | Subsidiaries International Inc.
| |
--------------------------------------------------------------------------------------- |
| | | | |
NEW TENNECO INC. Various Automotive and NEWPORT NEWS Various Energy Various Automotive
Packaging Subsidiaries SHIPBUILDING INC. Subsidiaries and Packaging
| Subsidiaries
-----------------------------------------
| |
Packaging Subsidiaries Shipbuilding
Subsidiaries
</TABLE>
15
<PAGE>
The following chart shows the abbreviated corporate structure of Tenneco
and its current subsidiaries immediately after giving effect to the Transaction:
<TABLE>
<CAPTION>
POST-TRANSACTION
NEW TENNECO NEWPORT NEWS EL PASO
<S> <C> <C> <C>
Former holders of Former holders of * Current El Paso * Current Tenneco
Tenneco Common Stock Tenneco Common Stock Stockholders to hold Stockholders to hold
to hold 100% of to hold 100% of approximately 66% of approximately 34% of
Common Stock Common Stock common equity common equity
/ / \ /
/ / \ /
New Tenneco Inc. Newport News El Paso Natural
(to be renamed Shipbuilding Inc. Gas Company
Tenneco Inc.) / \
/ / El Paso Energy
Monroe Auto Newport News Corporation
Equipment Co., Shipbuilding and Dry \
Walker Autoparts Dock Company and El Paso Energy Third parties to hold
Division and Related Subsidiaries to hold 100% of Common 100% of Tenneco Junior
other Stock (approximately Preferred Stock (approximately
Automotive 75% of equity value) 25% of equity value) and the
Subsidiaries/ \ / right to elect 1/6th of
/ El Paso Tennessee Pipeline Co. directors
Tenneco Packaging Inc. (formerly known as Tenneco Inc.)
and other Packaging /
Subsidiaries/ Tenneco Energy Operations
/ including TGP (pipeline division
Tenneco Business only), TCC, various other
Services Inc. Energy Subsidiaries and discontinued
and other operations
</TABLE>
* Is based on the number of shares of Tenneco Stock and El Paso Common Stock
outstanding on October 28, 1996 and assumes: (i) approval of the Stock
Issuance by El Paso Stockholders; and (ii) an Average El Paso Common Price and
Pre-Meeting El Paso Common Price of $46.6000. Does not give effect to a
proposed sale by El Paso of approximately $200 million of equity securities,
and the purchase by El Paso with the net proceeds of such sale of
approximately $200 million of Subordinated Tenneco Preferred Stock from
Tenneco, which El Paso presently intends to undertake following consummation
of the Transaction as part of the Refinancing Transactions. See "RISK
FACTORS."
16
<PAGE>
CONSIDERATION TO TENNECO STOCKHOLDERS
The following table summarizes what Tenneco Stockholders will receive if the
Transaction is consummated based on the number of shares of Tenneco Stock
outstanding as of October 28, 1996 and assuming (i) an Average El Paso Common
Price of $46.6000 (which is equal to the average per share closing price of El
Paso Common Stock on the NYSE for the 20-day trading period ended October 28,
1996), (ii) a Pre-Meeting El Paso Common Price equal to $46.6000, and (iii) the
issuance of no additional shares of Tenneco Common Stock upon the exercise of
options and the vesting of performance share awards in connection with the
Merger. Based on the foregoing assumptions and assuming the Stock Issuance is
approved, former Tenneco Stockholders would hold approximately 34% of the El
Paso Common Stock immediately following the Merger. Because the hypothetical
Average El Paso Common Price of $46.6000 used for purposes of the table below
is above the Collar, the number of shares to be received by holders of Tenneco
Common Stock in the Merger was based on the upper limit of the Collar of
$38.3625.
<TABLE>
<C> <S>
HOLDERS OF: WILL RECEIVE:
. Tenneco Common Stock . one share of New Tenneco Common Stock for every
share of Tenneco Common Stock held
. one share of Newport News Common Stock for every
five shares of Tenneco Common Stock held
. if the Stock Issuance is approved, .093 shares of
El Paso Common Stock for every share of Tenneco
Common Stock held (valued at $4.35)(/1/)
. if the Stock Issuance is not approved, .024
shares of El Paso Common Stock and .081 El Paso
Preferred Depositary Shares for every share of
Tenneco Common Stock held (valued at $4.35)(/1/)
. $7.40 Preferred Stock . 2.467 shares of El Paso Common Stock for every
share of $7.40 Preferred Stock held (valued at
$115)(/1/)
. $4.50 Preferred Stock . 2.467 shares of El Paso Common Stock for every
share of $4.50 Preferred Stock held (valued at
$115)(/1/)
</TABLE>
- --------
(/1/Assuming)(i) in the case of the Tenneco Common Stock, a market value for
the El Paso Common Stock equal to $46.6000 (the hypothetical Average El
Paso Common Price) and a market value for an El Paso Preferred Depositary
Share equal to $40 (one twenty-fifth of the liquidation value of a whole
share of El Paso Preferred Stock), and (ii) in the case of the Tenneco
Preferred Stock, a market value for the El Paso Common Stock equal to
$46.6000 (the hypothetical Pre-Meeting El Paso Common Price.)
Shares of the Tenneco Junior Preferred Stock, which will be issued between
the date hereof and the Merger pursuant to the NPS Issuance, will not be
converted or exchanged in the Merger and will remain outstanding following the
Merger. Holders thereof will receive no consideration in the Transaction.
17
<PAGE>
The following tables illustrate how changes in the Average El Paso Common
Price (in the case of Tenneco Common Stock) and the Pre-Meeting El Paso Common
Price (in the case of Tenneco Preferred Stock) will affect the number and value
of El Paso equity securities received, per share of Tenneco Stock and on an
aggregate basis, in the Merger (based on the number of shares of Tenneco Stock
outstanding on October 28, 1996 and assuming the issuance of no additional
shares of Tenneco Common Stock upon the exercise of options and the vesting of
performance awards in connection with the Merger).
If the Stock Issuance is approved:
<TABLE>
<CAPTION>
PER SHARE OF PER SHARE OF
TENNECO COMMON TENNECO AGGREGATE
STOCK PREFERRED STOCK TOTAL(4)
--------------- --------------- ---------------
SHARES SHARES SHARES
HYPOTHETICAL AVERAGE EL PASO OF EL OF EL OF EL
COMMON PRICE/PRE-MEETING EL PASO DOLLAR PASO DOLLAR PASO DOLLAR
PASO COMMON PRICE COMMON VALUE(1) COMMON VALUE(2) COMMON VALUE
---------------------------- ------ -------- ------ -------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
$30.0000...................... .114 $3.43 3.832 $115.00 24,097 $722,924
$31.3875 (Minimum El Paso
Price)....................... .114 3.58 3.663 115.00 23,895 750,000
$32.0000...................... .112 3.58 3.593 115.00 23,438 750,000
$34.0000...................... .105 3.58 3.381 115.00 22,059 750,000
$34.8750 (Median Collar
Price)....................... .103 3.58 3.297 115.00 21,505 750,000
$36.0000...................... .100 3.58 3.194 115.00 20,833 750,000
$38.0000...................... .094 3.58 3.025 115.00 19,737 750,000
$38.3625 (Maximum El Paso
Price)....................... .093 3.58 2.997 115.00 19,550 750,000
$40.0000...................... .093 3.74 2.874 115.00 19,404 776,145
$42.0000...................... .093 3.92 2.737 115.00 19,240 808,077
$44.0000...................... .093 4.11 2.613 115.00 19,091 840,009
$46.0000...................... .093 4.30 2.499 115.00 18,955 871,941
$46.6000(3)................... .093 4.35 2.467 115.00 18,917 881,521
$48.0000...................... .093 4.48 2.395 115.00 18,831 903,873
</TABLE>
- --------
(1) Assumes a market price for the El Paso Common Stock equal to the
hypothetical Average El Paso Common Price.
(2) Assumes a market price for the El Paso Common Stock equal to the
hypothetical Pre-Meeting El Paso Common Price and assumes that the Pre-
Meeting El Paso Common Price is equal to the hypothetical Average El Paso
Common Price. The actual Pre-Meeting El Paso Common Price used to determine
the shares of El Paso Common Stock issued to holders of Tenneco Preferred
Stock will likely be different than the actual Average El Paso Common Price
utilized.
(3) Represents the hypothetical Average El Paso Common Price based on the 20-
day trading period ended October 28, 1996.
(4) The portion of the aggregate total number of shares and aggregate total
value of El Paso Common Stock which will be issued to holders of Tenneco
Common Stock is as follows:
<TABLE>
<CAPTION>
TENNECO COMMON
------------------
SHARES OF
EL PASO DOLLAR
HYPOTHETICAL AVERAGE EL PASO COMMON PRICE COMMON VALUE
----------------------------------------- --------- --------
(IN THOUSANDS)
<S> <C> <C>
$30.0000............................................. 19,514 $585,424
$31.3875 (Minimum El Paso Price)..................... 19,514 612,500
$32.0000............................................. 19,141 612,500
$34.0000............................................. 18,015 612,500
$34.8750 (Median Collar Price)....................... 17,563 612,500
$36.0000............................................. 17,014 612,500
$38.0000............................................. 16,118 612,500
$38.3625 (Maximum El Paso Price)..................... 15,966 612,500
$40.0000............................................. 15,966 638,645
$42.0000............................................. 15,966 670,577
$44.0000............................................. 15,966 702,509
$46.0000............................................. 15,966 734,441
$46.6000............................................. 15,966 744,021
$48.0000............................................. 15,966 766,373
</TABLE>
18
<PAGE>
If the Stock Issuance is not approved:
<TABLE>
<CAPTION>
PER SHARE OF
PER SHARE OF TENNECO TENNECO
COMMON STOCK PREFERRED STOCK AGGREGATE TOTAL(4)
----------------------------- ------------------ -----------------------------
HYPOTHETICAL AVERAGE EL EL PASO EL PASO
PASO COMMON PRICE/PRE- SHARES OF PREFERRED TOTAL SHARES OF SHARES OF PREFERRED TOTAL
MEETING EL PASO DEPOSITARY DOLLAR EL PASO DOLLAR EL PASO DEPOSITARY DOLLAR
EL PASO COMMON PRICE COMMON SHARES VALUE(1) COMMON VALUE(2) COMMON SHARES VALUE
----------------------- --------- ---------- -------- --------- -------- --------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$30.0000................ .014 .075 $3.43 3.832 $115.00 7,000 12,825 $722,924
$31.3875 (Minimum El
Paso Price)............ .015 .078 3.58 3.663 115.00 7,000 13,250 750,000
$32.0000................ .016 .077 3.58 3.593 115.00 7,000 13,150 750,000
$34.0000................ .017 .075 3.58 3.381 115.00 7,000 12,800 750,000
$34.8750 (Median Collar
Price)................. .018 .074 3.58 3.297 115.00 7,000 12,650 750,000
$36.0000................ .019 .073 3.58 3.194 115.00 7,000 12,450 750,000
$38.0000................ .020 .071 3.58 3.025 115.00 7,000 12,100 750,000
$38.3625 (Maximum El
Paso Price)............ .020 .070 3.58 2.997 115.00 7,000 12,025 750,000
$40.0000................ .021 .073 3.74 2.874 115.00 7,000 12,400 776,145
$42.0000................ .022 .075 3.92 2.737 115.00 7,000 12,850 808,077
$44.0000................ .023 .078 4.11 2.613 115.00 7,000 13,300 840,009
$46.0000................ .023 .080 4.30 2.499 115.00 7,000 13,750 871,941
$46.6000(3)............. .024 .081 4.35 2.467 115.00 7,000 13,875 881,521
$48.0000................ .024 .083 4.48 2.395 115.00 7,000 14,200 903,873
</TABLE>
- --------
(1) Assumes a market price for the El Paso Common Stock equal to the
hypothetical average El Paso Common Price and a market value for an El Paso
Preferred Depositary Share equal to $40 (one twenty-fifth of the
liquidation value of a whole share of El Paso Preferred Stock), in the case
of the El Paso Preferred Depositary Shares.
(2) Assumes a market price for the El Paso Common Stock equal to the
hypothetical Pre-Meeting El Paso Common Price and assumes that the Pre-
Meeting El Paso Common Price is equal to the hypothetical Average El Paso
Common Price. The actual Pre-Meeting El Paso Common Price used to determine
the shares of El Paso Common Stock issued to holders of Tenneco Preferred
Stock will likely be different than the actual Average El Paso Common Price
utilized.
(3) Represents the hypothetical Average El Paso Common Price based on the 20-
day trading period ended October 28, 1996.
(4) The portion of the aggregate total number of shares and aggregate total
value of El Paso equity securities which will be issued to holders of
Tenneco Common Stock is as follows:
<TABLE>
<CAPTION>
TENNECO COMMON
-----------------------------
EL PASO
SHARES OF PREFERRED TOTAL
HYPOTHETICAL AVERAGE EL PASO COMMON EL PASO DEPOSITARY DOLLAR
PRICE COMMON SHARES VALUE
----------------------------------- --------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
$30.0000................................ 2,417 12,825 $585,424
$31.3875 (Minimum El Paso Price)........ 2,619 13,250 612,500
$32.0000................................ 2,703 13,150 612,500
$34.0000................................ 2,956 12,800 612,500
$34.8750 (Median Collar Price).......... 3,057 12,650 612,500
$36.0000................................ 3,181 12,450 612,500
$38.0000................................ 3,382 12,100 612,500
$38.3625 (Maximum El Paso Price)........ 3,416 12,025 612,500
$40.0000................................ 3,563 12,400 638,645
$42.0000................................ 3,726 12,850 670,577
$44.0000................................ 3,875 13,300 702,509
$46.0000................................ 4,011 13,750 734,441
$46.6000................................ 4,049 13,875 744,021
$48.0000................................ 4,135 14,200 766,373
</TABLE>
In all events, Tenneco Stockholders will receive cash (without interest) in
lieu of fractional shares and fractional El Paso Preferred Depositary Shares,
if any. There can be no assurance that the actual Average El Paso Common Price
or the Pre-Meeting El Paso Common Price will equal $46.6000 and, in any event
they are likely to be different from each other. As of October 28, 1996, the
closing sales prices of the El Paso Common Stock and Tenneco Common Stock on
the NYSE were $47.38 and $48.75, respectively.
REASONS FOR THE TRANSACTION
The combination of El Paso and Tenneco Energy will create one of the nation's
largest natural gas companies, with combined volumes of approximately 18.4
billion cubic feet of gas per day. The Merger will result in a combined company
with a coast-to-coast pipeline system with access to all of the nation's major
markets and supply basins, critical mass in non-regulated operations, including
gas gathering, processing and marketing, and will position the combined company
to participate in the emerging deregulation of the United States electric
industry. In addition, the combined company will have an expanded international
presence, with opportunities for further international growth. The charts on
the following pages illustrate (i) the combined United States operations of El
Paso and Tenneco Energy and (ii) the combined international operations of El
Paso and Tenneco Energy.
19
<PAGE>
EL Paso Tenneco Energy U.S. Operations
[MAP OF UNITED STATES APPEARS HERE]
Gathering/Processing/Treating Facilities
Altamont Gas Transmission (proposed) (Tenneco 53 1/3%)
Midwestern Gas Transmission (Tenneco 100%)
Overthrust Pipeline (Tenneco 18%)
TransColorado (El Paso 33 1/3%)
Mojave Pipeline System (El Paso 100%)
EPNG Pipeline System (El Paso 100%)
Cornerstone (El Paso 100%)
East Tennessee Natural Gas (Tenneco 100%)
Tennessee Gas Pipeline (Tenneco 100%)
D-T Line (Tenneco 40%)
A/S Pipeline (Tenneco 50%)
Oasis Pipeline (Tenneco 30%)
20
<PAGE>
Combined International Operations
[MAP OF THE WORLD APPEARS HERE]
* Location of International Facilities
21
<PAGE>
The Distributions are expected to enhance Tenneco stockholder values and to
accomplish the following principal business objectives: (i) to tailor the
assets of Tenneco to facilitate the acquisition of the Energy Business by El
Paso, (ii) to enhance the ability of New Tenneco and Newport News to provide
incentives to their respective management and other employees (including
through formation of an employee stock ownership plan by Newport News), and
(iii) to allow New Tenneco and Newport News greater flexibility in pursuing
business opportunities, including acquisitions, joint ventures and business
combinations. See "THE TRANSACTION--Reasons for the Transaction;
Recommendations of the Boards of Directors."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
TENNECO
The Board of Directors of Tenneco has approved the Distribution Agreement,
Merger Agreement and Charter Amendment and the transactions contemplated
thereby and recommends that the stockholders of Tenneco vote FOR approval and
adoption of the Transaction. The Board of Directors of Tenneco believes the
Transaction is in the best interests of Tenneco and its stockholders and, in
making that determination, considered the factors described under "THE
TRANSACTION--Reasons for the Transaction; Recommendations of the Boards of
Directors--Tenneco."
EL PASO
The Board of Directors of El Paso believes that the Merger Agreement is in
the best interests of El Paso and its stockholders, has approved the Merger
Agreement and the transactions contemplated thereby and recommends that the El
Paso stockholders vote FOR approval of the Stock Issuance. In making the
determination described above, the El Paso Board of Directors considered the
factors described under "THE TRANSACTION--Reasons for the Transaction;
Recommendations of the Boards of Directors--El Paso."
CERTAIN CONSIDERATIONS
In deciding whether to approve the Transaction or the Stock Issuance, as the
case may be, stockholders should carefully evaluate the matters set forth under
"RISK FACTORS" herein and in the New Tenneco Information Statement and the
Newport News Information Statement, in addition to the other matters described
herein and therein.
OTHER TERMS OF THE DISTRIBUTIONS AND MERGER
RELATIONSHIP AMONG TENNECO, NEW TENNECO AND NEWPORT NEWS AFTER THE
DISTRIBUTIONS
In addition to establishing the manner in which the Distributions will be
carried out, the Distribution Agreement provides for the consummation of
various pre-Distribution transactions, the allocation among the parties of
certain rights and obligations and the assumption by each of the parties of
certain liabilities. The Distribution Agreement also requires that, prior to
the Distributions, Tenneco, New Tenneco and/or Newport News enter into certain
of the ancillary instruments, assignments, arrangements and agreements to be
entered into in connection with the Distributions (the "Ancillary Agreements")
governing, among other things, tax sharing, insurance, transition services and
employee benefits and human resources allocation. See "THE DISTRIBUTIONS--
Relationship Among Tenneco, New Tenneco and Newport News After the
Distributions."
CONDITIONS TO CONSUMMATION OF THE DISTRIBUTIONS AND MERGER
The principal conditions to consummation of the Distributions include: (i)
approval of the Distributions (to be submitted as a part of the Transaction) by
the Tenneco Stockholders at the Tenneco Special Meeting and by the holders of
the Tenneco Junior Preferred Stock (if issued prior to the effectiveness of the
Charter Amendment); (ii) receipt of rulings (the "IRS Ruling Letter") from the
Internal Revenue Service ("IRS") to the effect that for federal income tax
purposes the Distributions will be treated as tax-free to Tenneco and its
22
<PAGE>
stockholders under the Internal Revenue Code of 1986, as amended (the "Code"),
and certain other transactions to be effected as a part of the Corporate
Restructuring Transactions will also be treated as tax-free; and (iii) approval
of the New Tenneco Common Stock and Newport News Common Stock for listing on
the NYSE. The IRS Ruling Letter was issued on October 30, 1996. See "THE
DISTRIBUTIONS--Conditions to Consummation of the Distributions."
Because consummation of the Distributions (with only certain permitted
modifications) is a condition to consummation of the Merger, all of the
conditions to the Distributions are therefore also generally conditions to the
Merger. The other principal conditions to consummation of the Merger include:
(i) approval of the El Paso Common Stock (and El Paso Preferred Depositary
Shares, if the Stock Issuance is not approved) issuable in the Merger for
listing on the NYSE; (ii) the receipt of an opinion of Jenner & Block, counsel
to Tenneco (the "Tax Opinion"), to the extent not covered by the IRS Ruling
Letter, to the effect that, among other things, the Merger will be treated as
tax-free for federal income tax purposes to El Paso, Tenneco and Tenneco
Stockholders (except to the extent that cash is received in lieu of fractional
shares (and fractional El Paso Preferred Depositary Shares, if any) or in
connection with a proper demand for appraisal of shares); (iii) the absence of
certain material adverse changes; (iv) the consummation of the Debt
Realignment; (v) the effectiveness of the Charter Amendment; and (vi) the
approval and adoption of the Merger Agreement by Tenneco Stockholders. See "THE
MERGER--Conditions Precedent." The IRS Ruling Letter issued on October 30, 1996
covered the matters to be addressed in the Tax Opinion. Accordingly, delivery
of the Tax Opinion is a condition to the consummation of the Merger which has
been satisfied.
Early termination of the waiting period applicable to the Merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (together with
the rules and regulations thereunder, the "HSR Act") was granted on July 30,
1996.
AMENDMENT OR TERMINATION OF THE DISTRIBUTIONS AND THE MERGER AGREEMENT
Tenneco has reserved the right, under certain circumstances, to amend or
terminate the Distribution Agreement and the transactions contemplated thereby
(without the approval of New Tenneco, Newport News or the stockholders of
Tenneco), subject in certain circumstances to the prior written consent of El
Paso. See "THE DISTRIBUTIONS--Amendment or Termination of the Distributions."
The Merger Agreement may be terminated at any time prior to the Merger
Effective Time, whether before or after its approval by the Tenneco
Stockholders and the approval of the Stock Issuance by El Paso's stockholders,
by (i) the mutual written consent of El Paso and Tenneco authorized by their
respective Boards of Directors; (ii) El Paso or Tenneco, if the Merger has not
been effected on or prior to June 30, 1997 (the "Termination Date"), subject to
limited exceptions; (iii) El Paso or Tenneco, if there has been a material
breach on the part of the other party of any covenant, agreement,
representation or warranty set forth in the Merger Agreement or any other
circumstances have occurred such that the conditions to El Paso's or Tenneco's
consummation of the Merger, respectively, could not be satisfied on or prior to
the Termination Date; (iv) El Paso or Tenneco if the Tenneco Stockholders at
the Tenneco Special Meeting do not approve the Transaction; (v) El Paso or
Tenneco, under certain circumstances if the board of directors of the other
party withdraws, amends or modifies its favorable recommendation to its
stockholders of the Transaction or the Stock Issuance, as applicable, or
promulgates any favorable recommendation with respect to certain other business
combinations not involving the other party; (vi) El Paso or Tenneco, if certain
events involving a business combination not involving El Paso or the Energy
Business occur; (vii) El Paso, if there have occurred since the date of the
Merger Agreement various events, changes or effects which, in the aggregate
with all other such events, changes or effects, reduce the value of the Energy
Business by more than $75 million; (viii) Tenneco, if there have occurred since
the date of the Merger Agreement various events, changes or effects which, in
the aggregate with all other such events, changes or effects, reduce the value
of El Paso by more than $75 million; or (ix) by El Paso or Tenneco (but only
prior to approval by Tenneco stockholders), in the event Tenneco receives a
Higher Proposal (as defined) which El Paso does not at least match within five
business days. See "THE MERGER--Amendment or Termination of the Merger
Agreement."
23
<PAGE>
Prior to the Merger Effective Time, whether before or after approval and
adoption of the Transaction by the Tenneco Stockholders, the provisions of the
Merger Agreement may be amended by a written agreement executed and delivered
by the parties thereto, subject to applicable law. After the Merger Effective
Time, the provisions of the Merger Agreement may be amended only by a written
agreement executed and delivered by El Paso, Tenneco (as the surviving
corporation of the Merger) and New Tenneco.
TRADING OF NEW TENNECO COMMON STOCK AND NEWPORT NEWS COMMON STOCK
There is not currently a public trading market with respect to shares of New
Tenneco Common Stock or Newport News Common Stock. New Tenneco and Newport News
have applied for listing of their respective shares of common stock on the NYSE
and the Distributions will not occur until such listings are approved.
TERMINATION FEE
The Merger Agreement requires Tenneco to pay to El Paso $25 million, plus up
to $10 million in actual out of pocket expenses incurred and payable to third
parties (collectively, the "Termination Fee"), if the Merger Agreement is
terminated under certain circumstances. See "THE MERGER--Termination Fee."
CONSULTING ARRANGEMENT
Tenneco and El Paso have entered into an Agreement, dated June 19, 1996 (the
"Consulting Agreement"), pursuant to which El Paso is providing certain
consulting services to Tenneco for the six-month term of the Consulting
Agreement with respect to enhancing the Energy Business' relationships with
customers, plaintiffs in material litigation and regulatory authorities. As
consideration for these services, El Paso is entitled to an aggregate
consulting fee of $60 million. Under the terms of the Consulting Agreement,
however, this fee is only due and payable by Tenneco if the Merger Agreement is
terminated under certain circumstances. See "THE MERGER--Consulting
Arrangement."
DEPOSITARY ARRANGEMENTS FOR EL PASO PREFERRED STOCK
If the Stock Issuance is not approved at the El Paso Special Meeting and the
Merger is consummated, El Paso will enter into a depositary arrangement (the
"Depositary Agreement") so that holders of Tenneco Common Stock are issued El
Paso Preferred Depositary Shares (each representing a one twenty-fifth interest
in a whole share of El Paso Preferred Stock) rather than whole shares of El
Paso Preferred Stock. Pursuant to the Depositary Agreement, holders of El Paso
Preferred Depositary Shares will have rights equivalent to those of holders of
whole shares of El Paso Preferred Stock (to the extent of their fractional
interests therein). The El Paso Preferred Depositary Shares, if any, will be
listed on the NYSE. See "DESCRIPTION OF EL PASO PREFERRED STOCK AND DEPOSITARY
SHARES."
APPRAISAL RIGHTS
Holders of record of $4.50 Preferred Stock who do not vote in favor of the
Transaction and persons who become record holders of Tenneco Junior Preferred
Stock on or prior to the date of the Tenneco Special Meeting have the right,
upon compliance with specific procedures set forth in Section 262 of the
General Corporation Law of the State of Delaware (the "DGCL"), to demand
payment from Tenneco of the fair value of their shares in connection with the
Merger. No other stockholders of Tenneco are entitled to such appraisal rights.
However, over 75% of the holders of the $4.50 Preferred Stock as of the Tenneco
Record Date have agreed to grant to Tenneco an irrevocable proxy to vote their
shares in favor of the Transaction and have agreed to waive and to not demand
their appraisal rights pursuant to a Voting Agreement and Irrevocable Proxy
(the "Voting Agreement") to be entered into with Tenneco. See "THE NPS
ISSUANCE" and "THE MERGER--Appraisal Rights."
MEETINGS OF STOCKHOLDERS
TENNECO SPECIAL MEETING
General. The Tenneco Special Meeting will be held on December 10, 1996 at
10:00 a.m. (EST), at the Tenneco executive offices at 1275 King Street,
Greenwich, Connecticut. At the Tenneco Special Meeting, holders of Tenneco
Stock will be asked to consider and vote upon the Transaction and to transact
such other business as may properly come before the meeting.
24
<PAGE>
Record Date; Shares Entitled to Vote; Quorum. Only the holders of record of
Tenneco Stock at the close of business on November 6, 1996 (the "Tenneco Record
Date"), will be entitled to notice of and to vote at the Tenneco Special
Meeting. On October 28, 1996, there were outstanding (i) 170,883,000 shares of
Tenneco Common Stock, (ii) 391,519 shares of $7.40 Preferred Stock, and (iii)
803,723 shares of $4.50 Preferred Stock, with each share being entitled to one
vote on each matter to be considered at the Tenneco Special Meeting by the
holders of shares of such class or series of Tenneco Stock. The holders of at
least (i) a majority of the outstanding shares of Tenneco Common Stock and
$7.40 Preferred Stock, and (ii) a majority of the outstanding shares of $7.40
Preferred Stock and $4.50 Preferred Stock, must be present in person or
represented by proxy at the Tenneco Special Meeting to establish a quorum for
consideration of the Transaction.
Votes Required. The Transaction must be approved and adopted by both (i)
holders of a majority of the outstanding shares of the Tenneco Common Stock and
$7.40 Preferred Stock, voting together as a class, and (ii) holders of a
majority of the outstanding shares of $4.50 Preferred Stock and $7.40 Preferred
Stock, voting together as a class. Any other business to properly come before
the Tenneco Special Meeting (except as otherwise provided by applicable law,
the Tenneco Charter or the Tenneco By-laws) will require the affirmative vote
of holders of a majority of the shares of Tenneco Common Stock and $7.40
Preferred Stock, voting together as a class, present in person or by proxy at
the Tenneco Special Meeting. The holders as of the Tenneco Record Date of over
75% of the $4.50 Preferred Stock have agreed to grant an irrevocable proxy to
Tenneco to vote their shares of $4.50 Preferred Stock in favor of the
Transaction. Because such shares of $4.50 Preferred Stock represent more than a
majority of the outstanding shares of $7.40 Preferred Stock and $4.50 Preferred
Stock as of the Tenneco Record Date, taken together, it thus is expected that
the required vote as described in clause (ii) above will be effectively
secured. See "THE TRANSACTION--Background of the Transaction." Approval of the
holders of the Tenneco Junior Preferred Stock to be issued in the NPS Issuance
also will be required to effect the Distributions and Charter Amendment if the
NPS Issuance occurs prior to effectiveness of the Charter Amendment. In such
event, the Distributions and Charter Amendment will be submitted for approval
by the initial record holders of the Tenneco Junior Preferred Stock by written
consent in lieu of a meeting.
Ownership of Management. On October 28, 1996, directors and executive
officers of Tenneco, and their respective affiliates, in the aggregate held (i)
889,226 shares of Tenneco Common Stock (less than one percent of the
outstanding shares of Tenneco Common Stock on October 28, 1996), (ii) no shares
of $7.40 Preferred Stock, and (iii) no shares of $4.50 Preferred Stock. See "--
El Paso Special Meeting--Beneficial Ownership of Management" for a description
of the voting rights of directors and executive officers of El Paso, and their
respective affiliates.
EL PASO SPECIAL MEETING
General. The El Paso Special Meeting will be held on December 9, 1996 at
10:00 a.m. (MST), at The Sheraton Crescent Hotel, 2620 West Dunlap Avenue,
Phoenix, Arizona. At the El Paso Special Meeting, holders of El Paso Common
Stock will be asked to consider and vote upon a proposal to approve the Stock
Issuance and to transact such other business as may properly come before the
meeting.
Record Date; Shares Entitled to Vote; Quorum. Only the holders of record of
El Paso Common Stock at the close of business on November 6, 1996 (the "El Paso
Record Date"), will be entitled to notice of and to vote at the El Paso Special
Meeting. On October 28, 1996, there were outstanding 36,936,311 shares of El
Paso Common Stock, with each share being entitled to one vote on each matter to
be considered at the El Paso Special Meeting. In order to establish a quorum
for the transaction of business at the El Paso Special Meeting, holders of a
majority of the outstanding shares of El Paso Common Stock must be either (i)
present in person at the El Paso Special Meeting, or (ii) represented at the
meeting by a valid proxy, whether the instrument granting such proxy is marked
as casting a vote or abstaining, is left blank or does not empower such proxy
to vote with respect to some or all matters to be voted upon at the meeting.
Vote Required. The Stock Issuance must be approved by the affirmative vote of
the holders of a majority of the shares of the El Paso Common Stock present in
person or represented by proxy at the El Paso Special
25
<PAGE>
Meeting and entitled to vote thereon. Any other business to come properly
before the El Paso Special Meeting will require the affirmative vote of the
holders of a majority of the shares of El Paso Common Stock present in person
or represented by proxy at the El Paso Special Meeting and entitled to vote
thereon, unless a greater vote is required by Delaware law or by El Paso's
Restated Certificate of Incorporation or By-laws.
Ownership of Management. As of October 28, 1996, directors and executive
officers of El Paso, and their respective affiliates, in the aggregate held
approximately 1,143,968 shares of El Paso Common Stock (or approximately 3.1%
of the outstanding shares of El Paso Common Stock). See "--Tenneco Special
Meeting--Beneficial Ownership of Management" for a description of the voting
rights of directors and executive officers of Tenneco, and their respective
affiliates, at the Tenneco Special Meeting.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Stockholders of Tenneco and El Paso should be aware, and should carefully
consider, that certain members of Tenneco and El Paso management and the
Tenneco Board of Directors may be deemed to have interests in the Transaction
that are in addition to their interests as holders of stock generally and which
may create potential conflicts of interest. These interests include, but are
not limited to, the acceleration of the vesting of certain Tenneco stock
options, restricted stock and performance share units in connection with the
Transaction, the commonality of the directors and executive officers of Tenneco
before the Transaction with the directors and executive officers of New Tenneco
and Newport News after the Transaction, certain insurance, indemnity and other
arrangements and the grants of restricted stock and nonqualified stock options
that have been made to certain officers of El Paso, contingent upon the closing
of the Merger and other factors. See "THE TRANSACTION--Interests of Certain
Persons in the Transaction."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Tenneco has requested a ruling from the IRS substantially to the effect that
for federal income tax purposes, among other things, the Distributions will be
tax-free to Tenneco and its stockholders (except with respect to cash received
for fractional shares) under Section 355 of the Code, and that certain internal
transactions involving Tenneco or its subsidiaries to be effected prior to the
Distributions as part of the Corporate Restructuring Transactions will not be
taxable transactions. Receipt of an IRS ruling to the effect that the
Distributions and certain internal spin-off transactions included in the
Corporate Restructuring Transactions will be tax-free for federal income tax
purposes under Section 355 of the Code is a condition to the Distributions.
The Merger is conditioned upon receipt of the foregoing IRS ruling and
receipt by Tenneco and El Paso of the Tax Opinion, to the extent not covered by
the IRS Ruling Letter, to the effect, among other things, that the Merger will
constitute a reorganization under Section 368(a)(1)(B) of the Code, and that
each of Tenneco, El Paso and El Paso Subsidiary will be a party to the
reorganization within the meaning of Section 368(b) of the Code, that El Paso
will not recognize any gain or loss upon the receipt of Tenneco Stock solely in
exchange for El Paso Common Stock and, under certain circumstances, El Paso
Preferred Stock as set forth in the Merger Agreement, and that no gain or loss
will be recognized by the holders of Tenneco Stock upon the exchange of such
Tenneco Stock for El Paso Common Stock and, under certain circumstances, El
Paso Preferred Stock (except to the extent that cash is received in lieu of
fractional shares, or in connection with a proper demand for appraisal of
shares). All stockholders should read carefully the discussion in "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" and other sections of this Joint Proxy
Statement-Prospectus.
The IRS Ruling Letter was issued on October 30, 1996. Because it covered the
matters to be addressed in the Tax Opinion, delivery of the Tax Opinion is a
condition to consummation of the Merger which has been satisfied.
BECAUSE OF THE COMPLEXITIES OF THE TAX TREATMENT OF THE TRANSACTION, IT IS
RECOMMENDED THAT EACH STOCKHOLDER CONSULT SUCH HOLDER'S OWN TAX ADVISOR
CONCERNING THE APPLICABLE FEDERAL, STATE AND LOCAL INCOME TAX CONSEQUENCES OF
THE TRANSACTION.
26
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
The El Paso Common Stock is traded on the NYSE under the symbol "EPG" and the
Tenneco Common Stock is traded on the NYSE under the symbol "TEN." No public
trading market currently exists for the El Paso Preferred Stock, El Paso
Preferred Depositary Shares, New Tenneco Common Stock or Newport News Common
Stock. The following table sets forth, for the periods indicated, the high and
low sales prices for the El Paso Common Stock and Tenneco Common Stock, as
reported on the NYSE Composite Transactions Tape, and cash dividends declared
on shares of El Paso Common Stock and Tenneco Common Stock. For current price
information, Tenneco Stockholders are urged to consult publicly available
sources.
<TABLE>
<CAPTION>
EL PASO COMMON TENNECO COMMON
STOCK PRICES STOCK PRICES
--------------- ---------------
EL PASO TENNECO
CASH CASH
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
------- ------- --------- ------- ------- ---------
(PER SHARE) (PER
COMMON
SHARE)
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter............ $41.875 $35.250 $0.3025 $58.750 $51.500 $0.4000
Second Quarter........... $39.000 $31.500 $0.3025 $54.875 $45.125 $0.4000
Third Quarter............ $35.375 $31.625 $0.3025 $49.500 $43.250 $0.4000
Fourth Quarter........... $34.750 $29.875 $0.3025 $45.750 $37.000 $0.4000
1995
First Quarter............ $32.500 $28.000 $0.3300 $47.375 $42.250 $0.4000
Second Quarter........... $29.875 $26.875 $0.3300 $48.625 $45.125 $0.4000
Third Quarter............ $29.500 $24.750 $0.3300 $50.250 $44.875 $0.4000
Fourth Quarter........... $31.625 $26.500 $0.3300 $50.375 $41.875 $0.4000
1996
First Quarter............ $38.125 $28.625 $0.3475 $58.500 $47.625 $0.4500
Second Quarter........... $39.000 $34.250 $0.3475 $57.625 $49.625 $0.4500
Third Quarter............ $45.875 $37.750 $0.3475 $51.875 $45.625 $0.4500
Fourth Quarter (through
October 28, 1996)....... $48.625 $44.125 $0.3475 $50.875 $46.500 $0.4500
</TABLE>
Since the second quarter of 1992, El Paso has paid quarterly cash dividends
to the holders of El Paso Common Stock. The timing and amount of future
dividends will be (i) dependent on El Paso's results of operations, financial
condition, cash requirements and other relevant factors, (ii) subject to the
discretion of the Board of Directors of El Paso, and (iii) subject to
restrictions, if any, contained in debt instruments of El Paso in effect from
time to time and under the DGCL.
On June 18, 1996, the last full trading day prior to the announcement of the
execution of the Merger Agreement, the high and low sales prices per share, as
reported on the NYSE Composite Transactions Tape, of El Paso Common Stock,
Tenneco Common Stock and $7.40 Preferred Stock were as follows:
<TABLE>
<CAPTION>
JUNE 18, 1996
----------------
HIGH LOW
-------- -------
<S> <C> <C>
El Paso Common Stock...................................... $ 35.250 $34.375
Tenneco Common Stock...................................... $ 54.875 $53.750
$7.40 Preferred Stock..................................... $100.000 $99.625
</TABLE>
Tenneco has declared cash dividends for the fourth quarter 1996 on the
Tenneco Common Stock and $7.40 Preferred Stock. See "THE MERGER--Final
Dividends on Tenneco Stock."
27
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA OF TENNECO
The summary consolidated financial data set forth below as of and for each of
the fiscal years in the five-year period ended December 31, 1995 were derived
from audited financial statements of Tenneco and its consolidated subsidiaries.
The financial statements as of and for each of the fiscal years in the five-
year period ended December 31, 1995 have been audited by Arthur Andersen LLP,
independent public accountants. The summary consolidated financial data set
forth below as of and for each of the six-month periods ended June 30, 1996 and
1995 were derived from the unaudited condensed financial statements of Tenneco
and its consolidated subsidiaries. In the opinion of Tenneco's management, the
summary consolidated financial data of Tenneco as of and for the six months
ended June 30, 1996 and 1995 include all adjusting entries (consisting only of
normal recurring adjustments) necessary to present fairly the information set
forth therein. The results of operations for the six months ended June 30, 1996
should not be regarded as indicative of the results that may be expected for
the full year. This information should be read in conjunction with Tenneco's
financial statements, and the notes thereto, contained in the Tenneco Annual
Report on Form 10-K, as amended, for the year ended December 31, 1995 and the
Tenneco Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1996, which are incorporated by reference herein. See "AVAILABLE INFORMATION,"
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE" and "SELECTED FINANCIAL
DATA--Tenneco and Consolidated Subsidiaries Consolidated Selected Financial
Information."
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------- ------------------------------------------------------------------------
(MILLIONS EXCEPT PER SHARE 1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
AMOUNTS) ------- ------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
(LOSS) DATA(B):
Net sales and operating
revenues from continuing
operations--
Automotive.............. $1,463 $1,263 $ 2,479 $ 1,989 $ 1,785 $ 1,763 $ 1,668
Energy.................. 1,366 937 1,916 2,378 2,862 2,183 2,183
Packaging............... 1,775 1,318 2,752 2,184 2,042 2,078 1,934
Shipbuilding............ 915 845 1,756 1,753 1,861 2,265 2,216
Other................... (2) (2) (4) (6) (5) 31 26
------- ------- ----------- ----------- ----------- ----------- -----------
Total.................. $ 5,517 $ 4,361 $ 8,899 $ 8,298 $ 8,545 $ 8,320 $ 8,027
======= ======= =========== =========== =========== =========== ===========
Income from continuing
operations before inter-
est expense, income
taxes and minority in-
terest--
Automotive.............. $ 163 $ 134 $ 240 $ 223 $ 222 $ 237 $ 188
Energy.................. 185 148 333 415 411 360 561 (c)
Packaging............... 256 244 430 209 139 221 139 (c)
Shipbuilding............ 81 90 160 200 225 249 225
Other................... (4) (11) (67) (25) 18 (32) (98)
------- ------- ----------- ----------- ----------- ----------- -----------
Total.................. 681 605 1,096 1,022 1,015 1,035 1,015
Interest expense (net of
interest capitalized)... 179 152 306 263 254 221 237
Income tax expense....... 175 185 279 249 298 282 258
Minority interest........ 10 11 22 7 -- -- --
------- ------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations.............. 317 257 489 503 463 532 520
Income (loss) from dis-
continued operations,
net of income tax(d).... 339 81 246 (51)(e) (12)(e) (1,144)(e) (1,252)(e)
Extraordinary loss, net
of income tax........... -- -- -- (5) (25) (12) --
Cumulative effect of
changes in accounting
principles, net of in-
come tax................ -- -- -- (39)(f) -- (699)(f) --
------- ------- ----------- ----------- ----------- ----------- -----------
Net income (loss)........ 656 338 735 408 426 (1,323) (732)
Preferred stock divi-
dends................... 5 6 12 12 14 16 16
------- ------- ----------- ----------- ----------- ----------- -----------
Net income (loss) to com-
mon stock............... $ 651 $ 332 $ 723 $ 396 $ 412 $ (1,339) $ (748)
======= ======= =========== =========== =========== =========== ===========
Earnings (loss) per
average share of common
stock
Continuing operations... $ 1.83 $ 1.43 $ 2.75 $ 2.72 $ 2.66 $ 3.58 $ 4.10
Discontinued operations. 1.99 .46 1.41 (.27) (.07) (7.93) (10.19)
Extraordinary loss...... -- -- -- (.03) (.15) (.08) --
Cumulative effect of
changes in accounting
principles............. -- -- -- (.22) -- (4.86) --
------- ------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss)..... $ 3.82 $ 1.89 $ 4.16 $ 2.20 (g) $ 2.44 (g) $ (9.29)(g) $ (6.09)
======= ======= =========== =========== =========== =========== ===========
Cash dividends paid per
common share............ $ .90 $ .80 $ 1.60 $ 1.60 $ 1.60 $ 1.60 $ 2.80
BALANCE SHEET DATA(B):
Total assets............ $13,262 $12,090 $ 13,451 $ 12,251 $ 11,105 $ 11,320 $ 12,985
Short-term debt......... 1,146 635 908 536 431 669 1,132
Long-term debt.......... 3,374 3,309 3,751 3,568 3,620 4,718 4,593
Minority interest....... 320 315 320 320 150 160 171
Preferred stock with
mandatory redemption
provisions............. 112 129 130 147 163 191 194
Shareowners' equity..... 3,569 2,911 3,148 2,900 2,601 1,330 2,774
</TABLE>
(Continued on next page)
28
<PAGE>
(Continued from previous page)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------- -----------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
(MILLIONS) ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided
(used) by operating
activities............ $(215) $ 255 $1,443 $ 450 $1,615 $ 929 $ 950
Net cash provided
(used) by investing
activities............ 505 183 (1,146) (117) (338) 105 (660)
Net cash provided
(used) by financing
activities............ (413) (741) (356) (151) (1,166) (1,136) (205)
OTHER DATA:
EBITDA(h).............. $ 956 $ 804 $1,523 $1,321 $1,385 $1,391 $1,350
</TABLE>
- --------
(a) For a discussion of significant items affecting comparability of the
financial information for 1995, 1994 and 1993, and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for Tenneco Inc. and
Consolidated Subsidiaries, included in the Tenneco Annual Report on Form
10-K, as amended, for the year ended December 31, 1995 and the Tenneco
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, which
are incorporated by reference herein.
(b) During 1995 and 1994, Tenneco completed several acquisitions at its various
operating segments, the most significant of which was Tenneco Packaging's
acquisition of the Mobil Plastics Division of Mobil Oil Corporation ("Mobil
Plastics") for $1.3 billion in late 1995. See Note 2 to the Financial
Statements of Tenneco Inc. and Consolidated Subsidiaries, included in the
Tenneco Annual Report on Form 10-K, as amended, for the year ended December
31, 1995, which is incorporated by reference herein, for further
information on the Tenneco acquisitions.
(c) For Tenneco Energy, includes a gain of $265 million related to the sale of
its natural gas liquids business, including its interest in an MTBE plant
then under construction. Also, Tenneco Packaging recorded a gain of $42
million related to the sale of three short-line railroads.
(d) Discontinued operations reflected in the above periods include Tenneco's
farm and construction equipment operations, which were discontinued in
March 1996, its chemicals and brakes operations, which were discontinued
during 1994, and its minerals and pulp chemicals operations, which were
discontinued in 1992. In addition, certain additional costs related to
Tenneco's discontinued oil and gas operations were reflected in the 1991
results.
(e) Includes a pre-tax restructuring charge of $920 million recorded in 1992
relating to the discontinued farm and construction equipment business. This
pre-tax restructuring charge was reduced by $20 million in 1993 and $16
million in 1994. Additionally, a $473 million pre-tax restructuring charge
was recorded in 1991, of which $461 million related to the discontinued
farm and construction equipment business.
(f) In 1994, Tenneco adopted Statement of Financial Accounting Standards
("FAS") No. 112, "Employers' Accounting for Postemployment Benefits." In
1992, Tenneco adopted FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and FAS No. 109, "Accounting
for Income Taxes."
(g) For purposes of computing earnings per share, Series A preferred stock was
included in average common shares outstanding until its conversion into
common stock in December 1994; therefore, the preferred dividends paid were
not deducted from net income (loss) to determine net income (loss) to
common stock. The inclusion of Series A preferred stock in the computation
of earnings per share was antidilutive for the years and certain quarters
in 1994, 1993 and 1992. Other convertible securities and common stock
equivalents outstanding during each of the five years ended December 31,
1995, 1994, 1993, 1992 and 1991 were not materially dilutive.
(h) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon generally accepted accounting principles
("GAAP"); however, the amounts included in the EBITDA calculation are
derived from amounts included in the consolidated historical Statements of
Income. In addition, EBITDA should not be considered as an alternative to
net income or operating income, as an indicator of the operating
performance of Tenneco or as an alternative to operating cash flows as a
measure of liquidity.
29
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED CONSOLIDATED FINANCIAL DATA OF EL
PASO
The summary financial data set forth below have been derived from the
financial statements of El Paso for each of the five fiscal years ended
December 31, 1995 and the unaudited six month periods ended June 30, 1996 and
June 30, 1995. The financial statements for each of the five fiscal years for
the period ended December 31, 1995 have been audited by Coopers & Lybrand
L.L.P., independent accountants. The summary consolidated financial data set
forth below as of and for each of the six-month periods ended June 30, 1996 and
1995 were derived from the unaudited condensed financial statements of El Paso
and its consolidated subsidiaries. In the opinion of El Paso's management, the
summary consolidated financial data of El Paso as of and for the six months
ended June 30, 1996 and 1995 include all adjusting entries (consisting only of
normal recurring adjustments) necessary to present fairly the information set
forth therein. The results of operations for the six months ended June 30, 1996
should not be regarded as indicative of the results that may be expected for
the full year.
The summary pro forma combined financial data as of and for the six months
ended June 30, 1996 and for the year ended December 31, 1995 have been prepared
to reflect: (i) certain Tenneco Energy restructuring and realignment
transactions (see the "Transaction" included elsewhere herein), (ii) the
Merger, and (iii) the Refinancing Transactions. The unaudited pro forma
combined financial position data has been prepared as if such transactions
occurred on June 30, 1996; the unaudited pro forma combined operating results
data have been prepared as if such transactions occurred as of January 1, 1995.
Additionally, the pro forma combined data is presented (i) assuming the Stock
Issuance is approved, and (ii) assuming the Stock Issuance is not approved. The
summary pro forma combined financial data are not necessarily indicative of
actual operating results or financial position had the transactions occurred as
of the dates indicated above, nor do they purport to indicate operating results
or financial position which may be attained in the future.
This information should be read in conjunction with the historical financial
statements and notes thereto contained in the El Paso Annual Report on Form 10-
K for the year ended December 31, 1995 and the El Paso Quarterly Report on Form
10-Q for the six months ended June 30, 1996, which are incorporated by
reference herein, and in conjunction with the Unaudited Pro Forma Combined
Financial Statements of El Paso and Tenneco Energy and notes thereto included
elsewhere in this Joint Proxy Statement-Prospectus. See "AVAILABLE
INFORMATION," "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE," and
"UNAUDITED PRO FORMA FINANCIAL INFORMATION."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
PRO FORMA 1995
-----------------------------
ASSUMING STOCK ASSUMING STOCK
ISSUANCE IS ISSUANCE IS
APPROVED NOT APPROVED 1995(D) 1994 1993(E) 1992 1991
-------------- -------------- ------- ------ ------- ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Operating revenues..... $2,912 $2,912 $1,038 $ 870 $ 909 $ 803 $ 735
Depreciation,
depletion, and
amortization.......... 293 293 72 65 54 73 61
Litigation special
charge................ -- -- -- 15 -- -- --
Operating income....... 317 317 212 222 229 185 185
Income from continuing
operations before
income taxes and
minority interest..... 192 192 133 148 151 123 141
Income taxes........... 2 2 48 58 59 47 52
Minority interest...... 23 23 -- -- -- -- --
Income from continuing
operations............ 167 167 85 90 92 76 89
Preferred stock
dividend.............. -- 56 -- -- -- -- --
Earnings available to
common stock.......... 167 111 85 90 92 76 89
Earnings per common
share from continuing
operations............ 2.89 2.43 2.47 2.45 2.46 2.12 2.82
Cash dividends declared
per common share(a)... 1.32 1.32 1.32 1.21 1.10 0.75 --
Average common shares
outstanding........... 57,717 45,787 34,495 36,632 37,212 36,049 31,422
Ratio of earnings to
combined fixed charges
and preferred stock
dividend requirements. 1.67 1.24 2.51 2.87 3.04 2.73 2.86
<CAPTION>
DECEMBER 31,
------------------------------------
1995(D) 1994 1993(E) 1992 1991
------- ------ ------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Total assets........... $2,535 $2,332 $2,270 $2,051 $2,302
Payable to Burlington
Resources Inc.,
including current
portion............... -- -- -- -- 625
Long-term debt(b)...... 772 779 796 637 250
Stockholders'
equity(c)............. 712 710 708 669 815
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------
PRO FORMA 1996
-----------------------------
ASSUMING STOCK ASSUMING STOCK
ISSUANCE IS ISSUANCE IS
APPROVED NOT APPROVED 1996(D) 1995
-------------- -------------- ------- ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Operating revenues...... $2,517 $2,517 $1,193 $ 389
Depreciation, depletion,
and amortization....... 161 161 43 34
Employee separation and
asset impairment
charge(f).............. 99 99 99 --
Operating income........ 106 106 29 109
Income (loss) from
continuing operations
before income taxes and
minority interest...... 50 50 (18) 70
Income taxes (benefit).. (5) (5) (7) 28
Minority interest....... 12 12 -- --
Income (loss) from
continuing operations.. 43 43 (11) 42
Preferred stock
dividend............... -- 28 -- --
Earning (loss) available
to common stock........ 43 15 (11) 42
Earnings (loss) per
common share from
continuing operations.. 0.74 0.33 (0.31) 1.21
Cash dividends declared
per common share....... 0.70 0.70 0.70 0.66
Average common shares
outstanding............ 58,486 46,556 35,264 34,976
Ratio of earnings to
combined fixed charges
and preferred stock
dividend requirements.. 1.32 --(h) --(g) 2.59
<CAPTION>
JUNE 30,
-----------------------------------------------
PRO FORMA 1996
-----------------------------
ASSUMING STOCK ASSUMING STOCK
ISSUANCE IS ISSUANCE IS
APPROVED NOT APPROVED 1996(D) 1995
-------------- -------------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Total assets............ $8,565 $8,565 $2,764 $2,266
Long-term debt(b)....... 2,184 2,184 670 775
Minority interest....... 323 323 -- --
Stockholders' equity.... 1,770 1,770 688 691
</TABLE>
- -------
(a) Represents dividends declared subsequent to El Paso's March 1992 initial
public offering.
(b) Excludes current maturities.
(c) In May 1991, El Paso declared and paid a dividend of $175 million to The El
Paso Company (formerly the parent company of El Paso). In September 1991,
El Paso declared a dividend of all its Oil and Gas Operations Segment to
The El Paso Company. The total amount of that dividend was $925 million. In
addition, El Paso declared and paid dividends to Burlington Resources, Inc.
totaling $55 million in 1991 and $274 million prior to El Paso's March 1992
initial public offering.
(d) Reflects the consolidation in September 1995 of Eastex Energy Inc., in
December 1995 of Premier Gas Company, and in June 1996 of Cornerstone
Natural Gas Company.
(e) Mojave Pipeline Company was consolidated beginning May 1993.
(f) Charge of $99 million pre-tax ($60 million after tax) to reflect costs
associated with the implementation of a workforce reduction plan and the
impairment of certain long-lived assets. Earnings per common share for the
six months ended June 30, 1996 before giving effect to this charge would
have been $1.41 (compared to $(0.31)) and $1.77 (compared to $0.74) on a
historical and pro forma basis (assuming the Stock Issuance is approved),
respectively.
(g) Earnings for the six months ended June 30, 1996 were inadequate to cover
fixed charges by $18 million due to a special charge for employee
separation and asset impairments of $99 million pre-tax.
(h) Earnings were inadequate to cover fixed charges by $4 million.
31
<PAGE>
SUMMARY COMBINED FINANCIAL DATA OF TENNECO ENERGY
The summary combined financial data as of December 31, 1995 and 1994 and for
the years ended December 31, 1995, 1994 and 1993 were derived from the audited
Combined Financial Statements of Tenneco Energy. The summary combined financial
data as of December 31, 1993, 1992 and 1991 and for the years ended December
31, 1992 and 1991 are unaudited and were derived from the accounting records of
Tenneco. The summary combined financial data as of and for each of the six-
month periods ended June 30, 1996 and 1995 were derived from the unaudited
Combined Financial Statements of Tenneco Energy. In the opinion of Tenneco
Energy's management, the summary combined financial data of Tenneco Energy as
of December 31, 1993, 1992 and 1991 and for the years ended December 31, 1992
and 1991, and as of and for the six months ended June 30, 1996 and 1995 include
all adjusting entries (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein. The results of
operations for the six months ended June 30, 1996 should not be regarded as
indicative of the results that may be expected for the full year.
This information should be read in conjunction with the "Combined Selected
Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the Energy Business and Tenneco
Energy's Combined Financial Statements, and notes thereto, included elsewhere
in this Joint Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------- ----------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
(MILLIONS) ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA(B):
Net sales and operating
revenues.............. $1,370 $ 939 $1,921 $2,381 $2,866 $2,221 $2,216
====== ====== ====== ====== ====== ====== ======
Income before interest
expense and income
taxes ................ $ 188 $ 140 $ 268 $ 367 $ 419 $ 337 $ 475(c)
Interest expense (net
of interest capital-
ized)................. 63 61 122 142 127 94 121
Income tax expense
(benefit)............. 22 32 (11) 72 104 63 103
------ ------ ------ ------ ------ ------ ------
Income before
extraordinary loss and
cumulative effect of
changes in accounting
principles, net of
income tax............ 103 47 157 153 188 180 251
Extraordinary loss, net
of income tax......... -- -- -- -- (25)(d) (9)(e) --
Cumulative effect of
changes in accounting
principles, net of
income tax............ -- -- -- -- -- (332)(f) --
------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 103 $ 47 $ 157 $ 153 $ 163 $ (161) $ 251
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA(B):
Total assets........... $5,539 $5,799 $5,792 $5,730 $4,290 $4,054 $4,464
Short-term debt(g)..... 521 376 456 399 304 392 338
Long-term debt(g)...... 1,519 1,737 1,811 2,242 2,019 2,282 2,674
Combined equity........ 1,054 899 687 382 (652) (1,503) (1,120)
</TABLE>
- -------
(a) For a discussion of the significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the Energy Business
included elsewhere in this Joint Proxy Statement-Prospectus.
(b) During 1995, 1994 and 1993, Tenneco Energy completed several acquisitions
and dispositions, the most significant of which was the acquisition of the
natural gas pipeline assets of the Pipeline Authority of South Australia in
1995 and the disposition of its 50% interest in Kern River Gas Transmission
Company in 1995. See Notes 4 and 5 to the Combined Financial Statements of
Tenneco Energy, included elsewhere in this Joint Proxy Statement-
Prospectus, for further information on the Tenneco Energy acquisitions and
dispositions.
(c) Includes a gain of $265 million related to the sale of Tenneco Energy's
natural gas liquids business, including its interest in an MTBE plant then
under construction.
(d) During 1993, Tenneco Energy recorded an extraordinary loss as a result of
the prepayment of long-term debt. See Note 5 to the Combined Financial
Statements of Tenneco Energy, included elsewhere in this Joint Proxy
Statement-Prospectus, for further information on the Tenneco Energy
extraordinary loss.
(e) During 1992, Tenneco Energy recorded an extraordinary loss as a result of
the defeasance of $310 million of its high interest bearing long-term debt.
(f) In 1992, Tenneco Energy adopted FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and FAS No. 109, "Accounting
for Income Taxes."
(continued on next page)
32
<PAGE>
(continued from previous page)
(g) Amounts are net of allocations from Tenneco to New Tenneco and Newport
News. The allocation is based on the portion of Tenneco's investment in New
Tenneco and Newport News which is deemed to be debt, generally based on the
ratio of New Tenneco's and Newport News' net assets to Tenneco consolidated
net assets plus debt. Tenneco's historical practice has been to incur
indebtedness for its consolidated group at the parent company level or at a
limited number of subsidiaries, rather than at the operating company level,
and to centrally manage various cash functions. Management believes that
the historical allocation of corporate debt and interest expense is
reasonable; however, it is not necessarily indicative of Tenneco Energy's
debt upon completion of the Debt Realignment. See Note 6 to the Combined
Financial Statements of Tenneco Energy, included elsewhere in this Joint
Proxy Statement--Prospectus.
33
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA OF NEW TENNECO
The summary combined financial data as of December 31, 1995 and 1994 and for
the years ended December 31, 1995, 1994 and 1993 were derived from the audited
Combined Financial Statements of New Tenneco. The summary combined financial
data as of December 31, 1993, 1992 and 1991 and for the years ended December
31, 1992 and 1991 are unaudited and were derived from the accounting records of
Tenneco. The summary combined financial data as of and for each of the six-
month periods ended June 30, 1996 and 1995 were derived from the unaudited
Combined Financial Statements of New Tenneco. In the opinion of New Tenneco's
management, the summary combined financial data of New Tenneco as of December
31, 1993, 1992 and 1991 and for the years ended December 31, 1992 and 1991, and
as of and for the six months ended June 30, 1996 and 1995 include all adjusting
entries (consisting only of normal recurring adjustments) necessary to present
fairly the information set forth therein. The results of operations for the six
months ended June 30, 1996 should not be regarded as indicative of the results
that may be expected for the full year.
The summary pro forma combined financial data as of and for the six months
ended June 30, 1996 and for the year ended December 31, 1995, have been
prepared to reflect (i) the acquisition of The Pullman Company and its Clevite
products division ("Clevite") in July 1996 and the acquisition of the Amoco
Foam Products Company, a unit of Amoco Chemical Company, ("Amoco Foam
Products"), in August 1996; (ii) the effect on New Tenneco of the Cash
Realignment and Debt Realignment; (iii) the effect on New Tenneco of the
Corporate Restructuring Transactions and other transactions pursuant to the
provisions of the Distribution Agreement and Merger Agreement; and (iv) the
issuance of New Tenneco Common Stock as part of the Industrial Distribution.
The unaudited pro forma combined financial data for the year ended December 31,
1995 also reflects the pro forma results of operations of Mobil Plastics prior
to its acquisition in November 1995. The Clevite and Amoco Foam Products
acquisitions do not meet the SEC's criteria for inclusion of separate
historical financial statements. The unaudited pro forma combined Statements of
Income Data have been prepared as if the transactions occurred on January 1,
1995; the unaudited pro forma combined Balance Sheet Data have been prepared as
if the transactions occurred on June 30, 1996. The summary pro forma combined
financial data are not necessarily indicative of the results of operations of
New Tenneco had the transactions reflected therein actually been consummated on
the dates assumed and are not necessarily indicative of the results of
operations for any future period.
This information should be read in conjunction with the "Unaudited Pro Forma
Combined Financial Statements of New Tenneco" the "New Tenneco Combined
Selected Financial Data" included elsewhere in this Joint Proxy--Prospectus,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of New Tenneco and New Tenneco's Combined Financial Statements, and
notes thereto, included in the New Tenneco Information Statement attached
hereto as Appendix C.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- ---------------------------------------------------------
PRO FORMA PRO FORMA
(MILLIONS EXCEPT PER SHARE 1996 1996(A) 1995(A) 1995 1995(A) 1994(A) 1993(A) 1992 1991
AMOUNTS) --------- ------- ------- --------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA(B):
Net sales and operating
revenues from continuing
operations--
Automotive............... $1,583 $1,463 $1,263 $2,710 $2,479 $1,989 $1,785 $1,763 $1,668
Packaging................ 1,927 1,775 1,318 4,556 2,752 2,184 2,042 2,078 1,934
Intergroup sales and
other................... (5) (5) (4) (10) (10) (7) (7) (5) (5)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total.................. $3,505 $3,233 $2,577 $7,256 $5,221 $4,166 $3,820 $3,836 $3,597
====== ====== ====== ====== ====== ====== ====== ====== ======
Income from continuing
operations before
interest expense, income
taxes and minority
interest--
Automotive............... $ 170 $ 163 $ 134 $ 258 $ 240 $223 $ 222 $ 237 $ 188
Packaging................ 280 256 244 548 430 209 139 221 139(c)
Other.................... (5) (5) -- 2 2 24 20 7 3
------ ------ ------ ------ ------ ------ ------ ------ ------
Total.................. 445 414 378 808 672 456 381 465 330
Interest expense (net of
interest capitalized).... 83 100 74 166 160 104 101 102 111
Income tax expense........ 147 126 124 291 231 114 115 154 80
Minority Interest......... 10 10 12 23 23 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from continuing
operations............... 205 178 168 328 258 238 165 209 139
Loss from discontinued
operations, net of income
tax...................... -- -- -- -- -- (31) (7) (7) (12)
Cumulative effect of
changes in accounting
principles, net of income
tax...................... -- -- -- -- -- (7)(d) -- (99)(d) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income................ $ 205 $ 178 $ 168 $ 328 $ 258 $ 200 $ 158 $ 103 $ 127
====== ====== ====== ====== ====== ====== ====== ====== ======
Income from continuing
operations per share..... $ 1.20 $ 1.89
====== ======
Net income per share...... $ 1.20 $ 1.89
====== ======
BALANCE SHEET DATA(B):
Total assets.............. $7,617 $6,523 $4,430 N/A $6,117 $3,940 $3,029 $2,812 $2,792
Short-term debt(e)........ 13 530 205 N/A 384 108 94 182 758
Long-term debt(e)......... 2,132 1,573 1,246 N/A 1,648 1,039 1,178 1,675 1,555
Minority interest......... 301 301 297 N/A 301 301 1 1 2
Combined equity........... 2,988 2,168 1,163 N/A 1,852 987 533 (87) (553)
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided (used)
by operating activities.. N/A $ 199 $ (9) N/A $ 489 $ 571 $ 324 $ 121 $ 503
Net cash provided (used)
by investing activities.. N/A (340) (206) N/A (2,041) (303) (152) (78) (237)
Net cash provided (used)
by financing activities.. N/A 169 (52) N/A 1,297 50 (165) (41) (251)
OTHER DATA:
EBITDA(f)................. $ 603 $ 551 $ 458 $1,023 $ 845 $ 598 $ 518 $ 595 $ 463
</TABLE>
(Continued on next page)
34
<PAGE>
(Continued from previous page)
- --------
(a) For a discussion of the significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of New Tenneco included in
the New Tenneco Information Statement attached hereto as Appendix C.
(b) During 1995 and 1994, the Automotive and Packaging operating segments of
New Tenneco each completed several acquisitions, the most significant of
which was the Packaging segment's acquisition of Mobil Plastics for $1.3
billion in late 1995. See Note 4 to the Combined Financial Statements of
New Tenneco, included in the New Tenneco Information Statement attached
hereto as Appendix C, for further information on New Tenneco's
acquisitions.
(c) Includes a gain of $42 million recorded by Tenneco Packaging related to the
sale of three short-line railroads.
(d) In 1994, New Tenneco adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits." In 1992, New Tenneco adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and FAS No. 109, "Accounting for Income Taxes."
(e) Historical amounts include debt allocated to New Tenneco from Tenneco based
on the portion of Tenneco's investment in New Tenneco which is deemed to be
debt, generally based upon the ratio of New Tenneco's net assets to Tenneco
consolidated net assets plus debt. Tenneco's historical practice has been
to incur indebtedness for its consolidated group at the parent company
level or at a limited number of subsidiaries, rather than at the operating
company level, and to centrally manage various cash functions. Management
believes that the historical allocation of corporate debt and interest
expense is reasonable; however, it is not necessarily indicative of New
Tenneco's debt upon completion of the Debt Realignment nor debt and
interest that may be incurred by New Tenneco as a separate public entity.
See the Combined Financial Statements of New Tenneco, and notes thereto,
included in the New Tenneco Information Statement attached hereto as
Appendix C.
(f) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon GAAP; however, the amounts included in the
EBITDA calculation are derived from amounts included in the combined
historical or pro forma Statements of Income. In addition, EBITDA should
not be considered as an alternative to net income or operating income, as
an indicator of the operating performance of New Tenneco or as an
alternative to operating cash flows as a measure of liquidity.
35
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA OF NEWPORT NEWS
The summary combined financial data as of December 31, 1995 and 1994 and for
the years ended December 31, 1995, 1994 and 1993 were derived from the audited
Combined Financial Statements of Newport News. The summary combined financial
data as of December 31, 1993, 1992 and 1991 and for the years ended December
31, 1992 and 1991 are unaudited and were derived from the accounting records of
Tenneco. The summary combined financial data as of and for each of the six-
month periods ended June 30, 1996 and 1995 were derived from the unaudited
Combined Financial Statements of Newport News. In the opinion of Newport News'
management, the summary combined financial data of Newport News as of December
31, 1993, 1992 and 1991 and for the years ended December 31, 1992 and 1991 and
as of and for the six months ended June 30, 1996 and 1995 include all adjusting
entries (consisting only of normal recurring adjustments) necessary to present
fairly the information set forth therein. The results of operations for the six
months ended June 30, 1996 should not be regarded as indicative of the results
that may be expected for the full year.
The summary pro forma combined financial data as of and for the six months
ended June 30, 1996 and for the year ended December 31, 1995, have been
prepared to reflect: (i) borrowings of $614 million under the Newport News
Financings (as defined); (ii) the cash dividend of $600 million to be paid by
Newport News to Tenneco or one of its subsidiaries as part of the Debt
Realignment; (iii) the payment of $14 million of fees and expenses incurred in
connection with the Newport News Financings; and (iv) the issuance of Newport
News Common Stock pursuant to the Shipbuilding Distribution. The unaudited pro
forma combined Statements of Earnings Data have been prepared as if the
transactions occurred on January 1, 1995; the unaudited pro forma combined
Balance Sheet Data have been prepared as if the transactions occurred on June
30, 1996. The summary pro forma combined financial data are not necessarily
indicative of the results of operations of Newport News had the transactions
reflected therein actually been consummated on the dates assumed and are not
necessarily indicative of the results of operations for any future period.
This information should be read in conjunction with the "Unaudited Pro Forma
Combined Financial Statements of Newport News" and the "Newport News Combined
Selected Financial Data" included elsewhere in this Joint Proxy Statement--
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of Newport News, and the Newport News Combined Financial
Statements, and notes thereto, included in the Newport News Information
Statement attached hereto as Appendix D.
<TABLE>
<CAPTION>
YEARS
ENDED
DECEMBER
SIX MONTHS ENDED JUNE 30, 31,
-------------------------- ------------------------------------------------------------
PRO FORMA PRO FORMA
(MILLIONS EXCEPT PER SHARE 1996 1996(A) 1995(A) 1995 1995(A) 1994(A) 1993(A) 1992 1991
AMOUNTS) --------- ------- ------- --------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS
DATA:
Net sales................ $ 915 $ 915 $ 845 $1,756 $1,756 $1,753 $1,861 $2,265 $2,216
====== ====== ====== ====== ====== ====== ====== ====== ======
Operating earnings....... $ 80 $ 81 $ 90 $ 155 $ 157 $ 201 $ 210 $ 249 $ 224
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings before
cumulative effect of
changes in accounting
principles.............. $ 29 $ 37 $ 41 $ 54 $ 73 $ 95 $ 111 (b) $ 143 $ 135
Cumulative effect of
changes in accounting
principles, net of tax.. -- -- -- -- -- (4)(c) -- (93)(c) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net earnings............. $ 29 $ 37 $ 41 $ 54 $ 73 $ 91 $ 111 $ 50 $ 135
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings per share........ $ .85 $ 1.55
====== ======
BALANCE SHEET DATA:
Working capital......... $ 185 $ 41 $ 4 N/A $ (19) $ (75) $ (121) $ (89) $ (470)
Total assets............ 1,461 1,452 1,337 N/A 1,380 1,263 1,235 1,450 1,412
Short-term debt(d)...... 28 95 54 N/A 68 30 34 83 36
Long-term debt(d)....... 586 282 326 N/A 292 287 423 761 364
Combined equity......... 194 349 236 N/A 272 199 105 (173) (30)
STATEMENT OF CASH FLOWS
DATA:
Net cash provided (used)
by operating
activities............. N/A $ (1) $ (18) N/A $ 63 $ 182 $ 215 $ (174) $ 352
Net cash provided (used)
by investing
activities............. N/A (45) (29) N/A (87) (29) 21 6 (99)
Net cash provided (used)
by financing
activities............. N/A 45 47 N/A 25 (154) (241) 181 (246)
OTHER DATA:
EBITDA(e)............... $ 113 $ 113 $ 123 $ 227 $ 227 $ 270 $ 297 $ 323 $ 298
</TABLE>
(continued on next page)
36
<PAGE>
(continued from previous page)
- --------
(a) For a discussion of significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of Newport News, included in
the Newport News Information Statement attached hereto as Appendix D.
(b) Includes a gain of $15 million related to the sale of Sperry Marine
businesses.
(c) In 1994, Newport News adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits." In 1992, Newport News adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and FAS No. 109, "Accounting for Income Taxes."
(d) Historical amounts represent debt allocated to Newport News from Tenneco
based on the portion of Tenneco's investment in Newport News which is
deemed to be debt, generally based upon the ratio of Newport News' net
assets to Tenneco consolidated net assets plus debt. Tenneco's historical
practice has been to incur indebtedness for its consolidated group at the
parent company level or at a limited number of subsidiaries, rather than at
the operating company level, and to centrally manage various cash
functions. Management believes that the historical allocation of corporate
debt and interest expense is reasonable; however, it is not necessarily
indicative of Newport News' debt upon completion of the Debt Realignment,
nor debt and interest that may be incurred by Newport News as a separate
public entity. See the Combined Financial Statements of Newport News, and
notes thereto, included in the Newport News Information Statement attached
hereto as Appendix D.
(e) EBITDA represents earnings before cumulative effect of changes in
accounting principles, income taxes, interest expense and depreciation and
amortization. EBITDA is not a calculation based upon GAAP; however, the
amounts included in the EBITDA calculation are derived from amounts
included in the combined historical or pro forma Statements of Earnings. In
addition, EBITDA should not be considered as an alternative to net income
or operating income, as an indicator of the operating performance of
Newport News or as an alternative to operating cash flows as a measure of
liquidity.
37
<PAGE>
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The tables below present comparative historical and pro forma income from
continuing operations per share, cash dividends per share and book value per
share of El Paso and historical and equivalent pro forma income from continuing
operations per share, cash dividends per share and book value per share of
Tenneco. The first table presents El Paso's historical and pro forma per share
data which is derived from El Paso's Selected Financial Data and Unaudited Pro
Forma Combined Financial Statements contained elsewhere in the Joint Proxy
Statement. The first table also presents the El Paso pro forma per share data
on a Tenneco per common equivalent share basis calculated as the product of the
El Paso pro forma per share data and the exchange ratio of El Paso common
shares (or common and preferred depositary shares if the Stock Issuance is not
approved) for Tenneco common shares. The second and third tables present
historical per share data which is derived from Tenneco's Selected Financial
Data contained elsewhere in the Joint Proxy Statement. Those tables also
present, on a per Tenneco common equivalent share basis, the pro forma per
share data of El Paso (giving effect to the Merger and Refinancing
Transactions), New Tenneco and Newport News. The per Tenneco common equivalent
share data was calculated as the product of the pro forma data of El Paso, New
Tenneco and Newport News and the exchange ratios of each respective transaction
(i.e. Merger and Distributions) for Tenneco common shares. The El Paso exchange
ratio was estimated assuming, solely for the purpose of making such
calculation, an Average El Paso Common Price of $46.6000 (which is equal to the
average per share closing price on the NYSE for the El Paso Common Stock for
the 20-day trading period ended on October 28, 1996). The actual exchange ratio
may be higher or lower depending upon the Average El Paso Common Price. See
"THE MERGER--Conversion of Shares". The New Tenneco exchange ratio is based on
one share of New Tenneco common stock for each share of Tenneco common stock.
The Newport News exchange ratio is based on one share of Newport News common
stock for five shares of Tenneco common stock. See "THE DISTRIBUTIONS" for a
discussion of the Distributions.
<TABLE>
<CAPTION>
PRO FORMA(A)
-------------------------------------------
TENNECO COMMON
EL PASO EQUIVALENT
--------------------- ---------------------
STOCK STOCK STOCK STOCK
EL PASO ISSUANCE ISSUANCE ISSUANCE ISSUANCE
HISTORICAL APPROVED NOT APPROVED APPROVED NOT APPROVED
---------- -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1995
Income from continuing
operations per common
share................. $ 2.47 $2.89 $2.43 $.27 $.06
Cash dividends per
common share.......... 1.32 1.32 1.32 .12 .03
Cash dividends per El
Paso Preferred
Depositary Share...... -- -- 4.00 -- .32
Six Months Ended June
30, 1996
Income (loss) from
continuing operations
per common share...... $(0.31) $ .74 $ .33 $.07 $.01
Cash dividends per
common share.......... 0.70 .70 .70 .07 .02
Cash dividends per El
Paso Preferred
Depositary Share...... -- -- 2.00 -- .16
Book value per common
share................. 19.32 30.08 25.88 2.78 .62
</TABLE>
<TABLE>
<CAPTION>
EQUIVALENT PRO FORMA(B)
---------------------------------
TENNECO NEW NEWPORT TOTAL
STOCK ISSUANCE APPROVED HISTORICAL EL PASO TENNECO NEWS PRO FORMA
- ----------------------- ---------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
Income from continuing operations
per common share................ $2.75 $.27 $1.89 $.31 $2.47
Cash dividends per common share.. 1.60 .12 N/A N/A .12
Cash dividends per El Paso
Preferred Depositary Share...... -- -- -- -- --
Six Months Ended June 30, 1996
Income from continuing operations
per common share................ $1.83 $.07 $1.20 $.17 $1.44
Cash dividends per common share.. .90 .07 N/A N/A .07
Cash dividends per El Paso
Preferred Depositary Share...... -- -- -- -- --
Book value per common share...... 20.89 2.78 17.49 1.14 21.43
<CAPTION>
EQUIVALENT PRO FORMA(B)
---------------------------------
TENNECO NEW NEWPORT TOTAL
STOCK ISSUANCE NOT APPROVED HISTORICAL EL PASO TENNECO NEWS PRO FORMA
- --------------------------- ---------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
Income from continuing operations
per common share................ $2.75 $.06 $1.89 $.31 $2.26
Cash dividends per common share.. 1.60 .03 N/A N/A .03
Cash dividends per El Paso
Preferred Depositary Share...... -- .32 -- -- .32
Six Months Ended June 30, 1996
Income from continuing operations
per common share................ $1.83 $.01 $1.20 $.17 $1.38
Cash dividends per common share.. .90 .02 N/A N/A .02
Cash dividends per El Paso
Preferred Depositary Share...... -- .16 -- -- .16
Book value per common share...... 20.89 .62 17.49 1.14 19.25
</TABLE>
- -------
(a) El Paso includes the pro forma effects of the Refinancing Transactions, the
proceeds of which will be used to pay down long-term debt assumed in
connection with the Merger. See the "Unaudited Pro Forma Combined Financial
Statements of El Paso and Tenneco Energy" included elsewhere herein.
(b) New Tenneco includes the pro forma effects of the Clevite and Amoco Foam
Products acquisitions for all periods, and the pro forma effects of the
Mobil Plastics acquisition for the year ended December 31, 1995. See the
"Unaudited Pro Forma Combined Financial Statements of New Tenneco" included
elsewhere herein.
38
<PAGE>
RECENT DEVELOPMENTS
TENNECO
On October 22, 1996, Tenneco announced consolidated earnings for the nine
months ended September 30, 1996. The prior year's results have been restated to
reflect Tenneco's farm and construction equipment business as a discontinued
operation.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
(IN MILLIONS)
Revenues.............................................. $8,320 $6,497
======== ========
Income before interest expense, income taxes and
minority interest.................................... $ 963 $ 855
Interest expense...................................... 268 222
Income tax expense.................................... 247 265
Minority interest..................................... 15 17
-------- --------
Income from continuing operations..................... 433 351
Income from discontinued operations, net of income
tax.................................................. 339 201
Extraordinary loss, net of income tax................. (1) --
-------- --------
Net income............................................ 771 552
Preferred stock dividends............................. 7 8
-------- --------
Net income to common stock............................ $ 764 $ 544
======== ========
Earnings (loss) per average common share:
Continuing operations............................... $ 2.50 $ 1.96
Discontinued operations............................. 1.99 1.15
Extraordinary loss.................................. (.01) --
-------- --------
$ 4.48 $ 3.11
======== ========
</TABLE>
Revenues for the nine months increased by 28 percent from $6.5 billion to
$8.3 billion. All divisions posted volume gains. Revenues at Tenneco Automotive
and Tenneco Packaging increased by approximately $1.1 billion due to recent
acquisitions, while in Tenneco's energy segment, revenues increased 46 percent
due primarily to higher gas prices in both regulated and non-regulated
operations. The revenue increase of $147 million in Tenneco's shipbuilding
segment was primarily attributable to increased carrier construction activity
and activity on the overhaul of the carrier Eisenhower, offset by decreased
submarine construction and conversion work.
Income before interest expense, income taxes and minority interest
("operating income") increased by 13 percent to $963 million for the nine month
period. Tenneco Automotive's operating income increased approximately $21
million as a result of recent acquisitions with the balance of the increase due
primarily to higher volumes in most of Tenneco Automotive's businesses. The
operating income increase of $53 million in Tenneco's energy segment resulted
from income from Australian assets which was up $10 million from 1995, an
increase of $14 million from oil and gas production operations, and a $29
million increase primarily due to benefits derived from the new rate case
implemented in July 1995 and increased volume activity. Tenneco Packaging's
operating income declined by $14 million. While recent acquisitions contributed
approximately $127 million in operating income and Tenneco Packaging realized a
$50 million gain on the sale of two recycled paperboard mills to a joint
venture, lower price realizations in the paperboard business more than offset
that increase. Earnings in Tenneco's shipbuilding segment declined $8 million
primarily due to $57 million of estimated contract losses on commercial product
tankers as well as lower margins on conversion work, offset by productivity
improvements and increased activity on the overhaul of the carrier Eisenhower.
Also, results in 1995 included a $25 million reserve related to the liquidation
of surplus real estate holdings.
Interest expense increased due to higher borrowings resulting from
acquisitions completed late in 1995 and during 1996.
Income from discontinued operations primarily reflects Tenneco's sale of its
remaining shares of Case Corporation ("Case") and Tenneco's share of Case's
income in 1995. The current period's net income included an extraordinary loss
of $1 million due to the early retirement of debt.
39
<PAGE>
Average common shares outstanding decreased by 4.4 million shares versus the
prior year due to shares repurchased. During the third quarter the stock
buyback program was completed.
THE ENERGY BUSINESS
Earnings for the Energy Business, which includes certain of Tenneco's
corporate operations, for the nine months ended September 30, 1996 and 1995 are
summarized below (amounts in millions).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................. $1,997 $1,368
======== ========
Income before interest expense and income taxes....... $ 264 $ 182
Interest expense...................................... 101 86
Income tax expense.................................... 36 44
-------- --------
Income before extraordinary loss...................... 127 52
Extraordinary loss, net of income tax................. (1) --
-------- --------
Net income............................................ $ 126 $ 52
======== ========
</TABLE>
The revenue increase for the Energy Business in 1996 compared to 1995
resulted primarily from higher gas prices as well as benefits from a new rate
case implemented on July 1, 1995. Volumes also increased in both of Energy's
regulated and non-regulated operations.
Operating income from regulated operations increased $43 million to $251
million due to benefits derived from the new rate case, increased volume
activity and a reduction in controllable costs. Year ago results also included
$24 million in operating income from Kern River Pipeline which was sold in late
1995. Non-regulated operations contributed $31 million in 1996, up $10 million
from 1995. The increase is primarily due to higher income of $10 million from
the acquisition of Australian assets and higher earnings of $14 million from
oil and gas production. Also, results in 1995 included a $25 million reserve
related to the liquidation of surplus real estate holdings.
NEW TENNECO
New Tenneco's earnings, on a stand alone basis, for the nine months ended
September 30, 1996 and 1995, are summarized below (amounts in millions).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues............................................... $4,886 $3,839
======== ========
Income before interest expense, income taxes and
minority interest..................................... $ 585 $ 551
Interest expense....................................... 145 113
Income tax expense..................................... 171 180
Minority interest...................................... 15 17
-------- --------
Net income............................................. $ 254 $ 241
======== ========
</TABLE>
Automotive's revenues for the year to date period increased approximately
$360 million. Recent acquisitions contributed $136 million of the increase
while the remainder resulted primarily from volume increases. Packaging's
revenues were $2,671 million for the first nine months of 1996 compared with
$1,983 million in 1995. Lower price realizations in the paperboard business
were more than offset by revenues from recent acquisitions of approximately
$966 million.
Operating income for automotive for the first nine months of 1996 was $245
million, an increase of $50 million from the same period in 1995. Of the
increase, approximately $21 million was due to recent acquisitions with the
remainder primarily due to volume increases. Packaging reported operating
income of $341 million compared to $355 million in 1995. The lower pricing
realizations in the paperboard business were offset by operating income of
approximately $127 million from recent acquisitions and a $50 million gain on
the sale of two recycled paperboard mills and a recovered fiber recycling and
brokerage business to a joint venture.
40
<PAGE>
Interest expense increased due to higher borrowings resulting from
acquisitions completed late in 1995 and during 1996.
NEWPORT NEWS
Newport News' earnings for the nine months ended September 30, 1996 and 1995,
are summarized below (amounts in millions).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Net sales.............................................. $1,437 $1,290
======== ========
Operating earnings..................................... $ 117 $ 125
Interest expense....................................... 25 26
Provision for income taxes............................. 40 41
-------- --------
Net earnings........................................... $ 52 $ 58
======== ========
</TABLE>
Newport News' net sales increase in 1996 was due primarily to higher carrier
construction activity and activity on the Eisenhower overhaul, which offset
revenue declines from the August completion of the Los Angeles-class submarine
construction program and lower activity on conversion work. See "The
Distributions--The Shipbuilding Distribution--Construction--Commercial," The
Newport News "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and the Newport News Combined Financial Statements,
included in the Newport News Information Statement attached hereto as Exhibit
D. Operating earnings for Newport News were down due to $57 million of contract
losses on commercial product tankers and lower margins on conversion work,
offset by productivity improvements and higher activity on the Eisenhower
overhaul.
EL PASO
On October 11, 1996, El Paso reported net income of $14 million for the nine
months ended September 30, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1996 1995
--------- --------
(IN MILLIONS EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C>
Revenues............................................. $ 1,938 $ 629
Operating costs and expenses......................... 1,745 468
Employee separation and asset impairment charge...... 99 --
--------- --------
Operating income..................................... 94 161
Other (income) expense, net.......................... (1) (5)
Interest expense..................................... 73 64
--------- --------
Income before income taxes........................... 22 102
Provision for income taxes........................... 8 40
--------- --------
Net income........................................... $ 14 $ 62
========= ========
Earnings per common share............................ $ .40 $ 1.81
========= ========
</TABLE>
Revenues for the nine months ended September 30, 1996 were $1.3 billion
higher than for the same period of 1995. This increase was due primarily to the
acquisition of Eastex Energy Inc., Premier Gas Company, and Cornerstone Natural
Gas Company.
Operating costs and expenses for the nine months ended September 30, 1996
were $1.2 billion higher than for the same period of 1995. This increase was
due primarily to the acquisition of Eastex Energy Inc., Premier Gas Company,
and Cornerstone Natural Gas Company. El Paso also took a special charge related
to employee separation and asset impairments in the first quarter of 1996.
Earnings per common share excluding the special charge would have been $2.12.
Other income for the nine months ended September 30, 1996 was $4 million
lower than for the same period of 1995 due primarily to a loss on donations and
lower income related to the recovery of certain regulatory assets, partially
offset by a gain on the disposition of property.
Interest expense for the nine months ended September 30, 1996 was $9 million
higher than for the same period of 1995 due primarily to increased short-term
borrowing levels and accruals for a provision for revenues collected subject to
refund.
41
<PAGE>
RISK FACTORS
The following factors, in conjunction with the other information included in
this Joint Proxy Statement-Prospectus (including the documents incorporated by
reference herein), should be considered by the stockholders of Tenneco and El
Paso in evaluating the matters presented herein.
RISKS RELATING TO THE TRANSACTION
Lack of Operating History as Separate Entities and Potential Disruptions in
Operations
Upon consummation of the Distributions, Tenneco (as an indirect subsidiary
of El Paso) will own and operate the Energy Business, New Tenneco will own and
operate the Industrial Business and Newport News will own and operate the
Shipbuilding Business. None of these businesses have any recent operating
histories as separate entities and each of these businesses has historically
been able to rely on the earnings, assets and cash flow of the others for
capital requirements and certain administrative services.
Following the Distributions, the ability of each of Tenneco, New Tenneco and
Newport News to satisfy its respective obligations and maintain profitability
will be dependent upon its future performance, which will be subject to
prevailing economic conditions and to financial, business and other factors
affecting the business operations of Tenneco, New Tenneco or Newport News,
respectively, including factors beyond the control of Tenneco, New Tenneco or
Newport News.
Subsequent to the Distributions, each of New Tenneco and Newport News will
be a smaller and less diversified company than Tenneco was prior to the
Distributions. In addition, the division of Tenneco may result in some
temporary dislocation and inefficiencies to the business operations, as well
as the organization and personnel structure, of each company, and will also
result in the duplication of certain personnel, administrative and other
expenses required for the operation of independent companies. Pursuant to the
Merger Agreement, the directors of El Paso Subsidiary as of the Merger
Effective Time will become the directors of Tenneco upon consummation of the
Merger. In addition, as of the Merger Effective Time, it is expected that
substantially all the executive officers of Tenneco will resign and become the
initial executive officers of New Tenneco and the executive officers of El
Paso Subsidiary as of the Merger Effective Time will become the executive
officers of Tenneco. There can be no assurance that such transition in the
management of Tenneco will not disrupt, at least temporarily, the operations
of the Energy Business. Nevertheless, the Tenneco Board of Directors believes
that separation of the companies also will result in certain long-term
operating efficiencies by allowing the companies to focus on their respective
businesses.
Potential Responsibility for Liabilities Not Expressly Assumed
The Distribution Agreement and the Ancillary Agreements allocate among
Tenneco, New Tenneco, Newport News and their respective subsidiaries
responsibility for various debts, liabilities and obligations. See "THE
DISTRIBUTIONS--Relationship Among Tenneco, New Tenneco and Newport News After
the Distributions." It is possible that a court would disregard this
contractual allocation of debts, liabilities and obligations among the parties
and require either Tenneco, New Tenneco, Newport News or their respective
subsidiaries to assume responsibility for obligations allocated to another
party, particularly if such other party were to refuse or was unable to pay or
perform any of its allocated obligations.
Potential Federal Income Tax Liabilities
On October 30, 1996, the IRS issued the IRS Ruling Letter to the effect,
among other things, that for federal income tax purposes the Distributions
will be tax-free to Tenneco and the Tenneco Stockholders under Section 355 of
the Code (except to the extent cash is received in lieu of fractional shares)
and that certain other transactions to be effected as part of the Corporate
Restructuring Transactions will be tax-free. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES." Such an IRS ruling letter, while generally binding upon the
IRS, is based upon certain factual representations and assumptions. If such
factual representations and assumptions were incomplete or untrue in a
material respect, or the facts upon which the IRS Ruling Letter was based are
materially different from the facts at the time of the Distributions, the IRS
could modify or revoke the IRS Ruling Letter retroactively. Each of El Paso,
Tenneco, New Tenneco and Newport News has agreed to certain restrictions on
its future actions to provide further assurances that the Distributions will
be tax-free for federal income tax purposes.
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If the Distributions were not to qualify as tax-free distributions under
Section 355 of the Code, then, in general, a corporate level federal income
tax would be payable by the consolidated group of which Tenneco is the common
parent, which tax (assuming the internal spin-off transactions included in the
Corporate Restructuring Transactions also failed to qualify under Section 355
of the Code) would be based upon the gain (computed as the difference between
the fair market value of the stock distributed and the distributing
corporation's adjusted basis in such stock) realized by each of the
distributing corporations upon its distribution of the stock of one or more
controlled corporations to its stockholders in the Transaction. The corporate
level federal income tax would be payable by Tenneco. Under certain limited
circumstances, however, New Tenneco and Newport News have agreed to indemnify
Tenneco for a defined portion of such tax liabilities. See "THE
DISTRIBUTIONS--Relationship Among Tenneco, New Tenneco and Newport News After
the Distributions--Terms of the Ancilliary Agreements--Tax Sharing Agreement."
In addition, under IRS regulations, each member of the consolidated group
(including New Tenneco and Newport News) is severally liable for such tax
liability.
The Administration's Budget Proposal issued March 19, 1996 (the "Budget
Proposal") contains a provision that would require a distributing corporation
in a transaction otherwise qualifying as a tax-free distribution under Section
355 of the Code to recognize gain on the distribution of the stock of one or
more controlled corporations under certain circumstances. If such legislation
were enacted, the Distributions, if ultimately subject to such legislation,
may result in significant taxable gain to Tenneco under Section 355(c) of the
Code. The Budget Proposal also contains a provision under which the receipt by
a stockholder of certain preferred stock in an otherwise tax-free
reorganization would result in gain recognition to the stockholder. If such
legislation were enacted, it is possible that the receipt of the El Paso
Preferred Depositary Shares would cause the Merger to fail to qualify as a
reorganization within the meaning of Section 368(a)(1)(B) of the Code
resulting in the recognition of gain by Tenneco stockholders as described
below. Even if the issuance of El Paso Preferred Stock and El Paso Preferred
Depositary Shares did not prevent qualification of the Merger as a tax-free
reorganization, holders of Tenneco Stock receiving El Paso Preferred
Depositary Shares would recognize gain on the exchange that might be taxable
as ordinary income to the extent of the earnings and profits of Tenneco. The
failure of the Merger to qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Code or the recognition of gain by shareholders as
a result of the receipt of El Paso Preferred Depositary Shares, may also cause
the Distributions to not qualify as tax-free distributions under Section 355
of the Code. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES--Possible Future
Legislation."
Furthermore, if the Distributions were not tax-free under Section 355 of the
Code, then each holder of Tenneco Common Stock who receives shares of New
Tenneco Common Stock and Newport News Common Stock in the Distributions would
be treated as if such stockholder received taxable distributions in an amount
equal to the fair market value of the New Tenneco Common Stock and Newport
News Common Stock received, which would result in: (i) a dividend to the
extent paid out of Tenneco's current and accumulated earnings and profits;
then (ii) a reduction in such stockholder's basis in Tenneco Common Stock to
the extent the amount received exceeds the amount referenced in clause (i);
and then (iii) gain from the sale or exchange of Tenneco Common Stock to the
extent the amount received exceeds the sum of the amounts referenced in
clauses (i) and (ii).
In connection with, and as a condition to consummation of, the Transaction,
Tenneco will also receive a Tax Opinion, to the effect, among other things
(but only to the extent not covered by the IRS Ruling Letter), that the Merger
will constitute a reorganization under Section 368(a)(1)(B) of the Code and
that no gain or loss will be recognized by the holders of Tenneco Stock upon
the exchange of such Tenneco Stock for El Paso Common Stock and El Paso
Preferred Stock, if any (except to the extent that cash is received in lieu of
fractional shares or in connection with a proper demand for appraisal of
shares). Because the IRS Ruling Letter issued on October 30, 1996 covered the
matters to be addressed in the Tax Opinion, delivery of the Tax Opinion is a
condition to consummation of the Merger which has been satisfied. If the
Merger does not qualify as a reorganization within the meaning of Section
368(a)(1)(B) of the Code, the Tenneco Stockholders will recognize gain or loss
upon the receipt of the El Paso Common Stock and any El Paso Preferred Stock
in exchange for their Tenneco Stock equal to the difference between the fair
market value of the El Paso Common Stock and El Paso Preferred Stock, if any,
received and their basis in their Tenneco Stock. In this regard, the failure
of the Merger to qualify as a reorganization within the meaning of Section
368(a)(1)(B) of the Code may also cause the Distributions to not
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qualify as tax-free distributions under Section 355 of the Code, in which case
Tenneco and the Tenneco Stockholders who receive Newport News Common Stock and
New Tenneco Common Stock in the Distributions would be treated in the manner
described in the previous two paragraphs of this section.
Consideration for Tenneco Common Stock in Merger May Vary Due to Collar
Under the terms of the Merger Agreement, the Collar only impacts the number
(and thus the aggregate value) of shares received in the Merger by the holders
of Tenneco Common Stock and does not have any impact on the number (and thus
the aggregate value) of shares received by holders of Tenneco Preferred Stock.
The number of shares of El Paso Common Stock and any El Paso Preferred
Depositary Shares to be issued to holders of Tenneco Common Stock in the Merger
will be based on the Average El Paso Common Price only if such price is within
the Collar. If this price exceeds the Collar, the number of such shares issued
will nonetheless be based on $38.3625, with the result that the aggregate
number of shares received by holders of Tenneco Common Stock in the Merger will
likely have a market value, as of the Merger Effective Time, that exceeds
$612.5 million. If, on the other hand, this price is less than the Collar, the
number of such shares so issued will nonetheless be based on $31.3875, with the
result that the aggregate number of shares received by holders of Tenneco
Common Stock in the Merger will likely have a market value, as of the Merger
Effective Time, that is less than $612.5 million. See "THE TRANSACTION--
Consideration to Tenneco Stockholders." The Average El Paso Common Price, if it
had been based on the 20-day trading period ended October 28, 1996, would have
been $46.6000. Since that price is above the Collar, the number of shares that
would have been issued to holders of Tenneco Common Stock in the Merger would
have been based on the upper limit of the Collar of $38.3625 (and thus would
have been likely to have a market value as of the Merger Effective Time in
excess of $612.5 million). There can no be assurance, however, that, when
finally determined as of the Merger Effective Time the Average El Paso Common
Price will not have fallen below $31.3875, thereby decreasing the total
consideration to be received by holders of Tenneco Common Stock in the Merger.
See "THE MERGER--Conversion of Shares."
No Current Market for New Tenneco Common Stock and Newport News Common Stock
There is not currently a public market for either New Tenneco Common Stock or
Newport News Common Stock, and there can be no assurance that such public
trading markets will develop or, assuming such public trading markets develop,
as to the prices at which trading in New Tenneco Common Stock or Newport News
Common Stock will occur after the Distributions. Until shares of New Tenneco
Common Stock and Newport News Common Stock are fully distributed and an orderly
market develops, the prices at which trading in such shares occurs may
fluctuate significantly. Application has been made to list the New Tenneco
Common Stock and Newport News Common Stock on the NYSE. See "THE
DISTRIBUTIONS--Trading of New Tenneco Common Stock and Newport News Common
Stock." Prices for New Tenneco Common Stock and Newport News Common Stock will
each be determined in the marketplace and may be influenced by many factors,
including the respective operating performances of New Tenneco and Newport
News, the depth and liquidity of the market for New Tenneco Common Stock and
Newport News Common Stock, investor perception of New Tenneco and Newport News
and general economic and market conditions.
No Current Market for El Paso Preferred Depositary Shares
Although El Paso intends to list the El Paso Preferred Depositary Shares, if
issued because the Stock Issuance is not approved, on the NYSE, there is not
currently a public market for El Paso Preferred Depositary Shares and there can
be no assurance that such a public trading market will develop or, assuming
such a public trading market develops, as to the prices at which trading in El
Paso Preferred Depositary Shares will occur after the Transaction. Until El
Paso Preferred Depositary Shares are fully distributed and an orderly market
develops, the prices at which trading in any such shares occurs may fluctuate
significantly. Furthermore, although the quarterly dividend rate on the El Paso
Preferred Stock will be adjustable in a manner designed (subject to certain
limitations) to cause the market price of 25 El Paso Preferred Depositary
Shares to equal approximately $1,000, there can be no assurance that such
market price will be obtained. See "DESCRIPTION OF EL PASO PREFERRED STOCK AND
DEPOSITARY SHARES."
Uncertainty Regarding Trading Prices of and Markets for Stock Following the
Transaction
Upon consummation of the Transaction, holders of Tenneco Common Stock as of
the Merger Effective Time and the Distribution Record Date will have received
shares of El Paso Common Stock (and El Paso
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Preferred Depositary Shares, if the Stock Issuance is not approved), New
Tenneco Common Stock and Newport News Common Stock and holders of Tenneco
Preferred Stock as of the Merger Effective Time will have received shares of
El Paso Common Stock.
Tenneco Stockholders should be aware that there can be no assurance as to
whether the combined market value after the Transaction of the shares of El
Paso Common Stock (and any El Paso Preferred Depositary Shares), New Tenneco
Common Stock and Newport News Common Stock (plus cash in lieu of fractional
shares and any fractional El Paso Preferred Depositary Shares) received in
respect of their shares of Tenneco Common Stock will be less than, equal to or
greater than the market value of their shares of Tenneco Common Stock prior to
the Transaction. Furthermore, there can be no assurance that after the
Transaction the market value of the shares of El Paso Common Stock (plus cash
in lieu of fractional shares) received in respect of their shares of $7.40
Preferred Stock or $4.50 Preferred Stock in the Merger will be less than,
equal to or greater than the liquidation preference or, in the case of the
$7.40 Preferred Stock, market value, of such shares of $7.40 Preferred Stock
or $4.50 Preferred Stock prior to the Transaction. Tenneco Common Stock is
currently listed and traded, and following the Distributions, New Tenneco
Common Stock will be listed, on the NYSE and the Chicago, Pacific, Toronto and
London Stock Exchanges. El Paso Common Stock and $7.40 Preferred Stock are
currently listed and traded on the NYSE. Upon consummation of the Transaction,
El Paso Preferred Depositary Shares, if issued because the Stock Issuance is
not approved, and Newport News Common Stock will be listed on the NYSE.
Uncertainty Regarding Future Dividend Policies
Historically, Tenneco has paid cash dividends on Tenneco Common Stock and
Tenneco Preferred Stock. The future payments of dividends by New Tenneco and
Newport News will depend on decisions that will be made by the New Tenneco
Board of Directors and the Newport News Board of Directors, respectively, from
time to time based on the results of operations and financial conditions of
each entity (subject to restrictions, if any, contained in debt instruments of
each entity in effect from time to time and the DGCL). The future payments of
dividends by El Paso will be (i) dependent on El Paso's results of operations,
financial condition, cash requirements and other relevant factors, (ii)
subject to the discretion of the Board of Directors of El Paso, and (iii)
subject to restrictions, if any, contained in debt instruments of El Paso in
effect from time to time and under the DGCL. El Paso Preferred Stock, if
issued because the Stock Issuance is not approved, will bear dividends at a
rate (which will be not less than 6% per year nor more than 10% per year)
which will be adjustable quarterly in a manner designed, to the extent
practicable, to cause the market price of 25 El Paso Preferred Depositary
Shares to equal approximately $1,000. There can be no assurance that the
annual dividend rate received by holders of Tenneco Common Stock prior to the
Transaction will be equal to the aggregate dividend rate which such holders
will receive from the shares of El Paso Common Stock, El Paso Preferred
Depositary Shares (if any), New Tenneco Common Stock and Newport News Common
Stock received in respect of their Tenneco Common Stock in the Transaction
(and it is unlikely that the dividend rate would be greater than the aggregate
dividend rate received by holders of Tenneco Common Stock prior to the
Transaction). There can be no assurance that the annual dividend rate received
by holders of Tenneco Preferred Stock prior to the Transaction will be equal
to the aggregate dividend rate which such holders will receive from the shares
of El Paso Common Stock received in respect of their Tenneco Preferred Stock
in the Transaction (and it is unlikely that the dividend rate would be greater
than the aggregate dividend rate received by holders of Tenneco Preferred
Stock prior to the Transaction).
Consents Required to Effect Transaction
Certain of Tenneco's existing debt and other contractual arrangements
prohibit the consummation of the Transaction unless an appropriate amendment,
consent or waiver from third parties is obtained. It is a condition of the
Transaction that these amendments, consents or waivers have been obtained,
except for those for which the failure to obtain would not have a material
adverse effect. See "THE DISTRIBUTIONS" and "DEBT AND CASH REALIGNMENT."
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Potential Conflicts
Subsequent to the Transaction, the interests of El Paso (which will include
Tenneco as a subsidiary), New Tenneco and Newport News may potentially
conflict due to the ongoing relationships among the companies. Additionally,
New Tenneco and Newport News will share one common director following the
Distributions and New Tenneco and El Paso will share one common director
following the Merger. Appropriate policies and procedures will be followed by
the Board of Directors of each company to attempt to limit the involvement of
the common directors (and, if appropriate, other officers and directors of
such companies) in situations that could give rise to conflicts of interest.
See "THE DISTRIBUTIONS--Relationship Among Tenneco, New Tenneco and Newport
News After the Distributions."
Differences in Stockholder Rights
For a description of the principal differences in the rights of holders of
Tenneco Stock and holders of El Paso Common Stock and El Paso Preferred Stock,
see "COMPARISON OF RIGHTS OF STOCKHOLDERS OF TENNECO AND EL PASO." For a
description of the principal differences in the rights of holders of Tenneco
Common Stock and holders of New Tenneco Common Stock and Newport News Common
Stock, see "COMPARISON OF RIGHTS OF STOCKHOLDERS OF TENNECO, NEW TENNECO AND
NEWPORT NEWS."
Potential Indemnification Liabilities
Pursuant to the Distribution Agreement and certain of the Ancillary
Agreements, each of Tenneco, New Tenneco and Newport News has agreed to
indemnify the other parties (and certain related persons) from and after
consummation of the Distributions with respect to certain debts, liabilities
and obligations. See "THE DISTRIBUTIONS--Relationship Among Tenneco, New
Tenneco and Newport News After the Distributions."
Potential Liabilities Due to Fraudulent Transfer Considerations and Legal
Dividend Requirements
The Corporate Restructuring Transactions, Debt Realignment and Tenneco's
distribution of the New Tenneco Common Stock and Newport News Common Stock to
holders of Tenneco Common Stock are subject to review under federal and state
fraudulent conveyance laws. Under these laws, if a court in a lawsuit by an
unpaid creditor or a representative of creditors (such as a trustee in
bankruptcy of Tenneco, New Tenneco or Newport News as a debtor-in-possession)
were to determine that Tenneco, New Tenneco, Newport News or any of their
subsidiaries did not receive fair consideration or reasonably equivalent value
for incurring indebtedness or transferring assets in connection with the Debt
Realignment and Corporate Restructuring Transactions and that, at the time of
the Distributions or such incurrence of indebtedness or transfer of assets,
Tenneco, New Tenneco, Newport News or any of their subsidiaries (i) was
insolvent or would be rendered insolvent, (ii) had unreasonably small capital
with which to carry on its business and all businesses in which it intended to
engage, or (iii) intended to incur, or believed it would incur, debts beyond
its ability to repay such debts as they would mature, then such court could
order the holders of the New Tenneco Common Stock and the Newport News Common
Stock to return the value of the stock and any dividends paid thereon, bar
future dividend and redemption payments on the stock, and invalidate, in whole
or in part, the Corporate Restructuring Transactions, Debt Realignment or
Distributions, as fraudulent conveyances.
The measure of insolvency for purposes of the fraudulent conveyance laws
will vary depending on which jurisdiction's law is applied. Generally,
however, an entity would be considered insolvent if the present fair saleable
value of its assets is less than (i) the amount of its liabilities (including
contingent liabilities), or (ii) the amount that will be required to pay its
probable liabilities on its existing debts as they become absolute and mature.
No assurance can be given as to what standard a court would apply in
determining insolvency or that a court would not determine that Tenneco, New
Tenneco, Newport News or any of their subsidiaries was "insolvent" at the time
of or after giving effect to the Corporate Restructuring Transactions, the
Debt Realignment and the Distributions.
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In addition, Tenneco's distribution of the New Tenneco Common Stock and the
Newport News Common Stock, and the distributions pursuant to the Corporate
Restructuring Transactions and Debt Realignment, are subject to review under
state corporate distribution statutes. Under the DGCL, a corporation may only
pay dividends to its stockholders either (i) out of its surplus (net assets
minus capital) and not out of capital, or (ii) if there is no such surplus,
out of its net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. Although all distributions are intended to
be made entirely from surplus, no assurance can be given that a court will not
later determine that some or all of the distributions were unlawful.
Prior to the Distributions, the Tenneco Board of Directors expects to obtain
an opinion from a third-party financial advisor regarding the solvency of
Tenneco, New Tenneco and Newport News and the permissibility of the
Distributions under Section 170 of the DGCL. Tenneco's Board of Directors and
management believe that, in accordance with this opinion, (a) Tenneco, New
Tenneco and Newport News each will not be insolvent at or following the time
of the Distributions (in accordance with the foregoing definitions), will be
able to repay its debts as they mature following the Distributions and will
have sufficient capital to carry on its businesses, and (b) the Distributions
will be made entirely out of surplus, in accordance with Section 170 of DGCL.
There is no certainty, however, that a court would find the opinion rendered
by Tenneco's financial advisor to be binding on creditors of Tenneco, New
Tenneco or Newport News or that a court would reach the same conclusions set
forth in such opinion in determining whether Tenneco, New Tenneco or Newport
News was insolvent at the time of, or after giving effect to, the
Distributions, or whether lawful funds were available for the distributions
made in connection with the Transaction.
Potential Dilution Due to Proposed El Paso Equity Offering
Subject to market conditions, El Paso currently intends to issue, in a
public transaction, up to approximately $200 million of equity securities
following the Merger as part of the Refinancing Transactions, the net proceeds
of which would be used to pay down indebtedness of El Paso and its
subsidiaries. There can be no assurance that such issuance will occur or as to
the price at which such securities may be issued. Such issuance could be
dilutive to El Paso's earnings per share and could adversely affect prices
for, or the liquidity of, El Paso Common Stock. See "--Risks Relating to El
Paso and Tenneco Energy--Consummation of the Refinancing Transactions."
RISKS RELATING TO EL PASO AND TENNECO ENERGY
Risks Associated with Fluctuating Market Conditions
The revenues generated by Tenneco Energy and El Paso are dependent upon the
price of natural gas, as well as the prices of alternative sources of energy.
Fluctuations in energy prices are caused by a number of factors, including
regional, domestic and international demand, availability and adequacy of
transportation facilities, energy legislation, federal or state taxes, if any,
on the sale or transportation of natural gas and natural gas liquids and the
abundance of supplies of alternative energy sources.
Uncertainty Surrounding Integration of Operations
El Paso is currently engaged in a comprehensive review of the business and
operations of the Energy Business. Following the completion of such review and
consummation of the Merger, El Paso plans to integrate, for the most part, the
operations of the Energy Business with those of El Paso to increase operating
and administrative efficiency through consolidation and reengineering of
facilities, workforce reductions and coordination of purchasing, sales and
marketing activities. The future operations of the Energy Business as a
subsidiary of El Paso may vary significantly from its historical operations as
a division of Tenneco. While El Paso believes that operational, financial and
administrative synergies can be achieved through the combination of El Paso
and the Energy Business, the amount and timing of realization of such
synergies will depend upon the ability of El Paso to integrate successfully
the businesses and operations of the companies, and the time period over which
such integration is effected.
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Consummation of Refinancing Transactions
El Paso has indicated that it currently intends to enter into the
Refinancing Transactions. However, there can be no assurance that any of the
Refinancing Transactions will occur or as to the price, terms or provisions of
any of such transactions. See "INFORMATION CONCERNING THE ENERGY BUSINESS TO
BE MERGED--Operation of the Energy Business After the Merger" and "UNAUDITED
PRO FORMA FINANCIAL INFORMATION--Unaudited Pro Forma Combined Financial
Statements of El Paso and Tenneco Energy."
Regulated Industry; Potential Adverse Impact of Pending Cost Recovery and
Rate Proceedings
Certain pipeline facilities, services and rates of both Tenneco Energy
(including TGP, Midwestern Gas Transmission Company and East Tennessee Natural
Gas Company) and El Paso are regulated by the FERC in accordance with the
Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978. The FERC
regulates the interstate transportation and certain sales of natural gas,
including, among other things, rates and charges allowed natural gas
companies, construction, extensions and abandonments of facilities and
service, rates of depreciation and amortization and accounting systems. The
businesses of El Paso and Tenneco Energy could be adversely affected by the
outcome of regulatory or rate proceedings relating to their pipeline
operations.
TGP and El Paso are each currently parties to various regulatory and rate
proceedings relating to their pipeline operations. In particular, TGP is a
party to regulatory proceedings before the FERC relating to the recovery of
gas supply realignment ("GSR") costs associated with the restructuring by TGP
of its transportation, storage and sales services to convert TGP from
primarily a merchant to primarily a transporter of gas.
As of June 30, 1996, TGP has deferred GSR costs yet to be recovered from its
customers of approximately $551 million, net of $380 million previously
recovered from its customers, subject to refund. A phased proceeding is
underway at the FERC with respect to the recovery of TGP's GSR costs (the "GSR
Proceeding"). Testimony has been completed in connection with Phase I of that
proceeding relating to the eligibility of GSR cost recovery; oral argument on
eligibility issues was originally set by a FERC administrative law judge
("ALJ") for late October 1996. The Chief Judge of the FERC has since issued
orders (i) cancelling the October oral argument, (ii) convening settlement
discussions which commenced on October 9, 1996, and (iii) postponing
scheduling oral argument on eligibility issues. Phase II of the proceeding on
the prudency of the costs to be recovered and on certain contract specific
eligibility issues has not yet been scheduled, but will likely occur sometime
after the ALJ's decision in Phase I is issued. As described under "INFORMATION
CONCERNING THE ENERGY BUSINESS TO BE MERGED--Operation of the Energy Business
After the Merger--Proposed Post-Merger Resolution of GSR Transition Cost
Disputes," El Paso has reached, contingent upon consummation of the Merger and
various other conditions (including approval by the FERC), the El Paso
Preliminary GSR Understanding with certain of TGP's customers regarding the
customers' challenges to TGP's GSR and other transition costs.
With regard to TGP's GSR costs, TGP, along with three other pipelines,
executed four separate settlement agreements with Dakota Gasification Company
and the U.S. Department of Energy and initiated four separate proceedings at
the FERC seeking approval to implement the settlement agreements. The
settlement resolved litigation concerning purchases made by TGP of synthetic
gas produced from the Great Plains Coal Gasification plant ("Great Plains").
The FERC previously ruled that the costs related to the Great Plains project
are eligible for recovery through GSR and other special recovery mechanisms
and that the costs are eligible for recovery for the duration of the term of
the original gas purchase agreements. On October 18, 1994, the FERC
consolidated the four proceedings and set them for hearing before an ALJ. The
hearing, which concluded in July 1995, was limited to the issue of whether the
settlement agreements are prudent. The ALJ concluded, in his initial decision
issued in December 1995, that the settlement was imprudent. TGP has filed
exceptions to this initial decision. Tenneco believes that this decision will
not impair TGP's recovery of the costs resulting from this contract. On July
17, 1996, the FERC ordered oral arguments to be heard in September 1996. Oral
arguments were held before the full FERC on September 25, 1996. A decision by
the FERC is expected by the end of 1996.
Also related to TGP's GSR costs, in June 1996, TGP settled certain
litigation with ICA Energy, Inc. ("ICA") and TransTexas Gas Corporation
("TransTexas") by making a payment of $125 million. This payment
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is included in the deferred GSR costs described above. In connection with that
litigation, certain royalty interest owners filed a claim in July 1996 against
TGP in Webb County, Texas, alleging that they are sellers entitled to tender
gas to TGP under the settled contract. This claim falls under the
indemnification provisions of TGP's settlement agreement with TransTexas and
ICA, which requires TransTexas and ICA to defend and indemnify TGP on this
claim.
In a separate declaratory judgment action relating to another gas purchase
contract, the Texas Supreme Court affirmed a ruling of the Texas Court of
Appeals favorable to TGP on August 1, 1995. On April 18, 1996, the Texas
Supreme Court withdrew its initial opinion and issued an opinion reversing the
Court of Appeals opinion on the matter which was favorable to TGP. That Texas
Supreme Court ruling, however, explicitly preserves TGP's defenses based on
bad faith conduct of the producers. In June 1996, TGP filed a motion for
rehearing with the Texas Supreme Court. On August 16, 1996, the Texas Supreme
Court denied TGP's motion. Nothing in the Supreme Court's decision affects
TGP's ability to seek recovery of its above-market costs of purchasing gas
under the contract from its customers as GSR costs in the phased proceedings
currently pending before the FERC. In addition, TGP has initiated two lawsuits
against the holders of this gas purchase contract seeking damages related to
their conduct in connection with that contract.
During the pendency of the declaratory judgment lawsuit, TGP has either
paid, or provided for the payment of, amounts it believes are appropriate to
cover the resolution of its contract reformation litigation, including
providing a bond (the "Bond") in the approximate amount of $200 million. On
September 30, 1996, TGP paid approximately $195 million to the producers and
the producers agreed to release all but approximately $2 million of the bonded
amount (to cover remaining disputed interest charges and attorneys' fees). On
October 1, 1996, TGP filed to recover the pricing differential portion of this
payment from its customers. It is anticipated that TGP will also continue to
pay the above-market contract price for the gas tendered by the producers
through the expiration of the contract in 1999, and will seek recovery of
those amounts from its customers in the FERC proceedings as well. TGP plans to
amend its complaint in one of the separate lawsuits pending against the
producers to seek recovery of amounts TGP believes it is entitled to recover
as a result of the producers' bad faith conduct.
The FERC has generally encouraged pipelines to settle such issues through
negotiations with customers. Although the FERC's Order 636 issued April 8,
1992 ("Order 636") transition cost recovery mechanism provides for complete
recovery by pipelines of eligible and prudently incurred transition costs,
certain customers have challenged the prudence and eligibility of TGP's GSR
costs and TGP has engaged in settlement discussions with its customers
concerning the amount of such costs in response to the FERC statements
acknowledging the desirability of such settlements.
As described under "INFORMATION CONCERNING THE ENERGY BUSINESS TO BE
MERGED--Operation of the Energy Business After the Merger--Proposed Post-
Merger Resolution of GSR Transition Cost Disputes," El Paso has reached,
contingent upon consummation of the Merger and various other conditions
(including approval by the FERC), the El Paso Preliminary GSR Understanding.
Given the uncertainty over the results of ongoing discussions between TGP
and its customers related to the recovery of GSR costs and the uncertainty
related to predicting the outcome of its gas purchase contract reformation
efforts and the associated litigation, Tenneco Energy is unable to predict the
timing or the ultimate impact that the resolution of these issues will have on
the combined financial position or results of operations of the Energy
Business.
On December 30, 1994, TGP filed for a general rate increase (the "1995 Rate
Case"). On January 25, 1995, the FERC accepted the filing, suspended its
effectiveness for the maximum period of five months pursuant to normal
regulatory process, and set the matter for hearing. On July 1, 1995, TGP began
collecting rates, subject to refund, reflecting an $87 million increase in
TGP's annual revenue requirement. A Stipulation and Agreement was filed with
an ALJ in this proceeding on April 5, 1996. This Stipulation, which is
currently pending before the FERC, proposed to resolve the rates subject to
the 1995 Rate Case, including structural rate design and increased revenue
requirements, and TGP is reserving revenues it believes adequate to cover the
income impact of any refunds that may be required upon final settlement of
this proceeding. On October 30, 1996, the FERC approved the Stipulation for
the settlement of the 1995 Rate Case, with certain modifications and
clarifications which are not material and which should not cause changes which
are adverse to the Energy Business.
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For a detailed description of rate and regulatory proceedings relating to
TGP, see "INFORMATION CONCERNING THE ENERGY BUSINESS TO BE MERGED--Interstate
Pipeline Operations--Federal Regulation."
In June 1995, El Paso made a filing with the FERC for approval of new system
rates for mainline transportation to be effective January 1, 1996. In July
1995, the FERC accepted and suspended El Paso's filing to be effective January
1, 1996, subject to refund and certain other conditions. The FERC also set El
Paso's rates for hearing. In March 1996, El Paso filed a comprehensive offer
of settlement which, if approved by the FERC, would resolve issues related to
the above-mentioned rate filing and issues surrounding certain contract
reductions and expirations scheduled to occur from January 1, 1996, through
December 31, 1997. The settlement provides for, among other things: (i) a long
term rate stability plan which establishes base rates for a ten-year period
from January 1, 1996, through December 31, 2005, subject to annual escalation
after 1997; (ii) payments within eight years to El Paso by its customers
totaling $255 million (prior to interest) representing recovery of
approximately 35 percent of the revenues (for the period 1996 to 2003)
associated with the contract reductions and expirations; (iii) the sharing
between El Paso (65%) and its customers (35%) of revenues, in excess of a
threshold, which are attributable to unsubscribed capacity sales during the
period 1996 through 2003; and (iv) a mechanism to adjust the base rate for
increases or decreases resulting from laws or regulations to the extent that
costs are impacted at a level in excess of $10 million a year. The settlement
contains a provision which permits any party desiring not to be bound by the
settlement to have its rates determined pursuant to procedures established by
the FERC.
In March 1996, Southern California Edison Company ("Edison"), a firm shipper
on El Paso's system, filed its own offer of settlement. While Edison's offer
is similar in many respects to El Paso's, it contains provisions that El Paso
believes would be adverse to its interests if Edison's offer was approved and
El Paso's offer was rejected. The ALJ has established procedures to determine
what discovery will be allowed in connection with comments on the two offers
of settlement to be filed by the parties and in the meantime has suspended the
schedule for filing comments. It is El Paso's position that discovery is
inappropriate because, among other things, a provision in El Paso's offer of
settlement affords Edison the opportunity to have its rates determined
separately. The ALJ will determine whether to certify El Paso's settlement to
the FERC and will make a similar determination concerning the Edison offer.
Even though the comment schedule has been suspended, comments supporting El
Paso's settlement have been filed by the FERC staff, the regulatory agencies
of California, Arizona, and Nevada, the State of New Mexico, and customers
representing 95 percent of the firm throughput on El Paso's mainline
transmission system. Comments opposing Edison's offer have been filed by El
Paso, the FERC staff, and the customer coalition supporting El Paso's
settlement. While El Paso believes that its settlement is likely to be
approved substantially on the terms proposed by El Paso, there can be no
assurance that there will not be changes to such settlement which are adverse
to El Paso.
Highly Competitive Industry
The regulated natural gas pipeline industry is experiencing increasing
competition, which results from actions taken by the FERC to strengthen market
forces throughout the industry. In a number of key markets, interstate
pipelines face competitive pressure from other major pipeline systems,
enabling local distribution companies and end users to choose a supplier or
switch suppliers based on the short term price of gas and the cost of
transportation. Both the Energy Business and El Paso also face varying degrees
of competition from alternative energy sources, such as electricity,
hydroelectric power, coal and oil.
Competition between pipelines is particularly intense in the Chicago,
Northern Indiana, Roanoke, Chattanooga and Atlanta markets served by the
Energy Business, and in TGP's supply area, Louisiana and Texas. In some
instances, the pipelines of the Energy Business have been required to discount
their transportation rates in order to maintain their market share.
Additionally, transportation contracts representing approximately 70% of firm
interstate transportation capacity of the Energy Business will be expiring
over the next five years, principally in the year 2000.
El Paso faces significant competition from three companies that transport
natural gas to the California market, which is the largest single market
served by El Paso. Competition generally occurs on the basis of delivered
price. The combined capacity of the four pipelines transporting natural gas to
the California market is
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6.9 billion cubic feet per day. In 1995, the demand for interstate pipeline
capacity to California averaged 5.0 billion cubic feet per day. For a
discussion of additional risks relating to the California market, see "--
Reliance on California Market."
Future renegotiations of El Paso's or Tenneco Energy's existing
transportation contracts and negotiations with potential new customers could
be adversely impacted by the foregoing or other competitive factors.
Potential Environmental Liabilities
The current and discontinued operations and activities of El Paso and the
Energy Business are subject to various federal, state, local and foreign laws
and regulations covering the discharge of material into the environment or
otherwise relating to protection of the environment. In particular, El Paso's
and Tenneco Energy's pipeline facilities and their use of facilities for
treating, processing, recovering, or otherwise handling natural gas are
subject to stringent environmental regulation by governmental authorities in
the United States and in foreign jurisdictions. Such regulations have
increased the costs of planning, designing, operating and abandoning
facilities.
El Paso and the Energy Business have each expended significant resources,
both financial and managerial, to comply with environmental regulations and
permitting requirements and each anticipates that it will continue to do so in
the future. Although El Paso and Tenneco Energy believe that their respective
operations and facilities are in general compliance with applicable
environmental laws and regulations, risks of substantial costs and liabilities
are inherent in natural gas operations, and there can be no assurance that
significant costs and liabilities will not be incurred in the future.
Moreover, it is possible that other developments, such as increasingly strict
environmental laws, regulations and enforcement policies thereunder, and
claims for damages to property, employees, other persons and the environment
resulting from El Paso's or Tenneco Energy's current or discontinued
operations, could result in substantial costs and liabilities in the future.
See "INFORMATION CONCERNING THE ENERGY BUSINESS TO BE MERGED--Environmental
Matters" and Note 15 to the Tenneco Energy Combined Financial Statements
included elsewhere herein.
Refinancing and Interest Rate Exposure Risks
The business and operating results of each of El Paso and the Energy
Business can be adversely affected by changes in the economic environment,
including changes in interest rates, market perceptions of the natural gas
industry, El Paso or the Energy Business, or security ratings. It is
anticipated that a substantial portion of the debt of El Paso and its
subsidiaries after the Merger (expected to be in excess of $2 billion) will be
refinanced into long-term fixed rate debt. El Paso's ability to refinance this
debt on favorable terms will be impacted by prevailing interest rates at the
time such debt is refinanced and no assurance can be made that such terms will
be available. El Paso's inability to refinance this debt could have a negative
impact on its financial condition and results of operations.
Risks Related to Use of Derivative Financial Instruments
Prior to 1995, El Paso used derivative instruments to principally manage
well-defined interest rate price risks and had limited involvement in
financial derivative instruments to manage commodity price risks. Subsequent
to the acquisition of Eastex Energy Inc. in September 1995, El Paso has
broadened its utilization of natural gas futures, options and swap contracts
to hedge higher levels of volumetric fixed price purchase and sale
commitments. In the ordinary course and conduct of its business, El Paso's
marketing affiliate, El Paso Energy Marketing ("EPEM"), utilizes futures and
option contracts traded on the New York Mercantile Exchange ("NYMEX") and
over-the-counter ("OTC") options and price and basis swaps with major gas
merchants and financial institutions to hedge its price risk exposure related
to inventories and fixed price commitments to purchase and sell natural gas.
It is EPEM's policy to seek to maintain a balanced portfolio of supply and
demand contracts, utilizing the NYMEX and OTC financial markets to hedge
against price volatility which may affect those obligations. In addition to
its hedging activities, EPEM also engages in selective trading of these
financial instruments. Losses incurred as a result of derivatives transactions
could have an adverse effect on the financial condition or results of
operations of El Paso.
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The Energy Business has utilized financial instruments for many years to
mitigate its exposure to various risks. The Energy Business is currently party
to financial instruments to hedge its exposure to changes in interest rates
and natural gas prices. Although losses could occur, the derivatives contracts
used by the Energy Business are generally designated as hedges whose fair
value correlates to price movements of natural gas. As a result, gains or
losses resulting from market changes should generally be offset by losses or
gains on the hedged transaction.
Operating Hazards and Uninsured Risks
The operations of El Paso and the Energy Business are subject to the
inherent risks normally associated with the transportation, gathering and
processing of natural gas, including explosions, pollution and fires, each of
which could result in damage to or destruction of gas transportation,
gathering and processing facilities or damage to persons and property. While
each of El Paso and the Energy Business maintains insurance against certain of
such risks and in amounts that it believes to be reasonable, the occurrence of
a significant event that is not fully insured against could have a material
adverse effect on the combined financial condition or operations of El Paso or
the Energy Business.
Potential Adverse Effects of Weather on Results of Operations
El Paso's and Tenneco Energy's results of operations can be adversely
affected by weather conditions, which may result in lower energy usage or in
increased availability of alternative energy sources, thereby reducing demand
for and prices of natural gas.
Acquisitions and Investments
Opportunities for growth through acquisitions and investments in joint
ventures, and future operating results and the success of acquisitions and
joint ventures within and outside the United States may be subject to the
effects of, and changes in, United States and foreign trade and monetary
policies, laws and regulations, political and economic developments, inflation
rates, and the effects of taxes and operating conditions. Activities in areas
outside the United States are also subject to the risks inherent in foreign
operations, including loss of revenue, property and equipment as a result of
hazards such as expropriation, nationalization, war, insurrection and other
political risks, and the effects of currency fluctuations and exchange
controls.
Liabilities of Tenneco Energy for Discontinued Businesses
Tenneco has certain actual and contingent liabilities which, under the terms
of the Distribution Agreement, will be liabilities of the Energy Business
after the Distributions. These liabilities relate to, among other things,
retiree medical and other retiree costs of former employees of Tenneco and its
subsidiaries, litigation, environmental matters, and liabilities (including
environmental liabilities) relating to discontinued businesses and operations
of Tenneco and its subsidiaries (other than the discontinued businesses of New
Tenneco and Newport News). El Paso has estimated that the aggregate amount of
these liabilities is approximately $600 million. However, the actual amount of
such liabilities could vary materially from such estimate.
Reliance on California Market
El Paso's business is particularly sensitive to the California market.
California is the largest single market served by El Paso and is the second
largest natural gas market in the nation. However, the industry's increasing
reliance on market forces has allowed the construction of significant excess
pipeline capacity into California. Currently, El Paso has firm transportation
contracts covering 89% of its current capacity to California. By 1998, that
figure has the potential to drop to approximately 53%. El Paso's largest
contracts for interstate capacity to California are with Southern California
Gas Company ("SoCal") and Pacific Gas and Electric Company ("PG&E"). In 1995,
natural gas deliveries by El Paso to SoCal and PG&E accounted for 17% and 12%,
respectively, of El Paso's consolidated operating revenues (no other customer
accounted for 10% or more of such revenues). SoCal has exercised an option in
its contract to relinquish certain firm capacity rights, and PG&E has
exercised its right to relinquish all firm capacity rights commencing in 1998.
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In addition to the comprehensive offer of settlement described above, El
Paso is seeking to offset the effects of these and other future reductions in
existing firm capacity commitments by actively seeking new markets, pursuing
attractive opportunities to increase traditional market share and controlling
costs. El Paso's efforts to obtain new markets in California at full tariff
rates are adversely impacted by the current excess interstate pipeline
capacity to California.
Purchase Accounting Adjustments
Certain of the pro forma adjustments under the "Unaudited Pro Forma
Financial Information" section below reflect preliminary estimated acquisition
adjustments under the purchase method of accounting. A number of these
adjustments reflect El Paso's management's intended business strategies, and
others El Paso's allocations to property, plant and equipment of the excess of
the total purchase price of the Company over the fair value of the net assets
acquired. This allocation reflects El Paso's internal evaluation of the excess
purchase price and is subject to the completion of an independent appraisal of
the fair value of the property acquired. Should the independent valuation not
support such allocation, the excess of total purchase price over the fair
value of the net assets acquired will be reflected as goodwill. There can be
no assurance as to the effect on El Paso or the El Paso Common Stock or the El
Paso Preferred Depositary Shares or the proposed Refinancing Transactions if
the final purchase accounting adjustments are materially different from those
reflected in the Unaudited Pro Forma Combined Financial Statements of El Paso
and Tenneco Energy.
RISKS RELATING TO NEW TENNECO
Stockholders of Tenneco should be aware that the Industrial Distribution and
ownership of New Tenneco Common Stock involve certain risk factors, including
those described below and elsewhere in this Joint Proxy Statement--Statement,
which could adversely affect the value of their holdings. Neither New Tenneco
nor Tenneco makes, nor is any other person authorized to make, any
representation as to the future market value of New Tenneco Common Stock.
Certain Antitakeover Features
Upon consummation of the Industrial Distribution, certain provisions of New
Tenneco's Restated Certificate of Incorporation and its Amended and Restated
By-laws, along with New Tenneco's stockholder rights plan and Delaware
statutory law, could discourage potential acquisition proposals and could
delay or prevent a change in control of New Tenneco. Such provisions could
diminish the opportunities for a stockholder to participate in tender offers,
including tender offers at a price above the then current market value of New
Tenneco Common Stock. Such provisions may also inhibit fluctuations in the
market price of New Tenneco Common Stock that could result from takeover
attempts. The provisions could also have the effect of making it more
difficult for third parties to cause the immediate removal and replacement of
the members of the then current Board of Directors of New Tenneco or the then
current management of New Tenneco without the concurrence of the Board of
Directors of New Tenneco. See "Antitakeover Effects of Certain Provisions" in
the New Tenneco Information Statement.
RISKS RELATING TO NEWPORT NEWS
Stockholders of Tenneco should be aware that the Shipbuilding Distribution
and ownership of Newport News Common Stock involve certain risk factors,
including those described below and elsewhere in this Joint Proxy Statement--
Prospectus, which could adversely affect the value of their holdings. Neither
Newport News nor Tenneco makes, nor is any other person authorized to make,
any representation as to the future market value of Newport News Common Stock.
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Reliance on Major Customer and Uncertainty of Future Work
Reliance on Major Customer. Newport News' business is primarily dependent
upon the design, construction, repair, overhaul and refueling of nuclear-
powered aircraft carriers and submarines for the U.S. Navy. The Navy accounted
for approximately 97% and 94% of Newport News' net sales for the year ended
December 31, 1995 and for the six months ended June 30, 1996, respectively.
Approximately 85% of its backlog consisted of contracts to build, repair or
overhaul nuclear-powered aircraft carriers as of June 30, 1996.
Uncertainty of Future Work. Although U.S. Government cuts in naval
shipbuilding have continued to put pressure on Newport News' backlog, Newport
News was successful in adding $1.0 billion in new work during 1995 and $443
million during the first six months of 1996. Newport News' total backlog,
however, decreased from $5.6 billion at December 31, 1994 to $4.6 billion at
December 31, 1995 and, as of June 30, 1996, was $4.1 billion. Newport News'
total backlog anticipated at December 31, 1996 is $3.4 billion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Backlog" in the Newport News Information Statement. Because much of
Newport News' business consists of constructing aircraft carriers, which
historically have been purchased by the Navy every four to six years, Newport
News' backlog has typically declined following each carrier contract, and
peaked again when the Navy orders a new aircraft carrier. For example, Newport
News' backlog dropped well below $3 billion in late 1994, then peaked at $5.6
billion with the signing of the CVN-76 contract later in that year. The
continuing effort of the U.S. Government to reduce the federal budget deficit
and the restructuring of U.S. Naval forces in the post Cold War environment,
however, will affect the level of funding for shipbuilding programs, which can
be revised at any time. The Report on the Bottom-Up Review by the U.S.
Department of Defense in 1993 stated a need for a fleet of 12 aircraft carriers
(down from 15 in 1992), creating demand for a new aircraft carrier every four
to six years. Re-evaluation of this need will continue by both the Department
of Defense and the Congress. Current Navy plans call for the award of a
contract for the construction of a new nuclear-powered aircraft carrier (CVN-
77) beginning in or before 2002 for delivery in 2009. The Navy has not
determined whether subsequent aircraft carriers will be nuclear-powered. If
there is an eventual shift towards building smaller, non-nuclear-powered
aircraft carriers, it is possible that Newport News may have to compete with
other shipyards in the future to build such aircraft carriers. Furthermore, in
response to the need for cheaper alternatives and the proliferation of "smart
weapons," it is also possible that future strategy reassessments by the
Department of Defense may result in the need for fewer aircraft carriers.
Newport News is currently performing design concept studies for the next
generation of aircraft carriers, which is expected to help Newport News in
maintaining its role as the Navy's only aircraft carrier builder. For the year
ended December 31, 1995 and for the first six months of 1996, aircraft carrier
construction accounted for approximately 40.5% and 41% of Newport News'
revenues, respectively. In addition, aircraft carrier programs and other
government projects can be delayed, and such delays typically cause loss of
income during the period of delay and retraining costs when work resumes. Any
significant reduction in the level of government appropriations for aircraft
carrier or other shipbuilding programs, or a significant delay of such
appropriations, would have a material adverse effect on Newport News' financial
condition and results of operations.
The prospects of U.S. shipyards, including Newport News, can be materially
affected by their success in securing significant U.S. Navy contract awards. In
1987, Newport News was awarded the lead design contract for the Seawolf
submarine. However, the collapse of the former Soviet Union Navy, with its
several hundred submarines, has greatly reduced the underwater threat to U.S.
and allied vessels. As a result, there was a dramatic cutback in the Seawolf
program (to three submarines), and Newport News did not construct any Seawolf
submarines. Construction of the three Seawolf submarines was awarded to
Electric Boat Corporation ("Electric
Boat"), a competitor of Newport News and wholly-owned subsidiary of General
Dynamics Corporation ("General Dynamics"). More recently, Congress
preliminarily approved authorization legislation to have Newport News construct
one of the Navy's new nuclear attack submarines ("NSSNs," the class of
submarines following the Seawolf) beginning in late 1998, and another NSSN
beginning in late 2000, although there can be no assurance that the NSSN
program will continue to be funded or proceed on schedule. Two NSSNs were also
authorized to be built by Electric Boat. Electric Boat has also been designated
as the lead design yard for NSSN submarines. Future contract awards (after the
fourth ship) for the construction of NSSNs, if made, are expected to be
determined by competitive bidding.
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Newport News, Ingalls Shipbuilding, Inc. ("Ingalls Shipbuilding") (the prime
contractor), Lockheed Martin Corporation ("Lockheed Martin") and National Steel
and Shipbuilding Co. ("National Steel") have entered into an alliance to bid on
the LPD-17 non-nuclear amphibious assault ship program, for which approximately
$974 million was recently appropriated for construction of the first vessel.
The U.S. Navy currently anticipates that 12 vessels will be built for the LPD-
17 program. The Navy has stated that it currently expects that the LPD-17
vessels will be a mainstay of the Navy over the next two decades, replacing a
number of vessels nearing the end of their useful lives. Funds for the
construction of the first LPD-17 vessel have been appropriated as part of the
overall Department of Defense appropriations for 1996. However, there can be no
assurance that the Department of Defense and Congress will fund the 12 vessels.
Furthermore, there can be no assurance that Newport News' alliance will be
awarded, assuming the appropriated funds are released, the LPD-17 contract or
that Congress will appropriate funds for any additional LPD-17 vessels. It is
possible that the U.S. Navy may award the program to a competing bidder or it
may allocate the vessels between competing bidders. It could also delay
implementation of the LPD-17 program. Even if the LPD-17 project is awarded to
Newport News' alliance, the U.S. Navy may decide to award other work to
competitors in order to sustain some level of work at various shipyards.
An alliance consisting of Newport News, Ingalls Shipbuilding and Lockheed
Martin was recently awarded a contract to develop design concepts for the U.S.
Navy's "Arsenal Ship." Newport News' alliance was one of five alliances to
receive such an award. Current U.S. Navy plans call for a downselect to two
alliances following evaluation of submitted concepts. Ultimately, one alliance
is expected to prevail in the award of a construction contract. The members of
Newport News' alliance initially designated Lockheed Martin as the prime
contractor. Although Newport News' alliance was selected to develop design
concepts, there can be no assurance that it will be awarded the construction
work or other aspects of the project. The allocation of responsibilities among
members of Newport News' LPD-17 alliance and Newport News' Arsenal Ship
alliance is subject to future negotiation among such members, and thus there
has not been a determination of the level of work which may ultimately be
assigned to Newport News if its alliances are awarded these projects.
As part of its expansion strategy, Newport News has also been pursuing orders
for commercial ships. It has also submitted bids on the fast frigate (FF-21)
military ships to the United Arab Emirates and Kuwait, and is in the process of
developing bids for the Philippines and Norway. With respect to the commercial
nuclear market, Newport News is preparing to bid (also with others in an
alliance) on several U.S. Department of Energy site management contracts.
Competition for these contracts and projects is intense and there can be no
assurance that Newport News will be successful with its initiatives in these
areas.
With a substantial portion of Newport News' current firm backlog scheduled
for completion in 1998 and 2002, the failure of Newport News to receive the
contract for the construction of the CVN-77 on a timely basis and other
significant naval work would have a material adverse affect on Newport News'
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Newport News
Information Statement and "THE DISTRIBUTIONS--The Shipbuilding Distribution."
Profit Recognition; Government Contracting
Similar to other companies principally engaged in long-term construction
projects, Newport News recognizes profits under the percentage of completion
method of accounting, with profit recognition commencing when progress under
the contract is sufficient to estimate final results with reasonable accuracy,
and loss recognition commencing immediately upon identification of such loss
without regard to percentage of completion. Because contract profit recognition
is dependent upon reliable estimates of the costs to complete the contract,
profits recognized upon completion of the contract may be significantly less
than anticipated, or Newport News may incur a loss with respect to the
contract, if it proves necessary to revise cost estimates.
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Moreover, Newport News' principal U.S. Government business is currently being
performed under fixed price ("FP"), fixed price plus incentive fee ("FPIF"),
cost plus incentive fee ("CPIF"), and cost plus fixed fee ("CPFF") contracts.
The risk to Newport News of not being reimbursed for its costs varies with the
type of contract. Under FP contracts, the contractor retains all costs savings
on completed contracts but is liable for the full amount of all expenditures in
excess of the contract price. FPIF contracts, on the other hand, provide for
cost sharing between the U.S. Government and the contractor. The contractor's
fee is increased or decreased according to a formula set forth in the contract
which generally compares the amount of costs incurred to the contract target
cost. The Government is liable for all allowable costs up to a ceiling price.
However, the contractor is responsible for all costs incurred in excess of such
contract ceiling price. In addition, FPIF contracts generally provide for the
U.S. Government to pay escalation based on published indices relating to the
shipbuilding industry in order to shift the primary risk of inflation to the
Government. Under both CPIF and CPFF contracts, generally the contractor is
only required to perform the contract to the extent the Government makes funds
available. Under the former, the contractor's profit is determined by a
contractually specified formula which essentially compares allowable incurred
costs to the contract target cost. Under the latter, with few exceptions, the
fee is the same without regard to the amount of cost incurred.
Newport News currently constructs aircraft carriers pursuant to FPIF
contracts but it performs work for the U.S. Government under all of the types
of contracts described above. For example, most of its contracts for ship
design are of the cost type and some of its ship repair contracts are of the
fixed price type.
The costs of performing all such types of contracts include those for labor,
material and overhead. Therefore, unanticipated increases in any such costs as
well as delays in product delivery, poor workmanship requiring correction, and
all other factors which affect the cost of performing contracts, many of which
are long term in nature, affect the profitability of most contracts held or
anticipated by Newport News.
In certain circumstances, Newport News may submit Requests for Equitable
Adjustment ("REAs") to the U.S. Navy seeking adjustments to contract prices to
compensate Newport News when it incurs costs for which it believes the U.S.
Government is responsible. For example, in June, 1996, Newport News settled
REAs relating to U.S. Government initiated changes in the requirements for
renovating the container "roll-on, roll-off" heavy armored vehicle Sealift
transportation ships. As part of the settlement, the Sealift contract was
converted from a fixed price incentive contract to a fixed price contract and
the contract price was increased. See Note 13 to the Combined Financial
Statements of Newport News in the Newport News Information Statement. Although
Newport News pursues REAs and all other contractual disputes vigorously, there
is no assurance that the U.S. Navy will resolve the REAs or any of these
disputes in a manner favorable to Newport News. Under U.S. Government
regulations, certain costs, including certain financing costs and marketing
expenses, are not allowable contract costs. These costs can be substantial. The
Government also regulates the methods by which all costs, including overhead,
are allocated to government contracts.
In cases where there are multiple suppliers, contracts for the construction
and conversion of U.S. Navy ships and submarines are subject to competitive
bidding. As a safeguard to anti-competitive bidding practices, the U.S. Navy
sometimes employs the concept of "cost realism," which requires that each
bidder submit information on pricing, estimated costs of completion and
anticipated profit margins. The U.S. Navy uses this and other data to determine
an estimated cost for each bidder. The U.S. Navy then re-evaluates the bids by
using the higher of the bidder's and the U.S. Navy's cost estimates.
The U.S. Government has the right to suspend or debar a contractor from
government contracting for violations of certain statutes or government
procurement regulations. See "--Government Claims and Investigations." The U.S.
Government may also unilaterally terminate contracts at its convenience with
compensation for work completed.
Competition and Regulation
In Newport News' opinion, programs currently planned by the U.S. Navy over
the next several years will not be sufficient to support all the U.S. shipyards
presently engaged in ship construction. The reduced level of
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shipbuilding activity by the U.S. Navy during the past decade has resulted in
significant workforce reductions in the industry, but almost no other
significant consolidation. The general result has been fewer contracts awarded
to the same fixed number of large shipyards. Newport News believes it currently
is (i) the only shipyard capable of building the Navy's nuclear-powered
aircraft carriers, (ii) the only non-government-owned shipyard capable of
refueling and overhauling the Navy's nuclear-powered aircraft carriers and
(iii) one of only two U.S. shipyards capable of building nuclear-powered
submarines. However, with respect to the market for U.S. military contracts for
other types of vessels, there are principally five major private U.S.
shipyards, including Newport News, that compete for contracts to construct,
overhaul or convert other types of surface combatant vessels. Competition for
these vessels, including the LPD-17 and the Arsenal Ship, is extremely intense.
Additionally, Newport News' products, such as aircraft carriers, submarines and
other ships, compete with each other for defense monies.
With respect to the domestic commercial shipbuilding market, currently the
Jones Act requires that all vessels transporting products between U.S. ports be
constructed by U.S. shipyards. There are approximately 16 private U.S.
shipyards that can accommodate the construction of vessels up to 400 feet in
length, five of which Newport News considers to be its direct competitors for
commercial contracts. Potential competitors include Alabama Shipyard, Inc.,
Avondale Industries, Inc. ("Avondale"), National Steel, Ingalls Shipbuilding
and Trinity Industries, Inc. Although the commercial market is growing, a
current overcapacity of suppliers has favored buyers and hindered the
profitability of shipyards. With respect to the international commercial
shipbuilding market, Newport News competes with numerous shipyards in several
countries. Overseas firms control almost all of the international commercial
shipbuilding market. In 1995, Japanese, South Korean and European yards each
controlled approximately 30% of this market. Chinese firms held approximately
four percent and the shipyards in the remaining countries held the remaining
six percent. Many foreign shipyards are heavily subsidized by their
governments, and a number of overseas shipyards presently construct ships at a
cost and over a period which is substantially less than the cost and period
applicable to Newport News. Although there can be no guarantees, Newport News
has undertaken major initiatives to reduce its cost structure and cycle times
for product development and ship delivery in an effort to develop commercial
business. To date Newport News has experienced substantial losses in connection
with its first major commercial construction contracts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Business Outlook" in the Newport News Information Statement and "THE
DISTRIBUTIONS--The Shipbuilding Distribution--Construction--Commercial." While
the percentage of Newport News' total business for commercial shipbuilding
could increase, the U.S. Navy has historically been and for the foreseeable
future is expected to continue to be Newport News' primary customer. See "THE
DISTRIBUTIONS--The Shipbuilding Distribution."
The termination of the U.S. construction-differential subsidy program in 1981
significantly curtailed the ability of U.S. shipyards to compete successfully
for international commercial shipbuilding contracts with foreign shipyards.
Currently, Newport News' future commercial shipbuilding opportunities are
dependent in part on certain U.S. laws and regulations, including (i) the Jones
Act, which, as noted above, currently requires that all vessels transporting
products between U.S. ports be constructed by U.S. shipyards, (ii) the Oil
Pollution Act of 1990, which beginning January 1, 1995, requires the phased-in
transition of single-hulled tankers and product carriers to double-hulled
vessels by 2015 and (iii) the 1993 amendments to the loan guarantee program
under Title XI of the Merchant Marine Act of 1936, which permit the U.S.
Government to guarantee loan obligations of foreign vessel owners for foreign-
flagged vessels built in U.S. shipyards. In connection with U.S. efforts to
implement a 1994 multilateral agreement designed in part to eliminate foreign
government subsidies to overseas commercial shipbuilders, Congress is currently
considering legislation that would eliminate the competitive advantage afforded
to U.S. shipyards under the 1993 amendments to the Title XI loan guarantee
program. In addition, legislative bills seeking to rescind or substantially
modify the provisions of the Jones Act mandating the use of U.S.-built ships
for coastwide trade are introduced from time to time, and are expected to be
introduced in the future. Changes in these laws could have a material adverse
effect on Newport News' financial condition and results of operations. See "THE
DISTRIBUTIONS--The Shipbuilding Distribution."
Newport News faces competition in the engineering, planning and design market
from other companies which provide lower cost engineering support services and
are located closer to the Washington D.C. area.
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Newport News has established a new Carrier Innovation Center for the
development of the Navy's next generation of aircraft carriers. Newport News
believes the Carrier Innovation Center will offset the geographic and cost
advantage of its competitors. There can be no assurance, however, that Newport
News will be the successful bidder on future U.S. Navy engineering work,
including new aircraft carrier research and development funding.
Newport News is also directly dependent upon allocation of defense monies to
the U.S. Navy. In addition to competition from other shipyards, Newport News
competes with firms providing other defense products and services, such as
tanks and aircraft, to other branches of the armed forces, and with other, non-
defense demands on the U.S. budget.
Substantial Leverage
Newport News has historically relied upon Tenneco for working capital
requirements on a short-term basis and for other financial support functions.
After the Shipbuilding Distribution, Newport News will not be able to rely on
the earnings, assets or cash flow of Tenneco and Newport News will be
responsible for paying dividends, servicing its own debt and obtaining and
maintaining sufficient working capital. Newport News will have substantial new
indebtedness upon the consummation of the Transaction. Newport News' debt upon
consummation of the Transaction will include (on a pro forma basis at June 30,
1996): (i) $200 million of Senior Notes due 2006 and $200 million of Senior
Subordinated Notes due 2006 (collectively the "Notes"), and (ii) secured
borrowings of $214 million under a senior secured credit facility ("Senior
Credit Facility"). As of June 30, 1996, on a pro forma basis after giving
effect to the Transaction, Newport News would have had outstanding $614 million
of total indebtedness and stockholders' equity of $194 million, with an
additional $201 million available for borrowing under the Senior Credit
Facility, consisting of $111 million for advances and letters of credit and $90
million for standby letters of credit.
The degree to which Newport News will be leveraged following the Transaction
could have important consequences to holders of the Newport News Common Stock,
including the following: (i) Newport News' ability to pay dividends and obtain
financing in the future for working capital, capital expenditures and general
corporate purposes may be impaired; (ii) a substantial portion of Newport News'
cash flow from operations must be dedicated to the payment of principal and
interest on its indebtedness; and (iii) the high degree of leverage may limit
Newport News' ability to react to changes in the industry, make Newport News
more vulnerable to economic downturns and limit its ability to withstand
competitive pressures.
Newport News' ability to pay dividends on the Newport News Common Stock and
service its debt obligations will depend upon its future operating performance,
which will be affected by prevailing economic conditions and financial and
business factors, many of which are beyond Newport News' control. If Newport
News cannot generate sufficient cash flow from operations to meet its
obligations, then Newport News' ability to pay dividends will be impaired and
it may be required to attempt to restructure or refinance its debt, raise
additional capital or take other actions such as selling assets or reducing or
delaying capital expenditures. There can be no assurance, however, that any of
such actions could be effected on satisfactory terms, if at all, or would be
permitted by the terms of the Senior Credit Facility, the trust indentures
governing the Notes (the "Indentures") or Newport News' other credit and
contractual arrangements.
The Senior Credit Facility and the Indentures will contain restrictive
covenants that, among other things, limit Newport News' ability to pay
dividends on the Newport News Common Stock, incur additional indebtedness,
create liens and make investments and capital expenditures. The Senior Credit
Facility will require Newport News to comply with certain financial ratios and
tests, under which Newport News is required to achieve certain financial and
operating results. Newport News' ability to meet these financial ratios and
tests may be affected by events beyond its control, and there can be no
assurance that they will be met. In the event of a default under the Senior
Credit Facility, the lenders thereunder may terminate their lending commitments
and declare the indebtedness immediately due and payable, resulting in a
default under the Notes. There can be no assurance that Newport News would have
sufficient assets to pay indebtedness then outstanding thereunder and under the
Notes.
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Government Claims and Investigations
More than 90% of Newport News' sales involve contracts entered into with the
U.S. Government. These contracts are subject to possible termination for the
convenience of the U.S. Government, to audit and to possible adjustments
affecting both cost-type and fixed price type contracts. Like many government
contractors, Newport News has received audit reports which recommend that
certain contract prices be reduced, or costs allocated to government contracts
be disallowed, to comply with various government regulations. Some of these
audit reports involve substantial amounts. Newport News has made adjustments
to its contract prices and the costs allocated to government contracts in
those cases in which it believes such adjustments are appropriate. In
addition, various governmental agencies may at any time be conducting various
other investigations or making specific inquiries concerning Newport News.
Management is of the opinion that the ultimate resolution of these matters
will not have a material adverse effect on Newport News' financial condition
or results of operations. In May 1996, Newport News was subpoenaed by the
Inspector General of the Department of Defense as part of a joint inquiry
conducted by the Department of Defense, the Department of Justice, the U.S.
Attorney's Office for the Eastern District of Virginia and the Naval Criminal
Investigation Service. See "THE DISTRIBUTIONS--The Shipbuilding Distribution--
Investigations and Legal Proceedings" and Note 13 of the Combined Financial
Statements of Newport News in the Newport News Information Statement.
Certain Antitakeover Features
Upon consummation of the Shipbuilding Distribution, certain provisions of
the Newport News' Restated Certificate of Incorporation and its Amended and
Restated By-laws (both of which will be adopted on the Distribution Date),
along with Newport News' stockholder rights plan and Delaware statutory law,
could discourage potential acquisition proposals and could delay or prevent a
change in control of Newport News. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of Newport News
Common Stock. Such provisions may also inhibit fluctuations in the market
price of Newport News Common Stock that could result from takeover attempts.
The provisions could also have the effect of making it more difficult for
third parties to cause the immediate removal and replacement of the members of
the then current Newport News Board of Directors or the then current
management of Newport News without the concurrence of the Newport News Board
of Directors. See "Antitakeover Effects of Certain Provisions" in the Newport
News Information Statement.
SAFE HARBOR DISCLOSURE: FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Joint Proxy Statement-Prospectus contains or incorporates by reference
forward-looking statements. The factors identified under "RISK FACTORS" are
important factors (but not necessarily all important factors) that could cause
actual results to differ materially from those expressed in any forward-
looking statement made by, or on behalf of, El Paso or Tenneco (or their
respective subsidiaries).
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, El Paso and
Tenneco caution that, while such assumptions or bases are believed to be
reasonable and are made in good faith, assumed facts or bases almost always
vary from actual results, and the differences between assumed facts or basis
and actual results can be material, depending upon the circumstances. Where,
in any forward-looking statement, El Paso or Tenneco (or their respective
subsidiaries), or their respective managements, express an expectation or
belief as to future results, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but there can be no assurance
that the statement of expectation or belief will result or be achieved or
accomplished. The words "believe," "expect" and "anticipate" and similar
expressions identify forward-looking statements. The portions of this Joint
Proxy Statement-Prospectus which contain forward-looking statements generally
include cross-references to "RISK FACTORS." See also the information contained
under the captions "--Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Energy Business," "--Interstate
Pipeline Operations," "--Gas Marketing, Intrastate Pipelines and Related
Services," "--International, Power Generation and Ventures," and "--Operation
of the Energy Business After the Merger," included in the section entitled
"INFORMATION CONCERNING THE ENERGY BUSINESS TO BE MERGED" included elsewhere
herein and the information incorporated by reference from El Paso's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995 and El Paso's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996, as
amended, and June 30, 1996 under the headings "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business and
Properties."
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THE TENNECO SPECIAL MEETING
GENERAL
This Joint Proxy Statement-Prospectus is being furnished to Tenneco
Stockholders in connection with the solicitation of proxies on behalf of the
Tenneco Board of Directors for use at the Tenneco Special Meeting to be held
on December 10, 1996 at the time and place specified in the accompanying
Notice of Special Meeting of Stockholders, or any adjournment or postponements
thereof.
PURPOSE OF THE TENNECO SPECIAL MEETING
The purpose of the Tenneco Special Meeting is to consider and vote upon a
single, unified proposal to approve and adopt the Transaction and to transact
such other business as may properly come before the Tenneco Special Meeting.
The Distributions, Merger and Charter Amendment will be voted on together as
parts of the Transaction, none of which will be consummated unless the
Transaction as a whole is approved at the Tenneco Special Meeting (although if
the Transaction is not approved, Tenneco may subsequently elect to undertake
one or more transactions included in the Transaction which do not require
stockholder approval). Stockholders should be aware that a number of the other
transactions which constitute components of the Transaction (and do not
require stockholder approval) are expected to be consummated prior to the
Tenneco Special Meeting (such as the NPS Issuance and certain Corporate
Restructuring Transactions) and are not expected to be unwound if the
Transaction is not approved by Tenneco Stockholders. See "THE TRANSACTION,"
"THE DISTRIBUTIONS," "THE MERGER" and "THE CHARTER AMENDMENT."
Each copy of this Joint Proxy Statement-Prospectus mailed to Tenneco
Stockholders is accompanied by a form of proxy for use at the Tenneco Special
Meeting. This Joint Proxy Statement-Prospectus is also being furnished to
Tenneco Stockholders as a prospectus of El Paso with respect to the shares of
El Paso Common Stock and El Paso Preferred Depositary Shares, if any, issuable
to Tenneco Stockholders upon consummation of the Merger.
THE BOARD OF DIRECTORS OF TENNECO RECOMMENDS THAT TENNECO STOCKHOLDERS VOTE
FOR APPROVAL AND ADOPTION OF THE TRANSACTION.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Board of Directors of Tenneco has fixed the close of business on
November 6, 1996 as the Tenneco Record Date for the determination of the
Tenneco Stockholders entitled to receive notice of and to vote at the Tenneco
Special Meeting. Only holders of record of shares of Tenneco Stock as of the
Tenneco Record Date will be entitled to notice of and to vote at the Tenneco
Special Meeting. On October 28, 1996, (a) 170,883,000 shares of Tenneco Common
Stock were outstanding, (b) 803,723 shares of $4.50 Preferred Stock were
outstanding, and (c) 391,519 shares of $7.40 Preferred Stock were outstanding,
with each share being entitled to one vote on each matter to be considered at
the Tenneco Special Meeting by the holders of shares of such class or series
of Tenneco Stock. The holders of at least (i) a majority of the outstanding
shares of Tenneco Common Stock and $7.40 Preferred Stock, together as a class,
and (ii) a majority of the outstanding shares of $7.40 Preferred Stock and
$4.50 Preferred Stock, together as a class, must be present in person or
represented by proxy at the Tenneco Special Meeting in order to establish a
quorum for the consideration of the Transaction at the Tenneco Special
Meeting. The holders of at least a majority of the outstanding shares of
Tenneco Common Stock and $7.40 Preferred Stock, together as a class, must be
present in person or represented by proxy at the Tenneco Special Meeting in
order to establish a quorum for the transaction of any additional business to
properly come before the Tenneco Special Meeting (except as may otherwise be
provided by applicable law, the Tenneco Charter or Tenneco's By-laws).
VOTES REQUIRED; EFFECT OF ABSTENTIONS AND NON-VOTES
Approval and adoption of the Transaction by the Tenneco Stockholders at the
Tenneco Special Meeting requires both (i) the affirmative vote of holders of a
majority of the outstanding shares of the Tenneco Common Stock and $7.40
Preferred Stock, voting together as a class, and (ii) the affirmative vote of
holders of a majority of the outstanding shares of the $4.50 Preferred Stock
and $7.40 Preferred Stock, voting together as a class. As
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described below, approval of the holders of the Tenneco Junior Preferred Stock
to be issued in the NPS Issuance also will be required to effect the
Distributions and Charter Amendment if the NPS Issuance occurs prior to
effectiveness of the Charter Amendment (which is expected to occur on the day
following the Tenneco Special Meeting if the Transaction is approved). In such
event, the Distributions and Charter Amendment will be submitted for approval
by the initial record holders of the Tenneco Junior Preferred Stock by written
consent in lieu of a meeting. See "THE NPS ISSUANCE" and "THE MERGER--
Appraisal Rights." Any other business to properly come before the Tenneco
Special Meeting (except as otherwise provided by applicable law, the Tenneco
Charter or the Tenneco By-laws) will require the affirmative vote of holders
of a majority of the shares of Tenneco Common Stock and $7.40 Preferred Stock,
voting together as a class, present in person or by proxy at the Tenneco
Special Meeting. Abstentions will be counted for purposes of determining the
presence or absence of a quorum at the Tenneco Special Meeting. Broker non-
votes (which occur when brokers holding shares as nominees for their customers
do not have authority to vote on a matter absent specific instructions from
the beneficial owners of the shares) will be counted for purposes of
determining the presence or absence of a quorum at the Tenneco Special
Meeting. Because approval of the Transaction requires the affirmative vote of
the majority of the outstanding shares of two groups of Tenneco stockholders,
abstentions, broker non-votes and failures to vote in person or by proxy at
the Tenneco Special Meeting will have the effect of votes against the
Transaction. With respect to all other business to properly come before the
Tenneco Special Meeting, abstentions, broker non-votes and failures to vote
shares represented and entitled to vote will have the effect of votes cast
against.
The holders of the $4.50 Preferred Stock as of the Tenneco Record Date have
agreed to grant an irrevocable proxy to Tenneco to vote such shares in favor
of the Transaction pursuant to the Voting Agreement to be entered into with
Tenneco. See "THE TRANSACTION--Background of the Transaction." Because such
shares of $4.50 Preferred Stock represent more than a majority of the
outstanding shares of $7.40 Preferred Stock and $4.50 Preferred Stock as of
the Tenneco Record Date, taken together, it thus is expected that the
requisite vote as described in clause (ii) of the immediately preceding
paragraph will be effectively secured.
While holders of Tenneco Common Stock are not entitled as a matter of
Delaware law to vote on the Distributions, approval thereof by the holders of
Tenneco Common Stock is a condition to the consummation of the Distributions
under the Distribution Agreement. Furthermore, although the holders of $4.50
Preferred Stock are not entitled as a matter of Delaware law to vote on the
Merger Agreement and Charter Amendment, Tenneco's Board of Directors has
nonetheless determined to submit the Transaction as a whole to the vote of all
Tenneco Stockholders.
VOTING AND REVOCATION OF PROXIES
Stockholders of record as of the Tenneco Record Date are entitled to cast
their votes, in person or by properly executed proxy, at the Tenneco Special
Meeting. All shares of Tenneco Stock represented at the Tenneco Special
Meeting by properly executed proxies received prior to the Tenneco Special
Meeting, unless properly revoked, will be voted at the Tenneco Special Meeting
in accordance with the instructions indicated on such proxies. IF A PROXY IS
SIGNED AND RETURNED BY A HOLDER OF TENNECO STOCK WITHOUT INDICATING ANY VOTING
INSTRUCTIONS, THE SHARES OF TENNECO STOCK REPRESENTED BY SUCH PROXY WILL BE
VOTED FOR APPROVAL AND ADOPTION OF THE TRANSACTION. Any proxy given by a
Tenneco Stockholder pursuant to this solicitation may be revoked by the person
giving it at any time before the proxy is voted by (a) filing with the
Secretary of Tenneco, at or before the Tenneco Special Meeting, a written
notice of revocation bearing a date later than the date of the proxy; (b) duly
executing a subsequent proxy relating to the same shares and delivering it to
the Secretary of Tenneco before the Tenneco Special Meeting; or (c) attending
the Tenneco Special Meeting and voting in person (although attendance at the
Tenneco Special Meeting will not in and of itself constitute a revocation of a
proxy).
The Board of Directors of Tenneco is not aware of any business to be acted
upon at the Tenneco Special Meeting other than as described in this Joint
Proxy Statement-Prospectus. If, however, other business is properly brought
before the Tenneco Special Meeting, the persons appointed as proxies or their
substitutes will have discretion to vote or act thereon according to their
best judgment and applicable law unless the proxy indicates otherwise, except
that no proxy that directs the proxy holders to vote the shares represented
thereby against, or to abstain from voting on, the Transaction shall be voted
in favor of any adjournment or postponement of the Tenneco Special Meeting.
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TENNECO STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
SOLICITATION OF PROXIES
In connection with the Tenneco Special Meeting, proxies are being solicited
by and on behalf of the Tenneco Board of Directors. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of Tenneco in person or by telephone, telegram or other
means of communication. Such directors, officers and employees will not be
specifically compensated for such services but may be reimbursed for out-of-
pocket expenses in connection with such solicitation. In addition, Tenneco has
engaged Georgeson & Company, Inc., Tenneco's regular investor relations firm,
to assist in the solicitation of proxies for the Tenneco Special Meeting. The
anticipated cost of such assistance is approximately $75,000. Arrangements
will be made with brokerage houses, nominees, fiduciaries and custodians for
forwarding of proxy solicitation materials to beneficial owners of Tenneco
Stock held of record by such persons, and Tenneco may reimburse such nominees,
fiduciaries and custodians for their reasonable expenses incurred in
connection therewith.
All expenses of the solicitation of proxies from Tenneco Stockholders in
connection with the Tenneco Special Meeting will be borne by Tenneco. However,
any such expenses which remain unpaid as of the Merger Effective Time will
remain the responsibility of Tenneco pursuant to the Debt Realignment and be
included in the Actual Energy Debt Amount. New Tenneco must reimburse Tenneco
for the amount by which the Actual Energy Debt Amount exceeds the Base Debt
Amount. See "THE TRANSACTION--Expenses."
APPRAISAL RIGHTS
Appraisal rights are available in connection with the Merger to record
holders of $4.50 Preferred Stock and persons who become record holders of
Tenneco Junior Preferred Stock on or prior to the date of the Tenneco Special
Meeting in connection with the Merger. However, over 75% of the holders of the
$4.50 Preferred Stock as of the Tenneco Record Date have agreed to grant to
Tenneco an irrevocable proxy to vote their shares in favor of the Transaction
and have agreed to waive and not demand their appraisal rights pursuant to the
Voting Agreement to be entered into with Tenneco. No other stockholders of
Tenneco are entitled to any such appraisal rights. See "THE NPS ISSUANCE" and
"THE MERGER--Appraisal Rights."
ADJOURNMENT OF THE TENNECO SPECIAL MEETING
If the Tenneco Special Meeting is adjourned to another time and place,
notice of the adjourned meeting will not be given if the time and place of the
adjourned meeting are announced at the Tenneco Special Meeting. If the
adjournment is for more than 30 days, or if after the adjournment the Tenneco
Board of Directors fixes a new record date for the adjourned meeting, a notice
of the Tenneco Special Meeting will be given to each Tenneco Stockholder of
record entitled to vote at the adjourned meeting.
TENNECO JUNIOR PREFERRED STOCKHOLDERS WRITTEN CONSENT
The holders of Tenneco Junior Preferred Stock issued pursuant to the NPS
Issuance will not vote at the Tenneco Special Meeting. If the NPS Issuance
occurs prior to effectiveness of the Charter Amendment, each of the
Distributions (which will require approval of a majority of the outstanding
shares of Tenneco Junior Preferred Stock) and the Charter Amendment (which
will require approval of two-thirds of the outstanding shares of Tenneco
Junior Preferred Stock) will be submitted for approval by the initial record
holders of Tenneco Junior Preferred Stock by written consent in lieu of a
meeting. See "THE NPS ISSUANCE."
THE EL PASO SPECIAL MEETING
GENERAL
This Joint Proxy Statement-Prospectus is being furnished to the stockholders
of El Paso in connection with the solicitation of proxies on behalf of the
Board of Directors of El Paso for use at the El Paso Special Meeting to be
held on December 9, 1996 at the time and place specified in the accompanying
Notice of Special Meeting of Stockholders, or any adjournment or postponements
thereof.
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PURPOSE OF THE EL PASO SPECIAL MEETING
The purpose of the El Paso Special Meeting is to consider and vote upon the
proposal to approve the Stock Issuance and to transact such other business as
may properly come before the El Paso Special Meeting.
El Paso is seeking stockholder approval of the Stock Issuance to comply with
certain requirements of the NYSE governing the listing of the El Paso Common
Stock thereon and relating to the issuance of El Paso Common Stock in the
Merger. Approval of the Stock Issuance by El Paso stockholders is not required
by Delaware law or by El Paso's Restated Certificate of Incorporation or By-
laws.
Each copy of this Joint Proxy Statement-Prospectus mailed to El Paso
stockholders is accompanied by a form of proxy for use at the El Paso Special
Meeting.
THE BOARD OF DIRECTORS OF EL PASO RECOMMENDS THAT EL PASO STOCKHOLDERS VOTE
FOR APPROVAL OF THE STOCK ISSUANCE.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Board of Directors of El Paso has fixed the close of business on
November 6, 1996 as the El Paso Record Date for the determination of the El
Paso stockholders entitled to receive notice of and to vote at the El Paso
Special Meeting. Only holders of record of shares of El Paso Common Stock as
of the El Paso Record Date will be entitled to notice of and to vote at the El
Paso Special Meeting. On October 28, 1996, 36,936,311 shares of El Paso Common
Stock were outstanding. In order to establish a quorum for the transaction of
business at the El Paso Special Meeting, holders of a majority of shares of
outstanding El Paso Common Stock must be either (i) present in person at the
El Paso Special Meeting, or (ii) represented at the meeting by a valid proxy,
whether the instrument granting such proxy is marked as casting a vote or
abstaining, is left blank or does not empower such proxy to vote with respect
to some or all matters to be voted upon at the El Paso Special Meeting.
VOTES REQUIRED; EFFECT OF ABSTENTIONS AND NON-VOTES
Each share of El Paso Common Stock outstanding as of the El Paso Record Date
entitles the holder thereof to one vote on each matter presented for a
stockholder vote at the El Paso Special Meeting. Approval and adoption of the
Stock Issuance by the stockholders of El Paso requires the affirmative vote of
the holders of the majority of the shares of the El Paso Common Stock present
in person or represented by proxy at the El Paso Special Meeting and entitled
to vote thereon. Any other business to come properly before the El Paso
Special Meeting will require the affirmative vote of holders of the majority
of the shares of El Paso Common Stock present in person or represented by
proxy at the El Paso Special Meeting and entitled to vote thereon, unless a
greater vote is required by Delaware law or by El Paso's Restated Certificate
of Incorporation or By-laws. In determining the number of votes cast for or
against a proposal, shares abstaining from voting on a matter will not be
treated as a vote for or against the proposal. A non-vote by a broker will be
treated as if the broker never voted, but a non-vote by a stockholder will be
counted as a vote "for" the management's position. Because approval of the
Stock Issuance requires the affirmative vote of the holders of the majority of
the shares of El Paso Common Stock present at the El Paso Special Meeting or
represented by proxy, and abstentions and broker non-votes will be counted
toward the quorum requirement, abstentions and broker non-votes at the El Paso
Special Meeting will have the effect of votes against the Stock Issuance.
El Paso recognizes that a vote by stockholders against the Stock Issuance
could be interpreted either as a vote in opposition to the Merger or as
expressing a preference for issuing the El Paso Preferred Stock. However,
because the Board of Directors of El Paso previously determined that entering
into the Merger Agreement was in the best interests of El Paso and its
stockholders and the obligation of El Paso to consummate the Merger is not
conditioned upon El Paso stockholder approval, El Paso is contractually bound,
subject to the other terms of the Merger Agreement, to consummate the Merger
regardless of the outcome of the vote upon the Stock Issuance.
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VOTING AND REVOCATION OF PROXIES
Stockholders of record as of the El Paso Record Date are entitled to cast
their votes, in person or by properly executed proxy, at the El Paso Special
Meeting. All shares of El Paso Common Stock represented at the El Paso Special
Meeting by properly executed proxies received at or prior to the El Paso
Special Meeting, unless properly revoked, will be voted at the El Paso Special
Meeting in accordance with the instructions indicated on such proxies. IF A
PROXY IS SIGNED AND RETURNED BY A HOLDER OF EL PASO COMMON STOCK WITHOUT
INDICATING ANY VOTING INSTRUCTIONS, THE SHARES OF EL PASO COMMON STOCK
REPRESENTED BY SUCH PROXY WILL BE VOTED FOR APPROVAL OF THE STOCK ISSUANCE. Any
proxy given pursuant to this solicitation may be revoked by the person giving
it at any time before the proxy is voted by: (a) filing with the Secretary of
El Paso, at or before the El Paso Special Meeting, a written notice of
revocation bearing a date later than the date of the proxy; (b) duly executing
another proxy relating to the same shares and bearing a date subsequent to the
proxy being revoked and delivering it to the Secretary of El Paso at or before
the El Paso Special Meeting; or (c) attending the El Paso Special Meeting and
voting in person.
The Board of Directors of El Paso is not aware of any business to be acted
upon at the El Paso Special Meeting other than as described in this Joint Proxy
Statement-Prospectus. If, however, other matters are properly brought before
the El Paso Special Meeting, or any adjournments or postponements thereof, the
persons appointed as proxies or their substitutes will have discretion to vote
or act thereon according to their best judgment and applicable law unless the
proxy indicates otherwise, except that no proxy that directs the proxyholders
to vote the shares represented thereby against, or to abstain from voting on,
the Stock Issuance shall be voted in favor of any adjournment or postponement
of the El Paso Special Meeting.
SOLICITATION OF PROXIES
In connection with the El Paso Special Meeting, proxies are being solicited
by and on behalf of the Board of Directors of El Paso. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of El Paso in person or by telephone, telegram or other
means of communication. Such directors, officers and employees will not be
specifically compensated for such services but may be reimbursed for out-of-
pocket expenses in connection with such solicitation. In addition, El Paso has
engaged Georgeson & Company, Inc., El Paso's regular investor relations firm,
to assist in the solicitation of proxies for the El Paso Special Meeting. The
anticipated cost of such assistance is approximately $10,000. Arrangements will
be made with brokerage houses, nominees, fiduciaries and custodians for
reasonable expenses incurred in connection therewith.
ADJOURNMENT OF THE EL PASO SPECIAL MEETING
If the El Paso Special Meeting is adjourned to another time and place, notice
of the adjourned meeting will not be given if the time and place of the
adjourned meeting are announced at the El Paso Special Meeting. If the
adjournment is for more than 30 days, or if after the adjournment the El Paso
Board of Directors fixes a new record date for the adjourned meeting, a notice
of the El Paso Special Meeting will be given to each El Paso stockholder of
record entitled to vote at the adjourned meeting.
64
<PAGE>
THE TRANSACTION
STRUCTURE OF THE TRANSACTION
The Distributions, Merger and Charter Amendment are separate parts of the
Transaction, none of which will be consummated unless the Transaction as a
whole is approved at the Tenneco Special Meeting (although Tenneco may elect
subsequently to proceed with one or more of the transactions included in the
Transaction which do not require stockholder approval if the Transaction is
not approved). The Charter Amendment is expected to be filed on the day
following the Tenneco Special Meeting, if the Transaction is approved thereat.
The Distributions are expected to be consummated as soon thereafter as
practicable, and in any event one day prior to the anticipated consummation of
the Merger. The Distributions will not be consummated until all other
conditions to the Merger that are capable of being satisfied at that time have
been satisfied (or can be contemporaneously satisfied).
The principal transactions which will be undertaken to consummate the
Transaction include the (i) NPS Issuance, (ii) Debt Realignment, (iii)
Corporate Restructuring Transactions, (iv) Cash Realignment, (v) Charter
Amendment, (vi) Distributions, and (vii) Merger, each as more fully described
below. See "THE DISTRIBUTIONS," "THE NPS ISSUANCE," "DEBT AND CASH
REALIGNMENT," "CORPORATE RESTRUCTURING TRANSACTIONS," "THE MERGER" and "THE
CHARTER AMENDMENT."
CONSIDERATION TO TENNECO STOCKHOLDERS
The following table sets forth what holders of Tenneco Stock will receive
upon consummation of the Transaction based on the number of shares of Tenneco
Stock outstanding as of October 28, 1996 and assuming, (i) an Average El Paso
Common Price of $46.6000 (which is equal to the average per share closing
price on the NYSE for the 20-day trading period ended October 28, 1996), (ii)
a Pre-Meeting El Paso Common Price also equal to $46.6000, and (iii) the
issuance of no additional shares of Tenneco Common Stock upon the exercise of
options and the vesting of performance share awards in connection with the
Merger. Because the hypothetical Average El Paso Price of $46.6000 used for
purposes of the table below is above the Collar, the number of shares to be
received by holders of Tenneco Common Stock in the Merger is based on the
upper limit of the Collar of $38.3625.
<TABLE>
<C> <S>
HOLDERS OF: WILL RECEIVE:
. Tenneco Common Stock . one share of New Tenneco Common Stock for
every share of Tenneco Common Stock held
. one share of Newport News Common Stock for
every five shares of Tenneco Common Stock
held
. if the Stock Issuance is approved, .093
shares of El Paso Common Stock for every
share of Tenneco Common Stock held (valued
at $4.35)(/1/)
. if the Stock Issuance is not approved, .024
shares of El Paso Common Stock and .081 El
Paso Preferred Depositary Shares for every
share of Tenneco Common Stock held (valued
at $4.35)(/1/)
. $7.40 Preferred Stock . 2.467 shares of El Paso Common Stock for
every share of $7.40 Preferred Stock held
(valued at $115)(/1/)
. $4.50 Preferred Stock . 2.467 shares of El Paso Common Stock for
every share of $4.50 Preferred Stock held
(valued at $115)(/1/)
</TABLE>
- --------
(1) Assumes (i) with respect to the Tenneco Common Stock, the market price for
El Paso Common Stock equals $46.6000 (the assumed Average El Paso Common
Price) and the market price for El Paso Preferred Depositary Shares equals
$40 (one twenty-fifth of the liquidation value of a whole share of El Paso
Preferred Stock), and (ii) in the case of the Tenneco Preferred Stock, a
market value for the El Paso Common Stock equal to $46.60000 (the assumed
Pre-Meeting El Paso Common Price).
65
<PAGE>
The number of shares to be issued to the holders of Tenneco Common Stock will
be based on the Average El Paso Common Price, subject, however, to the Collar.
After giving effect to the Collar, holders of Tenneco Common Stock will likely
receive in the Merger El Paso equity securities that have a market value as of
the Merger Effective Time which is more or less than $612.5 million if the
Average El Paso Common Price is above or below the Collar, respectively.
Furthermore, because the consideration to be received by Tenneco Stockholders
will be fixed based upon a closing price or an average of closing prices of the
El Paso Common Stock determined prior to the Merger, the market value at the
Merger Effective Time of the El Paso Common Stock and El Paso Preferred
Depositary Shares, if issued because the Stock Issuance is not approved,
received by Tenneco Stockholders in the Merger may be more or less than such
pre-Merger price or prices. As of October 28, 1996, the closing sales prices on
the NYSE of the El Paso Common Stock and Tenneco Common Stock were $47.38 and
$48.75, respectively.
The following tables illustrate how changes in the Average El Paso Common
Price (in the case of Tenneco Common Stock) and the Pre-Meeting El Paso Common
Price (in the case of Tenneco Preferred Stock) will affect the number and value
of El Paso equity securities received, per share of Tenneco Stock and on an
aggregate basis, in the Merger (based on the number of shares of Tenneco Stock
outstanding on October 28, 1996 and assuming the issuance of no additional
shares of Tenneco Common Stock upon the exercise of options and the vesting of
performance awards in connection with the Merger).
If the Stock Issuance is approved:
<TABLE>
<CAPTION>
PER SHARE OF PER SHARE OF
TENNECO COMMON TENNECO AGGREGATE
STOCK PREFERRED STOCK TOTAL(4)
--------------- --------------- ---------------
SHARES SHARES SHARES
HYPOTHETICAL AVERAGE EL PASO OF EL OF EL OF EL
COMMON PRICE/PRE-MEETING EL PASO DOLLAR PASO DOLLAR PASO DOLLAR
PASO COMMON PRICE COMMON VALUE(1) COMMON VALUE(2) COMMON VALUE
---------------------------- ------ -------- ------ -------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
$30.0000...................... .114 $3.43 3.832 $115.00 24,097 $722,924
$31.3875 (Minimum El Paso
Price)....................... .114 3.58 3.663 115.00 23,895 750,000
$32.0000...................... .112 3.58 3.593 115.00 23,438 750,000
$34.0000...................... .105 3.58 3.381 115.00 22,059 750,000
$34.8750 (Median Collar
Price)....................... .103 3.58 3.297 115.00 21,505 750,000
$36.0000...................... .100 3.58 3.194 115.00 20,833 750,000
$38.0000...................... .094 3.58 3.025 115.00 19,737 750,000
$38.3625 (Maximum El Paso
Price)....................... .093 3.58 2.997 115.00 19,550 750,000
$40.0000...................... .093 3.74 2.874 115.00 19,404 776,145
$42.0000...................... .093 3.92 2.737 115.00 19,240 808,077
$44.0000...................... .093 4.11 2.613 115.00 19,091 840,009
$46.0000...................... .093 4.30 2.499 115.00 18,955 871,941
$46.6000(3)................... .093 4.35 2.467 115.00 18,917 881,521
$48.0000...................... .093 4.48 2.395 115.00 18,831 903,873
</TABLE>
- --------
(1) Assumes a market price for the El Paso Common Stock equal to the
hypothetical Average El Paso Common Price.
(2) Assumes a market price for the El Paso Common Stock equal to the
hypothetical Pre-Meeting El Paso Common Price and assumes that the Pre-
Meeting El Paso Common Price is equal to the hypothetical Average El Paso
Common Price for purposes of this table. The actual Pre-Meeting El Paso
Common Price used to determine the shares of El Paso Common Stock issued to
holders of Tenneco Preferred Stock will likely be different than the actual
Average El Paso Common Price utilized.
(3) Represents the hypothetical Average El Paso Common Price based on the 20-
day trading period ended October 28, 1996.
(4) The portion of the aggregate total number of shares and aggregate total
value of El Paso Common Stock which will be issued to holders of Tenneco
Common Stock is as follows:
66
<PAGE>
<TABLE>
<CAPTION>
TENNECO COMMON
------------------
SHARES OF TOTAL
EL PASO DOLLAR
HYPOTHETICAL AVERAGE EL PASO COMMON PRICE COMMON VALUE
----------------------------------------- --------- --------
(IN THOUSANDS)
<S> <C> <C>
$30.0000............................................. 19,514 $585,424
$31.3875 (Minimum El Paso Price)..................... 19,514 612,500
$32.0000............................................. 19,141 612,500
$34.0000............................................. 18,015 612,500
$34.8750 (Median Collar Price)....................... 17,563 612,500
$36.0000............................................. 17,014 612,500
$38.0000............................................. 16,118 612,500
$38.3625 (Maximum El Paso Price)..................... 15,966 612,500
$40.0000............................................. 15,966 638,645
$42.0000............................................. 15,966 670,577
$44.0000............................................. 15,966 702,509
$46.0000............................................. 15,966 734,441
$46.6000............................................. 15,966 744,021
$48.0000............................................. 15,966 766,373
</TABLE>
If the Stock Issuance is not approved:
<TABLE>
<CAPTION>
PER SHARE OF
PER SHARE OF TENNECO TENNECO
COMMON STOCK PREFERRED STOCK AGGREGATE TOTAL(4)
----------------------------- ------------------ -----------------------------
HYPOTHETICAL AVERAGE EL EL PASO EL PASO
PASO COMMON PRICE/PRE- SHARES OF PREFERRED TOTAL SHARES OF SHARES OF PREFERRED TOTAL
MEETING EL PASO DEPOSITARY DOLLAR EL PASO DOLLAR EL PASO DEPOSITARY DOLLAR
EL PASO COMMON PRICE COMMON SHARES VALUE(1) COMMON VALUE(2) COMMON SHARES VALUE
----------------------- --------- ---------- -------- --------- -------- --------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$30.0000................ .014 .075 $3.43 3.832 $115.00 7,000 12,825 $722,924
$31.3875 (Minimum El
Paso Price)............ .015 .078 3.58 3.663 115.00 7,000 13,250 750,000
$32.0000................ .016 .077 3.58 3.593 115.00 7,000 13,150 750,000
$34.0000................ .017 .075 3.58 3.381 115.00 7,000 12,800 750,000
$34.8750 (Median Collar
Price)................. .018 .074 3.58 3.297 115.00 7,000 12,650 750,000
$36.0000................ .019 .073 3.58 3.194 115.00 7,000 12,450 750,000
$38.0000................ .020 .071 3.58 3.025 115.00 7,000 12,100 750,000
$38.3625 (Maximum El
Paso Price)............ .020 .070 3.58 2.997 115.00 7,000 12,025 750,000
$40.0000................ .021 .073 3.74 2.874 115.00 7,000 12,400 776,145
$42.0000................ .022 .075 3.92 2.737 115.00 7,000 12,850 808,077
$44.0000................ .023 .078 4.11 2.613 115.00 7,000 13,300 840,009
$46.0000................ .023 .080 4.30 2.499 115.00 7,000 13,750 871,941
$46.6000(3)............. .024 .081 4.35 2.467 115.00 7,000 13,875 881,521
$48.0000................ .024 .083 4.48 2.395 115.00 7,000 14,200 903,873
</TABLE>
- --------
(1) Assumes a market price for the El Paso Common Stock equal to the
hypothetical Average El Paso Common Price, and a market price for an El
Paso Preferred Depositary Share equal to $40 (one twenty-fifth of the the
liquidation value of a whole share of El Paso Preferred Stock).
(2) Assumes a market price for the El Paso Common Stock equal to the
hypothetical Pre-Meeting El Paso Common Price and assumes that the Pre-
Meeting El Paso Common Price is equal to the hypothetical Average El Paso
Common Price. The actual Pre-Meeting El Paso Common Price used to
determine the shares of El Paso Common Stock issued to holders of Tenneco
Preferred Stock will likely be different than the actual Average El Paso
Common Price utilized.
(3) Represents the hypothetical Average El Paso Common Price based on the 20-
day trading period ended October 28, 1996.
(4) The portion of the aggregate total number of shares and aggregate total
value of El Paso equity securities which will be issued to holders of
Tenneco Common Stock is as follows:
67
<PAGE>
<TABLE>
<CAPTION>
TENNECO COMMON
-----------------------------
EL PASO
SHARES OF PREFERRED TOTAL
EL PASO DEPOSITARY DOLLAR
HYPOTHETICAL AVERAGE EL PASO COMMON PRICE COMMON SHARES VALUE
----------------------------------------- --------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
$30.0000.................................. 2,417 12,825 $585,424
$31.3875 (Minimum El Paso Price).......... 2,619 13,250 612,500
$32.0000.................................. 2,703 13,150 612,500
$34.0000.................................. 2,956 12,800 612,500
$34.8750 (Median Collar Price)............ 3,057 12,650 612,500
$36.0000.................................. 3,181 12,450 612,500
$38.0000.................................. 3,382 12,100 612,500
$38.3625 (Maximum El Paso Price).......... 3,416 12,025 612,500
$40.0000.................................. 3,563 12,400 638,645
$42.0000.................................. 3,726 12,850 670,577
$44.0000.................................. 3,875 13,300 702,509
$46.0000.................................. 4,011 13,750 734,441
$46.6000.................................. 4,049 13,875 744,021
$48.0000.................................. 4,135 14,200 766,373
</TABLE>
Shares of the Tenneco Junior Preferred Stock, which will be issued pursuant
to the NPS Issuance, will not be converted or exchanged in the Merger and will
remain issued and outstanding following the Merger, and holders thereof will
receive no consideration therefor in the Transaction. See "THE NPS ISSUANCE."
In any event, Tenneco Stockholders will receive cash (without interest) in
lieu of fractional shares and fractional El Paso Preferred Depositary Shares,
if any. See "THE DISTRIBUTIONS--Manner of Distribution" and "THE MERGER--
Conversion of Shares."
Tenneco Stockholders may call El Paso's transfer agent, The First National
Bank of Boston, at 1-800-736-3001 beginning on November 6, 1996 to obtain
information regarding the average per share closing price of El Paso Common
Stock for the most recent 20 trading-day period.
BACKGROUND OF THE TRANSACTION
For the past several years, Tenneco has been undergoing a corporate
transformation from a highly diversified industrial corporation to a global
manufacturing company focused on its automotive and packaging businesses. This
process can best be described in three phases. The first phase included the
restructuring of Case and the successful implementation of a $1.1 billion
Tenneco equity offering in April 1993. The second phase consisted of an
extensive operating cost savings program, whereby the company instituted an
integrated system of processes, controls and incentives in an effort to
enhance profitability in each of the company's divisions.
The third phase, which is currently ongoing, involves an effort to enhance
growth through the redeployment of Tenneco's resources to higher growth, less
cyclical businesses. For example, the monetization of Tenneco's investment in
Case began with an initial public offering in June 1994 and was followed by
secondary offerings in November 1994, August 1995 and March 1996. Similarly,
Tenneco divested its Albright & Wilson chemicals subsidiary through a 100%
initial public offering in March 1995. The capital raised through these and
other initiatives has been (or will be) redeployed into higher growth
businesses such as (i) Heinrich Gillet GmbH & Co., the largest manufacturer of
automotive exhaust systems in Europe, that was acquired by Tenneco in November
1994, (ii) the Manufacturas Fonos, S.L., Spain's largest participant in the
exhaust systems aftermarket, that was acquired by Tenneco in the third quarter
of 1995, (iii) The Pullman Company and its Clevite products division, a
leading manufacturer of elastomeric vibration control components, that was
acquired by Tenneco in July 1996, (iv) Mobil Plastics, a specialty packaging
business with several leading brand-name products that was acquired by Tenneco
in November 1995, and (v) Amoco Foam Products, a leading manufacturer of foam
polystyrene tableware, that was acquired in August 1996.
68
<PAGE>
In the fourth quarter of 1995, Tenneco management began an intensive review
of structural alternatives for increasing stockholder value, including
strategic alliances, divestitures and business combinations. Fundamental to
this review was Tenneco's objective of clarifying its corporate focus in favor
of its automotive and packaging businesses and away from its energy and
shipbuilding business. The strategic review gradually became focused on two
spin-off alternatives because Tenneco's tax basis in its Energy and
Shipbuilding Businesses was significantly below the estimated enterprise
valuations of these businesses and therefore taxable transactions, such as
cash divestitures, were deemed to be dilutive to shareholder value. In
addition, Tenneco believed that both the Industrial and Shipbuilding
Businesses would have increased opportunities to develop strategic alliances,
joint ventures, other business combinations and the like, if appropriate, as
stand-alone entities. The first alternative focused upon the creation of three
independent publicly traded companies through tax-free spin-offs of both New
Tenneco and Newport News. The second alternative assumed that the Energy
Business would be acquired by a strategic buyer in a tax-free merger
transaction immediately following the spin-offs of New Tenneco and Newport
News.
Tenneco management, together with its financial advisor Lazard Freres & Co.
LLC ("Lazard"), analyzed these alternatives with a view towards maximizing
stockholder value and ensuring adequate financial flexibility for future
automotive and packaging acquisitions. After a thorough review of these
alternatives, both Tenneco management and its financial advisor concluded that
the alternative involving the merger of the Energy Business had the greatest
potential for maximizing shareholder value as Tenneco's stockholders would
receive common stock in a new company (i.e., the Energy Business combined with
the strategic buyer's existing business) that should have a stronger market
position and stronger earnings growth than the Energy Business as a stand-
alone company, providing stockholders with an increased opportunity for
enhanced stockholder value in the future. Tenneco management, together with
its financial advisor, also concluded that a merger of the Energy Business
would allow Tenneco to spin-off New Tenneco with less debt and thus greater
opportunity to take advantage of value enhancing transactions in the future.
In the first quarter of 1996, Lazard was asked to conduct a formal
divestiture process for the Energy Business. After an Offering Memorandum was
prepared describing the Energy Business, its prospects and the proposed merger
transaction, Lazard contacted over 20 possible logical strategic buyers with
respect to the proposed transaction. In addition, as a result of a Tenneco
press release indicating its development of strategic options to separate the
Energy Business from New Tenneco through a tax-free spinoff, a merger, a
strategic alliance or other action, Lazard was contacted directly by several
interested potential strategic buyers.
First round bidders were asked to indicate preliminary values for the Energy
Business based solely upon the information contained in the Offering
Memorandum and other publicly available information. In mid-April 1996, four
bidders submitted preliminary non-binding indications of interest for an
acquisition of the Energy Business. Given the relatively tight range of
preliminary indications of interest, each of the first round bidders was
invited to participate in second round due diligence. During second round due
diligence, prospective buyers were given complete access to the senior
management of the Energy Business, a comprehensive data room and visits to key
sites.
During the last week of May 1996, Lazard distributed a final bid package to
prospective buyers including: (i) detailed operating projections for the
Energy Business; (ii) guidelines with respect to the acquisition process; and
(iii) a summary of the terms of the agreement and plan of merger and drafts of
the related transaction documentation prepared by Tenneco. In an effort to
expedite the sales process in order to complete a transaction before the
anticipated enactment of legislation that could potentially affect adversely
the tax-free treatment of the proposed merger, a final bid date was not
formally communicated to potential bidders. Instead, bidders were encouraged
to set forth final proposals as quickly as possible with Tenneco reacting to
final proposals on a first-come, first-served basis. However, the final bid
package did make clear Tenneco's intention to fully negotiate a definitive
proposal and file an IRS ruling request prior to June 30, 1996.
Tenneco received three final proposals for an acquisition of the Energy
Business, one from a privately held energy company and the other two from
publicly held energy companies. These proposals reflected varying structures,
types and amounts of consideration to be delivered, liabilities to be assumed
(particularly with respect to liabilities associated with discontinued
operations) and conditions to closing (including further due diligence and
negotiation of transaction documentation). In addition, the potential
acquirors responded in different ways to
69
<PAGE>
Tenneco's request to provide definitive comments on documentation for the
transaction. At the June 19, 1996 meeting of the Tenneco Board of Directors,
Lazard reviewed the process by which the bids were solicited and reviewed the
three definitive proposals. In reviewing the three proposals, Tenneco
management, together with Lazard, reached the judgment that two of the
proposals (one of which was El Paso's) were substantially more favorable than
the third, which was judged to have a significantly lower value because it
provided for the assumption of less indebtedness and other liabilities and the
issuance of less equity consideration.
In reviewing the valuations of the two most favorable proposals, it was the
judgment of Tenneco management, together with Lazard, that although the bidder
other than El Paso assigned a nominally higher value to its proposal than the
terms set forth in the Merger Agreement, the adjusted value of that proposal
was, considered as a whole, slightly less than the terms set forth in the
Merger Agreement (primarily as a result of assigning a lower adjusted value to
the common equity consideration thereof which did not have an established
public market valuation). In addition, it was the judgment of Tenneco
management, together with Lazard, that such proposal was substantially less
certain of consummation in the time frame set by the Tenneco Board of
Directors for execution of definitive documentation than the El Paso proposal.
Tenneco management, together with Lazard, reached its judgment as to the
appropriate valuation of this other bidder's equity consideration after taking
into account the full benefit of a post-closing equity ownership adjustment
mechanism contained in such proposal. This proposal had provided for retention
of consolidated indebtedness by Tenneco, a limitation on the assumption of
liabilities for discontinued operations and the issuance of a partial equity
interest in a to be formed company the assets of which would have consisted of
Tenneco's Energy Business and certain business operations of the acquiror.
This acquiror did not submit definitive acquisition documentation with its
proposal, and Tenneco was concerned that a definitive agreement could not be
concluded on a timely basis.
On June 19, 1996, the Boards of Directors of both Tenneco and El Paso
approved the Transaction and the Merger, respectively, and the Merger
Agreement was originally executed and delivered. The transaction was publicly
announced after the financial markets in New York closed on June 19, 1996.
The Merger Agreement as originally executed provided that the Board of
Directors of Tenneco would fix the relative allocation of the total Equity
Consideration among the holders of Tenneco Stock and that the parties would
amend the Merger Agreement upon the fixing of such allocation. Pursuant to
discussions with the current holders of the $4.50 Preferred Stock during
September and October 1996 (which current holders have entered into an
arrangement to sell their shares of $4.50 Preferred Stock to a third party
prior to the Merger Effective Time), Tenneco management determined to
recommend that approximately $137.5 million of the Equity Consideration be
allocated to the holders of Tenneco Preferred Stock ($115 per share, or 115%
of the liquidation preference of such shares) and the remaining Equity
Consideration be allocated to the holders of Tenneco Common Stock. On November
1, 1996, the Tenneco Board of Directors met to consider amendments to the
Merger Agreement to fix the allocation of the Equity Consideration as
described above and to make certain other technical changes to the Merger
Agreement. On November 1, 1996, the Tenneco Board of Directors and El Paso
approved the amendments, and the original Merger Agreement was amended and
restated effective as of June 19, 1996. The holders of over 75% of the $4.50
Preferred Stock as of the Tenneco Record Date have agreed to grant an
irrevocable proxy to Tenneco to vote their shares of $4.50 Preferred Stock in
favor of the Transaction.
REASONS FOR THE TRANSACTION; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Tenneco. The Board of Directors of Tenneco has approved the Distribution
Agreement, the Merger Agreement and Charter Amendment and the transactions
contemplated thereby and recommends that the stockholders of Tenneco vote FOR
approval and adoption of the Transaction.
The Board of Directors of Tenneco believes the Transaction is in the best
interests of Tenneco and its stockholders. In reaching its decision to approve
the Transaction, the Tenneco Board of Directors consulted with Tenneco's
management, legal advisors and financial advisors, and considered a number of
factors, including, but not limited to, the following:
(i) Information regarding the financial condition, results of operations,
business and prospects of El Paso and Tenneco, as well as current industry
conditions and trends as they relate to the Energy, Industrial and
Shipbuilding Businesses and, based on these factors, the likelihood that
those businesses
70
<PAGE>
would have better growth opportunities following the Transaction as
separate businesses (in the case of the Industrial Business and
Shipbuilding Business) or combined with El Paso. There are a number of
reasons that Tenneco management believed the combined energy businesses
would have better growth opportunities, including: (i) the complementary
geographic and operating fit of the combined companies would result in
service to all major markets and producing basins; (ii) the combined
company would achieve critical mass in non-regulated operations, allowing
higher gathering, processing and marketing volumes and providing excellent
access to the Houston Ship Channel industrial area and Henry gas trading
hub; and (iii) potential synergies which may be realized by combining the
two businesses, including the consolidation of operations and facilities
and certain economies of scale.
(ii) That the holders of Tenneco Stock will receive in the Merger fair
value, in the form of El Paso Common Stock and, under certain
circumstances, El Paso Preferred Depositary Shares, for the businesses and
assets of the Energy Business being combined in the Merger with those of El
Paso and will retain a continuing interest in the future prospects of the
Energy Business as well as acquire an interest in the businesses and assets
of El Paso.
(iii) That the holders of Tenneco Stock will have investment liquidity,
since shares of El Paso Common Stock, New Tenneco Common Stock, Newport
News Common Stock and, if issued in the Merger, El Paso Preferred
Depositary Shares will be listed on the NYSE.
(iv) The potential for increased value believed to result from the
acquisition of the Energy Business by El Paso because of complementary
geographic and operating fit and in the possibility of efficiencies in,
costs savings to and the achievement of critical mass in non-regulated
operations of the combined Tenneco Energy-El Paso operations after the
Merger.
(v) The fact that the separation of Tenneco's Energy, Industrial and
Shipbuilding Businesses will allow each of Tenneco Energy, New Tenneco and
Newport News to concentrate exclusively on its own business objectives,
which the Board of Directors of Tenneco believes will enhance each
company's profitability.
(vi) The opportunity that the Transaction offers for each of Tenneco
Energy, New Tenneco and Newport News to attract, motivate and retain key
personnel through the provision of more effective incentive compensation
programs (including, in the case of Newport News, an employee stock
ownership plan) that are based on the performance of the respective
businesses in which such individuals are employed without being influenced
by the results of the businesses in which they have no involvement.
(vii) The strategic and financial alternatives available to Tenneco,
including the spinoff of all three of the Industrial Business, Shipbuilding
Business and Energy Business or the sale of one or more of the Energy
Business and the Shipbuilding Business, and the discussions with and
indications of interest from other potential acquirors of the Energy
Business and the Shipbuilding Business. After a review of these
alternatives, the Board of Directors believed that the alternative
involving the merger of the Energy Business had the greatest potential for
maximizing shareholder value as Tenneco's stockholders would receive stock
in a new company (i.e., the Energy Business combined with the strategic
buyer's existing business) that should have a stronger market position and
stronger earnings growth than the Energy Business as a stand-alone company,
providing stockholders with an increased opportunity for enhanced
stockholder value in the future. The Board of Directors also believed,
based on such review, that a merger of the Energy Business would allow
Tenneco to spin-off New Tenneco with less debt and thus greater opportunity
to take advantage of value enhancing transactions in the future.
(viii) Its and its financial advisor's analyses and judgements regarding
the three definitive proposals received from potential acquirors of the
Energy Business, as described under "--Background of The Transaction."
(ix) The opinion of Lazard to the effect that the consideration to be
received by the holders of Tenneco Stock pursuant to the Transaction was,
as of the date of such opinion, fair, from a financial point of view, to
such holders (see "--Opinions of Financial Advisors--Tenneco").
(x) The fact that the Transaction is expected to maximize stockholder
value by allowing for the value of the non-core businesses to be realized
and for the growth of core business revenues.
(xi) The flexibility the Transaction is expected to afford to each of New
Tenneco and Newport News to pursue business opportunities, including
acquisitions, joint ventures and business combinations, in certain
circumstances using their own common stock as consideration.
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(xii) The expected enhancement of the ability of each of Tenneco, New
Tenneco and Newport News to raise additional equity and debt financing by
better comprehension on the part of potential investors and lenders of the
nature and strength of the business and assets of each individual company
with a long-term reduction in the cost of capital.
(xiii) That the Distributions will facilitate the acquisition of the
Energy Business by El Paso in a tax-free transaction.
(xiv) The fact that both the Distributions and the Merger are expected to
be tax-free to Tenneco Stockholders for federal income tax purposes (other
than with respect to cash received in lieu of fractional shares and
fractional El Paso Preferred Depositary Shares, if any, or in connection
with a proper demand for appraisal of shares).
(xv) The formulas for determining the number of shares of El Paso Common
Stock and any El Paso Preferred Depositary Shares to be received by holders
of Tenneco Stock in the Merger, which the Board of Directors believed to be
in the best interests of Tenneco stockholders when applied to the trading
prices for El Paso Common Stock and Tenneco Common Stock.
(xvi) The terms of the Merger Agreement, Distribution Agreement,
Ancillary Agreements, Charter Amendment and other related agreements in
comparison to the transaction terms proposed by the other potential
acquirors of the Energy Business, including the types and amounts of
consideration to be delivered, the liabilities to be assumed, and
conditions to closing as described above under "--Background of the
Transaction."
The foregoing discussion of the information and factors considered and given
weight by the Tenneco Board of Directors is not intended to be exhaustive but
is believed to include all material factors considered by the Board of
Directors of Tenneco. In addition, in reaching the determination to approve
and recommend the Transaction, in view of the wide variety of factors
considered in connection with its evaluation of the proposed Transaction, the
Board of Directors of Tenneco did not assign any relative or specific weights
to the foregoing factors, and individual directors may have given differing
weights to the different factors.
THE BOARD OF DIRECTORS OF TENNECO RECOMMENDS THAT THE HOLDERS OF TENNECO
STOCK VOTE FOR APPROVAL AND ADOPTION OF THE TRANSACTION.
El Paso. At a meeting on June 19, 1996, the El Paso Board of Directors, by a
unanimous vote of the directors present, approved the Merger Agreement and the
transactions contemplated thereby and resolved to recommend that the El Paso
stockholders approve the Stock Issuance. The Board of Directors of El Paso
believes that the Merger is in the best interests of El Paso and its
stockholders and recommends that El Paso's stockholders vote FOR approval of
the Stock Issuance.
In reaching its determination, El Paso's Board of Directors consulted with
El Paso's management, as well as its financial and legal advisors, and
considered the following material factors:
(i) Information concerning the financial condition, cash flows, business
operations, assets, liabilities and prospects of El Paso and Tenneco
Energy, both on an historical and on a pro forma combined basis. As
discussed in greater detail in factors (ii), (iii), (iv), (v), (vi) and (x)
below, based upon the information received by the El Paso Board of
Directors, the Board of Directors believed that the combination of El Paso
and Tenneco Energy would create one of the nation's largest natural gas
companies, with a coast-to-coast pipeline system with access to all of the
nation's major markets and supply basins, critical mass in non-regulated
operations, and an expanded international presence, with increased
financial flexibility and strengthened financial performance.
(ii) The Merger would significantly expand the scope of El Paso's energy
business, resulting in a combined company which would be one of the
nation's three largest natural gas companies, transporting 4.5 trillion
cubic feet of gas annually through approximately 33,000 miles of pipeline.
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(iii) The projected strategic fit and geographic compatibility of the
combined companies which are expected to result in an integrated pipeline
system stretching across the United States with a substantial presence in
all major markets and production regions, which would enable El Paso to
diversify its transportation operations and reduce its dependence upon the
California natural gas market.
(iv) The Merger would add critical mass to, and significant expansion
opportunities for, El Paso's non-regulated gas gathering, processing and
marketing operations, and provide El Paso with access to the Houston Ship
Channel industrial area and the Henry gas trading hub, which will permit El
Paso to take advantage of favorable price differentials between Henry and
trading hubs to which El Paso's pipeline system currently has access,
increased flexibility to transport gas east through Tenneco Energy's 30%-
owned Oasis pipeline, and opportunities to participate in the emerging
deregulation of the United States electric industry.
(v) The Merger would expand the scope of El Paso's international
operations, complementing El Paso's existing Latin American operations and
adding projects in Europe, Indonesia and Australia, and providing
opportunities for further diversification and international expansion.
(vi) Potential synergies which may be realized by combining El Paso's and
Tenneco Energy's operations, including synergies resulting from
consolidation of operations and facilities, economies of scale and
reengineering of Tenneco Energy's operations.
(vii) The El Paso Board of Directors' evaluation of the legal and
regulatory issues faced by Tenneco Energy and the Board's belief, based
upon El Paso's familiarity with Tenneco Energy's customers and the
comprehensive settlement negotiated by El Paso with its customers in 1996,
that a combination of El Paso and Tenneco Energy should enhance Tenneco
Energy's ability to resolve those issues. See "RISK FACTORS--Risks Relating
to El Paso and Tenneco Energy--Regulated Industry; Potential Adverse Impact
of Pending Cost Recovery and Rate Proceedings."
(viii) The El Paso Board of Directors' assessment of the liabilities of
Tenneco's discontinued businesses being assumed by Tenneco Energy,
including liabilities relating to retiree medical and other retiree costs
of former employees of Tenneco and its subsidiaries, litigation,
environmental and other matters, the amount of which El Paso management
estimated to be approximately $600 million. The El Paso Board of Directors
believed that the willingness of a purchaser of Tenneco Energy to assume
responsibility for liabilities of discontinued businesses of Tenneco would
be an important factor in Tenneco's evaluation of proposals for the
acquisition of Tenneco Energy. Accordingly, the El Paso Board of Directors
considered the nature of the contingent liabilities of Tenneco's
discontinued businesses and El Paso management's estimate of the amount of
such liabilities. The El Paso Board of Directors viewed El Paso's agreement
to accept these liabilities for discontinued operations as a component of
the aggregate consideration offered by El Paso for Tenneco Energy.
Moreover, the El Paso Board of Directors recognized that, under the terms
of the Distribution Agreement, Tenneco Energy's liability was not capped at
$600 million and that it was possible that the amount of such liabilities
might ultimately exceed $600 million. See "RISK FACTORS--Risks Relating to
El Paso and Tenneco Energy--Liabilities of Tenneco Energy for Discontinued
Businesses."
(ix) The terms of the Merger Agreement, including the fact that the
Merger is not conditioned on approval of the Stock Issuance. El Paso's
Board of Directors believed that certainty of consummation would be an
important consideration for Tenneco's Board of Directors and that El Paso's
proposal would be more attractive to Tenneco's Board of Directors if the
proposal were not conditioned on El Paso stockholder approval. While the
Board of Directors believed that providing the alternative of offering El
Paso Preferred Stock to Tenneco stockholders was in the best interests of
El Paso (because this alternative made El Paso's proposal less
conditional), the Board of Directors noted that the alternative preferred
stock structure would significantly decrease El Paso's free cash flow,
reduce its fixed charge coverage ratio and increase its leverage ratio. The
Board of Directors also noted that the issuance of El Paso Preferred Stock
would be viewed less favorably by its rating agencies. El Paso recognizes
that a vote by stockholders against the Stock Issuance could be interpreted
either as a vote in opposition to the Merger or as expressing a preference
for issuing the El Paso Preferred Stock. However, because the Board of
Directors of El Paso previously
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determined that entering into the Merger Agreement was in the best
interests of El Paso and its stockholders and the obligation of El Paso to
consummate the Merger is not conditioned up El Paso stockholder approval,
El Paso is contractually bound, subject to the other terms of the Merger
Agreement, to consummate the Merger regardless of the outcome of the vote
upon the Stock Issuance.
(x) The Merger is expected to be accretive to El Paso's pro forma
earnings per share and cash flow (although if the Stock Issuance is not
approved, the Merger would be less accretive to El Paso's earnings per
share and cash flow). See "UNAUDITED PRO FORMA FINANCIAL INFORMATION--
Unaudited Pro Forma Combined Financial Statements of El Paso and Tenneco
Energy."
(xi) The analyses of its financial advisor, including the opinion of
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") described below
as to the fairness to El Paso and the El Paso stockholders of the
consideration to be paid by El Paso pursuant to the Merger Agreement from a
financial point of view.
The foregoing discussion sets forth the material information and factors
considered and given weight by the El Paso Board of Directors. In view of the
variety of factors considered in connection with its evaluation of the Merger,
the El Paso Board of Directors did not find it practicable or necessary to and
did not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of
the El Paso Board of Directors may have given different weights to different
factors.
THE BOARD OF DIRECTORS OF EL PASO RECOMMENDS THAT THE HOLDERS OF EL PASO
COMMON STOCK VOTE FOR APPROVAL OF THE STOCK ISSUANCE.
OPINIONS OF FINANCIAL ADVISORS
Tenneco. At the meeting of the Board of Directors of Tenneco held on June
19, 1996 to approve the Transaction, Lazard delivered its opinion to the Board
of Directors of Tenneco that, as of that date, the consideration to be
received by the Tenneco Stockholders pursuant to the Transaction was fair to
the Tenneco Stockholders from a financial point of view. The Lazard opinion
was prepared for the Tenneco Board of Directors and is directed only to the
fairness of the consideration to be received by the Tenneco Stockholders from
a financial point of view pursuant to the Transaction. The Lazard opinion does
not constitute a recommendation to any Tenneco Stockholder as to how such
stockholder should vote at the Tenneco Special Meeting.
In connection with rendering its opinion to the Tenneco Board of Directors
on June 19, 1996, Lazard, among other things: (i) reviewed the financial terms
and conditions of the forms of Distribution Agreement, Merger Agreement and
Ancillary Agreements; (ii) analyzed certain historical business and financial
information relating to Tenneco and El Paso; (iii) reviewed various financial
forecasts and other data provided to it by Tenneco and El Paso relating to
their respective businesses; (iv) held discussions with members of the senior
management of Tenneco and El Paso with respect to the past and current
operations and financial condition of Tenneco and El Paso and the business,
prospects and strategic objectives of Tenneco and El Paso and possible
benefits which might be realized after the Transaction; (v) reviewed public
information with respect to certain other companies in lines of business
Lazard believed to be generally comparable to the businesses of Tenneco and El
Paso; (vi) reviewed the financial terms of certain business combinations
involving companies in lines of business that Lazard believed to be generally
comparable to those of the Energy Business, and in other industries generally;
(vii) reviewed historical stock prices and trading volumes of the Tenneco
Common Stock and El Paso Common Stock; and (viii) conducted such other
financial studies, analyses, and investigations as it deemed appropriate.
Additionally, Lazard assumed and relied upon the accuracy and the
completeness of the financial and other information provided to it by Tenneco
and El Paso and did not assume responsibility for any independent verification
of such information or any independent valuation or appraisal of the assets or
liabilities of Tenneco and El Paso. With respect to financial forecasts,
Lazard assumed that such forecasts were reasonably prepared on a basis
reflecting the best currently available estimates and judgments of management
of Tenneco and El Paso, and Lazard assumed no responsibility for, and
expressed no view as to, such forecasts or the assumptions on which they were
based.
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Lazard also assumed that the Transaction would be consummated on the terms
contained in the forms of Distribution Agreement and Merger Agreement, without
any waiver of any material terms or conditions by Tenneco, and that obtaining
the necessary regulatory and governmental and other approvals for the
Transaction would not have an adverse effect on Tenneco's Energy Business,
Industrial Business or Shipbuilding Business. Further, Lazard's opinion was
necessarily based on economic, monetary, market and other conditions as in
effect on, and the other information made available to it as of, the date of
such opinion. In rendering its opinion, Lazard also specifically assumed that
the terms of any El Paso Preferred Depositary Shares representing interests in
El Paso Preferred Stock issued in connection with the Merger would be as
contemplated in the Merger Agreement, including that 25 El Paso Preferred
Depositary Shares would trade at an aggregate market price of $1,000 upon
issuance and that the El Paso Common Stock and El Paso Preferred Depositary
Shares would have the same value in the aggregate as the El Paso Common Stock
would have had if the consideration in connection with the Merger consisted
solely of El Paso Common Stock. Lazard expressed no opinion as to the prices at
which the shares of New Tenneco Common Stock, Newport News Common Stock, El
Paso Common Stock or El Paso Preferred Depositary Shares will trade when issued
to the holders of Tenneco Stock. Lazard also assumed that for federal income
tax purposes (i) the Distributions will be tax-free distributions under Section
355 of the Code, (ii) the Merger will qualify as a reorganization under Section
368(a)(1)(B) of the Code, and (iii) certain inter-company transfers included in
the Corporate Restructuring Transactions will qualify as tax-free transfers.
In connection with rendering its opinion to the Tenneco Board of Directors on
June 19, 1996, Lazard undertook the financial analysis summarized below.
Analysis of Certain Other Publicly Traded Energy Companies. Lazard reviewed
and analyzed certain publicly available information for a group of six selected
companies (Coastal Corporation, El Paso, NorAm Energy Corporation, PanEnergy
Corporation, Sonat, Inc. and The Williams Companies, Inc. (collectively, the
"Comparable Companies")) that, in Lazard's judgment and based in part on
conversations with the management of Tenneco, were generally comparable to the
Energy Business for purposes of this analysis. The Comparable Companies were
divided into two groups: those deemed to be more operationally comparable based
on size, asset base, growth profile and business mix (El Paso, PanEnergy
Corporation and The Williams Companies, Inc.) and those deemed to be less
operationally comparable (Coastal Corporation, NorAm Energy Corporation and
Sonat, Inc.). Such information included (i) market capitalization and market
value; (ii) operating performance; (iii) capitalization; (iv) profitability;
(v) market capitalization as a multiple of net sales; earnings before interest,
taxes, depreciation and amortization ("EBITDA"); and earnings before interest
and taxes ("EBIT") for the latest twelve months, the last fiscal year and
projected for the next two fiscal years; (vi) common stock price as a multiple
of earnings per share for the latest twelve months, the last fiscal year and
projected for the next two fiscal years; and (vii) leverage ratios pertaining
to total debt/total book capitalization, net debt/market capitalization and
total debt/EBITDA for the latest twelve months. Lazard's analysis indicated,
among other things, that (i) the capitalization of the companies deemed to be
more operationally comparable as a multiple of latest twelve months EBITDA
ranged from 6.9x to 11.6x, as a multiple of projected 1996 EBITDA ranged from
6.6x to 8.1x, as a multiple of projected 1997 EBITDA ranged from 6.1x to 7.2x,
as a multiple of latest twelve months EBIT ranged from 9.6x to 18.8x, as a
multiple of projected 1996 EBIT ranged from 8.9x to 12.3x and as a multiple of
projected 1997 EBIT ranged from 8.2x to 10.6x and (ii) the market price of
these companies as a multiple of latest twelve months earnings per share ranged
from 14.9x to 41.3x, as a multiple of projected 1996 earnings per share ranged
from 12.8x to 15.6x and as a multiple of projected 1997 earnings per share
ranged from 11.6x to 13.4x. The earnings estimates and growth rates for the
Comparable Companies were derived from published research reports of certain
analysts covering the Comparable Companies. Lazard then applied these multiples
to the corresponding financial information and forecasts of future performance
for the Energy Business provided by Tenneco management and derived a
theoretical range of enterprise values (before deducting the negative value of
the discontinued operations) for Tenneco Energy from $3.4 billion to $3.7
billion.
Analysis of Selected Transactions. Lazard reviewed the financial terms, to
the extent publicly available, of eighteen selected pending and completed
change of control transactions in the energy industry commenced since March 1,
1985 (the "Precedent Transactions") which, in Lazard's judgment, were generally
comparable to the Energy Business for purposes of this analysis. The 18
transactions, in reverse chronological order of public announcement, were the
following: (i) Tejas Gas Corporation's acquisition of Transok Inc. (1996); (ii)
El Paso Energy Corporation's acquisition of Cornerstone Natural Gas Inc.
(1996); (iii) Pacific Gas & Electric Co.'s
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acquisition of State Gas Pipeline-Queensland, Australia (1996); (iv) Texas
Utilities Co.'s acquisition of Enserch Corp. (1996); (v) IPL Energy Inc.'s
acquisition of Consumers Gas Company (1996); (vi) Forest Oil Corp.'s
acquisition of Atcor Resources Ltd. (1995); (vii) Tejas Gas Corporation's
acquisition of a gas processing plant from Seagull Energy Corp., Enron Corp.,
Panhandle Eastern Corp. and Amoco Corp. (1995); (viii) Crystal Oil Company's
acquisition of First Reserve Gas Company (1995); (ix) The Williams Companies,
Inc.'s acquisition of Transco Energy Co. (1994); (x) Tejas Gas Corporation's
acquisition of natural gas pipeline systems from Exxon (1993); (xi)
TransCanada Pipelines Ltd.'s acquisition of Alberta Natural Gas Co. Ltd. from
Pacific Gas Transmission Co. (1992); (xii) the acquisition by a group of
investors of TransCanada Pipelines Ltd. from BCE Inc. (1990); (xiii) American
Oil and Gas Corporation's acquisition of Cabot Gas Pipeline Companies from
Cabot Corporation (1989); (xiv) Panhandle Eastern Corporation's acquisition of
Texas Eastern Corporation (1989); (xv) Pacific Gas & Electric Co.'s
acquisition of Pacific Gas Transmission Company (1985); (xvi) MidCon Corp.'s
acquisition of United Energy Resources, Inc. (1985); (xvii) InterNorth Inc.'s
acquisition of Houston Natural Gas Corporation (1985); and (xviii) Coastal
Corporation's acquisition of American Natural Resources Company (1985). Lazard
reviewed the prices paid in such transactions in terms of (i) aggregate
transaction value as a multiple of latest twelve month sales, EBITDA and EBIT;
(ii) equity value as a multiple of latest twelve months net income; and (iii)
the premium paid to the closing stock price one month prior to announcement.
Lazard noted that the reasons for, and circumstances surrounding, each of the
Precedent Transactions were diverse and the characteristics of the companies
involved were not directly comparable to the Energy Business and El Paso.
Nonetheless, the transactions deemed to be most comparable for the purposes of
this analysis were The Williams Companies Inc.'s acquisition of Transco Energy
Co. in 1994 and IPL Energy Inc.'s acquisition of Consumers Gas Company in 1996
(the "Comparable Transactions"). Lazard's analysis indicated, among other
things, that (i) the aggregate transaction value of the Comparable
Transactions as a multiple of latest twelve months EBITDA ranged from 7.0x to
7.1x and as a multiple of latest twelve months EBIT ranged from 9.4x to 14.4x
and (ii) the equity value of the Comparable Transactions as a multiple of
latest twelve months net income ranged from 11.5x to 47.4x. Lazard then
applied these multiples to the corresponding financial information and
forecasts of future performance for the Energy Business provided by Tenneco
management and derived a theoretical range of enterprise values (before
deducting the negative value of the discontinued operations) for Tenneco
Energy from $3.7 billion to $4.2 billion. Lazard is of the view that no
transaction reviewed was identical to the Merger and that, accordingly, an
analysis of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the Energy Business that could affect the acquisition value of the companies
to which it was being compared.
Discounted Cash Flow Analysis. Lazard conducted a discounted cash flow
analysis to estimate the present value of the stand-alone unleveraged free
cash flow that the Energy Business was expected to generate based on
management's long-range plan prior to the Merger. This plan assumed compound
annual revenue growth of 19%, compound annual EBIT growth of 3% and average
EBIT, as a percentage of revenues, of 9% over a projected five year period
ending December 31, 2001. Lazard calculated a range of enterprise values for
the Energy Business by applying a range of terminal exit multiples of 6.5x to
7.5x to estimated EBITDA and a range of discount rates of 8.75% to 9.25%.
After adding back the negative present value of all liabilities for
discontinued operations (which Lazard and Tenneco's management believed to be
$500 million), Lazard's analysis derived a theoretical range of enterprise
values (before deducting the negative value of the discontinued operations)
for Tenneco Energy from $3.6 billion to $4.2 billion.
Other. In connection with rendering its opinion to the Tenneco Board of
Directors, Lazard also conducted an analysis of the total value that would be
realized by a common stockholder of Tenneco in each of two scenarios
considered by the Tenneco Board of Directors; one, the spin-offs of the
Industrial Business and Shipbuilding Business and the continuation of the
Energy Business as an independent, publicly held company; and two, the
Distributions and the Merger.
The summary set forth above does not purport to be a complete description of
analyses performed by Lazard. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to a partial analysis or
summary description. Lazard believes that its analyses must be considered as a
whole and that
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selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion. In addition,
Lazard may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the ranges of valuations resulting from any
particular analysis described above should not be taken to be Lazard's view of
the actual value of the Energy Business.
As described above, Lazard's opinion and presentation to the Tenneco Board
of Directors was one of the factors taken into consideration by the Tenneco
Board of Directors in making its determination to approve and recommend the
Transaction. Consequently, Lazard's analyses described above should not be
viewed as determinative of the Tenneco Board of Directors' or Tenneco
management's opinion with respect to the value of Tenneco or of whether the
Tenneco Board of Directors or Tenneco management would have been willing to
agree to different financial terms than those that are set forth in the Merger
Agreement.
A copy of the full text of the Lazard opinion, dated as of June 19, 1996,
which sets forth the assumptions made, matters considered and limitations of
the review undertaken, is attached as Appendix F hereto. HOLDERS OF TENNECO
STOCK ARE URGED TO READ THE TEXT OF THE LAZARD OPINION IN ITS ENTIRETY. THE
SUMMARY DISCUSSION OF THE OPINION OF LAZARD SET FORTH IN THIS JOINT PROXY
STATEMENT--PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF SUCH OPINION. LAZARD'S OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE TENNECO SPECIAL
MEETING OR EL PASO SPECIAL MEETING.
The Tenneco Board of Directors retained Lazard based upon its experience and
expertise and did not impose any limitations on Lazard with respect to the
procedures followed or factors considered by Lazard in issuing its opinions.
Lazard is an internationally recognized investment banking firm and is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements, leveraged
buyouts, and valuations for estate, corporate and other purposes.
Lazard has in the past provided investment banking and financial advisory
services to Tenneco and during the past two years has received customary
investment banking and financial advisory fees for rendering such services.
Lazard, certain of its managing directors and affiliates, and certain related
entities may have direct or indirect interests in the stock of Tenneco. Mr.
Michael Blumenthal, a senior advisor to Lazard, is a member of Tenneco's Board
of Directors.
Pursuant to the letter agreement dated as of February 1, 1996 between
Tenneco and Lazard, it was agreed that Lazard would be paid a fee of either
(i) $6,500,000 in the event of the spin-offs of the Shipbuilding Business and
the Industrial Business (the "Spin-Off Fee"), or (ii) $9,500,000 plus .50% of
the amount by which the aggregate consideration (as defined therein) to be
paid in connection with a sale exceeds $3,500,000,000 (the "Sale Fee") in the
event of a sale of Tenneco Energy. As a result of the Distributions and the
Merger, Lazard will be paid $12,100,000 (based on a projected aggregate
consideration of $4,020,000,000). Tenneco also agreed to use its best efforts,
subject to Lazard's agreement, to include Lazard as at least a co-manager with
respect to any securities offerings relating to these transactions.
Accordingly, Lazard will be a co-manager with respect to any offering of the
Tenneco Junior Preferred Stock for which it will be paid customary investment
banking fees. See "THE NPS ISSUANCE."
In addition, Tenneco has agreed, among other things, to reimburse Lazard for
all reasonable out-of-pocket expenses incurred in connection with the services
provided by Lazard, and to indemnify and hold harmless Lazard and certain
related parties to the full extent lawful from and against certain liabilities
and expenses, including certain liabilities under the federal securities laws,
in connection with its engagement.
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El Paso. In its role as financial advisor to El Paso, DLJ was asked by El
Paso to render an opinion to the Board of Directors of El Paso as to the
fairness to El Paso and its common stockholders, from a financial point of
view, of the consideration to be paid by El Paso pursuant to the terms of the
Merger Agreement. On June 19, 1996, DLJ delivered its oral opinion to the
Board of Directors of El Paso (subsequently confirmed in a written opinion to
the Board of Directors of El Paso, dated June 27, 1996 (the "DLJ Opinion"))
that, as of the date of the DLJ Opinion, and based upon and subject to the
assumptions, limitations and qualifications set forth in such opinion, the
consideration to be paid by El Paso pursuant to the Merger Agreement is fair
to El Paso and its common stockholders from a financial point of view.
THE FULL TEXT OF THE DLJ OPINION IS ATTACHED HERETO AS APPENDIX G. THE DLJ
OPINION SHOULD BE READ CAREFULLY IN ITS ENTIRETY FOR ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITS OF THE REVIEW AND PROCEDURES FOLLOWED BY DLJ IN
CONNECTION WITH SUCH OPINION.
The Board of Directors of El Paso selected DLJ as its financial advisor
because it is a nationally recognized investment banking firm that has
substantial experience in the natural gas industry and is familiar with El
Paso and its businesses. As part of its investment banking business, DLJ is
regularly engaged in the valuation of businesses and their securities in
connection with mergers, acquisitions, underwritings, sales and distributions
of listed and unlisted securities, private placements and valuations for
assets, corporate and other purposes.
The DLJ Opinion was prepared for the Board of Directors of El Paso and is
directed only to the fairness to El Paso and its common stockholders from a
financial point of view of the consideration to be paid by El Paso pursuant to
the Merger Agreement. The DLJ Opinion does not constitute a recommendation to
any El Paso stockholder as to how such stockholder should vote at the El Paso
Special Meeting. DLJ did not, and was not requested by the Board of Directors
of El Paso to, make any recommendation as to the form or amount of
consideration to be paid by El Paso in the Merger, which issues were
determined by arm's-length negotiations between El Paso and Tenneco, in which
negotiations DLJ advised El Paso. DLJ's opinion does not constitute an opinion
as to the price at which the El Paso Common Stock or, if issued, the El Paso
Preferred Depositary Shares representing interests in El Paso Preferred Stock
will actually trade at any time. No restrictions or limitations were imposed
by El Paso upon DLJ with respect to the investigations made or the procedures
followed by DLJ in rendering the DLJ Opinion.
In arriving at the DLJ Opinion, DLJ reviewed the form of Merger Agreement
and the exhibits thereto and financial and other information that was publicly
available or furnished to it by El Paso and Tenneco, including information
provided during discussions with their respective managements and certain
financial forecasts of Tenneco Energy and El Paso prepared by the management
of Tenneco or El Paso, as the case may be. In addition, DLJ compared certain
financial and securities data of El Paso with various other companies whose
securities are traded in public markets; reviewed the historical stock prices
and trading volumes of El Paso Common Stock; reviewed prices paid in certain
other business combinations; and conducted such other financial studies,
analyses and investigations as DLJ deemed appropriate for purposes of
rendering the DLJ Opinion.
In rendering the DLJ Opinion, DLJ relied upon and assumed the accuracy,
completeness and fairness of all of the financial and other information that
was available to it from public sources, that was provided to it by El Paso
and Tenneco or their respective representatives, or that was otherwise
reviewed by it. In particular, DLJ relied upon the views and judgments of the
management of El Paso as to (i) the impact of regulatory matters and customer
relationships on the business of Tenneco Energy, (ii) the amount of
liabilities associated with Tenneco's previously discontinued operations
included in the Energy Business, and (iii) the amount and timing of synergies
achievable as a result of the Merger. DLJ assumed that each of (i) the
Distributions, (ii) the Debt Realignment, and (iii) the NPS Issuance was
consummated prior to consummation of the Merger. With respect to the financial
forecasts supplied to it, DLJ assumed that they were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of El Paso and Tenneco as to the future operating and financial
performance of El Paso and Tenneco. DLJ did not assume any responsibility for
making
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any independent evaluation of the assets or liabilities of the Energy Business
or for making any independent verification of any of the information reviewed
by it. DLJ relied as to all legal matters on the advice of counsel to El Paso.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on the information made available to
DLJ as of, the date of such opinion. It should be understood that, although
subsequent developments may affect the DLJ Opinion, DLJ does not have any
obligation to update, revise or reaffirm the DLJ Opinion. DLJ expressed no
opinion as to the recoverability of gas supply realignment costs of Tenneco or
the amount of liabilities to be assumed by El Paso related to the discontinued
operations of Tenneco. DLJ was not requested to and did not express any
opinion regarding the financial impact of the amounts recovered or assumed, as
the case may be, on Tenneco Energy or El Paso and the effect, if any, of such
actual amounts on the fairness to El Paso from a financial point of view of
the consideration to be paid in the proposed Merger.
The following is a summary of certain factors considered and financial
analyses performed by DLJ in connection with the DLJ Opinion that were
included in a presentation to the Board of Directors of El Paso on June 19,
1996.
Unless otherwise stated, the financial analyses assume, among other things,
(i) the number of shares of El Paso Common Stock to be issued in the Merger is
based upon an Average El Paso Common Price of $34.875, the midpoint of the
Collar; (ii) post-closing asset sales and off balance sheet financings of
approximately $500 million (the "Asset Sales"); and (iii) a post-closing
common equity offering of approximately $200 million (the "New Common Equity
Offering").
Pro Forma Merger Analysis. DLJ analyzed certain pro forma effects resulting
from the Merger. DLJ reviewed, without independent verification, the operating
synergies contemplated to result from the Merger in 1997 by combining the
operations of the Energy Business and El Paso as forecasted by the managements
of Tenneco and El Paso. DLJ analyzed the pro forma effect of such operating
synergies on earnings per share and cash flow per share for El Paso. The
analysis indicated that the pro forma earnings per share of El Paso, assuming
the forecasted annual net operating synergies contemplated to result from the
Merger, would be higher in the fiscal year 1997 when compared to forecasts for
El Paso as a stand-alone company during the same period. The analysis also
indicated that the pro forma cash flow per share of El Paso, assuming the
forecasted annual net operating synergies contemplated to result from the
Merger would be higher in the fiscal year 1997 when compared to forecasts for
El Paso as a stand-alone company during the same period.
Contribution Analysis. DLJ analyzed El Paso's and the Energy Business'
relative contribution to the combined company with respect to earnings before
interest, taxes, depreciation and amortization ("EBITDA"), earnings before
interest and taxes ("EBIT"), and total assets. Such analysis was considered in
both absolute dollar terms and on a percentage basis and was made for the
historical fiscal year 1995 and for forecasted fiscal years 1996 and 1997. As
a result of the Merger, El Paso stockholders will own approximately 62% of the
common equity of the combined company. This compares with El Paso's
contribution to the combined company's pro forma results (before taking into
account any forecasted net operating synergies, asset sales and expenses from
discontinued operations which may result from the Merger) for (i) historical
fiscal year 1995 of 37% of EBITDA, and 42% of EBIT; (ii) forecasted fiscal
year 1996 of 40% EBITDA and 42% of EBIT, and (iii) forecasted fiscal year 1997
of 40% of EBITDA and 41% of EBIT. El Paso's contributions to the combined
company's pro forma total assets at forecasted fiscal year end 1996 was 36%.
Analysis of Certain Other Publicly Traded Companies. To provide contextual
data and comparative market information, DLJ reviewed selected historical
operating and financial ratios for Tenneco Energy and compared them to the
corresponding data and ratios of certain other companies whose securities are
publicly traded (collectively, the "Public Companies"). The Public Companies
were chosen because they possess general business, operating and financial
characteristics representative of companies in the industry in which El Paso
and Tenneco Energy operate. The Public Companies consisted of Coastal
Corporation, Enron Corp., NorAm Energy Corporation, PanEnergy Corporation,
Sonat, Inc. and The Williams Companies, Inc. Such data and ratios
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included "Adjusted Price," defined as equity value plus net debt (i.e. total
debt plus nonoperating liabilities assumed plus preferred stock less cash and
cash equivalents) as a multiple of EBITDA and EBIT for the latest reported
twelve months, such period being the twelve months ending March 31, 1996. The
average multiple of Adjusted Price to EBITDA for the Public Companies was 7.6
times and the average multiple of Adjusted Price to EBIT for the Public
Companies was 11.9 times. DLJ used the multiples resulting from this analysis
to derive a range of implied Adjusted Prices for the Energy Business of $4.0
billion to $4.4 billiion. DLJ then compared these multiples to the Adjusted
Price to EBITDA multiple of 6.8 times for the Merger and the Adjusted Price to
EBIT multiple of 10.7 times for the Merger and such multiples for the Merger
compared favorably to the multiples for the Public Companies.
Transaction Analysis. DLJ reviewed publicly available information for eight
selected transactions involving the combination of selected natural gas
companies. The eight transactions reviewed (the "Comparative Transactions")
were (i) Texas Eastern Corporation/Panhandle Eastern Corporation; (ii) Acadian
Gas Group/Tejas Gas Corporation; (iii) Exxon's Texas and Louisiana Interstate
Natural Gas Pipeline Systems/Tejas Gas Corporation; (iv) Grand Valley Gas
Company/Associated Natural Gas Corp.; (v) American Oil and Gas Co./KN Energy,
Inc.; (vi) Associated Natural Gas Corp./Panhandle Eastern Corporation;
(vii) Transco Energy Company/The Williams Companies, Inc.; and (viii) ENSERCH
Corporation/Texas Utilities Company. The eight transactions selected are not
intended to represent the complete list of natural gas industry transactions
which have occurred during the last several years; instead they include only
transactions involving combinations of companies with operating
characteristics, size or financial performance characteristics believed to be
comparable to such characteristics of Tenneco Energy and El Paso. DLJ
determined that (i) Texas Eastern Corporation/Panhandle Eastern Corporation;
(ii) Transco Energy Company/The Williams Companies, Inc.; and (iii) ENSERCH
Corporation/Texas Utilities Company were the most representative of the
Comparative Transactions because those transactions involved combinations of
companies with operating characteristics, size or financial performance
characteristics believed to be most similar to such characteristics of the
Energy Business and El Paso. DLJ reviewed the consideration paid in such
transactions in terms of the Adjusted Price as a multiple of EBITDA and EBIT
for the latest reported twelve months prior to the announcement of such
transaction. The ratio of Adjusted Price to EBITDA, computed for the
Comparative Transactions, had a mean of 9.3 times and the ratio of Adjusted
Price to EBIT for such transactions had a mean of 15.4 times. DLJ used the
multiples resulting from this analysis to derive a range of implied Adjusted
Prices for the Energy Business of $4.1 billion to $4.5 billion. DLJ then
compared these multiples to the Adjusted Price to EBITDA multiple of 6.8 times
for the Merger and the Adjusted Price to EBIT multiple of 10.7 times for the
Merger and such multiples for the Merger compared favorably to the multiples
for the other transactions.
Discounted Cash Flow Analysis. DLJ also performed a discounted cash flow
analysis to evaluate the consideration being paid in the Merger. Using the
information provided by the management of Tenneco and El Paso, DLJ performed a
stand-alone discounted cash flow analysis for the Energy Business. DLJ
calculated the estimated "Free Cash Flow" for the Energy Business stand-alone
based on forecasted unleveraged operating income adjusted for: (i) forecasted
annual net operating synergies; (ii) taxes; (iii) certain forecasted non-cash
items (i.e., depreciation, amortization and deferred taxes); (iv) forecasted
capital expenditures; (v) forecasted restructuring costs associated with the
Merger; (vi) forecasted cash flows relating to regulatory matters and customer
relationships; and (vii) the cost of liabilities associated with Tenneco's
previously discontinued operations. DLJ analyzed the Energy Business stand-
alone forecasts as adjusted by El Paso management and discounted the stream of
free cash flows from fiscal 1997 to fiscal 2001, provided in such forecasts,
back to December 31, 1996 using discount rates ranging from 9% to 13%. To
estimate the residual value of the Energy Business stand-alone at the end of
the forecast period, DLJ applied terminal multiples of 6.5 times to 8.5 times
to the forecasted fiscal 2001 EBITDA and discounted such value estimates back
to December 31, 1996 using discount rates ranging from 9% to 13%. DLJ then
summed the present values of the cash flows, the present values of the
residual values and the after-tax cash flows related to the Assets Sales to
derive a range of implied enterprise values for the Energy Business stand-
alone. The range of implied Adjusted Prices for the Energy Business stand-
alone, based on discount rates of 9% to 13% and the range of terminal
multiples of 6.5 times to 8.5 times, was $3.7 billion to $5.1 billion.
The summary set forth above does not purport to be a complete description of
the analyses performed by DLJ. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, notwithstanding the
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separate factors summarized above, DLJ believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinions.
Furthermore, in arriving at the DLJ Opinion, DLJ did not attribute any
particular weight to any analysis, or factor considered by it, but rather made
subjective and qualitative judgments as to the significance and relevance of
each analysis and factor. In performing its analyses, DLJ made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters. The analyses performed by DLJ are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than aggregated by such analyses.
Pursuant to the terms of an engagement letter dated May 14, 1996, El Paso has
paid to DLJ: (i) a retainer fee of $150,000; (ii) an additional fee of
$1,000,000 upon execution of the Merger Agreement; and (iii) a fee of
$1,000,000 at the time DLJ notified the El Paso Board that it was prepared to
deliver the DLJ Opinion. El Paso has also agreed to pay DLJ an additional fee
of $50,000 for each additional or updated opinion delivered by DLJ with respect
to the Merger and additional cash compensation of an amount equal to 0.2% of
the purchase price upon consummation of the Merger, less the amount paid by El
Paso pursuant to clauses (i), (ii) and (iii) above. In addition, El Paso has
agreed to pay DLJ a fee equal to 5% of any "termination fee," "break-up fee,"
"topping fee" or other form of consideration payable to El Paso if El Paso and
Tenneco fail to consummate the Merger and El Paso receives or is entitled to
receive any such compensation.
El Paso has also agreed to reimburse DLJ promptly for all out-of-pocket
expenses (including the reasonable fees and out-of-pocket expenses of counsel)
incurred by DLJ in connection with its engagement, and to indemnify DLJ and
certain related persons against certain liabilities in connection with its
engagement, including liabilities under the federal securities laws. The terms
of the fee arrangement with DLJ, which DLJ and El Paso believe are customary in
transactions of this nature, were negotiated at arm's length between El Paso
and DLJ and the Board of Directors of El Paso was aware of such arrangement,
including the fact that a significant portion of the aggregate fee payable to
DLJ is contingent upon consummation of the Merger.
In the ordinary course of its business, DLJ actively trades the securities of
both El Paso and Tenneco for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering the Transaction, stockholders should be aware of, and should
carefully consider that, certain members of Tenneco's management and the
Tenneco Board of Directors may be deemed to have interests in the Transaction
that are in addition to their interests as holders of Tenneco Stock generally
and which may create potential conflicts of interest. The Tenneco Board of
Directors was aware of these interests and considered them, among other
matters, in approving the Transaction.
Certain executive officers and members of the Board of Directors of Tenneco
will be, after consummation of the Distributions, executive officers and/or
members of the boards of directors of New Tenneco and/or Newport News. Each of
New Tenneco and Newport News plans to adopt various employee benefit plans in
connection with the Transaction. For a discussion of certain matters relating
to such plans see "THE DISTRIBUTIONS--Relationship Among Tenneco, New Tenneco
and Newport News After the Distributions" and the New Tenneco Information
Statement and Newport News Information Statement attached hereto as Appendices
C and D, respectively.
As of November 1, 1996, there were outstanding options to purchase 4,445,432
shares of Tenneco Common Stock granted pursuant to various Tenneco employee
stock option plans, of which options to purchase 1,680,751 shares were
currently exercisable and options to purchase 1,331,966 shares were held by
executive officers of Tenneco. The Merger Agreement requires that, in
connection with the Transaction, Tenneco accelerate the vesting of all stock
options held by employees of the Energy Business so that they become fully
exercisable prior to the Merger Effective Time. Accordingly, Tenneco
accelerated the vesting of options to purchase 633,000
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shares of Tenneco Common Stock in June 1996, of which options to purchase
50,000 shares were held by executive officers of Tenneco. If not exercised
prior to the Merger Effective Time, such options will be canceled upon
consummation of the Merger. All stock options held by employees of the
Industrial Business and Shipbuilding Business will be redenominated into
options to acquire New Tenneco Common Stock and Newport News Common Stock,
respectively, with terms and conditions set to preserve the aggregate "spread"
of the redenominated stock options.
As of November 1, 1996, 1,063,977 restricted shares of Tenneco Common Stock
held by various directors and employees (which generally vest according to the
length of service to Tenneco of the person holding such shares) were
accelerated to become fully vested and non-forfeitable in connection with the
Transaction. As of November 1, 1996, the conditions to the issuance of 242,000
shares of Tenneco Common Stock underlying performance share equivalent unit
awards held by various employees (each entitling the holder thereof to receive
one share of Tenneco Common Stock upon the achievement of specified Tenneco
performance goals) were waived and the maximum number of shares of Tenneco
Common Stock subject thereto were issued. Directors and executive officers of
Tenneco hold, in the aggregate, 294,825 of such restricted shares and shares
underlying 224,000 of such performance unit awards.
In addition, Tenneco, El Paso and El Paso Subsidiary have agreed to insurance
and indemnification for directors and executive officers of Tenneco after the
Merger Effective Time and certain employees of the Energy Business will receive
retention bonuses and severance benefits in connection with the Transaction.
See "THE MERGER--Certain Covenants" and "THE MERGER--Employee Benefits."
Stockholders should also be aware that the El Paso Energy Corporation
Strategic Stock Plan (the "El Paso Stock Plan") provides for the grant of stock
options, stock appreciation rights, limited stock appreciation rights and
restricted stock to officers and key management employees of El Paso and the
Energy Business in order to provide incentive to encourage the successful
acquisition and integration of the Energy Business with El Paso. A grant of
restricted stock and nonqualified stock options has been made to officers of El
Paso, contingent upon the consummation of the Merger and other factors. It is
anticipated that after the Merger Effective Time, certain officers and key
management employees of Tenneco who remain employed by the Energy Business may
receive grants under the El Paso Stock Plan.
EXPENSES
In connection with the Transaction, all costs and expenses of El Paso will be
paid by El Paso. In general, Tenneco is responsible for all fees and expenses
incurred by Tenneco, New Tenneco and Newport News in connection with the
Transaction for periods prior to the Distribution Date (except for certain
environmental costs and expenses and except for costs and expenses that are
incurred separately and directly by either New Tenneco or Newport News in
connection with the Transaction, which shall be such party's sole
responsibility and liability). Any such fees and expenses which are unpaid as
of the Merger Effective Time will be allocated to and remain the responsibility
of Tenneco but will be included in the Actual Energy Debt Amount. See "DEBT AND
CASH REALIGNMENT." Each party has also generally agreed to bear its own
respective fees and expenses incurred after the Distribution Date.
Notwithstanding the foregoing, pursuant to the Distribution Agreement, costs
and expenses incurred at any time in connection with compliance with
environmental laws shall be paid by the party that will own the assets or
operate the business subject to such laws after the Distribution Date.
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The following sections entitled "THE DISTRIBUTIONS," "THE NPS ISSUANCE,"
"DEBT AND CASH REALIGNMENT," "CORPORATE RESTRUCTURING TRANSACTIONS" and "THE
MERGER" contain descriptions of certain provisions of the Distribution
Agreement and Merger Agreement. These descriptions are only summaries and do
not purport to be complete. These descriptions are qualified in their entirety
by reference to the complete text of the Distribution Agreement and Merger
Agreement. Copies of the Distribution Agreement and Merger Agreement as
currently in effect are attached hereto as Appendix A and Appendix B,
respectively, and are incorporated herein by reference.
THE DISTRIBUTIONS
MANNER OF DISTRIBUTION
Pursuant to the Distribution Agreement, the Tenneco Board of Directors will
declare the special distribution to effect the Distributions and will set the
Distribution Record Date and Distribution Date (which will be prior to the
Merger Effective Time). Subject to the conditions summarized below, on the
Distribution Date Tenneco will distribute pro rata to all holders of record of
Tenneco Common Stock as of the Distribution Record Date, (i) one share of New
Tenneco Common Stock for every share of Tenneco Common Stock so held, and (ii)
one share of Newport News Common Stock for every five shares of Tenneco Common
Stock so held. Pursuant to the Distribution Agreement, as soon as practicable
on or after the Distribution Date, Tenneco will deliver to First Chicago Trust
Company of New York or such other trust company or bank designated by Tenneco
(the "Distribution Agent"), as distribution agent for holders of Tenneco Common
Stock as of the Distribution Record Date, certificates representing such shares
of New Tenneco Common Stock and Newport News Common Stock as are required for
the Distributions.
The Boards of Directors of New Tenneco and Newport News will each adopt a
stockholder rights plan and cause to be issued, with each share of New Tenneco
Common Stock and Newport News Common Stock to be distributed in the
Distributions, one right, entitling the holder thereof to purchase, under
certain circumstances, one one-hundredth of a share of a junior series of New
Tenneco preferred stock or Newport News preferred stock, as the case may be
(which rights will expire on June 10, 1998 (unless extended with stockholder
approval), the same date the rights under Tenneco's existing stockholder rights
plan would have expired if such plan were not being terminated in connection
with the Transaction). Unless the context otherwise requires, references herein
to New Tenneco Common Stock and Newport News Common Stock include the
associated rights.
Beneficial holders of Tenneco Common Stock who would be entitled to receive
fractional shares of Newport News Common Stock will receive cash in the
Distributions, in lieu of such fractional shares (because the New Tenneco
Common Stock is being distributed on the basis of one share for each share of
Tenneco Common Stock, no fractional interests will arise). To accomplish this,
the Distribution Agreement requires that the Distribution Agent determine the
number of whole and fractional shares of Newport News Common Stock to which
each beneficial holder of Tenneco Common Stock as of the Distribution Record
Date is entitled immediately following the Distributions. Next, the
Distribution Agent will aggregate these fractional share interests and sell
them on the open market at then-prevailing prices. The Distribution Agent will
distribute to each Tenneco Stockholder its ratable share of such proceeds after
deducting appropriate amounts for federal income tax withholding purposes and
any applicable transfer taxes. All brokers' fees and commissions incurred in
connection with such sales shall be paid by Tenneco.
If any shares of New Tenneco Common Stock or Newport News Common Stock are
returned to the Distribution Agent as unclaimed or cannot be distributed by the
Distribution Agent, any post-Distribution dividends or distributions thereon
will be paid to the Distribution Agent (or set aside and retained by the
applicable company). On the 180th day following the Distribution Date, the
Distribution Agent will return to Tenneco all unclaimed shares of New Tenneco
Common Stock and Newport News Common Stock, cash in lieu of fractional shares
and dividends or other distributions with respect thereto. Thereafter, holders
of Tenneco Common Stock as of the Distribution Record Date will be entitled to
look only to Tenneco for such amounts to which they are entitled, subject to
applicable escheat or other abandoned property laws.
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NO HOLDER OF TENNECO COMMON STOCK WILL BE REQUIRED TO PAY CASH OR OTHER
CONSIDERATION FOR THE SHARES OF NEW TENNECO COMMON STOCK AND NEWPORT NEWS
COMMON STOCK (OR THE CASH IN LIEU OF FRACTIONAL SHARES) TO BE RECEIVED IN THE
DISTRIBUTIONS, OR TO SURRENDER OR EXCHANGE SHARES OF TENNECO COMMON STOCK IN
ORDER TO RECEIVE EITHER NEW TENNECO COMMON STOCK OR NEWPORT NEWS COMMON STOCK
(OR THE CASH IN LIEU OF FRACTIONAL SHARES).
CERTAIN OTHER PRE-DISTRIBUTION TRANSACTIONS
Settlement of Intercompany Accounts. Pursuant to the Distribution Agreement,
all intercompany receivables, payables and loans (unless specifically provided
for in any Ancillary Agreement) between entities which will be the members of
separate business groups following consummation of the Distributions must be
settled, capitalized or converted into ordinary trade accounts as of the close
of business on the Distribution Date. Further, all intercompany agreements
between members of different business groups (other than those contemplated by
the Transaction) will be terminated.
Certain Consent Requirements. Pursuant to the Distribution Agreement, each
party has agreed to use its best efforts to obtain any third-party consents or
approvals that are required to consummate the transactions contemplated
thereby. Consent of the holders of certain of the Tenneco Energy Consolidated
Debt will be required and sought in connection with the Distributions. See
"DEBT AND CASH REALIGNMENT." Tenneco presently believes that it will be able to
obtain in a timely manner all required third-party consents with respect to its
material contractual obligations in connection with the Distributions.
Other. The Distribution Agreement also requires that a variety of other
actions be taken by Tenneco and/or its subsidiaries prior to consummation of
the Distributions including, without limitation, (i) certain corporate
organizational actions with respect to New Tenneco and Newport News, (ii) the
transfer and assignment of certain licenses and permits among Tenneco and its
subsidiaries after giving effect to the Transaction (the "Energy Group"), New
Tenneco and its subsidiaries after giving effect to the Transaction (the
"Industrial Group") and Newport News and its subsidiaries after giving effect
to the Transaction (the "Shipbuilding Group"), (iii) assignment and assumption
of agreements that relate exclusively to the Energy Business, Industrial
Business or Shipbuilding Business to the Energy Group, Industrial Group or
Shipbuilding Group, as appropriate (with joint agreements to be assigned and
assumed in part), and (iv) the preparation and filing of NYSE listing
applications and necessary federal and state securities laws filings.
RELATIONSHIP AMONG TENNECO, NEW TENNECO AND NEWPORT NEWS AFTER THE
DISTRIBUTIONS
Tenneco, New Tenneco and Newport News have entered into the Distribution
Agreement, which governs certain aspects of their relationships both prior to
and following the Distributions. See "--Certain Other Pre-Distribution
Transactions." In addition, Tenneco, New Tenneco and/or Newport News (and their
appropriate subsidiaries) have entered into, or will prior to the Distributions
enter into, the Ancillary Agreements, which are intended to further effect the
disaffiliation of the Energy Business, Industrial Business and Shipbuilding
Business and to govern certain additional aspects of their ongoing
relationships.
Terms of the Distribution Agreement. In addition to providing for the terms
of the Distributions and the various actions to be taken prior to the
Distributions, the Distribution Agreement contains other agreements governing
the relationship among Tenneco, New Tenneco and Newport News prior to and
following the Distributions.
The Distribution Agreement provides that, from and after the Distribution
Date, (i) Tenneco shall (and shall cause the other members of the Energy Group
to) assume, pay, perform and discharge all Energy Liabilities (as defined) in
accordance with their terms, (ii) New Tenneco shall (and shall cause the other
members of the Industrial Group to) assume, pay, perform and discharge all
Industrial Liabilities (as defined) in accordance with their terms, and (iii)
Newport News shall (and shall cause the other members of the Shipbuilding Group
to) assume, pay, perform and discharge all Shipbuilding Liabilities (as
defined) in accordance with their terms. See "CORPORATE RESTRUCTURING
TRANSACTIONS."
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In addition, the Distribution Agreement provides for cross-indemnities that
require (i) Tenneco to indemnify New Tenneco and Newport News (and their
respective subsidiaries, directors, officers, employees and agents and certain
other related parties) against all losses arising out of or in connection with
the Energy Liabilities or the breach of the Distribution Agreement or any
Ancillary Agreement by Tenneco, (ii) New Tenneco to indemnify Tenneco and
Newport News (and their respective subsidiaries, directors, officers, employees
and agents and certain other related parties) against all losses arising out of
or in connection with the Industrial Liabilities or the breach of the
Distribution Agreement or any Ancillary Agreement by New Tenneco, and (iii)
Newport News to indemnify Tenneco and New Tenneco (and their respective
subsidiaries, directors, officers, employees and agents and certain other
related parties) against all losses arising out of or in connection with the
Shipbuilding Liabilities or the breach of the Distribution Agreement or any
Ancillary Agreement by Newport News, and for contribution in certain
circumstances.
Pursuant to the Distribution Agreement, each of the parties has agreed to use
all reasonable efforts to take or cause to be taken all action, and do or cause
to be done all things, reasonably necessary, proper or advisable to consummate
the transactions contemplated by and carry out the purposes of the Distribution
Agreement. As such, the Distribution Agreement provides that if any
contemplated pre-Transaction transfers and assignments have not been effected
on or prior to the Distribution Date, the parties will cooperate to effect such
transfers as quickly thereafter as practicable. The entity retaining any asset
or liability which should have been transferred prior to the Distribution Date
will continue to hold that asset for the benefit of the party entitled thereto
or that liability for the account of the party required to assume it, and must
take such other action as may be reasonably requested by the party to whom such
asset was to be transferred or by whom such liability was to be assumed in
order to place such party, insofar as reasonably possible, in the same position
as would have existed had such asset or liability been transferred or assumed
as contemplated by the Distribution Agreement.
The Distribution Agreement provides for the transfer of books and records
among Tenneco, New Tenneco and Newport News and their respective subsidiaries
and grants to each party access to certain information in the possession of the
others (subject to certain confidentiality requirements). In addition, the
Distribution Agreement provides for the allocation of shared privileges with
respect to certain information and requires each party to obtain the consent of
the others prior to waiving any shared privilege.
Terms of the Ancillary Agreements. Below are descriptions of the principal
Ancillary Agreements which have been, or prior to consummation of the
Distributions will be, entered into by Tenneco, New Tenneco and/or Newport News
(and, in certain circumstances, their appropriate subsidiaries).
Benefits Agreement
The Benefits Agreement to be entered into by and among Tenneco, New Tenneco
and Newport News (the "Benefits Agreement") will define certain labor,
employment, compensation and benefit matters in connection with the
Distributions and the transactions contemplated thereby. Pursuant to the
Benefits Agreement, from and after the Distribution Date each of Tenneco, New
Tenneco and Newport News will continue employment of each of their respective
retained employees (subject to their rights to terminate said employees) with
the same compensation as prior to the Distribution Date, continue to honor
all related existing collective bargaining agreements, recognize related
incumbent labor organizations and continue sponsorship of hourly employee
benefit plans. New Tenneco will become the sole sponsor of the Tenneco Inc.
Retirement Plan (the "TRP") and of the Tenneco Inc. Thrift Plan (the "Tenneco
Thrift Plan") from and after the Distribution Date, and Tenneco and Newport
News will establish defined contribution plans for the benefit of each of
their respective employees to which the account balances of retained and
former employees of Tenneco and Newport News in the Tenneco Thrift Plan will
be transferred. The benefits accrued by Tenneco and Newport News employees in
the TRP will be frozen as of the last day of the calendar month including the
Distribution Date, and New Tenneco will amend the TRP to provide that all
benefits accrued through that day by Tenneco and Newport News employees are
fully vested and non-forfeitable. Tenneco will retain and assume employment
contracts with certain individuals. All liabilities under the Tenneco Inc.
Benefit Equalization Plan and the Supplemental Executive Retirement Plan will
be assumed by New Tenneco pursuant to the Benefits Agreement; however, New
Tenneco is entitled to reimbursement for certain payments thereunder from
Tenneco and Newport News. Generally, each of Tenneco, New Tenneco and Newport
News will retain liabilities with respect to the welfare benefits of its
current and former employees and their dependents, but Tenneco will assume
all liabilities for retiree medical benefits of the employees of
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discontinued operations and their dependents. In addition, as of the
Distribution Date, participation by retained and former employees of Tenneco
and Newport News in the Tenneco Inc. Deferred Compensation Plan and the 1993
Deferred Compensation Plan will be discontinued. For a discussion of how
Tenneco stock options, restricted stock and performance share equivalent unit
awards will be treated as of the Merger Effective Time, see "THE
TRANSACTION--Interests of Certain Persons in the Transaction."
Debt and Cash Allocation Agreement
The Debt and Cash Allocation Agreement to be entered into among Tenneco,
New Tenneco and Newport News in connection with the Distributions (the "Debt
and Cash Allocation Agreement") will govern the allocation among the parties
of the cash and cash equivalents of Tenneco and its consolidated subsidiaries
on hand as of the Merger Effective Time and responsibility for certain
capital expenditures related to the Energy Business, as described below under
"DEBT AND CASH REALIGNMENT." The Debt and Cash Allocation Agreement will also
(i) require Newport News to make a $600 million distribution to Tenneco or
one of its subsidiaries to be used in connection with the Debt Realignment,
(ii) govern certain terms of the Tenneco Credit Facility, (iii) govern the
conduct of the post-Transaction audit to be undertaken to ascertain the
Actual Energy Debt Amount and the amount of cash and cash equivalents held by
each of Tenneco, New Tenneco and Newport News upon consummation of the
Transaction, and (iv) require New Tenneco to pay in cash to Tenneco the
amount, if any, by which the Actual Energy Debt Amount exceeds the Base Debt
Amount (and require Tenneco to pay in cash to New Tenneco the amount, if any,
by which the Actual Energy Debt Amount is less than the Base Debt Amount).
See "DEBT AND CASH REALIGNMENT."
Insurance Agreement
Tenneco has historically maintained at the parent-company level various
insurance policies for the benefit or protection of itself and its
subsidiaries. The Insurance Agreement to be entered into among Tenneco,
Newport News and New Tenneco (the "Insurance Agreement") in connection with
the Distributions will provide for the respective continuing rights and
obligations from and after the Distribution Date of the parties with respect
to these insurance policies (other than directors' and officers' liability
insurance policies, which are addressed by the Merger Agreement). See "THE
MERGER--Certain Covenants."
In general, following consummation of the Transaction policies which relate
exclusively to the Energy Business or a member of the Energy Group will be
retained by Tenneco, policies which relate exclusively to the Industrial
Business or a member of the Industrial Group will be retained by New Tenneco
and policies which relate exclusively to the Shipbuilding Business or a
member of the Shipbuilding Group will be retained by Newport News.
Pursuant to the Insurance Agreement, any non-exclusive Tenneco policies
which are in effect as of the Distribution Date (other than those which are
cost plus, fronting, high deductible or retrospective premium programs, as
described below) will either be transferred into the name of New Tenneco or
cancelled, at New Tenneco's option. In general, "go-forward" coverage under
these policies for the Energy Group and Shipbuilding Group (and certain
related persons) will be terminated as follows: (i) coverage under "claims-
made" policies (i.e., those policies which provide coverage for claims made
during a specified period) will be terminated on the Distribution Date for
any claims not made prior thereto, and (ii) coverage under "occurrence-based"
policies (i.e., those policies which provide coverage for acts or omissions
occurring during a specified period) will be terminated on the Distribution
Date for acts or omissions occurring thereafter. However, the Energy Group,
Industrial Group and Shipbuilding Group (and certain related persons) will
all continue to have access to these policies ("go-backward" coverage) for
claims made prior to the Distribution Date, in the case of claims-made
policies, and for acts or omissions which occurred prior to the Distribution
Date, in the case of occurrence-based policies (subject to certain
obligations to replace exhausted policy limits). Each respective group will
be liable for and get the benefit of premiums, costs and charges under these
policies that relate to its coverage thereunder.
Pursuant to the Insurance Agreement, policies which are cost plus,
fronting, high deductible or retrospective premium programs will be retained
by the Energy Group following the Distributions and shall provide no go-
forward coverage to the Industrial Group or Shipbuilding Group. However, go-
backward coverage will continue to be available to these groups, subject to
an obligation to reimburse Tenneco for premiums, costs and charges under
these policies related to their respective coverages following the
Distributions. Following the Distributions, Tenneco will be required to
maintain in place certain letters of credit and surety bonds securing
obligations under these policies.
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Tax Sharing Agreement
The Tax Sharing Agreement to be entered into among Tenneco, Newport News,
New Tenneco and El Paso (the "Tax Sharing Agreement") will provide for the
allocation among the parties of tax liabilities arising prior to, as a result
of, and subsequent to the Distributions. As a general rule, Tenneco will be
liable for all taxes not specifically allocated to New Tenneco or Newport
News under the specific terms of the Tax Sharing Agreement. Generally, New
Tenneco will be liable for taxes imposed exclusively on the Industrial Group,
and Newport News will be liable for taxes imposed exclusively on the
Shipbuilding Group (including for pre-Distribution periods, taxes imposed on
Newport News). In the case of federal income taxes imposed on the combined
activities of Tenneco, the Industrial Group and the Shipbuilding Group, each
of New Tenneco and Newport News will be liable to Tenneco for federal income
taxes attributable to their activities, and each will be allocated an agreed-
upon share of estimated tax payments made by the Tenneco consolidated group,
except that (i) tax benefits attributable to the Debt Realignment ("Debt
Discharge Items"), presently anticipated to total approximately $120 million,
will be specifically allocated to the Industrial Group, and (ii) tax benefits
attributable to certain items included in the Base Debt Amount ("Base Debt
Amount Adjustment Items") will be specifically allocated to Tenneco. New
Tenneco will also be responsible for tax items attributable to certain
discontinued operations of Tenneco to the extent that such items exceed
forecasted amounts by more than a specified amount. In the case of state
income taxes imposed on the combined activities of the business groups,
Tenneco will be responsible for payment of the combined tax to the state tax
authority, and New Tenneco and Newport News will pay Tenneco a deemed tax
equal to the tax that would be imposed if the Industrial Group and the
Shipbuilding Group had filed combined returns for their respective groups,
except that Debt Discharge Items and Base Debt Amount Adjustment Items will
be specifically allocated to New Tenneco and Tenneco, respectively.
In general, and except as provided below, Tenneco will be responsible for
any taxes imposed on or resulting from the Transaction ("Transaction Taxes").
New Tenneco will be responsible for any Transaction Taxes resulting from any
inaccuracy in factual statements or representations in connection with the
IRS Ruling Letter or the Tax Opinion to the extent attributable to facts in
existence prior to the Merger, but excluding facts relating to the
Shipbuilding Group or El Paso. Newport News and El Paso will each be
responsible for the accuracy of any factual statements or representations
relating to them or their respective affiliates. Each of New Tenneco, Newport
News and El Paso will be responsible for any Transaction Tax to the extent
such tax is attributable to action taken by that entity which is inconsistent
with the tax treatment contemplated in the IRS Ruling Letter or Tax Opinion.
Certain Transaction Taxes (i.e., transfer taxes, and federal and state income
taxes imposed on those Corporate Restructuring Transactions which are known
to be taxable) are included in the determination of the Actual Energy Debt
Amount and consequently may be economically borne by New Tenneco (because New
Tenneco must pay to Tenneco in cash the amount, if any, by which the Actual
Energy Debt Amount exceeds the Base Debt Amount). If between the date of the
Merger Agreement and the Merger Effective Time, there is a change in law (as
defined in the Tax Sharing Agreement) and as a result of such change in law
Tenneco is required to restore certain deferred gains to income, then any
resulting tax shall be shared equally between New Tenneco and Tenneco.
Transition Services Agreement
Tenneco Business Services Inc. ("TBS") currently provides certain
administrative services to Tenneco, including mainframe computing services,
backup, recovery and related operations, consulting services and payroll
services. Under the Transition Services Agreement entered into among Tenneco,
TBS and El Paso (the "Transition Services Agreement"), at the request of El
Paso at least 45 days prior to the Merger Effective Time TBS (which will,
following the Distributions, be a subsidiary of New Tenneco) will continue to
provide the services specified in El Paso's request for a period of 12 months
from the Merger Effective Time at a price to be negotiated among the parties
and based on the market rate for comparable services. If elected, any or all
of the services may be terminated by Tenneco on 45 days notice to TBS.
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TBS Services Agreements
In connection with the Distributions, TBS will enter into a series of
separate services agreements (the "Service Agreements") with Newport News, as
described below.
One of the Service Agreements between TBS and Newport News will be for
mainframe data processing services (the "NNS Processing Services Agreement").
Under the NNS Processing Services Agreement, TBS will supply, as a vendor,
mainframe data processing services to Newport News for a period from the
Merger Effective Time through December 31, 1998, and thereafter only by
mutual agreement. The rate of compensation to TBS for services will be $9.1
million in 1997 and $9.6 million in 1998, payable in monthly installments,
subject to adjustment if Newport News requests a change in the scope of
services. TBS will lease the space currently used by it at the Newport News
headquarters for the period from the Merger Effective Time through December
31, 1998, with an option for TBS to extend for one-month periods for up to 12
months, for continued use by TBS as its mainframe data processing facility.
The rent under such lease will be approximately $1.2 million per year plus
pass throughs of certain occupancy-related costs.
TBS has also entered into a supplier participation agreement (the "NNS
Supplier Participation Agreement") with Newport News to govern the procedures
under which Newport News will continue to participate with New Tenneco in
vendor purchase agreements between TBS and various suppliers of goods and
services. The NNS Supplier Participation Agreement will provide for continued
participation of Newport News in various purchase programs, absent a
termination for cause, for the full existing terms of the agreements with
each such vendor. Under this Agreement, as is the case currently, purchases
of goods and services will be made directly by Newport News at prices
negotiated by TBS which are applicable to all participating purchasers. TBS
will charge Newport News a fixed fee of $5,000 per month for TBS contract
administration services including data collection, negotiations, progress
reporting, benefits reporting, follow-up and consulting in connection with
the vendor agreements.
Additionally, as described above, a separate Service Agreement may also be
entered into with Tenneco for transition services to be supplied by TBS to
Tenneco and its subsidiaries. The services covered and the compensation for
such services would depend on the services elected by Tenneco, and the
negotiation among the parties, pursuant to the Transition Services Agreement.
Trademark Transition License Agreements
Upon consummation of the Corporate Restructuring Transactions, New Tenneco
will hold the rights to various trademarks, servicemarks, tradenames and
similar intellectual property, including rights in the marks "Tenneco" "Ten"
and "Tenn" (but not "Tennessee"), alone and in combination with other terms
and/or symbols and variations thereof (collectively, the "Trademarks"), in
the United States and elsewhere throughout the world. In connection with the
Distributions, Trademark Transition License Agreements will be entered into
as of the Distribution Date between both (i) New Tenneco and Tenneco, and
(ii) New Tenneco and Newport News. Pursuant to these agreements, New Tenneco
will grant to each of Tenneco and Newport News a limited, non-exclusive,
royalty-free license to use the Trademarks, with respect to specified goods
and services as follows: (a) Tenneco and Newport News will be permitted to
use the Trademarks in their corporate names for 30 days after the date of the
agreements (and, pursuant to the Distribution Agreement, each have agreed to
remove the Trademarks from such corporate names within 30 days after the
Distribution Date), (b) Tenneco and Newport News will be permitted to use
their existing supplies and documents which have the Trademarks imprinted on
them for six months after the date of the agreements, and (c) Tenneco and
Newport News will be permitted to use the Trademarks on existing signs,
displays or other identifications for a period of two years (in the case of
Tenneco) and one year (in the case of Newport News) after the date of the
agreements. However, so long as Tenneco or Newport News continues to use the
Trademarks, it must maintain certain quality standards prescribed by New
Tenneco in the conduct of business operations in which the Trademarks are
used. In addition, under these agreements each of Tenneco and Newport News
will agree to indemnify New Tenneco from any claims that arise as a result of
its use of the Trademarks or any breach of its agreement and neither Tenneco
nor Newport News may adopt or use at any time a word or mark likely to
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be similar to or confused with the Trademarks. Each Trademark Transition
License Agreement shall be immediately terminable by New Tenneco upon a
material breach of the agreement by Tenneco or Newport News, as the case may
be.
Directors. After the Distribution Date, there will be one director of New
Tenneco who also serves on the Board of Directors of Newport News.
CONDITIONS TO CONSUMMATION OF THE DISTRIBUTIONS
The Distributions are conditioned on, among other things, approval of the
Distributions by the holders of Tenneco Stock at the Tenneco Special Meeting
and by the holders of Tenneco Junior Preferred Stock, if issued prior to the
effectiveness of the Charter Amendment, and formal declaration of the
Distributions by the Tenneco Board of Directors. Other conditions to the
Distributions include (i) execution and delivery of certain of the Ancillary
Agreements and consummation of the various pre-Distribution transactions (such
as the Corporate Restructuring Transactions and the Debt Realignment), (ii)
receipt of the IRS Ruling Letter to the effect that for federal income tax
purposes the Distributions will be tax-free to Tenneco and its stockholders
under Section 355 of the Code and that certain internal spin-off transactions
involving Tenneco or its subsidiaries to be effected pursuant to the Corporate
Restructuring Transactions will also be tax-free, (iii) approval for listing on
the NYSE of the New Tenneco Common Stock and Newport News Common Stock, (iv)
registration of the New Tenneco Common Stock and Newport News Common Stock
under the Exchange Act, (v) receipt of all material consents to the Corporate
Restructuring Transactions, the Distributions and transactions contemplated in
the Distribution Agreement, (vi) performance of the various covenants required
to be performed prior to the Distribution Date (see "--Certain Other Pre-
Distribution Transactions" and "--Relationship Among Tenneco, New Tenneco and
Newport News After the Distributions"), and (vii) lack of prohibition of the
Distributions by any law or governmental authority. On October 30, 1996, the
IRS issued the IRS Ruling Letter. Even if all the conditions to the
Distributions are satisfied, Tenneco has reserved the right to, under certain
circumstances, amend or terminate the Distribution Agreement and the
transactions contemplated thereby. The Tenneco Board of Directors has not
attempted to identify or establish objective criteria for evaluating the
particular types of events or conditions that would cause the Tenneco Board of
Directors to consider amending or terminating the Distributions. See "--
Amendment or Termination of the Distributions." Although the foregoing
conditions may be waived by Tenneco to the extent permitted by law, the Board
of Directors of Tenneco presently has no intention to proceed with the
Distributions unless each of these conditions is satisfied.
AMENDMENT OR TERMINATION OF THE DISTRIBUTIONS
Prior to the Distributions, the Distribution Agreement may be terminated and
the Distributions may be amended, modified or abandoned by Tenneco without the
approval of its stockholders or New Tenneco or Newport News, subject to the
consent of El Paso as described below. Any amendment or modification prior to
the termination of the Merger Agreement or consummation of the Merger which
adversely affects the Energy Business (other than to a de minimis extent) or
materially delays or prevents the consummation of the Merger can be effectuated
only with prior consent of El Paso. Termination of the Distribution Agreement
prior to the termination of the Merger Agreement or consummation of the Merger
can be effectuated only with the prior written consent of El Paso.
After consummation of the Distributions, the Distribution Agreement may be
amended or terminated only by a written agreement signed by Tenneco, New
Tenneco and Newport News. Certain amendments or terminations after the
Distributions also require the consent of third-party beneficiaries to the
extent that the Distribution Agreement has expressly guaranteed them rights.
TRADING OF NEW TENNECO COMMON STOCK AND NEWPORT NEWS COMMON STOCK
See "RISK FACTORS--Risks Relating to the Transaction--No Current Market for
New Tenneco Common Stock and Newport News Common Stock" and "RISK FACTORS--
Risks Relating to the Transaction
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- --Uncertainty Regarding Trading Prices of and Markets for Stock Following the
Transaction" for a discussion of certain considerations relating to the market
for and trading prices of New Tenneco Common Stock and Newport News Common
Stock following the Distributions.
Shares of New Tenneco Common Stock and Newport News Common Stock received by
stockholders of Tenneco pursuant to the Distributions will be freely
transferable, except for shares received by persons who may be deemed to be
"affiliates" of either New Tenneco or Newport News under the Securities Act.
Persons who are affiliates of either New Tenneco or Newport News will be
permitted to sell their shares of New Tenneco Common Stock or Newport News
Common Stock, respectively, only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act.
THE INDUSTRIAL DISTRIBUTION
Tenneco Automotive
Tenneco Automotive is one of the world's leading manufacturers of automotive
exhaust and ride control systems for the original equipment market and
aftermarket. Tenneco Automotive is a global business that sells its products
in over 100 countries, manufacturing and marketing its automotive exhaust
systems primarily under the Walker(R) brand name and its ride control
equipment primarily under the Monroe(R) brand name.
Overview of Automotive Parts Industry
The global market for automotive parts was approximately $435.3 billion in
1995, comprised of $352 billion in original equipment ("OE") sales and $83.3
billion in aftermarket sales. This market is expected to grow by 7.6% to
$468.4 billion in 1996 and by approximately 7.2% per year through 2000
resulting in a total market size of approximately $617.6 billion in that year.
As the North American and Western European automotive markets are relatively
mature (expected to grow at an estimated rate of 7.0% and 6.0%, respectively
through 2000), original equipment manufacturers ("OEMs") and automotive parts
suppliers are increasingly focusing on emerging markets for additional growth
opportunities, particularly China, Eastern Europe, India and Latin America.
Automotive parts are generally segmented into two categories: (i) OE sales
in which parts are sold in large quantities directly to the vehicle
manufacturers and (ii) aftermarket sales in which parts are sold in varying
quantities to a wide range of wholesalers, retailers and repair shops as
replacement parts in the aftermarket. Demand for automotive parts in the OE
market is driven by the number of new vehicle sales which in turn are
determined by prevailing economic conditions. Factors affecting demand in the
aftermarket include the number of vehicles on the road, the average useful
life of parts, the average age of such vehicles and number of miles driven.
Industry Trends
Currently, there are significant existing and emerging trends that are
dramatically reshaping the automotive industry. As the dynamics of the
automotive industry change, so do the roles, responsibilities and
relationships of its participants. Key trends affecting automotive parts
suppliers include:
Consolidation of Parts Suppliers. The automotive parts industry,
particularly with respect to OE suppliers, has been rapidly consolidating for
the last several years. The number of Tier I suppliers has decreased from
3,000 to 1,500 since 1990. By the year 2000, the number of suppliers is
expected to decrease by nearly 75%, leaving approximately 400 Tier I
suppliers. The primary reasons for this consolidation include: (i) an
increasing desire by OEMs to work with fewer, larger suppliers that can
provide fully-integrated systems and (ii) the inability of smaller suppliers
to compete on price with the larger companies who benefit from purchasing and
distribution economies of scale.
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Full-System Integration by Parts Suppliers. OEMs are moving towards
outsourcing entire automotive parts systems in order to take advantage of the
lower cost structure of the automotive parts suppliers. Development of
advanced electronics has enabled formerly independent components to become
"interactive," leading to a shift in demand from individual parts to fully-
integrated systems. OEMs seem to have accepted the need to work more closely
with suppliers, whose roles are now being transformed from "parts suppliers"
to "developers of modules and systems." This shift has created the role of the
systems integrator, who will increasingly have the ability to execute a number
of activities, such as design, product development, engineering, testing of
component systems, and purchasing from Tier II suppliers. It is estimated that
there will be approximately 60 systems integrators by the year 2005. This
emerging structure should allow the vehicle manufacturers to concentrate on
the activities which are core to their success such as product planning and
marketing, thus limiting their involvement to setting the "look and feel" and
cost parameters for new vehicle platforms. OEMs are also stimulating further
manufacturing cost improvements by implementing strategies that would provide
parts suppliers with greater
input and allow them to share in the benefits of cost savings and productivity
enhancements, thus strengthening the role and potential margins of the
surviving Tier I suppliers.
Globalization of the Automotive Industry. As a result of several factors,
OEMs are increasingly requiring "global" parts suppliers with global
management expertise. As the customer base of OEMs changes, and emerging
markets become more important to achieving growth, suppliers must be prepared
to provide products any place in the world. This requires a worldwide approach
to engineering, sales and distribution.
. Location of Production Closer to End Markets. OEMs have relocated
production globally on an "on-site" basis that is closer to end markets.
This international expansion allows suppliers to pursue sales in
developing markets, to take advantage of relatively lower labor costs
and, to some extent, to offset the counter-cyclicality of the European
and North American markets.
. Growing Importance of Emerging Markets. As the North American and Western
European automotive markets are relatively mature, OEMs are increasingly
focusing on emerging markets for growth opportunities, particularly
China, Eastern Europe, India and Latin America. The increased focus on
the OE markets has in turn increased the growth opportunities in the
aftermarket.
. Increasing Requirement of Government for Local Parts Content. Many
governments are beginning to require certain percentages of local
content.
Standardization of OEM Vehicle Platforms. OEMs are increasingly designing
"world cars" with standard bases and localized features, while also developing
niche market products such as multipurpose vehicles, four-wheel drive and
sports cars for mature markets. OEMs have learned that they can realize
significant economies of scale by limiting variations across items such as
steering columns, brake systems, transmissions, axles, exhaust systems,
support structures, fasteners, and power window and door lock mechanisms. This
shift towards standardization will have a large impact on components
manufacturers, who should experience a reduction in production costs if the
OEMs reduce components variations. This should result in not only higher
production volumes per unit and greater economies of scale, but also lower
investment costs for molds and dies, reduced development and prototype costs
and more efficient die changes and retooling.
Aftermarket. There are several factors that are positively affecting the
North American demand for automotive parts in the aftermarket, including:
. The average age of vehicles on the road is at an industry record-high of
8.4 years.
. The aggregate number of annual miles driven by all vehicles has increased
by 38% from 1,925 billion miles in 1988 to 2,360 billion miles in 1995.
. The size of the vehicle fleet has increased from approximately 157
million registrations in 1988 to approximately 188 million registrations
in 1995.
On the other hand, a factor negatively affecting the demand for aftermarket
parts is the increasing average useful life of most OEM automotive parts as a
result of technological advancements.
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Emphasis on Clean Air and Efficiency. The enactment of strict environmental
regulations regarding both pollution and recycling content has led suppliers
and OEMs to design products and develop materials to comply with increasingly
stringent requirements. The Clean Air Act Amendments of 1990 require
substantial reductions in automobile tailpipe emissions, longer warranties on
certain parts of an automobile's pollution-control equipment and additional
equipment to control fuel-vapor emissions. Manufacturers have responded by
focusing their efforts towards technological development, thus lowering costs
while minimizing industrial waste and pollution. Automakers are designing
vehicles that will be easier to dismantle and recycle at the end of their
useful lives and nearly all component manufacturers now deliver parts and
components in reusable shipping containers to reduce the amount of waste
produced at an assembly plant.
Overview of Tenneco Automotive
Tenneco Automotive is one of the world's leading manufacturers of automotive
exhaust and ride control systems for the OE market and the aftermarket.
Tenneco Automotive is a global business that sells its products in over 100
markets worldwide. Tenneco Automotive manufactures and markets its automotive
exhaust systems primarily under the Walker(R) brand name, and its ride control
equipment is primarily manufactured under the Monroe(R) brand name.
The following table sets forth information relating to the net sales of both
of Tenneco Automotive's primary product groups:
<TABLE>
<CAPTION>
NET SALES ($ IN MILLIONS)
----------------------------------
SIX MONTHS YEAR ENDED DECEMBER
ENDED 31,
JUNE 30, 1996 1995 1994 1993
------------- ------ ------ ------
<S> <C> <C> <C> <C>
EXHAUST SYSTEMS PRODUCTS GROUP
Aftermarket............................... $ 348 $ 637 $ 609 $ 562
OE Market................................. 499 829 465 385
------ ------ ------ ------
$ 847 $1,466 $1,074 $ 947
------ ------ ------ ------
RIDE CONTROL PRODUCTS GROUP
Aftermarket............................... $ 406 $ 687 $ 644 $ 580
OE Market................................. 210 326 271 258
------ ------ ------ ------
$ 616 $1,013 $ 915 $ 838
------ ------ ------ ------
Total Tenneco Automotive................ $1,463 $2,479 $1,989 $1,785
====== ====== ====== ======
</TABLE>
Brands. Tenneco Automotive has established, leading brand-name products.
Monroe(R) and Walker(R) are two of the most recognized brand names in the
automotive parts industry. As Tenneco Automotive acquires related product
lines, it is envisioned that they will be incorporated within these existing
product families.
Customers. Tenneco Automotive has developed long-standing business
relationships with many of its customers around the world, working with its
customers in all stages of production, including design, development,
component sourcing, quality assurance, manufacturing and delivery. Tenneco
Automotive has a strong and established reputation with its customers for
providing high quality products at competitive prices as well as for timely
delivery and customer service. Attention to these customer priorities has been
recognized by numerous customers who have awarded Tenneco Automotive supplier
quality awards.
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Tenneco Automotive serves both the OE market and the aftermarket since the
investment and technology required to produce products for the OEMs can be
profitably parlayed into the higher margin aftermarket. Tenneco Automotive
serves over 25 different OEM customers on a global basis, including the
following:
NORTH AMERICA EUROPE [/R] JAPAN [/R]
CAMI BMW [/R] Mazda [/R]
Chrysler DAF [/R] Nissan [/R]
Ford Daihatsu [/R] Suzuki [/R]
General Motors Fiat [/R] Toyota [/R]
Honda Ford [/R]
Mazda Jaguar [/R] AUSTRALIA [/R]
Mitsubishi Lada [/R] Ford [/R]
Nissan Leyland [/R] General Motors
NUMMI [/R] Mercedes-Benz [/R]
Mitsubishi
Toyota [/R] Mitsubishi [/R]
Toyota
Nissan
SOUTH AMERICA [/R]
Opel
Fiat Peugeot/Citroen [/R]
Ford Porsche [/R]
General Motors Renault/Matra [/R]
Volkswagen Rover/Land Rover [/R]
Saab/Scania
Toyota
Volkswagen/Audi/SEAT/Skoda
Volvo
Tenneco Automotive's aftermarket customers include such wholesalers and
retailers as National Auto Parts Association (NAPA), Big A Stores, Midas
International Corp. ("Midas"), Speedy Muffler King and Western Auto in North
America and Midas, Pit Stop and Kwik-Fit in Europe.
Exhaust Systems
Tenneco Automotive designs, manufactures and distributes exhaust systems
primarily under the Walker(R) brand name. These products include a variety of
automotive exhaust systems and emission control products, including mufflers,
catalytic converters, tubular exhaust manifolds, pipe, exhaust accessories and
electronic noise cancellation products. Founded in 1888 and a division of
Tenneco Automotive since 1967, the Walker business group ("Walker") is the
replacement market leader for exhaust systems in North America, Europe and
Australia. Walker is a leading supplier in the OE market in the U.S. as well,
supplying exhaust systems used in 7 of the 10 top-selling 1996 new car models
sold in the U.S. Walker has long been the European market leader in the
replacement market for exhaust systems, and with the acquisition of Heinrich
Gillet GmbH & Company ("Gillet") in 1994, Walker became Europe's leading OE
supplier.
Exhaust systems play a critical role in safely conveying noxious gases away
from the passenger compartment, reducing the level of pollutants and reducing
engine exhaust noise to an acceptable level. Precise engineering of the
manifold, pipe, catalytic converter and muffler leads to a pleasant, tuned
engine sound, minimal pollutants and optimized engine performance.
Manufacturing and Engineering. With plants in North America, Europe, South
America, South Africa, Asia and Australia, Walker locates its manufacturing
facilities in close proximity to its OE customers to provide just-in-time
delivery. In the U.S., Walker operates 10 manufacturing facilities and seven
distribution centers, three of which are located at manufacturing facilities.
Walker also has two research and development facilities in the U.S. In
addition, Walker operates 26 manufacturing facilities located in Argentina,
Australia, Canada, China, the Czech Republic, the United Kingdom, Mexico,
Denmark, Germany, France, Spain, Portugal, South Africa and Sweden. Walker is
in the process of establishing a production line in Brazil. It also has one
engineering and
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technical center at its facility in Germany and one at its facility in
Australia. Its engineering facilities include full anechoic chambers in the
U.S. and Europe.
Strategic Acquisitions/Joint Ventures. As part of its international growth
strategy, Walker acquired ownership of Gillet, a manufacturer of exhaust
systems, in November 1994. The acquisition of Gillet, Europe's largest OE
exhaust supplier, recast Tenneco Automotive as the market leader in exhaust
systems for the OE market in Europe. The acquisition also brought many new OE
customers and orders to the Walker business. Before Gillet, Walker had only
Toyota as a European OE exhaust customer. As a result of the acquisition of
Gillet, a variety of new customers have been added, including: Audi, Ford-
Europe, Opel (General Motors), Mercedes Benz, Peugeot/Citroen, Renault, Seat,
Skoda and Volkswagen. Significantly, following the Gillet acquisition, Ford
selected Walker as a supplier for its 1997 "world" car.
In 1995, Walker acquired ownership of Manufacturas Fonos, S.L., Spain's
largest participant in the exhaust systems aftermarket, and Perfection
Automotive Products, a U.S. catalytic converter producer, further expanding
Walker's presence in the exhaust systems replacement market. In 1996, Walker
established a joint venture in China (Dalian) to supply exhaust systems to the
northern Chinese automotive market.
The following table sets forth information relating to Tenneco Automotive's
sales of exhaust systems:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
--------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ---------------------------
1996 1995 1994 1993
---------- ------- ------- -------
<S> <C> <C> <C> <C>
United States Sales
Aftermarket.................... 42% 46% 48% 52%
OE Market...................... 58 54 52 48
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Foreign Sales
Aftermarket.................... 40% 42% 68% 70%
OE Market...................... 60 58 32 30
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Total Sales by Geographic Area
United States.................. 42% 42% 58% 60%
European Union................. 44 45 24 23
Canada......................... 8 7 10 12
Other areas.................... 6 6 8 5
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
</TABLE>
Ride Control Products
Tenneco Automotive designs, manufactures and distributes ride control
equipment primarily under the Monroe(R) brand name. Tenneco Automotive's ride
control equipment consists of hydraulic shock absorbers, air adjustable shock
absorbers, spring assisted shock absorbers, gas charged shock absorbers and
struts, replacement cartridges and electronically adjustable suspension
systems. Tenneco Automotive manufactures and markets replacement shock
absorbers for virtually all domestic and foreign makes of automobiles. In
addition, Tenneco Automotive manufactures and markets shock absorbers and
struts for use as original equipment on passenger cars and trucks, as well as
for other uses. Founded in 1916, the Monroe business group ("Monroe")
introduced the world's first shock absorber in 1926 and became part of Tenneco
Automotive in 1977. Tenneco Automotive is the market leader for ride control
equipment in the aftermarket in North America, Europe and Australia, as well
as in the OE market in Australia.
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<PAGE>
Superior ride control is governed by a vehicle's suspension system,
including its shocks and struts. Shocks and struts are components that help
maintain vertical loads placed on a vehicle's tires to help keep the tires in
contact with the road. A vehicle's ability to steer, brake and accelerate
depends on the adhesion, or friction, between the vehicle's tires and the
road. Adhesion is directly influenced by shock absorber and strut performance.
Worn or low quality shocks and struts allow weight to transfer from side to
side (roll), from front to rear (sway) and up and down (bounce). Monroe shocks
maintain vertical loads placed on tires by providing resistance to vehicle
bounce, sway and roll. Variations in tire to road contact affect a vehicle's
handling and braking performance and the safe operation of a vehicle; thus, by
enhancing the tire to road contact, Monroe's ride control products actually
function as safety components of a vehicle rather than merely providing a
comfortable ride.
Manufacturing and Engineering. Monroe has ten manufacturing facilities in
the United States and 14 foreign manufacturing operations in Australia,
Belgium, Brazil, Canada, the Czech Republic, Mexico, the United Kingdom,
Spain, Turkey and New Zealand. Monroe also has controlling interests in joint
ventures that own manufacturing operations in China and India as described
below. In designing its shock absorbers and struts, Monroe uses advanced
engineering and test capabilities to provide product reliability, endurance
and performance. Monroe's engineering capabilities feature state-of-the-art
testing equipment, advanced computer aided design equipment, and the talents
of over 100 engineers. Monroe's dedication to innovative solutions has led to
such technological advances as adaptive dampening systems; manual, hydraulic
and electronically adjustable suspensions; semi-active and active systems; and
air and hydraulic leveling systems. Conventional shocks and struts were only
able to provide either ride comfort or vehicle control. Monroe's innovative
new grooven-tube, gas-charged shocks and struts enable both ride comfort and
vehicle control, resulting in improved handling (less roll), reduced
vibration, a wider range of vehicle control and a lessening of the reduction
in performance as the struts become overheated (fade). This new technology,
together with Monroe's Position Sensitive Dampening(R) valve can be found in
Monroe's premium quality Sensa-Trac(R) shocks.
Strategic Acquisitions/Joint Ventures. As a means of expanding its product
lines and offering OEMs a complete modular ride control system, in July 1996,
Tenneco Automotive acquired Clevite. Clevite is a leading OE manufacturer of
elastomeric vibration control components, including bushings and engine
mounts, for the auto, light truck and heavy truck markets. With this
acquisition, Tenneco Automotive now has full capability to deliver complete
suspension systems to the OEMs. The Clevite acquisition also complements
Tenneco Automotive's interest in global growth opportunities, as both Clevite
and Monroe have manufacturing operations in Mexico and Brazil. In addition to
the operations mentioned in the preceding paragraph, Tenneco Automotive has a
51% interest in a joint venture that has three ride control manufacturing
facilities in India and has a 51% interest in a joint venture that has one
ride control manufacturing facility in China. It is anticipated that the joint
venture in India will also manufacture exhaust systems.
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<PAGE>
The following table sets forth information relating to Tenneco Automotive's
sales of ride control equipment:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
--------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ---------------------------
1996 1995 1994 1993
---------- ------- ------- -------
<S> <C> <C> <C> <C>
United States Sales
Aftermarket.................... 72% 70% 72% 72%
OE Market...................... 28 30 28 28
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Foreign Sales
Aftermarket.................... 61% 66% 69% 63%
OE Market...................... 39 34 31 37
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Total Sales by Geographic Area
United States.................. 45% 48% 49% 50%
European Union................. 36 36 32 29
Canada......................... 4 3 5 7
Other areas.................... 15 13 14 14
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
</TABLE>
Sales and Marketing
Both of the exhaust and ride control systems groups utilize similar sales
and marketing systems to distribute Tenneco Automotive products. Both groups
take advantage of a dedicated sales force and consumer brand marketing
professionals together with extensive marketing support, including trade and
consumer marketing, promotions and general advertising. Tenneco Automotive
maintains a customer order fill rate consistently exceeding 95%, which it
believes is among the highest in the industry.
Tenneco Automotive sells its OEM products directly. With respect to the
aftermarket, Tenneco Automotive employs three primary distribution techniques:
(i) the traditional three-step distribution system: warehouse distributors,
jobbers and installers; (ii) direct sales to retailers; and (iii) sales to
buying groups.
Strategy
Tenneco Automotive's primary goal is to enhance its leadership position in
the global automotive parts industry in which it is currently one of the
leading manufacturers of exhaust and ride control systems. Tenneco Automotive
intends to capitalize on certain significant existing and emerging trends in
the automotive industry, including (i) the consolidation and globalization of
the OEM supplier base, (ii) increased OEM outsourcing, particularly of more
complex components, assemblies, modules and complete systems to sophisticated,
independent suppliers and (iii) growth of emerging markets for both original
equipment and replacement markets. Key components of Tenneco Automotive's
strategy include:
Branding. Tenneco Automotive, whose major strategic strength is the
performance of its leading Monroe and Walker brand names and their market
shares, intends to emphasize product differentiation to give consumers added
reasons for specifying their brands. For example, Monroe introduced a premium
grade shock and strut called Sensa-Trac(R) in 1994, which helped it regain its
technological leadership in the ride control market, and Walker's
Advantage(TM) and Dyno Max(TM) brands are the leading brands in their product
categories. Tenneco Automotive also plans on capitalizing on its brand
strength by incorporating newly acquired product lines within existing product
families, as it did with Gillet.
Maintain Focus on Core Business. Tenneco Automotive intends to retain market
share in its core businesses with its primary customers while increasing
market share with customers with whom it has not fully realized its potential
market penetration. These objectives are designed to enable Tenneco Automotive
to respond better to
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the OEMs' evolving purchasing requirements, where in addition to
manufacturing, the supplier is required to provide design, engineering and
project management support for a complete package of integrated products.
Continue to Develop High Value-Added Products. Tenneco Automotive intends to
continue to manufacture high value-added products and to develop strategic
alliances with Tier I and Tier II suppliers in order to facilitate development
of these value-added products, including the development of highly engineered
or complex assemblies or systems. Tenneco Automotive intends to expand its
product lines by continuing to identify and fill new fast-growing niche
markets, by developing new products for existing markets, by acquiring
companies with product portfolios that complement the products currently
applied by Tenneco Automotive and by establishing strategic alliances with
other suppliers.
Increase Ability to Provide Full-System Capabilities. The automotive parts
industry is encountering a consolidation of parts suppliers as OEMs require
suppliers to provide design assistance and innovation and full-system
capabilities rather than just specific parts. In response to this trend, New
Tenneco plans to dedicate more resources towards strengthening technical
capability and design expertise and pursue appropriate strategic acquisitions,
joint ventures and strategic alliances in order to increase Tenneco
Automotive's ability to deliver such full-system capability. For example, the
recent acquisition of Clevite now gives Tenneco Automotive the ability to
deliver complete suspension systems to OEMs.
International Expansion. As Tenneco Automotive's OE customers expand their
assembly operations globally and in response to the development of global
aftermarkets, Tenneco Automotive plans to continue its international expansion
through joint ventures, acquisitions and strategic alliances. For example,
since August 1995, Tenneco Automotive has made eight acquisitions and entered
into four international joint ventures. These strategic initiatives have given
Tenneco Automotive an enhanced presence in Argentina, Brazil, China,
Australia, the Czech Republic, Spain, India and most recently, Turkey, In
September 1996, Tenneco Automotive acquired ownership of its Borusan Amortisor
shock absorber joint venture in Turkey ("Borusan Amortisor"). Borusan
Amortisor currently has approximately 23% of the OE market and 30% of the
aftermarket in Turkey. Both markets are expected to grow significantly by the
year 2000. The recent international acquisitions complement the November 1994
acquisitions of Gillet, Europe's largest supplier of automotive exhaust
equipment for the OEM market, which has already been successfully integrated
into Tenneco Automotive. Rather than segment the world, Tenneco Automotive
plans to integrate its international operations through the standardization of
products and processes, improvements in information technology and the global
coordination of purchasing, costing and quoting procedures.
Strategic Acquisitions. Strategic acquisitions have been, and management
believes will continue to be, an important element of Tenneco Automotive's
growth. Through such acquisitions, Tenneco Automotive can expand its product
portfolio, gain access to new customers and achieve leadership positions
within new geographic markets, while drawing on the strengths of existing
distribution channels with OEM relationships. Tenneco Automotive has developed
comprehensive integration plans to quickly integrate new companies into its
infrastructure. Tenneco Automotive intends to continue to pursue acquisition
opportunities in which management can substantially improve the profitability
of strategically related businesses by, among other things, rationalizing
similar product lines and eliminating certain lower margin product lines;
reconfiguring and upgrading manufacturing facilities; moving production to the
lowest cost facilities; and reducing selling, distribution, purchasing and
administrative costs.
Operating Cost Leadership. Tenneco Automotive will continue to seek cost
reductions as it standardizes it product and processes throughout its
international operations, improves its information technology, increases
employee training, invests in more efficient machinery and enhances the global
coordination of purchasing, costing and quoting procedures.
Other
As of July 1, 1996, Tenneco Automotive had approximately 21,000 employees.
Tenneco Automotive believes that its relations with its employees are good.
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<PAGE>
The principal raw material utilized by Tenneco Automotive is steel. Tenneco
Automotive believes that an adequate supply of steel can presently be obtained
from a number of different domestic and foreign suppliers.
Tenneco Automotive holds a number of domestic and foreign patents and
trademarks relating to its products and businesses. It manufactures and
distributes its products primarily under the names Walker(R) and Monroe(R),
which are well recognized in the marketplace. The patents, trademarks and
other intellectual property owned by Tenneco Automotive are important in the
manufacturing and distribution of its products.
The operations of Tenneco Automotive face competition from other
manufacturers of automotive equipment, including affiliates of certain of its
customers, in both the OE market and the aftermarket.
Tenneco Automotive is headquartered in Deerfield, Illinois.
Tenneco Packaging
Tenneco Packaging is among the world's leading and most diversified
packaging companies, manufacturing packaging products for consumer,
institutional and industrial markets. The paperboard business group
manufactures corrugated containers, folding cartons and containerboard, has a
joint venture in recycled paperboard, and offers high value-added products
such as enhanced graphics packaging and displays and kraft honeycomb products.
Its specialty products group produces disposable aluminum, foam and clear
plastic food containers, molded fiber and pressed paperboard products, as well
as polyethylene bags and industrial stretch wrap. Tenneco Packaging's consumer
products include such recognized brand names as Hefty(R), Baggies(R) and E-Z
Foil(R).
Overview of Packaging Industry
The global packaging market is estimated at nearly $360 billion with about
one quarter in North America, slightly less in Europe and the balance spread
throughout the rest of the world. Tenneco Packaging now ranks as the fourth
largest packaging manufacturer in North America by sales and the tenth largest
in the world. Packaging remains one of the most fragmented major industries,
with the top five companies comprising only a 10% worldwide market share.
Within packaging material categories, Tenneco Packaging participates in the
three growing segments of paper, plastic and aluminum, with substantial or
leading market shares in virtually all of its product segments.
Business Strategy
Tenneco Packaging has embarked upon an aggressive growth plan to be the
leading specialty packaging company offering a broad line of packaging
products to provide customers with the best packaging solutions. In the past
two years, Tenneco Packaging has doubled its size to nearly $4 billion in
annualized revenues through internal growth in its base businesses,
productivity gains and 12 acquisitions that have been completed since early
1995.
As a result of these redeployment activities, Tenneco Packaging has
significantly reduced its sensitivity to changes in economic cyclicality:
. Tenneco Packaging's business is now over half specialty (including the
full year impact of the Mobil Plastic acquisition and the recently
announced Amoco Foam Products purchase), which reduces exposure to
business cycles.
. On the paperboard side, four acquisitions in specialty graphics and the
purchase of Hexacomb, the world's largest supplier of kraft paper
honeycomb products used for protective packaging, have reduced
its sensitivity to raw material prices and offer greater opportunities to
add value. Currently, over 20% of Tenneco Packaging's paperboard business
is in higher margin, enhanced graphics including folding cartons, point-
of-purchase displays and point-of-sale packaging, as well as protective
packaging products.
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In the future, Tenneco Packaging will continue to pursue value-added, non-
cyclical growth opportunities, maintain market leadership positions in its
primary business groups and leverage its new product development expertise.
As with any manufacturing company whose product demand is sensitive to
general economic conditions, Tenneco Packaging's business results may be
adversely impacted by several uncertainties including raw material cost
fluctuations and pricing variability related to industry supply/demand
dynamics. In addition, potential packaging legislation or regulatory changes,
material substitution, new packaging technologies and changes in consumer
preferences or distribution channels could have an adverse impact on Newport
News. However, Tenneco Packaging has positioned itself to deal strategically
with these challenges through its:
. Multi-material focus, broad product line and concentration of growth in
packaging that offers customers greater functionality and value;
. Fiber flexibility, which enables Tenneco Packaging's paperboard business
to manage its mix of virgin and recycled fiber sources to take advantage
of changing market conditions;
. Raw material purchasing leverage in both fiber and plastic resin;
. Technology and new product development expertise, offering innovative
packaging design and materials applications; and
. Global expansion strategy of growing its international business through
value-added acquisitions, joint ventures, and multi-national customer
partnerships.
Tenneco Packaging believes that factors critical to its success include a
focused strategic direction, operating cost leadership, management expertise,
a committed and skilled workforce and a systems infrastructure to meet
stringent customer quality requirements and service needs. Tenneco Packaging
will spend approximately $110 million by the end of 1998 to provide state-of-
the-art customer linked manufacturing systems, shop floor scheduling and real-
time data for marketing and production management.
Overview of Tenneco Packaging
Tenneco Packaging is an industry leader in the manufacture and sale of
packaging products, offering a wide range of fiber-based materials and
packaging for consumer, institutional and industrial applications, as well as
aluminum and plastic-based specialty packaging for consumer, retail, food
service and food processing applications.
The following tables set forth information relating to the net sales of both
of Tenneco Packaging's primary business groups, in dollars and by percentages:
<TABLE>
<CAPTION>
NET SALES (MILLIONS)
----------------------------------
YEAR ENDED DECEMBER
SIX MONTHS 31,
ENDED --------------------
JUNE 30, 1996 1995 1994 1993
------------- ------ ------ ------
<S> <C> <C> <C> <C>
PAPERBOARD PRODUCTS GROUP
Corrugated shipping containers and
containerboard products.................. $751 $1,589 $1,214 $1,086
Folding cartons and recycled paperboard
mill products............................ 92 204 196 196
Paper Stock and other..................... 60 135 119 100
---- ------ ------ ------
903 1,928 1,529 1,382
---- ------ ------ ------
SPECIALTY PRODUCTS GROUP
Disposable plastic and aluminum packaging
products................................. 756 593 434 442
Molded fiber products..................... 100 191 186 183
</TABLE>
(table continued on next page)
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(continued from prior page)
- ----------------
(a) Restated 1995, 1994 and 1993 to re ect countries included in European
Union as of December 31, 1995: Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain and
Sweden.
Paperboard Products
The paperboard business group manufactures and sells corrugated
containers, folding cartons, containerboard, lumber and building products, and
has a joint venture in recycled paperboard. The group's product line includes
high value-added products such as enhanced graphics packaging and displays and
kraft honeycomb products. It produces over 2 million tons of containerboard that
is converted by its corrugated container plants and sold to both domestic and
export customers. Over 80% of the containerboard used by the corrugated
converting operations is either produced by Tenneco Packaging's own mills or
supplied through trade partnerships for other grades in exchange for product
produced at Tenneco Packaging's mills, which helps assure a secure supply of
product in a wide variety of grades to meet the requirements of its customers.
It also produces high quality, innovative folding carton products utilizing the
latest in printing and cutting technology for the sheet-fed o set, narrow-web
exo and rotogravure processes. Finally, Tenneco Packaging participates in the
wood products business and has access to over 1.0 million acres of timberland in
the United States through both owned and leased properties.
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<PAGE>
Sales and Marketing. Tenneco Packaging maintains a sales and marketing
organization of over 400 sales personnel. Tenneco Packaging also has four
graphics design centers with two more planned which help it meet its
customers' design and functional requirements.
New Product Development and Design. Tenneco Packaging's paperboard group is
establishing a nationwide network of new product development and creative
packaging design centers to develop and manufacture product packaging and
product display solutions to meet more sophisticated, complex customer needs.
This network includes four regional design centers, 22 primary and mid-range
graphics facilities and almost 100 sales personnel, new product development
engineers, and product graphics and design specialists. These centers offer
state-of-the-art computer and design equipment for 24-hour turnaround and
reduced product delivery times.
Manufacturing and Engineering. Tenneco Packaging has two kraft linerboard
mills and two medium mills, located in Tennessee, Georgia, Michigan and
Wisconsin, which together account for 7% of annual U.S. production, or 2.1
million tons. As of June 30, 1996, Tenneco Packaging had invested $75 million
at the Counce, Tennessee mill, which added 120,000 tons annually of capacity
and enabled the mill to meet a growing demand for lighter weight board. Each
of the mills has a strong focus on quality and is ISO 9002 certified. Two
paperstock recycling facilities provide some of the mills' recycled fiber
requirements.
Domestically, Tenneco Packaging's corrugated container network includes 64
geographically dispersed plants that manufacture approximately 7% of the total
annual U.S. corrugated shipments based on revenue, as well as seven kraft
paper honeycomb product plants, making it one of the top six integrated
producers. Tenneco Packaging also operates six folding carton plants located
primarily in the Midwest.
Tenneco Packaging has access to 1.0 million acres of timberland in the
United States through both owned and leased properties. To maximize the value
of the timber harvested, Tenneco Packaging operates four wood products
operations which produce hardwood dimensional lumber and utility poles.
Further, Tenneco Packaging is a party to a joint venture in a chip mill, as
well as a wood drying facility.
Tenneco Packaging's paperboard group operates a manufacturing and technical
support center located in Skokie, Illinois which provides engineering,
manufacturing and technical support to its corrugated operations. In addition,
it currently has a network of four design centers and a design organization
which includes more than 60 structural, graphic and package engineering
specialists for its corrugated and folding carton converting operations.
Strategic Acquisitions/Joint Ventures. As part of Tenneco Packaging's value-
added growth strategy, eight acquisitions were made during 1995 in the
Paperboard Products Group. Tenneco Packaging expanded its graphics and
printing capabilities to that of a full service supplier of point-of-purchase
displays and point-of-sale packaging by acquiring four facilities with
expertise in high impact graphics and design. The addition of Lux Packaging,
in Waco, Texas; the United Group in Los Angeles, California; Menasha
Corporation's South Brunswick, New Jersey plant; and DeLine Box in Windsor,
Colorado have broadened Tenneco Packaging's offering of products and services
to include permanent point-of-purchase displays, rotogravure preprint, litho-
lamination and advanced graphics design.
Tenneco Packaging added to its network of specialty sheet plants through the
acquisition of Mid-Michigan Container in Michigan; Sun King Container in El
Paso, Texas; and Domtar Packaging's Watertown, New York facility. It also
increased its protective packaging capabilities through the purchase of
Hexacomb Corporation, the world's largest supplier of honeycomb corrugated
products used for protective packaging, materials handling and specialized
structural applications.
In June 1996, Tenneco Packaging and Caraustar Industries entered a joint
venture pursuant to which Tenneco Packaging contributed its two recycled
paperboard mills (Rittman, Ohio and Tama, Iowa) and a recovered paper stock
and brokerage operation for cash and a 20% equity position in the business.
The mills will continue to supply recycled paperboard to Tenneco Packaging's
six folding carton plants.
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Specialty Products
Tenneco Packaging's Specialty Products Group produces disposable aluminum,
foam and clear plastic products for the food processing, food preparation and
food service industries. It also manufactures molded fiber and pressed
paperboard products, as well as polyethylene bags and industrial stretch film.
Consumer products are sold under such recognized brand names of Hefty(R),
Baggies(R), Hefty OneZip(TM) and E-Z Foil(R).
Tenneco Packaging's lightweight, durable plastic packaging for in-store
deli, produce, bakery and catering applications maintain quality and enhance
presentation. Plastic food storage and trash bags, foam and molded fiber
dinnerware, disposable aluminum baking pans and related products are sold
through a variety of retail outlets. Tenneco Packaging also manufactures
molded fiber for produce and egg packaging, food service items and
institutional tableware.
Sales and Marketing. Specialty packaging products are marketed to five
primary market segments: food service, supermarkets, institutional, packer
processor and industrial users. The sales organization is specialized by user
segment and its teams work in alliance with strategic customers to build
sales. Approximately 85% of specialty packaging products are sold to its
distributors, while the remainder are sold directly to retailers.
Consumer products are marketed primarily through three classes of retailers
or channels of trade: grocery (supermarkets and convenience stores), non-food
(mass merchandisers, drug stores, hardware stores, home centers), and
warehouse clubs with sales distributed 66%, 30%, and 4%, respectively, based
on 1994 net revenues. Consumer products' internal sales management personnel
are augmented by a national network of grocery brokers and manufacturing
representatives to provide headquarter and in-store sales coverage for the
grocery channel. Consumer products covers warehouse clubs and selected non-
food retailers on a direct basis. The overall sales breakdown is approximately
19% direct and 81% broker/representative.
Manufacturing and Engineering. In North America, Tenneco Packaging operates
30 specialty products facilities. With the acquisitions of the Mobil Plastics
division and Amoco Foam Products, Tenneco Packaging now has polystyrene
production in 18 locations in 13 states. It produces polyethylene products in
six locations including a Canadian facility. Aluminum roll stock is converted
at five locations, including three locations shared with polystyrene
production. Molded fiber packaging is produced in six locations. Finally,
pressed paperboard products are manufactured at one facility in Columbus,
Ohio. Research and development centers for packaging and process development
are located in Macedon, New York and Northbrook, Illinois.
Within the Specialty Products Group there are two major types of plastic
manufacturing plants, offering excellent process technology and high quality
equipment in polystyrene extrusion/thermoforming/automation, consumer waste
bags and stretch films. Tenneco Packaging's polyethylene plants produce
liners, food bags, grocery sacks and stretch film, as well as retail waste and
food bags for consumer applications. Most of the Specialty Products Group's
polyethylene processes are in-line. Polystyrene plants make foam products
including consumer tableware, foodservice disposables, meat trays and clear
containers. With multiple production lines, each plant is generally capable of
making several product types. Polystyrene pellets are marketed and extruded
and subsequently thermoformed and converted into finished products.
Strategic Acquisitions. Tenneco Packaging acquired Mobil Plastics in late
1995 which more than doubled the size of its Specialty Products Group and
added new technologies and product development capabilities. It provides
strong consumer branded products such as Hefty(R) trash bags, Baggies(R) food
bags, and Hefty OneZip(TM) food storage bags. In addition, it manufactures
clear and foam polystyrene food service containers; plates and meat trays;
and, polyethylene film products including can liners, produce and retail bags,
and medical and industrial disposable packaging.
In August 1996, Tenneco Packaging purchased Amoco Foam Products. Amoco Foam
Products, with 1995 sales of $288 million, manufactures foam polystyrene
tableware including cups, plates, carrying trays; hinged-lid food containers;
packaging trays, primarily for meat and poultry; and industrial products for
residential and commercial construction applications.
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International
Tenneco Packaging has a growing international presence with a revenue base
of nearly $200 million and an additional $100 million in export sales to
approximately 38 countries, manufacturing products that serve a wide range of
packaging needs. It expects to significantly enlarge its international
operations by growing its base businesses, strengthening its export
capabilities for both fiber-based and plastic products, and by growing
selectively in new markets, geographies or channels that represent high-
potential opportunities.
Manufacturing and Engineering. Tenneco Packaging currently operates or has
an ownership interest in 12 international manufacturing locations. Omni-Pac is
Europe's leading manufacturer of molded fiber packaging with facilities in
Elsfleth, Germany and Great Yarmouth, England. Tenneco Packaging's Alupak
operation in Belp, Switzerland is a major producer of smoothwall aluminum
portion packs. In plastic, Tenneco Packaging has the leading share of single-
use thermoformed plastic food containers in the United Kingdom, with four
manufacturing operations in England, Scotland and Wales.
Tenneco Packaging also operates a folding carton plant in Budapest, Hungary
and is building a wood products operation in Romania. It participates in
several international joint ventures, including folding carton plants in
Donngguan, China and Bucharest, Romania and a corrugated converting facility
in Zhejiang, China.
Acquisitions/Business Development. In 1995, Tenneco Packaging purchased
Penlea and Delyn, two plastic thermoforming operations in the United Kingdom.
In 1996, it entered the European wood products business with the startup of a
venture in Buchin, Romania. In addition to harvesting rights in excess of 1.8
million cubic meters of timber, Tenneco Packaging is constructing a wood
processing plant for value-added furniture components, to be supported by a
full sawmill operation.
Other
As of June 30, 1996, Tenneco Packaging had approximately 19,000 employees.
Tenneco Packaging believes that its relations with its employees are good.
Tenneco Packaging holds a number of domestic and foreign patents and
trademarks relating to its products and businesses. The patents, trademarks
and other intellectual property owned by Tenneco Packaging are important in
the manufacturing, marketing and distribution of its products.
The principal raw materials used by Tenneco Packaging in its manufacturing
operations are virgin pulp, recycled fiber, plastic resin and aluminum roll
stock. Tenneco Packaging obtains its virgin pulp from timberland owned or
controlled by it as well as from outside purchases. Recycled fiber is supplied
from both outside contractual sources as well as internally from its two
recycling centers and its own containerboard clippings and trim. Tenneco
Packaging obtains plastic resin and aluminum roll stock from various
suppliers.
As of June 30, 1996, Tenneco Packaging owned approximately 188,000 acres of
timberland in Alabama, Michigan, Mississippi and Tennessee and leased, managed
or had cutting rights on an additional 808,000 acres of timberland in Alabama,
Mississippi, Tennessee, Florida, Wisconsin and Georgia. In 1995, 1994, and
1993, approximately 30%, 28% and 28%, respectively, of the virgin fiber used
by Tenneco Packaging in its mill operations was obtained from Tenneco
Packaging-controlled timberlands.
The operations of Tenneco Packaging face competition from other
manufacturers of packaging products, including manufacturers of alternative
products, in each of its geographic and product markets.
Tenneco Packaging is headquartered in Evanston, Illinois.
Tenneco Business Services
TBS designs, implements and administers shared administrative service
programs for the various Tenneco businesses as well as, on an "as requested"
basis, for former Tenneco business entities.
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Primary service areas of TBS include (i) Financial Accounting Services,
including asset management, general accounting, purchasing and payables,
travel and entertainment, tax compliance and reporting and other applications;
(ii) Supplier Development and Administration, including vendor negotiations
and contract administration; (iii) Employee Benefits Administration for all
major salaried and hourly benefit plans; (iv) Technology Services, including
main frame computing services, telecommunication services and distributed
processing services; (v) Human Resources and Payroll Services, including
payroll processing, relocation services, government compliance services and
expatriate relocation and repatriation services; and (vi) Environmental Health
and Safety Services, including remediation consultation, operations risk
analysis and compliance audits.
TBS has to date only serviced other Tenneco businesses and, on an as
requested basis, former Tenneco businesses such as Case. However, TBS is in
the process of investigating opportunities to provide similar services to
outside businesses. It is anticipated that after the Distributions, TBS will
continue to provide services to Newport News pursuant to the terms of the
Services Agreements. See "THE DISTRIBUTIONS--Relationship Among Tenneco, New
Tenneco and Newport News After the Distributions--Terms of the Ancillary
Agreements--TBS Services Agreements"
In connection with its operations, TBS holds numerous software licenses,
owns and operates computer equipment and has agreements with numerous vendors
for supplies and services.
As of June 30, 1996, TBS had approximately 300 employees. TBS believes that
its relations with its employees are good.
Although to date TBS has provided its administrative programs exclusively to
current and former Tenneco businesses, once TBS attempts to begin providing
similar services to outside businesses it will face intense competition from
other providers of administrative services, many of whom are larger and have
more experience providing administrative services in a competitive
environment.
TBS is headquartered in The Woodlands, Texas.
Risks Relating to the Ownership of the New Tenneco Common Stock
Tenneco Stockholders should be aware that the Industrial Distribution and
ownership of New Tenneco Common Stock involve certain risk factors, including
those described under "RISK FACTORS," as well as elsewhere in this Joint Proxy
Statement-Prospectus. Such matters include, among others, the lack of a
current public market for New Tenneco Common Stock, the risk that the
Industrial Distribution may not qualify as a tax-free distribution under
Section 355 of the Code, certain antitakeover effects of certain provisions of
New Tenneco's Restated Certificate of Incorporation, its Amended and Restated
By-laws, New Tenneco's stockholder rights plan and Delaware statutory law, and
the risk that the Transaction is subject to review under federal and state
fraudulent conveyance laws. See "RISK FACTORS--Risks Relating to the
Transaction" and "RISK FACTORS--Risks Relating to New Tenneco" herein and
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business and Properties" and "Cautionary
Statement for Purposes of "Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995" in the New Tenneco Information Statement.
New Tenneco Information Statement
For additional information regarding the Industrial Business, see the New
Tenneco Information Statement attached hereto as Appendix C.
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THE SHIPBUILDING DISTRIBUTION
Newport News Overview
Newport News is the largest non-government-owned shipyard in the United
States, as measured by each of net sales, size of facilities and number of
employees. Its primary business is the design, construction, repair, overhaul
and refueling of nuclear-powered aircraft carriers and submarines for the
United States Navy. Newport News believes it currently is: (i) the only
shipyard capable of building the Navy's nuclear-powered aircraft carriers,
(ii) the only non-government-owned shipyard capable of refueling and
overhauling the Navy's nuclear-powered aircraft carriers, and (iii) one of
only two shipyards capable of building nuclear-powered submarines. Since its
inception in 1886, Newport News has developed a preeminent reputation through
the construction of 264 naval ships and 542 commercial vessels. For the year
ended December 31, 1995 and the six months ended June 30, 1996, Newport News
had net sales of $1,756 million and $915 million, respectively, and EBITDA (as
defined) of $227 million and $113 million, respectively. In addition, at June
30, 1996 Newport News had $4.1 billion of estimated backlog.
Aircraft carrier and submarine construction contracts with the U.S. Navy
have generated the majority of Newport News' net sales. Newport News has built
nine of the 12 active aircraft carriers in the U.S. fleet, including all eight
nuclear-powered aircraft carriers. For the last 35 years, Newport News has
been the sole designer and builder of the U.S. Navy's aircraft carriers.
Newport News currently holds contracts to build two nuclear-powered Nimitz-
class carriers, each representing approximately $2-3 billion in initial
contract revenue: the Harry S Truman, scheduled for delivery in 1998, and the
Ronald Reagan, scheduled for delivery in 2002. Based on current U.S. Navy
projections, Newport News anticipates the award in or before 2002 of a
contract for the construction of the last Nimitz-class aircraft carrier for
delivery in 2009. Under contract to the Navy, Newport News is currently
performing design concept studies for the next generation of aircraft
carriers. In addition, Newport News, as one of only two manufacturers of
nuclear-powered submarines, has constructed 53 nuclear-powered submarines
comprised of seven different classes. Newport News has recently been
designated by legislation to build two of the first four of the next
generation of the Navy's new nuclear attack submarines ("NSSNs") commencing in
late 1998.
Newport News built all the active Nimitz-class aircraft carriers. Newport
News also believes it currently is the only non-government-owned shipyard
currently capable of refueling nuclear-powered aircraft carriers. Puget Sound,
a government-owned shipyard, could refuel nuclear-powered carriers if it made
additional investments in its facilities, and Portsmouth Naval Shipyard, a
government-owned shipyard in Kittery, Maine, is presently involved in nuclear
refueling, overhauling and de-activating Los Angeles-class submarines. As a
result, Newport News has had the leading share of the refueling and overhaul
market for aircraft carriers. A Nimitz-class aircraft carrier must be refueled
at approximately the midpoint of its estimated 50-year life. The Navy often
commissions a major overhaul of each carrier to coincide with a refueling. It
normally takes two years to complete a refueling and overhauling. Currently
Newport News is overhauling the USS Dwight D. Eisenhower (an approximate $400
million contract), and it holds planning contracts to overhaul the Theodore
Roosevelt in 1997 and to refuel and overhaul the Nimitz beginning in 1998.
Newport News believes that, if awarded, the contracts for the Roosevelt and
the Nimitz will be for approximately $230 million and approximately $1
billion, respectively. In addition, the Navy has announced its schedule to
begin the refueling of the Eisenhower in 2001, the USS Carl Vinson in 2006 and
the Roosevelt in 2009 at an estimated cost of approximately $1 billion each.
Supported by its new Carrier Refueling Complex, Newport News believes it is
well-positioned to be awarded future refueling contracts.
Newport News' management is highly regarded in the defense and shipbuilding
industry and has been successful in creating a motivated and experienced
management team and enhancing its position as the premier U.S. shipyard. Led
by William P. Fricks, the Chief Executive Officer of Newport News, who has 30
years of experience, Newport News' senior executives average 10 years of
shipbuilding experience. Newport News is a separate operating entity with its
own corporate headquarters, management team and separate financial reporting
systems. Management therefore expects an orderly transition to an independent,
publicly-traded company.
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Business Strategy
To broaden and strengthen its competitive position, Newport News has
developed strategies with the following key elements: (i) maintain a
leadership position in its core business; (ii) further reduce its cost
structure; (iii) continue to reduce cycle time; and (iv) broaden and expand
products and markets.
Maintain a leadership position in its core business. Aircraft carriers and
submarines remain vital components of the Navy's strategy for protecting U.S.
global interests. The Navy has stated that it needs to maintain a minimum of
12 aircraft carriers to respond quickly to overseas crises and command a
credible presence around the world. As the aircraft carrier and submarine
fleets continue to age, Newport News believes there will be a steady long-term
demand for new construction and refueling and overhauling services, which it
intends to aggressively pursue.
Further reduce its cost structure. In 1991, Newport News embarked on a
program to reduce its cost structure and increase productivity in order to
remain a market leader in its core business as well as to facilitate entry
into related commercial markets. Management initiatives to reduce the overall
cost structure of Newport News have included workforce reductions of 38% (from
approximately 29,000 employees in 1991 to approximately 18,000 employees in
1996), overhead and other cost reductions, the successful negotiation of a
long-term labor agreement that stabilizes wages through April 1999, and the
closing of certain facilities. As a second step in its cost reduction program,
Newport News has begun outsourcing low value-added production activities and
has been investing in programs to upgrade and automate its operations. Since
1993, Newport News has spent $177 million on a variety of discretionary
capital programs designed to lower costs and improve efficiency. Recent and
ongoing expenditures include new computing technology ($85 million), an
automated steel factory ($71 million), the extension of a drydock to
accommodate multi-ship construction ($30 million), and the construction of the
Carrier Refueling Complex ($19 million).
Continue to reduce cycle time. Newport News plans to continue to reduce the
cycle times for product development and ship delivery by re-engineering key
production processes, including design, production planning, materials
management, steel fabrication and outfitting. Process innovation teams have
been assigned to each key production process to implement this strategy. In
connection with these initiatives, Newport News delivered the John C. Stennis
in November 1995, 7.5 months ahead of schedule and at a savings of over
1,000,000 man-hours compared to the previously delivered aircraft carrier.
Broaden and expand products and markets. Newport News has begun to seek to
leverage its existing expertise by expanding its commercial and other
shipbuilding projects. Newport News believes that this expansion effort should
create additional growth opportunities. In addition, by allowing for increased
economies of scale, Newport News believes its expansion initiatives should
help it reduce per ship costs and thereby make it more competitive in its core
U.S. Navy business, which currently accounts for over 90% of Newport News' net
sales. As part of this expansion effort, Newport News secured long-term, fixed
price contracts with two purchasers for a total of nine "Double Eagle" product
tankers. The initial ships under contract are being built at a loss, for which
Newport News has created a reserve. This new line of double-hulled product
tankers is designed to meet all of the stringent domestic and international
shipping specifications. Additionally, drawing on its nearly four decades of
safe fuel handling and reactor services for the U.S. Navy, Newport News won a
contract from the Department of Energy in 1995 to construct a facility to
store damaged fuel from Three Mile Island. Newport News is pursuing bids on
additional projects from the Department of Energy.
In order to further strengthen its position as a leading U.S. Navy
contractor, Newport News is attempting to broaden its naval portfolio to
include non-nuclear ships by bidding with others in an alliance on the design
and construction of the LPD-17 non-nuclear amphibious assault ship. Newport
News has also joined an alliance to develop design concepts for the Navy's new
"Arsenal Ship," a floating missile platform that utilizes a commercially
available double-hulled design, and pursue awards in the construction of such
ships. International
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military sales are also a key growth opportunity. Newport News is pursuing
orders for several versions of its international frigate, the FF-21, from
foreign navies and is currently focusing on naval modernization programs
presently underway in the United Arab Emirates, the Philippines, Norway and
Kuwait.
General
Currently, Newport News' business centers primarily on three areas involving
U.S. Naval and commercial ships: (i) construction; (ii) repair and overhaul;
and (iii) engineering and design. Newport News also engages in certain other
related businesses. In 1993, Newport News divested its maritime electronics
manufacturing business.
The following table sets forth information on the percentage of total net
sales contributed by Newport News' various classes of products and services:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------------------
JUNE 30, 1996 1995 1994 1993
--------------- ------------ ------------ ------------
NET % OF NET % OF NET % OF NET % OF
SALES TOTAL SALES TOTAL SALES TOTAL SALES TOTAL
------- ------ ------ ----- ------ ----- ------ -----
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Construction............ $536 59 $1,107 63 $1,144 65 $1,046 57
Repair and Overhaul..... 281 31 414 24 383 22 471 25
Engineering and Design.. 86 9 202 11 204 12 225 12
Other................... 12 1 33 2 22 1 119 6
------- ------ ------ --- ------ --- ------ ---
Net sales............. $915 100 $1,756 100 $1,753 100 $1,861 100
======= ====== ====== === ====== === ====== ===
</TABLE>
Construction
Newport News' primary activity is constructing ships, with approximately 63%
of net sales for the year ended December 31, 1995 and 59% of net sales for the
six months ended June 30, 1996 being generated from construction work. In
recent history, Newport News has relied on major carrier and submarine
contracts with the U.S. Navy, but Newport News' current objective is to
selectively add to its core business with contracts for other Naval segments
(e.g. LPD-17 and Arsenal Ship), and in the commercial and foreign military
markets.
The following chart shows the number of naval and commercial ships, and
other vessels built by Newport News, including ships currently under
construction.
<TABLE>
<CAPTION>
PRE 1900- 1920- 1940- 1960- 1980-
1900 1919 1939 1959 1979 1996 TOTAL
---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. NAVY SHIPS:
Aircraft Carriers................... -- -- 3 14 3 9 29
Submarines.......................... -- 8 -- -- 29 24 61
Amphibious Cargo; Attack Cargo;
Amphibious Flagship; Ammunition.... -- -- -- 53 5 -- 58
Battleships......................... -- 11 2 1 -- -- 14
Cruisers............................ -- 5 4 9 5 1 24
Destroyers.......................... -- 17 14 -- -- -- 31
Miscellaneous; including Coast Guard
Cutters, Landing Ships (Dock) and
Landing Ships (Tank)............... 3 10 1 31 2 -- 47
--- --- --- --- --- --- ---
Total U.S. Navy Ships............... 3 51 24 108 44 34 264
--- --- --- --- --- --- ---
</TABLE>
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<TABLE>
<CAPTION>
PRE 1900- 1920- 1940- 1960- 1980-
1900 1919 1939 1959 1979 1996 TOTAL
---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL SHIPS:
Cargo Vessels....................... 8 35 4 13 14 -- 74
Freighters.......................... -- -- -- 190 -- -- 190
Passenger Liners.................... 2 17 33 11 -- -- 63
Tankers............................. -- 22 11 42 11 4 90
Miscellaneous, including Dredges,
Ferry Boats, Steamers, (Bay and
River), Tugs and Yachts............ 8 20 22 2 -- -- 52
--- --- --- --- --- --- ---
Total Commercial Ships.............. 18 94 70 258 25 4 469
--- --- --- --- --- --- ---
OTHER VESSELS (Barges, Caissons, Car
Floats, Pilot Boats)................. -- -- -- -- -- -- 73
--- --- --- --- --- --- ---
TOTAL U.S. NAVY, COMMERCIAL AND OTHER
SHIPS................................ 21 145 94 366 69 38 806
=== === === === === === ===
</TABLE>
U.S. Navy. Newport News believes it currently is the only manufacturer in
the U.S. capable of constructing nuclear-powered aircraft carriers. Currently,
Newport News is constructing two Nimitz-class nuclear-powered aircraft
carriers, the Truman and the Reagan, which are scheduled for delivery in 1998
and 2002, respectively. A contract for an additional Nimitz-class aircraft
carrier is currently anticipated to be awarded in or before 2002. The first
ship in a new class of aircraft carrier, the CVX-78, is anticipated to be
awarded in 2006. Because of its past experience in manufacturing aircraft
carriers, and the lack of direct competitors, Newport News believes it is in a
strong competitive position to be awarded these contracts, although no
assurances can be made that it will be awarded these contracts, that these
projects will not be delayed, or that these contracts will be funded by
Congress.
Newport News is also one of two producers of nuclear-powered submarines.
Currently, the only other competitor is Electric Boat, a wholly-owned
subsidiary of General Dynamics. Newport News delivered its last Los Angeles-
class submarine on August 15, 1996. In 1987, Newport News was awarded the lead
design contract for the Seawolf submarine. However, due to the end of the Cold
War, there was a dramatic cutback in the Seawolf program to three submarines
which are being constructed by Electric Boat. More recently Newport News was
designated by legislation to build two of the next generation of attack
submarines known as the new nuclear attack submarines or NSSN program. Newport
News anticipates that it will construct the second and the fourth NSSN
submarines, and that Electric Boat will construct the first and third NSSN
submarines. After the fourth NSSN submarine, Newport News and Electric Boat
are expected to compete against each other for additional NSSN construction
contracts by competitive bidding. Newport News has constructed 53 nuclear-
powered submarines, including 39 attack submarines and 14 of the larger, fleet
ballistic missile submarines.
Newport News has formed an alliance with Ingalls Shipbuilding (the prime
contractor), Lockheed Martin and National Steel to submit a bid for the LPD-17
program. The LPD-17 is a program for the design and construction of non-
nuclear amphibious assault ships. According to current U.S. Navy estimates,
twelve ships are expected to be built in the LPD-17 program. The U.S. Navy has
stated that it currently expects that the LPD-17 vessels will be a mainstay of
the U.S. Navy over the next two decades, replacing a number of vessels nearing
the end of their useful lives. Newport News (with its alliance) submitted its
bid for the LPD-17 program on June 28, 1996. The contract for the LPD-17
program is expected to be awarded prior to the end of 1996. Competing firms
have also formed an alliance and submitted a bid.
An alliance consisting of Newport News, Ingalls Shipbuilding and Lockheed
Martin, was recently awarded a contract to develop design concepts for the
Arsenal Ship. Newport News' alliance was one of five alliances to receive such
an award. Current U.S. Navy plans call for a downselect to two alliances
following evaluation of submitted concepts. Ultimately, one alliance is
expected to prevail in the award of a construction contract.
Newport News is also completing conversion of two container ships to "roll-
on, roll-off" heavy armored vehicle Sealift transportation ships for the U.S.
Navy. The first ship was delivered in August 1996 and the second ship is
scheduled to be delivered in March 1997.
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Commercial. As part of its expansion strategy, Newport News has also been
pursuing orders for products and services from commercial customers.
In 1994 and 1995, Newport News entered into fixed price contracts (which
shift the risks of construction costs that exceed the contract price to
Newport News) to construct four Double Eagle product tankers for affiliates of
Eletson Corporation at a price of $36 million per ship. Construction of the
first tanker is substantially complete; construction has begun on the second
tanker; and a substantial portion of the materials needed for the construction
of the three uncompleted tankers has been ordered. Newport News presently
estimates that these ships will be constructed over the period ending in
February, 1998. In connection with the construction of these four tankers,
Newport News has incurred or estimates it will incur costs of approximately
$90 million in excess of the fixed contract prices. As of September 30, 1996,
the full amount of these excess costs has been reserved for by a charge
against income. Disagreements have arisen with the purchasers during the
course of construction as to whether the first and second ships were and are
being constructed in compliance with the specifications set forth in the
contracts, and the purchasers sent letters to Newport News purporting to
invoke the procedures set forth in the contracts for resolution of this
situation and requested that Newport News in the interim stop construction on
the ships. Newport News saw no reason to stop construction on the ships
because of its confidence that the ships will be in compliance with all
contract and classification society requirements. The purchasers have
withdrawn both their invocation of the dispute resolution procedures under the
contracts and their request that Newport News cease further construction of
the ships. Discussions between Newport News and the purchasers to date have
resulted in the resolution of a significant number of these disagreements,
although some remain unresolved and are the subject of further discussions. No
assurances can be given as to the effect the resolution of these remaining
disagreements will have on Newport News (although Newport News does not
believe such resolution will materially and adversely affect it) or the extent
to which the remaining work on these contracts can be completed without
further disagreements with the purchasers or the incurrence of additional
losses in excess of current estimates, although Newport News currently
believes it can complete the four ships within the current estimate of cost.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Business Outlook" and Note 13 to the Combined Financial
Statements of Newport News in the Newport News Information Statement.
In 1995, Newport News entered into fixed price contracts with limited
liability companies comprised principally of Hvide Partners, L.P. and an
affiliate of Van Ommeren International BV to construct an additional five
Double Eagle product tankers having a somewhat different design for the
domestic Jones Act market at a current average price of $43.4 million per
ship. Newport News is in the process of completing its design work on these
ships and expects to begin construction in the first half of 1997. These ships
are scheduled for delivery in 1998. Newport News presently estimates that it
will break even on these ships on an aggregate basis, but there can be no
assurance that the costs incurred in constructing these ships will not exceed
the contract prices for them.
These double-hull tankers are intended to serve the market currently served
by single-hull product carriers whose retirement is mandated by the Oil
Pollution Act of 1990 ("OPA 90"). The OPA 90 requires, among other things,
that existing single-hull ships must be retired from domestic transportation
of petroleum products between 1995 and 2015 unless retrofitted with double
hulls.
On October 8, 1996, the President signed into law, H.R. 1350--the Maritime
Security Act of 1996 (the "Maritime Act"), amending Title XI of the Merchant
Marine Act, 1936. The Maritime Act, among other things, (i) authorizes a $1
billion, 50-ship ten-year subsidy program for ship owners who agree to make
their ships available to the Department of Defense during national
emergencies, (ii) gives the U.S. Maritime Administration greater flexibility
in assigning risk factors to guaranteed loans and (iii) modifies several
aspects of the assessment and payment of loan guarantee fees. The primary
purpose of this Act is to assist ship operators and U.S. seamen, but the
legislation also has provisions which can indirectly assist U.S. shipbuilders.
The effect of these legislative changes is uncertain, but generally more
Title XI loan guarantee authority should be available (assuming Title XI funds
continue to be appropriated), on a facilitated basis, for potential purchasers
of U.S.-built ships. It is
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unclear whether any of the new ships would be purchased from Newport News, and
further whether Newport News would be in a position to build any such ships at
a significant profit. Accordingly, at this time Newport News is unable to
determine that it reasonably expects this development to have a material
impact on its business.
Although the commercial market is growing, a current overcapacity of
suppliers has favored buyers and hindered the profitability of shipyards.
Additionally, overseas firms control almost all of the international
commercial shipbuilding market. Many of Newport News' global competitors enjoy
government and/or corporate subsidies. Newport News is exploring various
possibilities to penetrate this market; however, there can be no assurance
that Newport News' efforts in this market will be successful. See "RISK
FACTORS--Risks Relating to Newport News--Competition and Regulation."
Foreign Military. Several U.S. allies overseas have or plan to embark on
navy modernization programs. Most of these programs anticipate the purchase of
one or more frigate size ships. Newport News has developed a flexible, multi-
mission design frigate called the FF-21 and has submitted bids for the
construction of these ships to the United Arab Emirates and Kuwait, and is in
the process of developing bids for Norway and the Philippines. A number
of international companies compete for these sales, and this market would
represent a new market for Newport News. To better position itself for the
United Arab Emirates market, Newport News subscribed to purchase a 40%
interest in the Abu Dhabi Ship Building Company ("ADSB") in 1995. ADSB is
currently renovating an existing shipyard and designing a new shipyard which
it plans to construct to replace the existing one. Each is to service
shipbuilding and repair demands of the United Arab Emirates military and
regional maritime fleets. Newport News believes that its equity investment in
ADSB may also serve as a means for Newport News to satisfy offset obligations
to the United Arab Emirates, if any, arising from contracts for sales of FF-
21s or other ships. Typically, offset obligations, when applicable, require an
investment, capital expenditure, training commitment or other benefit for the
country making the purchase. Newport News is obligated to make an additional
payment of $9.6 million with respect to its 40% equity interest in ADSB on
December 17, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Other
Investing Cash Flows" in the Newport News Information Statement. If there is a
change in control of Newport News, the Abu Dhabi Government has the right to
require Newport News to sell all of its shares to the Abu Dhabi Government or
such other person(s) as the Abu Dhabi Government may nominate at a price
determined as set forth in the Founder's Agreement relating to Newport News'
investment in ADSB (the "Founder's Agreement"). The right of the Abu Dhabi
Government to exercise its purchase option in relation to a particular event
is deemed to be waived if not exercised within 90 days of the date the Abu
Dhabi Government becomes aware of such event. The Shipbuilding Distribution
will cause a change in control of Newport News under the Founder's Agreement.
The Founder's Agreement reflects the oral agreement of these matters between
the parties thereto but has not yet been executed.
Repair and Overhauls
U.S. Navy Nuclear Refueling, Overhaul and Conversion. Newport News provides
ongoing maintenance for the U.S. Navy's vessels through overhauling, refueling
and repair work. Newport News possesses unique expertise in servicing nuclear
naval systems, and believes it currently is the only non-government-owned
shipyard capable of refueling nuclear-powered aircraft carriers. Puget Sound,
a government-owned shipyard, could refuel nuclear-powered carriers if it made
additional investments in its facilities, and Portsmouth Naval Shipyard, a
government-owned shipyard in Kittery, Maine, is presently involved in nuclear
refueling, overhauling and de-activating Los Angeles-class submarines. As a
result, Newport News has had a leading share of the market in aircraft carrier
refueling and overhauls.
Since aircraft carrier work is generally assigned by the U.S. Navy based on
the type of work, location and cost, Newport News intends to maintain its
leadership in this area of business by, among other things, positioning
Newport News as a low-cost refueling center, and providing unique competencies
such as nuclear fuel handling. Newport News completed the overhaul work for
the USS Enterprise in 1994, and is currently overhauling the Eisenhower.
Newport News also completes "Post Shake-Down Availabilities" on submarines.
This process involves making repairs and performing maintenance after sea
trials of the completed submarine.
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Naval Non-Nuclear Surface Ship Repair. Newport News was able to diversify
its overhaul work by winning its first contract to overhaul a guided missile
cruiser, the Thorn. In 1995, Newport News experienced a $31 million increase
from 1994 in repair and overhaul revenues as a result of the repair and
overhaul of the Thorn, together with increases in other miscellaneous U.S.
Navy repairs. Subsequently, it overhauled its first Aegis radar-equipped ship,
the USS Monterey. Newport News has a number of competitors bidding for a
substantial share of U.S. Navy non-nuclear repair and overhaul contracts, such
as Norfolk Shipbuilding and Dry Dock Corporation and Metro Machine.
Commercial Vessels. From February, 1992 through December, 1995, Newport News
completed over 100 ship repair or overhauls of commercial vessels. Newport
News believes that the world's commercial fleet, on average, is approximately
15 years old; repair of this fleet is undertaken on an ongoing basis.
Furthermore, Newport News expects seaborne trade to exhibit steady growth over
the next 10 years in all major segments--oil, dry cargo and general cargo.
While some customers are primarily concerned with price, other customers also
give substantial weight to other factors such as geographic location, dock
availability, manpower supply and the amount of time spent in dock. Newport
News believes it has successfully differentiated itself from its competitors
as a premium quality repair shipyard, with specialized facilities and an
extensive workforce. Newport News also believes that by engaging in the
commercial ship repair market, it should be able to transfer its experience to
new construction of commercial vessels, as well as to its core U.S. Navy
business.
Engineering and Design
Newport News provides engineering planning and design services to both U.S.
Government and commercial customers. Newport News maintains a stable level of
funded engineering support for the U.S. Navy. Support services provided by
Newport News include new aircraft carrier research and development, aircraft
carrier non-nuclear overhaul planning, the reactor plant planning yard,
aircraft carrier engineering support, and training and logistics. Newport News
is a leader in aircraft carrier design, accounting for the majority of ship
integration and related design development for the Naval Sea Systems Command
("NAVSEA"). The Navy's Puget Sound and Norfolk Naval Shipyards, however, are
typically assigned the design contracts for the non-nuclear portions of the
aircraft carriers. Newport News has been able to apply its engineering
capabilities in a variety of projects for the U.S. Navy, including being the
lead design yard for the Los Angeles and Seawolf-class submarines. See "RISK
FACTORS--Risks Relating to Newport News--Competition and Regulation."
Newport News also employs its engineering capabilities to successfully
secure and complete commercial and frigate construction contracts. In this
respect, Newport News is developing generic class designs and plans to
minimize new product costs, dramatically reduce cycle times for design and
production, and develop commercial ship engineering expertise through
selective international recruiting and strategic alliances.
Other
As part of its expansion strategy, Newport News also intends to actively
pursue opportunities in the management and operation of U.S. Department of
Energy nuclear sites. Newport News believes that, among other things, its
ability to effectively conduct radiological control operations and manage
large integrated sites, its world-class health, safety and environmental
practices, and its experienced personnel in the areas of Spent Nuclear Energy
("SNE") would provide for a strong foundation in pursuing such opportunities.
Newport News is also forming alliances with other companies with complementary
experiences to bid on some of these site management contracts.
Materials and Supplies
The principal materials used by Newport News in its shipbuilding, conversion
and repair business are standard steel shapes, steel plate and paint. Other
materials used in large quantities include aluminum, copper-nickel and steel
pipe, electrical cable and fittings. Newport News also purchases component
parts such as propulsion systems, boilers, generators and other equipment. All
of these materials and parts are currently
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available in adequate supply from domestic and foreign sources. Generally, for
all its long-term contracts, Newport News Company obtains price quotations for
its materials requirements from multiple suppliers to ensure competitive
pricing. In addition, through the cost escalation provisions contained in its
U.S. Government contracts, Newport News is generally protected from increases
in its materials costs to the extent that the increases in Newport News' costs
are in line with industry indices.
In connection with its government contracts, Newport News is required to
procure certain materials and component parts from supply sources approved by
the U.S. Government. Newport News has not generally been dependent upon any
one supply source; however, due largely to the consolidation of the defense
industry, there are currently several components for which there is only one
supplier. Newport News believes that these sole source suppliers as well as
its overall supplier base are adequate to meet its future needs.
Health, Safety and Environmental
In 1995, Newport News became the only shipyard to be awarded the Star Award
from the Occupational Safety and Health Administration's Voluntary Protection
Program. To earn this award, Newport News and its unions joined efforts and
supported the participation in the Voluntary Protection Program in which all
parties help each other to make Newport News' shipyard a safer place to work.
Newport News is the only shipyard and the largest single site (of any type) in
the United States to earn the Star Award; the next largest facility to earn
this award was approximately one-half the size of Newport News.
Newport News has also been recognized by its Local Sanitation District
(Hampton Roads Sanitation District) as a Gold Award Winner for its management
of wastes going to the local water treatment system.
Newport News is subject to stringent environmental laws and regulations in
all jurisdictions in which it operates. Management of Newport News believes
that Newport News is in general compliance with all applicable environmental
regulations, and historical environmental compliance costs incurred by Newport
News have not been significant. Like all of its competitor shipbuilders,
Newport News will be required to upgrade its air emission control facilities
pursuant to recently drafted regulations under the Clean Air Act Amendments of
1990. These regulations call for a phased-in compliance program so that
Newport News will incur its expenditures during the years from 1997 through
2000. Newport News' preliminary estimate of the cost of these upgrades is
between $10 million and $15 million. Although there can be no certainties,
management does not believe that future environmental compliance costs for
Newport News will have a material adverse effect on Newport News' financial
condition or results of operations. The Nuclear Regulatory Commission, the
Department of Energy and the Department of Defense regulate and control
various matters relating to nuclear materials handled by Newport News. Subject
to certain requirements and limitations, Newport News' government contracts
generally provide for indemnity by the U.S. Government for any loss arising
out of or resulting from certain nuclear risks.
Properties
Newport News' facilities are located in Newport News, Virginia on
approximately 550 acres owned by Newport News at the mouth of the James River,
which is part of Chesapeake Bay, the premier deep water harbor on the east
coast of the United States. Newport News' shipyard is one of the most
technically advanced in the world. Its facilities include seven graving docks,
a floating dry dock, two outfitting berths and five outfitting piers. Dry Dock
12 is the largest in the Western Hemisphere, and has recently been extended to
662 meters. Dry Dock 12 is serviced by a 900 metric ton capacity gantry crane
that spans the dry dock and work platen.
Newport News' shipyard also has a wide variety of other facilities including
an 11-acre all weather on-site steel fabrication shop, accessible by both rail
and transporter, a module outfitting facility which enables Newport News to
assemble a ship's basic structural modules indoors and on land, machine shops
totaling 300,000 square feet, and its own school which provides a four-year
accredited apprenticeship program that trains shipbuilders.
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Newport News believes that substantially all of its plants and equipment
are, in general, well maintained and in good operating condition. They are
considered adequate for present needs and, as supplemented by planned
construction, are expected to remain adequate for the near future. Newport
News' shipbuilding facilities were originally built on dredged fill material
beginning at the southern end of the site. Over the last 100 years, the
facilities expanded northward by sequential filling. A large portion of the
fill material consists of waste generated on-site by shipbuilding activities.
Investigations and Legal Proceedings
Retirement Plan. Tenneco and Newport News have received letters from the
Defense Contract Audit Agency (the "DCAA"), inquiring about certain aspects of
the Distributions, including the disposition of the Tenneco Inc. Retirement
Plan (the "TRP"), which covers salaried employees of Newport News and other
Tenneco divisions. The DCAA has been advised that (i) the TRP will retain the
liability for all benefits accrued by Newport News' employees through the
Distribution Date, (ii) Newport News' employees will not accrue additional
benefits under the TRP after the Distribution Date and (iii) no liabilities or
assets of the TRP will be transferred from the TRP to any plan maintained by
Newport News. A determination of the ratio of assets to liabilities of the TRP
attributable to Newport News will be based on facts, assumptions and legal
issues which are complicated and uncertain; however, it is likely that the
Government will assert a claim against Newport News with respect to the
amount, if any, by which the assets of the TRP attributable to Newport News'
employees are alleged to exceed the liabilities. New Tenneco, with the full
cooperation of Newport News, will defend against any claim by the Government,
and in the event there is a determination that an amount is due to the
Government, New Tenneco and Newport News will share its obligation for such
amount plus the amount of related defense expenses, in the ratio of 80% and
20%, respectively. Pending a final determination of any such claim, the
Government may, absent an agreement with Newport News to defer the payment of
the amounts claimed, withhold all or a portion of all future progress payments
due Newport News under its government contracts until it has recovered its
alleged share of the claimed amount plus interest. In the event of a claim by
the Government, Newport News will diligently seek a deferral agreement with
the Government; however, there can be no assurance that Newport News will be
able to arrange such an agreement and thus avoid an offset against future
progress payments pending a final determination. At this preliminary stage, it
is impossible to predict with certainty any eventual outcome regarding this
matter; however, Newport News does not believe that this matter will have a
material adverse effect on its financial condition or results of operations.
CVN-76 Cost and Pricing Data Submission. In March 1995, the DCAA informed
Newport News that it would conduct a post-award audit of the contract to build
the aircraft carrier Reagan (CVN-76), pursuant to federal regulations relating
to defective cost and pricing data. The audit concerns Newport News'
submission to the U.S. Navy of data relating to labor and overhead costs in
connection with the proposals and negotiations relating to the CVN-76
contract. The audit is ongoing and the DCAA has not issued its audit report.
In informal discussions with DCAA auditors, however, the DCAA auditors
indicated that the $2.5 billion CVN-76 contract price should be reduced by
approximately $122 million based on an alleged submission of defective cost
and pricing data.
In addition, in May 1996, Newport News received a subpoena from the
Inspector General of the Department of Defense requesting documents in
connection with a joint inquiry being conducted by the Department of Defense,
the Department of Justice, the U.S. Attorney's Office for the Eastern District
of Virginia, and the Naval Criminal Investigative Service. Like the DCAA
audit, the investigation appears to focus on whether data relating to labor
and overhead costs that Newport News supplied in connection with the proposals
and negotiations relating to the CVN-76 contract were current, accurate, and
complete. In 1995, Inspector General subpoenas were also served on at least
two of Newport News' consultants. Newport News believes that these subpoenas
are part of this same inquiry.
The Government has not asserted any formal claims against Newport News
relating to these CVN-76 contract matters. Based on Newport News' present
understanding of the focus of the inquiries, it is Newport News' opinion that
it has substantial defenses to claims that the Government might potentially
assert that
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Newport News submitted cost or pricing data relating to its labor and overhead
costs that were not current, accurate, and complete in its proposals or during
the negotiations for the CVN-76 contract. It is Newport News' intention to
vigorously assert these defenses in the event that the Government should
assert such claims. Based on Newport News' present understanding of the claims
the Government might assert concerning the CVN-76 contract, Newport News is of
the opinion that the ultimate resolution of such claims will not have a
material adverse effect on the financial condition or results of operations of
Newport News.
However, the early stage of the investigation and audit relating to the CVN-
76 contract, and the uncertainties and vagaries attendant to such
investigations and audits and any litigation which may ultimately arise with
respect to these potential claims make it impossible to predict with certainty
any eventual outcome. Construction of the Reagan (CVN-76) is scheduled for
completion in 2002 and the contract represents a substantial portion of
Newport News' current backlog of business. Depending on the outcome of the
audit and investigation, Newport News could be subject, under various civil
and criminal statutes, to a reduction to the CVN-76 contract price and to
fines and other penalties, including the suspension or debarment from
government contracting work. Any of these in substantial amounts could have a
material adverse effect on Newport News' financial condition and results of
operations.
Pending the ultimate resolution of the investigation and audit relating to
the CVN-76 contract and to reduce the consequences of an adverse outcome,
Newport News has taken steps to adjust its future progress billings on the
CVN-76 contract. Although these steps will reduce Newport News' cash flow
pending a final resolution, management believes these steps will not have a
material adverse effect on Newport News' financial condition or results of
operations. See "RISK FACTORS--Risks Relating to Newport News--Profit
Recognition; Government Contracting."
Other. As a general practice within the defense industry, the DCAA
continually reviews the cost accounting practices of government contractors.
In the course of those reviews, cost accounting issues are identified,
discussed and settled, or resolved through legal proceedings. In addition,
various government agencies may at any time be conducting various other
investigations or making specific inquiries. Newport News is currently engaged
in discussions on several cost accounting and other matters in addition to
those described above. Newport News is also a party to numerous other legal
proceedings relating to its business and operations. Newport News believes
that the outcome of these cost accounting or other matters and proceedings
will not have a material adverse effect on Newport News' financial condition
or results of operations.
Additionally, the Kirby Corporation ("Kirby"), an owner and operator of
several tankers with which Newport News' Hvide Van Ommeren tankers (the "Van
Ommeren Tankers") will compete, has instituted three legal proceedings
effectively seeking to have construction of the Van Ommeren Tankers stopped
(the "Kirby Proceedings"). Newport News is not a party to the Kirby
Proceedings. The first Kirby Proceeding, brought in the United States District
Court for the District of Columbia, was voluntarily dismissed. Kirby
Corporation v. The Honorable Frederico Pena (No. CA 96-0019). The other two
Kirby Proceedings have been consolidated and are currently pending in the
United States Court of Appeals for the Fifth Circuit. Kirby Corporation v. The
Honorable Frederico F. Pena, et al. (No. 96-20582); Kirby Corporation v. The
United States of America, et al. (No. 96-60154). Kirby alleges that the U.S.
Maritime Administration acted unlawfully in guaranteeing, pursuant to Title XI
of the Merchant Marine Act, 1936, as amended ("Title XI"), the $215 million of
ship financing bonds issued to finance the construction of the Van Ommeren
Tankers. Kirby asserts that the U.S. Maritime Administration erroneously
determined that the project is economically sound and that the entities that
will own the vessels are U.S. citizens qualified to operate the vessels in the
coastwide trade. Certain of the entities that will own the vessels have
intervened in the Kirby Proceedings to support the U.S. Department of Justice
in having the first Kirby Proceeding dismissed and in defending and seeking
the dismissal of the remaining Kirby
Proceedings. Newport News believes that the Kirby Proceedings are without
merit. Based on discussions with counsel, Newport News believes that, even in
the event that Kirby ultimately prevails in the Kirby Proceedings, the matter
is not likely to have a material adverse effect on Newport News because the
Kirby Proceedings are expected to extend beyond the delivery dates for some or
all of the Van Ommeren Tankers and the project would be completed or near
completion.
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Risks Relating to Ownership of the Newport News Common Stock
Stockholders of Tenneco should be aware that the Shipbuilding Distribution
and ownership of Newport News Common Stock involve certain risk factors
including those described under "RISK FACTORS," and elsewhere in this Joint
Proxy Statement-Prospectus. Such matters include, among others, Newport News'
reliance on the U.S. Navy for over 90% of its net sales; the uncertainty of
securing future work; Newport News' competitive environment; Newport News'
substantial leverage after the Shipbuilding Distribution; certain antitakeover
effects of certain provisions of Newport News' Restated Certificate of
Incorporation, its Amended and Restated By-laws, its stockholder rights plan
and the Delaware statutory law (see "RISK FACTORS--Risks Relating to Newport
News"); the lack of a current public market for the Newport News Common Stock;
the risk that the Shipbuilding Distribution may not qualify as a tax-free
distribution under Section 355 of the Code; the fact that the Transaction is
subject to review under federal and state fraudulent conveyance laws; and
other matters (see "RISK FACTORS--Risks Relating to the Transaction"). See
also "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Business Outlook," "Business," and
"Cautionary Statement for Purposes of "Safe Harbor' Provisions of the Private
Securities Limitation Reform Act of 1995" in the Newport News Information
Statement.
Newport News Information Statement
For additional information regarding the Shipbuilding Business, see the
Newport News Information Statement attached hereto as Appendix D.
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THE NPS ISSUANCE
Prior to the Merger, Tenneco will issue in a public offering new shares of
Tenneco Junior Preferred Stock in one or more series pursuant to the NPS
Issuance in an amount calculated to have, to the extent possible, an aggregate
value as of the Merger Effective Time that is equal to approximately 25% (but
in any event more than 20%) of the total value of all shares of Tenneco
capital stock then outstanding. Holders of the Tenneco Junior Preferred Stock
issued pursuant to the NPS Issuance will possess the right to elect, voting as
a class, a number of directors of Tenneco representing one-sixth of the
members of the Board of Directors of Tenneco, and the number of directors
comprising the entire Tenneco Board of Directors will be set at six or an
integral multiple of six. The NPS Issuance Proceeds are estimated to be $275
million. Tenneco expects to use the net NPS Issuance Proceeds (estimated to be
$265 million) to repay a portion of the outstanding Tenneco Energy
Consolidated Debt pursuant to the Debt Realignment.
Under the existing terms of the Tenneco Charter, the approval of a majority
of the outstanding Tenneco Junior Preferred Stock will be required to effect
the Distributions and the approval of two-thirds of the outstanding Tenneco
Junior Preferred Stock will be required to effect the Charter Amendment if the
Tenneco Junior Preferred Stock is issued prior to the effectiveness of the
Charter Amendment (which is expected to occur on the day following the Tenneco
Special Meeting if the Transaction is approved thereat). Accordingly, if the
NPS Issuance occurs prior to the effectiveness of the Charter Amendment, as
part of the NPS Issuance, the Charter Amendment and Distributions will be
submitted for approval by the initial record holders of the Tenneco Junior
Preferred Stock issued pursuant to the NPS Issuance (which will be the
underwriters for the public offering) by written consent in lieu of a meeting.
Notwithstanding such approval, persons who become record holders of the
Tenneco Junior Preferred Stock on or prior to the date of the Tenneco Special
Meeting will have the right to demand appraisal of their shares of Tenneco
Junior Preferred Stock at or prior to the Tenneco Special Meeting. See "THE
MERGER--Appraisal Rights."
The shares of Tenneco Junior Preferred Stock issued pursuant to the NPS
Issuance will not be converted or otherwise exchanged in the Merger and will
remain outstanding immediately following consummation thereof (held by the
persons who were the holders of such shares prior to the Merger), and the
holders thereof will receive no consideration in respect thereof in connection
with the Merger. See "THE CHARTER AMENDMENT."
Although the NPS Issuance is one of the transactions contemplated by the
Merger Agreement, Tenneco Stockholders should be aware that the NPS Issuance
is expected to be consummated prior to the Tenneco Special Meeting and thus
regardless of the outcome of the vote on the Transaction at the Tenneco
Special Meeting.
For a description of the anticipated terms of the Tenneco Junior Preferred
Stock, see "DESCRIPTION OF THE TENNECO JUNIOR PREFERRED STOCK."
DEBT AND CASH REALIGNMENT
In general, from and after the Distributions each of Tenneco, New Tenneco
and Newport News will be responsible for the debts, liabilities and
obligations related to the business or businesses that it owns and operates
following consummation of the Corporate Restructuring Transactions. See "THE
DISTRIBUTIONS" and "CORPORATE RESTRUCTURING TRANSACTIONS." Tenneco's
historical practice, however, has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Accordingly, the Merger Agreement, Distribution
Agreement and Ancillary Agreements provide for (i) the pre-Distribution
restructuring of the Tenneco Energy Consolidated Debt pursuant to the Debt
Realignment, (ii) the allocation among each of Tenneco, New Tenneco and
Newport News of the total amount of cash and cash equivalents on hand as of
the Merger Effective Time pursuant to the Cash Realignment, and (iii) the
allocation of responsibility for certain capital expenditures related to the
Energy Business.
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DEBT REALIGNMENT
The Merger Agreement requires Tenneco to, or to cause its relevant
subsidiaries to, obtain the requisite consents of the various lenders to
permit consummation of the Transaction and tender for, exchange, redeem,
prepay, defease or let mature the Tenneco Energy Consolidated Debt prior to
the Distributions.
The Debt Realignment is intended to reduce the total amount of the Tenneco
Energy Consolidated Debt to an amount that, when added to the total amount of
certain other obligations of the Energy Business outstanding, as of the Merger
Effective Time (i.e., the Actual Energy Debt Amount), equals the Base Debt
Amount. As of June 30, 1996, the total book value of Tenneco Energy
Consolidated Debt was $4,443 million, including $634 million of short-term
debt (excluding the current portion of long-term debt), $75 million of non-
public debt and $3,734 million book value ($3,955 million principal amount) of
publicly held debt (the "Public Debt"). The short-term debt consists primarily
of commercial paper and bank borrowings under Tenneco's current credit
facilities. The Public Debt includes an aggregate of $2,619 million, $436
million and $679 million book value ($2,625 million, $650 million and $680
million principal amount) of Public Debt issued in various series under
several different trust indentures by Tenneco, TGP and Tenneco Credit
Corporation ("TCC"), respectively.
The short-term debt and the $75 million of non-public debt will be retired
with cash. In addition, Tenneco and its subsidiaries will defease or let
mature approximately $428 million of Public Debt, New Tenneco will offer to
exchange debt obligations of New Tenneco (the "New Tenneco Public Debt") for
$1.95 billion of aggregate principal amount of Public Debt (the "Debt Exchange
Offers") and Tenneco will offer to purchase for cash approximately $1.58
billion of aggregate principal amount of Public Debt pursuant to a series of
tender offers (the "Debt Tender Offers"). The defeasances, Debt Tender Offers
and related extinguishments described above, as well as the retirement of
existing short-term and non-public debt, will be financed by internally
generated cash, borrowings by Tenneco under a new credit facility to be
entered into by Tenneco in connection with the Transaction (the "Tenneco
Credit Facility"), the net NPS Issuance Proceeds and a cash distribution of
$600 million to be paid by Newport News to Tenneco or one or more of its
subsidiaries using borrowings under one or more credit facilities and/or
financings to be entered into by Newport News in connection with the
Transaction (the "Newport News Financings"). The balance of the funding will
be financed by a cash distribution to be paid by New Tenneco to Tenneco
principally using borrowings under a new credit facility to be entered into by
New Tenneco in connection with the Transaction (the "New Tenneco Credit
Facility"). Upon consummation of the Debt Exchange Offers, Tenneco will
purchase for cash (and subsequently extinguish) the Public Debt held by New
Tenneco (which cash will then be distributed back to Tenneco). Upon
consummation of the Debt Tender Offers, the Public Debt acquired thereby will
be extinguished.
Accordingly, after giving effect to the Debt Realignment, Tenneco and its
appropriate subsidiaries, as applicable, will remain responsible for all of
the Tenneco Energy Consolidated Debt which remains outstanding and any
borrowings under the Tenneco Credit Facility, Newport News and its appropriate
subsidiaries, as applicable, will be responsible for all borrowings under the
Newport News Financings and New Tenneco will be responsible for the New
Tenneco Public Debt and all borrowings under the New Tenneco Credit Facility.
The Debt and Cash Allocation Agreement to be entered into among Tenneco, New
Tenneco and Newport News in connection with the Distributions contemplates
that, as of the Merger Effective Time, the Actual Energy Debt Amount be
limited to the Base Debt Amount. The Base Debt Amount will equal $2.65 billion
less the NPS Issuance Proceeds, (i) plus the sum of: (a) the amount of all
cash payments made by Tenneco and its subsidiaries during the period from June
19, 1996 to the Merger Effective Time (the "Merger Interim Period") in respect
of gas purchase contracts as a result or in respect of any settlement,
judgment or satisfaction of a bond in excess of the market price for gas
received under such contracts by Tenneco and its subsidiaries reduced by the
amount of any cash payments received by Tenneco and its subsidiaries from
customers, insurers or other third parties in respect of any such settlement,
judgment or satisfaction of a bond (other than ones refunded prior to the
Merger Effective Time) or with respect to any GSR costs recovered (and not
refunded) on or prior to the Merger Effective Time, (b) the amount of any
purchase price paid by Tenneco or its subsidiaries during the Merger Interim
Period to acquire an additional interest in certain existing pipeline
operations, (c) the amount of all cash
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payments made by Tenneco and any of its direct and indirect subsidiaries
remaining after giving effect to the Distributions (the "Energy Subsidiaries")
during the Merger Interim Period in settlement of any significant claim,
action, suit or proceeding to the extent such matter would be an Energy
Liability (as defined) and with the consent of El Paso, which shall not be
arbitrarily withheld, reduced by the amount of any payments by or recoveries
from third parties received by Tenneco or its subsidiaries during the Merger
Interim Period relating to any such settlement, and (d) the amount of certain
other capital expenditures and settlements of certain claims by the Energy
Business during the Merger Interim Period, and (ii) less (a) the amount,
calculated as of the Merger Effective Time, of any rate refunds, including
interest, which would be payable to customers pursuant to the rate settlement
at FERC Docket RP95-112 and which have not been paid as of the Merger
Effective Time, whether such amounts are to be paid to customers or credited
against GSR costs pursuant to a settlement with customers and (b) the proceeds
of the monetization of certain assets of the Energy Business during the Merger
Interim Period. The Actual Energy Debt Amount will include the following
amounts, as of the Merger Effective Time: (i) outstanding amounts under the
Tenneco Revolving Debt (plus accrued and accreted interest and fees), (ii) the
value of any remaining Public Debt, (iii) the outstanding amount of other
Tenneco Energy Consolidated Debt (plus accrued and accreted interest and
fees), (iv) the unpaid amount of Transaction expenses incurred by Tenneco and
its subsidiaries, (v) certain sales and use, gross receipt or other transfer
taxes applicable to the Transaction, (vi) certain income taxes resulting from
the Transaction, (vii) the outstanding amount of any off balance sheet
indebtedness incurred after the date of the Merger Agreement to finance the
acquisition by Tenneco of an additional interest in the pipeline operations
referred to above, (viii) unpaid dividends declared on Tenneco Stock which
have a record date before the Merger Effective Time, and (ix) dividends
accrued on the Tenneco Junior Preferred Stock which are unpaid as of the
Merger Effective Time.
Pursuant to the Debt Cash Adjustment, if the post-Transaction audit
conducted by the parties determines that the Actual Energy Debt Amount as of
the Merger Effective Time exceeds the Base Debt Amount, New Tenneco will be
required to pay the excess to Tenneco in cash. Likewise, Tenneco will be
required to pay to New Tenneco in cash the amount, if any, by which such
Actual Energy Debt Amount is less than the Base Debt Amount.
The Debt Realignment is expected to create tax benefits to Tenneco of
approximately $120 million. Pursuant to the tax sharing agreement to be
entered into by Tenneco, New Tenneco, Newport News and El Paso in connection
with the Distributions, any such tax benefits will be allocated to New
Tenneco. For a description of this tax sharing agreement, see "THE
DISTRIBUTIONS--Relationship Among Tenneco, New Tenneco and Newport News After
the Distributions."
Also in connection with the Debt Realignment, Tenneco has agreed that, (i)
the indebtedness for borrowed money of the Energy Subsidiaries as of the
Merger Effective Time (other than amounts outstanding under the Tenneco Credit
Facility) will contain only specified financial and operational covenants, and
(ii) with respect to the Public Debt for which Tenneco and the Energy
Subsidiaries will remain liable after the Merger, there shall be no extension
of maturity or average life, increase in interest rates or adverse change in
defeasance or redemption provisions.
As part of the Debt Tender Offers and the Debt Exchange Offers, Tenneco or
New Tenneco (on behalf of Tenneco), as the case may be, will solicit the
consent of the holders of certain of the Public Debt to make various
amendments to the indentures of Tenneco, TGP and TCC governing such Public
Debt, including amendments to certain of the indentures to permit various
aspects of the Transaction. The approval of a majority in aggregate principal
amount of all series of Public Debt of Tenneco taken together as a single
class is necessary to amend the indenture under which Public Debt was issued
by Tenneco. The approval of 66 2/3% in aggregate principal amount of the
series of Public Debt of TGP that is subject to a Debt Tender Offer is
necessary to amend the indenture under which such Public Debt was issued. The
approval of 66 2/3% in aggregate principal amount of all series of the senior
TCC Public Debt that are subject to the Debt Tender Offers, taken together,
and all series of the subordinated TCC Public Debt that are subject to the
Debt Tender Offers, taken together, are necessary to amend the indentures
under which such Public Debt was issued.
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The obligation of Tenneco to consummate the Debt Tender Offers and the
obligation of New Tenneco to consummate the Debt Exchange Offers, are
conditioned upon sufficient Public Debt being tendered and/or exchanged such
that the necessary amendments to the relevant indentures have been approved
and such tenders have not been withdrawn (which condition may be waived). The
Debt Tender Offers and the Debt Exchange Offers are expected to be consummated
immediately prior to the Distributions. Completion of the Debt Realignment is
a condition to the obligation of Tenneco and El Paso to consummate the Merger
and failure to consummate the Debt Realignment could result in Tenneco's
abandonment of the Transaction or El Paso's abandonment of the Merger.
Certain components of the Debt Realignment have already been consummated, or
are expected to be consummated prior to the Tenneco Special Meeting. Tenneco
does not intend to unwind any such transactions if the Transaction is not
approved at the Tenneco Special Meeting. See "THE TENNECO SPECIAL MEETING--
Purpose of the Tenneco Special Meeting."
The offering of the New Tenneco Public Debt in the Debt Exchange Offers will
be made by means of a separate prospectus that constitutes a part of New
Tenneco's Registration Statement on Form S-4 (File No. 333-14003), which has
been filed with the SEC. The Debt Tender Offers will be made only by means of
an offer to purchase made by Tenneco.
CAPITAL EXPENDITURE ADJUSTMENT
Also as part of the Debt Realignment, Tenneco has agreed to make certain
minimum capital expenditures with respect to the Energy Business pending
consummation of the Transaction. If the actual amount of such capital
expenditures exceeds the required amount, after consummation of the
Transaction Tenneco will be required to pay the excess to New Tenneco in cash.
Likewise, New Tenneco will be required to pay to Tenneco in cash the amount,
if any, by which such actual capital expenditures are less than the required
amount. The required amount of Energy Business capital expenditures is equal
to $333,200,000 for 1996, plus $27,750,000 per month for each month (or pro
rata portion) from January 1, 1997 to the Merger Effective Time.
CASH REALIGNMENT
Pursuant to the Cash Realignment, as of the Merger Effective Time Tenneco
will be allocated cash and cash equivalents equal to $25 million plus a
percentage of the proceeds from the sale of certain Energy Business
receivables, Newport News will be allocated $5.0 million of cash and cash
equivalents and New Tenneco will be allocated all remaining cash and cash
equivalents on hand. Following the post-Transaction audit described above, New
Tenneco will be required to pay to Tenneco or Newport News, as the case may
be, the amount of any shortfall as of the Merger Effective Time from the
above-reflected allocation. Likewise, Tenneco and Newport News will each be
required to pay to New Tenneco any excess cash and cash equivalents as of the
Merger Effective Time determined pursuant to such audit.
CORPORATE RESTRUCTURING TRANSACTIONS
Pursuant to the Distribution Agreement, prior to consummation of the
Distributions, Tenneco will effect the Corporate Restructuring Transactions
through a series of intercompany transfers and distributions. Upon completion
of the Corporate Restructuring Transactions, Tenneco's existing businesses and
assets will be restructured, divided and separated so that, upon consummation
of the Distributions, the assets, liabilities and operations of (i) the
Industrial Business will be owned and operated, directly and indirectly, by
New Tenneco, and (ii) the Shipbuilding Business will be owned and operated,
directly and indirectly, by Newport News. As a result of the Corporate
Restructuring Transactions, upon consummation of the Distributions the
remaining assets, liabilities and operations of Tenneco and its remaining
subsidiaries will consist solely of those related to the Energy Business,
which includes liabilities and limited assets relating to discontinued Tenneco
operations not related to the Industrial Business or the Shipbuilding
Business.
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The assets which will be owned by New Tenneco upon consummation of the
Corporate Restructuring Transactions (the "Industrial Assets") are generally
those related to the past and current conduct of the Industrial Business, as
reflected on the New Tenneco June 30, 1996 pro forma balance sheet attached as
an exhibit to the Distribution Agreement and included elsewhere herein, to the
extent still held on the Distribution Date (plus any subsequently acquired
asset which is of a nature or type that would have resulted in such asset
being included thereon had it been acquired prior to the date thereof), plus
all rights expressly allocated to New Tenneco and its subsidiaries under the
Distribution Agreement or any Ancillary Agreement. As part of the Corporate
Restructuring Transactions, New Tenneco will acquire various corporate assets
of Tenneco such as the "Tenneco" trademark and associated rights, other
intellectual property and certain office space and related equipment. The
assets which will be owned by Newport News (the "Shipbuilding Assets") upon
consummation of the Corporate Restructuring Transactions are generally those
related to the past and current conduct of the Shipbuilding Business, as
reflected on the Newport News June 30, 1996 pro forma balance sheet attached
as an exhibit to the Distribution Agreement and included elsewhere herein, to
the extent still held on the Distribution Date (plus any subsequently acquired
asset which is of a nature or type that would have resulted in such asset
being included thereon had it been acquired prior to the date thereof), plus
all rights expressly allocated to Newport News and its subsidiaries under the
Distribution Agreement or any Ancillary Agreement. See the New Tenneco
Information Statement and the Newport News Information Statement attached as
Appendices C and D, respectively, for a description of the assets to be owned
by New Tenneco and Newport News following consummation of the Transaction. The
remaining assets of Tenneco (the "Energy Assets") will continue to be owned
and operated by Tenneco following the Corporate Restructuring Transactions and
Distributions. See "INFORMATION CONCERNING THE ENERGY BUSINESS TO BE MERGED."
The liabilities to be retained or assumed by New Tenneco pursuant to the
Distribution Agreement (the "Industrial Liabilities") generally include (i)
those liabilities related to the Industrial Assets and the current and past
conduct of the Industrial Business, including liabilities reflected on the New
Tenneco June 30, 1996 pro forma balance sheet which remain outstanding as of
the Distribution Date (plus outstanding liabilities that were subsequently
incurred or accrued, determined on a basis consistent with the determination
of liabilities thereon), (ii) certain liabilities for violations of securities
or other laws including any liabilities arising out of (a) certain documents
filed or distributed by or on behalf of New Tenneco in connection with the
Transaction or (b) any information relating to the Industrial Business
included herein, and (iii) those liabilities expressly allocated to New
Tenneco or its subsidiaries under the Distribution Agreement or any Ancillary
Agreement.
The liabilities to be retained or assumed by Newport News pursuant to the
Distribution Agreement (the "Shipbuilding Liabilities") generally include (i)
those liabilities related to the Shipbuilding Assets and the current and past
conduct of the Shipbuilding Business, including liabilities reflected on the
aforementioned Newport News June 30, 1996 pro forma balance sheet which remain
outstanding as of the Distribution Date (plus outstanding liabilities that
were subsequently incurred or accrued, determined on a basis consistent with
the determination of liabilities thereon), (ii) certain liabilities for
possible violations of securities or other laws, including any liabilities
arising out of (a) certain documents filed or delivered by or on behalf of
Newport News in connection with the Transaction or the Newport News Financing,
or (b) any information relating to the Shipbuilding Business included herein,
and (iii) those liabilities expressly allocated to Newport News or its
subsidiaries under the Distribution Agreement or any Ancillary Agreement.
The liabilities to be retained or assumed by Tenneco and/or the Energy
Subsidiaries pursuant to the Distribution Agreement (the "Energy Liabilities")
generally include (i) those liabilities related to the Energy Assets and the
current and past conduct of the Energy Business, including liabilities
reflected on the Energy Business June 30, 1996 pro forma balance sheet
attached as an exhibit to the Distribution Agreement and included elsewhere
herein which remain outstanding as of the Distribution Date (plus outstanding
liabilities that were subsequently incurred or accrued, determined on a basis
consistent with the determination of liabilities thereon), (ii) those
liabilities expressly allocated to Tenneco or its subsidiaries under the
Distribution Agreement or any Ancillary Agreement, and (iii) all other
liabilities of Tenneco or any of the Energy Subsidiaries which do not
constitute Industrial Liabilities or Shipbuilding Liabilities (including
certain liabilities for violations of securities or other laws).
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It is expected that a substantial number of the Corporate Restructuring
Transactions will be consummated prior to the date of the Tenneco Special
Meeting. Tenneco does not presently intend to unwind any such transactions if
the Transaction is not approved at the Tenneco Special Meeting. See "THE
TENNECO SPECIAL MEETING--Purpose of the Tenneco Special Meeting."
For a description of certain liabilities that will be expressly allocated
among Tenneco, New Tenneco, Newport News and their respective subsidiaries by
the Distribution Agreement and Ancillary Agreements, including liabilities for
the Tenneco Energy Consolidated Debt, taxes and certain employee benefits, see
"THE DISTRIBUTIONS--Certain Other Pre-Distribution Transactions," "THE
DISTRIBUTIONS--Relationship Among Tenneco, New Tenneco and Newport News After
the Distributions" and "DEBT AND CASH REALIGNMENT."
THE MERGER
CLOSING OF THE MERGER
On June 19, 1996 the respective Boards of Directors of El Paso, El Paso
Subsidiary and Tenneco each approved, and El Paso, El Paso Subsidiary and
Tenneco each executed and delivered, the original Merger Agreement. On
November 1, 1996, the parties approved and executed an amended and restated
Merger Agreement to make certain technical changes and to fix the allocation
of the Equity Consideration among the holders of Tenneco Stock. See "THE
TRANSACTION--Background of the Transaction." A copy of the Merger Agreement as
currently in effect is appended hereto as Appendix B and is incorporated
herein by reference. The Merger Agreement provides that, at the Merger
Effective Time, El Paso Subsidiary will be merged with and into Tenneco, with
Tenneco continuing as the surviving corporation of the Merger and as a
subsidiary of El Paso, and the separate existence of El Paso Subsidiary will
cease.
Pursuant to the provisions of the Merger Agreement (unless the parties
otherwise agree), as soon as practicable (and in any event within two business
days) after the satisfaction or waiver of certain conditions summarized
herein, the closing of the transactions contemplated by the Merger Agreement
will take place (the "Closing") and a Certificate of Merger will be prepared,
executed and acknowledged and thereafter delivered to the Secretary of State
of Delaware for filing pursuant to the DGCL. The Merger shall become effective
at the Merger Effective Time, which shall be the time of the filing of the
Certificate of Merger with the Secretary of State of Delaware (or such later
date or time set forth therein). As used herein, the term "Closing Date"
refers to the date on which the Closing occurs.
Where an event or series of events occurs during the period of 20
consecutive trading days ended on the trading day that is two trading days
prior to the Merger Effective Time (the "Average Period"), or the 20 business
days prior thereto, which could reasonably be expected to have a temporary
effect on the price of El Paso Common Stock which would cause the Average El
Paso Common Price to be outside the Collar then Tenneco (if the Average El
Paso Common Price would be greater than the Maximum El Paso Price of $38.3625)
or El Paso (if the Average El Paso Common Price would be less than the Minimum
El Paso Price of $31.3875) has the right to delay or restart the commencement
of the Average Period (and thereby delay the Merger) until such temporary
effect has ended. In no event, however, may the Closing be delayed by more
than 15 days or beyond the Termination Date.
CONVERSION OF SHARES
AS DESCRIBED BELOW, THE ACTUAL NUMBER AND VALUE OF SHARES OF EL PASO COMMON
STOCK AND EL PASO PREFERRED DEPOSITARY SHARES (IF ISSUED BECAUSE THE STOCK
ISSUANCE IS NOT APPROVED) TO BE ISSUED TO THE HOLDERS OF TENNECO COMMON STOCK
IN THE MERGER WILL DEPEND ON THE AVERAGE EL PASO COMMON PRICE, WHICH WILL NOT
BE KNOWN AT THE TIME OF THE TENNECO SPECIAL MEETING. IN ADDITION, WHETHER
HOLDERS OF TENNECO COMMON STOCK RECEIVE EL PASO COMMON STOCK OR A COMBINATION
OF EL PASO COMMON STOCK AND EL PASO PREFERRED DEPOSITARY SHARES IN THE MERGER
DEPENDS ON THE OUTCOME OF THE VOTE BY EL PASO STOCKHOLDERS ON THE STOCK
ISSUANCE, WHICH IS EXPECTED TO BE KNOWN AT THE TIME OF THE TENNECO SPECIAL
MEETING BUT WILL LIKELY NOT BE KNOWN BEFORE STOCKHOLDERS SUBMIT THEIR PROXIES
IN RESPONSE HERETO.
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If the Stock Issuance is approved by El Paso's stockholders, then pursuant
to the Merger Agreement, by virtue of the Merger and without any action on the
part of the holder of any shares of capital stock at the Merger Effective
Time:
(1) each share of $4.50 Preferred Stock issued and outstanding
immediately prior to the Merger Effective Time (other than shares owned
directly or indirectly by Tenneco, El Paso or their respective wholly owned
subsidiaries and shares held by stockholders who perfect their appraisal
rights) shall be converted into the right to receive that number of fully
paid and nonassessable shares of El Paso Common Stock (rounded to the
nearest one-thousandth of a share) equal to (i) $115 divided by (ii) the
Pre-Meeting El Paso Common Price;
(2) each share of $7.40 Preferred Stock issued and outstanding
immediately prior to the Merger Effective Time (other than shares owned
directly or indirectly by Tenneco, El Paso or their respective wholly owned
subsidiaries) shall be converted into the right to receive that number of
fully paid and nonassessable shares of El Paso Common Stock (rounded to the
nearest one-thousandth of a share) equal to (i) $115 divided by (ii) the
Pre-Meeting El Paso Common Price;
(3) each share of Tenneco Common Stock issued and outstanding immediately
prior to the Merger Effective Time (other than shares owned directly or
indirectly by Tenneco, El Paso or their respective wholly owned
subsidiaries) shall be converted into the right to receive that number of
fully paid and nonassessable shares of El Paso Common Stock (rounded to the
nearest one-thousandth of a share) equal to (i) an amount equal to (A) the
Equity Consideration of $750 million less the value (based on the Pre-
Meeting El Paso Common Price) of the El Paso Common Stock issuable to
holders of Tenneco Preferred Stock in the Merger, divided by (B) the
Average El Paso Common Price after giving effect to the Collar, divided by
(ii) the number of shares of Tenneco Common Stock outstanding immediately
prior to the Merger Effective Time being converted in the Merger (the
"Tenneco Common Conversion Shares");
(4) each share of Tenneco Stock issued and outstanding immediately prior
to the Merger Effective Time after giving effect to the Distributions owned
directly or indirectly by Tenneco, El Paso or their respective wholly owned
subsidiaries shall be canceled, and no consideration shall be delivered
therefor;
(5) each share of El Paso Subsidiary's capital stock issued and
outstanding immediately prior to the Merger Effective Time shall be
converted into and become one fully paid and nonassessable share of Tenneco
Common Stock; and
(6) each share of Tenneco Junior Preferred Stock issued and outstanding
immediately prior to the Merger Effective Time shall not be converted or
exchanged pursuant to the Merger and shall remain outstanding immediately
after the Merger, held by the persons who were the holders of such Tenneco
Junior Preferred Stock immediately prior to the Merger. See "THE NPS
ISSUANCE."
The "Average El Paso Common Price" will be the average of the closing prices
of El Paso Common on the NYSE Composite Transactions Reporting System, as
reported in The Wall Street Journal, for the Average Period (but subject to
correction for typographical or other manifest errors in such reporting),
rounded to four decimal places.
The "Pre-Meeting El Paso Common Price" means the closing price of the El
Paso Common Stock on the NYSE Composite Transactions Reporting System, as
reported in The Wall Street Journal, for the trading day preceding the day on
which the holders of the Tenneco Common Stock entitled to vote at the Tenneco
Special Meeting vote with respect to Merger; provided, however, if there is no
closing price for the El Paso Common Stock on such trading day, the "Pre-
Meeting El Paso Common Price" shall be the closing price for the El Paso
Common Stock on the next preceding day on which a trade of the El Paso Common
Stock occurred.
Although not provided for in the Merger Agreement, pursuant to the terms of
El Paso's existing stockholder rights plan, Tenneco Stockholders who receive
El Paso Common Stock in connection with the Merger will receive, together with
each share of El Paso Common Stock issued in the Merger, one associated
preferred stock purchase right of El Paso (an "El Paso Purchase Right"). The
El Paso Purchase Rights are currently attached to certificates for shares of
El Paso Common Stock, are not separately tradeable and become exercisable only
upon certain conditions. Unless the context otherwise requires, references
herein to "El Paso Common Stock" include the associated El Paso Purchase
Rights.
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The Collar has the following effects on the shares of El Paso Common Stock to
be issued to holders of Tenneco Common Stock as described above: (i) if the
Average El Paso Common Price falls within the Collar (i.e., between $31.3875
and $38.3625, inclusive), the number of shares of El Paso Common Stock issued
to holders of Tenneco Common Stock will be based on that price, (ii) if the
Average El Paso Common Price is less than the Minimum El Paso Price of
$31.3875, the number of shares of El Paso Common Stock issued to holders of
Tenneco Common Stock will nonetheless be based on a per share price of
$31.3875, and (iii) if the Average El Paso Common Price is more than the
Maximum El Paso Price of $38.3625, the number of shares of El Paso Common Stock
issued to holders of Tenneco Common Stock will nonetheless be based on a per
share price of $38.3625. The Maximum El Paso Price and Minimum El Paso Price
are subject to appropriate adjustments, reasonably satisfactory to Tenneco and
El Paso in all respects, to reflect any recapitalization, reclassification,
stock split, combination of shares, issuance of equity (other than issuances of
shares pursuant to the exercise of employee stock options) or options for less
than full market value or the like of or involving El Paso.
Alternatively, if the El Paso stockholders do not approve the Stock Issuance,
El Paso will issue to the Tenneco Stockholders 7,000,000 shares of El Paso
Common Stock, with the balance of the equity consideration to consist of El
Paso Preferred Depositary Shares representing interests in El Paso Preferred
Stock. In such case, the holders of Tenneco Preferred Stock will receive shares
of El Paso Common Stock as described above, and each share of Tenneco Common
Stock will be converted into the right to receive (i) the number of shares of
El Paso Common Stock obtained by subtracting from 7,000,000 the number of such
shares issued to the holders of Tenneco Preferred Stock and dividing the
remainder by the number of Tenneco Common Conversion Shares, and (ii) El Paso
Preferred Depositary Shares representing interests in that fraction of a share
of El Paso Preferred Stock which has an aggregate liquidation preference equal
to the value of the additional shares of El Paso Common Stock (or fraction
thereof) that would have been issued to the holder of a single share of Tenneco
Common Stock if the Stock Issuance had been approved, such value to be
determined based on the Average El Paso Common Price.
Because the formula for determining the number of shares of El Paso Common
Stock and El Paso Preferred Depositary Shares issuable to holders of Tenneco
Common Stock if the Stock Issuance is not approved is designed to provide such
holders with the same aggregate dollar value of consideration that they would
have received had the Stock Issuance been approved, under this alternative
scenario holders of Tenneco Common Stock will also likely receive stock worth
more than $612.5 million if the Average El Paso Common Price is above the
Collar and less than $612.5 million if the Average El Paso Common Price is
below the Collar.
Notwithstanding the foregoing, holders of Tenneco Stock will not receive
fractional shares of El Paso Common Stock or fractional El Paso Preferred
Depositary Shares. Instead, a holder's fractional share interest will be
retained by El Paso and will be aggregated with the fractional share interests
of all other holders into whole shares of El Paso Common Stock or El Paso
Preferred Depositary Shares, as applicable. The Exchange Agent (as defined)
will sell these whole shares at then-prevailing prices on the NYSE as soon as
practicable after the Merger Effective Time. The Exchange Agent will then
determine and remit the portion of the proceeds from the sale of the whole
shares to which each holder is entitled provided that such holder has properly
surrendered such holder's certificate formerly representing Tenneco Stock.
Pursuant to the Merger Agreement, as soon as practicable after the Merger
Effective Time, a letter of transmittal will be mailed by First Chicago Trust
Company of New York, or such other trust company or bank designated by Tenneco,
as exchange agent for the holders of Tenneco Stock (the "Exchange Agent"), to
each holder of record of a certificate or certificates representing shares of
Tenneco Stock which were converted pursuant to the Merger (the "Certificates")
to be used in effecting the surrender of the Certificates in exchange for
certificates and depositary receipts representing shares of El Paso Common
Stock and El Paso Preferred Depositary Shares (the "New Certificates") to which
such holder has become entitled and, if applicable, cash in lieu of fractional
shares as described above. After receipt of the letter of transmittal, each
holder of Certificates formerly representing shares of Tenneco Stock should
surrender such Certificates together with the letter of transmittal duly
executed, and any other required documents as set forth in the letter of
transmittal, to the Exchange Agent, and each such holder will receive in
exchange New Certificates evidencing the whole shares of El Paso Common Stock
and El Paso Preferred Depositary Shares, if any, that such holder has the right
to receive, any dividend or distribution with respect thereto made with a
record date after the Merger Effective Time and
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any cash paid in lieu of fractional shares. The letter of transmittal will be
accompanied by instructions specifying the other details of the exchange.
STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE THE
LETTER OF TRANSMITTAL.
After the Merger Effective Time, each Certificate formerly representing
Tenneco Stock, until surrendered and exchanged, will be deemed for all
purposes to represent only the right to receive upon such surrender the number
of whole shares of El Paso Common Stock and El Paso Preferred Depositary
Shares, if any, into which the shares of Tenneco Stock shall have been so
converted, plus any dividends or other distributions in respect of such shares
of El Paso Common Stock and/or El Paso Preferred Depositary Shares and any
cash in lieu of fractional shares. The holder of any unexchanged Certificate
will not be entitled to receive in respect thereof any dividend or other
distribution with a record date after the Merger Effective Time payable by El
Paso to its stockholders until such Certificate is surrendered. Instead, all
such dividends and other distributions will be paid to the Exchange Agent
(until December 31, 1998, after which time such amounts will be set aside by
El Paso), who will hold such amounts for the benefit of the former Tenneco
Stockholder entitled thereto until such stockholder's Certificates are
surrendered for exchange.
After December 31, 1998, the Exchange Agent will return to El Paso all New
Certificates, dividends and distributions and cash in lieu of fractional
shares (and any fractional El Paso Preferred Depositary Shares) and thereafter
former Tenneco Stockholders will be entitled to look only to El Paso for
distribution of such amounts.
The Merger Agreement provides that all shares of El Paso Common Stock and
any El Paso Preferred Depositary Shares issued upon the surrender for exchange
of shares of Tenneco Stock pursuant thereto (plus cash in lieu of fractional
shares and any fractional El Paso Preferred Depositary Shares) shall be deemed
to have been issued in full satisfaction of all rights pertaining to such
shares of Tenneco Stock and that none of El Paso, El Paso Subsidiary, Tenneco,
New Tenneco or Newport News shall be liable to any holders of shares of
Tenneco Stock, or El Paso Common Stock or El Paso Preferred Depositary Shares,
for such shares or cash in lieu of fractional shares and any fractional El
Paso Preferred Depositary Shares delivered to a public official pursuant to
any applicable abandoned property, escheat or similar law.
FINAL DIVIDENDS ON TENNECO STOCK
Tenneco presently expects that the Transaction will be consummated, if
approved at the Tenneco Special Meeting, on or prior to the end of 1996.
Pursuant to the Merger Agreement, holders of Tenneco Preferred Stock do not
receive accrued but unpaid dividends on their shares of Tenneco Preferred
Stock as part of the Equity Consideration. Accordingly, the Tenneco Board has
declared a dividend on the $7.40 Preferred Stock of $1.85 per share for the
full fourth quarter 1996, payable on December 31, 1996 to the holders of
record as of the close of business on November 22, 1996. It is presently
expected that the Tenneco Board will also declare a dividend on the $4.50
Preferred Stock of $4.50 per share, payable on the date on which the Merger is
consummated to the holders of record as of the close of business on the date
prior to the date of the Tenneco Special Meeting. If the Transaction is
consummated on or prior to December 31, 1996, such dividends will be the final
dividends payable to the holders of $7.40 Preferred Stock. If the Transaction
is not consummated on or prior to December 31, 1996, dividends for the first
quarter 1997 on the Tenneco Preferred Stock will be paid on a date to be
determined.
In addition, the Tenneco Board of Directors has declared a dividend on the
Tenneco Common Stock of $.45 per share for the fourth quarter 1996, payable on
December 10, 1996 to holders of record as of the close of business on November
22, 1996.
All dividends on Tenneco Stock which are unpaid as of the Merger Effective
Time but have been declared with a record date prior to the Merger Effective
Time are considered a part of the Actual Energy Debt Amount. See "DEBT AND
CASH REALIGNMENT."
EFFECTS OF THE MERGER
The Merger will have the effects specified in the DGCL. In addition, the
Merger Agreement provides that the Tenneco Charter will be further amended as
of the Merger Effective Time, to, among other things (i) alter
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the authorized capital stock of Tenneco, (ii) eliminate the authorized class of
preferred stock of Tenneco, (iii) rename Tenneco's authorized class of junior
preferred stock as preferred stock, (iv) eliminate the restrictions on business
combinations with interested stockholders contained in the Tenneco Charter, (v)
modify the number of members of and the structure of the Tenneco Board of
Directors, and (vi) eliminate the provisions regarding transactions between
Tenneco and members of its Board of Directors with certain interests in the
transactions. The Merger Agreement also provides that the by-laws of El Paso
Subsidiary, as in effect immediately prior to the Merger Effective Time and
amended to include specified provisions regarding the indemnification of and
advancement of expenses to directors and officers, shall become the by-laws of
Tenneco. In addition, the Merger Agreement provides that the directors of El
Paso Subsidiary at the Merger Effective Time will be the initial directors of
Tenneco after the Merger.
CERTAIN OTHER PRE-MERGER TRANSACTIONS
Distributions and Related Transactions. The Merger Agreement requires that the
Distributions be consummated before the Merger Effective Time with only such
changes or modifications as do not adversely affect, other than to a de minimis
extent, the Energy Business. Accordingly, the pre-Distribution transactions and
conditions must generally be consummated or satisfied, as the case may be,
substantially as described herein prior to the Merger. See "THE DISTRIBUTIONS."
Notwithstanding the foregoing, the Merger Agreement contemplates that under
certain circumstances Tenneco may enter into negotiations and/or an agreement
regarding a sale, merger or other disposition transaction involving either or
both of the Shipbuilding Business and Industrial Business, or any portion
thereof (an "S/I Transaction"), and thereby abandon one or both of the
Distributions. With prior notice to El Paso, Tenneco may enter into an S/I
Transaction so long as such transaction is not adverse, other than to a de
minimis extent, to El Paso or the Energy Business and would not render the
Merger impossible or impracticable or materially delay the consummation
thereof. If the S/I Transaction would have any of the foregoing effects, the
transaction may nonetheless be pursued prior to approval of the Merger
Agreement, Merger and Distributions by Tenneco stockholders if the Tenneco
Board of Directors determines in good faith after consultation with counsel
that there is a substantial risk that failure to do so would constitute a
breach of its fiduciary duties under applicable law.
Rights Agreement and Dividend Reinvestment Program. In preparation for the
Merger, Tenneco has amended its stockholder rights plan to exempt El Paso and
El Paso Subsidiary from becoming an "acquiring person" thereunder, or otherwise
triggering the rights issued in connection therewith, solely by reason of the
execution of the Merger Agreement and consummation of the transactions
contemplated thereby, and to cause such rights to expire at the Merger
Effective Time. Furthermore, the Tenneco Dividend Reinvestment Program will be
terminated after reinvestment of Tenneco's third quarter 1996 dividends.
NO SOLICITATION
The Merger Agreement required Tenneco to immediately cease any then-existing
discussions or negotiations with any third parties with respect to any merger,
consolidation, business combination, sale of the Energy Business, sale of
certain major subsidiaries of Tenneco, tender or exchange or similar
transaction involving the Energy Business as a whole or certain major
subsidiaries as a whole other than the transactions contemplated in the Merger
Agreement (an "Acquisition Transaction"). The Merger Agreement further provides
that neither Tenneco, any of its subsidiaries nor any of their respective
directors and officers shall, and Tenneco shall use its best efforts to ensure
that none of its or its subsidiaries' affiliates, representatives or agents
shall, directly or indirectly, solicit any person, entity or group concerning
any Acquisition Transaction. Prior to the approval of the Merger and
Distributions by Tenneco's stockholders, however, Tenneco may furnish
information or enter into negotiations regarding, or enter into an agreement
for, an Acquisition Transaction if Tenneco provides prior notice to El Paso,
and Tenneco's Board of Directors determines in good faith, after consultation
with independent legal counsel, that there is a substantial risk that the
failure to do so would be found to
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constitute a breach of its fiduciary duties under applicable law, but only in
response to a proposal for an Acquisition Transaction received by Tenneco
which the Board of Directors of Tenneco determines in good faith after
consultation with its financial advisors is reasonably likely to result in
consummation of an Acquisition Transaction more favorable, from a financial
point of view, to the stockholders of Tenneco than the Transaction, taking
into account the financial responsibility of the party making such proposal,
as then reasonably determinable by Tenneco, and such party's ability, as then
reasonably determinable by Tenneco, to obtain regulatory approvals for such
Acquisition Transaction (a "Higher Proposal").
The Merger Agreement requires Tenneco to advise El Paso immediately if any
proposal for or other indication of interest in a Higher Proposal is received
by Tenneco and the terms and conditions thereof and keep El Paso promptly
informed of the status thereof. As of the date of this Joint Proxy Statement-
Prospectus, Tenneco has not received any such inquiries or proposals.
CERTAIN COVENANTS
Interim Operations of Tenneco. Pursuant to the Merger Agreement, Tenneco has
agreed, among other things, that from the date thereof to the Closing Date,
unless El Paso has consented in writing and except for actions (i) affecting
solely the Industrial Business or the Shipbuilding Business, (ii) which only
adversely affect the Energy Business to a de minimis extent and do not
materially delay or prevent consummation of the Transaction, (iii) specified
therein involving the Energy Group, or (iv) taken by Tenneco and its
affiliates in order to consummate the Transaction as contemplated by the
Merger Agreement, Tenneco shall and shall cause the Energy Subsidiaries to:
(i) use its reasonable best efforts to operate the Energy Business in the
ordinary course of business consistent with past practices, preserve
substantially intact the business organization thereof, preserve customer,
supplier and other business relationships in respect thereof and keep
available the services of employees and consultants thereto;
(ii) not amend the Tenneco Charter or its By-laws;
(iii) not issue or authorize the issuance of (except, with respect to
Tenneco, in the ordinary course of business consistent with past practices)
any of its capital stock, options, warrants or other rights to acquire such
capital stock or any other ownership interest (subject to limited
exceptions for certain existing rights, dividend reinvestment and benefits
plans);
(iv) not declare, set aside or pay any dividends or other distributions
in respect of the capital stock of Tenneco or any of the Energy
Subsidiaries except for (A) dividends declared and paid by Tenneco
consistent with its past practice, (B) the Distributions, and (C) cash
dividends declared by any of the Energy Subsidiaries;
(v) not reclassify, combine, split, subdivide or redeem, purchase, or
otherwise acquire, directly or indirectly, any class of the capital stock
of Tenneco or any of the Energy Subsidiaries, subject to exceptions
relating to employee benefit and dividend reinvestment plans;
(vi) generally not increase the compensation of persons who will be
employees of the Energy Business after the Merger Effective Time other than
in the ordinary course of business consistent with past practices (except
as contemplated by the Merger Agreement);
(vii) except in the ordinary course of business, not transfer, sell or
otherwise dispose of any of the Energy Assets (subject to specified
exceptions);
(viii) cooperate with El Paso with respect to any opportunity to acquire
additional interests in certain pipeline operations; and
(ix) not take any action that would (a) be reasonably likely to result in
any of the conditions to the Merger not being satisfied or (b) impair the
ability of Tenneco to consummate the Distributions or the Merger pursuant
to the terms of the Distribution Agreement and the Merger Agreement,
respectively.
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Interim Operations of El Paso. Pursuant to the Merger Agreement, during the
period from the date thereof to the Closing Date, neither El Paso nor any of
its affiliates may:
(i) subject to certain exceptions, amend its charter, by-laws or other
governing documents;
(ii) acquire (directly or indirectly, beneficially or of record) any
shares of Tenneco Stock;
(iii) take any action that would be reasonably likely to result in any of
the conditions to the Merger not being satisfied or that would either
impair the ability of El Paso or El Paso Subsidiary to consummate the
Merger or would delay the Merger; or
(iv) take or cause to be taken any action that would disqualify either of
the Distributions as a tax-free distribution within the meaning of Section
355 of the Code.
Furthermore, the Merger Agreement provides that El Paso Subsidiary may not
engage in any activities except in connection with the transactions
contemplated by the Merger Agreement and that, prior to the Merger Effective
Time, El Paso may not undertake any internal corporate restructuring or any
action which is primarily for the purpose of reducing the value of the
Transaction to Tenneco stockholders.
Additionally, during the 20 trading days prior to commencement of the
Average Period the Merger Agreement provides that El Paso and its subsidiaries
(i) will carry on their businesses in the ordinary course and use all
reasonable efforts to preserve intact their present business organizations and
relationships with customers, suppliers and others, (ii) will not declare or
pay any dividends or other distributions in respect of their capital stock
(other than regular quarterly dividends on El Paso Common Stock and certain
intercompany dividends), (iii) will not take certain actions involving the
issuance, repurchase or exchange of their capital stock (including any rights
to acquire said capital stock), and (iv) will not enter into certain business
combination or disposition transactions, in each case except as contemplated
by the Merger Agreement.
Certain Other Covenants and Agreements
Indemnification and Insurance of Directors and Officers
Pursuant to the Merger Agreement, El Paso has agreed not to cause or
permit amendments to certain charter and bylaw provisions of Tenneco
relating to indemnification of directors and officers for a period of six
years after the Merger.
The Merger Agreement also provides that prior to the Merger Effective
Time Tenneco shall, and from and after the Merger Effective Time El Paso
and Tenneco jointly and severally shall, indemnify, defend and hold
harmless each person who is now, has been at any time prior to the date of
the Merger Agreement or who becomes prior to the Merger Effective Time an
officer, director or employee of Tenneco or any of its subsidiaries
(collectively, the "Indemnified Parties") against all losses, expenses,
claims, damages, liabilities or amounts that are paid in settlement of,
with the approval of the indemnifying party (which approval shall not
unreasonably be withheld), or otherwise in connection with any claim,
action, suit, proceeding or investigation (a "Claim"), based in whole or in
part on the fact that such person is or was a director, officer or employee
of Tenneco or any of its subsidiaries and arising out of actions or
omissions occurring at or prior to the Merger Effective Time (including,
without limitation, the transactions contemplated by the Merger Agreement
and the Distribution Agreement), whether or not such Claim was asserted
prior to, at or after the Merger Effective Time, in each case to the
fullest extent permitted under the DGCL (and shall pay expenses in advance
of the final disposition of any such Claim to each Indemnified Party to the
fullest extent permitted under the DGCL, upon receipt from the Indemnified
Party to whom expenses are advanced of an undertaking to repay such
advances if required by Section 145(e) of the DGCL). However, these
obligations to indemnify do not affect the allocation of liability among
the Energy Group, the Industrial Group and Shipbuilding Group pursuant to
the Distribution Agreement and any corresponding indemnification rights
thereunder.
The Merger Agreement provides that any Indemnified Party wishing to claim
indemnification under the Merger Agreement, upon learning of any Claim,
will promptly notify Tenneco (or, after the Merger Effective Time, Tenneco
and El Paso) thereof, but the failure to so notify will not relieve Tenneco
or El Paso of any liability it may have if such failure does not materially
prejudice such party.
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In the event any Claim is brought against an Indemnified Party, the
Indemnified Party may retain counsel satisfactory to the Indemnified Party
(with the consent of Tenneco and, after the Merger Effective Time, El Paso)
and Tenneco (or, after the Merger Effective Time, Tenneco and El Paso)
shall pay all reasonable fees and expense of such counsel and use all
reasonable efforts to assist in the vigorous defense of the matter.
Furthermore, under the Merger Agreement El Paso and Tenneco have agreed
to maintain certain policies of directors' and officers' liability
insurance for a period of seven years following the Merger and to be
responsible for all costs and expenses associated therewith.
El Paso Guaranty of Tenneco Performance
Pursuant to the Merger Agreement and certain instruments to be executed
in connection therewith, from and after the Merger Effective Time El Paso
will guarantee the full and timely payment and performance by Tenneco and
the other members of the Energy Group of their obligations under the Merger
Agreement, Distribution Agreement and each and every other agreement to be
entered into pursuant thereto.
Other
The Merger Agreement also contains other agreements of the parties
including, without limitation, agreements to cooperate with respect to
certain regulatory requests, filings, approvals and proceedings, to not
take actions that would cause a breach of the Merger Agreement, to not take
actions which might cause certain adverse tax consequences (such as a
failure of the Merger or Distributions to qualify as tax-free for federal
income tax purposes), and to use reasonable best efforts to make effective
the transactions contemplated thereby and by the Distribution Agreement.
Under the terms of the Merger Agreement, El Paso will cause Tenneco to
pay any New York State Real Estate Transfer Tax and the New York City Real
Property Transfer Tax (and similar taxes in any other jurisdiction)
incurred in connection with the Merger. Tenneco and El Paso will cooperate
in the preparation and filing of returns with respect to such transfer
taxes (including returns on behalf of Tenneco Stockholders) and in the
determination of the portion of the consideration allocable to the real
property of Tenneco and its subsidiaries in New York State and City (and
any other jurisdiction, if applicable). The Tenneco Stockholders will be
bound by the allocation of consideration determined by Tenneco and El Paso
in the preparation of any return relating to the foregoing transfer taxes.
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES--The Merger."
EMPLOYEE BENEFITS
The Merger Agreement requires Tenneco to enter into the Benefits Agreement
and to perform its obligations thereunder. See "THE DISTRIBUTIONS--
Relationship Among Tenneco, New Tenneco and Newport News After the
Distributions." In addition, pursuant to the Merger Agreement, El Paso has
agreed to provide (or cause Tenneco to provide) certain benefits to certain
employees and former employees of Tenneco and their dependents from and after
the Merger Effective Time.
El Paso has agreed to provide severance benefits, vacation pay, outplacement
services and other benefits to certain employees of the Energy Business who
are terminated within one year of the Merger Effective Time (other than for
death, disability or cause). Pursuant to this agreement, approximately 50
high-level employees of the Energy Business would be eligible to receive
severance benefits ranging from 12 to 24 months' base pay and approximately
3,200 other employees of the Energy Business would be eligible to receive
severance benefits ranging from 6 to 52 weeks' base pay. Additionally, El Paso
has agreed to provide health care coverage to these employees on an optional
basis (with the costs being shared by the employee as are shared by similarly
situated active El Paso employees) for a period equal to the months of pay
received as severance, up to 12 months.
El Paso has also agreed to provide retiree medical and life benefits for at
least ten years from the Merger Effective Time to former employees of Tenneco
and their dependents and to current employees who are eligible to retire as of
the Merger Effective Time and retire within a window period after the Merger
Effective Time to
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be selected by El Paso, which will be not less than six months. However, El
Paso may institute changes to the retiree medical plan to implement
appropriate cost containment features and other methods of providing
comparable benefits.
El Paso has further agreed to provide retention payments to key and other
Energy Business employees. Under the executive retention program, certain key
employees will be paid an aggregate of $9 million if they cooperate with the
effort to sell the Energy Business and remain full-time active employees until
the Merger Effective Time. Additionally, a separate retention program has been
implemented for approximately 200 lower management and staff level employees
with similar conditions and an aggregate of $4 million in payments.
Employees of the Energy Business will also receive credit for past service
with Tenneco in determining entitlements under certain El Paso benefit
programs. El Paso has also agreed to satisfy certain obligations owed by
Tenneco to specific individuals.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of El
Paso, El Paso Subsidiary and Tenneco, none of which will survive the Merger
Effective Time.
The representations and warranties of Tenneco in the Merger Agreement
include, among other things, representations and warranties as to: corporate
organization, existence and good standing; capitalization; corporate and other
authority to enter into the transactions contemplated by the Merger Agreement;
the financial statements of Tenneco and the Energy Business; confirmation that
the Transaction will not violate certain duties, provisions and laws; the
absence of certain litigation, changes or events; the accuracy of Tenneco SEC
documents and other reports; the absence of any undisclosed material adverse
change; the receipt by Tenneco of an opinion of Lazard that the consideration
to be received in the Merger by Tenneco's stockholders is fair from a
financial point of view; the absence of any arrangements made by or on behalf
of Tenneco with any broker, investment banker or similar person other than
Lazard, Morgan Stanley & Co. Incorporated and J.P. Morgan Securities
Incorporated; and certain amendments to the stockholder rights plan of
Tenneco.
The representations and warranties of El Paso and El Paso Subsidiary in the
Merger Agreement include, among other things, representations and warranties
as to: corporate organization, existence and good standing; capitalization;
corporate and other authority to enter into the transactions contemplated by
the Merger Agreement; the accuracy of El Paso SEC documents and other reports;
the financial statements of El Paso; confirmation that the Transaction will
not violate certain duties, provisions and laws; the absence of certain
litigation, changes or events; the receipt by El Paso of an opinion from DLJ
that the Merger is fair to El Paso's stockholders from a financial point of
view; the absence of any undisclosed material adverse change; due
authorization of the shares of El Paso Stock to be issued in the Merger; El
Paso Subsidiary's lack of contractual liabilities, commitments, obligations or
assets; and the absence of arrangements made by or on behalf of El Paso with
any broker, investment banker or similar person other than DLJ.
CONDITIONS PRECEDENT
Conditions to Obligations of the Parties
The respective obligations of each of Tenneco, El Paso and El Paso
Subsidiary to consummate the transactions contemplated by the Merger Agreement
are subject to the satisfaction, at or prior to the Closing, of the following
conditions, any or all of which may be waived, in whole or in part, to the
extent permitted by applicable law:
(i) the Registration Statement (of which this Joint Proxy Statement-
Prospectus forms a part) shall have been declared effective under the
Securities Act and no stop orders with respect thereto shall have been
issued and no proceedings for that purpose shall have been instituted or,
to the parties' knowledge, be threatened;
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(ii) the Merger Agreement, the Merger and the Distributions shall have
been approved and adopted by the requisite vote of the stockholders of
Tenneco, in accordance with the DGCL and the Tenneco Charter;
(iii) any waiting period applicable to the consummation of the
transactions contemplated by the Merger Agreement under the HSR Act shall
have expired or been terminated (which condition has been satisfied);
(iv) all authorizations, consents, orders and approvals of, and
declarations or filings with, and expiration of waiting periods imposed by,
any governmental authority or other person shall have been obtained or
filed and shall be in full force and effect, other than those which if not
obtained or filed would not have a material adverse effect on El Paso and
its consolidated subsidiaries, the Energy Business or the ability of any
party to consummate the transactions contemplated by the Merger Agreement
prior to the Termination Date;
(v) no governmental authority shall have enacted, issued, promulgated,
enforced or entered any statute or rule, regulation, injunction or other
order (whether temporary, preliminary or permanent) which materially
restricts, prevents or prohibits consummation of the Merger or the other
transactions contemplated by the Merger Agreement;
(vi) the El Paso Common Stock and El Paso Preferred Depositary Shares (if
any) shall have been approved for listing on the NYSE, subject to official
notice of issuance;
(vii) Tenneco shall have received (a) the IRS Ruling Letter as described
under "THE DISTRIBUTIONS--Conditions to Consummation of the Distributions,"
and (b) to the extent not covered by the IRS Ruling Letter, the Tax Opinion
from the law firm of Jenner & Block (counsel to Tenneco) that, among other
things, the Merger will qualify as a tax-free reorganization under Section
368(a)(1)(B) of the Code (because the IRS Ruling Letter was received on
October 30, 1996 and covered the matters to be addressed in the Tax
Opinion, delivery of the Tax Opinion is a condition to the consummation of
the Merger which has been satisfied);
(viii) the Distributions, the Debt Realignment, the Charter Amendment and
the other transactions contemplated by the Distribution Agreement
(including any S/I Transaction) shall have been effected; and
(ix) the NPS Issuance shall have been consummated.
Conditions to Obligations of Tenneco
The obligations of Tenneco to consummate the transactions contemplated by
the Merger Agreement are also subject to the satisfaction, at the Closing, of
the following conditions, any or all of which may be waived, in whole or in
part, by Tenneco:
(i) the representations and warranties of El Paso and El Paso Subsidiary
in the Merger Agreement shall be true and correct as of the Closing Date
with the same effect as if made on and as of the Closing Date (except for
changes permitted by the Merger Agreement and failures to remain true and
correct which do not have a material adverse effect on El Paso and its
consolidated subsidiaries and will not prevent consummation of the
transactions contemplated by the Merger Agreement by El Paso or El Paso
Subsidiary prior to the Termination Date);
(ii) each of El Paso and El Paso Subsidiary shall have performed in all
material respects their respective obligations under the Merger Agreement
to be performed at or prior to the Closing; and
(iii) delivery to Tenneco by El Paso and El Paso Subsidiary of officers'
certificates with respect to the matters identified in clauses (i) and (ii)
and certain other corporate proceedings.
Conditions to Obligations of El Paso and El Paso Subsidiary
The obligations of El Paso and El Paso Subsidiary to effect the transactions
contemplated by the Merger Agreement are also subject to the satisfaction, at
the Closing, of the following conditions, any or all of which may be waived,
in whole or in part, by El Paso and El Paso Subsidiary:
(i) the representations and warranties of Tenneco contained in the Merger
Agreement shall be true and correct as of the Closing Date with the same
effect as if made on and as of the Closing Date (except for changes
permitted by the Merger Agreement and failures to remain true and correct
which do not have a
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material adverse effect on the Energy Business and will not prevent
consummation of the transactions contemplated by the Merger Agreement by
Tenneco prior to the Termination Date);
(ii) Tenneco shall have performed in all material respects its
obligations under the terms of the Merger Agreement to be performed at or
prior to the Closing;
(iii) El Paso shall not have reasonably determined, in good faith after
consultation with Tenneco and its advisors, that as a result of an
announcement or introduction of legislation by certain U.S. government
officials identified in the Merger Agreement there exists a reasonable
likelihood that the Distributions or the Merger would not be tax-free for
federal income tax purposes to Tenneco and El Paso; and
(iv) delivery to El Paso by Tenneco of officers' certificates with
respect to the matters identified in clauses (i) and (ii) and certain other
corporate proceedings.
AMENDMENT OR TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Merger
Effective Time, whether before or after the approval of the Merger Agreement,
the Merger or the Distributions by the stockholders of Tenneco and the
approval of the Stock Issuance by the stockholders of El Paso, by (i) the
mutual written consent of El Paso and Tenneco authorized by their respective
boards of directors; (ii) El Paso or Tenneco, if the Merger is not consummated
by the Termination Date (other than for the terminating party's failure to
observe any of the covenants, agreements and conditions of the Merger
Agreement to be performed or observed by such party prior to the Closing
Date); (iii) El Paso or Tenneco, if there has been a material breach on the
part of the other party of any covenant, representation or warranty set forth
in the Merger Agreement, or any failure on the part of the other party to
comply with its obligations under the Merger Agreement, or any other
circumstances have occurred such that the conditions to El Paso's or Tenneco's
consummation of the Merger, respectively, could not be satisfied on or prior
to the Termination Date; (iv) El Paso or Tenneco, if the stockholders of
Tenneco at the Tenneco Special Meeting do not approve the Transaction; (v) El
Paso, if the Board of Directors of Tenneco withdraws, amends or modifies in a
manner adverse to El Paso its favorable recommendation to its stockholders of
the Transaction or promulgates any favorable recommendation with respect to an
Acquisition Transaction (other than in response to a situation described in
clause (iii) above); (vi) Tenneco, if the Board of Directors of El Paso
withdraws, amends or modifies in a manner adverse to Tenneco its favorable
recommendation to its stockholders or approves an agreement for or recommends
to its stockholders a business combination transaction not involving Tenneco
(other than in response to a situation described in clause (iii) above); (vii)
El Paso or Tenneco, under certain circumstances where, prior to approval of
the Transaction by Tenneco stockholders, Tenneco enters into an S/I
Transaction which would adversely impact El Paso or the Energy Business, or
render the Merger impossible or impracticable or prevent or materially delay
consummation of the Merger; (viii) El Paso, if there has occurred since the
date of the Merger Agreement any event, change or effect which, in the
aggregate with all other events, changes or effects, reduces the value of the
Energy Business as of the date of the Merger Agreement by more than $75
million (excluding negative events, changes or effects which result from (A)
any action by El Paso or certain affiliated parties, (B) changes in general
economic, financial markets or industrial conditions, or (C) matters related
to the GSR Ruling); (ix) Tenneco, if there has occurred since the date of the
Merger Agreement any event, change or effect which, in the aggregate with all
other events, changes or effects, reduces the value of El Paso as of the date
of the Merger Agreement by more than $75 million (excluding negative events,
changes or effects which result from (A) any action by Tenneco or certain
affiliated parties, or (B) changes in general economic, financial markets or
industrial conditions); or (x) Tenneco or El Paso (but only prior to approval
of the Transaction by Tenneco's stockholders) if Tenneco receives a Higher
Proposal that it advises El Paso in writing that it wishes to accept and El
Paso does not make, within five business days of receipt of such written
notice, an offer that the Board of Directors of Tenneco believes, in good
faith after consultation with its financial advisors, is at least as
favorable, from a financial point of view, to the stockholders of Tenneco as
the Higher Proposal.
If the Merger Agreement is terminated as permitted above, the Merger
Agreement will become void and there will be no liability or obligation on the
part of the terminating party, or the directors, officers, stockholders,
employees, agents, consultants or representatives of such party, except that
such termination shall not relieve
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any other party of any damages or other amounts for which it would otherwise
be liable, including Tenneco's obligation to pay to El Paso the Termination
Fee under certain circumstances. See "--Termination Fee."
Prior to the Merger Effective Time, whether before or after approval and
adoption of the Transaction by the stockholders of Tenneco, the provisions of
the Merger Agreement may be amended by a written agreement executed and
delivered by the parties thereto, subject to applicable law. After the Merger
Effective Time, the provisions of the Merger Agreement may be amended only by
a written agreement executed and delivered by El Paso, Tenneco (as the
surviving corporation of the Merger) and New Tenneco.
WAIVER
Any time prior to the Merger Effective Time any party to the Merger
Agreement may, by action of its board of directors set forth in writing, to
the extent legally permissible, extend the time for performance of any of the
obligations or other acts of the other parties thereto, waive any inaccuracies
in the representations and warranties of the other parties contained therein
or in any document delivered pursuant thereto, and waive compliance by any of
the other parties thereto with any of the agreements or conditions contained
therein.
TERMINATION FEE
The Merger Agreement requires Tenneco to pay to El Paso the Termination Fee
of $25 million, plus up to $10 million in actual out of pocket expenses
incurred and payable to third parties by El Paso, if the Merger Agreement is
terminated (i) by El Paso or Tenneco, if prior to approval of the Transaction
by Tenneco stockholders Tenneco enters into an S/I Transaction which would
adversely impact El Paso or the Energy Business or would prevent or materially
delay consummation of the Merger upon a good faith determination (after
consultation with and based upon advice of independent counsel) by Tenneco's
Board of Directors that there is a substantial risk that the failure to do so
would result in a breach of its fiduciary duties under applicable law; (ii) by
El Paso or Tenneco, if the Tenneco stockholders do not adopt and approve the
Transaction; or (iii) by Tenneco or El Paso (but only prior to approval of the
Transaction by Tenneco's stockholders), if Tenneco receives a Higher Proposal
that it advises El Paso in writing that it wishes to accept and El Paso does
not make, within five business days of receipt of such written notice, an
offer that the Board of Directors of Tenneco believes, in good faith after
consultation with its financial advisors, is at least as favorable, from a
financial point of view, to the stockholders of Tenneco as the Higher
Proposal. The Termination Fee shall be payable by Tenneco in exchange for a
complete release of any liabilities under the Merger Agreement from El Paso.
CONSULTING ARRANGEMENT
Tenneco and El Paso have entered into the Consulting Agreement pursuant to
which El Paso is providing certain consulting services to Tenneco for the six-
month term of the Consulting Agreement with respect to enhancing the Energy
Business' relationships with customers, plaintiffs in material litigation and
regulatory authorities. As consideration for these services, El Paso is
entitled to an aggregate consulting fee of $60 million. Under the terms of the
Consulting Agreement, however, this fee is only due and payable by Tenneco if
the Merger Agreement is terminated by El Paso or Tenneco in the manner
described in either clause (i) or (iii) under "--Termination Fee," or in the
manner described in clause (ii) under "--Termination Fee," if Tenneco's Board
of Directors withdraws, amends or modifies its recommendation of the
Transaction prior to the vote of Tenneco Stockholders at the Tenneco Special
Meeting.
REGULATORY APPROVALS
Under the HSR Act certain transactions, including the Merger, may not be
consummated unless certain filing and waiting period requirements have been
satisfied. On July 9, 1996, Tenneco and El Paso each filed Premerger
Notification and Report Forms with respect to the Merger pursuant to the HSR
Act with the
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Department of Justice ("DOJ") and Federal Trade Commission ("FTC"). Early
termination of the waiting period applicable to the Merger was granted on July
30, 1996. The early termination of the waiting period does not preclude the
DOJ, FTC or others from challenging the Merger on antitrust grounds. El Paso
and Tenneco have also filed Premerger Notification and Report Forms pursuant
to the HSR Act with the DOJ and FTC relating to the indirect acquisition by El
Paso (through the Merger) of a 30% interest in the Oasis Pipeline. The waiting
period applicable to such acquisition expired on August 28, 1996.
APPRAISAL RIGHTS
Holders of shares of $4.50 Preferred Stock and, in the event the NPS
Issuance is consummated prior to approval of the Transaction at the Tenneco
Special Meeting, Tenneco Junior Preferred Stock (hereinafter together referred
to as "Eligible Stock") who do not vote in favor of the Merger or waive
appraisal rights and who properly demand appraisal of their Eligible Stock
will be entitled to appraisal rights in connection with the Merger under
Section 262 of the DGCL. No other stockholders of Tenneco are entitled to such
appraisal rights.
The holders as of the Tenneco Record Date of more than 75% of the $4.50
Preferred Stock have agreed to vote such shares in favor of the Transaction
(which includes the Merger) at the Tenneco Special Meeting, have agreed to
grant an irrevocable proxy to Tenneco to so vote such shares and not demand or
to assert any rights of appraisal under the DGCL in connection with the
Merger.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY BY THE
FULL TEXT OF SECTION 262 WHICH IS ATTACHED TO THIS JOINT PROXY STATEMENT-
PROSPECTUS AS APPENDIX E. ALL REFERENCES IN SECTION 262 AND IN THIS SUMMARY TO
A "STOCKHOLDER" ARE TO THE RECORD HOLDER OF THE SHARES OF ELIGIBLE STOCK AS TO
WHICH APPRAISAL RIGHTS ARE ASSERTED. A PERSON HAVING A BENEFICIAL INTEREST IN
SHARES OF ELIGIBLE STOCK HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS
A BROKER OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW
THE STEPS SUMMARIZED BELOW PROPERLY AND IN A TIMELY MANNER TO PERFECT
APPRAISAL RIGHTS.
Under the DGCL, holders of shares of Eligible Stock who follow the
procedures set forth in Section 262 will be entitled to have their shares of
Eligible Stock appraised by the Delaware Court of Chancery and to receive
payment of the "fair value" of such shares, exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest, as determined by such court.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Tenneco Special Meeting, the
corporation, not less than 20 days prior to the meeting, must notify each of
its stockholders entitled to appraisal rights that such appraisal rights are
available and include in such notice a copy of Section 262. This Joint Proxy
Statement-Prospectus shall constitute such notice, and the applicable
statutory provisions are attached to this Joint Proxy Statement-Prospectus as
Appendix E. Any holder of Eligible Stock who wishes to exercise such appraisal
rights or who wishes to preserve his, her or its right to do so, should review
the following discussion and Appendix E carefully because failure to timely
and properly comply with the procedures specified will result in the loss of
appraisal rights under the DGCL.
A holder of shares of Eligible Stock wishing to exercise his, her or its
appraisal rights must deliver to Tenneco, before the vote on the Transaction
(which includes the Merger) at the Tenneco Special Meeting, a written demand
for appraisal of his, her or its shares of Eligible Stock and must not vote in
favor of the Merger (which is being submitted as a part of the Transaction).
Because a duly executed proxy which does not contain voting instructions will,
unless revoked, be voted for the Transaction, a holder of shares of $4.50
Preferred Stock who votes by proxy and who wishes to exercise his, her or its
appraisal rights must (i) vote against the Transaction, or (ii) abstain from
voting on the Transaction. A vote against the Transaction, in person or by
proxy, will not in and of itself constitute a written demand for appraisal
satisfying the requirements of Section 262. In addition, a holder of shares of
Eligible Stock wishing to exercise his, her or its appraisal rights must hold
of record such shares on the date the written demand for appraisal is made and
must continue to hold such shares of record until the Merger Effective Time.
If any holder of shares of Eligible Stock fails to comply with any of these
conditions and the Merger becomes effective, the holder of shares of Eligible
Stock will be entitled to
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receive the consideration (if any) receivable with respect to such shares in
the absence of a valid assertion of appraisal rights in accordance with the
Merger Agreement.
Only a holder of record of shares of Eligible Stock is entitled to assert
appraisal rights for the shares of Eligible Stock registered in that holder's
name. A demand for appraisal should be executed by or on behalf of the holder
of record, fully and correctly, as his, her or its name appears on his, her or
its stock certificates, and must state that the stockholder intends thereby to
demand appraisal of his, her or its shares in connection with the Merger. If
the shares of Eligible Stock are owned of record in a fiduciary capacity, such
as by a trustee, guardian or custodian, execution of the demand should be made
in that capacity, and if the shares of Eligible Stock are owned of record by
more than one person, as in a joint tenancy and tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized agent,
including two or more joint owners, may execute a demand for appraisal on
behalf of a holder of record; however, the agent must identify the record
owner or owners and expressly disclose the fact that, in executing the demand,
the agent is agent for such owner or owners. A record holder such as a broker
who holds shares of Eligible Stock as nominee for several beneficial owners
may exercise appraisal rights with respect to the shares of Eligible Stock
held for one or more beneficial owners while not exercising such rights with
respect to the shares of Eligible Stock held for other beneficial owners; in
such case, however, the written demand should set forth the number of shares
of Eligible Stock as to which appraisal is sought and where no number of
shares of Eligible Stock is expressly mentioned the demand will be presumed to
cover all shares of Eligible Stock held in the name of the record owner.
Stockholders who hold their shares of Eligible Stock in brokerage accounts or
other nominee forms and who wish to exercise appraisal rights are urged to
consult with their brokers to determine the appropriate procedures for the
making of a demand for appraisal by such a nominee.
All written demands for appraisal pursuant to Section 262 should be sent or
delivered to Tenneco at 1275 King Street, Greenwich, Connecticut, 06831,
Attention: Corporate Secretary.
Within ten days after the Merger Effective Time, Tenneco, as the surviving
corporation of the Merger, must notify each holder of Eligible Stock who has
complied with Section 262 and has not voted in favor of or consented to the
Merger of the date that the Merger has become effective. Within 120 days after
the Merger Effective Time, but not thereafter, Tenneco or any holder of
Eligible Stock who has so complied with Section 262 and is entitled to
appraisal rights under Section 262 may file a petition in the Delaware Court
of Chancery demanding a determination of the fair value of his, her or its
shares of $4.50 Preferred Stock or Tenneco Junior Preferred Stock, as the case
may be. Tenneco is under no obligation to and has no present intention to file
such a petition. Accordingly, it is the obligation of the holders of $4.50
Preferred Stock and Tenneco Junior Preferred Stock, respectively, to initiate
all necessary action to perfect their appraisal rights within the time
prescribed in Section 262.
Within 120 days after the Merger Effective Time, any holder of Eligible
Stock who has complied with the requirements for exercise of appraisal rights
will be entitled, upon written request, to receive from Tenneco a statement
setting forth the aggregate number of shares of $4.50 Preferred Stock entitled
to demand appraisal rights or Tenneco Junior Preferred Stock, as the case may
be, not voted in favor of the Merger and with respect to which demands for
appraisal have been received and the aggregate number of holders of such
shares. Such statement must be mailed within ten days after a written request
therefor has been received by Tenneco or within ten days after the expiration
of the period for delivery of demands for appraisal, whichever is later.
If a petition for an appraisal is timely filed by a holder of shares of
$4.50 Preferred Stock entitled to demand appraisal rights or Tenneco Junior
Preferred Stock, as the case may be, and a copy thereof is served upon
Tenneco, Tenneco will then be obligated within 20 days to file with the
Delaware Register in Chancery a duly verified list containing the names and
addresses of all holders of $4.50 Preferred Stock or Tenneco Junior Preferred
Stock, as the case may be, who have demanded an appraisal of their shares and
with whom agreements as to the value of their shares have not been reached.
After notice to such stockholders as required by the Court, the Delaware Court
of Chancery is empowered to conduct a hearing on such petition to determine
those holders
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of $4.50 Preferred Stock or Tenneco Junior Preferred Stock, as the case may be,
who have complied with Section 262 and who have become entitled to appraisal
rights thereunder. The Delaware Court of Chancery may require the holders of
shares of Eligible Stock who demanded payment for their shares to submit their
stock certificates to the Register in Chancery for notation thereon of the
pendency of the appraisal proceeding; and if any stockholder fails to comply
with such direction, the Court of Chancery may dismiss the proceedings as to
such stockholder.
After determining the holders of Eligible Stock entitled to appraisal, the
Delaware Court of Chancery will appraise the "fair value" of their shares of
$4.50 Preferred Stock or Tenneco Junior Preferred Stock, as the case may be,
exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. Holders of Eligible Stock
considering seeking appraisal should be aware that the fair value of their
shares of Eligible Stock as determined in an appraisal proceeding under Section
262 could be more than, the same as or less than the value of the shares they
would receive or continue to hold, as the case may be, pursuant to the Merger
if they did not seek appraisal of their shares of Eligible Stock and that
investment banking opinions as to fairness from a financial point of view are
not necessarily opinions as to fair value under Section 262. The Delaware
Supreme Court has stated that "proof of value by any techniques or methods
which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered in the appraisal
proceeding. In addition, Delaware courts have decided that the statutory
appraisal remedy, depending on factual circumstances, may or may not be a
dissenter's exclusive remedy. The Court of Chancery will also determine the
amount of interest, if any, to be paid upon the amounts to be received by
persons whose shares of Eligible Stock have been appraised. The costs of the
action may be determined by the Court and taxed upon the parties as the Court
deems equitable. The Court may also order that all or a portion of the expenses
incurred by any stockholder in connection with an appraisal, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts
utilized in the appraisal proceeding, be charged against the value of all the
shares of Eligible Stock entitled to be appraised.
Any holder of shares of Eligible Stock who has duly demanded an appraisal in
compliance with Section 262 will not, after the Merger Effective Time, be
entitled to vote the shares of Eligible Stock subject to such demand for any
purpose or be entitled to the payment of dividends or other distributions on
those shares of Eligible Stock (except dividends or other distributions payable
to holders of record of Eligible Stock as of a record date prior to the Merger
Effective Time).
If any stockholder who demands appraisal of his, her or its shares of
Eligible Stock under Section 262 fails to perfect, or effectively withdraws or
loses, his, her or its right to appraisal, as provided in the DGCL, the shares
of $4.50 Preferred Stock or Tenneco Junior Preferred Stock, as the case may be,
of such stockholder will be converted into the right to receive shares of El
Paso Common Stock or remain outstanding as shares of Tenneco Junior Preferred
Stock, respectively, pursuant to the Merger Agreement as described herein
(without interest). A stockholder will fail to perfect, or effectively loses or
withdraws, his, her or its right to appraisal if no petition for appraisal is
filed within 120 days after the Merger Effective Time, or if the stockholder
delivers to Tenneco a written withdrawal of his, her, or its demand for
appraisal and an acceptance of the Merger, except that any such attempt to
withdraw made more than 60 days after the Merger Effective Time will require
the written approval of Tenneco and, once a petition for appraisal is filed,
the appraisal proceeding may not be dismissed as to any holder absent court
approval.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
Pursuant to the Merger Agreement, from and after the Merger Effective Time
Tenneco will be solely responsible for (and shall indemnify New Tenneco and
Newport News against) the payment of any and all consideration that may be
determined pursuant to Section 262 to be due to the holders of Eligible Stock
who have perfected their rights to appraisal as described herein.
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RESTRICTIONS ON RESALE OF EL PASO STOCK
The shares of El Paso Common Stock and El Paso Preferred Depositary Shares,
if any, to be issued to Tenneco Stockholders pursuant to the Merger Agreement
will be registered under the Securities Act, thereby allowing such shares to
be freely traded without restrictions by persons who will not be "affiliates"
of El Paso or who were not affiliates of Tenneco prior to the Merger.
Directors and executive officers of Tenneco may be deemed to have been
affiliates of Tenneco prior to the Merger and, pursuant to Rule 145 under the
Securities Act, will not be able to resell the shares of El Paso Common Stock
and El Paso Preferred Depositary Shares, if any, received by them in the
Merger unless such sale is registered or an exemption from registration under
the Securities Act is available. Pursuant to the Merger Agreement, Tenneco has
agreed to identify all persons who may be considered affiliates of Tenneco
under Rule 145, advise them of the resale restrictions described above and use
its best efforts to obtain from each a written agreement not to sell, transfer
or otherwise dispose of any shares of El Paso Common Stock and any El Paso
Preferred Depositary Shares received in the Merger except pursuant to an
effective registration statement or in compliance with Rule 145.
THE CHARTER AMENDMENT
If the Transaction is approved at the Tenneco Special Meeting, the Tenneco
Charter will be amended the following day to eliminate specified rights,
powers and preferences of the authorized class of junior preferred stock of
Tenneco ("Tenneco Junior Preferred Shares") contained therein. As of the date
of this Joint Proxy Statement-Prospectus, there are no Tenneco Junior
Preferred Shares outstanding. However, prior to the Merger, Tenneco will issue
one or more new series of Tenneco Junior Preferred Stock pursuant to the NPS
Issuance. Certain of the rights, powers and preferences eliminated in the
Charter Amendment may be preserved for the holders of the Tenneco Junior
Preferred Stock issued in the NPS Issuance in the Certificates of Designation
of the series.
Upon the Charter Amendment becoming effective, the Tenneco Charter will
provide that each series of Tenneco Junior Preferred Shares will have such
dividend and liquidation preferences, voting rights, redemption prices,
conversion rights and other terms and provisions as may be contained in the
Certificate of Designation creating such series. Thus, each of the following
provisions of the Tenneco Charter will be eliminated upon the effectiveness of
the Charter Amendment:
Dividends. The Charter Amendment would eliminate the provisions contained in
the Tenneco Charter prohibiting any dividends from being paid or declared, or
any distribution being made, on any class of stock ranking junior to the
Tenneco Junior Preferred Shares and prohibiting any shares of stock ranking
junior to the Tenneco Junior Preferred Shares from being purchased, retired or
otherwise acquired by Tenneco, unless all dividends on the Tenneco Junior
Preferred Shares for all past periods shall have been paid, or declared and a
sum sufficient for the payment of such dividends set apart, and the full
dividend thereon for the then current dividend period shall have been paid or
declared.
Liquidation Rights. The Charter Amendment would eliminate the sections of
the Tenneco Charter providing that: (i) in the event of any liquidation,
dissolution or winding up of the affairs of Tenneco, then, before any
distribution or payment shall be made to the holders of any class of stock of
Tenneco ranking junior to the Tenneco Junior Preferred Shares, the holders of
the Tenneco Junior Preferred Shares of the respective series (subject to the
rights of Tenneco's authorized class of preferred stock) shall be entitled to
be paid in full the respective amounts fixed for such series; (ii) after such
payment shall have been made in full to the holders of the Tenneco Junior
Preferred Shares, the remaining assets and funds of Tenneco shall be
distributed among the holders of the stock of Tenneco ranking junior to the
Tenneco Junior Preferred Shares according to their respective rights; and
(iii) in the event that the assets of Tenneco available for distribution to
holders of Tenneco Junior Preferred Shares shall not be sufficient to make the
foregoing payments required to be made in full, such assets shall be
distributed to the holders of the respective shares of Tenneco Junior
Preferred Shares pro rata in proportion to the amounts payable upon each share
thereof.
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Voting Rights. The Charter Amendment would eliminate from the Tenneco
Charter existing provisions which, if there are Tenneco Junior Preferred
Shares outstanding, require the consent of the holders of a majority of such
shares for the taking of any of the following actions by Tenneco: (i) creating
additional classes of stock ranking prior to the Tenneco Junior Preferred
Shares, or increasing the amount of preferred stock or any additional class of
stock ranking prior to the Tenneco Junior Preferred Shares in respect of
dividends or distribution of assets on liquidation; (ii) creating any
obligation or security convertible into shares of preferred stock ranking
prior to or on parity with the Tenneco Junior Preferred Shares in respect of
dividends or distribution of assets on liquidation; (iii) creating any class
of stock ranking on a parity with the Tenneco Junior Preferred Shares or
increasing the authorized amount of the Tenneco Junior Preferred Shares or of
any class of stock ranking on a parity with the Tenneco Junior Preferred
Shares in respect of dividends or distribution of assets on liquidation; (iv)
the purchase, redemption or other acquisition for value of any Tenneco Junior
Preferred Shares or of any other stock ranking on a parity with the Tenneco
Junior Preferred Shares in respect of dividends or distribution of assets on
liquidation during the continuance of any default in the payment of dividends
on the Tenneco Junior Preferred Shares; or (v) selling, leasing, transferring
or conveying all, or substantially all, of Tenneco's property or business, or
consolidating with or merging into any other corporation or corporations
(except for mergers of another corporation into Tenneco or mortgages, pledges
or other hypothecations of Tenneco property). The Charter Amendment also would
eliminate the provisions contained in the Tenneco Charter requiring the
consent of the holders of at least two-thirds of the number of Tenneco Junior
Preferred Shares at the time outstanding to amend, alter or repeal any of the
provisions of Article FOURTH of the Tenneco Charter (other than provisions
relating exclusively to Tenneco Junior Preferred Shares of a particular
series) so as to affect adversely the rights, powers or preferences of Tenneco
Junior Preferred Shares or of the holders thereof, and requiring the consent
of the holders of at least two-thirds of the number of Tenneco Junior
Preferred Shares of a particular series at the time outstanding to amend,
alter or repeal any of the provisions of Article FOURTH of the Tenneco Charter
(relating exclusively to the shares of Tenneco Junior Preferred Shares of such
series) or of any resolution or resolutions relating exclusively to the
Tenneco Junior Preferred Shares of such series so as to adversely affect the
rights, powers or preferences of the Tenneco Junior Preferred Shares of such
series or the holders thereof.
The Charter Amendment would allow the Board of Directors of Tenneco
additional flexibility in establishing the powers, preferences and relative
and other special rights, including voting rights, of any series of the
Tenneco Junior Preferred Shares issued in the future, and to take certain
actions without first obtaining the consent of holders of any outstanding
shares of the Tenneco Junior Preferred Shares, unless otherwise required by
law and unless the Board of Directors elected to provide voting rights with
respect to any of the foregoing actions pursuant to the terms of any series of
the Tenneco Junior Preferred Shares issued in the future.
The full text of the provisions of the Tenneco Charter relating to the
Tenneco Junior Preferred Shares, as such provisions will be amended pursuant
to the Charter Amendment if the Transaction is approved, is set forth as
Appendix H hereto.
A vote by a Tenneco Stockholder in favor of the Transaction constitutes a
vote in favor of, among other things, the Charter Amendment.
DESCRIPTION OF THE TENNECO JUNIOR PREFERRED STOCK
Prior to the Merger, Tenneco will issue one or more series of Tenneco Junior
Preferred Stock. The shares of Tenneco Junior Preferred Stock so issued are
currently expected to have the rights and preferences described below.
Shares of Tenneco Junior Preferred Stock issued in the NPS Issuance will pay
dividends at a rate to be determined. Such shares will rank as to payment of
dividends and amounts payable in liquidation senior to the Tenneco Common
Stock (and the Tenneco Series A Participating Junior Preferred Stock issuable,
in certain circumstances, pursuant to the Tenneco Rights Plan), on a parity
with each other series of the Tenneco Junior Preferred Shares (except to the
extent the terms of such other series provide otherwise) and junior to the
Tenneco Preferred Stock.
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In the event of any dissolution, liquidation or winding up of the affairs of
Tenneco, whether voluntary or involuntary (collectively, a "Liquidation"),
holders of the Tenneco Junior Preferred Stock will be entitled to receive a
preferential distribution, plus an amount equal to all accrued and unpaid
dividends to the date of final distribution (the "Liquidation Value"), but not
until the holders of Tenneco's capital stock ranking senior to such Tenneco
Junior Preferred Stock have been paid in full the liquidation preference, if
any, applicable thereto. After such amount is paid in full, no further
distributions or payments will be made in respect of shares of Tenneco Junior
Preferred Stock.
Except as described herein or required by law, it is presently expected that
the holders of the Tenneco Junior Preferred Stock will not be entitled to vote
on any matter on which the holders of any voting securities of Tenneco are
entitled to vote. Holders of the Tenneco Junior Preferred Stock will be
entitled, voting as a class, to elect one-sixth of the entire Board of
Directors of Tenneco. In addition, whenever dividends payable on the Tenneco
Junior Preferred Stock are in arrears in an aggregate amount equivalent to six
or more full quarter-yearly dividends, the holders of outstanding Tenneco
Junior Preferred Stock will have the exclusive right, voting separately as a
class, to elect two additional directors of Tenneco, until all accrued and
unpaid dividends on the Tenneco Junior Preferred Stock have been paid in full,
at which time the right of the holders of the Tenneco Junior Preferred Stock
to elect such two additional members of the Tenneco Board will terminate
automatically, and the term of office of the additional directors so elected
by the holders of the Tenneco Junior Preferred Stock will terminate. Under the
current Tenneco Charter, the holders of Tenneco Junior Preferred Stock also
will have certain voting rights with respect to specified extraordinary
corporate and other transactions involving Tenneco. See "THE CHARTER
AMENDMENT." The Charter Amendment, if it becomes effective, will eliminate
such voting rights, although the holders of Tenneco Junior Preferred Stock
issued in the NPS Issuance may have the right, pursuant to the Certificate of
Designation therefor, to vote, together as a class, on the creation of stock
ranking prior to or on a parity with the Tenneco Junior Preferred Stock and on
the purchase, redemption or other acquisition of stock ranking junior to or on
a parity with the Tenneco Junior Preferred Stock during the pendency of any
defaults in the payment of dividends thereon. See "THE CHARTER AMENDMENT."
The Tenneco Junior Preferred Stock is expected to be redeemable in whole or
in part, at the option of Tenneco at the Liquidation Value, plus accrued and
unpaid dividends, at any time or from time to time after the fifth anniversary
of the date of issuance. Each series of the Tenneco Junior Preferred Stock
also is expected to be redeemable at the option of Tenneco if less than a
specified percentage of the original issuance of such stock remains
outstanding. Certain series of the Tenneco Junior Preferred Stock also may be
redeemable, prior to the fifth anniversary of the date of issuance, in the
event of certain amendments to the Code in respect of the dividends received
deduction.
Tenneco will be required to redeem the Tenneco Junior Preferred Stock at a
premium to be determined, plus accrued and unpaid dividends, upon the earliest
to occur of (i) the proposal to approve the Transaction is voted on and is not
approved at the Tenneco Special Meeting, (ii) the Transaction fails to be
approved by the requisite votes of the holders of Tenneco stock entitled to
vote thereon on or prior to March 31, 1997, and (iii) Tenneco shall not have
accepted on or prior to March 31, 1997 any indebtedness of Tenneco and its
subsidiaries tendered to it pursuant to the Debt Tender Offers to be made by
it in connection with the Transaction. The Tenneco Junior Preferred Stock will
not be subject to any sinking fund provisions and will have no maturity date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the material federal income tax
consequences of the Transaction. This summary is for general informational
purposes only and is not intended as a complete description of all of the tax
consequences of the Transaction and does not discuss tax consequences under
the laws of state or local governments or of any other jurisdiction. Moreover,
the tax treatment of a stockholder may vary depending upon his, her or its
particular situation. In this regard, certain stockholders (including (i)
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers, and persons who are not citizens or residents of
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the United States or who are foreign corporations, foreign partnerships or
foreign trusts or estates as defined for United States federal income tax
purposes, and (ii) stockholders that hold shares as part of a position in a
"straddle" or as part of a "hedging" or "conversion" transaction for United
States federal income tax purposes and stockholders with a "functional
currency" other than the United States dollar) may be subject to special rules
not discussed below. In addition, this summary applies only to shares which
are held as capital assets. The following discussion may not be applicable to
a stockholder who acquired his or her shares pursuant to the exercise of stock
options or otherwise as compensation.
THE FOLLOWING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE
CODE, EXISTING, PROPOSED AND TEMPORARY TREASURY REGULATIONS THEREUNDER AND
CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE
SUBJECT TO CHANGE WHICH MAY OR MAY NOT BE RETROACTIVE, AND ANY SUCH CHANGES
COULD AFFECT THE VALIDITY OF THE FOLLOWING DISCUSSION. SEE "--POSSIBLE FUTURE
LEGISLATION" BELOW.
EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE TRANSACTION DESCRIBED
HEREIN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND THE POSSIBLE EFFECTS OF CHANGES OF APPLICABLE TAX LAWS.
TAX RULINGS AND OPINIONS
On October 30, 1996, the IRS issued the IRS Ruling Letter, to the effect,
among other things, that:
(a) the Industrial Distribution will be tax-free for federal income tax
purposes to Tenneco under Section 355(c)(1) of the Code and to the Tenneco
Stockholders under Section 355(a) of the Code;
(b) the Shipbuilding Distribution will be tax-free for federal income tax
purposes to Tenneco under Section 355(c)(1) of the Code and to the Tenneco
Stockholders under Section 355(a) of the Code; and
(c) the following distributions to be effected as part of the Corporate
Restructuring Transactions will be tax-free for federal income tax purposes
to the respective transferor corporations under Section 355(c)(1) or 361(c)
of the Code and to the respective stockholders of the transferor
corporations under Section 355(a) of the Code: (i) the distribution by
Newport News of the capital stock of Tenneco Packaging Inc. to Tenneco
Corporation; (ii) the distribution by Tenneco Corporation of the capital
stock of Newport News and New Tenneco to TGP; and (iii) the distribution by
TGP of the capital stock of Newport News and New Tenneco to Tenneco.
Receipt of the IRS Ruling Letter satisfied a condition to consummation of
the Distributions.
The IRS Ruling Letter contains certain representations as to factual
matters, including a representation that there is no stockholder of Tenneco
who beneficially owns five percent or more of Tenneco's capital stock, and to
the best knowledge of Tenneco management, there is no plan or intention on the
part of the remaining Tenneco stockholders to sell, exchange or otherwise
dispose of a number of shares of El Paso Common Stock or El Paso Preferred
Depositary Shares received in the Merger that would reduce the Tenneco
Stockholders' ownership of El Paso Common Stock and El Paso Preferred
Depositary Shares to a number of shares having a value, as of the Merger
Effective Time, of less than 50 percent of the value of all of the shares of
Tenneco Stock formerly outstanding as of the Merger Effective Time. For
purposes of the foregoing representation, shares of Tenneco Stock surrendered
by holders who demand appraisal rights or exchanged for cash in lieu of
fractional shares of El Paso Common Stock or fractional El Paso Preferred
Depositary Shares will be treated as outstanding Tenneco Stock as of the
Merger Effective Time. Moreover, shares of Tenneco Stock, El Paso Common Stock
and El Paso Preferred Depositary Shares held by Tenneco Stockholders and
otherwise sold, redeemed or disposed of prior to or subsequent to the Merger
Effective Time will be considered in making the foregoing representation.
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Representations as to factual matters will also include, among other things,
that (i) El Paso has no plan or intention to liquidate Tenneco, to merge
Tenneco into another corporation, to cause Tenneco to sell or otherwise dispose
of its assets, other than certain assets unrelated to (or immaterial in
relation to) Tenneco's interstate pipeline or natural gas marketing businesses,
or to sell or otherwise dispose of Tenneco Stock acquired in the Merger (except
as described in Section 368(a)(2)(C) of the Code), (ii) immediately following
the Merger, El Paso will continue the Energy Business or use a significant
portion of the assets of the Energy Business in a business, (iii) El Paso has
no plan or intention to reacquire any El Paso Common Stock or El Paso Preferred
Depositary Shares issued to Tenneco stockholders in the Merger, (iv)
immediately following the Merger, El Paso will be in control of Tenneco within
the meaning of Section 368(c) of the Code, and (v) except as set forth in the
Merger Agreement, Tenneco, El Paso, El Paso Subsidiary and the Tenneco
stockholders will pay their own expenses, if any, incurred in connection with
the Merger.
A ruling from the IRS, while generally binding on the IRS, may under certain
circumstances be retroactively revoked or modified by the IRS. The rulings
obtained from the IRS will be based on certain facts and representations, some
of which will have been made by El Paso. Generally, the IRS Ruling Letter would
not be revoked or modified retroactively provided that (i) there has been no
misstatement or omission of material facts, (ii) the facts at the time of the
Transaction are not materially different from the facts upon which the IRS
Ruling Letter was based, and (iii) there has been no change in the applicable
law.
Consummation of the Merger is conditioned upon receipt of the foregoing
rulings and, to the extent not covered by the IRS Ruling Letter, receipt of the
Tax Opinion of Jenner & Block, as counsel to Tenneco, to the effect that:
(a) the Merger will qualify as a tax-free reorganization within the
meaning of Section 368(a)(1)(B) of the Code, and Tenneco, El Paso and El
Paso Subsidiary will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code;
(b) El Paso will not recognize any gain or loss upon receipt of Tenneco
Stock, solely in exchange for El Paso Common Stock and El Paso Preferred
Depositary Shares (if any), as set forth in the Merger Agreement;
(c) El Paso's basis in the Tenneco Common Stock, $7.40 Preferred Stock
and $4.50 Preferred Stock, will, in each case, be equal to the basis of
such stock in the hands of Tenneco Stockholders immediately prior to the
Merger;
(d) El Paso's holding period for the Tenneco Common Stock, $7.40
Preferred Stock and $4.50 Preferred Stock will, in each case, include the
period during which such stock was held by the Tenneco Stockholders;
(e) the holders of the Tenneco Common Stock, $7.40 Preferred Stock and
$4.50 Preferred Stock will not recognize any gain or loss upon the exchange
of such stock for El Paso Common Stock and El Paso Preferred Depositary
Shares (if any);
(f) the basis of the El Paso Common Stock and El Paso Preferred
Depositary Shares (if any) to be received by the holders of the Tenneco
Common Stock, $7.40 Preferred Stock and $4.50 Preferred Stock will be the
same as the basis of the Tenneco Stock surrendered in exchange therefor;
and
(g) the holding period for the El Paso Common Stock and El Paso Preferred
Depositary Shares (if any) to be received by the holders of the Tenneco
Common Stock, $7.40 Preferred Stock and $4.50 Preferred Stock will include
the holding period for the Tenneco Stock surrendered in exchange therefor,
provided that the Tenneco Stock surrendered is held as a capital asset on
the closing date of the Merger.
The Tax Opinion also is to cover, to the extent not covered in the IRS Ruling
Letter, certain other federal tax matters addressed below in this section of
the Joint Proxy Statement-Prospectus (including treatment of holders of Tenneco
Stock receiving cash in lieu of fractional share interests of El Paso Common
Stock or
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fractional El Paso Preferred Depositary Shares and treatment of holders of
$4.50 Preferred Stock, if any, who demand appraisal rights in connection with
the Merger and receive cash in accordance with the DGCL).
The IRS Ruling Letter issued on October 30, 1996 covered the matters to be
addressed in the Tax Opinion. Accordingly, delivery of the Tax Opinion is a
condition to consummation of the Merger which has been satisfied.
THE DISTRIBUTIONS
It is expected that the Distributions will qualify as tax-free distributions
under Section 355 of the Code. Assuming that the Distributions so qualify, (i)
the holders of Tenneco Common Stock will not recognize gain or loss upon
receipt of shares of Newport News Common Stock or shares of New Tenneco Common
Stock, (ii) each holder of Tenneco Common Stock will allocate his, her or its
aggregate tax basis in the Tenneco Common Stock immediately before the
Distributions among the Tenneco Common Stock, Newport News Common Stock and New
Tenneco Common Stock in proportion to their respective fair market values,
(iii) the holding period of each holder of Tenneco Common Stock for the Newport
News Common Stock and the New Tenneco Common Stock will include the holding
period for his, her or its Tenneco Common Stock, provided that the Tenneco
Common Stock is held as a capital asset at the time of the Distributions, and
(iv) Tenneco will not recognize any gain or loss on its distribution of the New
Tenneco Common Stock or Newport News Common Stock to its stockholders.
No fractional shares of New Tenneco Common Stock or Newport News Common Stock
will be distributed in the Distributions. A holder of Tenneco Common Stock who,
pursuant to the Distributions, receives cash in lieu of fractional shares of
Newport News Common Stock will be treated as having received such fractional
shares of Newport News Common Stock pursuant to the Distributions and then as
having received such cash in a sale of such fractional shares of Newport News
Common Stock. Such holders will generally recognize capital gain or loss
pursuant to such deemed sale equal to the difference between the amount of cash
received and such holders' adjusted tax basis in the fractional share of
Newport News Common Stock received. Such gain or loss will be capital (provided
the Tenneco Common Stock is held as a capital asset at the time of the
Distributions) and will be treated as a long-term capital gain or loss if the
holding period for the fractional shares of Newport News Common Stock deemed to
be received and then sold is more than one year.
If the Distributions do not qualify as tax-free distributions under Section
355 of the Code, then each holder of Tenneco Common Stock who receives shares
of New Tenneco Common Stock and Newport News Common Stock in the Distributions
will be treated as if such stockholder received taxable distributions in an
amount equal to the fair market value of the New Tenneco Common Stock and
Newport News Common Stock received. Such distributions will be treated as (i) a
dividend to the extent paid out of Tenneco's current and accumulated earnings
and profits, then (ii) a reduction in such stockholder's basis in Tenneco
Common Stock to the extent the amount received exceeds the amount referenced in
clause (i), and then (iii) gain from the sale or exchange of Tenneco Common
Stock to the extent the amount received exceeds the sum of the amounts
referenced in clauses (i) and (ii). Each stockholder's basis in his, her or its
Newport News Common Stock and New Tenneco Common Stock would be equal to the
fair market value of such stock at the time of the Distributions. In addition,
if the Distributions were not to qualify as tax-free distributions under
Section 355 of the Code, then, in general, a corporate level federal income tax
would be payable by the consolidated group of which Tenneco is the common
parent, which tax (assuming the internal spin-off transactions included in the
Corporate Restructuring Transactions also failed to qualify under Code Section
355) would be based upon the gain (computed as the difference between the fair
market value of the stock distributed and the distributing corporation's
adjusted basis in such stock) realized by each of the distributing corporations
upon its distribution of the stock of one or more controlled corporations to
its stockholders in the Transaction. Under the terms of the Tax Sharing
Agreement, neither New Tenneco nor Newport News will be liable to indemnify
Tenneco for any additional taxes incurred by reason of the Distributions being
taxable, unless the Distributions fail to qualify for tax-free treatment under
Section 355 of Code as a result of the inaccuracy of certain factual statements
or representations made in connection with the request for the IRS Ruling
Letter or Tax Opinion or New Tenneco or Newport News take any action which is
inconsistent with any factual statements or representations or the tax
treatment of the
141
<PAGE>
Transaction as contemplated in the IRS Ruling Letter request or the Tax
Opinion. See the discussion of the Tax Sharing Agreement under "THE
DISTRIBUTIONS--Relationship Among Tenneco, New Tenneco and Newport News After
the Distributions."
Various of the Corporate Restructuring Transactions are intended to be tax-
free for federal income tax purposes, although Tenneco has sought an IRS ruling
to that effect only with respect to certain of such transactions. Except as
otherwise provided in the Tax Sharing Agreement, Tenneco will be liable for any
unintended gain recognized in connection with the Corporate Restructuring
Transactions, other than such gains which are the result of the failure of New
Tenneco or Newport News to comply with certain tax-related representations and
covenants to refrain from taking action which is inconsistent with certain
factual statements or representations or the tax treatment of the Transaction
as contemplated in the IRS Ruling Letter request or in the Tax Opinion. See
"THE DISTRIBUTIONS--Relationship Among Tenneco, New Tenneco and Newport News
After the Distributions."
THE MERGER
It is expected that the Merger will constitute a reorganization within the
meaning of Section 368(a)(1)(B) of the Code. If the Merger so qualifies, (i)
Tenneco Stockholders will not recognize gain or loss upon the receipt of El
Paso Common Stock and El Paso Preferred Depositary Shares (if any) in exchange
for their Tenneco Stock, (ii) each Tenneco Stockholder's tax basis in the
Tenneco Stock (as determined immediately following the Distributions) will
carry over to the El Paso Common Stock and El Paso Preferred Depositary Shares
(if any), (iii) each Tenneco Stockholder's holding period for Tenneco Stock
will carry over to the El Paso Common Stock and/or El Paso Preferred Depositary
Shares (if any), provided that the Tenneco Stock is held as a capital asset
immediately prior to the Merger Effective Time, and (iv) any Tenneco
Stockholder receiving cash in lieu of fractional shares or any fractional El
Paso Preferred Depositary Shares will recognize capital gain or loss (provided
the shares of Tenneco surrendered are held as capital assets immediately prior
to the Merger Effective Time) equal to the difference between the amount of
cash received and the portion of such stockholder's basis in the shares of
Tenneco Stock allocable to such fractional share interests and such capital
gain or loss will be long-term capital gain or loss if the holding period for
such shares is more than one year.
In addition, holders of $4.50 Preferred Stock and Tenneco Junior Preferred
Stock who properly demand appraisal in accordance with the terms of Delaware
law and receive cash in an appraisal proceeding will be treated as having
received that cash as a distribution in redemption of such stock subject to the
provisions and limitations of Section 302 of the Code. Any such holder who
holds no El Paso stock, directly or by reason of attribution under Section 318
of the Code, will be treated as having a complete termination of their
interests within the meaning of Section 302(b)(3) of the Code, the cash
received will be treated as a distribution in full payment in exchange for
their $4.50 Preferred Stock or Tenneco Junior Preferred Stock, as the case may
be, under Section 302(a) of the Code, and such stockholders will recognize
capital gain or loss, provided such stock is held as a capital asset at the
Merger Effective Time, in an amount equal to the difference between the amount
of the cash received and the stockholder's basis in the shares surrendered.
Such capital gain or loss will be long-term capital gain or loss if the holding
period for such shares is more than one year. Any such holder who holds El Paso
stock, directly or indirectly by reason of attribution under Section 318 of the
Code, will also be entitled to capital gain treatment unless the receipt of the
cash is considered to have the effect of a dividend distribution under Section
302 of the Code. In this event, the cash such stockholder receives is treated
as a dividend to the extent of the stockholder's ratable share of applicable
current and/or accumulated earnings and profits. For a stockholder taxed as a
domestic corporation (other than an S corporation), if the cash received is
treated as a dividend, the corporate stockholder may, subject to the conditions
set forth in Section 243 and 246 of the Code, be entitled to deduct an amount
equal to 70 percent of the amount taxed as a dividend. In general, the receipt
of cash or other property will not be considered to have the effect of a
dividend distribution if (a) it is "substantially disproportionate" with
respect to such stockholder, or (b) it is "not essentially equivalent to a
dividend" with respect to such stockholder. Stockholders should consult their
own tax advisors with respect to the issue of constructive ownership and the
possibility of satisfying the "substantially disproportionate" or "not
essentially equivalent to a dividend" tests.
142
<PAGE>
If the Merger does not qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Code, the Tenneco Stockholders will recognize gain
or loss upon the receipt of the El Paso Common Stock and El Paso Preferred
Depositary Shares (if any) in exchange for their Tenneco Stock equal to the
difference between the fair market value of the El Paso Common Stock and El
Paso Preferred Depositary Shares (if any) received and their basis in their
Tenneco Stock. In this regard, the failure of the Merger to qualify as a
reorganization within the meaning of Code Section 368(a)(1)(B) of the Code may
also cause the Distributions to not qualify as tax-free distributions under
Section 355 of the Code, in which case (as described in the third paragraph
under "--The Distributions" above) each holder of Tenneco Common Stock who
receives shares of New Tenneco Common Stock and Newport News Common Stock in
the Distributions will be treated as if such stockholder received taxable
distributions in an amount equal to the fair market value of the New Tenneco
Common Stock and Newport News Common Stock received. Such distributions would
be treated as (i) a dividend to the extent paid out of Tenneco's current and
accumulated earnings and profits, then (ii) a reduction in such stockholder's
basis in Tenneco Common Stock to the extent the amount received exceeds the
amount referenced in cause (i), and then (iii) gain from the sale or exchange
of Tenneco Common Stock to the extent the amount received exceeds the sum of
the amounts referenced in clauses (i) and (ii). Each stockholder's basis in the
Newport News Common Stock and New Tenneco Common Stock would be equal to the
fair market value of such stock at the time of the Distributions.
It is possible that, as a result of the Merger, certain New York state and
local real property transfer taxes (the "NY Transfer Taxes") will be imposed on
Tenneco Stockholders. Under the terms of the Merger Agreement, Tenneco will pay
all such NY Transfer Taxes, if any, directly to state and local tax authorities
on behalf of all Tenneco Stockholders. Any such payments by Tenneco on behalf
of the Tenneco Stockholders would likely result in dividend income to the
Tenneco Stockholders, to the extent of Tenneco's current and accumulated
earnings and profits, as determined for federal income tax purposes. The amount
of such dividend income attributable to each share of Tenneco Stock cannot be
calculated at this time but it is not expected to be material. Tenneco will be
required to report any such dividend income to the IRS if the aggregate amount
of all dividends received by a Tenneco Stockholder in the relevant year
(including dividends attributable to Tenneco's payment of the NY Transfer
Taxes) is $10.00 or more. Tenneco will notify each Tenneco Stockholder of the
amount of all dividends attributable to such stockholder on a Form 1099-DIV
which will be mailed to such stockholder at a later date.
POSSIBLE FUTURE LEGISLATION
The Administration's Budget Proposal issued March 19, 1996 contains several
revenue proposals, including a proposal (the "Anti-Morris Trust Proposal")
which would require a distributing corporation in a transaction otherwise
qualifying as a tax-free distribution under Section 355 of the Code to
recognize gain on the distribution of the stock of the controlled corporation
unless the direct and indirect stockholders of the distributing corporation own
more than 50 percent of the distributing corporation and controlled
corporations at all times during the four year period commencing two years
prior to the distribution. The Anti-Morris Trust Proposal would apply to any
distributions occurring after March 19, 1996, unless such distribution was (i)
pursuant to a binding contract on such date, (ii) described in a ruling request
submitted to the IRS on or before such date, or (iii) described in a public
announcement or SEC filing on or before such date.
On March 29, 1996, Senator William V. Roth, Chairman of the Senate Finance
Committee and Congressman Bill Archer, Chairman of the House Ways & Means
Committee, issued a joint statement (the "Roth-Archer Statement") to the effect
that, should certain of the revenue proposals included in the Administration's
Budget (including the Anti-Morris Trust Proposal) be enacted, their effective
date will be no earlier than the date of "appropriate Congressional action." As
of the date of this Joint Proxy Statement-Prospectus, no legislation has been
introduced relating to the Anti-Morris Trust Proposal. On June 27, 1996,
Tenneco submitted its request for rulings (including rulings on the tax-free
treatment of the Distributions) to the IRS. Accordingly, in view of the Roth-
Archer Statement, any future Anti-Morris Trust legislation should not
143
<PAGE>
apply to the Distributions assuming that the effective date of such legislation
contains a grandfather clause for transactions for which a ruling request has
been filed with the IRS prior to the date of "appropriate Congressional
action." Nevertheless, there can be no assurances that Congress will not adopt
Anti-Morris Trust legislation which would apply retroactively to the
Distributions. In the event such legislation is announced or introduced prior
to the consummation of the Transaction, under the terms of the Merger Agreement
El Paso may elect not to proceed with the Merger if it reasonably determines
that there exists a reasonable likelihood that the Distributions or the Merger
would not be tax-free for federal income tax purposes. If El Paso elects to
proceed with the Merger notwithstanding the announcement or introduction of
Anti-Morris Trust legislation, the Distributions, if ultimately subject to such
legislation, may result in significant taxable gain to Tenneco under Section
355(c) of the Code. Although Tenneco Stockholders would not recognize taxable
gain or loss on the receipt of the stock of New Tenneco and Newport News under
the current Anti-Morris Trust Proposal, the taxable gain required to be
recognized by Tenneco under Code Section 355(c) would significantly reduce the
value of the El Paso Common Stock and El Paso Preferred Depositary Shares (if
any) received by the Tenneco Stockholders in the Merger.
The Budget Proposal also contains a proposal (the "Nonqualified Preferred
Stock Proposal") that would, among other things, treat certain preferred stock
received in a reorganization as "other property" (boot) resulting in gain (but
not loss) recognition to the recipient of such stock. The Nonqualified
Preferred Stock Proposal would apply to transactions entered into after
December 7, 1995, with certain exceptions, including an exception for stock
issued pursuant to a written agreement binding (subject to customary
conditions) on such date.
The Roth-Archer Statement provides that should certain revenue proposals
included in the Budget Proposal (including the Nonqualified Preferred Stock
Proposal) be enacted, their effective date will be no earlier than the date of
"appropriate congressional action." As of the date of this Joint Proxy
Statement-Prospectus, no legislation has been introduced relating to the
Nonqualified Preferred Stock Proposal. The Merger Agreement which provides for
the issuance of the El Paso Preferred Stock, was entered into on June 19, 1996
and amended and restated on November 1, 1996 (effective as of June 19, 1996).
Accordingly, in view of the Roth-Archer Statement, any future legislation
including the Nonqualified Preferred Stock Proposal should not apply to the El
Paso Preferred Stock, if issued, assuming the effective date of such
legislation contains a grandfather clause for stock issued pursuant to a
binding agreement (subject to customary conditions) entered into on or before
the date of such Congressional action.
Nevertheless, there can be no assurances that Congress will not adopt
legislation containing the Nonqualified Preferred Stock Proposal that would
apply retroactively to the issuance of the El Paso Preferred Stock. In the
event such legislation is announced or introduced prior to the consummation of
the Transaction, if either Tenneco or El Paso determines that there exists a
reasonable likelihood that issuance of the El Paso Preferred Stock would cause
the Merger to be taxable to holders of Tenneco Stock, El Paso is obligated,
under the terms of the Merger Agreement, at its own cost, to amend the terms of
the El Paso Preferred Stock in a manner so as not to cause the Merger to be
taxable to holders of Tenneco Stock. If, however, legislation containing the
Nonqualified Preferred Stock Proposal were enacted following the Transaction,
and such legislation applied retroactively to the issuance of the El Paso
Preferred Stock, it is possible that the Merger would not qualify as a
reorganization within the meaning of Section 368(a)(1)(B) of the Code and
holders of Tenneco Stock receiving El Paso Common Stock or El Paso Preferred
Stock in the Merger would recognize gain on the exchange. Even if the issuance
of El Paso Preferred Stock did not prevent qualification of the Merger as a
tax-free reorganization, holders of Tenneco Stock receiving El Paso Preferred
Depositary Shares would recognize gain on the exchange that might be taxable as
ordinary income to the extent of the earnings and profits of Tenneco. The
failure of the Merger to qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Code or the recognition of gain by shareholders as
a result of the receipt of El Paso Preferred Depositary Shares may also cause
the Distributions to not qualify as tax-free distributions under Section 355 of
the Code. For a description of the federal income tax consequences of the
failure of the Distributions to qualify under Section 355 of the Code, see the
discussion under the heading "--The Distributions" above.
144
<PAGE>
BACK-UP WITHHOLDING REQUIREMENTS
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of Tenneco Stock, unless the
stockholder (i) is a corporation or comes within certain other exempt
categories, and, when required, demonstrates these facts, or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A stockholder who does not supply Tenneco with
his, her or its correct taxpayer identification number may be subject to
penalties imposed by the IRS. Any amount withheld under these rules will be
refunded or credited against the stockholder's federal income tax liability.
Stockholders should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption. If information reporting requirements apply to a stockholder, the
amount of dividends paid with respect to such shares will be reported annually
to the IRS and to such stockholder.
These backup withholding tax and information reporting rules currently are
under review by the United States Treasury Department and proposed Treasury
Regulations issued on April 15, 1996 would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules could be changed.
145
<PAGE>
SELECTED FINANCIAL DATA
TENNECO AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED SELECTED FINANCIAL INFORMATION
The following consolidated selected financial data as of and for each of the
fiscal years in the five-year period ended December 31, 1995 were derived from
audited financial statements of Tenneco and its consolidated subsidiaries. The
financial statements as of and for each of the fiscal years in the five-year
period ended December 31, 1995 have been audited by Arthur Andersen LLP,
independent public accountants. The consolidated selected financial data as of
and for each of the six-month periods ended June 30, 1996 and 1995 were
derived from the unaudited condensed financial statements of Tenneco and its
consolidated subsidiaries. In the opinion of Tenneco's management, the
selected financial data of Tenneco as of and for the six months ended June 30,
1996 and 1995 include all adjusting entries (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The results of operations for the six-months ended June 30, 1996
should not be regarded as indicative of the results that may be expected for
the full year. This information should be read in conjunction with Tenneco's
financial statements, and the notes thereto, contained in the Tenneco Annual
Report on Form 10-K, as amended, for the year ended December 31, 1995 and the
Tenneco Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1996, which are incorporated by reference herein.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------ ------------------------------------------------------------------------
(MILLIONS EXCEPT PER 1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
SHARE AMOUNTS) ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
(LOSS) DATA(B):
Net sales and
operating revenues
from continuing
operations--
Automotive.......... $ 1,463 $ 1,263 $ 2,479 $ 1,989 $ 1,785 $ 1,763 $ 1,668
Energy.............. 1,366 937 1,916 2,378 2,862 2,183 2,183
Packaging........... 1,775 1,318 2,752 2,184 2,042 2,078 1,934
Shipbuilding........ 915 845 1,756 1,753 1,861 2,265 2,216
Other............... (2) (2) (4) (6) (5) 31 26
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total.............. $ 5,517 $ 4,361 $ 8,899 $ 8,298 $ 8,545 $ 8,320 $ 8,027
=========== =========== =========== =========== =========== =========== ===========
Income from
continuing
operations before
interest expense,
income taxes and
minority interest--
Automotive.......... $ 163 $ 134 $ 240 $ 223 $ 222 $ 237 $ 188
Energy.............. 185 148 333 415 411 360 561 (c)
Packaging........... 256 244 430 209 139 221 139 (c)
Shipbuilding........ 81 90 160 200 225 249 225
Other............... (4) (11) (67) (25) 18 (32) (98)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total.............. 681 605 1,096 1,022 1,015 1,035 1,015
Interest expense (net
of interest
capitalized)........ 179 152 306 263 254 221 237
Income tax expense... 175 185 279 249 298 282 258
Minority interest.... 10 11 22 7 -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from
continuing
operations.......... 317 257 489 503 463 532 520
Income (loss) from
discontinued
operations, net of
income tax(d)....... 339 81 246 (51)(e) (12)(e) (1,144)(e) (1,252)(e)
Extraordinary loss,
net of income tax... -- -- -- (5) (25) (12) --
Cumulative effect of
changes in
accounting
principles, net of
income tax.......... -- -- -- (39)(f) -- (699)(f) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).... 656 338 735 408 426 (1,323) (732)
Preferred stock divi-
dends............... 5 6 12 12 14 16 16
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) to
common stock........ $ 651 $ 332 $ 723 $ 396 $ 412 $ (1,339) $ (748)
=========== =========== =========== =========== =========== =========== ===========
Average number of
shares of common
stock outstanding... 170,351,740 175,829,883 173,995,941 180,084,909 168,772,852 144,110,151 122,777,910
Earnings (loss) per
average share of
common stock--
Continuing
operations......... $ 1.83 $ 1.43 $ 2.75 $ 2.72 $ 2.66 $ 3.58 $ 4.10
Discontinued
operations......... 1.99 .46 1.41 (.27) (.07) (7.93) (10.19)
Extraordinary loss.. -- -- -- (.03) (.15) (.08) --
Cumulative effect of
changes in
accounting
principles......... -- -- -- (.22) -- (4.86) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss). $ 3.82 $ 1.89 $ 4.16 $ 2.20 (g) $ 2.44 (g) $ (9.29)(g) $ (6.09)
=========== =========== =========== =========== =========== =========== ===========
Cash dividends paid
per common share.... $ .90 $ .80 $ 1.60 $ 1.60 $ 1.60 $ 1.60 $ 2.80
</TABLE>
(Table continued on next page)
146
<PAGE>
(Continued from previous page)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- --------------------------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
------------ ------------ ----------- ----------- ----------- ---------- -----------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(B):
Total assets........... $ 13,262 $ 12,090 $ 13,451 $ 12,251 $ 11,105 $ 11,320 $ 12,985
Short-term debt........ 1,146 635 908 536 431 669 1,132
Long-term debt......... 3,374 3,309 3,751 3,568 3,620 4,718 4,593
Minority interest...... 320 315 320 320 150 160 171
Preferred stock with
mandatory redemption
provisions............ 112 129 130 147 163 191 194
Shareowners' equity.... 3,569 2,911 3,148 2,900 2,601 1,330 2,774
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided
(used) by operating
activities............ $ (215) $ 255 $ 1,443 $ 450 $ 1,615 $ 929 $ 950
Net cash provided
(used) by investing
activities............ 505 183 (1,146) (117) (338) 105 (660)
Net cash provided
(used) by financing
activities............ (413) (741) (356) (151) (1,166) (1,136) (205)
Capital expenditures
for continuing
operations............ 464 322 976 653 424 447 564
OTHER DATA:
EBITDA(h).............. $ 956 $ 804 $ 1,523 $ 1,321 $ 1,385 $ 1,391 $ 1,350
</TABLE>
- -------
(a) For a discussion of significant items affecting comparability of the
financial information for 1995, 1994 and 1993, and for the six months
ended June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for Tenneco and
Consolidated Subsidiaries included in the Tenneco Annual Report on Form
10-K, as amended, for the year ended December 31, 1995 and the Tenneco
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, which
are incorporated by reference herein.
(b) During 1995 and 1994, Tenneco completed several acquisitions at its
various operating segments, the most significant of which was Tenneco
Packaging's acquisition of Mobil Plastics for $1.3 billion in late 1995.
See Note 2 to the Financial Statements of Tenneco and Consolidated
Subsidiaries included in the Tenneco Annual Report on Form 10-K, as
amended, for the year ended December 31, 1995, which is incorporated by
reference herein, for further information on the Tenneco acquisitions.
(c) For Tenneco Energy, includes a gain of $265 million related to the sale of
its natural gas liquids business, including its interest in an MTBE plant
then under construction. Also, Tenneco Packaging recorded a gain of $42
million related to the sale of three short-line railroads.
(d) Discontinued operations reflected in the above periods include Tenneco's
farm and construction equipment operations, which were discontinued in
March 1996, its chemicals and brakes operations, which were discontinued
during 1994, and its minerals and pulp chemicals operations, which were
discontinued in 1992. In addition, certain additional costs related to
Tenneco's discontinued oil and gas operations were reflected in the 1991
results.
(e) Includes a pre-tax restructuring charge of $920 million recorded in 1992
relating to the discontinued farm and construction equipment business.
This pre-tax restructuring charge was reduced by $20 million in 1993 and
$16 million in 1994. Additionally, a $473 million pre-tax restructuring
charge was recorded in 1991, of which $461 million related to the
discontinued farm and construction equipment business.
(f) In 1994, Tenneco adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits". In 1992, Tenneco adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and FAS No. 109, "Accounting for Income Taxes."
(g) For purposes of computing earnings per share, Series A preferred stock was
included in average common shares outstanding until its conversion into
common stock in December 1994; therefore, the preferred dividends paid
were not deducted from net income (loss) to determine net income (loss) to
common stock. The inclusion of Series A preferred stock in the computation
of earnings per share was antidilutive for the years and certain quarters
in 1994, 1993 and 1992. Other convertible securities and common stock
equivalents outstanding during each of the five years ended December 31,
1995, 1994, 1993, 1992 and 1991 were not materially dilutive.
(h) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon GAAP; however, the amounts included in the
EBITDA calculation are derived from amounts included in the Statements of
Income. In addition, EBITDA should not be considered as an alternative to
net income or operating income, as an indicator of the operating
performance of Tenneco or as an alternative to operating cash flows as a
measure of liquidity.
147
<PAGE>
EL PASO
SELECTED FINANCIAL DATA
The summary financial data set forth below have been derived from the
financial statements of El Paso for each of the five fiscal years ended
December 31, 1995 and the unaudited six month periods ended June 30, 1996 and
June 30, 1995. The financial statements for each of the five fiscal years for
the period ended December 31, 1995 have been audited by Coopers & Lybrand
L.L.P., independent accountants. The summary consolidated financial data set
forth below as of and for each of the six-month periods ended June 30, 1996 and
1995 were derived from the unaudited condensed financial statements of El Paso
and its consolidated subsidiaries. In the opinion of El Paso's management, the
summary consolidated financial data of El Paso as of and for the six months
ended June 30, 1996 and 1995 include all adjusting entries (consisting only of
normal recurring adjustments) necessary to present fairly the information set
forth therein. The results of operations for the six months ended June 30, 1996
should not be regarded as indicative of the results that may be expected for
the full year.
This information should be read in conjunction with the historical financial
statements and notes thereto contained in the El Paso Annual Report on Form 10-
K for the year ended December 31, 1995 and the El Paso Quarterly Report on Form
10-Q for the six months ended June 30, 1996, which are incorporated by
reference herein, and in conjunction with the Unaudited Pro Forma Combined
Financial Statements of El Paso and Tenneco Energy and notes thereto included
elsewhere in this Joint Proxy Statement-Prospectus. See "AVAILABLE
INFORMATION," "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE," and
"UNAUDITED PRO FORMA FINANCIAL INFORMATION."
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ------------------------------------
1996(E) 1995 1995(E) 1994 1993(F) 1992 1991
------- ------ ------- ------ ------- ------ ------
(IN MILLIONS, EXCEPT PER COMMON SHARE AMOUNTS AND
RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Operating revenues...... $1,193 $ 389 $1,038 $ 870 $ 909 $ 803 $ 735
Depreciation, depletion,
and amortization....... 43 34 72 65 54 73 61
Litigation special
charge................. -- -- -- 15 -- -- --
Employee separation and
asset impairment
charge(a).............. 99 -- -- -- -- -- --
Operating income........ 29 109 212 222 229 185 185
Income (loss) from
continuing operations
before income taxes.... (18) 70 133 148 151 123 141
Income taxes (benefit).. (7) 28 48 58 59 47 52
Income (loss) from
continuing operations.. (11) 42 85 90 92 76 89
Earnings (loss) per
common share from
continuing operations.. (0.31) 1.21 2.47 2.45 2.46 2.12 2.82
Cash dividends declared
per common share(b).... 0.70 0.66 1.32 1.21 1.10 0.75 --
Average common shares
outstanding............ 35,264 34,976 34,495 36,632 37,212 36,049 31,422
Ratio of earnings to
combined fixed charges
and preferred stock
dividend requirements.. --(g) 2.59 2.51 2.87 3.04 2.73 2.86
<CAPTION>
JUNE 30, DECEMBER 31,
----------------- ------------------------------------
1996(E) 1995 1995(E) 1994 1993(F) 1992 1991
------- ------ ------- ------ ------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Total assets............ $2,764 $2,266 $2,535 $2,332 $2,270 $2,051 $2,302
Payable to Burlington
Resources Inc.,
including current
portion................ -- -- -- -- -- -- 625
Long-term debt(c)....... 670 775 772 779 796 637 250
Stockholders' equity(d). 688 691 712 710 708 669 815
</TABLE>
- --------
(a) Charge of $99 million pre-tax ($60 million after tax) to reflect costs
associated with the implementation of a workforce reduction plan and the
impairment of certain long-lived assets. Earnings per common share for the
six months ended June 30, 1996 before giving effect to this charge would
have been $1.41 compared to $(0.31).
(b) Represents dividends declared subsequent to El Paso's March 1992 initial
public offering.
(c) Excludes current maturities.
(d) In May 1991, El Paso declared and paid a dividend of $175 million to The El
Paso Company (formerly the parent company of El Paso). In September 1991,
El Paso declared a dividend of all its Oil and Gas Operations Segment to
The El Paso Company. The total amount of that dividend was $925 million. In
addition, El Paso declared and paid dividends to Burlington Resources Inc.
totaling $55 million in 1991 and $274 million prior to El Paso's March 1992
initial public offering.
(e) Reflects the consolidation in September 1995 of Eastex Energy Inc., in
December 1995 of Premier Gas Company, and in June 1996 of Cornerstone
Natural Gas Company.
(f) Mojave Pipeline Company was consolidated beginning May 1993.
(g) Earnings for the six months ended June 30, 1996 were inadequate to cover
fixed charges by $18 million due to a special charge for employee
separation and asset impairments of $99 million pre-tax.
148
<PAGE>
TENNECO ENERGY
COMBINED SELECTED FINANCIAL DATA
The combined selected financial data as of December 31, 1995 and 1994 and
for the years ended December 31, 1995, 1994 and 1993 were derived from the
audited Combined Financial Statements of Tenneco Energy. The combined selected
financial data as of December 31, 1993, 1992 and 1991 and for the years ended
December 31, 1992 and 1991 are unaudited and were derived from the accounting
records of Tenneco. The combined selected financial data as of and for each of
the six-month periods ended June 30, 1996 and 1995 were derived from the
unaudited Combined Financial Statements of Tenneco Energy. In the opinion of
Tenneco Energy's management, the combined selected financial data of Tenneco
Energy as of December 31, 1993, 1992 and 1991 and for the years ended December
31, 1992 and 1991, and as of and for the six months ended June 30, 1996 and
1995 include all adjusting entries (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
The results of operations for the six months ended June 30, 1996 should not be
regarded as indicative of the results that may be expected for the full year.
This information should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of the Energy
Business and Tenneco Energy's Combined Financial Statements, and notes
thereto, included elsewhere in this Joint Proxy Statement-Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------- -----------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
(MILLIONS) ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA(B):
Net sales and operating
revenues.............. $1,370 $ 939 $1,921 $2,381 $2,866 $2,221 $2,216
====== ====== ====== ====== ====== ====== ======
Income before interest
expense and income
taxes ................ $ 188 $ 140 $ 268 $ 367 $ 419 $ 337 $ 475(c)
Interest expense (net
of interest capital-
ized)................. 63 61 122 142 127 94 121
Income tax expense
(benefit)............. 22 32 (11) 72 104 63 103
------ ------ ------ ------ ------ ------ ------
Income before
extraordinary loss and
cumulative effect of
changes in accounting
principles, net of
income tax............ 103 47 157 153 188 180 251
Extraordinary loss, net
of income tax......... -- -- -- -- (25)(d) (9)(e) --
Cumulative effect of
changes in accounting
principles, net of in-
come tax.............. -- -- -- -- -- (332)(f) --
------ ------ ------ ------ ------ ------ ------
Net income (loss)...... $ 103 $ 47 $ 157 $ 153 $ 163 $ (161) $ 251
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA(B):
Total assets........... $5,539 $5,799 $5,792 $5,730 $4,290 $4,054 $4,464
Short-term debt(g)..... 521 376 456 399 304 392 338
Long-term debt(g)...... 1,519 1,737 1,811 2,242 2,019 2,282 2,674
Combined equity........ 1,054 899 687 382 (652) (1,503) (1,120)
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided
(used) by operating
activities............ $ (185) $ 174 $ 765 $ (278) $ 209 $ 729 $ 84
Net cash provided
(used) by investing
activities............ 117 (266) (537) (229) (35) (383) 61
Net cash provided
(used) by financing
activities............ (81) 63 (27) 426 (49) (393) (190)
Capital expenditures... 164 113 337 345 171 253 298
</TABLE>
- -------
(a)For a discussion of the significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the Energy Business
included elsewhere herein.
(b) During 1995, 1994 and 1993, Tenneco Energy completed several acquisitions
and dispositions, the most significant of which was the acquisition of the
natural gas pipeline assets of the Pipeline Authority of South Australia
in 1995 and the disposition of its 50% interest in Kern River Gas
Transmission Company in 1995. See Notes 4 and 5 to the Combined Financial
Statements of Tenneco Energy, included elsewhere in this Joint Proxy
Statement-Prospectus, for further information on the Tenneco Energy
acquisitions and dispositions.
(c) Includes a gain of $265 million related to the sale of Tenneco Energy's
natural gas liquids business, including its interest in an MTBE plant then
under construction.
(d) During 1993, Tenneco Energy recorded an extraordinary loss as a result of
the prepayment of long-term debt. See Note 5 to the Combined Financial
Statements of Tenneco Energy, included elsewhere in this Joint Proxy
Statement-Prospectus, for further information on the Tenneco Energy
extraordinary loss.
(e) During 1992, Tenneco Energy recorded an extraordinary loss as a result of
the defeasance of $310 million of its high interest bearing long-term
debt.
(f) In 1992, Tenneco Energy adopted FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and FAS No. 109, "Accounting
for Income Taxes."
(g) Amounts are net of allocations from Tenneco to New Tenneco and Newport
News. The allocation is based on the portion of Tenneco's investment in
New Tenneco and Newport News which is deemed to be debt, generally based
on the ratio of New Tenneco's and Newport News' net assets to Tenneco
consolidated net assets plus debt. Tenneco's historical practice has been
to incur indebtedness for its consolidated group at the parent company
level or at a limited number of subsidiaries, rather than at the operating
company level, and to centrally manage various cash functions. Management
believes that the historical allocation of corporate debt and interest
expense is reasonable; however, it is not necessarily indicative of
Tenneco Energy's debt and interest expense upon completion of the Debt
Realignment. See Note 6 to the Combined Financial Statements of Tenneco
Energy, included elsewhere in this Joint Proxy Statement-Prospectus.
149
<PAGE>
NEW TENNECO
COMBINED SELECTED FINANCIAL DATA
The combined selected financial data as of December 31, 1995 and 1994 and
for the years ended December 31, 1995, 1994 and 1993 were derived from the
audited Combined Financial Statements of New Tenneco. The combined selected
financial data as of December 31, 1993, 1992 and 1991 and for the years ended
December 31, 1992 and 1991 are unaudited and were derived from the accounting
records of Tenneco. The combined selected financial data as of and for each of
the six-month periods ended June 30, 1996 and 1995 were derived from the
unaudited Combined Financial Statements of New Tenneco. In the opinion of New
Tenneco's management, the combined selected financial data of New Tenneco as
of December 31, 1993, 1992 and 1991 and for the years ended December 31, 1992
and 1991, and as of and for the six months ended June 30, 1996 and 1995
include all adjusting entries (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
The results of operations for the six months ended June 30, 1996 should not be
regarded as indicative of the results that may be expected for the full year.
This information should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of New Tenneco
and New Tenneco's Combined Financial Statements, and notes thereto, included
in the New Tenneco Information Statement attached hereto as Appendix C.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------- -----------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
(MILLIONS) ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA(B):
Net sales and operating revenues
from continuing operations--
Automotive............ $1,463 $1,263 $2,479 $1,989 $1,785 $1,763 $1,668
Packaging............. 1,775 1,318 2,752 2,184 2,042 2,078 1,934
Intergroup sales and
other................ (5) (4) (10) (7) (7) (5) (5)
------ ------ ------ ------ ------ ------ ------
Total................ $3,233 $2,577 $5,221 $4,166 $3,820 $3,836 $3,597
====== ====== ====== ====== ====== ====== ======
Income from continuing
operations before
interest expense,
income taxes and
minority interest--
Automotive............ $ 163 $ 134 $ 240 $223 $ 222 $ 237 $ 188
Packaging............. 256 244 430 209 139 221 139(c)
Other................. (5) -- 2 24 20 7 3
------ ------ ------ ------ ------ ------ ------
Total................ 414 378 672 456 381 465 330
Interest expense (net
of interest capital-
ized)................. 100 74 160 104 101 102 111
Income tax expense..... 126 124 231 114 115 154 80
Minority interest...... 10 12 23 -- -- -- --
------ ------ ------ ------ ------ ------ ------
Income from continuing
operations............ 178 168 258 238 165 209 139
Loss from discontinued
operations, net of
income tax............ -- -- -- (31) (7) (7) (12)
Cumulative effects of
changes in accounting
principles, net of
income tax............ -- -- -- (7)(d) -- (99)(d) --
------ ------ ------ ------ ------ ------ ------
Net income............. $ 178 $ 168 $ 258 $ 200 $ 158 $ 103 $ 127
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA(B):
Total assets........... $6,523 $4,430 $6,117 $3,940 $3,029 $2,812 $2,792
Short-term debt(e)..... 530 205 384 108 94 182 758
Long-term debt(e)...... 1,573 1,246 1,648 1,039 1,178 1,675 1,555
Minority interest...... 301 297 301 301 1 1 2
Combined equity........ 2,168 1,163 1,852 987 533 (87) (553)
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided
(used) by operating
activities............ $ 199 $ (9) $ 489 $ 571 $ 324 $ 121 $ 503
Net cash provided
(used) by investing
activities............ (340) (206) (2,041) (303) (152) (78) (237)
Net cash provided
(used) by financing
activities............ 169 (52) 1,297 50 (165) (41) (251)
Capital expenditures
for continuing
operations............ 263 179 562 280 217 159 202
OTHER DATA:
EBITDA(f).............. $ 551 $ 458 $ 845 $ 598 $ 518 $ 595 $ 463
</TABLE>
- -------
(a) For a discussion of the significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of New Tenneco included in
the New Tenneco Information Statement attached hereto as Appendix C.
(b) During 1995 and 1994, Tenneco Automotive and Tenneco Packaging each
completed several acquisitions, the most significant of which was Tenneco
Packaging's acquisition of Mobil Plastics for $1.3 billion in late 1995.
See Note 4 to the Combined Financial Statements of New Tenneco, included
in the New Tenneco Information Statement attached hereto as Appendix C,
for further information on New Tenneco's acquisitions.
(c) Includes a gain of $42 million recorded by Tenneco Packaging related to
the sale of three short-line railroads.
(d) In 1994, New Tenneco adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits". In 1992, New Tenneco adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and FAS No. 109, "Accounting for Income Taxes."
(e) Historical amounts include debt allocated to New Tenneco from Tenneco
based on the portion of Tenneco's investment in New Tenneco which is
deemed to be debt, generally based upon the ratio of New Tenneco's net
assets to Tenneco consolidated net assets plus debt. Tenneco's historical
practice has been to incur indebtedness for its consolidated group at the
parent company level or at a limited number of subsidiaries, rather than
at the operating company level, and to centrally manage various cash
functions. Management believes that the historical allocation of corporate
debt and interest expense is reasonable; however, it is not necessarily
indicative of New Tenneco's debt upon completion of the Debt Realignment,
nor debt and interest that may be incurred by New Tenneco as a separate
public entity. See the Combined Financial Statements of New Tenneco, and
notes thereto, included in the New Tenneco Information Statement attached
hereto as Appendix C.
(f) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon GAAP; however, the amounts included in the
EBITDA calculation are derived from amounts included in the combined
historical Statements of Income. In addition, EBITDA should not be
considered as an alternative to net income or operating income, as an
indicator of the operating performance of New Tenneco or as an alternative
to operating cash flows as a measure of liquidity.
150
<PAGE>
NEWPORT NEWS
COMBINED SELECTED FINANCIAL DATA
The combined selected financial data as of December 31, 1995 and 1994 and
for the years ended December 31, 1995, 1994 and 1993 were derived from the
audited Combined Financial Statements of Newport News. The combined selected
financial data as of December 31, 1993, 1992 and 1991 and for the years ended
December 31, 1992 and 1991 are unaudited and were derived from the accounting
records of Tenneco. The combined selected financial data as of and for each of
the six-month periods ended June 30, 1996 and 1995 were derived from the
unaudited Combined Financial Statements of Newport News. In the opinion of
Newport News' management, the combined selected financial data of Newport News
as of December 31, 1993, 1992 and 1991 and for the years ended December 31,
1992 and 1991 and as of and for the six months ended June 30, 1996 and 1995
include all adjusting entries (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
The results of operations for the six months ended June 30, 1996 should not be
regarded as indicative of the results that may be expected for the full year.
This information should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of Newport News
and the Newport News Combined Financial Statements, and notes thereto, which
are included in the Newport News Information Statement attached hereto as
Appendix D.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------- --------------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
------- ------- ------- ------- ------- ------ ------
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS
DATA:
Net sales.............. $ 915 $ 845 $1,756 $1,753 $1,861 $2,265 $2,216
====== ====== ====== ====== ====== ====== ======
Operating earnings..... $ 81 $ 90 $ 157 $ 201 $ 210 $ 249 $ 224
Interest expense (net
of interest
capitalized).......... 17 20 29 30 36 42 23
Other.................. -- -- (3) 1 (15)(b) -- (2)
Provision for income
taxes................. 27 29 58 75 78 64 68
------ ------ ------ ------ ------ ------ ------
Earnings before
cumulative effect of
changes in accounting
principles............ 37 41 73 95 111 143 135
Cumulative effect of
changes in accounting
principles, net of
tax................... -- -- -- (4)(c) -- (93)(c) --
------ ------ ------ ------ ------ ------ ------
Net earnings........... $ 37 $ 41 $ 73 $ 91 $ 111 $ 50 $ 135
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA:
Working capital........ $ 41 $ 4 $ (19) $ (75) $ (121) $ (89) $ (470)
Total assets........... 1,452 1,337 1,380 1,263 1,235 1,450 1,412
Short-term debt (d).... 95 54 68 30 34 83 36
Long-term debt (d)..... 282 326 292 287 423 761 364
Combined equity........ 349 236 272 199 105 (173) (30)
STATEMENT OF CASH FLOWS
DATA:
Net cash provided
(used) by operating
activities............ $ (1) $ (18) $ 63 $ 182 $ 215 $ (174) $ 352
Net cash provided
(used) by investing
activities............ (45) (29) (87) (29) 21 6 (99)
Net cash provided
(used) by financing
activities............ 45 47 25 (154) (241) 181 (246)
Capital expenditures... 36 29 77 29 35 35 64
OTHER DATA:
EBITDA (e)............. $ 113 $ 123 $ 227 $ 270 $ 297 $ 323 $ 298
</TABLE>
- -------
(a) For a discussion of significant items affecting comparability of the
financial information for 1995, 1994 and 1993, and for the six months
ended June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of Newport News, included
in the Newport News Information Statement attached hereto as Appendix D.
(b) Includes a gain of $15 million related to the sale of Sperry Marine
businesses.
(c) In 1994, Newport News adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits." In 1992, Newport News adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and FAS No. 109, "Accounting for Income Taxes."
(d) Historical amounts represent debt allocated to Newport News from Tenneco
based on the portion of Tenneco's investment in Newport News which is
deemed to be debt, generally based upon the ratio of Newport News' net
assets to Tenneco consolidated net assets plus debt. Tenneco's historical
practice has been to incur indebtedness for its consolidated group at the
parent company level or at a limited number of subsidiaries, rather than
at the operating company level, and to centrally manage various cash
functions. Management believes that the historical allocation of corporate
debt and interest expense is reasonable; however, it is not necessarily
indicative of Newport News' debt upon completion of the Debt Realignment,
nor debt and interest that may be incurred by Newport News as a separate
public entity. See the Combined Financial Statements of Newport News, and
notes thereto, included in the Newport News Information Statement attached
hereto as Appendix D.
(e) EBITDA represents earnings before cumulative effect of changes in
accounting principles, income taxes, interest expense and depreciation and
amortization. EBITDA is not a calculation based upon GAAP; however, the
amounts included in the EBITDA calculation are derived from amounts
included in the Statements of Earnings. In addition, EBITDA should not be
considered as an alternative to net income or operating income, as an
indicator of the operating performance of Newport News or as an
alternative to operating cash flows as a measure of liquidity.
151
<PAGE>
INFORMATION CONCERNING TENNECO
Tenneco is a diversified industrial company conducting all of its operations
through its subsidiaries. The major businesses of Tenneco are (a) the Energy
Business--consisting primarily of the interstate and intrastate transportation
and marketing of natural gas and all of the discontinued operations of Tenneco
not involving the Industrial Business or the Shipbuilding Business, (b) the
Industrial Business--consisting primarily of the manufacture and sale of
automotive exhaust and ride control systems and packaging materials, cartons,
containers and specialty packaging products for consumer, institutional and
industrial markets, and Tenneco's administrative services business, and (c)
the Shipbuilding Business--consisting primarily of the design, construction,
repair and overhauling of ships, such as nuclear powered aircraft carriers and
submarines for the United States Navy.
Prior to the consummation of the Distributions, Tenneco and certain of its
consolidated subsidiaries will complete the Corporate Restructuring
Transactions, which are designed to facilitate the Distributions and the
Merger by separating and dividing the Industrial Business and Shipbuilding
Business from the Energy Business (including the assets and liabilities
included therein that relate to the discontinued operations of Tenneco not
involving the Industrial Business or the Shipbuilding Business). Accordingly,
upon consummation of the Corporate Restructuring Transactions, New Tenneco and
Newport News will each be a direct wholly-owned subsidiary of Tenneco and will
own and operate, directly and through its direct and indirect subsidiaries,
the Industrial Business and Shipbuilding Business, respectively.
INFORMATION CONCERNING THE ENERGY BUSINESS TO BE MERGED
GENERAL
The Energy Business consists principally of the interstate transportation of
natural gas, as well as certain other related business operations not
generally subject to regulation by the FERC, such as gas marketing, intrastate
pipeline operations, international pipelines and power generation, domestic
power generation operations and oil and gas ventures. The Energy Business also
includes the assets and liabilities of Tenneco and its subsidiaries that do
not relate to the Industrial Business or Shipbuilding Business, including
those business operations that have been discontinued or sold. See "--
Discontinued and Other Operations." The information under the heading
"INFORMATION CONCERNING THE ENERGY BUSINESS TO BE MERGED" includes certain
forward-looking statements, which should be read in conjunction with the
factors identified under "RISK FACTORS--Risks Relating to El Paso and Tenneco
Energy."
INTERSTATE PIPELINE OPERATIONS
The interstate pipeline operations of the Energy Business include the
pipeline systems of wholly owned subsidiaries TGP, Midwestern Gas Transmission
Company ("Midwestern") and East Tennessee Natural Gas Company ("East
Tennessee"), as well as certain joint ventures, which are primarily engaged in
the transportation and storage of natural gas for producers, marketers, end-
users and other gas transmission and distribution companies. TGP's multiple-
line system begins in the gas-producing regions of Texas and Louisiana,
including the continental shelf of the Gulf of Mexico, and extends into the
northeastern section of the United States, including the New York City and
Boston metropolitan areas. Midwestern's pipeline system extends from Portland,
Tennessee, to Chicago, and principally serves the Chicago metropolitan area.
East Tennessee's pipeline system serves the states of Tennessee, Virginia and
Georgia. Revenues from the interstate gas sales and transportation operations
of the Energy Business accounted for approximately 45%, 39% and 40% of the
total revenues of the Energy Business for 1993, 1994 and 1995, respectively.
The interstate gas transmission systems of the Energy Business include
approximately 16,300 miles of pipeline, gathering lines and sales laterals
(with 14,800 miles operated by TGP, 400 miles operated by Midwestern and 1,100
miles operated by East Tennessee), together with related facilities that
include 90 compressor stations with an aggregate of approximately 1.5 million
horsepower. The Energy Business also has
152
<PAGE>
interests in or contractual rights to six underground and above-ground gas
storage facilities to permit increased deliveries of gas during peak demand
periods. The total design delivery capacity of the Energy Business' interstate
systems as of December 31, 1995 was approximately 4,800 million cubic feet
("MMCF") of gas per day, and approximately 5,600 MMCF on peak demand days,
which includes gas withdrawn from storage.
Gas Sales and Transportation
The following table sets forth the volumes of gas, stated in billions of
British thermal units ("BBtu"), sold and transported by the interstate
pipeline systems for the periods shown.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Sales*...................................... 95,397 131,097 213,210
Transportation*............................. 2,139,169 2,183,944 2,118,936
--------- --------- ---------
Total..................................... 2,234,566 2,315,041 2,332,146
========= ========= =========
</TABLE>
- --------
* Sales and transportation volumes include all natural gas sold or transported
by the Energy Business' interstate pipeline systems (including the
proportionate share of transportation volumes of the joint ventures in which
the Energy Business had interests) and have not been adjusted to reflect the
sale of (i) a 50% interest in Kern River Gas Transmission Company ("Kern
River") in December 1995, (ii) a 13.2% general partnership interest in
Iroquois Gas Transmission System, L.P. ("Iroquois") in June 1996, and (iii)
a 100% interest in Viking Gas Transmission Company ("Viking") in 1993. Kern
River owns a 904-mile pipeline system extending from Wyoming to California,
Iroquois owns a 370-mile pipeline extending from the Canadian border at
Waddington, New York to Long Island, New York and Viking owns a 549-mile
pipeline extending from the Canadian border near Emerson, Manitoba to
Marshfield, Wisconsin. See "--Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Energy Business." Of
the total transportation volumes shown, Kern River transported approximately
135,827 BBtu, 129,964 BBtu and 127,624 BBtu during 1995, 1994 and 1993,
respectively, Iroquois transported approximately 45,272 BBtu, 32,489 BBtu
and 32,721 BBtu during 1995, 1994 and 1993, respectively, and Viking
transported approximately 58,579 BBtu during 1993.
Customers of the interstate pipeline operations of the Energy Business
include natural gas producers, marketers and end-users, as well as other gas
transmission and distribution companies. Substantially all of the revenues of
these operations are generated under long-term gas transmission contracts
entered into between the Energy Business and its customers. Contracts
representing approximately 70% of the firm transportation capacity of the
interstate pipeline operations of the Energy Business will be expiring over
the next five years, principally in the year 2000. Although the Energy
Business presently intends to pursue the renegotiation, extension and/or
replacement of these contracts, there can be no assurance as to whether the
Energy Business will be able to obtain extended or replacement contracts.
Federal Regulation
The interstate natural gas pipeline companies included in the Energy
Business are "natural gas companies" as defined in the Natural Gas Act of
1938, as amended (the "Natural Gas Act"). As such, these companies are subject
to the jurisdiction of the FERC. The interstate pipeline operations of the
Energy Business are operated pursuant to certificates of public convenience
and necessity issued under the Natural Gas Act and pursuant to the Natural Gas
Policy Act of 1978. The FERC regulates the interstate transportation and
certain sales of natural gas, including, among other things, rates and charges
allowed natural gas companies, extensions and abandonments of facilities and
service, rates of depreciation and amortization and the accounting system
utilized by the companies.
Prior to the FERC's industry restructuring initiatives in the 1980's, the
interstate pipeline companies included in the Energy Business operated
primarily as merchants, purchasing natural gas under long-term
153
<PAGE>
contracts and reselling the gas to customers, also under long-term contracts.
On April 8, 1992, the FERC issued Order 636 which restructured the natural gas
industry by requiring mandatory unbundling of pipeline sales and
transportation services. Numerous parties appealed to the U.S. Court of
Appeals for the D.C. Circuit the legality of Order 636 generally, as well as
the legality of specific provisions of Order 636. On July 16, 1996, the U.S.
Court of Appeals for the D.C. Circuit issued its decision upholding, in large
part, Order 636. The court remanded to the FERC several issues for further
explanation, including further explanation of the FERC's decision to allow
pipelines to recover 100% of their GSR costs.
TGP implemented revisions to its tariff, effective on September 1, 1993,
which restructured its transportation, storage and sales services to convert
TGP from primarily a merchant to primarily a transporter of gas as required by
Order 636. As a result of this restructuring, TGP's gas sales declined while
certain obligations to producers under long-term gas supply contracts
continued, causing TGP to incur significant restructuring transition costs.
Pursuant to the provisions of Order 636 allowing for the recovery of
transition costs related to the restructuring, TGP has made filings to recover
GSR costs resulting from remaining gas purchase obligations, costs related to
its Bastian Bay facilities, the remaining unrecovered balance of purchased gas
("PGA") costs and the "stranded" cost of TGP's continuing contractual
obligation to pay for capacity on other pipeline systems ("TBO costs").
TGP's filings to recover costs related to its Bastian Bay facilities have
been rejected by the FERC based on the continued use of the gas production
from the field; however, the FERC recognized the ability of TGP to file for
the recovery of losses upon disposition of these assets. TGP has filed for
appellate review of the FERC actions and believes that certain Bastian Bay
costs will ultimately be recovered as transition costs under Order 636; the
FERC has not contested the ultimate recoverability of these costs.
The filings implementing TGP's recovery mechanisms for the following
transition costs were accepted by the FERC effective September 1, 1993;
recovery was made subject to refund pending FERC review and approval for
eligibility and prudence: (i) direct-billing of unrecovered PGA costs to its
former sales customers over a twelve-month period; (ii) recovery of TBO costs,
which TGP is obligated to pay under existing contracts, through a surcharge
from firm transportation customers, adjusted annually; and (iii) GSR cost
recovery of 90% of such costs over a period of up to 36 months from firm
transportation customers and recovery of 10% of such costs from interruptible
transportation customers over a period of up to 60 months.
Following negotiations with its customers, TGP filed in July 1994 with the
FERC a Stipulation and Agreement (the "PGA Stipulation"), which provides for
the recovery of approximately $100 million and the recovery of PGA costs
associated with the transfer of storage gas inventory to new storage customers
in TGP's restructuring proceeding. The PGA Stipulation eliminates all
challenges to the PGA costs, but establishes a cap on the charges that may be
imposed upon former sales customers. On November 15, 1994, the FERC issued an
order approving the PGA Stipulation and resolving all outstanding issues. On
April 5, 1995, the FERC issued its order on rehearing affirming its initial
approval of the PGA Stipulation. TGP implemented the terms of the PGA
Stipulation and made refunds in May 1995. The refunds had no material effect
on the net income reported by the Energy Business. The orders approving the
PGA Stipulation have been appealed to the D.C. Circuit Court of Appeals by
certain customers. TGP believes the FERC orders approving the PGA Stipulation
will be upheld on appeal.
TGP is recovering through a surcharge, subject to refund, TBO costs formerly
incurred to perform its sales function. The FERC subsequently issued an order
requiring TGP to refund certain costs from this surcharge and refunds were
made in May 1996. TGP is appealing this decision and believes such appeal will
likely be successful.
With regard to TGP's GSR costs, TGP, along with three other pipelines,
executed four separate settlement agreements with Dakota Gasification Company
and the U.S. Department of Energy and initiated four separate proceedings at
the FERC seeking approval to implement the settlement agreements. The
settlement resolved litigation concerning purchases made by TGP of synthetic
gas produced from the Great Plains Coal Gasification
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plant ("Great Plains"). The FERC previously ruled that the costs related to
the Great Plains project are eligible for recovery through GSR and other
special recovery mechanisms and that the costs are eligible for recovery for
the duration of the term of the original gas purchase agreements. On October
18, 1994, the FERC consolidated the four proceedings and set them for hearing
before an ALJ. The hearing, which concluded in July 1995, was limited to the
issue of whether the settlement agreements are prudent. The ALJ concluded, in
his initial decision issued in December 1995, that the settlement was
imprudent. TGP has filed exceptions to this initial decision. Tenneco believes
this decision will not impair TGP's recovery of the costs resulting from this
contract. On July 17, 1996, the FERC ordered oral arguments to be heard in
September 1996. Oral arguments were held before the full FERC on September 25,
1996. A decision by the FERC is expected by the end of 1996.
Also related to TGP's GSR costs, on October 14, 1993, TGP was sued in the
State District Court of Ector County, Texas, by ICA Energy, Inc. ("ICA") and
TransTexas Gas Corporation ("TransTexas"). In that suit, ICA and TransTexas
contended that TGP had an obligation to purchase gas production which
TransTexas thereafter attempted to add unilaterally to the reserves originally
dedicated to a 1979 gas contract. An amendment to the pleading sought $1.5
billion from TGP for alleged damages caused by TGP's refusal to purchase gas
produced from the TransTexas leases covering the new production and lands. In
June 1996, TGP reached a settlement with ICA and TransTexas for $125 million
wherein ICA and TransTexas agreed to terminate their contract rights, released
TGP from liability under the contract, and indemnified TGP against future
claims, including royalty owner claims. In connection with that litigation,
certain royalty interest owners filed a claim in July 1996 against TGP in Webb
County, Texas, alleging that they are sellers entitled to tender gas to TGP
under the settled contract. This claim falls under the indemnification
provisions of TGP's settlement with ICA and TransTexas, which requires ICA and
TransTexas to defend and indemnify TGP on this claim.
TGP has been engaged in other settlement and contract reformation
discussions with other holders of certain gas purchase contracts who have sued
TGP. On August 1, 1995, the Texas Supreme Court affirmed a ruling of the Texas
Court of Appeals favorable to TGP in one of these matters and indicated that
it would remand the case to the trial court. On April 18, 1996, however, the
Texas Supreme Court withdrew its initial opinion and issued an opinion
reversing the Court of Appeals opinion on the matter which was favorable to
TGP. In June 1996, TGP filed a motion for rehearing with the Texas Supreme
Court which was denied in August 1996. The Texas Supreme Court's April 1996
ruling explicitly preserves TGP's defenses based on bad faith conduct of the
producers. Nothing in the Texas Supreme Court's decision affects TGP's ability
to seek recovery of its above-market costs of purchasing gas under the
contract from its customers as GSR costs in proceedings currently pending
before the FERC. In addition, TGP has initiated two lawsuits against the
holders of this gas purchase contract, seeking damages related to their
conduct in connection with that contract. TGP has accrued amounts which it
believes are appropriate to cover the resolution of the litigation associated
with its contract reformation efforts. See "RISK FACTORS--Risks Relating to El
Paso and Tenneco Energy--Regulated Industry; Potential Adverse Impact of
Pending Cost Recovery and Rate Proceedings."
As of June 30, 1996, TGP has deferred GSR costs yet to be recovered from its
customers of approximately $551 million, net of $380 million previously
recovered from its customers, subject to refund. The GSR Proceeding is
underway at the FERC with respect to the recovery of TGP's GSR costs.
Testimony has been completed in connection with Phase I of that proceeding
relating to the eligibility of GSR cost recovery; oral argument on eligibility
issues was originally set by a FERC ALJ for late October 1996. The Chief Judge
of the FERC has since issued orders (i) cancelling the October oral arguments,
(ii) convening settlement discussions which commenced on October 9, 1996, and
(iii) postponing scheduling an oral argument on eligibility issues.
Phase II of the proceeding on the prudency of the costs to be recovered and
on certain contract specific eligibility issues has not yet been scheduled,
but will likely occur sometime after the ALJ's decision in Phase I is issued.
The FERC has generally encouraged pipelines to settle such issues through
negotiations with customers. Although the Order 636 transition cost recovery
mechanism provides for complete recovery by pipelines of eligible and
prudently incurred transition costs, certain customers have challenged the
prudence and eligibility of TGP's GSR costs and TGP has engaged in settlement
discussions with its customers concerning the amount of such costs in response
to the FERC statements acknowledging the desirability of such settlements. As
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described under "INFORMATION CONCERNING THE ENERGY BUSINESS TO BE MERGED--
Operation of the Energy Business After the Merger--Proposed Post-Merger
Resolution of GSR Transition Cost Disputes," El Paso has reached, contingent
upon consummation of the Merger and various other conditions (including
approval by the FERC), the El Paso Preliminary GSR Understanding. See also
"RISK FACTORS--Risks Relating to El Paso and Tenneco Energy--Regulated
Industry; Potential Adverse Impact of Pending Cost Recovery and Rate
Proceedings."
Given the uncertainty over the results of ongoing discussions between TGP
and its customers related to the recovery of GSR costs and the uncertainty
related to predicting the outcome of its gas purchase contract reformation
efforts and the associated litigation, Tenneco is unable to predict the timing
or the ultimate impact that the resolution of these issues will have on the
combined financial position or results of operations of the Energy Business.
On December 30, 1994, TGP filed for a general rate increase. On January 25,
1995, the FERC accepted the filing, suspended its effectiveness for the
maximum period of five months pursuant to normal regulatory process, and set
the matter for hearing. On July 1, 1995, TGP began collecting rates, subject
to refund, reflecting an $87 million increase in TGP's annual revenue
requirement. A Stipulation and Agreement was filed with an ALJ in this
proceeding on April 5, 1996. This Stipulation, which is currently pending
before the FERC, proposed to resolve the rates subject to the 1995 Rate Case,
including structural rate design and increased revenue requirements, and TGP
is reserving revenues it believes adequate to cover the income impact from any
refunds that may be required upon final settlement of this proceeding. On
October 30, 1996, the FERC approved the Stipulation for the settlement of the
1995 Rate Case, with certain modifications and clarifications which are not
material and which should not cause changes which are adverse to the Energy
Business.
For a discussion of recent FERC proceedings relating to the recovery by
Tenneco Energy of certain environmental costs as a component of the rates
charged by its interstate pipeline operations see "--Environmental Matters."
TGP, as with all interstate pipelines, is subject to FERC audit review of
its books and records. TGP currently has an open audit covering the years
1991-1994. The FERC audit staff is expected to issue an audit report by year
end.
Competition
The regulated natural gas pipeline industry is experiencing increasing
competition, which results from actions taken by the FERC to strengthen market
forces throughout the industry. In a number of key markets, the interstate
pipelines of the Energy Business face competitive pressure from other major
pipeline systems, enabling local distribution companies and end users to
choose a supplier or switch suppliers based on the short term price of gas and
the cost of transportation. Competition between pipelines is particularly
intense in Midwestern's Chicago and Northern Indiana markets, in East
Tennessee's Roanoke, Chattanooga and Atlanta markets, and in TGP's supply
area, Louisiana and Texas. In some instances, the pipelines of the Energy
Business have been required to discount their transportation rates in order to
maintain their market share. As noted above, transportation contracts
representing approximately 70% of firm interstate transportation capacity will
be expiring over the next five years, principally in the year 2000. The
renegotiation of these contracts may be impacted by these competitive factors.
Gas Supply
With full implementation of Order 636, TGP's firm sales obligations
requiring maintenance of long-term gas purchase contracts have declined from
over a 1.4 billion dekatherm maximum daily delivery obligation to less than a
200 million dekatherm maximum daily delivery obligation. TGP has substantially
reduced its natural gas purchase portfolio in line with these requirements
through termination and assignment to third parties. Although TGP's
requirements for purchased gas are substantially less than prior to its
implementation of Order 636, the Energy Business is pursuing the attachment of
gas supplies to TGP's pipeline system for transportation by others. Current
gas supply activities include development of offshore and onshore pipeline
gathering projects and utilization of production financing programs to spur
exploration and development drilling in areas adjacent to TGP's system. Major
gathering systems in the Gulf of Mexico were completed during the fourth
quarter of 1994.
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GAS MARKETING, INTRASTATE PIPELINES AND RELATED SERVICES
Tenneco Energy Resources Corporation ("Tenneco Resources"), a wholly owned
subsidiary of Tenneco, and its subsidiaries are engaged primarily in the
businesses of marketing natural gas and owning and operating approximately
1,300 miles of pipelines that serve the Texas Gulf Coast and West Texas
markets.
Tenneco Resources' interstate marketing operations buy, sell and contract
for the transportation of up to 1.5 billion cubic feet of natural gas per day
from approximately 200 suppliers, through 40 pipelines to about 400 customers,
marketers and end-users. Tenneco Resources offers a portfolio of products and
services which are intended to help distributors, end-users and producers
manage their entire gas sales and purchasing processes, from budget control
and risk management to flexible takes and daily balances. Tenneco Resources
also owns and manages gas gathering systems and natural gas processing plants
in Pennsylvania, Texas and Louisiana. Additionally, Tenneco Resources owns and
operates, either directly or through joint ventures, approximately 1,300 miles
of intrastate pipelines in the Texas Gulf Coast and West Texas markets. In
addition to offering transportation capacity, these intrastate pipeline
operations manage buying, selling and transportation services for almost one
billion cubic feet of natural gas per day, serving approximately 150 suppliers
and 50 customers and shippers. The intrastate pipeline operations also provide
swing storage services and access to major intrastate and interstate pipelines
in Texas. Revenues from the operations of Tenneco Resources accounted for
approximately 55%, 61% and 57% of the total revenues of the Energy Business
for 1993, 1994 and 1995, respectively.
The following table sets forth the volumes of gas, stated in BBtu, sold and
transported by Tenneco Resources for the periods indicated:
<TABLE>
<CAPTION>
1995 1994 1993
------- --------- -------
<S> <C> <C> <C>
Sales........................................... 642,096 739,432 741,800
Transportation.................................. 229,415 273,587 235,940
------- --------- -------
Total......................................... 871,511 1,013,019 977,740
======= ========= =======
</TABLE>
In February 1994, the Energy Business sold a 20% interest in Tenneco
Resources to Ruhrgas AG, Germany's largest natural gas company. As part of the
sale, Tenneco agreed that neither it nor any of its affiliates would engage in
gas marketing activities in North America and certain gas processing and
gathering activities except through Tenneco Resources. The Energy Business
purchased this 20% interest in Tenneco Resources in September 1996 for $41
million.
INTERNATIONAL, POWER GENERATION AND VENTURES
The Energy Business is presently engaged in various other energy-related
businesses that are consistent with Tenneco Energy's overall goal of
diversifying its operations into businesses that are not regulated by the
FERC.
International Operations. The Energy Business has recently undertaken
various activities to extend TGP's traditional activities in North American
pipelines to international pipeline, power and energy-related projects, with a
current focus on activities in Latin America, Southeast Asia, Australia and
Europe.
In 1995, the Energy Business was selected to construct, own and operate a
470 mile natural gas pipeline in Queensland, Australia at a total cost of $170
million. Construction of the pipeline commenced in late 1995 and completion is
scheduled for December 1996. It is estimated that, as of June 30, 1996,
completion of the Queensland pipeline would require an additional $56 million
of capital expenditures. Additionally, in June 1995 Tenneco acquired the
natural gas pipeline assets of the Pipeline Authority of South Australia,
which includes a 488 mile pipeline, for $225 million. El Paso and Tenneco are
currently working together to monetize certain of Tenneco's Australian assets
as part of the Refinancing Transactions. See "--Operation of the Energy
Business after the Merger" and "UNAUDITED PRO FORMA FINANCIAL INFORMATION--
Unaudited Pro Forma Combined Financial Statements of El Paso and Tenneco
Energy." The Energy Business also has interests in a consortium pursuing the
development of a natural gas pipeline from Bolivia to Brazil and related gas-
fired electric generation plants. In December 1995, Tenneco Energy was
selected by the Beijing Natural Gas Transportation Company ("BGTC") to serve
as a paid technical advisor for the construction of China's first major
onshore natural gas pipeline. BGTC, a joint venture between the Chinese
National Petroleum Corporation and the city of Beijing, will build a 600 mile
line linking the Jingbian gas field in central China's Eerdous Basin with
Beijing. Construction commenced in March 1996, with an in-service date
scheduled for October 1997.
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Power Generation Operations. The Energy Business' power unit is involved in
developing, building, owning, operating and acquiring energy-related
infrastructure domestically and internationally, by capitalizing on the
experience of the Energy Business in major project development and gas
technologies, transportation and supply. Areas targeted for development
include Australia, Southeast Asia, central and eastern Europe and Latin
America.
Tenneco Power Generation Company ("Tenneco Power") has a 17.5% interest in a
240 megawatt power plant in Springfield, Massachusetts, and 50% interests in
two additional cogeneration projects in Florida which have a combined capacity
of 220 megawatts. El Paso and Tenneco are currently working together to
monetize the Energy Business interest in one of these Florida cogeneration
projects as part of the Refinancing Transactions. See "--Operation of the
Energy Business after the Merger" and "UNAUDITED PRO FORMA FINANCIAL
INFORMATION--Unaudited Pro Forma Combined Financial Statements of El Paso and
Tenneco Energy." In May 1996, Tenneco Power acquired from Energy Equity Corp.,
Ltd., an Australian company, a 50% interest in two of its subsidiaries which
participate in a joint venture to construct a 135 megawatt gas fired power
plant in Indonesia.
Tenneco Ventures. Tenneco Gas Production Corporation ("Tenneco Production")
and Tenneco Ventures Corporation ("Tenneco Ventures"), subsidiaries of
Tenneco, together with institutional investors and partners, invest in oil and
gas properties and finance independent producers engaged in exploration and
development projects. Tenneco Ventures and Tenneco Production hold various
ownership interests in oil and gas fields located primarily in the Gulf of
Mexico, Texas and Louisiana. Tenneco Ventures is also involved in Tenneco
Energy's international projects through exploration and development of gas
reserves in Indonesia, Poland and Bolivia. It is presently expected that,
after consummation of the Merger, El Paso will sell Tenneco Ventures and
Tenneco Production as part of the Refinancing Transactions, the proceeds of
which sale will be used to repay a portion of the indebtedness expected to
then be outstanding under the Tenneco Credit Facility. See "--Operation of the
Energy Business After the Merger" and "UNAUDITED PRO FORMA FINANCIAL
INFORMATION--Unaudited Pro Forma Combined Financial Statements of El Paso and
Tenneco Energy."
DISCONTINUED AND OTHER OPERATIONS
In addition to the operating assets and liabilities of the Energy Business,
upon consummation of the Distributions, Tenneco will continue to hold certain
limited assets and be responsible for the liabilities of the existing and
discontinued operations and businesses of Tenneco and its subsidiaries other
than those relating to the Industrial Business or the Shipbuilding Business.
These assets and liabilities consist primarily of Tenneco's remaining
interests in various discontinued operations which were engaged in (i) natural
gas pipeline transmission, gathering and processing, (ii) chemicals
production, (iii) the manufacture of farm and construction equipment through
Case and related companies, (iv) the extraction of minerals and other natural
resources, (v) oil and gas exploration, production and marketing through
Tenneco Oil Company and other companies, (vi) agricultural and urban
development, and (vii) insurance. Tenneco has established reserves which it
believes are adequate to cover these liabilities related to the various
discontinued operations of Tenneco for which it will remain liable following
consummation of the Transaction. See Note 13 to the Tenneco Energy Combined
Financial Statements included elsewhere herein and "--Environmental Matters."
EMPLOYEES
As of June 30, 1996, the Energy Business had approximately 3,200 full-time
employees.
PROPERTIES
Tenneco believes that substantially all of the facilities and equipment of
the Energy Business are, in general, well maintained and in good operating
condition. They are considered adequate for present needs and, as supplemented
by planned construction, are expected to remain adequate for the near future.
Tenneco also believes that it has generally satisfactory title to the
properties owned and used in the Energy Business, subject to liens for current
taxes and easements, restrictions and other liens which do not materially
detract from the value of such property or the interests therein or the use of
such properties in its businesses.
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OPERATION OF THE ENERGY BUSINESS AFTER THE MERGER
General. El Paso is currently engaged in a comprehensive review of the
business and operations of the Energy Business. Following the completion of
such review and consummation of the Merger, El Paso intends to integrate, for
the most part, the operations of the Energy Business with those of El Paso to
increase operating and administrative efficiency through consolidation and
reengineering of facilities, workforce reductions and coordination of
purchasing, sales and marketing activities. El Paso has indicated that it
anticipates that the complementary interstate and intrastate pipeline
operations and gas marketing activities of El Paso and the Energy Business
should provide the combined company with increased operating flexibility and
access to additional customers and markets.
Refinancing Transactions. El Paso intends to undertake the Refinancing
Transactions in order to reduce the amount of Tenneco debt that would
otherwise be outstanding after consummation of the Transaction. Accordingly,
El Paso and Tenneco currently are working together to monetize certain assets
of the Energy Business through asset sales and non-recourse project financings
which currently are expected to provide net proceeds to Tenneco of
approximately $500 million. El Paso has indicated that these proceeds will be
used to repay outstanding borrowings under the Tenneco Credit Facility. Assets
to be sold include Tenneco Ventures and Tenneco Production and a 50% interest
in Tenneco's Australian pipeline operations. Project financings include one of
Tenneco's U.S. cogeneration facilities and the Australian pipeline operations.
See "--International, Power Generation and Ventures."
Subject to market conditions, El Paso also currently intends to undertake a
public offering of El Paso equity securities after the Merger for anticipated
net proceeds of approximately $200 million. Using the proceeds of this
offering, El Paso will purchase from Tenneco approximately $200 million of
Subordinated Tenneco Preferred Stock (that will be subordinate to the Tenneco
Junior Preferred Stock issued in the NPS Issuance). The proceeds to Tenneco
from any sale of such Subordinated Tenneco Preferred Stock will be used to
repay outstanding borrowings under the Tenneco Credit Facility.
In addition, as market conditions may allow, El Paso may refinance Tenneco's
remaining post-Transaction debt through a sale of senior debt securities of
Tenneco and/or TGP. See "RISK FACTORS--Risks Relating to the Transaction--
Consummation of the Refinancing Transactions."
Proposed Post-Merger Resolution of GSR Transition Cost Disputes. On October
23, 1996, in anticipation of consummation of the Merger which will result in
TGP becoming a subsidiary of El Paso, El Paso reached a preliminary
understanding with certain of TGP's customers (i.e., the El Paso Preliminary
GSR Understanding). Under the El Paso Preliminary GSR Understanding, if the
Merger is consummated prior to April 1, 1997, then El Paso will settle the
customers' challenges to TGP's GSR and other transition costs, effective
January 1, 1997. It is unlikely that the El Paso Preliminary GSR Understanding
will be finalized and filed with the FERC prior to December 31, 1996. The
"Unaudited Pro Forma Combined Financial Statements of El Paso and Tenneco
Energy" included elsewhere herein assume the settlement with respect to TGP's
GSR costs on the terms of the El Paso Preliminary GSR Understanding.
Finalization of the El Paso Preliminary GSR Understanding is subject to
consummation of the Merger before April 1, 1997, and certain other conditions.
If the Merger is not consummated prior to April 1, 1997, then TGP has the
option to terminate the El Paso Preliminary GSR Understanding.
Assuming the El Paso Preliminary GSR Understanding is finalized and filed
with the FERC, non-consenting customers will have the opportunity to object to
the proposed settlement. It is impossible to predict with certainty whether
the FERC would approve the proposed settlement in the form ultimately
presented to it.
ENVIRONMENTAL MATTERS
Since 1988, TGP has been engaged in an internal project to identify and deal
with the presence of polychlorinated biphenyls ("PCBs") and other substances
of concern, including substances on the U.S. Environmental Protection Agency
("EPA") List of Hazardous Substances ("HS List") at compressor stations and
other facilities operated by both its interstate and intrastate natural gas
pipeline systems. While conducting
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this project, TGP has been in frequent contact with federal and state
regulatory agencies, both through informal negotiation and formal entry of
consent orders, in order to assure that its efforts meet regulatory
requirements.
Tenneco has established a reserve for TGP's environmental expenses, which
includes: (i) expected remediation expense and associated onsite, offsite and
groundwater technical studies; (ii) legal fees; and (iii) settlement of third-
party and governmental litigation, including civil penalties. Through June 30,
1996, Tenneco has charged approximately $156 million against the environmental
reserve, excluding recoveries related to TGP's environmental settlement as
discussed below. Of the remaining reserve, $24 million has been recorded on
the combined balance sheet under "Payables-trade" and $132 million under
"Deferred credits and other liabilities."
Due to the current uncertainty regarding the further activity necessary for
TGP to address the presence of the PCBs, the substances on the HS List and
other substances of concern on its sites, including the requirements for
additional site characterization, the actual amount of such substances at the
sites, and the final, site-specific cleanup decisions to be made with respect
to cleanup levels and remediation technologies, Tenneco cannot at this time
accurately project what additional costs, if any, may arise from future
characterization and remediation activities. While there are still many
uncertainties relating to the ultimate costs which may be incurred, based upon
TGP's evaluation and experience to date, Tenneco continues to believe that the
recorded estimate for the reserve is adequate.
Following negotiations with its customers, TGP in May 1995 filed with the
FERC a separate Stipulation and Agreement (the "Environmental Stipulation")
that establishes a mechanism for recovering a substantial portion of the
environmental costs. In November 1995, the FERC issued an order approving the
Environmental Stipulation. Although one shipper filed for rehearing, the FERC
denied rehearing of its order on February 20, 1996. This shipper filed a
Petition for Review on April 22, 1996 in the D.C. Circuit Court of Appeals;
TGP believes the FERC order approving the Environmental Stipulation will be
upheld on appeal. The effects of the Environmental Stipulation, which was
effective as of July 1, 1995, have been recorded with no material effect on
the combined financial position or results of operations of the Energy
Business. As of June 30, 1996, the balance of the regulatory asset is $61
million.
The Energy Business has completed settlements with and has received payments
from the majority of its liability insurance policy carriers for remediation
costs and related claims. Tenneco believes that the likelihood of recovery of
a portion of these remediation costs and claims against the remaining carriers
in its pending litigation is reasonably possible. In addition, TGP has settled
its pending litigation against and received payment from the manufacturer of
the PCB-containing lubricant. These recoveries have been considered in TGP's
recording of its environmental settlement with its customers.
TGP is a party in proceedings involving federal and state authorities
regarding the past use by TGP of a lubricant containing PCBs in its starting
air systems. TGP has executed a consent order with the EPA governing the
remediation of certain of its compressor stations and is working with the
Pennsylvania and New York environmental agencies to specify the remediation
requirements at the Pennsylvania and New York stations. Remediation activities
in Pennsylvania are essentially complete; in addition, pursuant to the Consent
Order dated August 1, 1995, between Tenneco and the Pennsylvania Department of
Environmental Protection, Tenneco funded an environmentally beneficial project
for $450,000 in April 1996. Remediation and characterization work at the
compressor stations under its consent order with the EPA and the jurisdiction
of the New York Department of Environmental Conservation is ongoing. Tenneco
believes that the ultimate resolution of these matters will not have a
material adverse effect on the combined financial position or results of
operations of the Energy Business.
TGP sold its subsidiary which owns a 13.2% general partnership interest in
Iroquois to ANR Iroquois Inc., a subsidiary of The Coastal Corporation.
Iroquois owns an interstate gas pipeline from the Canadian border through the
states of New York and Connecticut to Long Island. TGP is still under contract
to provide gas dispatching as well as post-construction field operation and
maintenance services for the operator of Iroquois, but TGP is not the operator
and is not an affiliate of the operator of Iroquois' pipeline system. A global
settlement was entered into during the second quarter of 1996 by Iroquois and
the operator of Iroquois' pipeline system with the Federal and New York State
authorities resolving all criminal, civil and administrative enforcement
actions contemplated by such authorities as a result of their investigation of
alleged environmental violations
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which occurred during the construction of the pipeline. Due to the sale of
Tenneco's interest in Iroquois, Tenneco believes that any environmental
matters relating to the construction and operation of the pipeline system by
Iroquois will not have a material adverse effect on the combined financial
position or results of operations of the Energy Business.
Tenneco has identified other sites in its various operating divisions
included within the Energy Business where environmental remediation expense
may be required should there be a change in ownership, operations or
applicable regulations. These possibilities cannot be predicted or quantified
at this time and accordingly, no provision has been recorded. However,
provisions have been made for all instances where it has been determined that
the incurrence of any material remedial expense is reasonably possible.
Tenneco believes that the provisions recorded for environmental exposures of
the Energy Business are adequate based on current estimates.
In Commonwealth of Kentucky, Natural Resources and Environmental Protection
Cabinet v. Tennessee Gas Pipeline Company (Franklin County Circuit Court,
Docket No. 88-C1-1531, November 16, 1988), the Kentucky environmental agency
alleged that TGP discharged pollutants into the waters of the state without a
permit and disposed of PCBs without a permit. The agency sought an injunction
against future discharges, sought an order to remediate or remove PCBs, and
sought a civil penalty. TGP has entered into agreed orders with the agency to
resolve many of the issues raised in the original allegations, has received
water discharge permits for its Kentucky stations from the agency, and
continues to work to resolve the remaining issues. Counsel for Tenneco are
unable to express an opinion as to the ultimate outcome. Tenneco believes that
the resolution of this issue will not have a material adverse effect on the
combined financial position or results of operations of the Energy Business.
Certain of the entities included in the Energy Business have been
designated, have received notice that they could be designated or have been
asked for information to determine whether they could be designated as
potentially responsible parties with respect to 26 "Superfund" sites (of which
24 are related to discontinued operations included within the Energy
Business). The Energy Business has sought to resolve its liability with
respect to these sites through indemnification by third parties and/or
settlements which provide for payment of the Energy Business' allocable share
of remediation costs. Tenneco has estimated the Energy Business' share of the
remediation costs at these sites to be between $7 million and $41 million and
has provided reserves that it believes are adequate for such costs. Because
the clean-up costs are estimates and are subject to revision as more
information becomes available about the extent of remediation required,
Tenneco's estimate of the Energy Business' share of remediation costs could
change. Moreover, liability under the federal Superfund statute (the
Comprehensive Environmental Response, Compensation and Liability Act), is
joint and several, meaning that the Energy Business could be required to pay
in excess of its pro rata share of remediation costs. Tenneco's understanding
of the financial strength of other potentially responsible parties has been
considered, where appropriate, in its determination of the estimated liability
of the Energy Business as described herein. Tenneco presently believes that
the costs associated with the current status of such Energy Business entities
as potentially responsible parties at the Superfund sites referenced above
will not have a material adverse effect on the combined financial position or
results of operations of the Energy Business.
In addition, the Energy Business includes liabilities to remediate a number
of formerly owned or leased sites, and certain other sites associated with the
discontinued operations included in the Energy Business, pursuant to state and
federal laws enacted for the protection of the environment. Tenneco estimates
the Energy Business' share of the remediation costs at these sites to be
between $23 million and $43 million and has provided reserves that it believes
are adequate for such costs. Because the clean-up costs are estimates and are
subject to revision as more information becomes available about the extent of
remediation required, Tenneco's estimate of the Energy Business' share of
remediation costs could change. Tenneco presently believes that the costs to
remediate these sites will not have a material adverse effect on the combined
financial position or results of operations of the Energy Business.
For additional information concerning environmental matters, see the caption
"Environmental Matters" under Note 15 in the notes to the Tenneco Energy
Combined Financial Statements included elsewhere herein.
For a discussion of various regulatory proceedings involving cost recovery
and contract reformation in connection with the interstate pipeline operations
of the Energy Business, see "--Interstate Pipeline Operations--Federal
Regulation."
161
<PAGE>
LEGAL PROCEEDINGS
In addition to the proceedings described herein under "--Interstate Pipeline
Operations--Federal Regulation" and "--Environmental Matters," Tenneco and its
subsidiaries are parties to numerous other legal proceedings relating to the
Energy Business and arising from their present and former operations. Tenneco
believes that the outcome of these other proceedings, individually and in the
aggregate, will have no material adverse effect on the combined financial
condition or results of operations of the Energy Business.
TENNECO CREDIT FACILITY
Tenneco intends to enter into the Tenneco Credit Facility in connection with
the Transaction, under which it is expected that a syndicate of banks (the
"Lenders") will commit to provide up to $3 billion of financing to Tenneco on
an unsecured basis. It is expected that Chase Securities Inc. will arrange the
Tenneco Credit Facility and The Chase Manhattan Bank will act as agent for the
Lenders. The Tenneco Credit Facility is expected to be a 364-day revolving
credit facility, with a two-year term thereafter, the proceeds of which will
be used to effect the Debt Realignment and for other general corporate
purposes and, upon consummation of the Merger, will be guaranteed by El Paso.
Initial borrowings under the Tenneco Credit Facility are expected to occur
on or shortly before the Merger Effective Time. See "UNAUDITED PRO FORMA
FINANCIAL INFORMATION--Unaudited Pro Forma Combined Financial Statements of El
Paso and Tenneco Energy" for a description of the application of the proceeds
of such borrowings. The borrowings under the Tenneco Credit Facility are
expected to mature in November 1999.
Borrowings under the Tenneco Credit Facility are expected to bear interest
at a rate per annum equal to, at Tenneco's option, either
(a) the highest of (i) the rate from time to time publicly announced by
The Chase Manhattan Bank in New York City as its prime rate, and (ii) the
federal funds effective rate from time to time plus 1/2 of 1% (such higher
rate, the "Alternate Base Rate"), plus in each case, the Applicable Margin
(as defined); or
(b) the average of the rates at which eurodollar deposits for one, two,
three or six months or, subject to availability to each lender, nine or 12
months (as selected by Tenneco) are offered in the interbank eurodollar
market in the approximate amount of the relevant loan (the "Eurodollar
Rate"), plus the Applicable Margin.
It is expected that the "Applicable Margin" will be based on El Paso's senior
long-term debt rating, as determined from time to time, or, if El Paso's debt
is not rated, each rating agency will be assumed to have assigned its lowest
rating.
It is expected that the Tenneco Credit Facility will require that El Paso's
ratio of total indebtedness to total indebtedness plus net worth not exceed
70%. Failure to satisfy the foregoing minimum requirement will be a default
under the Tenneco Credit Facility that will enable the Lenders to refuse to
loan funds to Tenneco and to accelerate the indebtedness thereunder.
It is also expected that the Tenneco Credit Facility will impose
prohibitions or limitations on liens (other than agreed permitted liens),
subsidiary indebtedness and guarantee obligations, asset dispositions (with
certain permitted exceptions) and dividends, among others.
It is expected that the Tenneco Credit Facility will contain certain default
provisions, including, among other things, (i) nonpayment of any amount due to
the lenders under the Tenneco Credit Facility, (ii) material breach of
representations and warranties, (iii) default in the performance of covenants,
(iv) bankruptcy or insolvency, (v) cross-default with respect to indebtedness
for borrowed money and related guaranty obligations in excess of $100 million
and (vi) a judgment suffered by El Paso in excess of $50 million not covered
by insurance and which judgment shall not have been vacated, discharged,
stayed or bonded pending appeal within 60 days.
162
<PAGE>
MANAGEMENT AFTER THE TRANSACTION
Pursuant to the Merger Agreement, the directors of El Paso Subsidiary as of
the Merger Effective Time will become the initial directors of Tenneco upon
consummation of the Merger. In addition, the executive officers of El Paso
Subsidiary as of the Merger Effective Time will become the executive officers
of Tenneco upon consummation of the Merger. El Paso has advised Tenneco that
the following individuals will be the executive officers and directors of the
El Paso Subsidiary as of the Merger Effective Time and will become the
executive officers (holding the offices indicated below) and directors of
Tenneco upon consummation of the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William A. Wise.................. 51 Chairman of the Board, President and Chief
Executive Officer
H. Brent Austin.................. 42 Senior Vice President, Chief Financial
Officer and Director
Joel Richards III................ 49 Senior Vice President and Director
Britton White, Jr................ 53 Senior Vice President, General Counsel and
Director
Jeffrey I. Beason................ 47 Vice President, Treasurer, Controller and
Director
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
WILLIAM A. WISE--Upon consummation of the Merger, Mr. Wise will become the
Chairman of the Board, President and Chief Executive Officer of Tenneco. Mr.
Wise has been Chairman of the Board of El Paso since January 1994 and the
President and Chief Executive Officer of El Paso since January 1990. He was
President and Chief Operating Officer of El Paso from April 1989 to December
1989. From March 1987 until April 1989, Mr. Wise was an Executive Vice
President of El Paso. From January 1984 to February 1987, he was a Senior Vice
President of El Paso. He is a member of the Board of Directors of Battle
Mountain Gold Company.
H. BRENT AUSTIN--Upon consummation of the Merger, Mr. Austin will become the
Senior Vice President, Chief Financial Officer and a Director of Tenneco. Mr.
Austin has been Executive Vice President of El Paso since May 1995 and he has
been Chief Financial Officer of El Paso since April 1992. He was Senior Vice
President of El Paso from April 1992 to April 1995. He was Vice President,
Planning and Treasurer of Burlington Resources, Inc. ("BR") from November 1990
to March 1992 and Assistant Vice President, Planning of BR from January 1989
to October 1990.
JOEL RICHARDS III--Upon consummation of the Merger, Mr. Richards will become
the Senior Vice President and a Director of Tenneco. Mr. Richards has been
Senior Vice President of El Paso since January 1991 and he was Vice President
from June 1990 to December 1990. He was Senior Vice President, Finance and
Human Resources of Meridian Minerals Company, a wholly owned subsidiary of BR,
from October 1988 to June 1990.
BRITTON WHITE, JR.--Upon consummation of the Merger, Mr. White will become
the Senior Vice President, General Counsel and a Director of Tenneco. Mr.
White has been Senior Vice President and General Counsel of El Paso since
March 1991 and from March 1991 to April 1992, he was also Corporate Secretary
of El Paso. For more than five years prior to that time, Mr. White was a
partner in the law firm of Holland & Hart.
JEFFREY I. BEASON--Upon consummation of the Merger, Mr. Beason will become
the Vice President, Treasurer, Controller and a Director of Tenneco. Mr.
Beason has been Vice President, Controller and Treasurer of El Paso since
April 1996 and from September 1993 to April 1996 he was Senior Vice President
of Administration for Mojave Pipeline Operating Company, a subsidiary of El
Paso. For more than five years prior to September 1993, Mr. Beason was
Director of Financial Reporting for El Paso.
163
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE ENERGY BUSINESS
The following review of the financial condition and results of operations of
the Energy Business should be read in conjunction with the Combined Financial
Statements of Tenneco Energy and the notes thereto presented on pages F-3 to
F-28 of this Joint Proxy Statement--Prospectus. Such review includes certain
forward-looking statements, which should be read in conjunction with the
factors identified in "RISK FACTORS" herein.
PROPOSED MERGER WITH EL PASO
In the first quarter of 1996, Tenneco announced its intention to focus on
its automotive parts and packaging businesses. This strategic action included
the spin-off of Newport News to the holders of Tenneco Common Stock and the
development of options to separate Tenneco Energy from the packaging and
automotive parts divisions. On June 19, 1996, Tenneco announced that it had
signed the Merger Agreement, pursuant to which El Paso Subsidiary will be
merged with and into Tenneco, with Tenneco surviving the Merger as a
subsidiary of El Paso. Prior to the Merger, Tenneco will spin off New Tenneco
and Newport News to the holders of Tenneco Common Stock as separate public
companies.
The Merger represents a total value for Tenneco stockholders of
approximately $4 billion which includes:
. New shares of El Paso equity to be issued to Tenneco stockholders valued
at approximately $750 million (subject to the effect of the Collar on
the Average El Paso Common Price, as more fully described herein under
"THE MERGER--Conversion of Shares").
. Retention by Tenneco after the Distributions and the Merger of
approximately $2.65 billion (subject to adjustment as more fully
described herein under "DEBT AND CASH REALIGNMENT") of Tenneco Energy
Consolidated Debt and the Tenneco Junior Preferred Stock to be issued in
the NPS Issuance.
. Other payments and certain liability retentions by El Paso which El Paso
has estimated at an aggregate of approximately $600 million. See "THE
MERGER."
Upon consummation of the Transaction, holders of Tenneco Common Stock will
own equity securities of three separate, publicly held companies--New Tenneco,
Newport News and El Paso (which will include Tenneco Energy as a subsidiary)--
and holders of $7.40 Preferred Stock and $4.50 Preferred Stock will hold El
Paso Common Stock.
The consummation of the Transaction is subject to certain conditions,
including approval of the Transaction by Tenneco Stockholders at the Tenneco
Special Meeting and approval of the Distributions and the Charter Amendment by
the holders of the Tenneco Junior Preferred Stock issued in the NPS Issuance
(if issued prior to the Charter Amendment becoming effective). See "THE
DISTRIBUTIONS--Conditions to Consummation of the Distributions" and "THE
MERGER--Conditions Precedent."
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Net income for the 1996 first half of $103 million increased significantly
compared with $47 million in the first half of 1995.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
-----------
1996 1995
------ ----
(MILLIONS)
<S> <C> <C>
Revenues...................................................... $1,370 $939
Operating income.............................................. 188 140
</TABLE>
NET SALES AND OPERATING REVENUES
Revenues for the 1996 first half were $1.37 billion, an increase of 46
percent compared with $939 million for the year ago period.
164
<PAGE>
Revenues from Tenneco Energy's operations which are subject to regulation by
the FERC (generally referred to herein as its "regulated" operations)
increased to $423 million, or 21 percent. Non-recurring regulatory adjustments
that had no operating income impact contributed $55 million to the increase.
In addition, transportation revenues increased by $18 million primarily due to
a new rate structure implemented in July 1995 and increased transportation
volumes. Revenues from Tenneco Energy's energy-related operations which are
not generally subject to regulation by the FERC (generally referred to herein
as its "nonregulated" operations) increased 61 percent to $943 million,
primarily the result of higher gas prices resulting in a $226 million revenue
increase, an increase in gas volumes which increased revenues by $101 million,
the acquisition of the assets of the Pipeline Authority of South Australia
("PASA") in June 1995 which contributed $18 million in revenues and new
processing and gathering projects which increased revenues by $11 million.
Revenues from other operations were $4 million compared with $2 million in the
prior-year period.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)
Operating income from regulated operations in the U.S. rose $32 million to
$166 million. The increase included $15 million for a favorable legal
settlement in addition to a $4 million gain on the sale of TGP's interest in
Iroquois. Higher transportation revenues contributed $18 million to the
increase, while related operating costs primarily remained constant.
Additionally, 1995 included a loss of $7 million from the sale of TGP's
interest in Ozark Gas Transmission System ("Ozark") which added to the 1996
increase. Partially offsetting these increases was the absence of earnings
contributed by Kern River, which added $16 million in the year-ago period.
Tenneco Energy's 50 percent interest in Kern River was sold in late 1995.
Nonregulated operating income increased to $19 million in the first half of
1996 from $14 million in the 1995 first half due to higher operating income
from Tenneco Ventures' oil and gas production of $10 million and the
acquisition of PASA in June 1995 which contributed $10 million. Partially
offsetting the nonregulated earnings increase was lower operating income of $5
million due to increased development costs on international programs and $5
million in unfavorable legal settlements.
Tenneco Energy's other operations reported operating income of $3 million
during the first half of 1996 compared with an operating loss of $8 million in
the 1995 first half. The increase is due to the recognition of a $32 million
deferred gain on the sale of Tenneco Energy's investment in Cummins Engine
Company stock offset by lower interest income from the rolloff of Case retail
receivables.
INTEREST EXPENSE (NET OF INTEREST ALLOCATED TO AFFILIATES)
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at an operating company level and to centrally
manage various cash functions. Consequently, the corporate debt of Tenneco and
its related interest expense have been allocated to New Tenneco and Newport
News based upon the portion of Tenneco's investment in New Tenneco and Newport
News which is deemed to be debt, generally based upon the ratio of New
Tenneco's and Newport News' net assets to Tenneco consolidated net assets plus
debt. Interest expense was allocated at a rate equivalent to the weighted
average cost of all corporate debt, which was 7.7 percent, 8.3 percent and 7.4
percent for 1995, 1994 and 1993, respectively. Total pre-tax interest expense
allocated to New Tenneco and Newport News in 1995, 1994 and 1993 was $180
million, $120 million and $124 million, respectively. New Tenneco and Newport
News have also been allocated tax benefits approximating 35 percent of the
allocated pre-tax interest expense. Although interest expense and the related
tax effects have been allocated to New Tenneco and Newport News for financial
reporting on a historical basis, New Tenneco and Newport News have not been
billed for these amounts. The changes in allocated corporate debt and the
after-tax allocated interest expense have been included as a component of
Tenneco Energy's combined equity. Although management believes that the
historical allocation of corporate debt and interest is reasonable, it is not
necessarily indicative of what Tenneco Energy's debt and interest expense will
be upon completion of the Debt Realignment and the other components of the
Transaction. For additional information, see "DEBT AND CASH REALIGNMENT".
165
<PAGE>
Interest expense increased from $61 million in the 1995 first half to $63
million in the 1996 first half. The increase was primarily attributable to
higher levels of debt.
INCOME TAXES
Income tax expense for the first half of 1996 was $22 million compared with
$32 million for the 1995 first half. The effective tax rate for the first half
of 1996 was 18 percent compared with 41 percent in the prior year first half.
CHANGES IN ACCOUNTING PRINCIPLES
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes new accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The statement is
effective for transactions occurring after December 31, 1996. The impact of
the new standard has not been determined.
Tenneco Energy adopted FAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," in the first
quarter of 1996. FAS No. 121 establishes new accounting standards for
measuring the impairment of long-lived assets. The adoption of the new
standard did not have a material effect on Tenneco Energy's combined financial
position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
CASH PROVIDED (USED) BY: 1996 1995
------------------------ -------- --------
(MILLIONS)
<S> <C> <C>
Operating activities................................ $ (185) $ 174
Investing activities................................ 117 (266)
Financing activities................................ (81) 63
</TABLE>
Tenneco Energy's operating results, combined with proceeds from sales of
assets and businesses, supplemented by net contributions from affiliates and
borrowings, have provided funds for acquisitions and capital investments in
existing businesses, to repurchase Tenneco Common Stock and to retire long-
term debt.
Operating Activities
Operating cash flow for the first six months of 1996 declined due to lower
sales of customer receivables compared with the first half of 1995. This
decrease was due primarily to trade receivables sold to Asset Securitization
Cooperative Corporation ("ASCC"), which were $140 million lower in the first
half of 1996 compared with the first half of 1995. Operating cash flow in the
first half of 1996 also declined as a result of higher tax payments compared
with the first half of 1995 due to the settlement of 1987 through 1989 federal
tax liabilities and TGP's gas contract settlement with ICA and TransTexas for
$125 million.
Investing Activities
The sale of other businesses and assets, primarily Tenneco Energy's 50
percent interest in Kern River, generated an additional $278 million of cash
during the first half of 1996. The acquisition of assets, primarily the
acquisition of PASA, required $225 million of cash during the first half of
1995.
Tenneco Energy invested $164 million in capital expenditures in its existing
businesses during the first half of 1996. Capital expenditures were $113
million during the first half of 1995.
166
<PAGE>
Financing Activities
Cash used by financing activities was $81 million during the first six
months of 1996, a $144 million decrease from the same period in 1995. Tenneco
repurchased $122 million in common stock in the first half of 1996, down $328
million from the previous year. Tenneco had short-term debt outstanding at the
end of June 1996 of $130 million more than 1995. Tenneco also retired $292
million of long-term debt in the first six months of 1996 compared to $180
million retired in 1995. Finally, Tenneco received $301 million in cash
contributions from affiliates, down from $786 million received in the first
six months of 1995. Cash contributions from affiliates vary based on cash
generated by affiliates from operations net of cash required for operating and
investing activities.
CAPITALIZATION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(MILLIONS)
<S> <C> <C>
Short-term debt and current maturities.............. $ 521 $ 456
Long-term debt...................................... 1,519 1,811
Minority interest................................... 18 19
Preferred stock..................................... 112 130
Combined equity..................................... 1,054 687
------ ------
Total capitalization................................ $3,224 $3,103
====== ======
</TABLE>
Debt decreased $227 million at June 30, 1996 compared with December 31,
1995. For additional information on corporate debt allocation, see "--Interest
Expense (net of interest allocated to affiliates)" above.
LIQUIDITY
Historically, Tenneco Energy's excess net cash flows from operating and
investing activities have been used to meet consolidated debt and other
obligations. Conversely, when Tenneco Energy's cash requirements have been in
excess of cash flows from operations, Tenneco has utilized its consolidated
credit facilities to fund Tenneco Energy's obligations. Also, depending on
market and other conditions, Tenneco Energy has utilized external sources of
capital to meet specific funding requirements. However, during 1995, Tenneco
made cash distributions of approximately $1.3 billion, in the aggregate, to
its Tenneco Automotive, Tenneco Packaging and Newport News subsidiaries to
fund strategic acquisitions and capital spending. The disposition of the
Albright and Wilson chemicals operations and the sales of Case common stock
and other assets provided approximately $1.6 billion for these cash
distributions.
Prior to the Transaction, Tenneco will restructure its consolidated
indebtedness for money borrowed pursuant to the Debt Realignment through a
series of tender offers, exchange offers, payments, defeasances and
prepayments. In connection with the Debt Realignment, Tenneco will enter into
the Tenneco Credit Facility, which will consist of a one-year committed
revolving credit facility. Initial borrowings under the Tenneco Credit
Facility will be used to finance certain aspects of the Debt Realignment. For
additional information, see "DEBT AND CASH REALIGNMENT."
After giving effect to the Refinancing Transactions and based on El Paso's
representations regarding the operations of the Energy Business after the
Merger, Tenneco believes that internally generated funds of the Energy
Business and the availability under the Tenneco Credit Facility will provide
adequate sources of funds to finance the future capital requirements of the
Energy Business including any payments associated with the settlement of the
GSR issues discussed herein.
167
<PAGE>
RESULTS OF OPERATIONS FOR THE YEARS 1995 AND 1994
1995 STRATEGIC ACTIONS
In December 1995, Tenneco Energy sold its 50 percent interest in Kern River,
a joint venture that owns a 904-mile pipeline extending from Wyoming to
California. The sales price was $206 million, resulting in a pre-tax gain of
$30 million.
Tenneco Energy acquired the natural gas pipeline assets of PASA, which
includes a 488-mile pipeline, in June 1995 for approximately $225 million and
a 50 percent interest in two gas-fired cogeneration plants from ARK Energy in
November 1995 for approximately $65 million in cash and Tenneco Common Stock.
During 1995, Tenneco completed the $500 million common stock repurchase
program announced in December 1994. Also, in 1995, Tenneco announced two
additional share buyback programs, one for up to 3 million shares and another
for 2.5 million shares. These programs were designed to offset the growth in
common shares resulting from shares issued pursuant to employee benefit plans.
The 3 million share repurchase program was completed in 1995. Since December
1994, Tenneco has repurchased a total of 14.3 million common shares at a cost
of $646 million.
RESULTS OF OPERATIONS--YEARS 1995 AND 1994
Tenneco Energy's net income for 1995 of $157 million increased by three
percent compared with $153 million in 1994. The increased results occurred in
both the regulated and nonregulated businesses, all of which are discussed
below.
Significant transactions affecting the comparability of operating income
between 1995 and 1994 are:
. Pre-tax gains on sales of assets and businesses of $11 million in 1995
(primarily Tenneco Energy's interest in Kern River) compared with gains
of $24 million in 1994 (primarily from the sale of a 20 percent interest
in Tenneco Resources).
. Reserves established in 1995 of $25 million for the liquidation of
surplus real estate holdings and notes and $30 million for estimated
regulatory and legal settlement costs at Tenneco Energy.
. A gain from a 1994 contract settlement between Tenneco Energy and
Columbia Gas Transmission Corporation ("Columbia Gas") of $11 million.
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Revenues....................................................... $1,921 $2,381
Operating income............................................... 268 367
</TABLE>
NET SALES AND OPERATING REVENUES
The regulated portion of Tenneco Energy's business experienced a decline in
revenues from $918 million in 1994 to $761 million in 1995. Lower regulated
merchant gas sales caused a decline of approximately $222 million. Under FERC
Order 636, customers assume the responsibility for acquiring their gas
supplies, reducing sales by the pipeline. Other non-recurring regulatory
adjustments that had no operating income impact also increased revenue by $63
million.
Revenues in Tenneco Energy's nonregulated operations were $1,155 million,
down $305 million compared with 1994. Average natural gas prices were lower in
1995 compared with 1994, contributing approximately $175 million to the
revenue decrease. Furthermore, natural gas volumes declined contributing $148
million to the revenue decrease. Warmer weather in early 1995 resulted in
lower levels of storage activity during the year, decreasing demand for
natural gas and forcing prices lower. These effects were offset somewhat by
$18 million in revenues earned by the PASA assets which were acquired by
Tenneco Energy in June 1995.
Revenues from Tenneco Energy's other operations were $5 million compared
with $3 million in 1994.
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)
Operating income in the regulated portion of Tenneco Energy's business was
down by $27 million in 1995 as compared with 1994. The 1995 results included
the $30 million pre-tax gain on the sale of Tenneco Energy's
168
<PAGE>
interest in Kern River, a $7 million loss on the sale of Tenneco Energy's
interest in Ozark, and a $21 million reserve for estimated regulatory and
legal settlement costs while 1994 included the $11 million benefit from the
Columbia Gas contract settlement. Excluding these transactions, Tenneco
Energy's regulated business operating income decrease of approximately $18
million was primarily due to the termination or expiration of transportation
contracts.
The 1995 operating income for the nonregulated business decreased $55
million compared with 1994. Operating income in 1994 included a $23 million
gain from the sale of a 20 percent interest in Tenneco Resources to Ruhrgas
AG. The remainder of the operating income decline was due to increased startup
and development costs on international programs of approximately $12 million,
a $9 million reserve for estimated legal settlement costs and lower margins
and volumes due to lower demand in gas marketing which resulted in a $9
million decrease and an increase in administrative costs of approximately $5
million. Tenneco Energy operating results included $9 million in income from
operating the PASA assets during the last half of 1995.
Tenneco Energy's other operations reported an operating loss of $65 million
during 1995. This included a $25 million charge to establish a reserve for
liquidation of surplus real estate holdings and notes. During 1994, other
operations reported $48 million in operating losses.
INTEREST EXPENSE (NET OF INTEREST ALLOCATED TO AFFILIATES)
Tenneco Energy's interest expense in 1995 was $122 million compared with
$142 million in 1994. For a discussion of the historical allocation of
indebtedness of Tenneco and its subsidiaries, see "--Results of Operations for
the Six Months Ended June 30, 1996 and 1995 -- Interest Expense (net of
interest allocated to affiliates)."
INCOME TAXES
Income tax benefit for 1995 was $11 million compared with income tax expense
of $72 million in 1994.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, Tenneco Energy adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits," using the cumulative catch-up method.
It requires employers to account for postemployment benefits for former or
inactive employees after employment but before retirement on the accrual basis
rather than the "pay-as-you-go" basis. The adoption of this new standard had
no material impact on Tenneco Energy's financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
<TABLE>
<CAPTION>
CASH PROVIDED (USED) BY: 1995 1994
------------------------ ----- -----
(MILLIONS)
<S> <C> <C>
Operating activities...................................... $ 765 $(278)
Investing activities...................................... (537) (229)
Financing activities...................................... (27) 426
</TABLE>
Tenneco Energy's operating results, combined with proceeds from sales of
assets and businesses, and supplemented by contributions from affiliates and
short-term and long-term borrowings, have provided funds for acquisitions and
capital investments in existing businesses and to repurchase Tenneco Common
Stock.
Operating Activities
Operating cash flow for 1995 improved as Tenneco Energy generated $783
million from the collection and sale of customer receivables compared with
$245 million in 1994. This increase was due primarily to trade
169
<PAGE>
receivables sold to the ASCC, which were $783 million higher in 1995 compared
with 1994. The increase in collections of receivables was also due in part to
the collection of approximately $300 million of Case retail receivables in
1995. In addition, rate refund payments of approximately $250 million were
made to pipeline customers in 1994. The working capital increase of $652
million in 1994 resulted primarily from the reduction of the pipeline rate
refund liability of approximately $250 million and lower tax accruals of $252
million. The lower tax accruals resulted from the utilization of capital
losses related to the sale of assets.
Investing Activities
Cash used for business acquisitions during 1995 totaled $241 million. This
included the acquisition of PASA for approximately $225 million. Further,
Tenneco Energy invested $337 million in capital expenditures in its existing
businesses during the year. During 1994, Tenneco Energy's other cash sources
included $68 million in proceeds from the sale of assets. Capital expenditures
were $345 million for continuing operations.
Financing Activities
In addition to business expansion, Tenneco Energy used its cash flow during
the year for the scheduled retirement of $497 million in long-term debt, to
reacquire Tenneco Common Stock for $655 million and to pay $286 million in
dividends on Tenneco Stock. During 1994, Tenneco Energy had a net reduction of
$605 million in debt and paid dividends on Tenneco Stock of $318 million.
Other cash sources included net contributions from affiliates of $1,367
million.
CAPITALIZATION
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Short-term debt and current maturities..................... $ 456 $ 399
Long-term debt............................................. 1,811 2,242
Minority interest.......................................... 19 19
Preferred stock............................................ 130 147
Combined equity............................................ 687 382
------ ------
Total capitalization....................................... $3,103 $3,189
====== ======
</TABLE>
Debt decreased $374 million at December 31, 1995 compared with December 31,
1994. For additional information on corporate debt allocation, see "--Results
of Operations for the Six Months Ended June 30, 1996 and 1995--Interest
Expense (net of interest allocated to affiliates)."
RESULTS OF OPERATIONS FOR THE YEARS 1994 AND 1993
NET SALES AND OPERATING REVENUES
Revenues for 1994 were $2.38 billion, down from $2.87 billion in 1993.
Tenneco Energy revenues were down $485 million or 17 percent as customers
shifted from sales to transportation service in the regulated business which
resulted in a decrease of approximately $390 million, and lower gas prices in
the nonregulated gas marketing business which decreased revenues by $167
million. Offsetting these decreases, the nonregulated businesses reported a
volume increase which resulted in increased revenues of $56 million and the
contract settlement with Columbia Gas which increased 1994 revenues by $11
million.
170
<PAGE>
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES (OPERATING INCOME)
Tenneco Energy reported operating income of $367 million in 1994 compared
with $419 million in 1993.
The energy operations reported operating income for 1994 of $415 million,
compared with $411 million in 1993. Special items in 1994 included a $23
million gain on the sale of a 20 percent interest in Tenneco Resources to
Ruhrgas AG and an $11 million contract settlement with Columbia Gas. Special
items in 1993 included a $31 million gain on the sale of Viking and Dean
Pipeline Company. When non-recurring items in both years are excluded,
operating income in 1994 declined slightly, compared with 1993. Declines
during 1994 in the regulated business were primarily due to transportation
contract expirations amounting to $12 million. Declines in nonregulated gas
marketing prices resulted in a $10 million decrease. Offsetting these declines
was significant growth in the nonregulated businesses which contributed $24
million.
Tenneco Energy's other operations reported an operating loss of $48 million
in 1994, compared with operating income of $8 million for 1993. The 1993
operating income included a gain of $39 million from contributing Tenneco
Energy's investment in Cummins Engine Company to the Case Corporation Pension
Plan for Hourly Paid Employees.
INTEREST EXPENSE (NET OF INTEREST ALLOCATED TO AFFILIATES)
Net interest expense increased $15 million from $127 million in 1993 to $142
million in 1994. For additional information on corporate debt allocation, see
"--Results of Operations for the Six Months Ended June 30, 1996 and 1995--
Interest Expense (net of interest allocated to affiliates)."
INCOME TAXES
Income tax expense for 1994 was $72 million compared with $104 million
reported for 1993. The lower tax expense in 1994 was primarily the result of
lower pre-tax earnings.
EXTRAORDINARY LOSS
Extraordinary loss for 1993 was $25 million, net of income tax benefit of
$13 million. This was the result of redemption premiums from prepaying high
interest-bearing long-term debt.
LIQUIDITY & CAPITAL RESOURCES
Operating Activities
Net cash used by operating activities was $278 million for the year 1994,
compared with net cash provided of $209 million for 1993, a decrease of $487
million. This decrease was due in part to lower sales of receivables in 1994.
Trade receivables sold to the ASCC were $313 million less in 1994 compared
with 1993. In addition, rate refund payments of approximately $250 million
were made to pipeline customers in 1994. The working capital increase of $652
million for 1994 resulted primarily from the reduction of the pipeline rate
refund liability of approximately $250 million and lower tax accruals of $252
million. The lower tax accruals resulted from the utilization of capital
losses related to the sale of assets.
Investing Activities
Net cash used by investing activities in 1994 was $229 million, compared
with net cash used of $35 million in 1993. Net proceeds from the sale of
businesses and assets were $68 million in 1994. Net proceeds from the sale of
businesses in 1993 of $114 million resulted from the sales of Dean Pipeline
Company and Viking.
171
<PAGE>
Expenditures for plant, property and equipment from continuing operations
for 1994 were $345 million, compared with $171 million for 1993.
Financing Activities
Cash provided by financing activities was $426 million in 1994 compared to
cash used of $49 million in 1993. During 1993, Tenneco issued $1.2 billion of
common stock which was used to retire long-term debt. In 1994, Tenneco issued
common stock for $188 million, received cash from affiliates of $1.4 billion,
including approximately $700 million in proceeds from sales of assets by
affiliates, and retired debt of $508 million.
FERC MATTERS
TGP has deferred certain costs it has incurred associated with renegotiating
GSR costs as a result of FERC Order 636. For a discussion of TGP's ongoing
settlement and contract reformation discussions with holders of long-term gas
purchase contracts, ongoing discussions between TGP and its customers related
to the recovery of GSR costs and various FERC proceedings relating to TGP cost
recovery of transition costs incurred pursuant to implementation of Order 636,
see "INFORMATION CONCERNING THE ENERGY BUSINESS TO BE MERGED--Interstate
Pipeline Operations--Federal Regulation."
ENVIRONMENTAL MATTERS
Tenneco Energy and certain of its subsidiaries are subject to various
environmental claims and proceedings relating to its current businesses and
discontinued operations. See "INFORMATION CONCERNING THE ENERGY BUSINESS TO BE
MERGED--Environmental Matters."
172
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF EL PASO AND TENNECO
ENERGY
ASSUMING THE STOCK ISSUANCE IS APPROVED
The following Unaudited Pro Forma Combined Financial Statements of El Paso
and Tenneco Energy (the "Pro Forma Financial Statements") illustrate the
effect of (i) the Corporate Restructuring Transactions, the Cash and Debt
Realignment, the NPS Issuance and the Distributions (which are all part of the
Transaction discussed elsewhere herein); (ii) the Merger; and (iii) the
Refinancing Transactions (see "Risk Factors" included elsewhere herein). The
Unaudited Pro Forma Consolidated Balance Sheet has been prepared as if such
transactions occurred on June 30, 1996; the Unaudited Pro Forma Consolidated
Statements of Income have been prepared as if such transactions occurred as of
January 1, 1995.
The Pro Forma Financial Statements reflect El Paso having acquired 100% of
the outstanding Tenneco Common Stock, $7.40 Preferred Stock and $4.50
Preferred Stock. Pursuant to the Merger Agreement, El Paso will acquire an
amount of debt equal to $2.65 billion (subject to certain other adjustments)
less the NPS Issuance Proceeds, will issue approximately $750 million (subject
to the effects of a collar on the average El Paso Common Stock market price)
of El Paso equity securities to holders of Tenneco Common Stock, $4.50
Preferred Stock and $7.40 Preferred Stock, will assume the $275 million of
Tenneco Junior Preferred Stock issued in the NPS Issuance, and will acquire
approximately an estimated amount of $600 million in other liabilities of
certain discontinued businesses of Tenneco for a total purchase price of
approximately $4 billion. El Paso's acquisition of Tenneco will be accounted
for under the purchase method. El Paso stockholders will be asked to vote on
the Stock Issuance at the El Paso Special Meeting (scheduled to be held
December 9, 1996, one day prior to the Tenneco Special Meeting where Tenneco
Stockholders will be asked to vote on the Transaction). These pro forma
financial statements reflect the approval of the Stock Issuance. If the Stock
Issuance is not approved, the Merger is still expected to be consummated, but
Tenneco stockholders will receive a combination of El Paso Common Stock and El
Paso Preferred Depositary Shares evidencing El Paso Preferred Stock (see
"Unaudited Pro Forma Combined Financial Statements of El Paso and Tenneco
Energy Assuming the Stock Issuance is Not Approved").
A final determination of required purchase accounting adjustments, including
the allocation of the purchase price to the assets acquired and liabilities
assumed based on their respective fair values, has not yet been made.
Accordingly, the purchase accounting adjustments made in connection with the
development of the Pro Forma Financial Statements are preliminary and have
been made solely for purposes of developing the pro forma combined financial
information. However, management believes that the pro forma adjustments and
the underlying assumptions reasonably present the significant effects of the
Merger and the Refinancing Transactions. In addition, El Paso will undertake a
study to determine the fair value of Tenneco Energy's assets and liabilities
and will revise purchase accounting adjustments upon completion of that study.
Upon consummation of the Merger, the actual financial position and results of
operations of the combined entity will differ, perhaps significantly, from the
pro forma amounts reflected herein because of a variety of factors, including
access to additional information, changes in value and changes in operating
results between the dates of the pro forma financial information and the date
on which the Merger takes place. The Pro Forma Financial Statements are not
necessarily indicative of actual operating results or financial position had
the transactions occurred as of the dates indicated above, nor do they purport
to indicate operating results or financial position which may be attained in
the future.
The pro forma results of operations reflect (i) higher depreciation expense
to give effect to the allocation of excess purchase price and the fair value
of net assets acquired to property, plant and equipment, and (ii) higher
interest expense reflecting the debt assumed as a component of the purchase
price. If the Stock Issuance is not approved, earnings available to common
stock would be reduced by the preferred stock dividends of $28 million and $56
million for the six months ended June 30, 1996 and twelve months ended
December 31, 1995, respectively.
173
<PAGE>
The significant adjustments to the pro forma financial position reflect (i)
reductions to cash, receivables and payables and increases to debt for the
Corporate Restructuring Transactions and the Cash and Debt Realignment
Transactions, (ii) increases to property, plant and equipment and accrued
liabilities and decreases to regulatory assets for the purchase price
allocation, and (iii) decreases to property, plant and equipment and debt and
increases to equity for asset sales, debt restructuring and equity offerings
in connection with the Merger and the Refinancing Transactions. If the Stock
Issuance is not approved, total equity consideration will not change; however,
preferred stock will increase by $556 million and common stock and additional
paid in capital will decrease by an equal amount.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of El Paso and Tenneco Energy, which are
incorporated by reference and included herein, respectively, and the Notes to
the Pro Forma Financial Statements included elsewhere herein. The pro forma
adjustments do not reflect any potential operating efficiencies or cost
savings which El Paso believes are achievable with respect to the combined
companies.
174
<PAGE>
EL PASO NATURAL GAS COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
ASSUMING THE STOCK ISSUANCE IS APPROVED
JUNE 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
TENNECO ENERGY
PRE-MERGER PRO FORMA PRO FORMA MERGER
------------------------------------- ------------------------------------------
RESTRUCTURING,
TENNECO REALIGNMENT TENNECO EL PASO/
EL PASO ENERGY AND NPS ENERGY MERGER REFINANCING TENNECO ENERGY
HISTORICAL HISTORICAL ISSUANCE AS ADJUSTED ADJUSTMENTS TRANSACTIONS COMBINED
---------- ---------- -------------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary
investments........... $ 50 $ 100 $ (36)(d) $ 25 $ $ $ 75
(39)(g)
Receivables............ 367 1,190 (116)(a) 760 1,127
(357)(b)
48 (c)
(5)(d)
Other current assets... 78 138 (23)(c) 118 196
3 (d)
------ ------ ----- ------ ------ ----- ------
Total current assets... 495 1,428 (525) 903 1,398
------ ------ ----- ------ ------ ----- ------
Net property, plant and
equipment.............. 1,989 2,924 (39)(c) 2,885 2,089 (k) (580)(n) 6,383
Other assets and
deferred charges....... 280 1,187 (172)(b) 1,014 (590)(j) 80 (n) 784
(1)(c)
------ ------ ----- ------ ------ ----- ------
Total assets $2,764 $5,539 $(737) $4,802 $1,499 $(500) $8,565
====== ====== ===== ====== ====== ===== ======
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current liabilities:
Short-term debt........ $ 421 $ 521 $(521)(f) $ $ $ 330 (o) $ 751
Payables............... 426 532 (111)(a) 222 20 (h) 668
(2)(b)
(197)(f)
Other current
liabilities........... 173 718 (11)(c) 605 120 (j) 898
(20)(b)
(82)(f)
------ ------ ----- ------ ------ ----- ------
Total current
liabilities........... 1,020 1,771 (944) 827 140 330 2,317
Long-term debt.......... 670 1,519 1,290 (f) 2,544 (500)(n) 2,184
(265)(e) (200)(m)
(330)(o)
Other liabilities and
deferred credits....... 82 652 (17)(b) 594 151 (j) 827
(41)(d)
Deferred income taxes... 264 413 (13)(b) 401 479 (l) 1,144
1 (c)
------ ------ ----- ------ ------ ----- ------
2,036 4,355 11 4,366 770 (700) 6,472
------ ------ ----- ------ ------ ----- ------
Minority interest....... 40 18 18 265(k) 323
------ ------ ----- ------ ------ ----- ------
Preferred stock with
mandatory
redemption provisions.. 112 112 (112)(i)
------ ------ ----- ------ ------ ----- ------
Stockholders' equity:
Preferred Stock........ 265 (e) 265 (265)(k)
Common Stock........... 112 57 (i) 15 (m) 184
Additional Paid In
Capital............... 462 825 (i) 185 (m) 1,472
Accumulated Earnings... 114 114
Tenneco Combined
Equity................ 1,054 (5)(a) 41 (41)(k)
(477)(b)
(5)(c)
3 (d)
(490)(f)
(39)(g)
------ ------ ----- ------ ------ ----- ------
Total stockholders'
equity................ 688 1,054 (748) 306 576 200 1,770
------ ------ ----- ------ ------ ----- ------
Total liabilities and
stockholders' equity.. $2,764 $5,539 $(737) $4,802 $1,499 $(500) $8,565
====== ====== ===== ====== ====== ===== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
175
<PAGE>
EL PASO NATURAL GAS COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
ASSUMING THE STOCK ISSUANCE IS APPROVED
RESTRUCTURING, REALIGNMENT AND NPS ISSUANCE:
(a) To reflect the settlement of intercompany trade accounts receivable and
intercompany trade accounts payable with Tenneco Energy affiliates.
(b) To reflect the distribution to New Tenneco of receivables previously sold
to Tenneco Credit Corporation, a Tenneco Energy affiliate.
(c) To reflect the transfer from Tenneco Energy to New Tenneco and affiliates
of certain assets and liabilities held at the corporate level.
(d) To reflect the transfer to New Tenneco of insurance liabilities and the
related portfolio of short-term cash investments and other assets
previously held by Eastern Insurance Company Limited.
(e) To reflect the NPS Issuance of $275 million of Tenneco Junior Preferred
Stock, with an assumed 8 1/2% dividend yield, for net NPS Issuance
Proceeds of $265 million, and the use of the net NPS Issuance Proceeds for
the repayment of Tenneco Energy Consolidated Debt.
(f) To reflect the restructuring and realignment of the Tenneco debt pursuant
to the Debt Realignment, the Distributions and the applicable provisions
of the Merger Agreement, and the assumed payment of accrued interest on
the Tenneco Energy Consolidated Debt defeased, redeemed, tendered or
exchanged as part of the Debt Realignment. The Pro Forma Financial
Statements assume no such reduction in the Base Debt Amount. The amount of
"Tenneco Energy as Adjusted" debt immediately prior to the Merger will
consist primarily of borrowings under the Tenneco Credit Facility
(assuming 100% acceptance of the Debt Tender Offers and Debt Exchange
Offers) and is calculated from the provisions of the Merger Agreement as
follows (in millions):
<TABLE>
<S> <C>
Base Debt Amount per Merger agreement................................ $2,650
Less: NPS Issuance proceeds.......................................... (275)
------
2,375
Plus: Cash settlement payments....................................... 439
Less: Estimated collections subject to refund........................ (270)
------
"Tenneco Energy as Adjusted" debt.................................... $2,544
======
</TABLE>
At this time, Tenneco management cannot determine the ultimate amount of
securities which will be purchased in the Debt Tender Offers, or the
ultimate amount of securities which will be exchanged into New Tenneco
Public Debt pursuant to the Debt Exchange Offers, and such amount could
vary significantly. However, for purposes of these pro forma adjustments,
it is assumed that 100% of the securities subject to the Debt Tender Offers
are purchased pursuant to the Debt Tender Offers and 100% of the securities
subject to the Debt Exchange Offers are exchanged into New Tenneco Public
Debt pursuant to the Debt Exchange Offers.
(g) To reflect distribution from Tenneco Energy of cash in excess of $25
million pursuant to the Cash Realignment provisions of the Merger
Agreement. The distribution may be adjusted by the sale of Tenneco Energy
receivables by Tenneco prior to the Merger Effective Time.
MERGER ADJUSTMENTS:
(h) To reflect the liability for the estimated legal, investment banking and
stock issuance costs of $20 million to be incurred by El Paso in
connection with the Merger.
(i) To reflect the issuance of approximately 18.930 million shares of El Paso
Common Stock valued at $882 million based on an assumed price of $46.60
per share. (If the Stock Issuance is not approved by the stockholders of
El Paso, the transaction will be consummated by issuing preferred stock,
with an assumed 10% dividend yield, and common stock of El Paso. See Pro
Forma Financial Information Assuming the Stock Issuance is Not Approved
which follows herein.) The Equity Consideration will be issued in exchange
for the $112 million of $7.40 Preferred Stock and $4.50 Preferred Stock at
an assumed redemption amount equal to $137 million with the remainder
exchanged for Tenneco Common Stock.
176
<PAGE>
(j) To reflect the preliminary estimated acquisition adjustments under the
purchase method of accounting to record assets acquired and liabilities
assumed at estimated fair value for (i) reduction of certain other assets,
deferred charges and regulatory assets, (ii) revision of benefit plan
assumptions relating to the retiree medical plan obligation, other
employee benefit costs and environmental costs, and (iii) the accrual of
an obligation to New Tenneco which is expected to be paid after completion
of the transaction as a result of the utilization of certain tax benefits
generated by the Debt Realignment. The following adjustments reflect El
Paso management's intended business strategies which may differ from the
business strategies employed by Tenneco Energy management prior to the
Merger (in millions):
<TABLE>
<S> <C>
Other assets and deferred charges...................................... $590
Other liabilities and deferred credits................................. 151
Other current liabilities.............................................. 120
----
$861
====
</TABLE>
(k) The following adjustments are made to adjust the historical values of
certain assets and liabilities to their estimated fair values as follows
(in millions):
<TABLE>
<S> <C>
Increase property, plant and equipment............................... $2,089
Reduce other assets and deferred charges............................. (590)
Increase current liabilities......................................... (140)
Increase other liabilities and deferred credits...................... (151)
Increase deferred income taxes....................................... (479)
Eliminate Tenneco Energy stockholders' equity:
Tenneco Energy preferred stock..................................... 112
Tenneco Energy equity.............................................. 41
------
Issuance of El Paso Common Stock..................................... $ 882
======
</TABLE>
The allocation above reflects El Paso's internal evaluation of the excess
purchase price and is subject to the completion of an independent appraisal
of the fair value of the property. It is not expected that any excess
purchase price allocated to property, plant and equipment will be allowed
for regulatory purposes or recovered through rates. Should the independent
appraisal not support such allocation to property, plant and equipment, the
excess of total purchase price over the fair value of the net assets
acquired will be reflected as goodwill.
(l) To reflect the increase in deferred income taxes of $479 million which
have been provided for temporary differences after the allocation of the
pro forma purchase price and acquisition adjustments. The following pro
forma adjustments were required for estimated book and tax basis
differences resulting from the allocation of the pro forma purchase price,
at an assumed tax rate of 39% (in millions):
<TABLE>
<S> <C>
Property, plant and equipment......................................... $ 815
Other assets.......................................................... (230)
Other liabilities..................................................... (106)
-----
$ 479
=====
</TABLE>
REFINANCING TRANSACTIONS:
(m) To reflect the assumed issuance of $200 million El Paso Common Stock to
pay down $200 million of long-term debt acquired pursuant to the Merger.
(n) To reflect the assumed monetization of $500 million of assets through
sales or project financings, at book value, and to reflect El Paso's
remaining $80 million investment in certain Australian projects using the
equity method. These proceeds are used to pay down long-term debt acquired
pursuant to the Merger.
(o) To reflect the replacement of the remaining balance under the Tenneco
Credit Facility with short-term and long-term financing at interest rates
of 6% and 8%, respectively.
177
<PAGE>
EL PASO NATURAL GAS COMPANY
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
ASSUMING THE STOCK ISSUANCE IS APPROVED
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TENNECO ENERGY
PRE-MERGER PRO FORMA PRO FORMA MERGER
------------------------------------- ------------------------------------
RESTRUCTURING, EL PASO/
TENNECO REALIGNMENT TENNECO TENNECO
EL PASO ENERGY AND NPS ENERGY MERGER REFINANCING ENERGY
HISTORICAL HISTORICAL ISSUANCE AS ADJUSTED ADJUSTMENTS TRANSACTIONS COMBINED
---------- ---------- -------------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $1,193 $1,370 $ $1,370 $ $ (46)(i) $2,517
Operating costs and
expenses............... 1,065 1,279 (38)(a) 1,241 26 (e) (24)(i) 2,312
4 (f)
Employee separation and
asset impairment
charge................. 99 (2) 99
------ ------ ---- ------ ------ ----- ------
Operating income....... 29 91 38 129 (30) (22) 106
Other (income) expense,
net.................... (1) (97) 33(a) (64) (65)
Interest expenses....... 48 63 42(c) 105 (28)(h) 121
(3)(j)
(1)(i)
------ ------ ---- ------ ------ ----- ------
Income (loss) before
income taxes and
minority interest..... (18) 125 (37) 88 (30) 10 50
Provision for income
taxes (benefit)(1)..... (7) 22 (14)(d) 8 (12)(g) (5)(i) (5)
11 (k)
------ ------ ---- ------ ------ ----- ------
Income (loss) before
minority interest...... (11) 103 (23) 80 (18) 4 55
Minority interest....... 12 (b) 12 12
------ ------ ---- ------ ------ ----- ------
Net income (loss)....... (11) 103 (35) 68 (18) 4 43
Preferred stock
dividends..............
------ ------ ---- ------ ------ ----- ------
Earnings available to
common stock........... $(11) $103 $(35) $ 68 $ (18) $ 4 $ 43
====== ====== ==== ====== ====== ===== ======
Earnings (loss) per
average share of common
stock(2)............... $ (.31) $ .74
====== ======
Number of shares used in
computation of earnings
per common shares
(in thousands)......... 35,264 18,930 4,292 58,486
====== ====== ===== ======
</TABLE>
- --------
(1) The provision for income taxes for Tenneco Energy reflects the realization
of unrecognized deferred tax assets; therefore, the overall effective tax
rate is significantly lower than the assumed statutory rate of 39%. If the
statutory rate had been used, the combined provision for income taxes
would have been $20 million and the pro forma combined amounts for
earnings available to common stock and earnings per average share of
common stock would have been $18 million and $0.31, respectively.
(2) Per share data is calculated using the income applicable to common shares
divided by the pro forma shares outstanding. The pro forma weighted
average common shares outstanding includes the following assumptions: (i)
the issuance of 18.930 million shares of El Paso Common Stock to holders
of Tenneco Common Stock, $7.40 Preferred Stock and $4.50 Preferred Stock
under the terms of the Merger, and (ii) the assumed issuance of 4.292
million shares of El Paso Common Stock at $46.60 per share as part of the
Refinancing Transactions, the proceeds of which will be used to pay down
long-term debt. Earnings per average share of common stock excluding the
employee separation and asset impairment special charge ($60 million after
tax) would be $1.41 and $1.77 per common share for the El Paso Historical
and El Paso/Tenneco Energy Combined presentations, respectively.
See accompanying Notes to Unaudited Pro Forma Combined Income Statements.
178
<PAGE>
EL PASO NATURAL GAS COMPANY
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
ASSUMING THE STOCK ISSUANCE IS APPROVED
FOR THE YEAR ENDED DECEMBER 31, 1995
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TENNECO ENERGY
PRE-MERGER PRO FORMA PRO FORMA MERGER
------------------------------------- ------------------------------------
RESTRUCTURING, EL PASO/
TENNECO REALIGNMENT TENNECO TENNECO
EL PASO ENERGY AND NPS ENERGY MERGER REFINANCING ENERGY
HISTORICAL HISTORICAL ISSUANCE AS ADJUSTED ADJUSTMENTS TRANSACTIONS COMBINED
---------- ---------- -------------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $1,038 $1,921 $ $1,921 $ $ (47)(i) $2,912
Operating costs and
expenses............... 826 1,843 (93)(a) 1,750 52 (e) (41)(i) 2,595
8 (f)
------ ------ ---- ------ ------ ----- ------
Operating income....... 212 78 93 171 (60) (6) 317
Other (income) expense,
net.................... (7) (190) 84 (a) (106) (113)
Interest expense........ 86 122 95 (c) 217 (56)(h) 238
(6)(j)
(3)(i)
------ ------ ---- ------ ------ ----- ------
Income before income
taxes and minority
interest.............. 133 146 (86) 60 (60) 59 192
Provision for income
taxes (benefit)(1)..... 48 (11) (33)(d) (44) (23)(g) 22 (k) 2
(1)(i)
------ ------ ---- ------ ------ ----- ------
Income before minority
interest............... 85 157 (53) 104 (37) 38 190
Minority interest....... 23 (b) 23 23
------ ------ ---- ------ ------ ----- ------
Net income (loss)....... 85 157 (76) 81 (37) 38 167
Preferred stock
dividends..............
------ ------ ---- ------ ------ ----- ------
Earnings available to
common stock........... $ 85 $ 157 $(76) $ 81 $ (37) $ 38 $ 167
====== ====== ==== ====== ====== ===== ======
Earnings (loss) per
average share of common
stock(2)............... $ 2.47 $ 2.89
====== ======
Number of shares used in
computation of earnings
per common share
(in thousands)......... 34,495 18,930 4,292 57,717
====== ====== ===== ======
</TABLE>
- --------
(1) The provision for income taxes for Tenneco Energy reflects the realization
of unrecognized deferred tax assets; therefore, the overall effective tax
rate is significantly lower than the assumed statutory rate of 39%. If
this statutory rate had been used, the combined provision for income taxes
would have been $75 million and the pro forma combined amounts for
earnings available to common stock and earnings per average share of
common stock would have been $94 million and $1.63, respectively.
(2) Per share data is calculated using the income applicable to common shares
divided by the pro forma shares outstanding. The pro forma weighted
average common shares outstanding includes the following assumptions: (i)
the issuance of 18.930 million shares of El Paso Common Stock to holders
of Tenneco Common Stock, $7.40 Preferred Stock and $4.50 Preferred Stock
under the terms of the Merger, and (ii) the assumed issuance of 4.292
million shares of El Paso Common Stock at $46.60 per share as part of the
Refinancing Transactions, the proceeds of which will be used to pay down
long-term debt.
See accompanying Notes to Unaudited Pro Forma Combined Income Statements.
179
<PAGE>
EL PASO NATURAL GAS COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
ASSUMING THE STOCK ISSUANCE IS APPROVED
RESTRUCTURING, REALIGNMENT AND NPS ISSUANCE:
(a) To reflect the earnings impact of the distribution to New Tenneco of
receivables previously sold to Tenneco Credit Corporation, a Tenneco
Energy affiliate and the related income tax expense effect at an estimated
39%.
(b) To reflect preferred stock dividends in the Combined Pro Forma Income
Statement on the Tenneco Junior Preferred Stock issued in the NPS Issuance
at an assumed dividend yield of 8 1/2%.
(c) To reflect interest expense on additional debt issued under the Tenneco
Credit Facility. For purposes of the pro forma calculations, an assumed
interest rate of 8% has been used.
(d) To reflect the income tax expense effects of pro forma adjustments at an
estimated rate of 39%.
MERGER ADJUSTMENTS:
(e) To reflect depreciation expense related to the increase in fair value of
property, plant and equipment, depreciated over a 40 year period which
approximates the FERC approved depreciation rate for the regulated
property, plant and equipment of Tenneco Energy prospectively.
(f) To reflect the assumed pro forma postretirement cost for Tenneco Energy
employees.
(g) To reflect the income tax expense effects of pro forma adjustments at an
estimated rate of 39%.
REFINANCING TRANSACTIONS:
(h) To reflect an interest expense reduction relating to debt repaid from
proceeds from the $200 million equity offering and proceeds from the
monetization of $500 million of asset sales and project financings at book
value.
(i) To remove the historical operating results of Tenneco Energy's exploration
and production business which is assumed to be disposed at book value.
(j) To reflect the interest expense reduction relating to the replacement of
the remaining balance under the Tenneco Credit Facility with short-term
and long-term financing at interest rates of 6% and 8%, respectively. A
1/8% change in interest rates would have the impact of increasing total
pro forma interest expense by approximately $1 million and $2 million for
the six months ended June 30, 1996 and the year ended December 31, 1995,
respectively.
(k) To reflect the income tax expense effects of pro forma adjustments at an
estimated rate of 39%.
180
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF EL PASO AND TENNECO
ENERGY
ASSUMING THE STOCK ISSUANCE IS NOT APPROVED
The following Pro Forma Financial Statements illustrate the effect of (i)
the Corporate Restructuring Transactions, the Cash and Debt Realignment, the
NPS Issuance and the Distributions (which are all part of the Transaction
discussed elsewhere herein); (ii) the Merger; and (iii) the Refinancing
Transactions (see "Risk Factors" included elsewhere herein). The Unaudited Pro
Forma Consolidated Balance Sheet has been prepared as if such transactions
occurred on June 30, 1996; the Unaudited Pro Forma Consolidated Statements of
Income have been prepared as if such transactions occurred as of January 1,
1995.
The Pro Forma Financial Statements reflect El Paso having acquired 100% of
the outstanding Tenneco Common Stock, $7.40 Preferred Stock and $4.50
Preferred Stock. Pursuant to the Merger Agreement, El Paso will acquire an
amount of debt equal to $2.65 billion (subject to certain other adjustments)
less the NPS Issuance Proceeds, will issue approximately $750 million (subject
to the effects of a collar on the average El Paso Common Stock market price)
of El Paso equity securities to holders of Tenneco Common Stock, $4.50
Preferred Stock and $7.40 Preferred Stock, will assume the $275 million of
Tenneco Junior Preferred Stock issued in the NPS Issuance, and will acquire
approximately an estimated amount of $600 million in other liabilities of
certain discontinued businesses of Tenneco for a total purchase price of
approximately $4 billion. El Paso's acquisition of Tenneco will be accounted
for under the purchase method. El Paso stockholders will be asked to vote on
the Stock Issuance at the El Paso Special Meeting (scheduled to be held
December 9, 1996, one day prior to the Tenneco Special Meeting where Tenneco
Stockholders will be asked to vote on the Transaction). These Pro Forma
Financial Statements assume the Stock Issuance is not approved and
accordingly, reflect Equity Consideration of 7 million shares of El Paso
Common Stock plus shares of a new series of El Paso Preferred Stock in
accordance with the Merger Agreement. The preferred stock, which has a twenty
year maturity, may be exchanged for El Paso Common Stock at El Paso's option
as described elsewhere herein. If the Stock Issuance is approved, Equity
Consideration will consist entirely of El Paso Common Stock (see "Unaudited
Pro Forma Combined Financial Statements of El Paso and Tenneco Energy Assuming
the Stock Issuance is Approved.")
A final determination of required purchase accounting adjustments, including
the allocation of the purchase price to the assets acquired and liabilities
assumed based on their respective fair values, has not yet been made.
Accordingly, the purchase accounting adjustments made in connection with the
development of the Pro Forma Financial Statements are preliminary and have
been made solely for purposes of developing the pro forma combined financial
information. However, management believes that the pro forma adjustments and
the underlying assumptions reasonably present the significant effects of the
Merger and the Refinancing Transactions. In addition, El Paso will undertake a
study to determine the fair value of Tenneco Energy's assets and liabilities
and will revise purchase accounting adjustments upon completion of that study.
Upon consummation of the Merger, the actual financial position and results of
operations of the combined entity will differ, perhaps significantly, from the
pro forma amounts reflected herein because of a variety of factors, including
access to additional information, changes in value and changes in operating
results between the dates of the pro forma financial information and the date
on which the Merger takes place. The Pro Forma Financial Statements are not
necessarily indicative of actual operating results or financial position had
the transactions occurred as of the dates indicated above, nor do they purport
to indicate operating results or financial position which may be attained in
the future.
The pro forma results of operations reflect (i) higher depreciation expense
to give effect to the allocation of excess purchase price over the fair value
of net assets acquired to property, plant and equipment (ii) higher interest
expense reflecting the debt assumed in a component of the purchase price, and
(iii) higher preferred stock dividends reflecting the issuance of preferred
stock. If the Stock Issuance is approved, preferred stock dividends would not
be required and earnings available to common stock would be increased by $28
million and $56 million for the six months ended June 30, 1996 and twelve
months ended December 31, 1995, respectively.
The significant adjustments to the pro forma financial position reflect (i)
reductions to cash, receivables and payables and increases to debt for the
Corporate Restructuring Transactions and the Cash and Debt Realignment
Transactions, (ii) increases to property, plant and equipment and accrued
liabilities and decreases to regulatory
181
<PAGE>
assets for the purchase price allocation, and (iii) decreases to property,
plant and equipment and debt and increases to equity for asset sales, debt
restructuring and equity offerings in connection with the Merger and the
Refinancing Transactions. If the Stock Issuance is approved, total equity
consideration will not change; however, preferred stock will decrease by $556
million and common stock and additional paid in capital will increase by an
equal amount.
The Pro Forma Financial Statements should be read in conjunction with the
historical financial statements of El Paso and Tenneco Energy, which are
incorporated by reference and included herein, respectively, and the Notes to
the Pro Forma Financial Statements included elsewhere herein. The pro forma
adjustments do not reflect any potential operating efficiencies or cost
savings which El Paso believes are achievable with respect to the combined
companies.
182
<PAGE>
EL PASO NATURAL GAS COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
ASSUMING THE STOCK ISSUANCE IS NOT APPROVED
JUNE 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
TENNECO ENERGY
PRE-MERGER PRO FORMA PRO FORMA MERGER
------------------------------------- ------------------------------------------
RESTRUCTURING,
TENNECO REALIGNMENT TENNECO EL PASO/
EL PASO ENERGY AND NPS ENERGY MERGER REFINANCING TENNECO ENERGY
HISTORICAL HISTORICAL ISSUANCE AS ADJUSTED ADJUSTMENTS TRANSACTIONS COMBINED
---------- ---------- -------------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary
investments........... $ 50 $ 100 $ (36)(d) $ 25 $ $ $ 75
(39)(g)
Receivables............ 367 1,190 (116)(a) 760 1,127
(357)(b)
48 (c)
(5)(d)
Other current assets... 78 138 (23)(c) 118 196
3 (d)
------ ------ ----- ------ ------ ----- ------
Total current assets... 495 1,428 (525) 903 1,398
------ ------ ----- ------ ------ ----- ------
Net property, plant and
equipment.............. 1,989 2,924 (39)(c) 2,885 2,089 (k) (580)(n) 6,383
Other assets and
deferred charges....... 280 1,187 (172)(b) 1,014 (590)(j) 80 (n) 784
(1)(c)
------ ------ ----- ------ ------ ----- ------
Total assets $2,764 $5,539 $(737) $4,802 $1,499 $(500) $8,565
====== ====== ===== ====== ====== ===== ======
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current liabilities:
Short-term debt........ $ 421 $ 521 $(521)(f) $ $ $ 330 (o) $ 751
Payables............... 426 532 (111)(a) 222 20 (h) 668
(2)(b)
(197)(f)
Other current
liabilities........... 173 718 (11)(c) 605 120 (j) 898
(20)(b)
(82)(f)
------ ------ ----- ------ ------ ----- ------
Total current
liabilities........... 1,020 1,771 (944) 827 140 330 2,317
Long-term debt.......... 670 1,519 1,290 (f) 2,544 (500)(n) 2,184
(265)(e) (200)(m)
(330)(o)
Other liabilities and
deferred credits....... 82 652 (17)(b) 594 151 (j) 827
(41)(d)
Deferred income taxes... 264 413 (13)(b) 401 479 (l) 1,144
1 (c)
------ ------ ----- ------ ------ ----- ------
2,036 4,355 11 4,366 770 (700) 6,472
------ ------ ----- ------ ------ ----- ------
Minority interest....... 40 18 18 265(k) 323
------ ------ ----- ------ ------ ----- ------
Preferred stock with
mandatory
redemption provisions.. 112 112 (112)(i)
------ ------ ----- ------ ------ ----- ------
Stockholders' equity:
Preferred stock........ 265 (e) 265 (265)(k)
556 (i) 556
Common stock........... 112 21 (i) 15 (m) 148
Additional paid in
capital............... 462 305 (i) 185 (m) 952
Accumulated earnings... 114 114
Tenneco combined
equity................ 1,054 (5)(a) 41 (41)(k)
(477)(b)
(5)(c)
3 (d)
(490)(f)
(39)(g)
------ ------ ----- ------ ------ ----- ------
Total stockholders'
equity................ 688 1,054 (748) 306 576 200 1,770
------ ------ ----- ------ ------ ----- ------
Total liabilities and
stockholders' equity.. $2,764 $5,539 $(737) $4,802 $1,499 $(500) $8,565
====== ====== ===== ====== ====== ===== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
183
<PAGE>
EL PASO NATURAL GAS COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
ASSUMING THE STOCK ISSUANCE IS NOT APPROVED
RESTRUCTURING, REALIGNMENT AND NPS ISSUANCE:
(a) To reflect the settlement of intercompany trade accounts receivable and
intercompany trade accounts payable with Tenneco Energy affiliates.
(b) To reflect the distribution to New Tenneco of receivables previously sold
to Tenneco Credit Corporation, a Tenneco Energy affiliate.
(c) To reflect the transfer from Tenneco Energy to New Tenneco and affiliates
of certain assets and liabilities held at the corporate level.
(d) To reflect the transfer to New Tenneco of insurance liabilities and the
related portfolio of short-term cash investments and other assets
previously held by Eastern Insurance Company Limited.
(e) To reflect the NPS Issuance of $275 million of Tenneco Junior Preferred
Stock, with an assumed 8 1/2% dividend yield, for net NPS Issuance
Proceeds of $265 million, and the use of the net NPS Issuance Proceeds for
the repayment of Tenneco Energy Consolidated Debt.
(f) To reflect the restructuring and realignment of the Tenneco debt pursuant
to the Debt Realignment, the Distributions and the applicable provisions
of the Merger Agreement, and the assumed payment of accrued interest on
the Tenneco Energy Consolidated Debt defeased, redeemed, tendered or
exchanged as part of the Debt Realignment. The Pro Forma Financial
Statements assume no such reduction in the Base Debt Amount. The amount of
"Tenneco Energy as Adjusted" debt immediately prior to the Merger will
consist primarily of borrowings under the Tenneco Credit Facility
(assuming 100% acceptance of the Debt Tender Offers and Debt Exchange
Offers) and is calculated from the provisions of the Merger Agreement as
follows (in millions):
<TABLE>
<S> <C>
Base Debt Amount per Merger agreement................................ $2,650
Less: NPS Issuance proceeds.......................................... (275)
------
2,375
Plus: Cash settlement payments....................................... 439
Less: Estimated collections subject to refund........................ (270)
------
"Tenneco Energy as Adjusted" debt.................................... $2,544
======
</TABLE>
At this time, Tenneco management cannot determine the ultimate amount of
securities which will be purchased in the Debt Tender Offers, or the
ultimate amount of securities which will be exchanged into New Tenneco
Public Debt pursuant to the Debt Exchange Offers, and such amounts could
vary significantly. However, for purposes of these pro forma adjustments,
it is assumed that 100% of the securities subject to the Debt Tender Offers
are purchased pursuant to the Debt Tender Offers and 100% of the securities
subject to the Debt Exchange Offers are exchanged into New Tenneco Public
Debt pursuant to the Debt Exchange Offers.
(g) To reflect distribution from Tenneco Energy of cash in excess of $25
million pursuant to the Cash Realignment provisions of the Merger
Agreement. The distribution may be adjusted by the sale of Tenneco Energy
receivables by Tenneco prior to the Merger Effective Time.
MERGER ADJUSTMENTS:
(h) To reflect the liability for the estimated legal, investment banking and
stock issuance costs of $20 million to be incurred by El Paso in
connection with the Merger.
(i) To reflect the issuance of approximately 7 million shares of El Paso
Common Stock valued at $326 million based on an assumed price of $46.60
per share, plus shares of a new El Paso preferred stock valued at $556
184
<PAGE>
million, with an assumed 10% dividend yield. The preferred stock, which has
a twenty year maturity, may be exchanged for El Paso Common Stock at El
Paso's option as described elsewhere herein. The El Paso Equity
Consideration will be issued in exchange for the $112 million of $7.40
Preferred Stock and $4.50 Preferred Stock at an assumed redemption amount
equal to $137 million with the remainder exchanged for Tenneco Common
Stock. (If the Stock Issuance is approved by the stockholders of El Paso,
the total value of the Equity Consideration is the same; however, the
transaction will be consummated by issuing 18.930 million shares of common
stock valued at $882 million based on an assumed price of $46.60 per share.
See Pro Forma Financial Information Assuming the Stock Issuance is Approved
included herein.)
(j) To reflect the preliminary estimated acquisition adjustments under the
purchase method of accounting to record assets acquired and liabilities
assumed at estimated fair value for (i) reduction of certain other assets,
deferred charges and regulatory assets, (ii) revision of benefit plan
assumptions relating to the retiree medical plan obligation, other
employee benefit costs and environmental costs, and (iii) the accrual of
an obligation to New Tenneco which is expected to be paid after completion
of the transaction as a result of the utilization of certain tax benefits
generated by the Debt Realignment. The following adjustments reflect El
Paso management's intended business strategies which may differ from the
business strategies employed by Tenneco Energy management prior to the
Merger (in millions):
<TABLE>
<S> <C>
Other assets and deferred charges...................................... $590
Other liabilities and deferred credits................................. 151
Other current liabilities.............................................. 120
----
$861
====
</TABLE>
(k) The following adjustments are made to adjust the historical values of
certain assets and liabilities to their estimated fair values as follows
(in millions):
<TABLE>
<S> <C>
Increase property, plant and equipment............................... $2,089
Reduce other assets and deferred charges............................. (590)
Increase current liabilities......................................... (140)
Increase liabilities and deferred credits............................ (151)
Increase deferred income taxes....................................... (479)
Eliminate Tenneco Energy stockholders' equity:
Tenneco Energy preferred stock..................................... 112
Tenneco Energy equity.............................................. 41
------
Issuance of El Paso Common Stock..................................... $ 882
======
</TABLE>
The allocation above reflects El Paso's internal evaluation of the excess
purchase price and is subject to the completion of an independent appraisal
of the fair value of the property. It is not expected that any excess
purchase price allocated to property, plant and equipment will be allowed
for regulatory purposes or recovered through rates. Should the independent
appraisal not support such allocation to property, plant and equipment, the
excess of total purchase price over the fair value of the net assets
acquired will be reflected as goodwill.
(l) To reflect the increase in deferred income taxes of $479 million which
have been provided for temporary differences after the allocation of the
pro forma purchase price and acquisition adjustments. The following pro
forma adjustments were required for estimated book and tax basis
differences resulting from the allocation of the pro forma purchase price,
at an assumed tax rate of 39% (in millions):
<TABLE>
<S> <C>
Property, plant and equipment......................................... $ 815
Other assets.......................................................... (230)
Other liabilities..................................................... (106)
-----
$ 479
=====
</TABLE>
REFINANCING TRANSACTIONS:
(m) To reflect the assumed issuance of $200 million El Paso Common Stock to
pay down $200 million of long-term debt acquired pursuant to the Merger.
185
<PAGE>
(Continued)
(n) To reflect the assumed monetization of $500 million of assets through
sales or project financings, at book value, and to reflect El Paso's
remaining $80 million investment in certain Australian projects using the
equity method. These proceeds are used to pay down long-term debt acquired
pursuant to the Merger.
(o) To reflect the replacement of the remaining balance under the Tenneco
Credit Facility with short-term and long-term financing at interest rates
of 6% and 8%, respectively.
186
<PAGE>
EL PASO NATURAL GAS COMPANY
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
ASSUMING THE STOCK ISSUANCE IS NOT APPROVED
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TENNECO ENERGY
PRE-MERGER PRO FORMA PRO FORMA MERGER
------------------------------------- -----------------------------------
RESTRUCTURING, EL PASO/
TENNECO REALIGNMENT TENNECO TENNECO
EL PASO ENERGY AND NPS ENERGY MERGER REFINANCING ENERGY
HISTORICAL HISTORICAL ISSUANCE AS ADJUSTED ADJUSTMENTS TRANSACTIONS COMBINED
---------- ---------- -------------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $1,193 $1,370 $ $1,370 $ $ (46)(i) $2,517
Operating costs and
expenses............... 1,065 1,279 (38)(a) 1,241 26 (e) (24)(i) 2,312
4 (f)
Employee separation and
asset impairment
charge................. 99 (2) 99
------ ------ ---- ------ ----- ----- ------
Operating income....... 29 91 38 129 (30) (22) 106
Other (income) expense,
net.................... (1) (97) 33 (a) (64) (65)
Interest expenses....... 48 63 42 (c) 105 (28)(k) 121
(3)(j)
(1)(i)
------ ------ ---- ------ ----- ----- ------
Income (loss) before
income taxes and
minority interest..... (18) 125 (37) 88 (30) 10 50
Provision for income
taxes (benefit)(1)..... (7) 22 (14)(d) 8 (12)(h) 11 (l) (5)
(5)(i)
------ ------ ---- ------ ----- ----- ------
Income (loss) before
minority interest..... (11) 103 (23) 80 (18) 4 55
Minority interest....... 12 (b) 12 12
------ ------ ---- ------ ----- ----- ------
Net income (loss)...... (11) 103 (35) 68 (18) 4 43
Preferred stock
dividends.............. 28 (g) 28
------ ------ ---- ------ ----- ----- ------
Earnings available to
common stock.......... $ (11) $ 103 $(35) $ 68 $ (46) $ 4 $ 15
====== ====== ==== ====== ===== ===== ======
Earnings (loss) per
average share of common
stock(2)............... $ (.31) $ .33
====== ======
Number of shares used in
computation of earnings
per common shares
(in thousands)......... 35,264 7,000 4,292 46,556
====== ===== ===== ======
</TABLE>
- --------
(1) The provision for income taxes for Tenneco Energy reflects the realization
of unrecognized deferred tax assets; therefore, the overall effective tax
rate is significantly lower than the assumed statutory rate of 39%. If the
statutory rate had been used, the combined provision for income taxes
would have been $20 million and the pro forma combined amounts for
earnings available to common stock and earnings per average share of
common stock would have been $(10) million and $(.21), respectively.
(2) Per share data is calculated using the income applicable to common shares
divided by the pro forma shares outstanding. The pro forma weighted
average common shares outstanding includes the following assumptions: (i)
the issuance of 7 million shares of El Paso Common Stock to holders of
Tenneco Common Stock, $7.40 Preferred Stock and $4.50 Preferred Stock
under the terms of the Merger and (ii) the assumed issuance of 4.292
million shares of El Paso Common Stock at $46.60 per share as part of the
Refinancing Transactions, the proceeds of which will be used to pay down
long-term debt. Earnings per average share of common stock excluding the
employee separation and asset impairment special charge ($60 million after
tax) would be $1.41 and $1.61 per common share for the El Paso Historical
and El Paso/Tenneco Energy Combined presentations, respectively.
See accompanying Notes to Unaudited Pro Forma Combined Income Statements.
187
<PAGE>
EL PASO NATURAL GAS COMPANY
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
ASSUMING THE STOCK ISSUANCE IS NOT APPROVED
FOR THE YEAR ENDED DECEMBER 31, 1995
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TENNECO ENERGY
PRE-MERGER PRO FORMA PRO FORMA MERGER
------------------------------------- -----------------------------------
RESTRUCTURING, EL PASO/
TENNECO REALIGNMENT TENNECO TENNECO
EL PASO ENERGY AND ENERGY MERGER REFINANCING ENERGY
HISTORICAL HISTORICAL NPS ISSUANCE AS ADJUSTED ADJUSTMENTS TRANSACTIONS COMBINED
---------- ---------- -------------- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $1,038 $1,921 $ $1,921 $ $(47)(i) $2,912
Operating costs and
expenses............... 826 1,843 (93)(a) 1,750 52 (e) (41)(i) 2,595
8 (f)
------ ------ ---- ------ ----- ----- ------
Operating income....... 212 78 93 171 (60) (6) 317
Other (income) expense,
net.................... (7) (190) 84 (a) (106) (113)
Interest expense........ 86 122 95 (c) 217 (56)(k) 238
(6)(j)
(3)(i)
------ ------ ---- ------ ----- ----- ------
Income before income
taxes and minority
interest.............. 133 146 (86) 60 (60) 59 192
Provision for income
taxes (benefit)(1)..... 48 (11) (33)(d) (44) (23)(h) 22 (l) 2
(1)(i)
------ ------ ---- ------ ----- ----- ------
Income before minority
interest............... 85 157 (53) 104 (37) 38 190
Minority interest....... 23 (b) 23 23
------ ------ ---- ------ ----- ----- ------
Net income (loss)....... 85 157 (76) 81 (37) 38 167
Preferred stock
dividends.............. 56 (g) 56
------ ------ ---- ------ ----- ----- ------
Earnings available to
common stock........... $ 85 $ 157 $(76) $ 81 $ (93) $ 38 $ 111
====== ====== ==== ====== ===== ===== ======
Earnings (loss) per
average share of common
stock(2)............... $ 2.46 $ 2.43
====== ======
Number of shares used in
computation of earnings
per common share (in
thousands)............. 34,495 7,000 4,292 45,787
====== ===== ===== ======
</TABLE>
- --------
(1) The provision for income taxes for Tenneco Energy reflects the realization
of unrecognized deferred tax assets; therefore, the overall effective tax
rate is significantly lower than the assumed statutory rate of 39%. If
this statutory rate had been used, the combined provision for income taxes
would have been $75 million and the pro forma combined amounts for
earnings available to common stock and earnings per average share of
common stock would have been $38 million and $.83, respectively.
(2) Per share data is calculated using the income applicable to common shares
divided by the pro forma shares outstanding. The pro forma weighted
average common shares outstanding includes the following assumptions: (i)
the issuance of 7 million shares of El Paso Common Stock to holders of
Tenneco Common Stock, $7.40 Preferred Stock and $4.50 Preferred Stock
under the terms of the Merger, and (ii) the assumed issuance of 4.292
million shares of El Paso Common Stock at $46.60 per share as part of the
Refinancing Transactions, the proceeds of which will be used to pay down
long-term debt.
See accompanying Notes to Unaudited Pro Forma Combined Income Statements.
188
<PAGE>
EL PASO NATURAL GAS COMPANY
NOTES TO UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
ASSUMING THE STOCK ISSUANCE IS NOT APPROVED
RESTRUCTURING, REALIGNMENT AND NPS ISSUANCE:
(a) To reflect the earnings impact of the distribution to New Tenneco of
receivables previously sold to Tenneco Credit Corporation, a Tenneco
Energy affiliate and the related income tax expense effect at an estimated
rate of 39%.
(b) To reflect preferred stock dividends in the Combined Pro Forma Income
Statement on the Tenneco Junior Preferred Stock issued in the NPS Issuance
at an assumed dividend yield of 8 1/2%.
(c) To reflect interest expense on additional debt issued under the Tenneco
Credit Facility. For purposes of the pro forma calculations, an assumed
interest rate of 8% has been used.
(d) To reflect the income tax expense effects of pro forma adjustments at an
estimated rate of 39%.
MERGER ADJUSTMENTS:
(e) To reflect depreciation expense related to the increase in fair value of
property, plant and equipment depreciated over a 40 year period which
approximates the FERC approved depreciation rate for the regulated
property, plant and equipment of Tenneco Energy prospectively.
(f) To reflect the assumed pro forma postretirement cost for Tenneco Energy
employees.
(g) To reflect preferred dividends included in the Combined Pro Forma Income
Statement at an assumed dividend yield of 10%. (If the Stock Issuance is
approved by the stockholders of El Paso, the transaction will be
consummated by issuing 18.930 million shares of common stock and no
preferred stock will be issued other than the Tenneco Junior Preferred
Stock, which is reflected as minority interest, and accordingly there will
be no preferred stock dividends. See Pro Forma Financial Information
Assuming the Stock Issuance is Approved included herein.)
(h) To reflect the income tax expense effects of pro forma adjustments at an
estimated rate of 39%.
REFINANCING TRANSACTIONS:
(i) To remove the historical operating results of Tenneco Energy's exploration
and production business which is assumed to be disposed at book value.
(j) To reflect the interest expense reduction relating to the replacement of
the remaining balance under the Tenneco Credit Facility with short-term
and long-term financing at interest rates of 6% and 8%, respectively. A
1/8% change in interest rates would have the impact of increasing total
pro forma interest expense by approximately $1 million and $2 million for
the six months ended June 30, 1996 and the year ended December 31, 1995,
respectively.
(k) To reflect an interest expense reduction relating to debt repaid from
proceeds from the $200 million equity offering and proceeds from the
monetization of $500 million of asset sales and project financings at book
value.
(l) To reflect the income tax expense effects of pro forma adjustments at an
estimated rate of 39%.
189
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF NEW TENNECO
The following Unaudited Pro Forma Combined Balance Sheet of New Tenneco as
of June 30, 1996 and the Unaudited Pro Forma Combined Statements of Income for
the six months ended June 30, 1996 and the year ended December 31, 1995 have
been prepared to reflect: (i) the acquisition of Clevite in July 1996 and the
acquisition of Amoco Foam Products in August 1996; (ii) the effect on New
Tenneco of the Cash Realignment and Debt Realignment; (iii) the effect on New
Tenneco of the Corporate Restructuring Transactions, and other transactions
pursuant to the provisions of the Distribution Agreement and Merger Agreement;
and (iv) the issuance of New Tenneco Common Stock as part of the Industrial
Distribution. The "Combined Acquisitions" caption in the Unaudited Pro Forma
Combined Statement of Income for the year ended December 31, 1995 also
reflects the pro forma results of operations of Mobil Plastics prior to its
acquisition in November 1995.
The acquisitions of Clevite and Amoco Foam Products have been included in
the accompanying Unaudited Pro Forma Combined Financial Statements for the
respective periods under the caption "Combined Acquisitions." The Combined
Acquisitions have been accounted for under the purchase method of accounting.
As such, pro forma adjustments are reflected in the accompanying Unaudited Pro
Forma Combined Financial Statements to reflect a preliminary allocation of New
Tenneco's purchase cost for the assets acquired and liabilities assumed as
well as additional depreciation and amortization resulting from New Tenneco's
purchase cost.
The historical Combined Financial Statements of New Tenneco reflect the
financial position and results of operations for the Industrial Business whose
net assets will be transferred to New Tenneco pursuant to the Corporate
Restructuring Transactions, and other transactions pursuant to the provisions
of the Distribution Agreement and Merger Agreement. The accounting for the
transfer of assets and liabilities pursuant to the Corporate Restructuring
Transactions represents a reorganization of companies under common control
and, accordingly, all assets and liabilities are reflected at their historical
cost in the Combined Financial Statements of New Tenneco.
The Unaudited Pro Forma Combined Balance Sheet has been prepared as if such
transactions occurred on June 30, 1996; the Unaudited Pro Forma Combined
Statements of Income have been prepared as if such transactions occurred as of
January 1, 1995. The Unaudited Pro Forma Combined Financial Statements set
forth on the following pages are unaudited and not necessarily indicative of
the results that would have actually occurred if the transactions had been
consummated as of June 30, 1996, or January 1, 1995, or results which may be
attained in the future.
The pro forma adjustments, as described in the Notes to the Unaudited Pro
Forma Combined Financial Statements, are based upon available information and
upon certain assumptions that management believes are reasonable. The
Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the Combined Financial Statements of New Tenneco, and notes
thereto, and the pre-acquisition Combined Financial Statements of Mobil
Plastics, and notes thereto, which appear in the New Tenneco Information
Statement attached hereto as Appendix C. The Clevite and Amoco Foam Products
acquisitions do not meet the SEC's criteria for inclusion of separate
historical financial statements.
190
<PAGE>
NEW TENNECO
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
COMBINED ACQUISITIONS
-----------------------
POST-
ACQUISITIONS TRANSACTION
NEW TENNECO PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
----------- ----------- ----------- ------------ ----------- ---------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and temporary
cash investments..... $ 129 $ 2 $ $ 131 $ 36 (e) $ 205
38 (f)
Receivables........... 829 74 903 (113)(a) 1,044
182 (b)
(48)(c)
120 (d)
Inventories........... 820 46 6 (i) 872 872
Deferred income taxes. 28 28 28
Other current assets.. 196 8 204 (5)(c) 204
5 (e)
------ ---- -------- ------ ------- ------
Total Current Assets. 2,002 130 6 2,138 215 2,353
------ ---- -------- ------ ------- ------
Goodwill and
intangibles............ 965 384 (i) 1,349 1,349
Other Assets............ 808 9 817 9 (c) 836
10 (g)
Plant, property and
equipment, net......... 2,748 148 144 (i) 3,040 39 (c) 3,079
------ ---- -------- ------ ------- ------
Total Assets......... $6,523 $287 $ 534 $7,344 $ 273 $7,617
====== ==== ======== ====== ======= ======
<CAPTION>
LIABILITIES AND EQUITY
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
Short-term debt....... $ 530 $ $ 638 (i) $1,168 $(1,155)(g) $ 13
Payables.............. 622 28 650 (23)(a) 629
2 (b)
Other current
liabilities.......... 558 76 634 17 (c) 651
------ ---- -------- ------ ------- ------
Total Current
Liabilities......... 1,710 104 638 2,452 (1,159) 1,293
------ ---- -------- ------ ------- ------
Long-term debt.......... 1,573 1 1,574 558 (g) 2,132
Deferred income taxes... 451 (5)(i) 446 13 (b) 459
Deferred credits and
other liabilities...... 320 53 30 (i) 403 41 (e) 444
Minority interest....... 301 301 301
------ ---- -------- ------ ------- ------
Total Liabilities..... 4,355 158 663 5,176 (547) 4,629
------ ---- -------- ------ ------- ------
Equity:
Combined equity....... 2,168 129 (129)(i) 2,168 (90)(a) --
167 (b)
(22)(c)
120 (d)
38 (f)
607 (g)
(2,988)(h)
Common Stock.......... -- -- -- 2 (h) 2
Paid in Capital....... -- -- -- 2,986 (h) 2,986
Retained Earnings..... -- -- -- -- (h) --
------ ---- -------- ------ ------- ------
Total Liabilities
and Equity......... $6,523 $287 $ 534 $7,344 $ 273 $7,617
====== ==== ======== ====== ======= ======
</TABLE>
- --------
* Certain amounts have been reclassified to conform to New Tenneco's
classification.
See the accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
191
<PAGE>
NEW TENNECO
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED ACQUISITIONS
-----------------------
POST-
ACQUISITIONS TRANSACTION
NEW TENNECO PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales and Operating Revenues. $ 3,233 $272 $ $3,505 $ $ 3,505
Other Income, Net................ 71 -- 71 71
Costs and Expenses............... 2,890 232 9 (j) 3,131 3,131
------- ---- ------- ------ ------- -----------
Income Before Interest Expense,
Income Taxes and Minority
Interest........................ 414 40 (9) 445 445
Interest Expense................. 100 12 7 (j) 119 (36)(k) 83
Income Tax Expense............... 126 8 (1)(j) 133 14 (k) 147
Minority Interest................ 10 10 10
------- ---- ------- ------ ------- -----------
Income from continuing
operations...................... $ 178 $ 20 $ (15) $ 183 $ 22 $ 205
======= ==== ======= ====== ======= ===========
Average number of common shares
outstanding..................... 170,351,740
===========
Income from continuing operations
per share....................... $ 1.20
===========
</TABLE>
- --------
* Certain amounts have been reclassified to conform to New Tenneco's
classification.
See the accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
192
<PAGE>
NEW TENNECO
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED ACQUISITIONS
-----------------------
POST-
NEW ACQUISITIONS TRANSACTION
TENNECO PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales and Operating
Revenues............... $5,221 $2,035 $ $7,256 $ $ 7,256
Other Income............ 39 6 45 45
Costs and Expenses...... 4,588 1,888 17(j) 6,493 6,493
------ ------ -------- ------ -------- -----------
Income Before Interest
Expense, Income Taxes
and Minority Interest.. 672 153 (17) 808 808
Interest Expense........ 160 126 5 (j) 291 (125)(k) 166
Income Tax Expense...... 231 19 (9)(j) 241 50 (k) 291
Minority Interest....... 23 -- 23 23
------ ------ -------- ------ -------- -----------
Income from continuing
operations............. $ 258 $ 8 $ (13) $ 253 $ 75 $ 328
====== ====== ======== ====== ======== ===========
Average number of common
shares outstanding..... 173,995,941
===========
Income from continuing
operations per share... $ 1.89
===========
</TABLE>
- --------
* Certain amounts have been reclassified to conform to New Tenneco's
classification.
See the accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
193
<PAGE>
NEW TENNECO
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) To reflect the settlement or capitalization of intercompany accounts
receivable and payable with Tenneco affiliates pursuant to the Corporate
Restructuring Transactions.
(b) To reflect the acquisition by New Tenneco of certain receivables from
Tenneco Credit Corporation, a Tenneco affiliate, in connection with the
Merger.
(c) To reflect the allocation between New Tenneco, Newport News and Tenneco of
certain corporate assets and liabilities in connection with the Corporate
Restructuring Transactions, the Distributions and the Merger.
(d) To reflect a $120 million receivable from El Paso pursuant to the
Distribution Agreement and Merger Agreement for certain tax benefits to be
realized as a result of the Debt Realignment.
(e) To reflect the transfer to New Tenneco of insurance liabilities and the
related portfolio of short-term cash investments and other assets
previously held by Eastern Insurance Company Limited, a Tenneco affiliate,
in connection with the Corporate Restructuring Transactions and the Merger.
(f) To reflect the cash contribution from Tenneco to New Tenneco pursuant to
the Cash Realignment provisions of the Distribution Agreement and Merger
Agreement. The contribution of cash between Tenneco and New Tenneco as part
of the Cash Realignment may be adjusted by the sale of Energy Business
receivables prior to the Merger Effective Time.
(g) To reflect adjustments to New Tenneco's indebtedness for the pre-
Distribution restructuring and refinancing of debt pursuant to the Debt
Realignment. If the Debt Realignment had been consummated on June 30, 1996,
on a pro forma basis, New Tenneco would have had total long-term debt of
$2,132 million, and short-term debt of $13 million. The total pro forma
long-term debt includes $2,069 million of New Tenneco Public Debt ($1,950
million aggregate principal amount) assumed to be exchanged in the Debt
Exchange Offers, which will be recorded based on the fair values of the New
Tenneco Public Debt, and $63 million of long-term debt of New Tenneco
subsidiaries. At this time, New Tenneco and Tenneco cannot determine the
ultimate amount of debt securities which will be exchanged by the
applicable Tenneco Public Debt holders into New Tenneco Public Debt
pursuant to the Debt Exchange Offers, and such amount could vary
significantly. For purposes of these pro forma adjustments it is assumed
that 100% of securities subject to the Debt Exchange Offers are exchanged
for New Tenneco Public Debt pursuant to the Debt Exchange Offers. Tenneco
expects to incur an extraordinary charge as a result of the Debt
Realignment. Tenneco estimates that this cost will be approximately $300
million after-tax based on current market rates of interest. Certain other
costs will also be incurred in connection with the Corporate Restructuring
Transactions and the Distributions which Tenneco estimates will be
approximately $100 million after tax. The effect on New Tenneco's debt of
these costs has been reflected in this pro forma adjustment. However, such
charges have not been reflected in the pro forma income statement.
(h) To reflect the distribution of New Tenneco Common Stock to the holders of
Tenneco Common Stock at an exchange ratio of one share of New Tenneco
Common Stock for each share of Tenneco Common Stock.
(i) To reflect short-term debt issued to complete the Combined Acquisition and
the preliminary allocation of purchase price to the assets acquired and
liabilities assumed related to the Combined Acquisitions. These purchase
accounting adjustments for Clevite and Amoco Foam Products are based on
preliminary estimates of fair values and will be adjusted when more
complete evaluations of fair values are received. The preliminary
allocations have been made solely for purposes of developing these
Unaudited Pro Forma Combined Financial Statements.
(j) To reflect additional depreciation and amortization related to the Combined
Acquisitions resulting from New Tenneco's purchase accounting adjustments,
interest expense at an assumed rate of 5.90% on the debt issued to complete
the acquisition, and the related tax effects at an assumed effective tax
rate of 40%. The excess
194
<PAGE>
of New Tenneco's purchase cost over the fair value of assets acquired and
liabilities assumed is amortized over 40 years for Clevite and 30 years for
Amoco Foam Products.
(k) To reflect the adjustment to interest expense, and related tax effects at
an assumed effective tax rate of 40%, from the changes in the debt of New
Tenneco pursuant to the Debt Realignment as discussed in (g) above. For
purposes of this pro forma adjustment, the New Tenneco Public Debt is
assumed to bear interest at a weighted average annual effective interest
rate of 7.5%. In addition, the pro forma adjustment to interest expense
includes commitment fees on the unused borrowing capacity of the New
Tenneco Credit Facility and amortization of deferred debt financing costs
incurred in connection with the Debt Exchange Offers and the New Tenneco
Credit Facility. A 1/8% change in the assumed interest rates would change
annual pro forma interest expense by approximately $2.7 million, before the
effect of income taxes.
(l) EBITDA, on a pro forma basis, was $603 million and $1,023 million for the
six months ended June 30, 1996 and the year ended December 31, 1995,
respectively. EBITDA represents income from continuing operations before
interest expense, income taxes and depreciation, depletion and
amortization. EBITDA is not a calculation based upon GAAP; however, the
amounts included in the EBITDA calculation are derived from amounts
included in the combined pro forma Statements of Income. In addition,
EBITDA should not be considered as a alternative to net income or operating
income, as an indicator of the operating performance of New Tenneco or as
an alternative to operating cash flows as a measure of liquidity.
195
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF NEWPORT NEWS
The following Unaudited Pro Forma Combined Balance Sheet of Newport News as
of June 30, 1996 and Unaudited Pro Forma Combined Statements of Earnings for
the six months ended June 30, 1996 and the year ended December 31, 1995 have
been prepared to reflect: (i) borrowings of $614 million under the Newport
News Financings; (ii) the cash dividend of $600 million to be paid by Newport
News to Tenneco or one or more of its subsidiaries pursuant to the Debt
Realignment; (iii) the payment of $14 million of fees and expenses incurred in
connection with the Newport News Financings and (iv) the issuance of Newport
News Common Stock pursuant to the Shipbuilding Distribution.
The historical Combined Financial Statements of Newport News reflect the
financial position and results of operations of the Shipbuilding Business
whose net assets will be transferred to Newport News pursuant to the Corporate
Restructuring Transactions. The accounting for the transfer of assets and
liabilities pursuant to the Corporate Restructuring Transactions represents a
reorganization of companies under common control and, accordingly, all assets
and liabilities are reflected at their historical cost basis in the Combined
Financial Statements of Newport News.
The Unaudited Pro Forma Combined Balance Sheet has been prepared as if the
Transaction occurred on June 30, 1996; the Unaudited Pro Forma Combined
Statements of Earnings have been prepared as if the Transaction occurred as of
January 1, 1995. The Unaudited Pro Forma Combined Financial Statements set
forth on the following pages are not necessarily indicative of the results
that would have actually occurred if the Transaction had been consummated as
of June 30, 1996, or January 1, 1995, or results which may be attained in the
future.
The pro forma adjustments, as described in the Notes to the Unaudited Pro
Forma Combined Financial Statements, are based upon available information and
upon certain assumptions that management believes are reasonable. The
Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the Combined Financial Statements of Newport News, and notes
thereto, which appear in the Newport News Information Statement attached
hereto as Appendix D.
196
<PAGE>
NEWPORT NEWS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
NEWPORT NEWS PRO FORMA PRO FORMA
ASSETS HISTORICAL ADJUSTMENTS COMBINED
------ ------------ ----------- ---------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................. $ 1 $ 4 (a) $ 5
614 (b)
(614)(c)
Contracts in process...................... 282 282
Other current assets...................... 190 190
------ ----- ------
Total current assets.................... 473 4 477
------ ----- ------
NONCURRENT ASSETS
Property, plant and equipment, net........ 824 824
Other assets.............................. 155 14 (c) 160
(9)(d)
------ ----- ------
Total noncurrent assets................. 979 5 984
------ ----- ------
$1,452 $ 9 $1,461
====== ===== ======
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable.......................... $ 177 $ (73)(d) $ 104
Short term debt........................... 95 28 (b) 28
(95)(e)
Other accrued liabilities................. 160 160
------ ----- ------
Total current liabilities............... 432 (140) 292
------ ----- ------
NONCURRENT LIABILITIES
Long-term debt............................ 282 586 (b) 586
(282)(e)
Deferred income taxes..................... 140 140
Other long-term liabilities............... 249 249
------ ----- ------
Total noncurrent liabilities............ 671 304 975
------ ----- ------
EQUITY
Common stock.............................. 1 (f) 1
Paid-in capital........................... 193 (f) 193
Retained earnings......................... -- (f) --
Combined equity........................... 349 4 (a) --
(600)(c)
64 (d)
377 (e)
(194)(f)
------ ----- ------
Total equity............................ 349 (155) 194
------ ----- ------
$1,452 $ 9 $1,461
====== ===== ======
</TABLE>
See the accompanying Notes to Unaudited Pro Forma
Combined Financial Statements.
197
<PAGE>
NEWPORT NEWS
UNAUDITED PRO FORMA COMBINED STATEMENTS OF EARNINGS
(MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-----------------------------------
NEWPORT
NEWS PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales................................. $ 915 $ $ 915
Operating costs and expenses.............. 834 1 (g) 835
------ ----- -----------
Operating earnings........................ 81 (1) 80
Interest expense.......................... 17 (17)(e) 28
28 (g)
------ ----- -----------
Earnings before income taxes.............. 64 (12) 52
Provision for income taxes................ 27 6 (e) 23
(10)(g)
------ ----- -----------
Net earnings.............................. $ 37 $ (8) $ 29
====== ===== ===========
Average number of common shares
outstanding.............................. 34,070,348
===========
Earnings per share........................ $ .85
===========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------
NEWPORT
NEWS PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales................................. $1,756 $ $ 1,756
Operating costs and expenses.............. 1,599 2 (g) 1,601
------ ----- -----------
Operating earnings........................ 157 (2) 155
Interest expense.......................... 29 (29)(e) 56
56 (g)
Other income, net......................... (3) (3)
------ ----- -----------
Earnings before income taxes.............. 131 (29) 102
Provision for income taxes................ 58 10 (e) 48
(20)(g)
------ ----- -----------
Net earnings.............................. $ 73 $(19) $ 54
====== ===== ===========
Average number of common shares
outstanding.............................. 34,799,188
===========
Earnings per share........................ $ 1.55
===========
</TABLE>
See the accompanying Notes to Unaudited Pro Forma
Combined Financial Statements.
198
<PAGE>
NEWPORT NEWS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) To reflect a cash capital contribution from Tenneco to Newport News
pursuant to the Cash Realignment provisions in the Distribution Agreement
covering the Shipbuilding Distribution.
(b) To reflect $614 million in total borrowings under various credit
facilities which borrowings will consist of (i) a $200 million six-year
amortizing term loan with an estimated annual interest rate of 8%, (ii)
$200 million senior notes due 2006 with an estimated annual interest rate
of 9.25%, (iii) $200 million senior subordinated notes due 2006 with an
estimated annual interest rate of 9.75%, and (iv) $14 million in
borrowings under a $215 million six-year revolving credit facility, with
an estimated annual interest rate of 8% and commitment fees due on the
unused portion of the facility, for payment of certain fees and expenses
described in (c) below. Approximately $28 million of the assumed term loan
borrowings will mature within one year and such amount is reflected as
short-term debt in the accompanying Pro Forma Combined Balance Sheet.
(c) To reflect: (i) a cash dividend of $600 million to be paid by Newport News
to Tenneco or one or more of its subsidiaries, principally using
borrowings under the Newport News Financings pursuant to the Debt
Realignment and (ii) a payment of $14 million for certain fees and
expenses in connection with the Newport News Financings.
(d) To reflect the settlement or capitalization of intercompany accounts
payable with Tenneco affiliates and the transfer of certain assets prior
to the Shipbuilding Distribution pursuant to certain Corporate
Restructuring Transactions.
(e) To reflect the elimination of corporate debt and related interest expense
allocated by Tenneco to Newport News. See the Combined Financial
Statements of Newport News included in the Newport News Information
Statement attached hereto as Appendix D.
(f) To reflect the distribution of Newport News Common Stock to the holders of
Tenneco Common Stock at an exchange ratio of one share of Newport News
Common Stock for five shares of Tenneco Common Stock.
(g) To reflect: (i) interest expense related to the borrowings assumed
outstanding under the Newport News Financings at the assumed annual
interest rates discussed in (b), (ii) the cost of commitment fees on the
unused borrowing capacity under the revolving credit facility, and (iii)
the amortization of deferred debt financing costs incurred in connection
with the Newport News Financings, as well as the related tax effects of
these items at an assumed statutory rate of 35%. A 1/8% change in these
assumed annual interest rates would change pro forma annual interest
expense by $0.8 million, before the effect of income taxes.
(h) EBITDA, on a pro forma basis, was $113 million and $227 million for the
six months ended June 30, 1996 and the year ended December 31, 1995,
respectively. EBITDA represents earnings before cumulative effect of
changes in accounting principles, income taxes, interest expense and
depreciation and amortization. EBITDA is not a calculation based upon
GAAP; however, the amounts included in the EBITDA calculation are derived
from amounts included in the combined pro forma Statements of Earnings. In
addition, EBITDA should not be considered as an alternative to net income
or operating income, as an indicator of the operating performance of
Newport News or as an alternative to operating cash flows as a measure of
liquidity.
199
<PAGE>
COMPARISON OF RIGHTS OF STOCKHOLDERS OF
TENNECO, NEW TENNECO AND NEWPORT NEWS
Descriptions herein of the provisions of the Restated Certificate of
Incorporation of New Tenneco (the "New Tenneco Charter"), the Amended and
Restated By-laws of New Tenneco (the "New Tenneco By-laws"), the Restated
Certificate of Incorporation of Newport News (the "Newport News Charter") and
the Amended and Restated By-laws of Newport News (the "Newport News By-laws")
are descriptions of the provisions therein which will be in effect upon
consummation of the Distributions. Except as otherwise indicated herein, such
provisions (including the provisions thereof relating to the classification of
directors, the calling of special meetings of stockholders, the advance notice
requirements for stockholder nominations and proposals and the setting of
record dates for actions by written consent of stockholders in lieu of a
meeting) will be substantially identical to the provisions of the Tenneco
Charter and the Tenneco By-laws as presently in effect. In connection with the
Transaction, the Tenneco Charter will be amended, and the by-laws of El Paso
Subsidiary will become the new by-laws of Tenneco (with certain modifications
regarding the indemnification of directors and officers), as described herein
under "THE MERGER--Effects of the Merger" and "THE CHARTER AMENDMENT." Except
as may otherwise be indicated, the following discussion is a comparison of the
rights of stockholders of New Tenneco and Newport News to the rights of
Tenneco stockholders based on the Tenneco Charter and By-laws currently in
effect without giving effect to the amendments which will occur in connection
with the Transaction.
CAPITALIZATION
Tenneco's authorized capital stock consists of 350,000,000 shares of Tenneco
Common Stock, 15,000,000 shares of preferred stock, without par value
("Tenneco Senior Preferred Shares"), and 50,000,000 shares of junior preferred
stock, without par value ("Tenneco Junior Preferred Shares"). New Tenneco's
authorized capital stock consists of 350,000,000 shares of New Tenneco Common
Stock, and 50,000,000 shares of preferred stock, par value $.01 per share
("New Tenneco Preferred Stock"). Newport News' authorized capital stock
consists of 70,000,000 shares of Newport News Common Stock, and 10,000,000
shares of preferred stock, par value $.01 per share ("Newport News Preferred
Stock").
In general, the Tenneco Board of Directors is presently authorized to issue
the Tenneco Senior Preferred Shares and the Tenneco Junior Preferred Shares in
series and to fix the terms of such series, but such authority is subject to
numerous requirements and/or limitations as specified in the Tenneco Charter
relating to, among other things, the voting rights of such series and the
ability of Tenneco to pay dividends and acquire its capital stock while any
such series is outstanding. The Boards of Directors of New Tenneco and Newport
News are authorized to issue the New Tenneco Preferred Stock and Newport News
Preferred Stock, respectively, in series and to fix the terms of such series,
without limitation (other than as provided in the DGCL).
All series of Tenneco Senior Preferred Shares (but not Tenneco Junior
Preferred Shares) must rank on a parity with respect to the payment of
dividends. Any of the terms of a series of the New Tenneco Preferred Stock or
the Newport News Preferred Stock may differ from those of any other series
thereof.
CLASS VOTING
Under the Tenneco Charter, approval of two-thirds of the outstanding shares
of Tenneco Senior Preferred Shares or Tenneco Junior Preferred Shares, or of a
series thereof, is required for any charter amendment which adversely affects
the rights, powers or preferences of the Tenneco Senior Preferred Shares or
Tenneco Junior Preferred Shares, or of a series thereof, as the case may be.
Under both the New Tenneco Charter and the Newport News Charter, there is no
such two-thirds approval requirement; however, the DGCL generally requires any
charter amendment that so adversely affects a particular class or series of
stock be approved by a majority of the outstanding shares of such class or
series, as the case may be.
The Tenneco Charter requires separate class votes of the Tenneco Senior
Preferred Shares and of the Tenneco Junior Preferred Shares (i) to create a
class of stock ranking senior thereto, (ii) to sell, lease, transfer or convey
all or substantially all of Tenneco's assets or (iii) to merge with another
corporation (unless Tenneco survives). No such class votes are required under
either the New Tenneco Charter or the Newport News Charter.
200
<PAGE>
BUSINESS COMBINATIONS
The Tenneco Charter prohibits certain "Business Combinations" with
"Interested Stockholders" (as defined therein) without supermajority
stockholder approval unless (i) approved by a majority of the "Continuing
Directors" (as defined therein), or (ii) certain detailed requirements as to,
among other things, the value and type of consideration to be paid to the
Tenneco stockholders, the maintenance of Tenneco's dividend policy, the public
disclosure of the Business Combination and the absence of any major change in
Tenneco's business or equity capital structure without the approval of a
majority of Continuing Directors, have been satisfied. The same restrictions
apply in the New Tenneco Charter. The Newport News Charter contains no such
restrictions on such Business Combinations.
CHARTER AMENDMENTS
Under the Tenneco Charter and New Tenneco Charter, a majority in voting
power of the outstanding shares of voting stock is generally required to
effect a charter amendment, other than an amendment of the provisions relating
to Business Combinations (and other than the class voting requirements under
the Tenneco Charter described above). Each of the Tenneco Charter and the New
Tenneco Charter provides that, in addition to approval by the board of
directors and notwithstanding that a lesser percentage or separate class vote
may be specified by law, the certificate of incorporation or the by-laws, any
proposal to amend or repeal, or adopt any provision inconsistent with, the
provisions of the certificate of incorporation regarding Business Combinations
proposed by or on behalf of an Interested Stockholder or affiliate thereof
requires the affirmative vote of the holders of 66 2/3% in voting power of the
outstanding shares of voting stock, excluding voting stock beneficially owned
by any Interested Stockholder, unless the amendment or repeal of, or the
adoption of any provision inconsistent with, the provisions regarding Business
Combinations is unanimously recommended by the members of the board of
directors and if each of the members of the board of directors qualifies as a
Continuing Director thereunder.
Under the Newport News Charter, a majority in voting power of the
outstanding shares of voting stock is generally required to effect a charter
amendment.
STOCKHOLDER RIGHTS PLANS
Tenneco adopted a stockholder rights plan on May 24, 1988, which was amended
and restated on October 1, 1989 (the "Tenneco Rights Plan"). Pursuant to and
in accordance with such plan, one preferred share purchase right (a "Tenneco
Purchase Right") is attached to each share of Tenneco Common Stock. Each
Tenneco Purchase Right entitles the registered holder thereof to, among other
things, purchase, under certain circumstances, from Tenneco a unit consisting
of one one-hundredth of a share of Tenneco Series A Junior Preferred Stock.
Tenneco has amended the Tenneco Rights Plan to exempt El Paso and El Paso
Subsidiary from becoming an "acquiring person" thereunder, or otherwise
triggering the Tenneco Purchase Rights, solely by reason of the execution of
the Merger Agreement and consummation of the transactions contemplated
thereby, and to cause the Tenneco Purchase Rights to expire at the Merger
Effective Time.
In connection with the Transaction, New Tenneco will adopt a stockholder
rights plan (the "New Tenneco Rights Plan"). The New Tenneco Rights Plan is,
in all material respects, the same as the Tenneco Rights Plan except that the
Redemption Price (as defined therein), the Final Expiration Date (as defined
therein), the Purchase Price (as defined therein) and the number of one one-
hundredths of a share of New Tenneco preferred stock for which a right is
exercisable (which under the Tenneco Rights Plan may not be supplemented or
amended) may be supplemented or amended with stockholder approval. Newport
News will adopt a stockholder rights plan that is substantially identical to
the New Tenneco Rights Plan.
STOCKHOLDER MEETINGS
The New Tenneco By-laws and the Newport News By-laws provide that the New
Tenneco Board of Directors and the Newport News Board of Directors,
respectively, and the chairman of a meeting may adopt rules for the conduct of
stockholder meetings and specify the types of rules that may be adopted
(including the establishment of an agenda, rules relating to presence at the
meeting of persons other than stockholders,
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restrictions on entry at the meeting after commencement thereof and the
imposition of time limitations for questions by participants at the meeting).
Such issues are not expressly addressed by the Tenneco By-laws.
NUMBER OF DIRECTORS
Under the Tenneco Charter, the number of directors constituting the whole
Tenneco Board of Directors is required to be not less than 8, nor more than
16, and determined from time to time, within such limits, by the Tenneco Board
of Directors. The New Tenneco Charter contains an identical provision with
respect to the New Tenneco Board.
Under the Newport News Charter, the number of directors constituting the
entire Newport News Board of Directors is required to be not less than 3, nor
more than 16, and determined from time to time, within such limits, by the
Newport News Board of Directors.
INDEMNIFICATION
The Tenneco By-laws provide for mandatory indemnification for directors and
officers of Tenneco and for directors and officers of Tenneco serving as
directors and officers of other entities at the request of Tenneco to the
fullest extent permitted by the DGCL. The New Tenneco By-laws and the Newport
News By-laws provide similar mandatory indemnification except (i) such
indemnification includes directors and officers of New Tenneco and Newport
News, respectively, serving as directors, officers, employees or agents of
another entity at the request of New Tenneco and Newport News, respectively,
and (ii) suits (or parts thereof) instituted by any such indemnitee without
approval of the New Tenneco Board of Directors or the Newport News Board of
Directors, respectively, are excluded from such mandatory indemnification.
Both the New Tenneco By-laws and the Newport News By-laws also provide for
mandatory advancement of expenses in defending any proceeding for which
mandatory indemnification may be available. The Tenneco By-laws do not provide
for such mandatory advancement of expenses.
Under the New Tenneco By-laws and the Newport News By-laws, persons claiming
indemnification or advancement may file suit in respect thereof if New Tenneco
or Newport News, respectively, do not pay such a claim within 30 days after
receipt of a written claim therefor and, if successful in whole or in part,
are entitled to be paid the expense of prosecuting such claim. The New Tenneco
By-laws and the Newport News By-laws provide that in any such action New
Tenneco or Newport News, respectively, shall have the burden of proving that
the indemnitee is not entitled to the requested indemnification or
advancement. Such issues are not expressly addressed by the Tenneco By-laws.
DIRECTOR EXCULPATION
Pursuant to Section 102(b)(7) of the DGCL, the Tenneco Charter provides that
a director thereof shall not be liable to Tenneco or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to Tenneco or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii) under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit.
Each of the New Tenneco Charter and the Newport News Charter provides that a
director of New Tenneco or Newport News, respectively, shall not be liable to
New Tenneco or Newport News, respectively, or its respective stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption from liability or limitation thereof is not permitted
under the DGCL as the same exists or may thereafter be amended. Each of the
New Tenneco Charter and the Newport News Charter, therefore, affords directors
of New Tenneco and Newport News, respectively, the benefit of any subsequent
broadening of director exculpation permitted by the DGCL without the need for
a further charter amendment.
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INTERESTED TRANSACTIONS; RATIFICATION
The Tenneco Charter provides that a director of Tenneco shall not be
disqualified by his office from dealing or contracting with Tenneco either as
a vendor, purchaser or otherwise, nor shall any transaction or contract of
Tenneco be void or voidable by reason of the fact that any director or any
firm of which any director is a member, or any corporation of which any
director is a shareholder, officer or director, is in any way interested in
such transaction or contract, provided that such transaction or contract is or
shall be authorized, ratified or approved either (i) by a vote of a majority
of a quorum of the Board of Directors of Tenneco or of the Executive Committee
of Tenneco, without counting in such majority or quorum any director so
interested or a member of a firm so interested, or a shareholder, officer or
director of a corporation so interested, or (ii) by the written consent, or by
the vote at any stockholders' meeting, of the holders of record of a majority
of all the outstanding shares of stock of Tenneco entitled to vote, nor shall
any director be liable to account to Tenneco for any profits realized by or
from or through any such transaction or contract of Tenneco authorized,
ratified or approved as aforesaid by reason of the fact that he, or any firm
of which he is a member or any corporation of which he is a shareholder,
officer or director was interested in such transaction or contract.
The Tenneco By-laws provide that any transaction questioned in any
stockholders derivative suit on the ground of lack of authority, defective or
irregular execution, adverse interest of director, officer or stockholder,
nondisclosure, miscomputation, or the application of improper principles or
practices of accounting may be ratified, before or after judgment, by the
Board of Directors of Tenneco or by Tenneco's stockholders. The Tenneco By-
laws also provide that, if so ratified, the transaction shall have the same
force and effect as if it had been originally duly authorized, and said
ratification shall be binding upon Tenneco and its stockholders and shall
continue as a bar to any claim or execution of any judgment in respect of such
questioned transaction.
Neither the New Tenneco Charter or New Tenneco By-laws nor the Newport News
Charter or Newport News By-laws expressly addresses such issues. However,
Section 144 of the DGCL provides, in relevant part, that no contract or
transaction between a corporation and one or more of its directors or
officers, or between a corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be
void or voidable solely for this reason, or solely because the director or
officer is present at or participates in the meeting of the board or committee
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose, if: (i) the material facts as to his
relationship or interest and as to the contract or transaction are disclosed
or are known to the board of directors or the committee, and the board or
committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum; or (ii) the material facts
as to his relationship or interest and as to the contract or transaction are
disclosed or are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
shareholders; or (iii) the contract or transaction is fair as to the
corporation as of the time it is authorized, approved or ratified, by the
board of directors, a committee or the shareholders.
CONTRACTS
Each of the New Tenneco By-laws and the Newport News By-laws provides that,
except as otherwise required by law, its certificate of incorporation or its
by-laws, any contracts or other instruments may be executed and delivered in
the name and on the behalf of the corporation by such officer or officers of
the corporation as the Board of Directors of the corporation may from time to
time direct. Each of the New Tenneco By-laws and the Newport News By-laws
provides that such authority may be general or confined to specific instances
as its Board may determine. Each of the New Tenneco By-laws and the Newport
News By-laws provides that (i) the Chairman of the Board, the President or any
Vice President may execute bonds, contracts, deeds, leases and other
instruments to be made or executed for or on behalf of the corporation, and
(ii) subject to any restrictions imposed by the Board, the Chairman of the
Board, the President or any Vice President of the corporation may delegate
contractual powers to others under his jurisdiction, it being understood,
however, that any such delegation of power shall not relieve such officer of
responsibility with respect to the exercise of such delegated power. Such
issues are not expressly addressed by the Tenneco By-laws.
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PROXIES
Each of the New Tenneco By-laws and the Newport News By-laws provides that,
unless otherwise provided by resolution adopted by its Board of Directors, the
Chairman of the Board, the President or any Vice President may from time to
time appoint an attorney or attorneys or agent or agents of the corporation,
in the name and on behalf of the corporation, to cast the votes which the
corporation may be entitled to cast as the holder of stock or other securities
in any other corporation or other entity, any of whose stock or other
securities may be held by the corporation, at meetings of the holders of the
stock or other securities of such other corporation or other entity, or to
consent in writing, in the name of the corporation as such holder, to any
action by such other corporation or other entity, and may instruct the person
or persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed in the name and on behalf of
the corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the
premises. Such issues are not expressly addressed by the Tenneco By-laws.
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INFORMATION CONCERNING EL PASO
El Paso is a Delaware corporation which was incorporated in 1928. In
recognition of changes in the natural gas industry and the manner in which El
Paso manages its businesses, and in order to facilitate a more detailed
understanding of the various activities in which it engages, El Paso began
doing business under the name El Paso Energy Corporation (effective April 22,
1996) and has segregated its business activities into three business segments:
(i) natural gas transmission; (ii) field and merchant services; and (iii)
corporate and other.
The natural gas transmission segment includes one of the nation's largest
mainline natural gas transmission systems, connecting natural gas supply
regions in New Mexico, Texas, Oklahoma and Colorado to markets in California,
Nevada, Arizona, New Mexico, Texas and northern Mexico. The transmission
system consists of approximately 10,000 miles of pipelines and is connected to
one of the most prolific supply basins in the nation, the San Juan Basin of
northern New Mexico and southern Colorado.
The field and merchant services segment provides field services, including
gathering, products extraction, dehydration, purification and compression. In
addition, the field and merchant services segment purchases, markets and
trades natural gas, natural gas liquids, power and other energy commodities,
and provides risk management activities associated with those commodities.
This segment has approximately 7,900 miles of gathering lines and 64,000
horsepower of compression located in the San Juan, Anadarko and Permian
Basins, and in East Texas and Louisiana.
The corporate and other segment includes El Paso Energy International,
through which El Paso conducts its international activities, and other
corporate activities.
DESCRIPTION OF EL PASO PREFERRED STOCK AND DEPOSITARY SHARES
The following description of the terms of the El Paso Preferred Stock and
the El Paso Preferred Depositary Shares does not purport to be complete and is
subject to and qualified in its entirety to the Certificate of Designation for
the El Paso Preferred Stock and the Depositary Agreement, forms of which have
been filed as exhibits to the Registration Statement of which this Joint Proxy
Statement-Prospectus is a part.
EL PASO PREFERRED STOCK
If the stockholders of El Paso do not approve the Stock Issuance, El Paso
will issue, pursuant to the Merger Agreement, shares of the El Paso Preferred
Stock, to be known as the Adjustable Rate Cumulative Preferred Stock, par
value $.01 per share.
Maturity, Redemption and Exchange. The El Paso Preferred Stock will mature
20 years from date of issuance. At the maturity date, El Paso shall redeem, in
cash out of funds legally available therefor, all outstanding shares of El
Paso Preferred Stock, at a redemption price per share equal to $1,000, plus an
amount equal to accrued and unpaid dividends, if any (whether or not
declared), up to but excluding such date. The El Paso Preferred Stock will be
redeemable by El Paso at its option at any time after the fifth anniversary of
the Merger in whole, or in part from time to time, on at least 30 but not more
than 60 days' notice, at a redemption price of $1,000 per share (in all cases
plus dividends accrued to but excluding the date fixed for redemption). El
Paso may, at any time by and at its option, on at least 30 but not less than
60 days' notice, exchange the El Paso Preferred Stock by exchanging, for each
share of El Paso Preferred Stock, the number of shares of El Paso Common Stock
having an aggregate market value (as determined by the average closing prices
for El Paso Common Stock for the five trading days prior to exchange) of
$1,000 (in all cases plus a cash payment equal to the amount of dividends
accrued to but excluding the date fixed for redemption).
Priority. The El Paso Preferred Stock will rank, with respect to dividend
rights and rights on liquidation, winding-up and dissolution, (i) senior to
all classes of common stock of El Paso, as they exist on the date hereof
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or as such stock may be constituted from time to time, and each other class of
capital stock or series of preferred stock established by the Board of El Paso
to the extent the terms of such stock do not expressly provide that it ranks
senior to or on a parity with the El Paso Preferred Stock as to dividend rights
and rights on liquidation, winding-up and dissolution, including the El Paso
Series A Junior Preferred Stock, par value $.01 per share, issuable in
connection with El Paso's stockholder rights plan; (ii) on a parity with each
other class of capital stock or series of preferred stock issued by El Paso
established by the Board of El Paso to the extent the terms of such stock
expressly provide that it will rank on a parity with the El Paso Preferred
Stock as to dividend rights and rights on liquidation, winding-up and
dissolution; and (iii) junior to each other class of capital stock or series of
preferred stock established by the Board of El Paso to the extent the terms of
such stock expressly provide that it will rank senior to the El Paso Preferred
Stock as to dividend rights and rights on liquidation, winding-up and
dissolution.
So long as shares of El Paso Preferred Stock are outstanding, no dividends or
other distributions may be paid or declared and set apart for such payment on
securities ranking junior to or on a parity with the El Paso Preferred Stock
with respect to dividends and rights on liquidation, winding-up and dissolution
for any period (except dividends paid in shares of junior securities) and no
securities ranking junior to or on a parity with the El Paso Preferred Stock
with respect to dividends and rights on liquidation, winding-up and dissolution
may be repurchased, redeemed, or otherwise retired, nor may funds be declared
and set apart for payment with respect thereto, nor shall El Paso permit any
corporation or entity directly or indirectly controlled by El Paso to purchase
any securities ranking junior to or on a parity with the El Paso Preferred
Stock with respect to dividends and rights on liquidation, winding-up and
dissolution, unless, in each case, the full cumulative dividends on all
outstanding shares of El Paso Preferred Stock shall have been declared and paid
in full for all past quarterly dividend periods. Notwithstanding the foregoing,
El Paso may (i) make redemptions, purchases and other acquisitions of
securities ranking junior to or on a parity with respect to dividends and
rights on liquidation, winding-up and dissolution payable in junior securities,
and (ii) make redemptions of rights distributed pursuant to El Paso's
stockholder rights plan.
Dividends. Dividends on the El Paso Preferred Stock will be cumulative from
the date of issue and will be payable quarterly on the last days of March,
June, September and December in each year (each, a "Dividend Payment Date").
The first Dividend Payment Date shall be the next Dividend Payment Date
following the date of issue. The holders of the El Paso Preferred Stock will be
entitled to cumulative cash dividends only when, as and if declared by the
Board of Directors of El Paso and out of funds legally available therefor.
Accrued but unpaid dividends on the El Paso Preferred Stock will not bear
interest. The dividend rate on the El Paso Preferred Stock shall be adjustable
quarterly in a manner designed to cause, to the extent possible, the market
price of 25 El Paso Preferred Depositary Shares to equal approximately $1,000.
The applicable rate for each dividend period shall be the average of quotations
from at least two reference banks, one selected by El Paso and one by Tenneco,
except that the applicable rate for the first dividend period will be set by
Morgan Stanley & Co. Incorporated if the reference banks for Tenneco and El
Paso do not agree. The applicable dividend rate will not be less than 6.0% per
annum nor higher than 10.0% per annum.
Liquidation Rights. In the event of any liquidation (voluntary or
involuntary), dissolution or winding up of the affairs of El Paso and before
any distribution of assets to holders of stock ranking junior to the El Paso
Preferred Stock, the holders of shares of El Paso Preferred Stock then
outstanding shall be entitled to receive, out of the assets available for
distribution to holders of El Paso Preferred Stock, an amount per share equal
to $1,000 plus accrued dividends, if any, to the date of payment. If, upon such
a voluntary or involuntary liquidation, dissolution or winding-up of El Paso,
the assets of El Paso are insufficient to pay in full the amounts described
above as payable with respect to El Paso Preferred Stock, the holders of El
Paso Preferred Stock and any securities ranking on a parity therewith with
respect to dividends and rights on liquidation, winding-up and dissolution will
share ratably in any distribution of assets of El Paso, first in proportion to
their respective liquidation preferences until such preferences are paid in
full, and then in proportion to their respective amounts of accrued but unpaid
dividends. After payment in full of any such liquidation preference and accrued
but unpaid dividends, the El Paso Preferred Stock will not be entitled to any
further participation in any distribution of assets
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by El Paso. Neither the sale or transfer of all or any part of the assets of
El Paso, nor the merger or consolidation of El Paso into or with any other
corporation or a merger of any other corporation with or into El Paso, will be
deemed to be a liquidation, dissolution or winding-up of El Paso.
Voting. Holders of the El Paso Preferred Stock will be entitled to 15 votes
per share on each matter submitted to a vote at any meeting of El Paso's
stockholders. Whenever dividends are in arrears for six or more dividend
periods, the occurrence of such contingency shall mark the beginning of a
default period which shall extend until such time as all accrued and unpaid
dividends on the El Paso Preferred Stock shall have been declared and paid in
full. During each such default period, the holders of El Paso Preferred Stock,
voting separately as a class, shall have the right to elect two additional
directors to El Paso's Board of Directors. The terms of any additional
directors so elected shall terminate upon the end of the default period.
Transfer Agent and Registrar. The First National Bank of Boston will serve
as registrar and transfer agent for the El Paso Preferred Stock (and El Paso
Preferred Depositary Shares).
Listing. Although application has been made to list the El Paso Preferred
Depositary Shares issuable in connection with the Merger on the NYSE, no
application has been made to list the shares of El Paso Preferred Stock on the
NYSE or any other national securities exchange. Upon the termination of the
Depositary Agreement, as described below, El Paso may be required to cause the
shares of El Paso Preferred Stock to be so listed.
Reissuance. If shares of El Paso Preferred Stock are redeemed or exchanged,
the shares so reacquired shall, upon compliance with any statutory
requirements, assume the status of authorized but unissued shares of preferred
stock of El Paso, but may not be reissued as El Paso Preferred Stock.
Other. For a description of provisions contained in the El Paso Charter (as
defined) which are intended to protect stockholders of El Paso against certain
takeover bids, see the sections entitled "Fair Price Provisions" and
"Stockholder Rights Plan" under "COMPARISON OF RIGHTS OF STOCKHOLDERS OF
TENNECO AND EL PASO".
Request will be made for the El Paso Preferred Depositary Shares to be rated
by Moody's Investors Service, Inc. and Standard & Poor's Ratings Group.
EL PASO PREFERRED DEPOSITARY SHARES
If the Stock Issuance is not approved, and the Merger is consummated, the El
Paso Preferred Stock will be issued to a bank or trust company to be selected
by El Paso, as depositary (the "Depositary") under the Depositary Agreement.
El Paso Preferred Depositary Shares, each representing a one-twenty-fifth
fractional interest in a whole share of El Paso Preferred Stock, would then be
issued to holders of Tenneco Common Stock in the Merger.
The El Paso Preferred Depositary Shares will be evidenced by depositary
receipts issued pursuant to the Deposit Agreement (the "Depositary Receipts").
The El Paso Preferred Depositary Shares will be subject to the terms and
conditions of the Deposit Agreement. The following description summarizes
certain provisions of the form of Deposit Agreement as currently contemplated
by El Paso and does not purport to be complete. The terms of the Deposit
Agreement, if entered into betweeen the Depositary and El Paso, may change.
Withdrawal of El Paso Preferred Stock--Upon surrender of Depositary Receipts
at the principal office of the Depositary, upon payment of a sum sufficient
for the payment of any tax or other governmental charge with respect thereto,
and subject to the terms of the Deposit Agreement, the owner of the El Paso
Preferred Depositary Shares evidenced thereby is entitled to delivery of the
number of whole shares of El Paso Preferred Stock represented by such El Paso
Preferred Depositary Shares. Fractional shares of El Paso Preferred Stock will
not be issued. If the Depositary Receipts delivered by the holder evidence a
number of El Paso Preferred Depositary Shares in excess of the number of El
Paso Preferred Depositary Shares representing the number of whole shares
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of El Paso Preferred Stock to be withdrawn, the Depositary will deliver to such
holder at the same time a new Depositary Receipt evidencing such excess number
of El Paso Preferred Depositary Shares. Holders of El Paso Preferred Stock thus
withdrawn will not thereafter be entitled to deposit such shares under the
Deposit Agreement or to receive Depositary Receipts evidencing El Paso
Preferred Depositary Shares therefor. There is currently no market for El Paso
Preferred Stock and it is not expected that an active trading market for El
Paso Preferred Stock will develop.
Redemption and Exchange of El Paso Preferred Depositary Shares--As described
under "--El Paso Preferred Stock--Maturity, Redemption and Exchange," the El
Paso Preferred Stock is subject to (i) the right of El Paso to call the El Paso
Preferred Stock (and thereby the El Paso Preferred Depositary Shares) at any
time after the fifth anniversary of the Merger, at El Paso's option, for
redemption, and (ii) the right of El Paso to exchange the El Paso Preferred
Stock (and thereby the El Paso Preferred Depositary Shares) at any time for
shares of El Paso Common Stock. The El Paso Preferred Depositary Shares are
subject to redemption and exchange upon the same terms and conditions
(including as to notice to the owners of El Paso Preferred Depositary Shares
and as to selection of El Paso Preferred Depositary Shares to be redeemed if
fewer than all the outstanding El Paso Preferred Depositary Shares are to be
redeemed) as the El Paso Preferred Stock held by the Depositary, except that
the amount of money or other property received upon redemption or exchange of
each El Paso Preferred Depositary Share will be equal to one twenty-fifth of
the amount of money or other property received upon redemption or exchange of
each share of El Paso Preferred Stock.
Dividends and Other Distributions--El Paso, on behalf of the Depositary (or,
if El Paso determines otherwise, the Depositary), will distribute all cash
dividends or other cash distributions in respect of the El Paso Preferred Stock
represented by the El Paso Preferred Depositary Shares to the record holders of
Depositary Receipts in proportion to the number of El Paso Preferred Depositary
Shares owned by such holders on the relevant record date, which will be the
same date as the relevant record date fixed by El Paso for the El Paso
Preferred Stock.
In the event of a distribution other than in cash, El Paso, on behalf of the
Depositary (or, if El Paso determines otherwise, the Depositary), will
distribute property to the record holders of Depositary Receipts entitled
thereto, in proportion, as nearly as may be practicable, to the number of El
Paso Preferred Depositary Shares owned by such holders on the relevant record
date, unless El Paso determines that it is not feasible to make such
distribution, in which case El Paso on behalf of the Depositary (or, if El Paso
determines otherwise, the Depositary), may adopt any other method for such
distribution as it deems appropriate, including the sale of such property and
distribution of the net proceeds from such sale to such holders.
Procedures for Voting--Upon receipt of notice of any meeting at which the
holders of El Paso Preferred Stock represented by such holders' El Paso
Preferred Depositary Shares are entitled to vote, the Depositary (unless
another arrangement for allowing holders of El Paso Preferred Depositary Shares
to exercise the voting rights associated with the El Paso Preferred Depositary
Shares is agreed by El Paso and the Depositary) will, as soon as practicable
thereafter, cause the information contained in such notice of meeting to be
mailed to the record holders of Depositary Receipts as of the record date for
such meeting. Each such record holder of Depositary Receipts will be entitled
to instruct the Depositary as to the exercise of voting rights with respect to
the number of shares of El Paso Preferred Stock represented by such holder's El
Paso Preferred Depositary Shares. The Depositary will endeavor, insofar as
practicable, to vote with respect to the number of shares of El Paso Preferred
Stock represented by such El Paso Preferred Depositary Shares in accordance
with such instructions, and El Paso intends to take all action which may be
deemed necessary by the Depositary in order to enable the Depositary to do so.
The Depositary will abstain from voting with respect to the El Paso Preferred
Stock to the extent that it does not receive specific written instructions from
the holders of Depositary Receipts.
Amendment and Termination of Deposit Agreement--The form of Depositary
Receipt evidencing the El Paso Preferred Depositary Shares and any provision of
the Deposit Agreement may at any time and from time to time be amended by
agreement between El Paso and the Depositary. Every holder of an outstanding El
Paso Preferred Depositary Share at the time any such amendment becomes
effective will be deemed, by continuing to hold such El Paso Preferred
Depositary Share, to consent and agree to such amendment and to be bound by the
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Deposit Agreement as amended thereby. No such amendment may impair the right,
subject to the terms of the Deposit Agreement, of any owner of any El Paso
Preferred Depositary Shares to surrender the Depositary Receipt evidencing such
El Paso Preferred Depositary Shares with instructions to the Depositary to
deliver to the holder of the El Paso Preferred Stock represented thereby,
except in order to comply with mandatory provisions of applicable law.
The Deposit Agreement may be terminated by El Paso or the El Paso Preferred
Depositary only if (a) (i) all outstanding Depositary Shares have been redeemed
or (ii) there has been a final distribution in respect of the El Paso Preferred
Stock in connection with any liquidation, dissolution or winding-up of El Paso
and such distribution has been made to all the holders of El Paso Preferred
Depositary Shares; and (b) reasonable notice has been given to any remaining
holders of El Paso Preferred Depositary Shares. In the event the Deposit
Agreement is terminated, El Paso will use its best efforts to list the El Paso
Preferred Stock on the NYSE or any other national securities exchange on which
the El Paso Common Stock is listed.
Miscellaneous--El Paso will deliver to the Depositary all reports to
shareholders and other communications which El Paso is required to furnish to
the holders of the El Paso Preferred Stock by law, by the rules of the NYSE or
by the Certificate of Incorporation of El Paso or Certificate of Designation
relating to the El Paso Preferred Stock. The Depositary will make available for
inspection by holders of such El Paso Preferred Depositary Shares at the
principal office of the Depositary, and at such other places as it may from
time to time deem advisable, any reports and communications received from El
Paso by the Depositary as a holder of El Paso Preferred Stock that are made
generally available to the holders of El Paso Preferred Stock. The Depositary
will comply with all information reporting requirements applicable to it under
law in its capacity as Depositary.
Neither the Depositary nor El Paso will be subject to any liability under the
Deposit Agreement to holders of Depositary Receipts other than for negligence,
bad faith or willful misconduct. Neither the Depositary nor El Paso will be
liable if it is prevented or delayed by law or any circumstance beyond its
control in performing its obligations under the Deposit Agreement. The
obligations of El Paso and the Depositary under the Deposit Agreement will be
limited to performance in good faith of their duties thereunder, and they will
not be obligated to prosecute or defend any legal proceeding in respect of any
El Paso Preferred Depositary Shares or shares of El Paso Preferred Stock unless
satisfactory indemnity is furnished. El Paso and the Depositary may rely upon
written advice of counsel or accountants, on information provided by holders of
El Paso Preferred Depositary Shares or other persons believed in good faith to
be competent to give such information and on documents believed to be genuine
and to have been signed or presented by the proper party or parties.
Resignation and Removal of Depositary--The Depositary may resign at any time
by delivering to El Paso notice of its election to do so. El Paso may at any
time, by notice, remove the Depositary or may terminate the engagement of the
Depositary with respect to any or all of its duties and obligations under the
Deposit Agreement. Any such resignation, removal or termination will take
effect upon the appointment of a successor Depositary and such successor's
acceptance of such appointment with respect to all the predecessor's duties and
obligations so terminated. Such successor Depositary must be appointed within
45 days after delivery of the notice for resignation, removal or termination,
or the predecessor Depositary may petition a court of competent jurisdiction to
appoint a successor. If the successor Depositary is to acquire title to El Paso
Preferred Stock, such successor must be a bank or trust company having its
principal office in the United States of America and having a combined capital
and surplus of at least $50,000,000.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF TENNECO AND EL PASO
GENERAL
As a result of the Merger, holders of Tenneco Common Stock and Tenneco
Preferred Stock will become holders of El Paso Common Stock and possibly, in
the case of the holders of Tenneco Common Stock, El Paso Preferred Depositary
Shares and the rights of all such former Tenneco Stockholders thereafter will
be governed by the Restated Certificate of Incorporation of El Paso (the "El
Paso Charter"), the By-laws of El Paso (the "El
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Paso By-laws"), the DGCL and, under certain circumstances, the Depositary
Agreement. The rights of the holders of Tenneco Common Stock and Tenneco
Preferred Stock presently are governed by the Tenneco Charter, the Tenneco
Bylaws and the DGCL. The following summary, which does not purport to be a
complete statement of the general differences among the rights of the
stockholders of El Paso and Tenneco, sets forth certain differences between the
El Paso Charter and the Tenneco Charter (as presently in effect) and between
the El Paso By-laws and Tenneco Bylaws (as presently in effect, except as
otherwise indicated). This summary is qualified in its entirety by reference to
the full text of each of such documents and the DGCL. For information as to how
such documents may be obtained, see "AVAILABLE INFORMATION." If the Transaction
is approved at the Tenneco Special Meeting, the Charter Amendment will be filed
the following day and will eliminate specified rights, powers and preferences
of the Tenneco Junior Preferred Shares. See "THE CHARTER AMENDMENT." Upon
consummation of the Merger, the Tenneco Charter and Tenneco Bylaws will be
amended as described herein under "THE MERGER--Effects of the Merger."
AUTHORIZED CAPITAL STOCK
El Paso. The total authorized capital stock of El Paso consists of
100,000,000 shares of El Paso Common Stock, par value $3.00 per share, and
25,000,000 shares of preferred stock, par value $.01 per share. El Paso has
designated 1,000,000 shares of preferred stock as Series A Junior Participating
Preferred Stock, par value $.01 per share (the "El Paso Series A Junior
Preferred Stock"), for its stockholder rights plan, none of which is
outstanding. See "--Stockholder Rights Plan." In addition, if the El Paso
stockholders do not approve the Stock Issuance, El Paso will designate and
issue the El Paso Preferred Stock to the Depositary (and El Paso Preferred
Depositary Shares in respect thereof will be issued to holders of Tenneco
Common Stock) in connection with the Merger. See "DESCRIPTION OF EL PASO
PREFERRED STOCK AND DEPOSITARY SHARES" for a description of the terms of El
Paso Preferred Stock and El Paso Preferred Depositary Shares which may be
issued in connection with the Merger.
Tenneco. The total number of authorized shares of capital stock of Tenneco is
415,000,000 shares of stock, consisting of 350,000,000 shares of Tenneco Common
Stock, 15,000,000 shares of the Tenneco Senior Preferred Shares, and 50,000,000
shares of the Tenneco Junior Preferred Shares. Tenneco has designated 803,723
shares of Tenneco Senior Preferred Shares as $4.50 Preferred Stock and 391,519
shares of the Tenneco Senior Preferred Shares as $7.40 Preferred Stock. Tenneco
has also designated 3,500,000 shares of the Tenneco Junior Preferred Shares as
the Tenneco Series A Junior Preferred Stock, for its stockholder rights plan
(the "Tenneco Rights Plan Preferred Stock"), none of which have been issued.
See "--Stockholder Rights Plan." In addition, in connection with the Merger
Tenneco plans to issue shares of one or more new series of the Tenneco Junior
Preferred Shares pursuant to the NPS Issuance. See "THE NPS ISSUANCE," "THE
CHARTER AMENDMENT" and "DESCRIPTION OF THE TENNECO JUNIOR PREFERRED STOCK."
PREEMPTIVE RIGHTS
Under the DGCL, a stockholder does not have preemptive rights unless such
rights are specifically granted in the certificate of incorporation. Both the
El Paso Charter and the Tenneco Charter deny preemptive rights to their
respective stockholders.
VOTING RIGHTS
Under the DGCL, unless otherwise provided in the certificate of incorporation
and subject to other qualifications of the DGCL, each stockholder is entitled
to one vote for each share of capital stock held.
El Paso. Each holder of any class or series of El Paso stock is entitled to
one vote for each share having voting power with respect to each matter upon
which a vote is being taken, except as provided in the El Paso Charter. The El
Paso Charter provides that holders of El Paso Series A Junior Preferred Stock
are entitled to 100 votes per share on all matters submitted to a vote of the
stockholders of El Paso, subject to adjustment. Each share of El Paso Preferred
Stock would entitle the holder thereof to 15 votes per share on all matters
submitted
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to a vote at any meeting of El Paso's stockholders. In addition, the El Paso
Charter provides that holders of preferred stock of El Paso, including holders
of El Paso Series A Junior Preferred Stock and any El Paso Preferred Stock
issued in connection with the Merger, shall have the right to vote separately
as a class to elect two directors of El Paso during any period that dividends
on such stock are in arrears in an amount equal to six quarterly dividends.
Tenneco. Generally, holders of Tenneco Common Stock are entitled to one vote
for each share held at all meetings of stockholders and holders of Tenneco
Senior Preferred Shares and Tenneco Junior Preferred Shares are not entitled to
voting rights, unless such rights are granted in the resolution designating a
series of such stock. Holders of $7.40 Preferred Stock are entitled to one vote
for each share held at all meetings of the stockholders of Tenneco and holders
of Tenneco Rights Plan Preferred Stock are entitled to 100 votes per share on
all matters submitted to a vote of stockholders, subject to adjustment. Holders
of $7.40 Preferred Stock and Tenneco Rights Plan Preferred Stock also are each
entitled to vote to elect two directors of Tenneco during any period that
dividends payable on $7.40 Preferred Stock or Tenneco Rights Plan Preferred
Stock, as the case may be, are in arrears in an aggregate amount equivalent to
six full quarter-yearly dividends. Except as otherwise provided by the DGCL and
except as set forth in the Tenneco Charter with respect to the rights of
holders of Tenneco Senior Preferred Shares to vote on certain matters, holders
of $4.50 Preferred Stock are not entitled to vote.
Consent of the holders of the Tenneco Senior Preferred Shares or a series of
such stock, as the case may be, must be obtained in the following
circumstances: (i) to amend, alter or repeal any provision of the Tenneco
Charter in a manner which adversely affects the rights, powers or preferences
of the Tenneco Senior Preferred Shares or of a series of such stock; (ii) to
create or authorize any class of stock ranking prior to or on a parity with the
Tenneco Senior Preferred Shares in respect of dividends or distribution of
assets on liquidation; (iii) to increase the authorized amount of any class of
stock ranking prior to or on a parity with the Tenneco Senior Preferred Shares
in respect of dividends or distribution of assets on liquidation; (iv) to
create or authorize any obligation or security convertible into Tenneco Senior
Preferred Shares or shares of any class of stock ranking prior to or on a
parity with Tenneco Senior Preferred Shares; (v) to purchase, redeem or
otherwise acquire for value any Tenneco Senior Preferred Shares or shares of
any class of stock ranking on a parity with Tenneco Senior Preferred Shares
while there is any default in the payment of dividends on the Tenneco Senior
Preferred Shares; or (vi) to sell, lease, transfer or convey all, or
substantially all, of Tenneco's property or businesses or to consolidate or
merge with any other corporation, with certain exceptions (including an
exception for mergers in which Tenneco is the surviving corporation).
Also, consents of the holders of Tenneco Junior Preferred Shares or a series
of such stock, as the case may be, must be obtained in the following
circumstances: (i) to amend, alter or repeal any provision of the Tenneco
Charter in a manner which adversely affects the rights, powers or preferences
of the Tenneco Junior Preferred Shares or of a series of such stock; (ii) to
create or authorize any class of stock ranking prior to or on a parity with the
Tenneco Junior Preferred Shares in respect of dividends or distribution of
assets on liquidation; (iii) to increase the authorized amount of any class of
stock ranking prior to or on a parity with the Tenneco Junior Preferred Shares
in respect of dividends or distribution of assets on liquidation; (iv) to
create or authorize any obligation or security convertible into Tenneco Junior
Preferred Shares or shares of any class of stock ranking prior to or on a
parity with Tenneco Junior Preferred Shares; (v) to purchase, redeem or
otherwise acquire for value any Tenneco Junior Preferred Shares while there is
any default in the payment of dividends on Tenneco Junior Preferred Shares; or
(vi) to sell, lease, transfer or convey all, or substantially all, of Tenneco's
property or businesses or to consolidate or merge with any other corporation,
with certain exceptions (including an exception for Mergers in which Tenneco is
the surviving corporation).
DIVIDENDS
The DGCL provides that the directors of a corporation, subject to
restrictions contained in its certificate of incorporation, may declare and pay
dividends on the shares of its capital stock either (i) out of surplus or (ii)
if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year, unless the corporation's
capital is less than the amount of capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets.
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El Paso. The El Paso By-laws provide that, except as otherwise provided by
statute or by the El Paso Charter, the El Paso Board of Directors may declare
dividends upon the shares of its capital stock either (i) out of its surplus or
(ii) if there is no surplus, out of its net profits for the fiscal year,
whenever, and in such amounts as, in its opinion it is advisable. The El Paso
Charter requires that dividends be paid on El Paso Series A Junior Preferred
Stock in preference to the holders of El Paso Common Stock or any other junior
stock of El Paso.
The El Paso Charter provides that, whenever dividends or distributions
payable on El Paso Series A Junior Preferred Stock or El Paso Preferred Stock
are in arrears, and until such dividends and distributions are paid in full, El
Paso shall not (i) declare or pay dividends and distributions on, redeem,
purchase or otherwise acquire any shares of stock ranking junior to or on a
parity with El Paso Series A Junior Preferred Stock or El Paso Preferred Stock,
as the case may be, with certain exceptions, or (ii) purchase or otherwise
acquire shares of El Paso Series A Junior Preferred Stock, or El Paso Preferred
Stock, as the case may be, with certain exceptions. If issued in connection
with the Merger, the holders of the El Paso Preferred Stock will be entitled to
cumulative cash dividends only when, as and if declared by the Board of
Directors of El Paso and out of funds legally available therefor. The
applicable dividend rate will not be less than 6.0% per annum nor higher than
10.0% per annum, and will be adjustable quarterly in a manner designed to
cause, to the extent possible, 25 El Paso Preferred Depositary Shares to have a
market price of $1,000. See "DESCRIPTION OF EL PASO PREFERRED STOCK AND
DEPOSITARY SHARES."
Tenneco. The Tenneco Charter provides that, subject to the rights of holders
of Tenneco Senior Preferred Shares and Tenneco Junior Preferred Shares, the
Tenneco Board may declare and pay dividends on Tenneco Common Stock from time
to time out of funds legally available therefor. The dividend rate on the $7.40
Preferred Stock is $7.40 per share per annum and the dividend rate on the $4.50
Preferred Stock is $4.50 per share per annum. The Tenneco Charter further
provides that: (i) in no event shall any dividends be paid or distributions
made, (a) in the case of Tenneco Senior Preferred Shares, on any class of stock
ranking junior to the Tenneco Senior Preferred Shares, and (b) in the case of
Tenneco Junior Preferred Shares, on any shares of stock ranking junior to the
Tenneco Junior Preferred Shares; and (ii) no shares of such junior stock shall
be purchased, retired or otherwise acquired, in each case unless all dividends
on the Tenneco Senior Preferred Shares or Tenneco Junior Preferred Shares, as
the case may be, for past periods shall have been paid or declared and sums for
the payment thereof set apart and all such dividends for current periods shall
have been paid or declared.
REDEMPTION
The DGCL provides that the stock of any class or series may be made
redeemable by the corporation at its option or at the option of the holders of
such stock, subject to certain limitations imposed by the DGCL, including the
requirements that (i) the corporation have outstanding shares of at least one
class or series of stock with full voting power which shall not be subject to
redemption, (ii) redemption must be made in accordance with the certificate of
incorporation, and (iii) the redemption not occur when the capital of the
corporation is impaired and not cause an impairment to the capital of the
corporation, with certain exceptions.
El Paso. The El Paso Charter states that shares of El Paso Series A Junior
Preferred Stock shall not be redeemable. Any El Paso Preferred Stock issued in
the Merger will be redeemable at El Paso's option at any time after the fifth
anniversary of the Merger in whole or in part for $1,000 per share, plus
accrued and unpaid dividends (subject to certain limitations). Each share of El
Paso Preferred Stock will also be exchangeable at El Paso's option at any time
for shares of El Paso Common Stock having an aggregate market value of $1,000,
plus an amount in cash equal to accrued and unpaid dividends (subject to
certain limitations).
Tenneco. The Tenneco Charter provides that Tenneco, at the option of the
Tenneco Board of Directors, may redeem any series of Tenneco Senior Preferred
Shares and Tenneco Junior Preferred Shares which, by its terms, is redeemable.
The Tenneco Charter further provides that shares of $7.40 Preferred Stock are
subject to (i) optional redemption by Tenneco on or after March 1, 1993 at a
price of $100 per share, and (ii) mandatory
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redemption by Tenneco (195,761 shares per year) at a price of $100 per share or
by purchase thereof in such manner as the Tenneco Board of Directors may
determine from time to time at a price not exceeding the mandatory redemption
price, provided that all shares outstanding on March 1, 1998 will be acquired
by Tenneco on such date, in each case, together with accrued and unpaid
dividends. Shares of $4.50 Preferred Stock are subject to (A) optional
redemption by Tenneco at a price of $100 per share, and (B) mandatory
redemption by Tenneco for all shares outstanding on or before the annual
dividend payment date in 1999 at a price of $100 per share or by purchase
thereof in such manner as the Tenneco Board of Directors may determine from
time to time at a price not exceeding the mandatory redemption price, in each
case, together with accrued and unpaid dividends. Shares of Tenneco Rights Plan
Preferred Stock are subject to optional redemption at a price per share equal
to 100 times the "current per share market price" (as defined in the Tenneco
Charter) of Tenneco Common Stock on the date notice of such redemption is
mailed, subject to adjustment.
LIQUIDATION
El Paso. The El Paso Charter provides that, upon liquidation, dissolution or
winding up of the company, no distribution shall be made to the holders of
shares of stock ranking junior to El Paso Series A Junior Preferred Stock until
holders of El Paso Series A Junior Preferred Stock have received the required
liquidation preference. Additionally, before any distribution of assets to
holders of stock ranking junior to the El Paso Preferred Stock, the holders of
shares of El Paso Preferred Stock then outstanding shall be entitled to receive
an amount per share equal to $1,000 plus accrued and unpaid dividends, if any,
to the date of payment. Following a certain liquidation payment to holders of
El Paso Common Stock, holders of El Paso Series A Junior Preferred Stock shall
receive a pro rata portion of any remaining assets to be distributed.
Tenneco. The Tenneco Charter provides that, in the event of a liquidation,
dissolution or winding up of the affairs of the company, (i) holders of Tenneco
Senior Preferred Shares are entitled to be paid in full the amounts fixed for
such stock before any distribution or payment shall be made to the holders of
any class of stock ranking junior to Tenneco Senior Preferred Shares, and (ii)
holders of Tenneco Junior Preferred Shares are entitled to be paid in full the
amounts fixed for such stock before any distribution or payment shall be made
to the holders of any class of stock ranking junior to Tenneco Junior Preferred
Shares. After payment has been made in full to holders of Tenneco Senior
Preferred Shares and Tenneco Junior Preferred Shares, the remaining assets and
funds of the corporation shall be distributed among holders of Tenneco Common
Stock.
SIZE OF THE BOARD OF DIRECTORS
El Paso. The El Paso By-laws provide for the number of directors to be not
less than one and permit the El Paso Board of Directors to fix the number of
directors by a vote of a majority of the directors then in office. The El Paso
Board of Directors currently consists of seven directors.
Tenneco. The Tenneco Bylaws provide for the number of directors to be not
less than eight nor more than sixteen and permit the Tenneco Board of Directors
by resolution adopted by a majority of the whole Board to fix the number of
directors. The Tenneco Board of Directors currently consists of eleven
directors.
ELECTION AND CLASSIFICATION OF THE BOARD OF DIRECTORS
El Paso. The entire El Paso Board of Directors is elected by the stockholders
of El Paso at each annual meeting of stockholders for a term of one year. As
discussed in "--Voting Rights," in certain circumstances holders of preferred
stock of El Paso are entitled to elect two directors to the El Paso Board of
Directors.
Tenneco. The Tenneco Board of Directors is divided into three classes of
directors. At each annual meeting of stockholders, successors to the class of
directors whose term expires at such annual meeting are elected for a three-
year term. In addition, as discussed in "--Voting Rights," in certain
circumstances holders of $7.40 Preferred Stock and Tenneco Rights Plan
Preferred Stock are each entitled to elect two directors to the Tenneco Board
of Directors. The Tenneco Charter provides that, whenever the holders of any
class of stock or
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any series of Tenneco Senior Preferred Shares or Tenneco Junior Preferred
Shares have the right to vote separately by class or series to elect directors
at an annual or special meeting of stockholders, such directors are not to be
divided into classes unless expressly provided in the Tenneco Charter. The
Tenneco Charter relating to the $7.40 Preferred Stock and the Tenneco Rights
Plan Preferred Stock does not require such directors to be divided into
classes.
CUMULATIVE VOTING
The DGCL permits a certificate of incorporation to provide for cumulative
voting in the election of directors. Neither the El Paso Charter nor the
Tenneco Charter permits cumulative voting.
REMOVAL OF DIRECTORS; FILLING VACANCIES
The DGCL provides that any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors, unless the corporation has a
classified board or has cumulative voting. Unless otherwise provided in the
certificate of incorporation or by-laws, vacancies and newly created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director.
El Paso. The El Paso By-laws provide that any director of El Paso may be
removed, with or without cause, at any special meeting of the stockholders
called for that purpose, by the affirmative vote of the holders of a majority
of shares of El Paso entitled to vote for the election of such director, and
the vacancy in the Board caused by any such removal may be filled by the
stockholders at such a meeting. The ability of the stockholders of El Paso to
remove directors, however, is limited because the stockholders cannot call a
special meeting and no action by stockholders of El Paso may be taken by
written consent. Vacancies and newly created directorships may be filled in the
manner set forth in the DGCL.
Tenneco. As provided by the DGCL, because the Tenneco Board is classified,
stockholders may remove a director only for cause. In addition, the Tenneco
Bylaws provide that any vacancy on the Tenneco Board of Directors that results
from an increase in the number of directors may be filled by a majority of the
directors then in office, provided that a quorum is present, and any other
vacancy occurring in the Board may be filled by a majority of the directors
then in office, even if less than a quorum, or by a sole remaining director.
The ability of stockholders of Tenneco to remove a director also is limited
because such stockholders cannot call a special meeting of stockholders.
SPECIAL MEETINGS OF STOCKHOLDERS
Under the DGCL, special meetings of stockholders may be called by the board
of directors or by such persons authorized by the certificate of incorporation
or the by-laws.
El Paso. The El Paso By-laws provide that special meetings of the
stockholders for any purpose may be called only by a majority of the El Paso
Board of Directors, the Chairman of the Board, the Chief Executive Officer, the
President or the Vice Chairman of the Board. The effect of this provision is
that a stockholder could not force stockholder consideration of a proposal over
the opposition of the El Paso Board, the Chairman of the Board, the Chief
Executive Officer, the President or the Vice Chairman of the Board by calling a
special meeting of stockholders prior to the time the El Paso Board of
Directors, the Chairman, the Chief Executive Officer, the President or the Vice
Chairman believes such consideration to be appropriate.
Tenneco. The Tenneco Bylaws provide that special meetings of stockholders may
be called only by the Tenneco Board of Directors. This provision prevents a
stockholder from forcing stockholder consideration of a proposal at a special
meeting over the opposition of the Tenneco Board of Directors.
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STOCKHOLDER ACTION BY WRITTEN CONSENT
The DGCL provides that, unless otherwise provided in the certificate of
incorporation, any action of stockholders may be taken without a meeting,
without prior notice and without a vote, if consents in writing, setting forth
the action so taken, are signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.
El Paso. The El Paso Charter provides that any action by the stockholders
will be taken at a meeting of stockholders and no action may be taken by
written consent of stockholders entitled to vote on such action. The provisions
of the El Paso Charter prohibiting stockholder action by written consent may
have the effect of delaying consideration of a stockholder proposal until the
next annual meeting of stockholders. These provisions also would prevent the
holders of a majority of the voting power of the El Paso Common Stock from
unilaterally using the written consent procedure to take stockholder action.
Tenneco. Stockholders of Tenneco are not prohibited from taking action by
written consent.
LIMITATION OF LIABILITY OF DIRECTORS
The DGCL permits a corporation to include a provision in its certificate of
incorporation eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for breach of the
director's fiduciary duty, except for liability for (i) any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) violation of certain provisions of the DGCL
relating to payment of dividends and stock repurchases, (iv) any transaction
from which the director derived an improper personal benefit, or (v) any act or
omission prior to the adoption of such provision. Each of the El Paso Charter
and the Tenneco Charter includes such a provision.
While these provisions provide directors with protection from awards of
monetary damages for breaches of their duty of care, they do not eliminate such
duty. Accordingly, these provisions will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions described above apply to an
officer of the corporation only if he or she is a director of the corporation
and is acting in his or her capacity as director, and do not apply to officers
of the corporation who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents against amounts paid and expenses incurred in connection with an
action or proceeding to which such person is or is threatened to be made a
party by reason of such position if such person acted in good faith and in a
manner reasonably believed to be in, or not opposed to, the best interests of
the corporation, and with respect to any criminal action which such person had
no reasonable cause to believe was unlawful. The DGCL provides that a
corporation may advance expenses of defense (upon receipt of an undertaking
from any such officer or director to reimburse the corporation if he is
ultimately not entitled to indemnification) and must reimburse a successful
defendant for expenses, including attorney's fees, actually and reasonably
incurred. The DGCL provides that, in any action brought by or in the right of
the corporation, indemnification may not be made for any claim, issue or matter
as to which a person has been adjudged by a court of competent jurisdiction to
be liable to the corporation, unless and only to the extent a court determines
that the person is entitled to indemnity for such expenses.
The El Paso By-laws contain substantially similar language. The Tenneco By-
laws require indemnification of directors and officers to the extent permitted
by the DGCL and permit indemnification of employees or agents, at the
discretion of the Tenneco Board of Directors, to the same extent as provided
for directors and officers.
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AMENDMENT OF BY-LAWS
The DGCL vests the power to adopt, amend and repeal by-laws in the
stockholders entitled to vote and permits a corporation to confer such power on
its board of directors.
El Paso. The El Paso By-laws may be amended by the affirmative vote of a
majority of the entire El Paso Board of Directors, subject to the right of
stockholders to amend by-laws made or amended by the Board, by the affirmative
vote of a majority of the outstanding shares represented at a stockholder
meeting and entitled to vote thereon.
Tenneco. The Tenneco By-laws provide that the Tenneco Board of Directors may
amend the Tenneco By-laws, but any by-laws so amended may be amended by the
stockholders of Tenneco.
AMENDMENT OF CERTIFICATE OF INCORPORATION
The DGCL provides that an amendment to the certificate of incorporation,
after being declared advisable by the board of directors, generally must be
approved by holders of a majority of the outstanding stock of the corporation
entitled to vote thereon, unless the certificate requires a greater percentage.
El Paso. The El Paso Charter contains a provision requiring the affirmative
vote of not less than 51% of all shares entitled to vote in the election of
directors, excluding the stock of any Interested Stockholder (as defined below
with respect to El Paso), to amend (i) the "fair price" provisions described
below in "--Fair Price Provisions," and (ii) the provision prohibiting action
by stockholders by written consent. These provisions make it more difficult for
stockholders to make changes to the El Paso Charter, including changes designed
to facilitate the exercise of control over El Paso.
Tenneco. The Tenneco Charter provides that, in addition to approval by the
Board of Directors of Tenneco and notwithstanding that a lesser percentage or
separate class vote may be specified by law, the Tenneco Charter or the Tenneco
By-laws, any proposal to amend, repeal or adopt any provision inconsistent with
the provisions of the Tenneco Charter regarding Business Combinations proposed
by or on behalf of an Interested Stockholder (as each of such terms is defined
below with respect to Tenneco) or affiliate thereof requires the affirmative
vote of the holders of 66 2/3% in voting power of the outstanding shares of
voting stock, excluding shares of voting stock beneficially owned by any
Interested Stockholder, unless the amendment, repeal or the adoption of any
provison inconsistent with the provisions regarding Business Combinations is
unanimously recommended by the members of the Board of Directors of Tenneco and
each of such members qualifies as a Continuing Director (as defined below). In
addition, under the Tenneco Charter approval of two-thirds of the outstanding
shares of Tenneco Senior Preferred Shares or Tenneco Junior Preferred Shares,
or of a series thereof, is required for any charter amendment which adversely
affects the rights, powers or preferences of the Tenneco Senior Preferred
Shares or Tenneco Junior Preferred Shares, or of a series thereof, as the case
may be.
BUSINESS COMBINATIONS
Under the DGCL, approval by the affirmative vote of the holders of a majority
of the outstanding stock of a corporation entitled to vote is generally
required for a merger or consolidation or sale, lease or exchange of all or
substantially all of the corporation's assets to be consummated. Unless the
corporate charter provides otherwise, no vote of the stockholders of a
surviving corporation is required to approve a merger if (i) the agreement of
merger does not amend in any respect the surviving corporation's charter, (ii)
each share of the corporation's stock outstanding immediately prior to the
effective date of the merger is to remain outstanding, and (iii) the number of
shares of the surviving corporation's common stock to be issued or delivered
under the plan of merger does not exceed 20% of the surviving corporation's
common stock outstanding immediately prior to the effective date of the merger.
Neither the El Paso Charter nor the Tenneco Charter addresses the vote required
by stockholders of a surviving corporation to approve a merger, unless the fair
price provisions described below are applicable.
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FAIR PRICE PROVISIONS
El Paso. The El Paso Charter provides that, in addition to any affirmative
vote otherwise required, the affirmative vote of not less than 51% of the
holders of stock entitled to vote in the election of directors, excluding the
stock of an Interested Stockholder (defined below) who is a party to a Business
Combination (defined in the El Paso Charter to include certain transactions,
including a merger, sale of assets and certain recapitalizations), shall be
required for the adoption or authorization of a Business Combination, unless
Disinterested Directors (as defined in the El Paso Charter) determine by a two-
thirds vote that: (i) the Interested Stockholder is the beneficial owner of not
less than 80% of all shares entitled to vote in the election of directors and
has declared its intention to vote in favor of or to approve such Business
Combination; or (ii)(A) the fair market value of the consideration per share to
be received or retained by the holders of each class or series of stock of El
Paso in a Business Combination is equal to or greater than the consideration
per share (including brokerage commissions and soliciting dealer's fees) paid
by such Interested Stockholder in acquiring the largest number of shares of
such class of stock previously acquired in any one transaction or series of
related transactions, whether before or after the Interested Stockholder became
an Interested Stockholder, and (B) the Interested Stockholder shall not have
received the benefit, directly or indirectly (except proportionately as a
stockholder), of any loans, advances, guarantees, pledges or other financial
assistance provided by El Paso, whether in anticipation of or in connection
with such Business Combination or otherwise.
For the purposes of the above paragraph, an "Interested Stockholder" is a
person other than El Paso who is (1) the beneficial owner of 10% or more of the
stock of El Paso entitled to vote for the election of directors, or (2) an
affiliate of El Paso which (A) at any time within a two-year period prior to
the record date for the vote on a Business Combination was the beneficial owner
of 10% or more of the stock entitled to vote in the election of directors, or
(B) at the completion of the Business Combination will be the beneficial owner
of 10% or more of such stock.
The "fair price" provision is intended to ensure that all stockholders
receive equal treatment in the event of a tender or exchange offer and to
protect stockholders against certain takeover bids. Notwithstanding the
foregoing, the provision also could have the effect of discouraging a third
party from making a tender or exchange offer for El Paso, even though such an
offer might be beneficial to El Paso and its stockholders.
Tenneco. The Tenneco Charter requires, in addition to any other affirmative
vote required, the affirmative vote of not less than 66 2/3% of the holders of
stock entitled to vote on all matters submitted to the stockholders generally,
excluding the stock of an Interested Stockholder (defined below), for the
approval of a Business Combination (defined to include certain transactions,
including a merger, certain sales or exchanges of assets or certain
recapitalizations) with or proposed by an Interested Stockholder or an
affiliate of such, unless certain criteria set forth in the Tenneco Charter are
met, including the requirements that either (i) such Business Combination is
approved by a majority of Continuing Directors (defined generally as directors
(a) who are not affiliates, associates or representatives of the Interested
Stockholder and who were members of the Tenneco Board prior to the Interested
Stockholder becoming an Interested Stockholder, or (b) who were elected to
succeed any of the Continuing Directors by a majority of the Continuing
Directors), or (ii) (a) the aggregate amount of cash and the fair market value
of consideration other than cash to be received by holders of Tenneco Common
Stock and holders of any class or series of outstanding capital stock, other
than Tenneco Common Stock, are each equal to a certain minimum amount, (b) the
consideration to be received by stockholders meets certain requirements as to
the form thereof, (c) a proxy or information statement describing the proposed
Business Combination is mailed to all stockholders, and (d) such Interested
Stockholder shall not have made any major change in Tenneco's business or
equity capital structure without the approval of a majority of the Continuing
Directors.
For purposes of the above paragraph, the term "Interested Stockholder" means
any person (other than Tenneco or one of its subsidiaries and other than any
profit-sharing, employee stock ownership or other employee benefit plan of
Tenneco or one of its subsidiaries or any trustee of or fiduciary with respect
to any such plan when acting in such capacity) who (a) is or has announced or
publicly disclosed a plan or intention to become
217
<PAGE>
the beneficial owner of stock representing 5% or more of the votes entitled to
be cast by the holders of all then outstanding shares of stock entitled to vote
generally at stockholders' meetings, or (b) is an affiliate or associate of the
corporation and at any time within the two-year period immediately prior to the
date in question was the beneficial owner of stock representing 5% or more of
the votes entitled to be cast by the holders of all then outstanding shares of
stock which are entitled to vote generally at stockholders' meetings.
STOCKHOLDER RIGHTS PLAN
El Paso. El Paso adopted a stockholder rights plan that is designed to
protect El Paso stockholders from coercive or unfair takeover tactics. To
implement the plan, in July 1992, El Paso's Board of Directors declared a
dividend distribution of one El Paso Purchase Right for each share of El Paso
Common Stock then outstanding. All shares of El Paso Common Stock issued
subsequently also include these El Paso Purchase Rights. One El Paso Purchase
Right will be issued with respect to each share of El Paso Common Stock issued
pursuant to the Merger. Under certain conditions, each El Paso Purchase Right
may be exercised to purchase from El Paso one one-hundredth of a share of El
Paso Series A Junior Preferred Stock at a price of $75 per one one-hundredth of
a share, subject to adjustment.
The El Paso Purchase Rights are exercisable only if, without the prior
consent of the El Paso Board of Directors, a person or group becomes the
beneficial owner of 15% or more of the voting power of all outstanding voting
securities of El Paso (any such person or group, an "El Paso Acquiring Person")
or commences or announces a tender or exchange offer which would result in such
person or group becoming an El Paso Acquiring Person. In the event that a
person or group becomes an El Paso Acquiring Person, or, during such time as
there is an El Paso Acquiring Person, there shall be any reclassification of
securities, or recapitalization of El Paso, or any merger or consolidation of
El Paso with any of its subsidiaries or any other transaction or series of
transactions which has the effect, directly or indirectly, of increasing by
more than 1% the proportionate share of the outstanding shares of any class of
equity securities of El Paso or any of its subsidiaries which is directly or
indirectly owned by the El Paso Acquiring Person, then each El Paso Purchase
Right not owned by the El Paso Acquiring Person will entitle its holder to
purchase, at the El Paso Purchase Right's then-current exercise price, shares
of El Paso Common Stock (or in certain circumstances other equity securities of
El Paso with at least the same economic value as El Paso Common Stock) having a
market value of twice the El Paso Purchase Right's then-current exercise price.
If, after the El Paso Purchase Rights become exercisable, El Paso is involved
in a merger or other business combination transaction in which the El Paso
Common Stock is exchanged or changed, or it sells 50% or more of its assets or
earning power, each El Paso Purchase Right will entitle the holder to purchase,
at the El Paso Purchase Right's then-current exercise price, common stock of
the acquiring company having a value of twice the exercise price of the El Paso
Purchase Right. The El Paso Purchase Rights, which have no voting rights,
expire no later than July 7, 2002. The El Paso Purchase Rights may be redeemed
by El Paso under certain circumstances prior to their expiration date at a
purchase price of $.01 per El Paso Purchase Right. It is possible that the
existence of the El Paso Purchase Rights may have the effect of delaying,
deterring or preventing a takeover of El Paso.
Tenneco. Under the Tenneco Rights Plan, each holder of Tenneco Common Stock
of record on June 10, 1988 received one right which represents the right to
purchase one one-hundredth of a share of Tenneco Rights Plan Preferred Stock (a
"Tenneco Purchase Right"), exercisable at a price of $130 per one one-hundredth
of a share of Tenneco Rights Plan Preferred Stock, subject to adjustment. If a
person or group (i) becomes the beneficial owner of 20% or more of the
outstanding shares of Tenneco Common Stock (a "Tenneco Acquiring Person"),
unless such person or group becomes the owner of such percentage of shares
pursuant to a tender offer or exchange offer for all outstanding shares of
Tenneco Common Stock at a price and on terms determined by at least a majority
of the members of the Tenneco Board of Directors who are not officers of
Tenneco or representatives, nominees, affiliates or associates of a Tenneco
Acquiring Person, after receiving advice from one or more investment banking
firms, to be at a price that is fair to stockholders and otherwise in the best
interests of Tenneco and its stockholders, or (ii) has, in the judgment of the
Tenneco Board of Directors, acquired a substantial amount (not less than 10%)
of Tenneco Common Stock under certain motives deemed adverse to Tenneco's best
interests, each Tenneco Purchase Right entitles the holder to purchase, at the
exercise price of
218
<PAGE>
$130, shares of Tenneco Common Stock or other securities of Tenneco having a
value of twice such exercise price. If Tenneco is acquired in a business
combination in which Tenneco is not the surviving entity or if more than 50% of
Tenneco's assets or earning power is sold, each Tenneco Purchase Right entitles
the holder to purchase, at the exercise price, shares of the acquiring person
having a value of twice the exercise price. The Tenneco Purchase Rights, under
certain circumstances, are redeemable by Tenneco at a price of $.02 per Tenneco
Purchase Right. The Tenneco Purchase Rights expire June 10, 1998. See "THE
MERGER" for a description of certain amendments to the Tenneco Rights Plan made
in connection with the Transaction.
BENEFICIAL OWNERSHIP
Set forth below is the ownership, as of September 30, 1996, of the number of
shares and percentage of Tenneco Common Stock beneficially owned by (i) each
director of Tenneco, (ii) the Chief Executive Officer and each of the four
other most highly compensated executive officers of Tenneco, and (iii) all
executive officers and directors of Tenneco.
<TABLE>
<CAPTION>
PERCENT OF
SHARES OF TENNECO COMMON TENNECO COMMON
DIRECTORS STOCK OWNED(A)(B) STOCK OUTSTANDING
--------- ------------------------ -----------------
<S> <C> <C>
Mark Andrews.................. 5,404 (c)
W. Michael Blumenthal......... 3,555 (c)
M. Kathryn Eickhoff........... 3,697 (c)
Peter T. Flawn................ 3,850 (c)
Henry U. Harris, Jr........... 5,802 (c)
Belton K. Johnson............. 6,111 (c)
John B. McCoy................. 2,850 (c)
Dana G. Mead.................. 199,310 (c)
Sir David Plastow............. 2,100 (c)
William L. Weiss.............. 4,850 (c)
Clifton R. Wharton, Jr........ 2,350 (c)
<CAPTION>
EXECUTIVE OFFICERS
------------------
<S> <C> <C>
Theodore R. Tetzlaff.......... 33,637 (c)
S. D. Chesebro'............... 115,042 (c)
Stacy S. Dick................. 19,292 (c)
Paul T. Stecko................ 28,137 (c)
All executive officers and
directors as a group......... 889,226(d) (c)
</TABLE>
- --------
(a) Each director and executive officer has sole voting and investment power
over the shares beneficially owned (or has the right to acquire shares as
set forth in note (b) below) as set forth in this column, except for (i)
shares that are held in trust for each director and executive officer under
Tenneco's restricted stock plans and (ii) shares that executive officers of
Tenneco have the right to acquire pursuant to Tenneco's stock option plans.
All restricted stock held by employees (including executive officers) was
vested effective November 1, 1996 (except that a small number of TBS
employees will be given cash in lieu of vesting of their restricted stock).
Restricted stock held by directors was also vested effective November 1,
1996, and the directors will be paid an amount in cash to defray taxes
incurred on such vesting.
(b) Includes shares that are: (i) held in trust under Tenneco's restricted
stock plans; at July 31, 1996, Messrs. Mead, Tetzlaff, Chesebro', Dick, and
Stecko held 24,500; 15,000; 10,500; 7,000; and 5,000 restricted
219
<PAGE>
shares, respectively; and (ii) subject to options, which were granted under
Tenneco's stock option plans, and are exercisable at September 30, 1996 or
within 60 days of said date, for Messrs. Mead, Tetzlaff, Blakely, Dick, and
Stecko to purchase 133,335; 16,667; 68,000; 12,667; and 18,667 shares,
respectively.
(c) Less than one percent.
(d) Includes 278,015 shares of Tenneco Common Stock that are subject to options
that are exercisable at September 30, 1996, or within 60 days of such date,
by all executive officers of Tenneco as a group, and includes 252,150
shares that are held in trust under the Tenneco restricted stock plans, for
all executive officers and directors of Tenneco as a group.
ACCOUNTING TREATMENT
Consummation of the Transaction is subject to certain conditions, including
receipt of a favorable ruling from the IRS to the effect that the Distributions
and certain internal spin-off transactions included in the Corporate
Restructuring Transactions will be tax-free for federal income tax purposes and
approval by the Tenneco Stockholders. Upon receipt of a favorable ruling from
the IRS, approval of the Transaction by Tenneco Stockholders and approval of
the Distributions and Charter Amendment by the initial record holders of the
Tenneco Junior Preferred Stock, Tenneco will restate its consolidated financial
statements to reflect discontinued operations. The Distributions will be
accounted for based on Tenneco's historical basis in the assets and liabilities
of the Industrial Business and Shipbuilding Business.
El Paso intends to account for the Merger using the purchase method of
accounting under GAAP and the rules and regulations of the SEC. Under the
purchase method of accounting, El Paso will be treated as the acquiror of
Tenneco and, as a result, the assets and liabilities of the Energy Business
will be recorded by El Paso at their estimated fair values. The historical
financial statements of the Energy Business included herein have not been
adjusted for any purchase price adjustments.
LEGAL MATTERS
The validity of the shares of El Paso Common Stock and El Paso Preferred
Depositary Shares offered hereby, as well as the El Paso Preferred Stock, will
be passed upon for El Paso by Fried, Frank, Harris, Shriver & Jacobson, a
partnership including professional corporations, New York, New York. Certain
federal income tax consequences in connection with the Merger and Distributions
will be passed upon for Tenneco by Jenner & Block, Chicago, Illinois.
EXPERTS
The financial statements and schedules appearing in El Paso's Annual Report
on Form 10-K for the year ended December 31, 1995, have been audited by Coopers
& Lybrand L.L.P., independent accountants, as set forth in their report thereon
included therein and incorporated by reference herein. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The following financial statements and schedules included or incorporated by
reference in this Joint Proxy Statement-Prospectus and elsewhere in this
Registration Statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said reports: (i) Tenneco
Inc. and consolidated subsidiaries included in Tenneco's Annual Report on Form
10-K, as amended, for the year ended December 31, 1995, incorporated by
reference herein; (ii) the Businesses of Tenneco Energy, included herein; (iii)
the Businesses of New Tenneco, included in the New Tenneco Information
Statement attached hereto as Appendix C; and (iv) the Businesses of Newport
News, included in the Newport News Information Statement attached hereto as
Appendix D.
220
<PAGE>
The combined financial statements of Mobil Plastics Division of Mobil
Corporation for the year ended December 28, 1994 appearing in the Current
Report of Tenneco Inc. on Form 8-K dated November 17, 1995, which is
incorporated by reference herein, and the combined financial statements of
Mobil Plastics Division of Mobil Oil Corporation for the period December 29,
1994 to November 17, 1995 and the year ended December 28, 1994 appearing in the
New Tenneco Information Statement attached hereto as Appendix C, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon included therein and herein. Such financial statements have
been incorporated herein by reference and included herein in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
Representatives of Arthur Andersen LLP and Coopers & Lybrand L.L.P. are
expected to be present at the Tenneco Special Meeting and El Paso Special
Meeting, respectively, will have an opportunity to make a statement if they
desire to do so, and will be available to respond to appropriate questions from
stockholders.
STOCKHOLDER PROPOSALS
Stockholders wishing to present proposals at the 1997 Annual Meeting of
Stockholders of Tenneco should submit such proposals in writing to Tenneco at
its principal executive offices no later than December 9, 1996, so that they
may be considered by Tenneco for inclusion in its proxy statement and form of
proxy relating to that meeting. Tenneco will consider for inclusion in the
proxy statement only proposals meeting the requirements of applicable SEC
rules.
Stockholder proposals submitted for inclusion in El Paso's proxy statement to
be issued in connection with El Paso's 1997 Annual Meeting of Stockholders must
be delivered to the Corporate Secretary, El Paso Natural Gas Company, 100 North
Stanton Street, El Paso, Texas 79901, and must be received by the Corporate
Secretary on or before November 22, 1996. El Paso will consider for inclusion
in the proxy statement only proposals meeting the requirements of applicable
SEC rules.
221
<PAGE>
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
"1995 Rate Case"................ 49
"$4.50 Preferred Stock"......... 2
"$7.40 Preferred Stock"......... 2
"Acquisition Transaction"....... 125
"Actual Energy Debt Amount"..... 12
"ALJ"........................... 48
"Ancillary Agreements".......... 22
"Average El Paso Common Price".. 2
"Average Period"................ 121
"Base Debt Amount".............. 12
"BBtu".......................... 153
"Benefits Agreement"............ 85
"Cash Realignment".............. 12
"Charter Amendment"............. 2
"Closing"....................... 121
"Code".......................... 23
"Collar"........................ 2
"Consulting Agreement".......... 24
"Corporate Restructuring
Transactions".................. 13
"Debt and Cash Allocation
Agreement"..................... 86
"Debt Cash Adjustment" ......... 12
"Debt Exchange Offer"........... 117
"Debt Realignment".............. 12
"Debt Tender Offers"............ 117
"Depositary Agreement".......... 24
"DGCL".......................... 24
"Distribution Agreement"........ 1
"Distribution Agent"............ 83
"Distribution Date"............. 13
"Distribution Record Date"...... 13
"Distributions"................. 1
"DLJ"........................... 74
"El Paso"....................... 1
"El Paso Common Stock".......... 2
"El Paso Preferred Depositary
Shares"........................ 3
"El Paso Preferred Stock"....... 3
"El Paso Record Date"........... 2
"El Paso Special Meeting........ 1
"El Paso Subsidiary"............ 1
"Eligible Stock"................ 133
"Energy Assets"................. 120
"Energy Business"............... 10
"Energy Group".................. 84
"Energy Liabilities"............ 120
"Energy Subsidiaries"........... 118
"Equity Consideration".......... 2
"Exchange Act".................. 4
"Exchange Agent"................ 123
"FERC".......................... 10
"GSR"........................... 11
"GSR Proceeding"................ 48
"HSR Act"....................... 23
"Higher Proposal"............... 126
"Industrial Assets"............. 120
"Industrial Business"........... 11
"Industrial Distribution"....... 13
"Industrial Group".............. 84
"Industrial Liabilities"........ 120
"Insurance Agreement"........... 86
"IRS"........................... 22
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
"IRS Ruling Letter"................................................... 22
"Lazard".............................................................. 69
"Maximum El Paso Price"............................................... 14
"Merger".............................................................. 1
"Merger Agreement".................................................... 1
"Merger Effective Time"............................................... 2
"Minimum El Paso Price"............................................... 14
"Monroe".............................................................. 94
"MMCF"................................................................ 153
"Natural Gas Act"..................................................... 153
"New Tenneco"......................................................... 1
"New Tenneco Common Stock"............................................ 13
"New Tenneco Information Statement"................................... 4
"New Tenneco Registration Statement".................................. 4
"New Tenneco Rights Plan"............................................. 201
"Newport News"........................................................ 1
"Newport News Common Stock"........................................... 13
"Newport News Financings"............................................. 117
"Newport News Information Statement".................................. 4
"Newport News Registration Statement"................................. 4
"NPS Issuance"........................................................ 12
"NPS Issuance Proceeds"............................................... 12
"NYSE"................................................................ 2
"Order 636"........................................................... 49
"Pre-Meeting El Paso Common Price".................................... 2
"Refinancing Transactions"............................................ 11
"Registration Statement".............................................. 4
"S/I Transaction"..................................................... 125
"SEC"................................................................. 4
"Securities Act"...................................................... 4
"Shipbuilding Assets"................................................. 120
"Shipbuilding Business"............................................... 12
"Shipbuilding Distribution"........................................... 13
"Shipbuilding Group".................................................. 84
"Shipbuilding Liabilities"............................................ 120
"Stock Issuance"...................................................... 2
"Tax Opinion"......................................................... 23
"Tax Sharing Agreement"............................................... 87
"TBS"................................................................. 87
"TBS Services Agreement".............................................. 88
"TCC"................................................................. 117
"Tenneco"............................................................. 1
"Tenneco Automotive".................................................. 11
"Tenneco Charter"..................................................... 12
"Tenneco Common Stock"................................................ 1
"Tenneco Energy"...................................................... 10
"Tenneco Energy Consolidated Debt".................................... 12
"Tenneco Packaging"................................................... 11
"Tenneco Junior Preferred Stock"...................................... 12
"Tenneco Preferred Stock"............................................. 2
"Tenneco Record Date"................................................. 1
"Tenneco Special Meeting"............................................. 1
"Tenneco Stock"....................................................... 2
"Tenneco Stockholders"................................................ 13
"Termination Date".................................................... 23
"Termination Fee"..................................................... 24
"TGP"................................................................. 10
"Transaction"......................................................... 1
"Transition Services Agreement"....................................... 87
"Walker".............................................................. 93
</TABLE>
222
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE BUSINESSES OF TENNECO ENERGY
Report of Independent Public Accountants................................ F-3
Combined Statements of Income for each of the three years in period
ended December 31, 1995 and the six months ended June 30, 1996 and
1995................................................................... F-4
Combined Balance Sheets--December 31, 1995 and 1994 and June 30, 1996... F-5
Combined Statements of Cash Flows for each of the three years in the
period ended December 31, 1995 and the six months ended June 30, 1996
and 1995............................................................... F-6
Statements of Changes in Combined Equity for each of the three years in
the period ended December 31, 1995 and the six months ended June 30,
1996................................................................... F-7
Notes to Combined Financial Statements.................................. F-8
FINANCIAL STATEMENT SCHEDULE
Valuation and Qualifying Accounts--The Businesses of Tenneco Energy..... S-1
</TABLE>
F-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tenneco Inc.:
We have audited the accompanying combined balance sheets of the businesses
of Tenneco Energy (see Note 1) as of December 31, 1995 and 1994, and the
related combined statements of income, cash flows and changes in combined
equity for each of the three years in the period ended December 31, 1995.
These combined financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
businesses of Tenneco Energy as of December 31, 1995 and 1994, and the results
of its combined operations and cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The supplemental schedule
listed in the index to the combined financial statements and schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic combined financial statements.
The supplemental schedule has been subjected to the auditing procedures
applied in the audits of the basic combined financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic combined financial statements of
the businesses of Tenneco Energy taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
August 19, 1996
F-3
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
--------------------- ----------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues..... $1,921 $2,381 $2,866 $1,370 $ 939
Other income--
Interest income.................... 85 65 25 31 44
Equity in net income of affiliated
companies......................... 65 51 47 18 37
Gain (loss) on sale of assets, net. 11 1 62 42 (7)
Gain on the sale by a subsidiary of
its stock......................... -- 23 -- -- --
Other income, net.................. 29 17 37 6 19
------ ------ ------ ------ ------
2,111 2,538 3,037 1,467 1,032
------ ------ ------ ------ ------
COSTS AND EXPENSES
Cost of gas sold..................... 954 1,472 1,786 795 493
Operating expenses................... 414 379 442 230 170
General and administrative........... 200 143 169 113 96
Finance charges...................... 79 75 51 34 43
Depreciation, depletion and
amortization........................ 196 102 170 107 90
------ ------ ------ ------ ------
1,843 2,171 2,618 1,279 892
------ ------ ------ ------ ------
Income before interest expense and
income taxes........................ 268 367 419 188 140
Interest expense, net of interest
allocated to affiliates............. 122 142 127 63 61
------ ------ ------ ------ ------
Income before income taxes........... 146 225 292 125 79
Income tax expense (benefit)......... (11) 72 104 22 32
------ ------ ------ ------ ------
Income before extraordinary loss..... 157 153 188 103 47
Extraordinary loss, net of income
tax................................. -- -- (25) -- --
------ ------ ------ ------ ------
Net income .......................... $ 157 $ 153 $ 163 $ 103 $ 47
====== ====== ====== ====== ======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined statements of income.
F-4
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
(MILLIONS) 1995 1994 1996
- ---------- ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments................ $ 249 $ 48 $ 100
Receivables--
Customer notes and accounts (net)................. 508 961 503
Affiliated companies.............................. 199 215 170
Gas transportation and exchange................... 64 214 151
Income taxes...................................... 133 234 105
Other............................................. 436 130 261
Inventories........................................ 24 22 24
Deferred income taxes.............................. -- -- 21
Prepayments and other.............................. 83 92 93
------ ------ ------
1,696 1,916 1,428
------ ------ ------
Investments and other assets:
Investment in affiliated companies................. 280 358 230
Long-term notes and other receivables (net) ....... 352 683 235
Goodwill........................................... 22 25 37
Other.............................................. 601 307 685
------ ------ ------
1,255 1,373 1,187
------ ------ ------
Plant, property and equipment, at cost............... 6,272 5,768 6,436
Less--Reserves for depreciation, depletion and
amortization...................................... 3,431 3,327 3,512
------ ------ ------
2,841 2,441 2,924
------ ------ ------
$5,792 $5,730 $5,539
====== ====== ======
LIABILITIES AND COMBINED EQUITY
Current liabilities:
Short-term debt (including current maturities on
long-term debt)................................... $ 456 $ 399 $ 521
Payables--
Trade............................................. 365 324 312
Affiliated companies.............................. 88 47 113
Gas transportation and exchange................... 28 159 107
Taxes accrued...................................... 525 56 25
Deferred income taxes.............................. 65 29 --
Interest accrued................................... 102 124 97
Natural gas pipeline revenue reservation........... 27 190 59
Other.............................................. 428 238 537
------ ------ ------
2,084 1,566 1,771
------ ------ ------
Long-term debt....................................... 1,811 2,242 1,519
------ ------ ------
Deferred income taxes................................ 323 735 413
------ ------ ------
Postretirement benefits.............................. 260 288 246
------ ------ ------
Deferred credits and other liabilities............... 478 351 406
------ ------ ------
Commitments and contingencies
Minority interest.................................... 19 19 18
------ ------ ------
Preferred stock with mandatory redemption provisions. 130 147 112
------ ------ ------
Combined equity...................................... 687 382 1,054
------ ------ ------
$5,792 $5,730 $5,539
====== ====== ======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined balance sheets.
F-5
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- ------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ----- ----- ------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 157 $ 153 $ 163 $ 103 $ 47
Adjustments to reconcile net income to net
cash provided (used) by operating
activities --
Extraordinary loss, net of tax.......... -- -- 25 -- --
Depreciation, depletion and
amortization........................... 196 102 170 107 90
Equity in net income of affiliated
companies, net of dividends............ (12) (3) (5) (1) (12)
Deferred income taxes................... 88 51 93 5 (7)
(Gain) loss on sale of assets, net...... (11) (24) (62) (42) 7
Cash paid for interest allocated to
affiliates, net of tax................. (117) (78) (81) (75) (56)
Changes in components of working
capital--
(Increase) decrease in receivables..... 451 17 78 19 163
(Increase) decrease in prepayments and
other current assets.................. 8 35 51 4 8
Increase (decrease) in payables........ (25) (262) (241) (2) (70)
Increase (decrease) in taxes accrued... 40 (252) 90 (235) 9
Increase (decrease) in interest
accrued............................... (52) (39) (32) (15) (27)
Increase (decrease) in natural gas
pipeline revenue reservation.......... (156) (91) 136 11 (179)
Increase (decrease) in other current
liabilities........................... (102) (60) (122) (161) (7)
(Increase) decrease in long-term notes
and other receivables (net)............ 332 228 -- 138 199
Take-or-pay (refunds to customers)
recoupments, net....................... 36 26 (34) 2 25
Other................................... (68) (81) (20) (43) (16)
----- ----- ------- ----- -----
Net cash provided (used) by operating
activities............................... 765 (278) 209 (185) 174
----- ----- ------- ----- -----
INVESTING ACTIVITIES
Net proceeds from sale of assets.......... 17 68 114 278 13
Expenditures for plant, property and
equipment................................ (337) (345) (171) (164) (113)
Acquisitions of businesses................ (241) -- -- -- (225)
Investments and other..................... 24 48 22 3 59
----- ----- ------- ----- -----
Net cash provided (used) by investing
activities............................... (537) (229) (35) 117 (266)
----- ----- ------- ----- -----
FINANCING ACTIVITIES
Issuance of Tenneco Inc. common, treasury
and SECT shares.......................... 102 188 1,215 46 39
Purchase of Tenneco Inc. common stock..... (655) (26) (7) (122) (450)
Redemption of Tenneco Inc. preferred
stock.................................... (20) (20) (30) (20) (20)
Dividends (Tenneco Inc. common and
preferred stock)......................... (286) (318) (307) (158) (146)
Redemption of equity securities by a
subsidiary............................... -- (160) -- -- --
Net increase (decrease) in short-term debt
excluding current maturities on long-term
debt..................................... 415 (97) 19 164 34
Issuance of long-term debt................ 594 -- -- -- --
Retirement of long-term debt.............. (497) (508) (1,335) (292) (180)
Net cash contributions from affiliates.... 320 1,367 396 301 786
----- ----- ------- ----- -----
Net cash provided (used) by financing
activities............................... (27) 426 (49) (81) 63
----- ----- ------- ----- -----
Increase (decrease) in cash and temporary
cash investments......................... 201 (81) 125 (149) (29)
Cash and temporary cash investments, at
beginning of period...................... 48 129 4 249 48
----- ----- ------- ----- -----
Cash and temporary cash investments, at
end of period............................ $ 249 $ 48 $ 129 $ 100 $ 19
===== ===== ======= ===== =====
Cash paid during the year for interest.... $ 420 $ 349 $ 498 $ 220 $ 210
Cash paid during the year for income taxes
(net of refunds and tax payments from
affiliates).............................. $(123) $(129) $ 14 $ 516 $ 56
</TABLE>
Note: Cash and temporary cash investments include highly liquid investments
with a maturity of three months or less at the date of purchase.
The accompanying notes to combined financial statements are an integral part of
these combined statements of cash flows.
F-6
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
STATEMENTS OF CHANGES IN COMBINED EQUITY
<TABLE>
<CAPTION>
(MILLIONS)
- ----------
<S> <C>
Balance, December 31, 1992............................................ $(1,503)
Net income.......................................................... 163
Cash paid for interest allocated to affiliates, net of tax.......... (81)
Change in corporate debt allocated to affiliates.................... (905)
Cash contributions from (distributions to) affiliates, net.......... 396
Noncash contributions from (distributions to) affiliates, net....... 360
Contributions from (distributions to) shareowners, net.............. 918
-------
Balance, December 31, 1993............................................ (652)
Net income.......................................................... 153
Cash paid for interest allocated to affiliates, net of tax.......... (78)
Change in corporate debt allocated to affiliates.................... (135)
Cash contributions from (distributions to) affiliates, net.......... 1,367
Noncash contributions from (distributions to) affiliates, net....... (98)
Contributions from (distributions to) shareowners, net.............. (175)
-------
Balance, December 31, 1994............................................ 382
Net income.......................................................... 157
Cash paid for interest allocated to affiliates, net of tax.......... (117)
Change in corporate debt allocated to affiliates.................... 930
Cash contributions from (distributions to) affiliates, net.......... 320
Noncash contributions from (distributions to) affiliates, net....... (235)
Contributions from (distributions to) shareowners, net.............. (750)
-------
Balance, December 31, 1995............................................ 687
Net income.......................................................... 103
Cash paid for interest allocated to affiliates, net of tax.......... (75)
Change in corporate debt allocated to affiliates.................... 111
Cash contributions from (distributions to) affiliates, net.......... 301
Noncash contributions from (distributions to) affiliates, net....... 140
Contributions from (distributions to) shareowners, net.............. (213)
-------
Balance, June 30, 1996 (unaudited).................................... $ 1,054
=======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements of changes in combined equity.
F-7
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of Presentation
The accompanying combined financial statements represent the financial
position, results of operations and cash flows of all energy businesses and
operations owned directly or indirectly by Tenneco Inc. ("Tenneco") and its
subsidiaries, and other existing and discontinued operations of Tenneco and
its subsidiaries other than those relating to Tenneco's automotive, packaging,
administrative services and shipbuilding businesses. The combination of these
energy businesses and operations and such other existing and discontinued
operations of Tenneco, together with Tenneco (which will remain the parent
company of such businesses and operations after the Distributions and Merger
described in Note 2 below) are collectively referred to herein as "Tenneco
Energy" or the "Company".
Investments in 20% to 50% owned companies where Tenneco Energy has the
ability to exert significant influence over operating and financial policies
are carried at cost plus equity in undistributed earnings since date of
acquisition. Reference is made to Note 11, "Investment in Affiliated
Companies," for information concerning significant equity method investees.
All significant transactions and balances among combined businesses have been
eliminated.
Description of Business
Tenneco Energy is engaged primarily in the interstate transportation of
natural gas. The Company is also engaged in related businesses that are not
generally subject to regulation by the Federal Energy Regulatory Commission
("FERC"). The principal activities of these businesses include the intrastate
transportation and marketing of natural gas, the development of and
participation in international natural gas pipelines, primarily in Australia,
the participation in international and domestic gas-fired power generation
projects and the development of natural gas production and production
financing programs, primarily in the United States. Tenneco Energy, through
its combined subsidiary Tenneco Credit Corporation ("TCC"), is also engaged in
financing, on a nonrecourse basis, receivables of certain current and former
operating divisions of Tenneco.
2. MERGER AND DISTRIBUTIONS
On June 19, 1996, Tenneco and El Paso Natural Gas Company ("El Paso")
entered into a merger agreement pursuant to which a subsidiary of El Paso will
be merged with and into Tenneco (the "Merger") which, immediately following
the distributions discussed below, will consist only of the energy businesses
and operations and the other existing and discontinued operations of Tenneco.
The Merger is part of a larger Tenneco reorganization (the "Transaction"),
which includes the distribution of all of the outstanding shares of common
stock of New Tenneco Inc., a newly formed subsidiary of Tenneco which, after
giving effect to certain corporate restructuring transactions, will hold
substantially all of the assets, liabilities and operations of Tenneco's
current automotive, packaging and administrative services businesses ("New
Tenneco"), and Newport News Shipbuilding Inc., a subsidiary of Tenneco that
was formerly named Tenneco InterAmerica Inc. and that will hold substantially
all of the assets, liabilities and operations of Tenneco's current
shipbuilding business ("Newport News"), to the holders of Tenneco common stock
(collectively, the "Distributions"). Upon completion of the Transaction,
holders of Tenneco common stock will receive equity securities in New Tenneco,
Newport News and El Paso.
Prior to the Transaction Tenneco intends to initiate a realignment of its
existing indebtedness. As part of the debt realignment, certain New Tenneco
Public Debt will be offered in exchange for certain issues of Tenneco debt.
Tenneco will initiate tender offers for other Tenneco debt, and certain debt
issues may be defeased. These tender offers and defeasances will be financed
by a combination of new lines of credit of the Company, New
F-8
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Tenneco (which may declare and pay a dividend to Tenneco) and Newport News
(which will declare and pay a dividend of approximately $600 million to
Tenneco). Upon completion of the debt realignment, Tenneco will have
responsibility for $2.65 billion of debt and preferred stock, subject to
certain adjustments, Newport News will have responsibility for the borrowings
under its credit lines and New Tenneco will have responsibility for the
remaining debt.
The Transaction is subject to certain conditions, including receipt of a
favorable ruling from the Internal Revenue Service to the effect that the
Distributions and certain internal spin-off transactions will be tax-free for
federal income tax purposes and approval by Tenneco's shareowners.
In order to assist in the orderly transition of New Tenneco and Newport News
into separate, publicly held companies, Tenneco intends to modify, amend or
enter into certain contractual agreements with New Tenneco and Newport News,
including a tax sharing agreement (see "Income taxes" in Note 3), an employee
benefits agreement, an insurance agreement, an administrative services
agreement and other ancillary agreements. These agreements will provide, among
other things, that: (i) New Tenneco will become the sole sponsor of the
Tenneco Inc. Retirement Plan, the Tenneco Inc. Thrift Plan, and various
Tenneco Inc. welfare plans; (ii) New Tenneco and Newport News will retain
specific insurance policies relating to their businesses and will continue to
have rights and obligations under certain parent-company level insurance
policies of Tenneco; and (iii) at the election of Tenneco pursuant to El
Paso's request, New Tenneco will provide certain services, such as mainframe
data processing and product purchasing services, to the Company for a limited
period of time following the Distributions.
3. SUMMARY OF ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of the Company's assets,
liabilities, revenues and expenses. Reference is made to the "Revenue
Recognition" and "Income Taxes" sections of this footnote and Notes 9, 13, 14
and 15 for additional information on significant estimates included in the
Company's combined financial statements.
Unaudited Interim Information
The unaudited interim combined financial statements as of June 30, 1996 and
for each of the six month periods ended June 30, 1996 and 1995, included
herein, have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim combined financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The interim financial results may not be indicative
of operating results for an entire year.
Notes Receivable and Allowance for Doubtful Accounts and Notes
Short-term notes receivable of $302 million and $305 million were
outstanding at December 31, 1995 and 1994, respectively, of which $216 million
and $284 million, respectively, related to TCC. These notes receivable are
presented net of unearned finance charges of $26 million and $43 million at
December 31, 1995 and 1994, respectively, which related to TCC. At December
31, 1995 and 1994, unearned finance charges related to long-term notes and
other receivables were $23 million and $66 million, respectively, which relate
to TCC.
F-9
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, the allowance for doubtful accounts and
notes receivable was $49 million and $21 million, respectively.
Inventory
Inventories, consisting of materials and supplies are valued at the lower of
average cost or market.
Property, Plant and Equipment, at Cost
The majority of the Company's property, plant and equipment consists of its
investment in interstate and intrastate pipeline systems. At December 31, 1995
and 1994, $223 million and $160 million, respectively, of the Company's
property, plant and equipment balance is construction work in progress.
Additionally, the Company has recorded capitalized interest and an allowance
for equity funds used during construction in the cost of property, plant and
equipment. Pursuant to a FERC order, Tennessee Gas Pipeline Company, a
combined subsidiary of the Company ("Tennessee") recorded all natural gas in
storage as a fixed asset. As of December 31, 1995 and 1994, the balance of
Tennessee's natural gas in storage included in property, plant and equipment
was $96 million.
Depreciation, Depletion and amortization
Depreciation of the Company's regulated transmission plants are provided
using the composite method over the estimated useful lives of the depreciable
facilities. The rates for depreciation range from 2% to 5%. Costs of
properties that are not operating units, as defined by the FERC, which are
retired, sold or abandoned by the regulated subsidiaries are credited or
charged, net of salvage, to accumulated depreciation. Gains or losses on sales
of operating units are credited or charged to income.
Depreciation of the Company's nonregulated properties is provided using the
straight line or composite method which, in the opinion of management, is
adequate to allocate the cost of properties over their estimated useful lives.
Goodwill
Goodwill is being amortized over a 15-year period using the straight-line
method. Such amortization amounted to $1.8 million for 1995, 1994 and 1993 and
is included in "Other income, net" in the accompanying combined statements of
income. Accumulated amortization of goodwill was $5.4 million and $3.6 million
at December 31, 1995 and 1994, respectively.
Environmental Liabilities
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations,
and which do not contribute to current or future revenue generation, are
expensed. Liabilities are recorded when environmental assessments indicate
that remedial efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. All available evidence is considered including prior experience in
remediation of contaminated sites, other companies clean-up experience and
data released by the United States Environmental Protection Agency or other
organizations. These estimated liabilities are subject to revision in future
periods based on actual costs or new circumstances. These liabilities are
included in the combined balance sheets at their undiscounted amounts.
Recoveries are evaluated separately from the liability and, when recovery is
assured, are
F-10
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
recorded and reported separately from the associated liability in the combined
financial statements. Reference is made to Note 15, "Commitments and
Contingencies--Environmental Matters" for further information on this subject.
Revenue Recognition
The regulated subsidiaries of the Company are subject to FERC regulations
and, accordingly, revenues are collected subject to possible refunds pending
final FERC orders. The regulated subsidiaries record rate refund accruals
based on management's estimate of the expected income impact of the rate
proceedings. The Company has recorded revenue reservations of $27 million and
$190 million as of December 31, 1995 and 1994, respectively. The Company
believes the estimate for revenues subject to refund is adequate.
Other Income
Gains or losses on the sale by a subsidiary of its stock are included in
"Other Income, net" in the accompanying combined statements of income.
Income Taxes
The Company utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the combined financial statements.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period. The estimates
utilized in the recognition of deferred tax assets are subject to revision in
future periods based on new facts or circumstances.
Tenneco, together with certain of its subsidiaries which are owned 80% or
more (including Tenneco Energy), have entered into an agreement to file a
consolidated U.S. federal income tax return. Such agreement provides, among
other things, that (i) each company in a taxable income position will be
currently charged with an amount equivalent to its federal income tax computed
on a separate return basis, and (ii) each company in a tax loss position will
be reimbursed currently to the extent its deductions, including general
business credits, are utilized in the consolidated return. The income tax
amounts reflected in the combined financial statements of Tenneco Energy under
the provisions of the tax sharing arrangement are not materially different
from the income taxes which would have been provided had Tenneco Energy filed
a separate tax return. Under the tax sharing agreement, Tenneco pays all
federal taxes directly and bills or refunds, as applicable, its subsidiaries,
including those comprising Tenneco Energy, for the applicable portion of the
total tax payments.
In connection with the Distributions, the current tax sharing agreement will
be cancelled and the Company will enter into a tax sharing agreement among
Newport News, New Tenneco and El Paso. The tax sharing agreement will provide,
among other things, for the allocation of taxes among the parties of tax
liabilities arising prior to, as a result of, and subsequent to the
Distributions. Generally, Tenneco will be liable for taxes imposed on Tenneco
Energy. In the case of federal income taxes imposed with respect to periods
prior to the consummation of the Distributions on the combined activities of
Tenneco and other members of its consolidated group prior to giving effect to
the Distributions, New Tenneco and Newport News will be liable to Tenneco for
federal income taxes attributable to their activities, and each will be
allocated an agreed-upon share of estimated tax payments made by the Tenneco
consolidated group.
Changes in Accounting Principles
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments
F-11
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
of Liabilities," which establishes new accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. The statement is effective for transactions occurring after
December 31, 1996. The impact of the new standard has not been determined.
Effective January 1, 1996, the Company adopted FAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". FAS No. 121 establishes new accounting standards for measuring the
impairment of long-lived assets. The adoption of this new standard had no
material impact on the Company's combined financial position or results of
operations.
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees, after employment but before retirement, on the accrual basis rather
than the "pay-as-you-go" basis. The adoption of this new standard had no
material impact on the Company's combined financial position or results of
operations.
Risk Management Activities
The Company is currently a party to financial instruments and commodity
contracts to hedge its exposure to changes in interest rates and natural gas
prices. These financial instruments and commodity contracts are accounted for
on the accrual basis with gains and losses being recognized based on the type
of contract and exposure being hedged. The amounts paid or received under
interest rate swap agreements are recognized, on the accrual basis, as an
adjustment to interest expense. Net gains and losses on energy commodity
contracts and financial instruments are deferred and recognized when the
hedged transaction is consummated. In the combined statements of cash flows,
cash receipts or payments related to these financial instruments and commodity
contracts are classified consistent with the cash flows from the transactions
being hedged.
4. ACQUISITIONS
During 1995, the Company acquired the natural gas pipeline assets of the
Pipeline Authority of South Australia, which includes a 488-mile pipeline, for
approximately $225 million. Also during 1995, the Company acquired a 50%
interest in two gas-fired cogeneration plants from ARK Energy, a privately-
owned power generation company, for approximately $65 million in cash and
Tenneco common stock. Each of the acquisitions was accounted for as a
purchase. If these assets and investments had been acquired January 1, 1995,
net income would not have been significantly different from the reported
amount.
5. DISPOSITION OF ASSETS AND EXTRAORDINARY LOSS
Disposition of Assets
During the first six months of 1996, the Company sold its 13.2% interest in
Iroquois Gas Transmission System, L.P., its 50% interest in Dauphin Island
Gathering System, an investment in stock and certain other assets, resulting
in a pre-tax gain of $42 million.
In December 1995, the Company sold its 50% interest in Kern River Gas
Transmission Company ("Kern River") for a pre-tax gain of $30 million. Kern
River owns a 904-mile pipeline extending from Wyoming to California. Also in
1995, the Company sold certain other facilities and assets for a combined pre-
tax loss of $19 million.
In 1994, Tenneco Energy Resources Corporation, a combined subsidiary which
operates the Company's nonregulated gas marketing and intrastate pipeline
businesses, issued 50 shares of its common stock, diluting Tenneco's ownership
in this subsidiary to 80% and resulting in a gain of $23 million. No taxes
were provided on the gain because management expects that the recorded
investment will be recovered in a tax-free manner.
F-12
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
During 1993, the Company disposed of two wholly-owned companies, Viking Gas
Transmission Company and Dean Pipeline Company, and investments in stock and
certain other assets for a total pre-tax gain of $62 million.
Extraordinary Loss
In April 1993, Tenneco issued 23.5 million shares of its common stock for
approximately $1.1 billion. The proceeds were used to retire $327 million of
short-term debt, $688 million of long-term debt and $14 million of variable-
rate preferred stock. In November 1993, Tenneco retired DM250 million bonds.
The redemption premium related to the retirement of long-term debt resulting
from these two transactions ($25 million, net of income tax benefits of $13
million) was recorded as an extraordinary loss.
6. TRANSACTIONS WITH AFFILIATES
Combined Equity
The "Combined equity" caption in the accompanying combined financial
statements represents Tenneco's cumulative investment in the combined
businesses of Tenneco Energy. Changes in the "Combined equity" caption
represent the net income of the Company, cash paid for interest allocated to
affiliates, net of tax, changes in corporate debt allocated to affiliates, net
cash and noncash contributions from (distributions to) affiliates and net
contributions from (distributions to) shareowners. Reference is made to the
Statements of Changes in Combined Equity for an analysis of activity in the
"Combined equity" caption for each of the three years ended December 31, 1995
and for the six months ended June 30, 1996.
General and Administrative Expenses
Included in the total general and administrative expenses for 1995, 1994 and
1993, is $16 million, $13 million, and $17 million, respectively, which
represents Tenneco Energy's share of Tenneco's corporate general and
administrative costs for legal, financial, communication and other
administrative services. Tenneco's corporate general and administrative
expenses are allocated based on the estimated level of effort devoted to
Tenneco's various operations and relative size based on revenues, gross
property and payroll. The Company's management believes the method for
allocating corporate general and administrative expenses is reasonable. Total
general and administrative expenses reflected in the accompanying combined
statements of income are reasonable when compared with the total general and
administrative costs Tenneco Energy would have incurred on a stand-alone
basis.
Corporate Debt and Interest Allocations
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense have been allocated to New Tenneco and Newport News
based upon the portion of Tenneco's investment in New Tenneco and Newport News
which is deemed to be debt, generally based upon the ratio of New Tenneco's
and Newport News' net assets to Tenneco consolidated net assets plus debt.
Interest expense was allocated at a rate equivalent to the weighted-average
cost of all corporate debt, which was 7.7%, 8.3% and 7.4% for 1995, 1994 and
1993, respectively. Total pre-tax interest expense allocated to New Tenneco
and Newport News in 1995, 1994 and 1993 was $180 million, $120 million and
$124 million, respectively. New Tenneco and Newport News have also been
allocated tax benefits totaling approximately 35% of the allocated pre-tax
interest expense. Although interest expense, and the related tax effects, have
been allocated to New Tenneco and Newport News
F-13
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
for financial reporting on a historical basis, New Tenneco and Newport News
have not been billed for these amounts. The changes in allocated corporate
debt and the after-tax allocated interest expense have been included as a
component of the Company's combined equity. Although, management believes that
the historical allocation of corporate debt and interest expense is
reasonable, it is not necessarily indicative of the Company's debt upon
completion of the Debt Realignment.
Notes and Advances Payable with Affiliates
"Cash contributions from (distributions to) affiliates" in the Statements of
Changes in Combined Equity consist of net cash changes in notes and advances
payable between the Company and New Tenneco and Newport News which have been
included in combined equity. Historically, Tenneco has utilized notes and
advances to centrally manage cash funding requirements for its consolidated
group.
At December 31, 1995 and 1994, the Company had an interest bearing note
payable to New Tenneco totaling $494 million and $310 million, respectively,
which is due on demand and is included as a component of the Company's
combined equity. At December 31, 1995 and 1994, the Company had a non-interest
bearing note payable to Newport News totalling $965 million and $991 million,
respectively, which is due on demand and is included as a component of the
Company's combined equity.
Accounts Receivable and Accounts Payable--Affiliated Companies
The "Payables--Affiliated companies" balance primarily includes billings for
general and administrative costs incurred by New Tenneco and charged to
Tenneco Energy. The "Receivables--Affiliated companies" balance primarily
relates to billings for U.S. income taxes incurred by Tenneco and charged to
New Tenneco and Newport News. Affiliated accounts receivable and accounts
payable between the Company and New Tenneco and Newport News will be settled,
capitalized or converted into ordinary trade accounts, as applicable, as part
of the Distributions.
Employee Benefits
Certain employees of the Company participate in Tenneco's employee stock
ownership and employee stock purchase plans. The Tenneco employee stock
ownership plan provides for the grant of Tenneco common stock options and
other stock awards at a price not greater than market value at the date of
grant. The Tenneco employee stock purchase plan allows employees to purchase
Tenneco common stock at a 15% discount subject to certain thresholds. Certain
employees of New Tenneco and Newport News also participate in Tenneco's
employee stock ownership and employee stock purchase plans. The cost of stock
issued to these employees is billed to New Tenneco and Newport News. In
connection with the Distributions, outstanding options on Tenneco common stock
held by the Company's employees will be vested so that they become fully
exercisable prior to the Merger. If not exercised prior to the Merger, such
options will be cancelled upon consummation of the Merger. Outstanding options
on Tenneco common stock held by New Tenneco and Newport News employees will be
converted into new options of New Tenneco and Newport News, as applicable, so
as to preserve the aggregate value of the options held prior to the
Distributions.
Employees of the Company also participate in certain Tenneco postretirement
and pension plans. Reference is made to Notes 13 and 14 for a further
discussion of the plans.
Sales of Receivables
TCC purchased $513 million and $384 million of trade receivables from New
Tenneco at December 31, 1995 and 1994, respectively. TCC sells these trade
receivables to a third party in the ordinary course of business.
F-14
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT, SHORT-TERM DEBT AND FINANCING ARRANGEMENTS
Long-Term Corporate Debt
A summary of long-term corporate debt obligations of the Company at December
31, 1995 and 1994, is set forth in the following table:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ------ ------
<S> <C> <C>
Tenneco Inc.--
Debentures due 1998 through 2025, average effective interest
rate 8.7% in 1995 and 9.7% in 1994 (net of $2 million in 1995
and 1994 of unamortized discount)............................. $ 698 $ 398
Notes due 1996 through 2005, average effective interest rate
8.8% in 1995 and 9.2% in 1994 (net of $5 million in 1995 and
$4 million in 1994 of unamortized discount)................... 1,962 1,681
Tennessee Gas Pipeline Company--
Debentures due 2011, effective interest rate 15.1% in 1995 and
1994 (net of $216 million in 1995 and $219 million in 1994 of
unamortized discount)......................................... 184 181
Notes due 1996 through 1997, average effective interest rate
9.7% in 1995 and 10.1% in 1994 (net of $5 million in 1995 and
$8 million in 1994 of unamortized discount)................... 573 808
Tenneco Credit Corporation--
Senior notes due 1996 through 2001, average effective interest
rate 9.7% in 1995 and 9.6% in 1994 (net of $1 million in 1995
and $2 million in 1994 of unamortized discount)............... 549 749
Medium-term notes due 1996 through 2002, average interest rate
9.0% in 1995 and 9.4% in 1994................................. 38 73
Subordinated notes due 1998 through 2001, average interest rate
9.9% in 1995 and 1994......................................... 92 92
Other subsidiaries--
Notes due 1996 through 2014, average effective interest rate
8.6% in 1995 and 8.0% in 1994 (net of $14 million in 1995 and
$15 million in 1994 of unamortized discount).................. 8 4
------ ------
4,104 3,986
Less--Current maturities......................................... 414 485
------ ------
Total long-term corporate debt............................... $3,690 $3,501
====== ======
</TABLE>
The aggregate maturities and sinking fund requirements applicable to the
issues outstanding at December 31, 1995, are $414 million, $513 million, $838
million, $250 million and $175 million for 1996, 1997, 1998, 1999 and 2000,
respectively.
Long-Term Corporate Debt Allocation
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- -------- --------
<S> <C> <C>
Total long-term corporate debt................................ $ 3,690 $ 3,501
Less: Long-term corporate debt allocated to New Tenneco and
Newport News................................................. (1,879) (1,259)
-------- --------
Total long-term corporate debt, net of allocation to New
Tenneco and Newport News................................... $ 1,811 $ 2,242
======== ========
</TABLE>
- --------
Note: Reference is made to Note 6 for information concerning debt allocated to
New Tenneco and Newport News.
F-15
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Short-Term Corporate Debt
The Company uses commercial paper, lines of credit and overnight borrowings
to finance its short-term capital requirements. Information regarding short-
term debt for the years ended December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
--------------------- ---------------------
TENNECO TENNECO
COMMERCIAL CREDIT COMMERCIAL CREDIT
(MILLIONS) PAPER AGREEMENTS PAPER AGREEMENTS
- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding borrowings at end of
year.............................. $346 $ 85 $ -- $ 17
Weighted average interest rate on
outstanding borrowings at end of
year.............................. 6.2% 7.2% -- 10.7%
Approximate maximum month-end
outstanding borrowings during
year.............................. $615 $467 $362 $133
Approximate average month-end
outstanding borrowings during
year.............................. $109 $104 $164 $ 51
</TABLE>
- --------
Note:Includes borrowings under both committed credit facilities and
uncommitted lines of credit and similar arrangements.
Tenneco had other short-term borrowings outstanding of $24 million at
December 31, 1995, and none at December 31, 1994.
Short-Term Corporate Debt Allocation
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Current maturities on long-term corporate debt.................... $ 414 $ 485
Commercial paper.................................................. 346 --
Credit agreements................................................. 85 17
Other............................................................. 24 --
----- -----
Total short-term corporate debt (including current maturities on
long-term corporate debt)...................................... 869 502
Less: Short-term corporate debt allocated to New Tenneco and
Newport News................................................... (413) (103)
----- -----
Total short-term corporate debt, net of allocation to New
Tenneco and Newport News..................................... $ 456 $399
===== =====
</TABLE>
- --------
Note:Reference is made to Note 6 for information concerning corporate debt
allocated to New Tenneco and Newport News.
Financing Arrangements
As of December 31, 1995, Tenneco had arranged committed credit facilities of
approximately $2.5 billion:
<TABLE>
<CAPTION>
COMMITTED CREDIT FACILITIES(a)
------------------------------------------
(MILLIONS) TERM COMMITMENTS UTILIZED AVAILABLE
- ---------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Tenneco credit agreements............ 1996-1999 $2,400(b) $346(c) $2,054
Other credit agreements.............. various 79 35 44
------ ---- ------
$2,479 $381 $2,098
====== ==== ======
</TABLE>
- --------
Notes:(a) These facilities generally require the payment of commitment fees on
the unused portion of the total commitment and facility fees on the
total commitment.
(b) In 1996, $400 million of these agreements expire; the remainder are
committed through 1999. Of the total committed long-term credit
facilities, $400 million are available to both Tenneco and TCC.
(c) Tenneco's committed long-term credit facilities support its commercial
paper borrowings; consequently, the amount available under the committed
long-term credit facilities is reduced by outstanding commercial paper
borrowings.
F-16
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. FINANCIAL INSTRUMENTS
The carrying and estimated fair values of the Company's financial
instruments by class at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
(MILLIONS) CARRYING FAIR CARRYING FAIR
ASSETS (LIABILITIES) AMOUNT VALUE AMOUNT VALUE
- -------------------- -------- ------ -------- ------
<S> <C> <C> <C> <C>
Asset and Liability Instruments
Cash and temporary cash investments........ $ 249 $ 249 $ 48 $ 48
Receivables (customer and long-term)....... 860 860 1,644 1,644
Accounts payable (trade)................... (365) (365) (324) (324)
Short-term debt (excluding current
maturities) (Note)........................ (455) (455) (17) (17)
Long-term debt (including current
maturities) (Note)........................ (4,104) (4,692) (3,986) (4,206)
Instruments With Off-Balance-Sheet Risk
Derivative
Interest rate swaps:
In a net receivable position........... -- 10 -- --
In a net payable position.............. -- (22) -- (30)
Natural gas swaps, futures and options... -- 3 -- (5)
Non-derivative
Financial guarantees..................... -- (14) -- (14)
</TABLE>
- --------
Note: The carrying amounts and estimated fair values of short-term debt and
long-term debt are before allocation of corporate debt to New Tenneco
and Newport News. Reference is made to Note 6 for information concerning
corporate debt allocated to New Tenneco and Newport News.
Asset and Liability Instruments
The fair value of cash and temporary cash investments, receivables, accounts
payable, and short-term debt in the above table was considered to be the same
as or was determined not to be materially different from the carrying amount.
At December 31, 1995 and 1994, respectively, Tenneco Energy's aggregate
customer and long-term receivable balance was concentrated by industry as
follows: energy industry 22% and 21%; automotive parts industry 9% and 11%;
packaging industry 8% and 13%; and farm and construction equipment industry
52% and 47%; all other amounts were not significant. Receivables in the
automotive parts, packaging and farm and construction equipment industries
result from TCC's financing receivables of current and former operating
divisions of Tenneco. TCC sells these trade receivables to a third party in
the ordinary course of business.
Long-term debt--The fair value of fixed-rate long-term debt was based on the
market value of debt with similar maturities and interest rates; the carrying
amount of floating-rate debt was assumed to approximate its fair value.
Instruments With Off-Balance-Sheet Risk
Derivative
Interest Rate Swaps--The fair value of interest rate swaps was based on the
cost that would have been incurred to buy out those swaps in a loss position
and the consideration that would have been received to terminate those swaps
in a gain position. At December 31, 1995 and 1994, the Company was a party to
swaps with a notional value of $1.5 billion and $1.6 billion, respectively. At
December 31, 1995, $750 million were in a net receivable position and $795
million were in a net payable position. At December 31, 1994, the entire $1.6
billion was in a net payable position. Notional amounts associated with these
swaps do not represent future cash payment requirements. These contractual
amounts are only used as a base to measure amounts to be exchanged at
specified settlement dates.
F-17
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Consistent with its overall policy, the Company uses these instruments from
time to time only to hedge known, quantifiable risks arising from fluctuations
in interest rates. The counterparties to these interest rate swaps are major
international financial institutions. The risk associated with counterparty
default on interest rate swaps is measured as the cost of replacing, at the
prevailing market rates, those contracts in a gain position. In the event of
non-performance by the counterparties, the cost to replace outstanding
interest rate swaps at December 31, 1995 and 1994, would not have been
material.
Price Risk Management--The Company uses exchange-traded futures and option
contracts and over-the-counter option and swap contracts to reduce its
exposure to fluctuations in the prices of natural gas. The fair value of these
contracts is based upon the estimated consideration that would be received to
terminate those contracts in a gain position and the estimated cost that would
be incurred to terminate those contracts in a loss position. As of December
31, 1995 and 1994, these contracts, maturing through 1997 and 1996,
respectively, had an absolute notional contract quantity of 321 Bcf and 187
Bcf, respectively. Since the contracts described above are designated as
hedges whose fair values correlate to price movements of natural gas, any
gains or losses on the contracts resulting from market changes will be offset
by losses or gains on the hedged transactions. The Company has off-balance
sheet risk of credit loss in the event of non-performance by counterparties to
all over-the-counter contracts. However, the Company does not anticipate non-
performance by the counterparties.
Non-derivative
Guarantees--At December 31, 1995 and 1994, the Company had guaranteed
payment and performance of approximately $14 million, primarily with respect
to letters of credit and other guarantees supporting various financing and
operating activities.
9. FEDERAL ENERGY REGULATORY COMMISSION REGULATORY MATTERS
Restructuring Proceedings
On April 8, 1992, the FERC issued Order 636 which restructured the natural
gas industry by requiring mandatory unbundling of pipeline sales and
transportation services. Numerous parties appealed, to the U.S. Court of
Appeals for the D.C. Circuit Court, the legality of Order 636 generally, as
well as the legality of specific provisions of Order 636. On July 16, 1996,
the U.S. Court of Appeals for the D.C. Circuit issued its decision upholding,
in large part, Order 636. The Court remanded to the FERC several issues for
further explanation, including further explanation of the FERC's decision to
allow pipelines to recover 100% of their gas supply realignment ("GSR") costs.
Tennessee implemented revisions to its tariff, effective on September 1,
1993, which restructured its transportation, storage and sales services to
convert Tennessee from primarily a merchant to primarily a transporter of gas
as required by Order 636. As a result of this restructuring, Tennessee's gas
sales declined while certain obligations to producers under long-term gas
supply contracts continued, causing Tennessee to incur significant
restructuring transition costs. Pursuant to the provisions of Order 636
allowing for the recovery of transition costs related to the restructuring,
Tennessee has made filings to recover GSR costs resulting from remaining gas
purchase obligations, costs related to its Bastian Bay facilities, the
remaining unrecovered balance of purchased gas ("PGA") costs and the
"stranded" cost of Tennessee's continuing contractual obligation to pay for
capacity on other pipeline systems ("TBO costs").
Tennessee's filings to recover costs related to its Bastian Bay facilities
have been rejected by the FERC based on the continued use of the gas
production from the field; however, the FERC recognized the ability of
Tennessee to file for the recovery of losses upon disposition of these assets.
Tennessee has filed for appellate
F-18
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
review of the FERC actions and is confident that the Bastian Bay costs will
ultimately be recovered as transition costs under Order 636; the FERC has not
contested the ultimate recoverability of these costs.
The filings implementing Tennessee's recovery mechanisms for the following
transition costs were accepted by the FERC effective September 1, 1993;
recovery was made subject to refund pending FERC review and approval for
eligibility and prudence: 1) direct-billing of unrecovered PGA costs to its
former sales customers over a twelve-month period; 2) recovery of TBO costs,
which Tennessee is obligated to pay under existing contracts, through a
surcharge from firm transportation customers, adjusted annually; and 3) GSR
cost recovery of 90% of such costs over a period of up to 36 months from firm
transportation customers and recovery of 10% of such costs from interruptible
transportation customers over a period of up to 60 months.
Following negotiations with its customers, Tennessee filed in July 1994 with
the FERC a Stipulation and Agreement (the "PGA Stipulation"), which provides
for the recovery of PGA costs of approximately $100 million and the recovery
of costs associated with the transfer of storage gas inventory to new storage
customers in Tennessee's restructuring proceeding. The PGA Stipulation
eliminates all challenges to the PGA costs, but establishes a cap on the
charges that may be imposed upon former sales customers. On November 15, 1994,
the FERC issued an order approving the PGA Stipulation and resolving all
outstanding issues. On April 5, 1995, the FERC issued its order on rehearing
affirming its initial approval of the PGA Stipulation. Tennessee implemented
the terms of the PGA Stipulation and made refunds in May 1995. The refunds had
no material effect on Tenneco Energy's reported net income. The orders
approving the PGA Stipulation have been appealed to the D.C. Circuit Court of
Appeals by certain customers. Tennessee believes the FERC orders approving the
PGA Stipulation will be upheld on appeal.
Tennessee is recovering through a surcharge, subject to refund, TBO costs
formerly incurred to perform its sales function. The FERC subsequently issued
an order requiring Tennessee to refund certain costs from this surcharge and
refunds were made in May 1996. Tennessee is appealing this decision and
believes such appeal will likely be successful.
With regard to Tennessee's GSR costs, Tennessee, along with three other
pipelines, executed four separate settlement agreements with Dakota
Gasification Company and the U.S. Department of Energy and initiated four
separate proceedings at the FERC seeking approval to implement the settlement
agreements. The settlement resolved litigation concerning purchases made by
Tennessee of synthetic gas produced from the Great Plains Coal Gasification
plant ("Great Plains"). The FERC previously ruled that the costs related to
the Great Plains project are eligible for recovery through GSR and other
special recovery mechanisms and that the costs are eligible for recovery for
the duration of the term of the original gas purchase agreements. On October
18, 1994, the FERC consolidated the four proceedings and set them for hearing
before an administrative law judge ("ALJ"). The hearing, which concluded in
July 1995, was limited to the issue of whether the settlement agreements are
prudent. The ALJ concluded, in his initial decision issued in December 1995,
that the settlement was imprudent. Tennessee has filed exceptions to this
initial decision and believes that this decision will not impair Tennessee's
recovery of the costs resulting from this contract. On July 17, 1996, the FERC
ordered oral arguments to be heard September 1996.
Also related to Tennessee's GSR costs, on October 14, 1993, Tennessee was
sued in the State District Court of Ector County, Texas, by ICA Energy, Inc.
("ICA") and TransTexas Gas Corporation ("TransTexas"). In that suit, ICA and
TransTexas contended that Tennessee had an obligation to purchase gas
production which TransTexas thereafter attempted to add unilaterally to the
reserves originally dedicated to a 1979 gas contract. An amendment to the
pleading sought $1.5 billion from Tennessee for alleged damages caused by
Tennessee's refusal to purchase gas produced from the TransTexas leases
covering the new production and lands. In June 1996, Tennessee reached a
settlement with ICA and TransTexas for $125 million wherein ICA and TransTexas
agreed to terminate the contract, released Tennessee from liability under the
contract, and indemnified Tennessee against future claims, including royalty
owner claims.
F-19
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Tennessee has been engaged in other settlement and contract reformation
discussions with other holders of certain gas purchase contracts who have sued
Tennessee. On August 1, 1995, the Texas Supreme Court affirmed a ruling of the
Court of Appeals favorable to Tennessee in one of these matters and indicated
that it would remand the case to the trial court. On April 18, 1996, however,
the Texas Supreme Court withdrew its initial opinion and issued an opinion
reversing the Court of Appeals opinion on the matter which was favorable to
Tennessee. In June 1996, Tennessee filed a motion for rehearing with the Texas
Supreme Court which was denied in August 1996. The Supreme Court's April 1996
ruling explicitly preserves Tennessee's defenses based on bad faith conduct of
the producers. Nothing in the Supreme Court's decision affects Tennessee's
ability to seek recovery of its above-market costs of purchasing gas under the
contract from its customers as GSR costs in proceedings currently pending
before the FERC. In addition, Tennessee has initiated two lawsuits against the
holders of this gas purchase contract, seeking damages related to their
conduct in connection with that contract. Tennessee has accrued amounts which
it believes are appropriate to cover the resolution of the litigation
associated with its contract reformation efforts.
As of June 30, 1996, and December 31, 1995, Tennessee has deferred GSR costs
yet to be recovered from its customers of approximately $551 million and $462
million, respectively, net of $380 million and $316 million, respectively,
previously recovered from its customers, subject to refund. A phased
proceeding is underway at the FERC with respect to the recovery of Tennessee's
GSR costs. Testimony has been completed in connection with Phase I of that
proceeding relating to the eligibility of GSR cost recovery; oral argument on
eligibility issues has been set by a FERC ALJ for late October 1996. Phase II
of the proceeding on the prudency of the costs to be recovered and on certain
contract specific eligibility issues has not yet been scheduled, but will
likely occur sometime after the ALJ's decision in Phase I is issued. The FERC
has generally encouraged pipelines to settle such issues through negotiations
with customers. Although the Order 636 transition cost recovery mechanism
provides for complete recovery by pipelines of eligible and prudently incurred
transition costs, certain customers have challenged the prudence and
eligibility of Tennessee's GSR costs and Tennessee has engaged in settlement
discussions with its customers concerning the amount of such costs in response
to the FERC statements acknowledging the desirability of such settlements.
Given the uncertainty over the results of ongoing discussions between
Tennessee and its customers related to the recovery of GSR costs and the
uncertainty related to predicting the outcome of its gas purchase contract
reformation efforts and the associated litigation, the Company is unable to
predict the timing or the ultimate impact that the resolution of these issues
will have on its combined financial position or results of operations.
Rate Proceedings
On December 30, 1994, Tennessee filed for a general rate increase (the "1995
Rate Case"). On January 25, 1995, the FERC accepted the filing, suspended its
effectiveness for the maximum period of five months pursuant to normal
regulatory process, and set the matter for hearing. On July 1, 1995, Tennessee
began collecting rates, subject to refund, reflecting an $87 million increase
in Tennessee's annual revenue requirement. A Stipulation and Agreement was
filed with an ALJ in this proceeding on April 5, 1996. This Stipulation, which
is currently pending before the FERC, proposed to resolve the rates subject to
the 1995 Rate Case, including structural rate design and increased revenue
requirements, and Tennessee is reserving revenues it believes are adequate to
cover any refunds that may be required upon final settlement of this
proceeding.
F-20
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
Following is a comparative analysis of the components of combined income tax
expense (benefit) for the years 1995, 1994 and 1993:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Current--
U.S. ................................................ $(96) $25 $(11)
State and local...................................... (3) (4) 22
---- --- ----
(99) 21 11
---- --- ----
Deferred--
U.S.................................................. 76 39 82
State and local...................................... 12 12 11
---- --- ----
88 51 93
---- --- ----
Income tax expense (benefit)........................... $(11) $72 $104
==== === ====
</TABLE>
Following is a reconciliation of income taxes computed at the statutory U.S.
federal income tax rate (35% for all years presented) to the income tax
expense (benefit) reflected in the combined statements of income for the years
1995, 1994 and 1993:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. federal
income tax rate........................................ $ 51 $79 $102
Increases (reductions) in income tax expense resulting
from:
State and local taxes on income, net of U.S. federal
income tax benefit................................... 6 5 21
U.S. federal income tax rate change................... -- -- 4
Permanent differences on sales of assets.............. 12 -- (15)
Realization of unrecognized deferred tax assets....... (72) -- --
Other................................................. (8) (12) (8)
---- --- ----
Income tax expense (benefit)............................ $(11) $72 $104
==== === ====
</TABLE>
Current U.S. income tax expense (benefit) for the years ended December 31,
1995, 1994 and 1993, includes a reduction in tax benefits of $63 million, $42
million and $44 million, respectively, related to the allocation of corporate
interest expense to New Tenneco and Newport News. Reference is made to Note 6
for information concerning corporate debt allocated to New Tenneco and Newport
News from the Company.
F-21
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The components of the Company's net deferred tax liability at December 31,
1995 and 1994, were as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
---------- ---- ------
<S> <C> <C>
Deferred tax assets--
U.S. capital loss carryforwards.......................... $163 $ 267
Postretirement benefits other than pensions.............. 104 107
GSR reserve.............................................. 141 --
Environmental reserve.................................... 75 81
Other.................................................... 76 119
Valuation allowance...................................... (117) (293)
---- ------
Net deferred tax asset................................... 442 281
---- ------
Deferred tax liabilities--
Tax over book depreciation............................... 440 437
Asset related to GSR costs of operations regulated by the
FERC.................................................... 141 --
Other regulatory assets.................................. 67 56
Debt related items....................................... 43 44
Book versus tax gains and losses on asset disposals...... 23 321
Other.................................................... 116 187
---- ------
Total deferred tax liability............................. 830 1,045
---- ------
Net deferred tax liability................................. $388 $ 764
==== ======
</TABLE>
As reflected by the valuation allowance in the table above, the Company had
potential tax benefits of $117 million and $293 million at December 31, 1995
and 1994, respectively, which were not recognized in the combined statements
of income when generated. These benefits resulted primarily from U.S. capital
loss carryforwards which are available to reduce future capital gains. During
1995, the Company reduced its deferred tax asset valuation allowance due to
the recognition of U.S. capital loss carryforwards utilized to offset income
taxes payable on asset dispositions. During 1996, these capital loss
carryfowards were utilized to offset taxes on capital gain transactions.
11. INVESTMENT IN AFFILIATED COMPANIES
The Company holds investments in various affiliates which are accounted for
on the equity method of accounting. The principal equity method investments
were the Company's 50% investment in Kern River, and joint venture interests
in power generation plants, interstate pipelines, gathering systems and
natural gas storage facilities.
At December 31, 1995 and 1994, the Company's combined equity included equity
in undistributed earnings from equity method investments of $25 million and
$69 million, respectively. Dividends and distributions received from
affiliates accounted for on the equity method were $53 million, $48 million
and $42 million during 1995, 1994 and 1993, respectively.
F-22
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information of the Company's proportionate share of 50%
or less owned companies accounted for by the equity method of accounting as of
December 31, 1995, 1994 and 1993, and for the years then ended is as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Current assets............................................ $ 60 $ 47 $ 41
Non-current assets........................................ 543 901 829
Short-term debt........................................... 122 19 17
Other current liabilities................................. 24 61 37
Long-term debt............................................ 152 494 496
Other non-current liabilities............................. 25 16 13
Equity in net assets...................................... 280 358 307
Revenues and other income................................. 184 183 164
Costs and expenses........................................ 119 132 117
Net income................................................ 65 51 47
</TABLE>
- --------
Note: Balance sheet amounts related to Kern River are not included in the
table above as of December 31, 1995, due to the Company's sale of its
investment in Kern River in December 1995. Reference is made to Note 5 for
information concerning the sale of Kern River.
12. PREFERRED STOCK
At December 31, 1995, Tenneco had authorized 15,000,000 shares of preferred
stock. In addition, Tenneco has an authorized class of stock consisting of
50,000,000 shares of junior preferred stock, without par value, none of which
has been issued.
The preferred stock issues outstanding at December 31, 1995, are as follows:
<TABLE>
<CAPTION>
SHARES REDEMPTION PERIODS OPTIONAL
ISSUED AND ------------------- REDEMPTION
ISSUE OUTSTANDING OPTIONAL MANDATORY PRICE
----- ----------- --------- --------- ----------
<S> <C> <C> <C> <C>
$7.40 preferred (no par
value)....................... 587,270 1996-1998 1996-1998 $100
$4.50 preferred (no par
value)....................... 803,723 1996-1999 1999 $100
---------
1,390,993
=========
</TABLE>
The $7.40 and $4.50 preferred stock issues have a mandatory redemption value
of $100 per share (an aggregate of $139 million and $159 million at December
31, 1995 and 1994, respectively). Tenneco recorded these preferred stocks at
their fair value at the date of original issue (an aggregate of $250 million)
and is making periodic accretions of the excess of the redemption value over
the fair value at the date of issue.
During 1993, Tenneco retired the remainder of a variable rate preferred
stock issue at the redemption price of $100 per share, or $17 million.
The aggregate maturities applicable to preferred stock issues outstanding at
December 31, 1995, are $20 million for each of the years 1996 and 1997, $19
million for 1998 and $80 million for 1999.
F-23
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Changes in Preferred Stock with Mandatory Redemption Provisions
<TABLE>
<CAPTION>
1995 1994 1993
----------------- ----------------- -----------------
(MILLIONS EXCEPT SHARE
AMOUNTS) SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- ---------------------- --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1........ 1,586,764 $147 1,782,508 $163 2,084,796 $191
Shares redeemed........ (195,771) (20) (195,744) (20) (302,288) (31)
Accretion of excess of
redemption value over
fair value at date of
issue................. -- 3 -- 4 -- 3
--------- ---- --------- ---- --------- ----
Balance December 31...... 1,390,993 $130 1,586,764 $147 1,782,508 $163
========= ==== ========= ==== ========= ====
</TABLE>
13. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits
Tenneco has postretirement health care and life insurance plans which cover
substantially all of Tenneco Energy's employees. For salaried employees, the
plans cover employees retiring from the Company on or after attaining age 55
who have had at least 10 years service with the Company after attaining age
45. For hourly employees, the postretirement benefit plans generally cover
employees who retire pursuant to one of Tenneco's hourly employee retirement
plans. Tenneco Energy is also obligated to provide certain benefits to former
employees of operations previously disposed of by Tenneco. Tenneco Energy will
retain this liability after the Distributions. In addition, Tenneco Energy
will retain liabilities with respect to welfare benefits of its current and
former employees of Tenneco Energy and their dependents in connection with the
Distributions. All of these benefits may be subject to deductibles, copayment
provisions and other limitations, and Tenneco has reserved the right to change
these benefits.
The majority of Tenneco's postretirement benefit plans are not funded. In
June 1994, two trusts were established to fund postretirement benefits for
certain plan participants of the Company. The contributions are collected from
customers in FERC approved rates. As of December 31, 1995, cumulative
contributions were $10 million. Plan assets consist principally of fixed
income securities.
The funded status of the postretirement benefit plans reconciles with
amounts recognized on the combined balance sheets at December 31, 1995 and
1994, as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ----- -----
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit
obligation at September 30:
Retirees....................................................... $ 320 $ 321
Fully eligible active plan participants........................ 5 5
Other active plan participants................................. 2 2
----- -----
Total accumulated postretirement benefit obligation.............. 327 328
Plan assets at fair value at September 30........................ 3 2
----- -----
Accumulated postretirement benefit obligation in excess of plan
assets at September 30.......................................... (324) (326)
Claims paid during the fourth quarter............................ 14 10
Unrecognized reduction of prior service obligations resulting
from plan amendments............................................ (68) (83)
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions........................................ 74 65
----- -----
Accrued postretirement benefit cost at December 31............... $(304) $(334)
===== =====
</TABLE>
- --------
Note: The accrued postretirement benefit cost has been recorded based upon
certain actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
F-24
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The net periodic postretirement benefit cost for the years 1995, 1994 and
1993 consist of the following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
---------- ---- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the year......... $ 1 $ 1 $ 1
Interest cost on accumulated postretirement benefit
obligation.............................................. 26 17 8
Net amortization of unrecognized amounts................. (13) (6) (1)
---- --- ---
Net periodic postretirement benefit cost................. $ 14 $12 $ 8
==== === ===
</TABLE>
The initial weighted average assumed health care cost trend rate used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligation was 7%, 8% and 9%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage-point
in each year would increase the 1995, 1994 and 1993 accumulated postretirement
benefit obligations by approximately $14 million, $14 million and $7 million,
respectively, and would increase the aggregate of the service cost and
interest cost components of the net postretirement benefit cost for 1995, 1994
and 1993 by approximately $1 million, $3 million and $1 million, respectively.
The discount rates (which are based on long-term market rates) used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligations were 7.75%, 8.25% and 7.50%, respectively.
Postemployment Benefits
The Company adopted FAS No. 112, "Employers' Accounting for Postemployment
Benefits," in the first quarter of 1994. This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual basis rather
than the "pay-as-you-go" basis. The adoption of this new standard had no
material impact on the Company's combined financial position or results of
operations.
14. PENSION PLANS
Tenneco has retirement plans which cover substantially all of the Company's
employees. Benefits are based on years of service and, for most salaried
employees, on final average compensation. Tenneco's funding policies are to
contribute to the plans amounts necessary to satisfy the funding requirements
of federal laws and regulations. Plan assets consist principally of listed
equity and fixed income securities. Certain employees of the Company
participate in the Tenneco Inc. Retirement Plan (the "TRP").
New Tenneco will become the sole sponsor of the TRP upon consummation of the
Distributions. The benefits accrued by the employees of Tenneco Energy who
participate in the TRP will be frozen as of the last day of the calendar month
including the Distributions and New Tenneco will amend the TRP to provide that
all benefits accrued through that day by the employees of Tenneco Energy are
fully vested and non-forfeitable.
F-25
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plans reconciles with amounts recognized on the
combined balance sheets at December 31, 1995 and 1994, as follows:
<TABLE>
<CAPTION>
ALL PLANS
----------
(MILLIONS) 1995 1994
- ---------- ---- ----
<S> <C> <C>
Actuarial present value of benefits based on service to date and
present pay levels at September 30:
Vested benefit obligation....................................... $187 $169
Non-vested benefit obligation................................... 12 11
---- ----
Accumulated benefit obligation.................................. 199 180
Additional amounts related to projected salary increases.......... 41 37
---- ----
Total projected benefit obligation at September 30................ 240 217
Plan assets at fair value at September 30......................... 259 224
---- ----
Plan assets in excess of total projected benefit obligation at
September 30..................................................... 19 7
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions......................................... 14 26
Unrecognized prior service obligations resulting from plan
amendments....................................................... 2 3
Remaining unrecognized net asset at initial application........... (14) (16)
---- ----
Prepaid pension cost at December 31............................... $ 21 $ 20
==== ====
</TABLE>
- --------
Note: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid pension cost has been recorded based upon certain
actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
Net periodic pension income for the years 1995, 1994 and 1993 consist of the
following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the year. $ 6 $ 6 $ 7
Interest accrued on prior year's projected
benefit obligation........................... 18 16 15
Expected return on plan assets--
Actual (return) loss........................ (45) 4 (31)
Unrecognized excess (deficiency) of actual
return over expected return................ 22 (26) 10
--- --- ---
(23) (22) (21)
Net amortization of unrecognized amounts...... (2) (2) (2)
---- ---- ----
Net periodic pension income................... $ (1) $ (2) $ (1)
==== ==== ====
</TABLE>
The weighted average discount rates (which are based on long-term market
rates) used in determining the 1995, 1994 and 1993 actuarial present value of
the benefit obligations were 7.8%, 8.3% and 7.5%, respectively. The rate of
increase in future compensation was 4.9%, in 1995, 1994, and 1993. The
weighted average expected long-term rate of return on plan assets was 10% in
1995, 1994 and 1993.
15. COMMITMENTS AND CONTINGENCIES
Capital Commitments
The Company estimates that expenditures aggregating approximately $636
million will be required after December 31, 1995, to complete facilities and
projects authorized at such date, and substantial commitments have been made
in connection therewith.
F-26
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Purchase Obligations
In connection with the financing commitments of certain joint ventures, the
Company has entered into unconditional purchase obligations for products and
services of $145 million ($106 million on a present value basis) at December
31, 1995. The Company's annual obligations under these agreements are $22
million for the years 1996 through 2000. Payments under such obligations,
including additional purchases in excess of contractual obligations, were $26
million, $34 million and $31 million for the years 1995, 1994 and 1993,
respectively. In addition, in connection with the Great Plains coal
gasification project (Dakota Gasification Company), Tennessee has contracted
to purchase 30% of the output of the plant's original design capacity for a
remaining period of 14 years. Tennessee has executed a settlement of this
contract as a part of its gas supply realignment negotiations discussed in
Note 9.
Litigation
Reference is made to Note 9, "Federal Energy Regulatory Commission
Regulatory Matters," for information concerning gas supply litigation. The
Company is party to numerous other legal proceedings arising from their
operations. The Company believes that the outcome of these proceedings,
individually and in the aggregate, will have no material effect on the
combined financial position or results of operations of the Company.
Environmental Matters
Since 1988, Tennessee has been engaged in an internal project to identify
and deal with the presence of polychlorinated biphenyls ("PCBs") and other
substances of concern, including substances on the U.S. Environmental
Protection Agency ("EPA") List of Hazardous Substances ("HS List") at
compressor stations and other facilities operated by both its interstate and
intrastate natural gas pipeline systems. While conducting this project,
Tennessee has been in frequent contact with federal and state regulatory
agencies, both through informal negotiation and formal entry of consent
orders, in order to assure that its efforts meet regulatory requirements.
The Company has established a reserve for Tennessee's environmental
expenses, which includes: 1) expected remediation expense and associated
onsite, offsite and groundwater technical studies, 2) legal fees and 3)
settlement of third party and governmental litigation, including civil
penalties. Through June 30, 1996, and December 31, 1995, the Company has
charged approximately $156 million and $147 million, respectively, against the
environmental reserve, excluding recoveries related to Tennessee's
environmental settlement as discussed below. Of the remaining reserve at June
30, 1996 and December 31, 1995, $24 million and $38 million, respectively, has
been recorded on the combined balance sheets under "Payables-trade" and $132
million and $126 million, respectively, under "Deferred credits and other
liabilities."
Due to the current uncertainty regarding the further activity necessary for
Tennessee to address the presence of the PCBs, the substances on the HS List
and other substances of concern on its sites, including the requirements for
additional site characterization, the actual amount of such substances at the
sites, and the final, site-specific cleanup decisions to be made with respect
to cleanup levels and remediation technologies, Tennessee cannot at this time
accurately project what additional costs, if any, may arise from future
characterization and remediation activities. While there are still many
uncertainties relating to the ultimate costs which may be incurred, based upon
Tennessee's evaluation and experience to date, the Company continues to
believe that the recorded estimate for the reserve is adequate.
Following negotiations with its customers, Tennessee in May 1995 filed with
the FERC a separate Stipulation and Agreement (the "Environmental
Stipulation") that establishes a mechanism for recovering a substantial
portion of the environmental costs. In November 1995, the FERC issued an order
approving the Environmental Stipulation. Although one shipper filed for
rehearing, the FERC denied rehearing of its order on
F-27
<PAGE>
THE BUSINESSES OF TENNECO ENERGY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
February 20, 1996. This shipper filed a Petition for Review on April 22, 1996
in the D.C. Circuit Court of Appeals; Tennessee believes the FERC Order
approving the Environmental Stipulation will be upheld on appeal. The effects
of the Environmental Stipulation, which was effective as of July 1, 1995, have
been recorded with no material effect on the Company's combined financial
position or results of operations. As of June 30, 1996, and December 31, 1995,
the balance of the regulatory asset is $61 million and $74 million,
respectively.
The Company has completed settlements with and has received payments from
the majority of its liability insurance policy carriers for remediation costs
and related claims. The Company believes that the likelihood of recovery of a
portion of its remediation costs and claims against the remaining carriers in
its pending litigation is reasonably possible. In addition, Tennessee has
settled its pending litigation against and received payment from the
manufacturer of the PCB-containing lubricant. These recoveries have been
considered in Tennessee's recording of its environmental settlement with its
customers.
The Company has identified other sites where environmental remediation
expense may be required should there be a change in ownership, operations or
applicable regulations. These possibilities cannot be predicted or quantified
at this time and accordingly, no provision has been recorded. However,
provisions have been made for all instances where it has been determined that
the incurrence of any material remedial expense is reasonably possible. The
Company believes that the provisions recorded for environmental exposures are
adequate based on current estimates.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
NET SALES INCOME
AND BEFORE INTEREST
QUARTER OPERATING EXPENSE AND NET
(MILLIONS) REVENUES INCOME TAXES INCOME
- ---------- --------- --------------- ------
<S> <C> <C> <C>
1996 1st....................................... $ 748 $119 $ 78
2nd....................................... 622 69 25
------ ---- ----
$1,370 $188 $103
====== ==== ====
1995 1st....................................... $ 505 $ 71 $ 32
2nd....................................... 434 69 15
3rd....................................... 429 43 5
4th....................................... 553 85 105
------ ---- ----
$1,921 $268 $157
====== ==== ====
1994 1st....................................... $ 693 $ 89 $ 18
2nd....................................... 607 80 60
3rd....................................... 549 71 (38)
4th....................................... 532 127 113
------ ---- ----
$2,381 $367 $153
====== ==== ====
</TABLE>
- --------
Note: Reference is made to Notes 4 and 5 and "Managements' Discussion and
Analysis of Financial Condition and Results of Operations" for
discussion of items affecting quarterly results.
The preceding notes to combined financial statements are an integral part of
the foregoing combined financial statements.
F-28
<PAGE>
SCHEDULE II
THE BUSINESSES OF TENNECO ENERGY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts Deducted from
Assets to Which it
Applies:
Year Ended December 31,
1995.................. $21 $26 $ 9 $ 7 $49
=== === === === ===
Year Ended December 31,
1994.................. $37 $ 2 $22 $20 $21
=== === === === ===
Year Ended December 31,
1993.................. $15 $23 $ 3 $ 4 $37
=== === === === ===
</TABLE>
S-1
<PAGE>
APPENDIX A
DISTRIBUTION AGREEMENT
AMONG
TENNECO INC.,
NEW TENNECO INC.
AND
NEWPORT NEWS SHIPBUILDING INC.
(FORMERLY KNOWN AS TENNECO INTERAMERICA INC.)
DATED AS OF
NOVEMBER 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I DEFINITIONS.................................................. 1
SECTION 1.01. General........................................ 1
SECTION 1.02. References..................................... 12
ARTICLE II PRE-DISTRIBUTION TRANSACTIONS; CERTAIN COVENANTS............. 13
SECTION 2.01. Corporate Restructuring Transactions........... 13
SECTION 2.02. Pre-Distribution Stock Dividends to Tenneco.... 13
SECTION 2.03. Charters and Bylaws............................ 13
SECTION 2.04. Election of Directors of Industrial Company and
Shipbuilding Company............................. 13
SECTION 2.05. Transfer and Assignment of Certain Licenses and
Permits.......................................... 14
SECTION 2.06. Transfer and Assignment of Certain Agreements.. 14
SECTION 2.07. Consents....................................... 15
SECTION 2.08. Other Transactions............................. 15
SECTION 2.09. Election of Officers........................... 15
SECTION 2.10. Registration Statements........................ 16
SECTION 2.11. State Securities Laws.......................... 16
SECTION 2.12. Listing Application............................ 16
SECTION 2.13. Certain Financial and Other Arrangements....... 16
SECTION 2.14. Director, Officer and Employee Resignations.... 17
SECTION 2.15. Transfers Not Effected Prior to the
Distributions; Transfers Deemed Effective as of
the Distribution Date............................ 17
SECTION 2.16. Ancillary Agreements........................... 18
ARTICLE III THE DISTRIBUTIONS............................................ 18
SECTION 3.01. Tenneco Action Prior to the Distributions...... 18
SECTION 3.02. The Distributions.............................. 19
SECTION 3.03. Fractional Shares.............................. 19
ARTICLE IV CONDITIONS TO THE DISTRIBUTIONS.............................. 20
SECTION 4.01. Conditions Precedent to the Distributions...... 20
SECTION 4.02. No Constraint.................................. 21
SECTION 4.03. Deferral of Distribution Date.................. 21
SECTION 4.04. Public Notice of Deferred Distribution Date.... 21
ARTICLE V COVENANTS.................................................... 22
SECTION 5.01. Further Assurances............................. 22
SECTION 5.02. Tenneco Name................................... 22
SECTION 5.03. Supplies and Documents......................... 22
SECTION 5.04. Assumption and Satisfaction of Liabilities..... 23
SECTION 5.05. No Representations or Warranties; Consents..... 23
SECTION 5.06. Removal of Certain Guarantees.................. 24
SECTION 5.07. Public Announcements........................... 24
SECTION 5.08. Intercompany Agreements........................ 25
SECTION 5.09. Tax Matters.................................... 25
ARTICLE VI ACCESS TO INFORMATION........................................ 25
SECTION 6.01. Provision, Transfer and Delivery of Applicable
Corporate Records........................................... 25
SECTION 6.02. Access to Information.......................... 26
SECTION 6.03. Reimbursement; Other Matters................... 26
SECTION 6.04. Confidentiality................................ 26
SECTION 6.05. Witness Services............................... 27
SECTION 6.06. Retention of Records........................... 27
SECTION 6.07. Privileged Matters............................. 27
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE VII INDEMNIFICATION............................................ 28
SECTION 7.01. Indemnification by Tenneco................... 28
SECTION 7.02. Indemnification by Industrial Company........ 28
SECTION 7.03. Indemnification by Shipbuilding Company...... 28
SECTION 7.04. Limitations on Indemnification Obligations... 29
SECTION 7.05. Procedures for Indemnification............... 30
SECTION 7.06. Indemnification Payments..................... 31
SECTION 7.07. Other Adjustments............................ 31
SECTION 7.08. Obligations Absolute......................... 32
SECTION 7.09. Survival of Indemnities...................... 32
SECTION 7.10. Remedies Cumulative.......................... 32
SECTION 7.11. Cooperation of the Parties With Respect to
Actions and Third Party Claims................. 32
SECTION 7.12. Contribution................................. 33
ARTICLE VIII MISCELLANEOUS.............................................. 33
SECTION 8.01. Complete Agreement; Construction............. 33
SECTION 8.02. Ancillary Agreements......................... 33
SECTION 8.03. Counterparts................................. 33
SECTION 8.04. Survival of Agreements....................... 33
SECTION 8.05. Responsibility for Expenses.................. 34
SECTION 8.06. Notices...................................... 34
SECTION 8.07. Waivers...................................... 34
SECTION 8.08. Amendments................................... 34
SECTION 8.09. Assignment................................... 35
SECTION 8.10. Successors and Assigns....................... 35
SECTION 8.11. Termination.................................. 35
SECTION 8.12. Third Party Beneficiaries.................... 35
SECTION 8.13. Attorney Fees................................ 35
SECTION 8.14. Title and Headings........................... 35
SECTION 8.15. Exhibits and Schedules....................... 35
SECTION 8.16. Specific Performance......................... 35
SECTION 8.17. Governing Law................................ 35
SECTION 8.18. Severability................................. 36
SECTION 8.19. Subsidiaries................................. 36
SECTION 8.20. Shipbuilding Hedging Transactions............ 36
</TABLE>
ii
<PAGE>
EXHIBITS
EXHIBIT ABenefits Agreement--[Intentionally Omitted]
EXHIBIT BCorporate Restructuring Transactions--[Intentionally Omitted]
EXHIBIT CDebt and Cash Allocation Agreement
EXHIBIT DEnergy Business Pro Forma Balance Sheet--[Intentionally Omitted]
EXHIBIT EEnergy Subsidiaries--[Intentionally Omitted]
EXHIBIT FIndustrial Business Pro Forma Balance Sheet--[Intentionally
Omitted]
EXHIBIT GIndustrial Subsidiaries--[Intentionally Omitted]
EXHIBIT HInsurance Agreement--[Intentionally Omitted]
EXHIBIT IShipbuilding Business Pro Forma Balance Sheet--[Intentionally
Omitted]
EXHIBIT JShipbuilding Subsidiaries--[Intentionally Omitted]
EXHIBIT KTax Sharing Agreement--[Intentionally Omitted]
EXHIBIT LTBS Services Agreement--[Intentionally Omitted]
EXHIBIT MTransition Services Agreement--[Intentionally Omitted]
EXHIBIT NForm of Restated Certificate of Incorporation--[Intentionally
Omitted]
EXHIBIT OForm of Bylaws--[Intentionally Omitted]
EXHIBIT PTenneco Transition Trademark License--[Intentionally Omitted]
EXHIBIT QShipbuilding Transition Trademark License--[Intentionally Omitted]
iii
<PAGE>
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT is made and entered into as of this first day of
November, 1996 by and among TENNECO INC., a Delaware corporation ("TENNECO"),
NEW TENNECO INC., a Delaware corporation ("INDUSTRIAL COMPANY"), and NEWPORT
NEWS SHIPBUILDING INC. (formerly known as Tenneco InterAmerica Inc.), a
Delaware corporation ("SHIPBUILDING COMPANY").
R E C I T A L S
WHEREAS, Tenneco, El Paso Natural Gas Company, a Delaware corporation
("ACQUIROR"), and El Paso Merger Company, a Delaware corporation and an
indirect wholly owned subsidiary of Acquiror ("ACQUIROR SUBSIDIARY"), have
entered into an Amended and Restated Agreement and Plan of Merger, dated as of
November 1, 1996, but effective as of June 19, 1996 (as amended from time to
time, the "MERGER AGREEMENT"), providing for the merger of Acquiror Subsidiary
with and into Tenneco (the "MERGER"), with Tenneco continuing as the surviving
corporation of the Merger (the "SURVIVING CORPORATION"), upon the terms and
subject to the conditions set forth in the Merger Agreement;
WHEREAS, the Board of Directors of Tenneco has deemed it appropriate and
advisable, prior to the Merger and as contemplated by the Merger Agreement,
to:
(a) separate and divide the existing businesses of Tenneco so that (i)
the automotive, packaging and business services businesses shall be owned
directly and indirectly by Industrial Company, and (ii) the shipbuilding
business shall be owned directly and indirectly by Shipbuilding Company;
and
(b) distribute, following such separation and division and immediately
prior to the Merger, as a dividend to the holders of shares of Common
Stock, par value $5.00 per share, of Tenneco (the "TENNECO COMMON STOCK")
all of the outstanding shares of common stock, $.01 par value, of
Industrial Company (the "INDUSTRIAL COMMON STOCK") and all of the
outstanding shares of common stock, $.01 par value, of Shipbuilding Company
(the "SHIPBUILDING COMMON STOCK");
WHEREAS, following such separation, division and distributions, the
remaining businesses, operations, assets and liabilities of Tenneco and its
remaining direct and indirect subsidiaries shall be acquired by Acquiror
pursuant to the Merger; and
WHEREAS, each of Tenneco, Industrial Company and Shipbuilding Company has
determined that it is necessary and desirable to set forth the principal
corporate transactions required to effect such separation, division and
distributions and to set forth other agreements that will govern certain other
matters prior to and following such separation, division and distributions.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. GENERAL. Unless otherwise defined herein or unless the context
otherwise requires, the following terms will have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined).
"ACTION" means any action, suit, arbitration, inquiry, proceeding or
investigation by or before any Governmental Authority or any arbitration
tribunal.
"ACQUIROR SUBSIDIARY" has the meaning ascribed to such term in the
recitals to this Agreement.
"AFFILIATE" means, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the Person
specified.
<PAGE>
"AGENT" means First Chicago Trust Company of New York, or such other
trust company or bank designated by Tenneco, who shall act as agent for the
holders of Tenneco Common Stock in connection with the Distributions.
"AGREEMENT" means this Distribution Agreement by and among Tenneco,
Industrial Company and Shipbuilding Company, including any amendments
hereto and each Schedule and Exhibit attached hereto.
"ANCILLARY AGREEMENTS" means all of the written agreements, instruments,
understandings, assignments or other arrangements (other than this
Agreement or the Merger Agreement) entered into by the parties hereto or
any other member of their respective Group in connection with the Corporate
Restructuring Transactions, the Distributions and the other transactions
contemplated hereby or thereby, including, without limitation, the
following:
(i) the Debt and Cash Allocation Agreement;
(ii) the Insurance Agreement;
(iii) the Conveyancing and Assumption Instruments;
(iv) the Benefits Agreement;
(v) the Tax Sharing Agreement;
(vi) the Transition Services Agreement;
(vii) the TBS Services Agreement; and
(viii) the Transition Trademark License.
"BENEFITS AGREEMENT" means the Benefits Agreement by and among Tenneco,
Industrial Company and Shipbuilding Company, which agreement shall be
entered into on or prior to the Distribution Date in the form attached
hereto as EXHIBIT A, except for such changes or modifications thereto that
do not, individually or in the aggregate, adversely affect the Energy
Business other than to a de minimis extent.
"BOOKS AND RECORDS" means all books, records, manuals, agreements and
other materials (in any form or medium), including without limitation, all
mortgages, licenses, indentures, contracts, financial data, customer lists,
marketing materials and studies, advertising materials, price lists,
correspondence, distribution lists, supplier lists, production data, sales
and promotional materials and records, purchasing materials and records,
personnel records, manufacturing and quality control records and
procedures, blue prints, research and development files, records, data and
laboratory books, accounts records, sales order files, litigation files,
computer files, microfiche, tape recordings and photographs.
"CODE" means the Internal Revenue Code of 1986, as amended, or any
successor law.
"COMMISSION" means the United States Securities and Exchange Commission.
"CONSENTS" has the meaning ascribed to such term in SECTION 2.07 hereof.
"CONVEYANCING AND ASSUMPTION INSTRUMENTS" means, collectively, the
various written agreements, instruments and other documents to be entered
into to effect the Corporate Restructuring Transactions or to otherwise
effect the transfer of assets and the assumption of Liabilities in the
manner contemplated by this Agreement, the Ancillary Agreements and the
Corporate Restructuring Transactions.
"CORPORATE RESTRUCTURING TRANSACTIONS" means, collectively, (a) each of
the distributions, transfers, conveyances, contributions, assignments and
other transactions described and set forth on EXHIBIT B attached hereto,
and (b) such other distributions, transfers, conveyances, contributions,
assignments and other transactions (so long as such other distributions,
transfers, conveyances, contributions, assignments and other transactions
do not, individually or in the aggregate, adversely affect the Energy
Business (other than to a de minimis extent) or materially delay or prevent
the consummation of the Merger) that may be required to be accomplished,
effected or consummated by any of Tenneco, Industrial Company,
2
<PAGE>
1Shipbuilding Company or any of their respective Subsidiaries and
Affiliates in order to separate and divide, in a series of transactions
that, to the extent intended to qualify for tax-free transactions under the
Code, shall qualify for tax-free treatment under the Code, the existing
businesses of Tenneco so that, except as otherwise expressly set forth on
EXHIBIT B hereto:
(i) the Industrial Assets, Industrial Liabilities and Industrial
Business shall be owned, directly and indirectly, by Industrial
Company;
(ii) the Shipbuilding Assets, Shipbuilding Liabilities and
Shipbuilding Business shall be owned, directly and indirectly, by
Shipbuilding Company; and
(iii) the businesses, assets and liabilities of Tenneco that remain
after the separations and divisions described in clauses (i) and (ii)
above, including, without limitation, the Energy Assets, Energy
Liabilities and Energy Business, are, after giving effect to the
Distributions, owned, directly and indirectly, by Tenneco.
"DEBT AND CASH ALLOCATION AGREEMENT" means the Debt and Cash Allocation
Agreement by and among Tenneco, Industrial Company and Shipbuilding
Company, which agreement shall be entered into on or prior to the
Distribution Date in the form attached hereto as EXHIBIT C, except for such
changes or modifications thereto that do not, individually or in the
aggregate, adversely affect the Energy Business (other than to a de minimis
extent) or materially delay or prevent the consummation of the Merger.
"DEBT REALIGNMENT" has the meaning ascribed to such term in the Merger
Agreement.
"DEBT REALIGNMENT DOCUMENTS" means all documents furnished by Tenneco or
Industrial Company to any holders of indebtedness or debt securities of
Tenneco or any of its Subsidiaries or filed by Tenneco or Industrial
Company in connection therewith with any Governmental Authority or
securities exchange in connection with the Debt Realignment.
"DISTRIBUTIONS" means the Industrial Distribution and the Shipbuilding
Distribution.
"DISTRIBUTION DATE" means such date as may hereafter be determined by
Tenneco's Board of Directors as the date on which the Distributions shall
be effected.
"DISTRIBUTION RECORD DATE" means the close of business on the date
determined by the Board of Directors of Tenneco for the purpose of
determining the holders of record of Tenneco Common Stock entitled to
participate in the Distributions.
"DGCL" means the Delaware General Corporation Law, as amended.
"ENERGY ASSETS" means, collectively, all the rights and assets owned by
Tenneco or any of its Subsidiaries as of the close of business on the
Distribution Date other than the Industrial Assets, the Shipbuilding Assets
and the capital stock of Industrial Company and Shipbuilding Company,
including without limitation:
(i) the capital stock of the Energy Subsidiaries;
(ii) all of the assets included on the Energy Business Pro Forma
Balance Sheet which are owned by Tenneco and its Subsidiaries as of the
close of business on the Distribution Date and any other asset acquired
by Tenneco or any of its Subsidiaries from the date of the Energy
Business Pro Forma Balance Sheet to the close of business on the
Distribution Date that is owned by Tenneco and its Subsidiaries as of
the close of business on the Distribution Date and that is of a type or
nature that would have resulted in such asset being included as an
asset on the Energy Business Pro Forma Balance Sheet had it been
acquired on or prior to the date of the Energy Business Pro Forma
Balance Sheet, determined on a basis consistent with the determination
of assets included on the Energy Business Pro Forma Balance Sheet; and
(iii) all of the assets and rights expressly allocated to Tenneco or
any of the Energy Subsidiaries under this Agreement, any of the
Ancillary Agreements or the Merger Agreement.
"ENERGY BUSINESS" means the businesses (other than the Industrial
Business and the Shipbuilding Business) that, after giving effect to the
Corporate Restructuring Transactions, are or were conducted by:
(i) Tenneco, the Energy Subsidiaries or any of the other members of
the Energy Group;
(ii) any other division, Subsidiary or investment of Tenneco, or any
Energy Subsidiary or any of the other members of the Energy Group
managed or operated or in existence as of the date of this Agreement or
any prior time, unless such other division, Subsidiary or investment is
expressly included
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in either the Industrial Group or the Shipbuilding Group immediately
after giving effect to the Corporate Restructuring Transactions; and
(iii) any business entity acquired or established by or for Tenneco
or any of the Energy Subsidiaries between the date of this Agreement
and the close of business on the Distribution Date that is engaged in,
or intends to engage in, any business that is of a type or nature that
would have resulted in such business being included either as a
Subsidiary or an asset of Tenneco on the Energy Business Pro Forma
Balance Sheet had it been acquired or established on or prior to the
date of the Energy Business Pro Forma Balance Sheet, determined on a
basis consistent with the determination of the Subsidiaries and assets
included on the Energy Business Pro Forma Balance Sheet.
"ENERGY BUSINESS PRO FORMA BALANCE SHEET" means the Pro Forma
Consolidated Balance Sheet for Tenneco and the Energy Subsidiaries as of
June 30, 1996 attached hereto as EXHIBIT D.
"ENERGY GROUP" means Tenneco, the Energy Subsidiaries and the
corporations, partnerships, joint ventures, investments and other entities
that represent equity investments of Tenneco or any of the Energy
Subsidiaries following consummation of the Corporate Restructuring
Transactions and the Distributions.
"ENERGY INDEMNITEES" means:
(i) Tenneco, the Energy Subsidiaries and each Affiliate thereof after
giving effect to the Corporate Restructuring Transactions and the
Distributions; and
(ii) each of the respective past, present and future directors,
officers, employees and agents of any of the entities described in the
immediately preceding clause (i) and each of the heirs, executors,
successors and assigns of such directors, officers, employees and
agents.
"ENERGY LIABILITIES" means, collectively, all of the Liabilities of
Tenneco and the Energy Subsidiaries and each of the other members of the
Energy Group remaining after giving effect to the Corporate Restructuring
Transactions, the Distributions and the transactions contemplated under the
Debt and Cash Allocation Agreement, including without limitation:
(i) all of the Liabilities included on the Energy Business Pro Forma
Balance Sheet which remain outstanding as of the close of business on
the Distribution Date;
(ii) all Liabilities which are incurred or which otherwise accrue or
are accrued at any time on, prior to or after the date of the Energy
Business Pro Forma Balance Sheet and which arise or arose out of, or in
connection with, the Energy Assets or the Energy Business, determined
on a basis consistent with the determination of Liabilities of Tenneco
included on the Energy Business Pro Forma Balance Sheet;
(iii) all of the Liabilities of Tenneco, the Energy Subsidiaries or
any of the other members of the Energy Group under, or to be retained
or assumed by Tenneco, any Energy Subsidiary or any of the other
members of the Energy Group pursuant to the Corporate Restructuring
Transactions, this Agreement, any of the Ancillary Agreements or the
Merger Agreement;
(iv) all of the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising whether prior to, on or following the
Distribution Date) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Distribution
Date of the Energy Business;
(v) all Securities Liabilities relating to or arising out of the
information and data (financial or otherwise and including pro forma
financial data) provided by or on behalf of Acquiror for inclusion in
the Registration Statement on Form S-4 of Industrial Company
registering certain debt securities of New Tenneco to be exchanged for
certain existing debt securities of Tenneco and certain of its
Subsidiaries in connection with the Debt Realignment, including,
without limitation, information, disclosures and data relating to or
concerning Acquiror, Acquiror Subsidiary, the business, operations and
management of the Energy Business and/or Energy Group following the
Merger and any refinancing or other transactions which Acquiror,
Acquiror Subsidiary and/or any member of the Energy Group anticipates
consummating following the Merger (collectively "ENERGY EXCHANGE
LIABILITIES"); and
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(vi) all other Liabilities of Tenneco, the Energy Subsidiaries or any
of the other members of the Energy Group (which do not constitute
Industrial Liabilities or Shipbuilding Liabilities), which other
Liabilities of Tenneco, the Energy Subsidiaries or any of the other
members of the Energy Group shall include, without limitation, any and
all Liabilities arising out of or relating to any Action or Third Party
Claim by any Governmental Authority or any other Person that is based
on (A) any violations or alleged violations by Tenneco, its
Subsidiaries (prior to giving effect to the Distributions) and/or any
of their respective directors, officers, employees, agents or
representatives of any of the provisions of the Exchange Act,
Securities Act, or the rules and regulations of the Commission
promulgated thereunder or any other securities or similar Law (other
than Liabilities (collectively "INFORMATION STATEMENT LIABILITIES") for
violations or alleged violations that arise out of, or in connection
with, the Industrial Information Statement, the Shipbuilding
Information Statement or information or data in the Joint Proxy
Statement or the Debt Realignment Documents concerning the Shipbuilding
Business or the Industrial Business), (B) any alleged breach of
fiduciary duty by the Board of Directors of Tenneco or any member
thereof, or (C) any stockholder derivative suit or other similar
Actions.
"ENERGY RECORDS" has the meaning ascribed to such term in SECTION 6.01(C)
hereof.
"ENERGY SUBSIDIARIES" means the Subsidiaries of Tenneco set forth on
EXHIBIT E hereto and all other Subsidiaries of Tenneco other than
Shipbuilding Company, Industrial Company, the Shipbuilding Subsidiaries and
the Industrial Subsidiaries.
"ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign
statutes, laws, regulations, ordinances, rules, judgments, orders, decrees,
permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions (including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et
seq.), whether now or hereafter in existence, relating to the environment,
natural resources or human health and safety or endangered or threatened
species of fish, wildlife and plants or to emissions, discharges or
releases of pollutants, contaminants, petroleum or petroleum products,
chemicals or industrial, toxic or hazardous substances or wastes into the
environment, including, without limitation, ambient air, surface water,
ground water or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the cleanup or other
remediation thereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE FILE MATERIAL" means the Registration Statements, as amended at
the times they were declared effective under the Exchange Act, the related
Information Statements or any amendment or supplement thereto, the related
letter of transmittal, any related stockholder communication, any other
exhibits to any of the foregoing and any amendment or supplement thereto,
in each case including all information incorporated by reference therein.
"GAAP" means United States generally accepted accounting principles and
practices, as in effect on the date of this Agreement, as promulgated by
the Financial Accounting Standards Board and its predecessors.
"GOVERNMENTAL AUTHORITY" means any government or any agency, bureau,
board, commission, court, department, official, political subdivision,
tribunal or other instrumentality of any government, whether federal, state
or local, domestic or foreign.
"GROUP" means (i) with respect to Tenneco, the Energy Group, (ii) with
respect to Industrial Company, the Industrial Group, and (iii) with respect
to Shipbuilding Company, the Shipbuilding Group.
"INDEMNIFIABLE LOSSES" means, with respect to any Person, any and all
losses, liabilities, penalties, claims, damages, demands, costs and
expenses (including, without limitation, reasonable attorneys' fees,
investigation expenses and any and all other out-of-pocket expenses, but
excluding any punitive or consequential damages) or other Liabilities
whatsoever that are assessed, imposed, awarded against, incurred or accrued
by such Person either (a) in investigating, preparing for, defending
against or otherwise arising out of or in connection with any Actions, any
potential or threatened Actions or any Third Party
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Claims for which such Person would be entitled to indemnification under
ARTICLE VII hereof, or (b) in respect of any other event, occurrence or
matter for which such Person would be entitled to indemnification under
ARTICLE VII hereof, in each case whether accrued or incurred on, before or
after the date of this Agreement.
"INDEMNIFYING PARTY" has the meaning ascribed to such term in SECTION
7.04(A) hereof.
"INDEMNITEE" has the meaning ascribed to such term in SECTION 7.04(A)
hereof.
"INDUSTRIAL ASSETS" means, collectively, all of the following rights and
assets that are owned by Tenneco or any of its Subsidiaries as of the close
of business on the Distribution Date:
(i) the capital stock of the Industrial Subsidiaries;
(ii) all of the assets included on the Industrial Business Pro Forma
Balance Sheet that are owned by Tenneco or any of its Subsidiaries as
of the close of business on the Distribution Date;
(iii) all of the assets and rights expressly allocated to Industrial
Company or any of the Industrial Subsidiaries under this Agreement or
any of the Ancillary Agreements; and
(iv) any other asset acquired by Tenneco or any of its Subsidiaries
from the date of the Industrial Business Pro Forma Balance Sheet to the
close of business on the Distribution Date that is owned by Tenneco or
any of its Subsidiaries as of the close of business on the Distribution
Date and that is of a type or nature that would have resulted in such
asset being included as an asset on the Industrial Business Pro Forma
Balance Sheet had it been acquired on or prior to the date of the
Industrial Business Pro Forma Balance Sheet, determined on a basis
consistent with the determination of the assets included on the
Industrial Business Pro Forma Balance Sheet.
"INDUSTRIAL BUSINESS" means the businesses that, after giving effect to
the Corporate Restructuring Transactions, are conducted by:
(i) the Industrial Company, the Industrial Subsidiaries or any of the
other members of the Industrial Group; and
(ii) any business entity acquired or established by or for Tenneco,
Industrial Company or any of the Industrial Subsidiaries between the
date of this Agreement and the close of business on the Distribution
Date that is engaged in, or intends to engage in, any business that is
of a type or nature that would have resulted in such business being
included either as a Subsidiary or an asset of Industrial Company on
the Industrial Business Pro Forma Balance Sheet had it been acquired or
established on or prior to the date of the Industrial Business Pro
Forma Balance Sheet, determined on a basis consistent with the
determination of the Subsidiaries and assets included on the Industrial
Business Pro Forma Balance Sheet.
"INDUSTRIAL BUSINESS PRO FORMA BALANCE SHEET" means the Pro Forma
Consolidated Balance Sheet for Industrial Company and the Industrial
Subsidiaries as of June 30, 1996 attached hereto as EXHIBIT F.
"INDUSTRIAL COMMON SHARES" means the shares of Industrial Common Stock
owned by Tenneco after giving effect to the stock dividend provided for in
SECTION 2.02(A) hereof.
"INDUSTRIAL COMMON STOCK" has the meaning ascribed to such term in the
recitals to this Agreement.
"INDUSTRIAL COMPANY" means New Tenneco Inc., a Delaware corporation.
"INDUSTRIAL DISTRIBUTION" means the distribution on the Distribution Date
as a dividend to holders of record of shares of Tenneco Common Stock as of
the Distribution Record Date of all of the outstanding Industrial Common
Shares owned by Tenneco on the basis provided in SECTION 3.02 hereof.
"INDUSTRIAL GROUP" means Industrial Company, the Industrial Subsidiaries
and the corporations, partnerships, joint ventures, investments and other
entities that represent equity investments of any of Industrial Company or
any of the Industrial Subsidiaries following the consummation of the
Corporate Restructuring Transactions and the Distributions.
"INDUSTRIAL INDEMNITEES" means:
(i) Industrial Company and each Affiliate thereof after giving effect
to the Corporate Restructuring Transactions and the Distributions; and
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(ii) each of the respective past, present and future directors,
officers, employees and agents of any of the entities described in the
immediately preceding clause (i) and each of the heirs, executors,
successors and assigns of any of such directors, officers, employees
and agents.
"INDUSTRIAL INFORMATION STATEMENT" means the information statement or
registration statement relating to Industrial Company and the transactions
contemplated hereby to be distributed to holders of Tenneco Common Stock
pursuant to the terms of this Agreement.
"INDUSTRIAL LIABILITIES" means, collectively, all of the Liabilities of
Industrial Company, the Industrial Subsidiaries and each of the other
members of the Industrial Group after giving effect to the Corporate
Restructuring Transactions, the Distributions and the transactions
contemplated under the Debt and Cash Allocation Agreement, including,
without limitation:
(i) all of the Liabilities included on the Industrial Business Pro
Forma Balance Sheet which remain outstanding as of the close of
business on the Distribution Date;
(ii) all Liabilities (other than Energy Exchange Liabilities) which
are incurred or which otherwise accrue or are accrued at any time on,
prior to or after the date of the Industrial Business Pro Forma Balance
Sheet and which arise or arose out of, or in connection with (A) the
Industrial Assets, the Industrial Business or the Prior Industrial
Businesses, determined on a basis consistent with the determination of
Liabilities of Industrial Company on the Industrial Business Pro Forma
Balance Sheet, including Information Statement Liabilities which arise
or arose out of or in connection with, the Industrial Information
Statement or which arise or arose out of or in connection with
information or data in the Joint Proxy Statement or the Debt
Realignment Documents concerning the Industrial Business (except to the
extent such Liabilities constitute Shipbuilding Securities Liabilities
or are otherwise based on any of (i) the actions or inactions of
Shipbuilding Company, any other member of the Shipbuilding Group, or
any director, officer or employee of the Shipbuilding Company or any
other member of the Shipbuilding Group or any underwriter or investment
banking firm of any member of the Shipbuilding Group (or any of their
directors, officers, employees, advisors or representatives)
(collectively, the "SHIPBUILDING PARTIES," or individually, a
"SHIPBUILDING PARTY"), or (ii) the information or data provided in
writing by any Shipbuilding Party expressly for inclusion in the
Industrial Information Statement), or (B) the Shipbuilding Information
Statement to the extent such Information Statement Liabilities are
based on information or data concerning directly and solely the
Industrial Company or the Industrial Business that is provided in
writing by Industrial Company (or any other member of its Group or any
Affiliate thereof after giving effect to the Distributions) expressly
for inclusion in the Shipbuilding Information Statement;
(iii) all of the Liabilities of Industrial Company, the Industrial
Subsidiaries or any of the other members of the Industrial Group under,
or to be retained or assumed by Industrial Company, any Industrial
Subsidiary or any of the other members of the Industrial Group pursuant
to this Agreement or any of the Ancillary Agreements; and
(iv) all of the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising whether prior to, at or following the
Distribution Date) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Distribution
Date of the Industrial Business.
"INDUSTRIAL RECORDS" has the meaning ascribed to such term in SECTION
6.01(A) hereof.
"INDUSTRIAL REGISTRATION STATEMENT" means the Registration Statement on
Form 10 to be filed with the Commission pursuant to the requirements of
Section 12 of the Exchange Act and the rules and regulations thereunder in
order to register the Industrial Common Stock under Section 12(b) of the
Exchange Act.
"INFORMATION STATEMENT LIABILITIES" has the meaning ascribed to such term
in CLAUSE (V) of the definitions herein of Energy Liabilities.
"INFORMATION STATEMENTS" means the Industrial Information Statement and
the Shipbuilding Information Statement.
"INDUSTRIAL SUBSIDIARIES" means the Subsidiaries listed on EXHIBIT G
hereto.
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"INSURANCE AGREEMENT" means the Insurance Agreement by and among Tenneco,
Industrial Company and Shipbuilding Company, which agreement shall be
entered into on or prior to the Distribution Date in the form attached
hereto as EXHIBIT H except for such changes or modifications thereto that
do not, individually or in the aggregate, adversely affect the Energy
Business other than to a de minimis extent.
"INSURANCE PROCEEDS" means, with respect to any insured party, those
monies, net of any applicable premium adjustment, retrospectively-rated
premium, deductible, retention, or cost of reserve paid or held by or for
the benefit of such insured, which are either:
(i) received by an insured from an insurance carrier; or
(ii) paid by an insurance carrier on behalf of an insured.
"JOINT PROXY STATEMENT" has the meaning ascribed to such term in the
Merger Agreement.
"LAW" means all laws, statutes and ordinances and all regulations, rules
and other pronouncements of Governmental Authorities having the effect of
law of the United States, any foreign country, or any domestic or foreign
state, province, commonwealth, city, country, municipality, territory,
protectorate, possession or similar instrumentality, or any Governmental
Authority thereof.
"LIABILITIES" means any and all debts, liabilities, obligations,
responsibilities, response actions, losses, damages (whether compensatory,
punitive or treble), fines, penalties and sanctions, absolute or
contingent, matured or unmatured, liquidated or unliquidated, foreseen or
unforeseen, joint, several or individual, asserted or unasserted, accrued
or unaccrued, known or unknown, whenever arising, including, without
limitation, those arising under or in connection with any Law (including
any Environmental Law), Action, threatened Action, order or consent decree
of any Governmental Authority or any award of any arbitration tribunal, and
those arising under any contract, guarantee, commitment or undertaking,
whether sought to be imposed by a Governmental Authority, private party, or
party to this Agreement, whether based in contract, tort, implied or
express warranty, strict liability, criminal or civil statute, or
otherwise, and including any costs, expenses, interest, attorneys' fees,
disbursements and expense of counsel, expert and consulting fees and costs
related thereto or to the investigation or defense thereof.
"MERGER" has the meaning ascribed to such term in the recitals to this
Agreement.
"MERGER AGREEMENT" has the meaning ascribed to such term in the recitals
to this Agreement.
"NYSE" means the New York Stock Exchange.
"PERSON" means any natural person, corporation, business trust, joint
venture, association, company, partnership, limited liability company or
other entity, or any government, or any agency or political subdivision
thereof.
"PRIOR INDUSTRIAL BUSINESSES" means, collectively, all divisions,
Subsidiaries, other business entities or investments of Tenneco (or one of
its Subsidiaries) that, at any time prior to the date of the Industrial
Business Pro Forma Balance Sheet, were included in the "automotive parts"
or "packaging" segments for purposes of segment reporting in any of
Tenneco's Annual Reports on Form 10-K, and were sold, transferred,
otherwise disposed of or discontinued prior to such date.
"PRIOR SHIPBUILDING BUSINESSES" means, collectively, all divisions,
Subsidiaries, other business entities or investments of Tenneco (or one of
its Subsidiaries) that, at any time prior to the date of the Shipbuilding
Business Pro Forma Balance Sheet, were included in the "shipbuilding"
segment for purposes of segment reporting in any of Tenneco's Annual
Reports on Form 10-K, and were sold, transferred, otherwise disposed of or
discontinued prior to such date.
"PRIVILEGE" has the meaning ascribed to such term in SECTION 6.07(A)
hereof.
"PRIVILEGED INFORMATION" has the meaning ascribed to such term in SECTION
6.07(A) hereof.
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"REGISTRATION STATEMENTS" means the Industrial Registration Statement and
the Shipbuilding Registration Statement.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES LIABILITIES" means any and all losses, liabilities,
penalties, claims, damages, demands, costs or expenses or other Liabilities
whatsoever that are assessed, imposed, awarded against, incurred or accrued
by a Person arising out of or relating in whole or in part to any Action,
any potential or threatened Action or any Third Party Claim (or potential
or threatened Third Party Claim) by any Governmental Authority or any other
Person that is based on any violations or alleged violations of the
Securities Act, Exchange Act, any of the rules or regulations of the
Commission promulgated under the Securities Act or Exchange Act, or any
other securities or other similar Law.
"SHIPBUILDING ASSETS" means, collectively, all of the following rights
and assets that are owned by Tenneco and or any of its Subsidiaries as of
the close of business on the Distribution Date:
(i) the capital stock of the Shipbuilding Subsidiaries;
(ii) all of the assets included on the Shipbuilding Business Pro
Forma Balance Sheet that are owned by Tenneco or any of its
Subsidiaries as of the close of business on the Distribution Date;
(iii) all of the assets and rights expressly allocated to
Shipbuilding Company or any of the Shipbuilding Subsidiaries under this
Agreement or any of the Ancillary Agreements; and
(iv) any other asset acquired by Tenneco or any of its Subsidiaries
from the date of the Shipbuilding Business Pro Forma Balance Sheet to
the close of business on the Distribution Date that is owned by Tenneco
or any of its Subsidiaries as of the close of business on the
Distribution Date and that is of a nature or type that would have
resulted in such asset being included as an asset on the Shipbuilding
Business Pro Forma Balance Sheet had it been acquired on or prior to
the date of the Shipbuilding Business Pro Forma Balance Sheet,
determined on a basis consistent with the determination of the assets
included on the Shipbuilding Business Pro Forma Balance Sheet.
"SHIPBUILDING BUSINESS" means the businesses that, after giving effect to
the Corporate Restructuring Transactions, are conducted by:
(i) the Shipbuilding Company, the Shipbuilding Subsidiaries or any of
the other members of the Shipbuilding Group; and
(ii) any business entity acquired or established by or for Tenneco,
Shipbuilding Company or any of the Shipbuilding Subsidiaries between
the date of this Agreement and the close of business on the
Distribution Date that is engaged in, or intends to engage in, any
business that is of a type or nature that would have resulted in such
business being included either as a Subsidiary or an asset of
Shipbuilding Company on the Shipbuilding Business Pro Forma Balance
Sheet had it been acquired or established on or prior to the date of
the Shipbuilding Business Pro Forma Balance Sheet, determined on a
basis consistent with the determination of the Subsidiaries and assets
included on the Shipbuilding Business Pro Forma Balance Sheet.
"SHIPBUILDING BUSINESS PRO FORMA BALANCE SHEET" means the Pro Forma
Consolidated Balance Sheet for Shipbuilding Company and the Shipbuilding
Subsidiaries (prepared in accordance with GAAP) as of June 30, 1996
attached hereto as EXHIBIT I.
"SHIPBUILDING COMMON SHARES" means the Shares of Shipbuilding Common
Stock owned by Tenneco after giving effect to the stock dividend provided
for in SECTION 2.02(B) hereof.
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"SHIPBUILDING COMMON STOCK" has the meaning ascribed to such term in the
recitals to this Agreement.
"SHIPBUILDING COMPANY" means Newport News Shipbuilding Inc. (formerly
known as Tenneco InterAmerica Inc.), a Delaware corporation.
"SHIPBUILDING DISTRIBUTION" means the distribution on the Distribution
Date as a dividend to holders of record of shares of Tenneco Common Stock
as of the Distribution Record Date, of all of the outstanding Shipbuilding
Common Shares owned by Tenneco on the basis provided in SECTION 3.02
hereof.
"SHIPBUILDING FINANCING MATERIALS" means any registration statement,
private placement memorandum, offering circular, prospectus, information
memorandum and/or any other document or filing (with the Commission or any
Governmental Authority or the NYSE or other stock exchange) prepared by or
on behalf of Shipbuilding Company (or its Affiliates) and distributed to
prospective lenders or prospective purchasers of any debt or equity
securities of the Shipbuilding Company (or any other member of the
Shipbuilding Group) in connection with any of the transactions contemplated
under this Agreement, the Merger Agreement or any of the Ancillary
Agreements, including, without limitation, the Confidential Information
Memorandum dated September 1996 relating to the Senior Credit Facility (as
defined in the Shipbuilding Information Statement), the 144A Offering
Memorandum relating to the Senior Subordinated Notes and Senior Notes (as
such terms are defined in the Shipbuilding Information Statement), and the
registration statement on Form S-1 to be filed by Shipbuilding Company
after the Distribution Date to register the Senior Subordinated Notes and
Senior Notes under the Securities Act and all related documents.
"SHIPBUILDING GROUP" means Shipbuilding Company, the Shipbuilding
Subsidiaries and the corporations, partnerships, joint ventures,
investments and other entities that represent equity investments of
Shipbuilding Company or any of the Shipbuilding Subsidiaries following the
consummation of the Corporate Restructuring Transactions and the
Distributions.
"SHIPBUILDING INDEMNITEES" means:
(i) Shipbuilding Company and each Affiliate thereof after giving
effect to the Corporate Restructuring Transactions and the
Distributions; and
(ii) each of the respective past, present and future directors,
officers, employees and agents of any of the entities described in the
immediately preceding clause (i) and each of the heirs, executors,
successors and assigns of any of such directors, officers, employees
and agents.
"SHIPBUILDING INFORMATION STATEMENT" means the information statement or
registration statement relating to Shipbuilding Company and the
transactions contemplated hereby to be distributed to holders of Tenneco
Common Stock pursuant to the terms of this Agreement.
"SHIPBUILDING LIABILITIES" means, collectively, all of the Liabilities of
Shipbuilding Company, the Shipbuilding Subsidiaries and each of the other
members of the Shipbuilding Group after giving effect to the Corporate
Restructuring Transactions, the Distributions and the transactions
contemplated by the Debt and Cash Allocation Agreement, including, without
limitation:
(i) all of the Liabilities included on the Shipbuilding Business Pro
Forma Balance Sheet that remain outstanding as of the close of business
on the Distribution Date;
(ii) all other Liabilities that are incurred or which accrue or are
accrued at any time on, prior to or after the date of the Shipbuilding
Business Pro Forma Balance Sheet and that arise or arose out of, or in
connection with, the Shipbuilding Assets, the Shipbuilding Business or
the Prior Shipbuilding Businesses, determined on a basis consistent
with the determination of Liabilities of Shipbuilding Company on the
Shipbuilding Business Pro Forma Balance Sheet, including, without
limitation,
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Shipbuilding Securities Liabilities and Information Statement
Liabilities to the extent such Information Statement Liabilities (A)
arise or arose out of or in connection with the Shipbuilding
Information Statement or information or data in the Joint Proxy
statement or the Debt Realignment Documents concerning the Shipbuilding
Business or (B) are based on information or data provided in writing by
Shipbuilding Company (or any member of its Group or any Affiliate
(after giving effect to the Distributions) thereof) expressly for
inclusion in the Industrial Information Statement;
(iii) all of the Liabilities of Shipbuilding Company, the
Shipbuilding Subsidiaries or any of the other members of the
Shipbuilding Group under, or to be retained or assumed by Shipbuilding
Company, any Shipbuilding Subsidiary or any of the other members of the
Shipbuilding Group pursuant to, this Agreement or any of the Ancillary
Agreements; and
(iv) all the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising whether prior to, on or following the
Distribution Date) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Distribution
Date of the Shipbuilding Business.
"SHIPBUILDING RECORDS" has the meaning ascribed to such term in SECTION
6.01(B) hereof.
"SHIPBUILDING REGISTRATION STATEMENT" means the Registration Statement on
Form 10 to be filed with the Commission pursuant to the requirements of
Section 12 of the Exchange Act and the rules and regulations promulgated
thereunder in order to register the Shipbuilding Common Stock under Section
12(b) of the Exchange Act.
"SHIPBUILDING SECURITIES LIABILITIES" means any and all Securities
Liabilities arising out of, or in connection with, or relating in whole or
in part to any of the following: (i) the Shipbuilding Registration
Statement; (ii) the Shipbuilding Information Statement (whether in the form
as an Appendix to the Joint Proxy Statement or as the Information Statement
included in the Shipbuilding Registration Statement); (iii) the
Shipbuilding Financing Materials; (iv) any of the information, data
(financial or otherwise) or disclosures in (or any alleged failure to set
forth certain information, data or disclosures in) the Shipbuilding
Registration Statement, Shipbuilding Information Statement (whether in the
form as an Appendix to the Joint Proxy Statement or as the Information
Statement included in the Shipbuilding Registration Statement) or
Shipbuilding Financing Materials, irrespective of (A) who authored,
prepared or provided such information, data or disclosures (or, as the case
may be, the section or discussion in which certain information, data or
disclosure is alleged to have been omitted), or (B) the form in which, or
medium through which (e.g., verbally, in writing, etc.), such information,
data, disclosures, discussion or section were provided; or (v) any of the
information, data (financial or otherwise) or disclosures in (or any
alleged failure to set forth certain information, data or disclosures in)
the Joint Proxy Statement or the Debt Realignment Documents concerning any
matter relating to the business, operations, management, financial results
or potential risks of (or pending or threatened claims or investigations
relating to) the Shipbuilding Business, Prior Shipbuilding Businesses,
Shipbuilding Assets or Shipbuilding Liabilities, irrespective of (A) who
authored, prepared or provided such information data or disclosures (or, as
the case may be, the section or discussion in which certain information,
data or disclosure is alleged to have been omitted), or (B) the form in
which, or medium through which (e.g., verbally, in writing, etc.), such
information, data, disclosure, section or discussion were provided.
"SHIPBUILDING SUBSIDIARIES" means the Subsidiaries listed on EXHIBIT J
hereto.
"SUBSIDIARY" means, with respect to any Person:
(i) any corporation of which at least a majority in interest of the
outstanding voting stock (having by the terms thereof voting power
under ordinary circumstances to elect a majority of the directors of
such corporation, irrespective of whether or not at the time stock of
any other class or classes of such corporation shall have or might have
voting power by reason of the happening of a contingency) is at
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the time, directly or indirectly, owned or controlled by such Person or
by such Person and one or more of its Subsidiaries; or
(ii) any non-corporate entity in which such Person or such Person and
one or more Subsidiaries of such Person either (a) directly or
indirectly, at the date of determination thereof, has at least majority
ownership interest, or (b) at the date of determination is a general
partner or an entity performing similar functions (e.g., manager of a
Limited Liability Company or a trustee of a trust).
"SURVIVING CORPORATION" has the meaning ascribed to such term in the
recitals to this Agreement.
"TAX" or "TAXES" means any income, gross income, gross receipts, profits,
capital stock, franchise, withholding, payroll, social security, workers
compensation, unemployment, disability, property, ad valorem, stamp,
excise, occupation, services, sales, use, license, lease, transfer, import,
export, value added, alternative minimum, estimated or other similar tax
(including any fee, assessment or other charge in the nature of or in lieu
of any tax) imposed by any governmental entity or political subdivision
thereof, and any interest, penalties, additions to tax, or additional
amounts in respect of the foregoing.
"TAX SHARING AGREEMENT" means the Tax Sharing Agreement by and among
Tenneco, Shipbuilding Company, Industrial Company and Acquiror, which
agreement shall be entered into on or prior to the Distribution Date in the
form attached hereto as EXHIBIT K, except for such changes or modifications
thereto that do not, individually or in the aggregate, adversely affect the
Energy Business other than to a de minimis extent.
"TENNECO" means Tenneco Inc., a Delaware corporation.
"TENNECO COMMON STOCK" has the meaning ascribed to such term in the
recitals to this Agreement.
"TENNECO CORPORATE RECORDS" has the meaning ascribed to such term in
SECTION 6.01(A) hereof.
"TENNECO HOLDERS" means the holders of record of Tenneco Common Stock as
of the Distribution Record Date.
"TENNECO TRADEMARKS AND TRADENAMES" means all trademarks, service marks,
and tradenames containing "TENNECO", "TEN", or "TENN" or variations
thereof, along with their respective applications and registrations
wherever used or registered; provided, however, that the term shall not
include the word "Tennessee" to the extent such word is used in the
business and operations of Tennessee Gas Pipeline Company or otherwise in
the Energy Business.
"TERMINATION DATE" means the date on which this Agreement is terminated
pursuant to and in accordance with the provisions of SECTION 8.11 of this
Agreement.
"THIRD PARTY CLAIM" has the meaning as defined in SECTION 7.05(A) hereof.
"TBS SERVICES AGREEMENT" means the Services Agreement by and among
Industrial Company, Shipbuilding Company and Tenneco Business Services
Inc., which agreement shall be entered into on or prior to the Distribution
Date in substantially the form attached hereto as EXHIBIT L and which
agreement Tenneco and the Energy Business will not become a party to and
not be bound by without the consent of Acquiror, which Acquiror may
withhold in its sole discretion.
"TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement
by and between Tenneco and Tenneco Business Services Inc., which agreement
shall be entered into on or prior to the Distribution Date in the form
attached hereto as EXHIBIT M.
"TRANSITION TRADEMARK LICENSE" has the meaning ascribed to such term in
SECTION 5.02 hereof.
SECTION 1.02. REFERENCES. References to an "EXHIBIT" or to a "SCHEDULE" are,
unless otherwise specified, to one of the Exhibits or Schedules attached to
this Agreement, and references to a "SECTION" are, unless otherwise specified,
to one of the Sections of this Agreement.
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ARTICLE II
PRE-DISTRIBUTION TRANSACTIONS;
CERTAIN COVENANTS
SECTION 2.01. CORPORATE RESTRUCTURING TRANSACTIONS. On or prior to the
Distribution Date (but in all events prior to the Distributions) and otherwise
in accordance with the terms and provisions set forth in EXHIBIT B hereto,
each of Tenneco, Industrial Company and Shipbuilding Company shall, and shall
cause each of their respective Subsidiaries to, as applicable, take such
action or actions as is necessary to cause, effect and consummate the
Corporate Restructuring Transactions. Each of Tenneco, Shipbuilding Company
and Industrial Company hereby agrees that any one or more of the Corporate
Restructuring Transactions may be modified, supplemented or eliminated;
provided such modification, supplement or elimination (a) is determined to be
necessary or appropriate (i) to divide the existing businesses of Tenneco so
that the automotive, packaging and business services businesses shall be
owned, directly and indirectly, by Industrial Company and the shipbuilding
business shall be owned, directly and indirectly, by Shipbuilding Company, or
(ii) to obtain a ruling from the Internal Revenue Service as described in
Section 7.1(g) of the Merger Agreement, and (b) does not, individually or in
the aggregate, adversely affect the Energy Business (other than to a de
minimis extent) or materially delay or prevent the consummation of the Merger.
SECTION 2.02. PRE-DISTRIBUTION STOCK DIVIDENDS TO TENNECO. On or prior to
the Distribution Date (but in all events prior to the Distributions):
(a) INDUSTRIAL COMPANY STOCK DIVIDEND. Industrial Company shall issue to
Tenneco, as a stock dividend, the number of shares of Industrial Common
Stock as is required to effect the Industrial Distribution, as certified by
the Agent. In connection therewith, Tenneco shall deliver to Industrial
Company for cancellation the share certificate (or certificates) currently
held by it representing all Industrial Common Stock, and Industrial Company
shall issue a new certificate (or certificates) to Tenneco representing the
total number of Industrial Common Shares to be owned by Tenneco after
giving effect to such stock dividend.
(b) SHIPBUILDING COMPANY STOCK DIVIDEND. Shipbuilding Company shall issue
to Tenneco, as a stock dividend, the number of shares of Shipbuilding
Common Stock as is required to effect the Shipbuilding Distribution, as
certified by the Agent. In connection therewith, Tenneco shall deliver to
Shipbuilding Company for cancellation the share certificate (or
certificates) currently held by it representing all Shipbuilding Common
Stock, and Shipbuilding Company shall issue a new certificate (or
certificates) representing the total number of Shipbuilding Common Shares
to be owned by Tenneco after giving effect to such stock dividend.
SECTION 2.03. CHARTERS AND BYLAWS.
(a) CERTIFICATE OF INCORPORATION AND BYLAWS OF INDUSTRIAL COMPANY. On or
prior to the Distribution Date (but in all events prior to the
Distributions), Tenneco and Industrial Company shall each take all
necessary actions so that, as of the Distribution Date, the Restated
Certificate of Incorporation and Bylaws of Industrial Company will be
substantially in the forms set forth in EXHIBITS N and O, respectively.
(b) CERTIFICATE OF INCORPORATION AND BYLAWS OF SHIPBUILDING COMPANY. On
or prior to the Distribution Date (but in all events prior to the
Distributions), Tenneco and Shipbuilding Company shall each take all
necessary actions so that, as of the Distribution Date, the Restated
Certificate of Incorporation and Bylaws of Shipbuilding Company will be
substantially in the forms set forth in EXHIBITS N and O, respectively.
SECTION 2.04. ELECTION OF DIRECTORS OF INDUSTRIAL COMPANY AND SHIPBUILDING
COMPANY. On or prior to the Distribution Date, Tenneco, as the sole
stockholder of each of Industrial Company and Shipbuilding Company, shall take
all necessary action so that as of the Distribution Date the directors of
Industrial Company and of Shipbuilding Company will be as set forth in the
Industrial Information Statement and the Shipbuilding Information Statement,
respectively.
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SECTION 2.05. TRANSFER AND ASSIGNMENT OF CERTAIN LICENSES AND PERMITS.
(a) LICENSES AND PERMITS RELATING TO THE INDUSTRIAL BUSINESS. On or prior
to the Distribution Date, or as soon as reasonably practicable thereafter,
each of Tenneco and Shipbuilding Company shall (and, if applicable, shall
cause any other Person over which it has legal or effective direct or
indirect control to), severally but not jointly, duly and validly transfer
or cause to be duly and validly transferred to the appropriate member of
the Industrial Group (as directed by Industrial Company) all transferrable
licenses, permits and authorizations issued by any Governmental Authority
that relate to the Industrial Business but which are held in the name of
any member of the Energy Group or the Shipbuilding Group, or any of their
respective employees, officers, directors, stockholders or agents.
(b) LICENSES AND PERMITS RELATING TO THE SHIPBUILDING BUSINESS. On or
prior to the Distribution Date, or as soon as reasonably practicable
thereafter, each of Tenneco and Industrial Company shall (and, if
applicable, shall cause any other Person over which it has legal or
effective direct or indirect control to), severally but not jointly, duly
and validly transfer or cause to be duly and validly transferred to the
appropriate member of the Shipbuilding Group (as directed by Shipbuilding
Company) all transferrable licenses, permits and authorizations issued by
any Governmental Authority that relate to the Shipbuilding Business but
which are held in the name of any member of the Energy Group or the
Industrial Group, or any of their respective employees, officers,
directors, stockholders or agents.
(c) LICENSES AND PERMITS RELATING TO THE ENERGY BUSINESS. On or prior to
the Distribution Date, or as soon as reasonably practicable thereafter,
each of Industrial Company and Shipbuilding Company shall (and, if
applicable, shall cause any other Person over which it has legal or
effective direct or indirect control to), severally but not jointly, duly
and validly transfer or cause to be duly and validly transferred to the
appropriate member of the Energy Group (as directed by Tenneco) all
transferrable licenses, permits and authorizations issued by any
Governmental Authority that relate to the Energy Business but which are
held in the name of any member of the Industrial Group or the Shipbuilding
Group, or any of their respective employees, officers, directors,
stockholders or agents.
SECTION 2.06. TRANSFER AND ASSIGNMENT OF CERTAIN AGREEMENTS.
(a) TRANSFER AND ASSIGNMENT OF ENERGY BUSINESS AGREEMENTS. On or prior to
the Distribution Date, or as soon as reasonably practicable thereafter, and
subject to the limitations set forth in this SECTION 2.06, each of Industrial
Company and Shipbuilding Company shall (and, if applicable, shall cause any of
the other members of its Group over which it has legal or effective direct or
indirect control to), severally but not jointly, assign, transfer and convey
to Tenneco (or such other member of the Energy Group as Tenneco shall direct)
all of its (or such other member of its Group's) right, title and interest in
and to any and all agreements that relate exclusively to the Energy Business
or any member of the Energy Group.
(b) TRANSFER AND ASSIGNMENT OF INDUSTRIAL BUSINESS AGREEMENTS. On or prior
to the Distribution Date, or as soon as reasonably practicable thereafter, and
subject to the limitations set forth in this SECTION 2.06, each of Tenneco and
Shipbuilding Company shall (and, if applicable, shall cause any of the other
members of its Group over which it has legal or effective direct or indirect
control to), severally but not jointly, assign, transfer and convey to
Industrial Company (or such other member of the Industrial Group as Industrial
Company shall direct) all of its (or such other member of its Group's) right,
title and interest in and to any and all agreements that relate exclusively to
the Industrial Business or any member of the Industrial Group.
(c) TRANSFER AND ASSIGNMENT OF SHIPBUILDING BUSINESS AGREEMENTS. On or prior
to the Distribution Date, or as soon as reasonably practicable thereafter, and
subject to the limitations set forth in this SECTION 2.06, each of Tenneco and
Industrial Company shall (and, if applicable, shall cause any of the other
members of its Group over which it has legal or effective direct or indirect
control to), severally but not jointly, assign, transfer and convey to
Shipbuilding Company (or such other member of the Shipbuilding Group as
Shipbuilding Company shall direct) all of its (or such other member of its
Group's) right, title and interest in and to any and all agreements that
relate exclusively to the Shipbuilding Business or any member of the
Shipbuilding Group.
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(d) JOINT AGREEMENTS. Subject to the provisions of SECTION 2.06(F) below,
any agreement to which any party hereto (or any other member of such party's
Group) is a party that inures to the benefit of more than one of the Energy
Business, the Industrial Business and the Shipbuilding Business shall be
assigned in part, at the expense and risk of the assignee, on or prior to the
Distribution Date or as soon as reasonably practicable thereafter, so that
each party (or such other member of such party's Group) shall be entitled to
the rights and benefits inuring to its business under such agreement.
(e) OBLIGATIONS OF ASSIGNEES. The assignee of any agreement assigned, in
whole or in part, hereunder (an "ASSIGNEE") shall, as a condition to such
assignment, assume and agree to pay, perform, and fully discharge all
obligations of the assignor under such agreement (whether such obligations
arose or were incurred prior to, on or subsequent to the Distribution Date and
irrespective of whether such obligations have been asserted as of the
Distribution Date) or, in the case of a partial assignment under SECTION
2.06(D) above, such Assignee's related portion of such obligations as
determined in accordance with the terms of the relevant agreement, where
determinable on the face thereof, and otherwise as determined in accordance
with the practice of the parties prior to the Distributions. Furthermore, the
Assignee shall use its commercially reasonable efforts to cause the assignor
of such agreement to be released from its obligations under the assigned
agreements.
(f) NO ASSIGNMENT OF CERTAIN AGREEMENTS. Notwithstanding anything in this
Agreement to the contrary, this Agreement shall not constitute an agreement to
assign any agreement, in whole or in part, or any rights thereunder if the
agreement to assign or attempt to assign, without the consent of a third
party, would constitute a breach thereof or in any way adversely affect the
rights of the Assignee thereof until such consent is obtained. If an attempted
assignment thereof would be ineffective or would adversely affect the rights
of any party hereto so that the Assignee would not, in fact, receive all such
rights, the parties hereto will cooperate with each other to effect any
arrangement designed reasonably to provide for the Assignee the benefits of,
and to permit the Assignee to assume liabilities under, any such agreement,
subject to the remaining sentences of this SECTION 2.06(F). There are certain
software license agreements held in the name of a member of the Industrial
Group that presently inure to the benefit of the Energy Business, the
Industrial Business and the Shipbuilding Business. Notwithstanding any other
provision of this Agreement, each such license agreement shall continue to be
held by that member of the Industrial Group without any obligation of any
party to cause the assignment or inurement to the benefit of such license
agreement, or to effect any arrangement to provide such benefit, to the Energy
Business or the Shipbuilding Business, except where the license agreement
expressly permits the benefits and obligations to be divided among the
Businesses or as may be negotiated with the licensor by that member of the
Industrial Group and such other parties and the Industrial Business shall use
commercially reasonable efforts to do so.
SECTION 2.07. CONSENTS. The parties hereto shall use their best efforts to
obtain any third-party consents or approvals that are required to consummate
the Corporate Restructuring Transactions, the Distributions and the other
transactions contemplated herein (the "CONSENTS").
SECTION 2.08. OTHER TRANSACTIONS. On or prior to the Distribution Date (but
in all events prior to the Distributions), each of Tenneco, Industrial Company
and Shipbuilding Company shall have consummated those other transactions in
connection with the Corporate Restructuring Transactions and the Distributions
that are contemplated by the Information Statements and the ruling request
submission by Tenneco to the Internal Revenue Service dated June 27, 1996 (as
subsequently supplemented), and not specifically referred to in SECTIONS 2.01
through 2.07 above, subject, however, to the limitations set forth in
SUBPARAGRAPH (B) of SECTION 2.01 above.
SECTION 2.09. ELECTION OF OFFICERS. On or prior to the Distribution Date,
each of Tenneco, Industrial Company and Shipbuilding Company shall, as
applicable, take all actions necessary and desirable so that as of the
Distribution Date the officers of Industrial Company and of Shipbuilding
Company will be as set forth in the Industrial Information Statement and the
Shipbuilding Information Statement, respectively.
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SECTION 2.10. REGISTRATION STATEMENTS. Each of Tenneco, Industrial Company
and Shipbuilding Company shall prepare, and shall file with the Commission,
the Registration Statements in accordance with the terms of this SECTION 2.10.
(a) PREPARATION AND FILING OF INDUSTRIAL REGISTRATION STATEMENT. Tenneco,
Industrial Company and Shipbuilding Company shall prepare or cause to be
prepared, and Industrial Company shall file or cause to be filed with the
Commission, the Industrial Registration Statement. The Industrial
Registration Statement shall include or incorporate by reference the
Industrial Information Statement setting forth appropriate disclosure
concerning Tenneco, Industrial Company, Shipbuilding Company, the
Distributions and such other matters as may be required to be disclosed
therein by the provisions of the Exchange Act and the rules and regulations
promulgated thereunder. Tenneco and Industrial Company shall take all such
actions as may be reasonably necessary or appropriate in order to cause the
Industrial Registration Statement to become effective by order of the
Commission pursuant to the Exchange Act.
(b) PREPARATION AND FILING OF SHIPBUILDING REGISTRATION STATEMENT.
Tenneco, Industrial Company and Shipbuilding Company shall prepare or cause
to be prepared, and Shipbuilding Company shall file or cause to be filed
with the Commission, the Shipbuilding Registration Statement. The
Shipbuilding Registration Statement shall include or incorporate by
reference the Shipbuilding Information Statement setting forth appropriate
disclosure concerning Tenneco, Shipbuilding Company, Industrial Company,
the Distributions and such other matters as may be required to be disclosed
therein by the provisions of the Exchange Act and the rules and regulations
promulgated thereunder. Tenneco and Shipbuilding Company shall take all
such actions as may be reasonably necessary or appropriate in order to
cause the Shipbuilding Registration Statement to become effective by order
of the Commission pursuant to the Exchange Act.
SECTION 2.11. STATE SECURITIES LAWS. Prior to the Distribution Date,
Tenneco, Industrial Company and Shipbuilding Company shall take all such
action as may be necessary or appropriate under the securities or blue sky
laws of states or other political subdivisions of the United States in order
to effect the Distributions.
SECTION 2.12. LISTING APPLICATION. Prior to the Distribution Date, Tenneco,
Industrial Company and Shipbuilding Company shall prepare and file with the
NYSE listing applications and related documents and shall take all such other
actions with respect thereto as shall be necessary or desirable in order to
cause the NYSE to list on or prior to the Distribution Date, subject to
official notice of issuance, the Industrial Common Shares and the Shipbuilding
Common Shares.
SECTION 2.13. CERTAIN FINANCIAL AND OTHER ARRANGEMENTS.
(a) SETTLEMENT OF INTERCOMPANY ACCOUNTS BETWEEN INDUSTRIAL GROUP AND ENERGY
GROUP. All intercompany receivables, payables and loans (other than
receivables, payables and loans otherwise specifically provided for in any of
the Ancillary Agreements or hereunder), including, without limitation, in
respect of any cash balances, any cash balances representing deposited checks
or drafts for which only a provisional credit has been allowed or any cash
held in any centralized cash management system, between any member of the
Industrial Group, on the one hand, and any member of the Energy Group, on the
other hand, shall, as of the close of business on the Distribution Date, be
settled, capitalized or converted into ordinary trade accounts, in each case
as may be agreed in writing prior to the Distribution Date by duly authorized
representatives of Tenneco, Industrial Company and the Acquiror.
(b) SETTLEMENT OF INTERCOMPANY ACCOUNTS BETWEEN SHIPBUILDING GROUP AND
ENERGY GROUP. All intercompany receivables, payables and loans (other than
receivables, payables and loans otherwise specifically provided for in any of
the Ancillary Agreements or hereunder), including, without limitation, in
respect of any cash balances, any cash balances representing deposited checks
or drafts for which only a provisional credit has been allowed or any cash
held in any centralized cash management system, between any member of the
Shipbuilding Group, on the one hand, and any member of the Energy Group, on
the other hand, shall, as of the close of business on the Distribution Date,
be settled, capitalized or converted into ordinary trade accounts, in each
case as may be agreed in writing prior to the Distribution Date by duly
authorized representatives of Tenneco, Shipbuilding Company and the Acquiror.
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(c) SETTLEMENT OF INTERCOMPANY ACCOUNTS BETWEEN INDUSTRIAL GROUP AND
SHIPBUILDING GROUP. All intercompany receivables, payables and loans (other
than receivables, payables and loans otherwise specifically provided for in
any of the Ancillary Agreements or hereunder), including, without limitation,
in respect of any cash balances, any cash balances representing deposited
checks or drafts for which only a provisional credit has been allowed or any
cash held in any centralized cash management system, between any member of the
Industrial Group, on the one hand, and any member of the Shipbuilding Group,
on the other hand, shall, as of the close of business on the Distribution
Date, be settled, capitalized or converted into ordinary trade accounts, in
each case as may be agreed in writing prior to the Distribution Date by duly
authorized representatives of Industrial Company and Shipbuilding Company.
(d) OPERATIONS IN ORDINARY COURSE. Except as otherwise provided in this
Agreement, the Merger Agreement or any Ancillary Agreement, during the period
from the date of this Agreement through the Distribution Date, each of
Tenneco, Industrial Company and Shipbuilding Company shall, and shall cause
any entity that is a Subsidiary of such party at any time during such period
to, conduct its business in a manner substantially consistent with current and
past operating practices and in the ordinary course, including, without
limitation, with respect to the payment and administration of accounts payable
and the collection and administration of accounts receivable, the purchase of
capital assets and equipment and the management of inventories.
SECTION 2.14. DIRECTOR, OFFICER AND EMPLOYEE RESIGNATIONS. Subject to the
provisions of SECTION 2.04 and SECTION 2.09 above:
(a) RESIGNATIONS BY DIRECTORS AND EMPLOYEES OF THE ENERGY GROUP. Tenneco
shall cause all of its directors and all employees of the Energy Group to
resign, effective as of the close of business on the Distribution Date,
from all boards of directors or similar governing bodies of each member of
the Industrial Group or the Shipbuilding Group on which they serve, and
from all positions as officers or employees of any member of the Industrial
Group or the Shipbuilding Group, except as otherwise set forth in the
Information Statements or mutually agreed to in writing on or prior to the
Distribution Date by Tenneco, on the one hand, and, as applicable,
Industrial Company and/or Shipbuilding Company, on the other hand.
(b) RESIGNATIONS BY DIRECTORS AND EMPLOYEES OF THE INDUSTRIAL GROUP.
Industrial Company shall cause all of its directors and all employees of
the Industrial Group to resign, effective as of the close of business on
the Distribution Date, from all boards of directors or similar governing
bodies of each member of the Energy Group or the Shipbuilding Group on
which they serve, and from all positions as officers or employees of any
member of the Energy Group or the Shipbuilding Group, except as otherwise
set forth in the Information Statements or mutually agreed to in writing on
or prior to the Distribution Date by Industrial Company, on the one hand,
and, as applicable, Tenneco and/or Shipbuilding Company, on the other hand.
(c) RESIGNATIONS BY DIRECTORS AND EMPLOYEES OF THE SHIPBUILDING GROUP.
Shipbuilding Company shall cause all of its directors and all employees of
the Shipbuilding Group to resign, effective as of the close of business on
the Distribution Date, from all boards of directors or similar governing
bodies of each member of the Energy Group or the Industrial Group on which
they serve, and from all positions as officers or employees of any member
of the Energy Group or the Industrial Group, except as otherwise set forth
in the Information Statements or mutually agreed to in writing on or prior
to the Distribution Date by Shipbuilding Company, on the one hand, and, as
applicable, Industrial Company and/or Tenneco, on the other hand.
SECTION 2.15. TRANSFERS NOT EFFECTED PRIOR TO THE DISTRIBUTIONS; TRANSFERS
DEEMED EFFECTIVE AS OF THE DISTRIBUTION DATE. To the extent that any transfers
contemplated by this ARTICLE II shall not have been consummated on or prior to
the Distribution Date, the parties hereto shall cooperate (and shall cause
each of their respective Affiliates and each member of their respective Groups
over which they have legal or effective direct or indirect control to
cooperate) to effect such transfers as promptly following the Distribution
Date as shall be practicable. Nothing herein shall be deemed to require the
transfer of any assets or the assumption of any Liabilities which by their
terms or operation of Law cannot be transferred or assumed; provided, however,
that the parties hereto shall cooperate (and shall cause each of their
respective Affiliates and each member of their respective Groups over which
they have legal or effective direct or indirect control to cooperate) to seek
to
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obtain any necessary consents or approvals for the transfer of all assets and
Liabilities contemplated to be transferred pursuant to this ARTICLE II. In the
event that any such transfer of assets or Liabilities has not been
consummated, from and after the Distribution Date the party retaining such
asset or Liability (or, as applicable, such other member or members of such
party's Group) shall hold such asset in trust for the use and benefit of the
party entitled thereto (at the expense of the party entitled thereto) or
retain such Liability for the account of the party by whom such Liability is
to be assumed pursuant hereto, as the case may be, and take such other action
as may be reasonably requested by the party to whom such asset is to be
transferred, or by whom such Liability is to be assumed, as the case may be,
in order to place such party, insofar as is reasonably possible, in the same
position as would have existed had such asset or Liability been transferred or
assumed as contemplated hereby. As and when any such asset or Liability
becomes transferable or assumable, such transfer shall be effected forthwith.
As of the Distribution Date, each party hereto (or, if applicable, such other
members of such party's Group) shall be deemed to have acquired (or, as
applicable, retained) complete and sole beneficial ownership over all of the
assets, together with all rights, powers and privileges incident thereto, and
shall be deemed to have assumed in accordance with the terms of this Agreement
all of the Liabilities, and all duties, obligations and responsibilities
incident thereto, which such party (or any other member of such party's Group)
is entitled to acquire or required to assume pursuant to the terms of this
Agreement.
SECTION 2.16. ANCILLARY AGREEMENTS. Prior to the Distribution Date, each of
Tenneco, Industrial Company and Shipbuilding Company shall enter into, and/or
where applicable shall cause such other members of their respective Groups to
enter into, (a) the Ancillary Agreements and (b) any other agreements in
respect of the Corporate Restructuring Transactions and the Distributions as
are reasonably necessary or appropriate in connection with the transactions
contemplated hereby and thereby so long as such agreements do not materially
delay or prevent consummation of the Merger or adversely affect the Energy
Business other than to a de minimis extent.
ARTICLE III
THE DISTRIBUTIONS
SECTION 3.01. TENNECO ACTION PRIOR TO THE DISTRIBUTIONS. Subject to the
terms and conditions set forth herein, Tenneco shall take, or cause to be
taken, the following acts or actions in connection with, and to otherwise
effect in accordance with the terms of this Agreement, the Distributions.
(a) DECLARATION OF DISTRIBUTIONS AND ESTABLISHMENT OF DISTRIBUTION DATE.
The Board of Directors of Tenneco shall, in its sole discretion and subject
to and in accordance with the applicable rules of the NYSE and provisions
of the DGCL, declare the Distributions and establish the Distribution
Record Date, the Distribution Date, the date on which Industrial Common
Shares, Shipbuilding Common Shares and any cash in lieu of fractional
shares shall be mailed to the Tenneco Holders and all appropriate
procedures in connection with the Distributions to the extent not provided
for herein; provided, however, that no such action shall create any
obligation on the part of Tenneco to effect the Distributions or in any way
limit Tenneco's power of termination as set forth in SECTION 8.11 hereof or
alter the consequences of any such termination from those specified in such
Section.
(b) NOTICE TO NYSE. Tenneco shall, to the extent possible, give the NYSE
not less than ten days advance notice of the Distribution Record Date in
compliance with Rule 10b-17 under the Exchange Act.
(c) MAILING OF INDUSTRIAL INFORMATION STATEMENT. Tenneco shall, as soon
as practicable after the Industrial Registration Statement shall have been
declared effective under the Exchange Act, cause the Industrial Information
Statement to be mailed to the Tenneco Holders.
(d) MAILING OF SHIPBUILDING INFORMATION STATEMENT. Tenneco shall, as soon
as practicable after the Shipbuilding Registration Statement shall have
been declared effective under the Exchange Act, cause the Shipbuilding
Information Statement to be mailed to the Tenneco Holders.
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SECTION 3.02. THE DISTRIBUTIONS.
(a) DUTIES AND OBLIGATIONS OF TENNECO. Subject to the conditions contained
herein, on the Distribution Date but effective immediately following the close
of business on the Distribution Date Tenneco shall:
(i) deliver to the Agent the share certificates representing the
Industrial Common Shares and Shipbuilding Common Shares issued to
Tenneco by Industrial Company and Shipbuilding Company, respectively,
pursuant to SECTION 2.02 hereof, endorsed by Tenneco in blank, for the
benefit of the Tenneco Holders; and
(ii) instruct the Agent to distribute, as soon as practicable
following consummation of the Distributions, to the Tenneco Holders the
following:
(A) one share of Industrial Common Stock for every one share of
Tenneco Common Stock;
(B) one share of Shipbuilding Common Stock for every five shares
of Tenneco Common Stock; and
(C) cash, if applicable, in lieu of fractional shares obtained in
the manner provided in SECTION 3.03 hereof.
(b) DUTIES AND RESPONSIBILITIES OF INDUSTRIAL COMPANY AND SHIPBUILDING
COMPANY. Industrial Subsidiary and Shipbuilding Subsidiary shall provide, or
cause to be provided, to the Agent sufficient certificates representing
Industrial Common Stock and Shipbuilding Common Stock, respectively, in such
denominations as the Agent may request in order to effect the Distributions.
All shares of Industrial Common Stock issued pursuant to the Industrial
Distribution will be validly issued, fully paid and nonassessable and free of
any preemptive (or similar) rights. All shares of Shipbuilding Common Stock
issued pursuant to the Shipbuilding Distribution will be validly issued, fully
paid and nonassessable and free of any preemptive (or similar) rights.
SECTION 3.03. FRACTIONAL SHARES.
(a) NO FRACTIONAL SHARES. Notwithstanding anything herein to the contrary,
no certificate or scrip evidencing a fractional share of Industrial Common
Stock or Shipbuilding Common Stock shall be issued in connection with the
Distributions, and any such fractional share interests to which a Tenneco
Holder would otherwise be entitled will not entitle such Tenneco Holder to
vote or to any rights of a stockholder of Industrial Company or Shipbuilding
Company, as the case may be. In lieu of any such fractional shares, each
Tenneco Holder who, but for the provisions of this SECTION 3.03, would be
entitled to receive a fractional share interest of Industrial Common Stock or
Shipbuilding Common Stock pursuant to the Distributions shall be paid cash,
without any interest thereon, as hereinafter provided. Tenneco shall instruct
the Agent to determine the number of whole shares and fractional shares of
Industrial Common Stock and Shipbuilding Common Stock allocable to each
Tenneco Holder, to aggregate all such fractional shares into whole shares, to
sell the whole shares obtained thereby in the open market at the then
prevailing prices on behalf of Tenneco Holders who otherwise would be entitled
to receive fractional share interests and to distribute to each such Tenneco
Holder his, her or its ratable share of the total proceeds of such sale, after
making appropriate deductions of the amount required for federal income tax
withholding purposes and after deducting any applicable transfer taxes. All
brokers' fees and commissions incurred in connection with such sales shall be
paid by Tenneco.
(b) UNCLAIMED STOCK OR CASH. Any Industrial Common Stock, Shipbuilding
Common Stock or cash in lieu of fractional shares and dividends or
distributions with respect to Industrial Common Stock or Shipbuilding Common
Stock that remain unclaimed by any Tenneco Holder 180 days after the
Distribution Date shall be returned to Tenneco and any such Tenneco Holders
shall look only to Tenneco for the Industrial Common Stock, Shipbuilding
Common Stock, cash, if any, in lieu of fractional share interests and any such
dividends or distributions to which they are entitled, subject in each case to
applicable escheat or other abandoned property laws.
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(c) BENEFICIAL OWNERS. Solely for purposes of computing fractional share
interests pursuant to SECTION 3.03(A), the beneficial owner of shares of
Tenneco Common Stock held of record in the name of a nominee will be treated
as the holder of record of such shares.
ARTICLE IV
CONDITIONS TO THE DISTRIBUTIONS
SECTION 4.01. CONDITIONS PRECEDENT TO THE DISTRIBUTIONS. The obligation of
Tenneco to cause the Distributions to be consummated shall be subject, at the
option of Tenneco, to the fulfillment or waiver, on or prior to the
Termination Date, of each of the following conditions.
(a) TAX SHARING AGREEMENT. Tenneco, Industrial Company, Shipbuilding
Company and Acquiror shall have executed and delivered the Tax Sharing
Agreement and such agreement shall be in full force and effect.
(b) BENEFITS AGREEMENT. Tenneco, Industrial Company and Shipbuilding
Company shall have executed and delivered the Benefits Agreement and such
agreement shall be in full force and effect.
(c) TRANSITION SERVICES AGREEMENT. Tenneco and Tenneco Business Services
Inc. shall have executed and delivered the Transition Services Agreement
and such agreement shall be in full force and effect.
(d) INSURANCE AGREEMENT. Tenneco, Industrial Company and Shipbuilding
Company shall have executed and delivered the Insurance Agreement and such
agreement shall be in full force and effect.
(e) DEBT AND CASH ALLOCATION AGREEMENT. Tenneco, Industrial Company and
Shipbuilding Company shall have executed and delivered the Debt and Cash
Allocation Agreement and such agreement shall be in full force and effect.
(f) EFFECTIVE DATE OF REGISTRATION STATEMENT. Each of the Registration
Statements shall have been declared effective by order of the Commission
and no stop order shall have been entered, and no proceeding for that
purpose shall have been initiated or threatened by the Commission with
respect thereto.
(g) NYSE LISTING. The Industrial Common Shares and the Shipbuilding
Common Shares shall have been approved for listing on the NYSE, subject to
official notice of issuance.
(h) TAX RULING. Tenneco shall have received rulings from the Internal
Revenue Service reasonably acceptable to Tenneco and Acquiror, which
rulings shall be in full force and effect as of the Distribution Date, to
the effect that:
(i) The Industrial Distribution as contemplated hereunder will be
tax-free for federal income tax purposes to Tenneco under Section
355(c)(1) of the Code and to the stockholders of Tenneco under
Section 355(a) of the Code;
(ii) The Shipbuilding Distribution as contemplated hereunder will be
tax-free for federal income tax purposes to Tenneco under
Section 355(c)(1) of the Code and to the stockholders of Tenneco
under Section 355(a) of the Code; and
(iii) The following distributions will be tax free to the respective
transferor corporations under Section 355(c)(1) of the Code and
to the respective stockholders of the transferor corporations
under Section 355(a) of the Code: (A) the distribution by the
Shipbuilding Company of the capital stock of Tenneco Packaging
Inc. to Tenneco Corporation contemplated under the Corporate
Restructuring Transactions; (B) the distribution by Tenneco
Corporation of the capital stock of the Shipbuilding Company
and the Industrial Company to Tennessee Gas Pipeline Company as
contemplated under the Corporate Restructuring Transactions;
and (C) the distribution by Tennessee Gas Pipeline Company of
the capital stock of the Shipbuilding Company and the
Industrial Company to Tenneco Inc. as contemplated under the
Corporate Restructuring Transactions.
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(i) PRE-DISTRIBUTION TRANSACTIONS. Each of the transactions and other
matters contemplated by ARTICLE II and SECTION 3.01 hereof (including,
without limitation, each of the distributions, transfers, conveyances,
contributions, assignments or other transactions included in, or otherwise
necessary to consummate, the Corporate Restructuring Transactions) shall
have been fully effected, consummated and accomplished.
(j) COVENANTS. The covenants contained in ARTICLE V of this Agreement
that are required to be performed on or before the Distribution Date shall
have been fully performed.
(k) NO PROHIBITIONS. Consummation of the transactions contemplated hereby
shall not be prohibited by Law and no Governmental Authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered
any statute, rule, regulation, executive order, decree, injunction or other
order (whether temporary, preliminary or permanent) which is in effect and
which materially restricts, prevents or prohibits consummation of the
Distributions, the Merger or any transaction contemplated by this Agreement
or the Merger Agreement, it being understood that the parties hereto hereby
agree to use their reasonable best efforts to cause any such decree,
judgment, injunction or other order to be vacated or lifted as promptly as
possible.
(l) CONSENTS. Tenneco, Industrial Company, Shipbuilding Company and the
other members of their respective Groups shall have obtained all Consents
the failure of which to obtain would, in the determination of the Board of
Directors of Tenneco, have a material adverse effect on the Energy Group,
the Industrial Group or the Shipbuilding Group, each taken as a whole, and
such Consents shall be in full force and effect.
(m) STOCKHOLDER APPROVAL. The Distributions shall have been approved by
the requisite vote of the holders of the outstanding Tenneco Common Stock
and the holders of the outstanding $7.40 Cumulative Preferred Stock of
Tenneco, voting together as a class, by the requisite vote of the holders
of the outstanding $4.50 Cumulative Preferred Stock of Tenneco and the
holders of the outstanding $7.40 Cumulative Preferred Stock of Tenneco,
voting together as a class, and by any requisite vote of the holders of the
outstanding New Preferred Stock (as defined in the Merger Agreement),
voting separately as a class, in accordance with the DGCL and the
provisions of Tenneco's Certificate of Incorporation.
(n) HSR ACT. The waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, applicable to the transactions
contemplated under the Merger Agreement shall have expired or been
terminated.
(o) DEBT REALIGNMENT. Each of the transactions and other matters
contemplated under the Debt Realignment (as defined under the Merger
Agreement) shall have been fully effected, consummated and accomplished.
SECTION 4.02. NO CONSTRAINT. Notwithstanding the provisions of SECTION 4.01
above (but subject to Tenneco's obligations under the Merger Agreement), the
fulfillment or waiver of any or all of the conditions precedent to the
Distributions set forth therein shall not:
(i) create any obligation on the part of Tenneco or any other party
hereto to effect the Distributions;
(ii) in any way limit Tenneco's right and power under SECTION 8.11 hereof
to terminate this Agreement and the process leading to the Distributions
and to abandon the Distributions; or
(iii) alter the consequences of any such termination under SECTION 8.11
hereof from those specified in such Section.
SECTION 4.03. DEFERRAL OF DISTRIBUTION DATE. If the Distribution Date shall
have been established by the Board of Directors of Tenneco but all the
conditions precedent to the Distributions set forth in this Agreement have not
theretofore been fulfilled or waived, or Tenneco does not reasonably
anticipate that they will be fulfilled or waived, on or prior to the date
established as the Distribution Date, Tenneco may, by resolution of its Board
of Directors (or a committee thereof, so authorized), defer the Distribution
Date to a later date.
SECTION 4.04. PUBLIC NOTICE OF DEFERRED DISTRIBUTION DATE. If the Board of
Directors (or a committee thereof, so authorized) of Tenneco shall defer the
Distribution Date in accordance with SECTION 4.03 above and public
announcement of the prior Distribution Date has theretofore been made, Tenneco
shall promptly thereafter
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issue, in accordance with the advice of legal counsel, a public announcement
with respect to such deferment and shall, with the advice of legal counsel,
take such other actions as may be deemed necessary or desirable with respect
to the dissemination of such information.
ARTICLE V
COVENANTS
SECTION 5.01. FURTHER ASSURANCES. Each of Tenneco, Industrial Company and
Shipbuilding Company shall use all reasonable efforts to:
(a) take or cause to be taken all actions, and to do or cause to be done
all things reasonably necessary, proper or advisable under applicable Law
and agreements or otherwise to consummate and make effective the
transactions contemplated hereby, including without limitation using
commercially reasonable efforts to obtain any consents and approvals from,
enter into any amendatory agreements with and make any applications,
registrations or filings with, any third Person or any Governmental
Authority necessary or desirable in order to consummate the transactions
contemplated hereby or to carry out the purposes of this Agreement; and
(b) execute and deliver such further instruments and documents and take
such other actions as the other party may reasonably request in order to
consummate the transactions contemplated hereby and effectuate the purposes
of this Agreement.
SECTION 5.02. TENNECO NAME. Industrial Company shall grant to each of
Tenneco and Shipbuilding Company transition licenses, in the forms of EXHIBIT
P and Q, respectively (the "Transition Trademark License"), to use the Tenneco
Trademarks and Tradenames for the limited use as more fully described below in
this SECTION 5.02 and in SECTION 5.03. Each of Tenneco and Shipbuilding
Company shall, and shall cause each of the other members of its Group over
which it has legal or effective direct or indirect control to, at its own
expense:
(a) Within 30 days following the Distribution Date, change, if necessary,
its corporate name to delete therefrom the word "Tenneco" or any other word
that is confusingly similar to the word "Tenneco" (except the word
"Tennessee"); and
(b) With respect to Tenneco, within two years following the Distribution
Date, and, with respect to Shipbuilding Company, within one year following
the Distribution Date, remove any and all references to the Tenneco
Trademark and Tradenames from any and all signs, displays or other
identification or advertising material (excluding any such material that is
the subject of SECTION 5.03 below). After the conclusion of such period,
each of Tenneco, Shipbuilding Company, and each other member of its
respective Group or over which it has legal or effective direct or indirect
control shall not use or display any of the Tenneco Trademarks and
Tradenames without the prior written consent of Industrial Company, which
consent may be withheld for any reason or no reason whatsoever. After the
Distribution Date, no party hereto shall represent or permit to be
represented to any third Person that it or any member of its Group has a
business affiliation with any other party hereto or any member of such
other party's Group, except as expressly permitted by any of the Ancillary
Agreements.
SECTION 5.03. SUPPLIES AND DOCUMENTS. Notwithstanding the provisions of
SECTION 5.02 above, for a period of six (6) months following the Distribution
Date, the Transition Trademark License shall license (on a nonexclusive basis)
to each of the members of the Energy Group and the Shipbuilding Group the
right to use existing supplies and documents which have imprinted thereon any
of the Tenneco Trademarks and Tradenames to the extent that such supplies and
documents were existing in the inventory of such member of the Energy Group or
Shipbuilding Group, as applicable, as of the Distribution Date.
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SECTION 5.04. ASSUMPTION AND SATISFACTION OF LIABILITIES. Except as
otherwise specifically set forth in any Ancillary Agreement, from and after
the Distribution Date:
(a) Tenneco shall, and shall cause each of the other members of the
Energy Group over which it has legal or effective direct or indirect
control to, assume, pay, perform and discharge all Energy Liabilities in
accordance with their terms, when determinable, and otherwise as determined
in accordance with the practice of the parties prior to the Distributions;
(b) Industrial Company shall, and shall cause each of the other members
of the Industrial Group over which it has legal or effective direct or
indirect control to, assume, pay, perform and discharge all Industrial
Liabilities in accordance with their terms, when determinable, and
otherwise as determined in accordance with the practice of the parties
prior to the Distributions; and
(c) Shipbuilding Subsidiary shall, and shall cause each of the other
members of the Shipbuilding Group over which it has legal or effective
direct or indirect control to, assume, pay, perform and discharge all
Shipbuilding Liabilities in accordance with their terms, when determinable,
and otherwise as determined in accordance with the practice of the parties
prior to the Distributions.
SECTION 5.05. NO REPRESENTATIONS OR WARRANTIES; CONSENTS.
(a) General. Each of the parties hereto understands and agrees that no party
hereto is, in this Agreement or in any other agreement or document
contemplated by this Agreement (including the Ancillary Agreements) or
otherwise, making any representation or warranty whatsoever, including without
limitation, any representation or warranty:
(i) as to the value or freedom from encumbrance of, or any other matter
concerning, any assets of such party; or
(ii) as to the legal sufficiency to convey title to any asset as of the
execution, delivery and filing of this Agreement or any Ancillary
Agreement, including, without limitation, any Conveyancing and Assumption
Instrument.
(b) DISCLAIMER OF MERCHANTABILITY OR FITNESS OF ASSETS. Each party hereto
further understands and agrees that there are no warranties, express or
implied, as to the merchantability or fitness of any of the assets either
transferred to or retained by the Energy Group, the Industrial Group or the
Shipbuilding Group, as the case may be, pursuant to Corporate Restructuring
Transactions and the other terms and provisions of this Agreement, any
Conveyancing and Assumption Agreement or any Ancillary Agreement, and all such
assets which are so transferred will be transferred on an "AS IS, WHERE IS"
basis, and the party to which any such assets are transferred hereunder, or
which retains assets hereunder, shall bear the economic and legal risk that
any conveyances of such assets shall prove to be insufficient or that the
title of such party or any other member of its respective Group to any such
assets shall be other than good and marketable and free from encumbrances.
(c) ACKNOWLEDGEMENT OF DISCLOSURE AND WAIVER. Each of Industrial Company and
Shipbuilding Company acknowledges, for itself and on behalf of each other
member of its respective Group, that:
(i) Tenneco and the other members of the Energy Group have disclosed, and
Industrial Company and Shipbuilding Company have knowledge of, all matters
pertaining to the assets and properties to be conveyed to Industrial
Company, Shipbuilding Company or any member of their respective Group
pursuant to the Corporate Restructuring Transactions or otherwise pursuant
to the other terms of this Agreement to the same extent that Tenneco and
the other members of the Energy Group have knowledge of such matters; and
(ii) such knowledge constitutes notice and disclosure of such matters.
Each of Industrial Company and Shipbuilding Company waives, to the fullest
extent permitted by law, for itself and for each other member of its
respective Group, any and all claims or causes of action which any of them may
have arising out of such matters or the failure of any Conveyancing and
Assumption Instrument to describe or refer to, or provide notice of, any such
matters.
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(d) NO REPRESENTATIONS OR WARRANTIES REGARDING CONSENTS. Each of the parties
hereto understands and agrees that no party hereto is, in this Agreement or
any Ancillary Agreement or in any other agreement or document contemplated by
this Agreement or any Ancillary Agreement or otherwise, representing or
warranting in any way that the obtaining of any consents or approvals, the
execution and delivery of any amendatory agreements and the making of any
filings or applications contemplated by this Agreement will satisfy the
provisions of any or all applicable agreements or the requirements of any or
all applicable Law. Each of the parties hereto further agrees and understands
that the party to which any assets are transferred as contemplated by the
Corporate Restructuring Transactions or the other provisions of this Agreement
shall bear the economic and legal risk that any necessary consents or
approvals are not obtained, that any necessary amendatory agreements are not
executed and delivered or that any requirements of Laws are not complied with.
(e) COVENANT TO USE REASONABLE EFFORTS TO OBTAIN CONSENTS. Notwithstanding
the provisions of SECTION 5.05(D) above, each of the parties hereto shall (and
shall cause each other member of its respective Group over which it has direct
or indirect legal or effective control to) use commercially reasonable efforts
to obtain all consents and approvals, to enter into all amendatory agreements
and to make all filings and applications which may be reasonably required for
the consummation of the transactions contemplated by this Agreement and shall
take all such further reasonable actions as shall be reasonably necessary to
preserve for each of the Energy Group, the Industrial Group and the
Shipbuilding Group, to the greatest extent feasible, the economic and
operational benefits of the allocation of assets and Liabilities contemplated
by this Agreement. In case at any time after the Distribution Date any further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of each party to this Agreement shall take
all such necessary or desirable action.
SECTION 5.06. REMOVAL OF CERTAIN GUARANTEES.
(a) REMOVAL OF ENERGY GROUP AS GUARANTOR OF INDUSTRIAL AND SHIPBUILDING
LIABILITIES. Except as otherwise contemplated in the Corporate Restructuring
Transactions or otherwise specified in any Ancillary Agreement, each of
Tenneco, Industrial Company and Shipbuilding Company shall use its
commercially reasonable efforts to have, on or prior to the Distribution Date,
or as soon as practicable thereafter, Tenneco and any other member of the
Energy Group removed as a guarantor of, or obligor under or for, any
Industrial Liability or Shipbuilding Liability.
(b) REMOVAL OF INDUSTRIAL GROUP AS GUARANTOR OF ENERGY AND SHIPBUILDING
LIABILITIES. Except as otherwise contemplated in the Corporate Restructuring
Transactions or otherwise specified in any Ancillary Agreement, each of
Tenneco, Industrial Company and Shipbuilding Company shall use its
commercially reasonable efforts to have, on or prior to the Distribution Date,
or as soon as practicable thereafter, Industrial Company and any other member
of the Industrial Group removed as a guarantor of, or obligor under or for,
any Energy Liability or Shipbuilding Liability.
(c) REMOVAL OF SHIPBUILDING GROUP AS GUARANTOR OF ENERGY AND INDUSTRIAL
LIABILITIES. Except as otherwise contemplated in the Corporate Restructuring
Transactions or otherwise specified in any Ancillary Agreement, each of
Tenneco, Industrial Company and Shipbuilding Company shall use their
commercially reasonable efforts to have, on or prior to the Distribution Date,
or as soon as practicable thereafter, Shipbuilding Company and any other
member of the Shipbuilding Group removed as a guarantor of, or obligor under
or for, any Energy Liability or Industrial Liability.
SECTION 5.07. PUBLIC ANNOUNCEMENTS. Each party hereto shall consult with
each other before issuing any press release or otherwise issuing any other
similar written public statement with respect to this Agreement or the
Distributions and shall not issue any such press release or make any such
public statement without the prior consent of each other party, which shall
not be unreasonably withheld; provided, however, that a party may, without the
prior consent of any other party, issue such press release or other similar
written public statement as may be required by law or any listing agreement
with a national securities exchange to which any party hereto (or any member
of such party's Group) is a party if it has used all reasonable efforts to
consult with such other party and to obtain such party's consent but has been
unable to do so in a timely manner.
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SECTION 5.08. INTERCOMPANY AGREEMENTS. Effective as of the consummation of
the Distributions, each of Industrial Company, Shipbuilding Company and
Tenneco shall (and shall cause each other member of its respective Group over
which it has legal or effective direct or indirect control) to terminate each
and every agreement between it and any member of any of the other Groups other
than this Agreement, any of the Ancillary Agreements and any of the license
agreements referred to in SECTION 2.06(F) above; provided, however, that such
termination shall not have any effect whatsoever on any of its rights and/or
obligations that accrued or were incurred prior to the Distribution Date
(subject to the terms of SECTION 2.13 above).
SECTION 5.09. TAX MATTERS. Each of Tenneco, the Industrial Company and the
Shipbuilding Company intend the Distributions to be treated as tax-free
distributions under Code Section 355 and each such party shall use its
reasonable best efforts to cause the Distributions to so qualify. Neither
Tenneco, on the one hand, nor the Industrial Company and Shipbuilding Company,
on the other hand, shall take any action (other than the Merger) which might
cause:
(i) the Distributions to fail to qualify as tax-free distributions under
Code Section 355;
(ii) any other transfer described in the Corporate Restructuring
Transactions that is intended (as described in Tenneco's request for
rulings from the Internal Revenue Service) to qualify as a tax free
transfer under Code Sections 332, 351, 355 or 368 to fail to so qualify; or
(iii) Tenneco or any Energy Subsidiary to recognize any gains relating to
deferred intercompany transactions or excess loss accounts between or among
any member of affiliated group of corporations of which Tenneco is the
common parent, other than those defined intercompany gains listed on
EXHIBIT H to the Merger Agreement.
ARTICLE VI
ACCESS TO INFORMATION
SECTION 6.01. PROVISION, TRANSFER AND DELIVERY OF APPLICABLE CORPORATE
RECORDS.
(a) PROVISION, TRANSFER AND DELIVERY OF INDUSTRIAL RECORDS. Each of Tenneco
and Shipbuilding Company shall (and shall cause each other member of its
respective Group over which it has legal or effective direct or indirect
control to) arrange as soon as practicable following the Distribution Date for
the transportation (at Industrial Company's cost) to Industrial Company of the
Books and Records in its possession (i) that relate primarily to the
Industrial Business or are necessary to operate the Industrial Business
(collectively, the "INDUSTRIAL RECORDS"), and (ii) that consist of the
corporate minutes of the Board of Directors (or committees thereof) of Tenneco
or otherwise relate to the business, administrative and management operations
of Tenneco as the parent holding company of the Energy Business, Industrial
Business and Shipbuilding Business (collectively, the "TENNECO CORPORATE
RECORDS") except to the extent such items are already in the possession of any
member of the Industrial Group. The Industrial Records and the Tenneco
Corporate Records shall be the property of Industrial Company, but shall be
available to each of Tenneco and Shipbuilding Company for review and
duplication, at their cost, pursuant to the terms of this Agreement.
(b) PROVISION, TRANSFER AND DELIVERY OF SHIPBUILDING RECORDS. Each of
Tenneco and Industrial Company shall (and shall cause each other member of its
respective Group over which it has legal or effective direct or indirect
control to) arrange as soon as practicable following the Distribution Date for
the transportation (at Shipbuilding Company's cost) to Shipbuilding Company of
the Books and Records in its possession that relate primarily to the
Shipbuilding Business or are necessary to operate the Shipbuilding Business
(collectively, the "SHIPBUILDING RECORDS"), except to the extent such items
are already in the possession of any member of the Shipbuilding Group. The
Shipbuilding Records shall be the property of Shipbuilding Company, but shall
be available to each of Tenneco and Industrial Company for review and
duplication , at their cost, pursuant to the terms of this Agreement.
(c) PROVISION, TRANSFER AND DELIVERY OF ENERGY RECORDS. Each of Industrial
Company and Shipbuilding Company shall (and shall cause each other member of
its respective Group over which it has legal or effective direct or indirect
control to) arrange as soon as practicable following the Distribution Date for
the transportation (at Tenneco's cost) to Tenneco of the Books and Records in
its possession that relate primarily to the Energy
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Business or are necessary to operate the Energy Business (collectively, the
"ENERGY RECORDS"), except to the extent such items are already in the
possession of any member of the Energy Group. The Energy Records shall be the
property of Tenneco, but shall be available to each of Industrial Company and
Shipbuilding Company for review and duplication, at their cost, pursuant to
the terms of this Agreement.
SECTION 6.02. ACCESS TO INFORMATION.
(a) ACCESS TO BOOKS AND RECORDS. Unless otherwise contemplated by SECTION
6.06 hereof, from and after the Distribution Date, each of Tenneco, Industrial
Company and Shipbuilding Company shall (and shall cause each of the other
members of its respective Group over which it has legal or effective direct or
indirect control to) afford to each other party and its authorized
accountants, counsel and other designated representatives reasonable access
and duplicating rights (all such duplicating costs to be borne by the
requesting party) during normal business hours, subject to appropriate
restrictions for classified, privileged or confidential information, to the
personnel, properties, Books and Records and other data and information of
such party and each other member of such party's Group relating to operations
prior to the Distributions insofar as such access is reasonably required by
the other requesting party for the conduct of the requesting party's business
(but not for competitive purposes).
(b) PROVISION OF POST-DISTRIBUTION COMMISSION FILINGS. For a period of five
years following the Distribution Date, each of Tenneco, Industrial Company and
Shipbuilding Company shall (and shall cause each of the other members of its
respective Group over which it has legal or effective direct or indirect
control to) provide to the other, promptly following such time at which such
documents are filed with the Commission, all documents (other than documents
or portions thereof for which confidential treatment has been granted or a
request for confidential treatment is pending) filed by it and by each other
member of such party's Group with the Commission pursuant to the Securities
Act or the periodic and interim reporting requirements of the Exchange Act and
the rules and regulations of the Commission promulgated thereunder.
SECTION 6.03. REIMBURSEMENT: OTHER MATTERS. Except to the extent otherwise
contemplated hereby or by any Ancillary Agreement, a party providing Books and
Records or access to information to any other party (or such party's
representatives) under this ARTICLE VI shall be entitled to receive from such
other party, upon the presentation of invoices therefor, payments for such
amounts, relating to supplies, disbursements and other out-of-pocket expenses,
as may be reasonably incurred in providing such Books and Records or access to
information.
SECTION 6.04. CONFIDENTIALITY.
(a) GENERAL RESTRICTION ON DISCLOSURE. Each of Tenneco, Industrial Company
and Shipbuilding Company shall not (and shall not permit any other member of
its respective Group over which it has legal or effective direct or indirect
control to) use or permit the use of (without the prior written consent of the
other) and shall hold, and shall cause its consultants, advisors and other
representatives and any other member of its respective Group (over which it
has legal or effective direct or indirect control) to hold, in strict
confidence, all information concerning each other party hereto and the other
members of such other party's Group in its possession, custody or control to
the extent such information either
(i)relates to the period up to the Distribution Date,
(ii)relates to any Ancillary Agreement, or
(iii)is obtained in the course of performing services for the other party
pursuant to any Ancillary Agreement, and each party hereto shall not (and
shall cause each other member of its respective Group over which it has
legal or effective direct or indirect control not to) otherwise release or
disclose such information to any other Person, except its auditors,
attorneys, financial advisors, bankers and other consultants and advisors,
without the prior written consent of the other affected party or parties,
unless compelled to disclose such information by judicial or administrative
process or unless such disclosure is required by Law and such party has
used commercially reasonable efforts to consult with the other affected
party or parties prior to such disclosure.
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(b) COMPELLED DISCLOSURE. To the extent that a party hereto is compelled by
judicial or administrative process to disclose such information under
circumstances in which any evidentiary privilege would be available, such
party agrees to assert such privilege in good faith prior to making such
disclosure. Each of the parties shall consult with each relevant other party
in connection with any such judicial or administrative process, including,
without limitation, in determining whether any privilege is available, and
shall not object to each such relevant party and its counsel participating in
any hearing or other proceeding (including, without limitation, any appeal of
an initial order to disclose) in respect of such disclosure and assertion of
privilege.
(c) EXCEPTIONS TO CONFIDENTIAL TREATMENT. Anything herein to the contrary
notwithstanding, no party hereto shall be prohibited from using or permitting
the use of, or required to hold in confidence, any information to the extent
that (i) such information has been or is in the public domain through no fault
of such party, (ii) such information is, after the Distribution Date, lawfully
acquired from other sources by such party, or (iii) this Agreement, any
Ancillary Agreement or any other agreement entered into pursuant hereto
permits the use or disclosure of such information by such party.
SECTION 6.05. WITNESS SERVICES. At all times from and after the Distribution
Date, each of Tenneco, Industrial Company and Shipbuilding Company shall use
its reasonable efforts to make available to each other party hereto, upon
reasonable written request, the officers, directors, employees and agents of
each member of its respective Group for fact finding, consultation or
interviews and as witnesses to the extent that:
(a) such persons may reasonably be required in connection with the
prosecution or defense of any Action in which the requesting party or any
member of its respective Group may from time to time be involved; and
(b) there is no conflict in the Action between the requesting party or
any member of its respective Group and the party to which a request is made
pursuant to this SECTION 6.05 or any member of such party's Group. Except
as otherwise agreed by the parties, a party providing witness services to
any other party under this Section shall be entitled to receive from the
recipient of such services, upon the presentation of invoices therefor,
payments for such amounts, relating to supplies, disbursements and other
out-of-pocket expenses (but not salary expenses) and direct and indirect
costs of employees who participate in fact finding, consultation or
interviews or are witnesses, as are actually and reasonably incurred in
providing such fact finding, consulting, interviews or witness services by
the party providing such services.
SECTION 6.06. RETENTION OF RECORDS. Except when a longer period is required
by Law or is specifically provided for herein or in any Ancillary Agreement,
each party hereto shall cause the members of its Group over which it has legal
or effective direct or indirect control, to retain, for a period of at least
seven years following the Distribution Date, all material information
(including without limitation all material Books and Records) relating to such
Group and its operations prior to the Distribution Date. Notwithstanding the
foregoing, any party hereto may offer in writing to deliver to the other
parties all or a portion of such information as it relates to members of the
offering party's Group and, if such offer is accepted in writing within 90
days after receipt thereof, the offering party shall promptly arrange for the
delivery of such information (or copies thereof) to each accepting party (at
the expense of such accepting party). If such offer is not so accepted, the
offered information may be destroyed or otherwise disposed of by the offering
party at any time thereafter.
SECTION 6.07. PRIVILEGED MATTERS.
(a) PRIVILEGED INFORMATION. Each of the parties hereto shall, and shall
cause the members of its Group over which it has legal or effective direct
or indirect control to, use its reasonable efforts to maintain, preserve,
protect and assert all privileges including, without limitation, all
privileges arising under or relating to the attorney-client relationship
(including without limitation the attorney-client and attorney work product
privileges) that relate directly or indirectly to any member of any other
Group for any period prior to the Distribution Date ("PRIVILEGE" or
"PRIVILEGES"). Each of the parties hereto shall use its reasonable efforts
not to waive, or permit any member of its Group over which it has legal or
effective direct or indirect control to waive, any such Privilege that
could be asserted under applicable Law without the prior written consent of
the other parties. With respect to each party, the rights and obligations
created by this SECTION 6.07 shall apply to all information as to which a
member of any Group did assert or, but for the
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Distributions, would have been entitled to assert the protection of a
Privilege ("PRIVILEGED INFORMATION") including, but not limited to, any and
all information that either:
(i) was generated or received prior to the Distribution Date but
which, after the Distributions, is in the possession of a member of
another Group; or
(ii) is generated or received after the Distribution Date but refers
to or relates to Privileged Information that was generated or received
prior to the Distribution Date.
(b) PRODUCTION OF PRIVILEGED INFORMATION. Upon receipt by a party or any
member of its Group of any subpoena, discovery or other request that
arguably calls for the production or disclosure of Privileged Information,
or if a party or any member of its Group obtains knowledge that any current
or former employee of such party or any member of its Group has received
any subpoena, discovery or other request which arguably calls for the
production or disclosure of Privileged Information, such party shall
promptly notify the other parties of the existence of the request and shall
provide the other parties a reasonable opportunity to review the
information and to assert any rights it may have under this SECTION 6.07 or
otherwise to prevent the production or disclosure of Privileged
Information. No party will, or will permit any member of its Group over
which it has direct or indirect legal or effective control to, produce or
disclose any information arguably covered by a Privilege under this SECTION
6.07 unless:
(i) each other party has provided its express written consent to such
production or disclosure; or
(ii) a court of competent jurisdiction has entered an order which is
not then appealable or a final, nonappealable order finding that the
information is not entitled to protection under any applicable
privilege.
(c) NO WAIVER. The parties hereto understand and agree that the transfer
of any Books and Records or other information between any members of the
Energy Group, the Industrial Group, or the Shipbuilding Group shall be made
in reliance on the agreements of Tenneco, Industrial Company and
Shipbuilding Company, as set forth in SECTION 6.04 and SECTION 6.07 hereof,
to maintain the confidentiality of Privileged Information and to assert and
maintain all applicable Privileges. The Books and Records being transferred
pursuant to SECTION 6.01 hereof, the access to information being granted
pursuant to SECTION 6.02 hereof, the agreement to provide witnesses and
individuals pursuant to SECTION 6.05 hereof and the transfer of Privileged
Information to either party pursuant to this Agreement shall not be deemed
a waiver of any Privilege that has been or may be asserted under this
Section or otherwise.
ARTICLE VII
INDEMNIFICATION
SECTION 7.01. INDEMNIFICATION BY TENNECO. Except as otherwise specifically
set forth in any provision of this Agreement or of any Ancillary Agreement,
Tenneco shall, to the fullest extent permitted by law, indemnify, defend and
hold harmless the Industrial Indemnitees and the Shipbuilding Indemnitees from
and against any and all Indemnifiable Losses of the Industrial Indemnitees and
the Shipbuilding Indemnitees, respectively, arising out of, by reason of or
otherwise in connection with either (i) the Energy Liabilities, or (ii) the
breach by Tenneco of any provision of this Agreement or any Ancillary
Agreement.
SECTION 7.02. INDEMNIFICATION BY INDUSTRIAL COMPANY. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, Industrial Company shall, to the fullest extent permitted by law,
indemnify, defend and hold harmless the Energy Indemnitees and the
Shipbuilding Indemnitees from and against any and all Indemnifiable Losses of
the Energy Indemnitees and the Shipbuilding Indemnitees, respectively, arising
out of, by reason of or otherwise in connection with either (i) the Industrial
Liabilities, or (ii) the breach by Industrial Company of any provision of this
Agreement or any Ancillary Agreement.
SECTION 7.03. INDEMNIFICATION BY SHIPBUILDING COMPANY. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, Shipbuilding Company shall, to the fullest
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entent permitted by law, indemnify, defend and hold harmless the Energy
Indemnitees and the Industrial Indemnitees from and against any and all
Indemnifiable Losses of the Energy Indemnitees and the Industrial Indemnitees,
respectively, arising out of, by reason of or otherwise in connection with
either (i) the Shipbuilding Liabilities, or (ii) the breach by Shipbuilding
Company of any provision of this Agreement or any Ancillary Agreement. In
addition, and without limiting the generality of the foregoing indemnification
provisions of this SECTION 7.03, Shipbuilding Company shall, to the fullest
extent permitted by law, indemnify, defend and hold harmless the Industrial
Indemnitees and the Energy Indemnitees from and against any and all
Indemnifiable Losses of the Industrial Indemnitees and the Energy Indemnitees,
respectively, arising out of, by reason of or otherwise in connection with any
matter, of whatever kind or nature, relating in any way to the commercial
ships commonly known as the "Double Eagle" product tankers, including without
limitation, (i) the design, engineering or construction of any of the Double
Eagle product tankers, (ii) the sale or other disposition of any of the Double
Eagle product tankers (or the sale or other disposition of any direct or
indirect equity interest in any of the Double Eagle product tankers), (iii)
the direct or indirect financing of the construction of any of the Double
Eagle product tankers or any other financing relating to any of the Double
Eagle product tankers, (iv) the direct or indirect equity investments in any
of the Double Eagle product tankers, (v) the purchase of raw materials and
other materials and services in connection with the design, construction or
engineering of any of the Double Eagle product tankers, (vi) the negotiation
of any contract for the construction of or financing for the construction of,
any of the Double Eagle product tankers, or (vii) the operation by any Person
whatsoever of any of the Double Eagle product tankers.
SECTION 7.04. LIMITATIONS ON INDEMNIFICATION OBLIGATIONS.
(a) REDUCTIONS FOR INSURANCE PROCEEDS AND OTHER RECOVERIES. The amount that
any party (an "INDEMNIFYING PARTY") is or may be required to pay to any other
Person (an "INDEMNITEE") pursuant to SECTION 7.01, SECTION 7.02 or SECTION
7.03 above, as applicable, shall be reduced (retroactively or prospectively)
by any Insurance Proceeds or other amounts actually recovered from third
parties by or on behalf of such Indemnitee in respect of the related
Indemnifiable Losses (except that nothing herein shall be construed as
requiring any Indemnitee in respect of any Shipbuilding Securities Liability
to file any claim for insurance). The existence of a claim by an Indemnitee
for insurance or against a third party in respect of any Indemnifiable Loss
shall not, however, delay any payment pursuant to the indemnification
provisions contained herein and otherwise determined to be due and owing by an
Indemnifying Party. Rather the Indemnifying Party shall make payment in full
of such amount so determined to be due and owing by it against an assignment
by the Indemnitee to the Indemnifying Party of the entire claim of the
Indemnitee for such insurance or against such third party. Notwithstanding any
other provisions of this Agreement, it is the intention of the parties hereto
that no insurer or any other third party shall be (i) entitled to a benefit it
would not be entitled to receive in the absence of the foregoing
indemnification provisions or (ii) relieved of the responsibility to pay any
claims for which it is obligated. If an Indemnitee shall have received the
payment required by this Agreement from an Indemnifying Party in respect of
any Indemnifiable Losses and shall subsequently actually receive Insurance
Proceeds or other amounts in respect of such Indemnifiable Losses, then such
Indemnitee shall hold such Insurance Proceeds in trust for the benefit of such
Indemnifying Party and shall pay to such Indemnifying Party a sum equal to the
amount of such Insurance Proceeds or other amounts actually received, up to
the aggregate amount of any payments received from such Indemnifying Party
pursuant to this Agreement in respect of such Indemnifiable Losses.
(b) FOREIGN CURRENCY ADJUSTMENTS. In the event that any indemnification
payment required to be made hereunder or under any Ancillary Agreement shall
be denominated in a currency other than U.S. Dollars, the amount of such
payment shall be translated into U.S. Dollars using the foreign exchange rate
for such currency determined in accordance with the following rules:
(i) with respect to any Indemnifiable Losses arising from the payment by
a financial institution under a guarantee, comfort letter, letter of
credit, foreign exchange contract or similar instrument, the foreign
exchange rate for such currency shall be determined as of the date on which
such financial institution shall have been reimbursed;
(ii) with respect to any Indemnifiable Losses covered by insurance, the
foreign exchange rate for such currency shall be the foreign exchange rate
employed by the insurance company providing such insurance in settling such
Indemnifiable Losses with the Indemnifying Party; and
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(iii) with respect to any Indemnifiable Losses not covered by either
clause (i) or (ii) above, the foreign exchange rate for such currency shall
be determined as of the date that notice of the claim with respect to such
Indemnifiable Losses shall be given to the Indemnitee.
SECTION 7.05. PROCEDURES FOR INDEMNIFICATION. Except as otherwise
specifically provided in any Ancillary Agreement, including, without
limitation, the Tax Sharing Agreement and the Benefits Agreement:
(a) NOTICE OF THIRD PARTY CLAIMS. If a claim or demand is made against an
Indemnitee by any Person who is not a member of the Energy Group, Industrial
Group or Shipbuilding Group (a "THIRD PARTY CLAIM") as to which such
Indemnitee is entitled to indemnification pursuant to this Agreement, such
Indemnitee shall notify the Indemnifying Party in writing, and in reasonable
detail, of the Third Party Claim promptly (and in any event within 15 business
days) after receipt by such Indemnitee of written notice of the Third Party
Claim; provided, however, that failure to give such notification shall not
affect the Indemnitee's right to indemnification hereunder except to the
extent the Indemnifying Party shall have been actually prejudiced as a result
of such failure (except that the Indemnifying Party shall not be liable for
any expenses incurred during the period in which the Indemnitee failed to give
such notice). Thereafter, the Indemnitee shall deliver to the Indemnifying
Party, promptly (and in any event within 15 business days) after the
Indemnitee's receipt thereof, copies of all notices and documents (including
court papers) received by the Indemnitee relating to the Third Party Claim.
(b) LEGAL DEFENSE OF THIRD PARTY CLAIMS. If a Third Party Claim is made
against an Indemnitee, the Indemnifying Party shall be entitled to participate
in the defense thereof and, if it so chooses, to assume the defense thereof
with counsel selected by the Indemnifying Party, which counsel shall be
reasonably satisfactory to the Indemnitee. Should the Indemnifying Party so
elect to assume the defense of a Third Party Claim, the Indemnifying Party
shall not be liable to the Indemnitee for legal or other expenses subsequently
incurred by the Indemnitee in connection with the defense thereof. If the
Indemnifying Party assumes such defense, the Indemnitee shall have the right
to participate in the defense thereof and to employ counsel, at its own
expense, separate from the counsel employed by the Indemnifying Party, it
being understood that the Indemnifying Party shall control such defense. The
Indemnifying Party shall be liable for the reasonable fees and expenses of
counsel employed by the Indemnitee for any period during which the
Indemnifying Party has failed to assume the defense of the Third Party Claim
(other than during the period prior to the time the Indemnitee shall have
given notice of the Third Party Claim as provided above). If the Indemnifying
Party so elects to assume the defense of any Third Party Claim, all of the
Indemnitees shall cooperate with the Indemnifying Party in the defense or
prosecution thereof. Notwithstanding the foregoing:
(i) the Indemnifying Party shall not be entitled to assume the defense of
any Third Party Claim (and shall be liable to the Indemnitee for the
reasonable fees and expenses of counsel incurred by the Indemnitee in
defending such Third Party Claim) if the Third Party Claim either (A) seeks
an order, injunction or other equitable relief or relief for other than
money damages against the Indemnitee which the Indemnitee reasonably
determines, after conferring with its counsel, cannot be separated from any
related claim for money damages; provided, however, that if such equitable
relief or other relief portion of the Third Party Claim can be so separated
from that for money damages, the Indemnifying Party shall be entitled to
assume the defense of the portion relating to money damages; or (B) relates
to or arises out of any Shipbuilding Securities Liability.
(ii) an Indemnifying Party shall not be entitled to assume the defense of
any Third Party Claim (and shall be liable for the reasonable fees and
expenses of counsel incurred by the Indemnitee in defending such Third
Party Claim) if, in the Indemnitee's reasonable judgment, a conflict of
interest between such Indemnitee and such Indemnifying Party exists in
respect of such Third Party Claim; and
(iii) if at any time after assuming the defense of a Third Party Claim an
Indemnifying Party shall fail to prosecute or withdraw from the defense of
such Third Party Claim, the Indemnitee shall be entitled to resume the
defense thereof and the Indemnifying Party shall be liable for the
reasonable fees and expenses of counsel incurred by the Indemnitee in such
defense.
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(c) SETTLEMENT OF THIRD PARTY CLAIMS. Except as otherwise provided below in
this SECTION 7.05(C), or as otherwise specifically provided in any Ancillary
Agreement, including without limitation, the Tax Sharing Agreement and the
Benefits Agreement, if the Indemnifying Party has assumed the defense of any
Third Party Claim, then
(i) in no event will the Indemnitee admit any liability with respect to,
or settle, compromise or discharge, any Third Party Claim without the
Indemnifying Party's prior written consent; provided, however, that the
Indemnitee shall have the right to settle, compromise or discharge such
Third Party Claim without the consent of the Indemnifying Party if the
Indemnitee releases the Indemnifying Party from its indemnification
obligation hereunder with respect to such Third Party Claim and such
settlement, compromise or discharge would not otherwise adversely affect
the Indemnifying Party, and
(ii) the Indemnitee will agree to any settlement, compromise or discharge
of a Third Party Claim that the Indemnifying Party may recommend and that
by its terms obligates the Indemnifying Party to pay the full amount of the
liability in connection with such Third Party Claim and releases the
Indemnitee completely in connection with such Third Party Claim and that
would not otherwise adversely affect the Indemnitee.
provided, however, that the Indemnitee may refuse to agree to any such
settlement, compromise or discharge if the Indemnitee agrees that the
Indemnifying Party's indemnification obligation with respect to such Third
Party Claim shall not exceed the amount that would be required to be paid by
or on behalf of the Indemnifying Party in connection with such settlement,
compromise or discharge. If the Indemnifying Party has not assumed the defense
of a Third Party Claim then in no event shall the Indemnitee settle,
compromise or discharge such Third Party Claim without providing prior written
notice to the Indemnifying Party, which shall have the option within 15
business days following receipt of such notice to
(i) approve and agree to pay the settlement,
(ii) approve the amount of the settlement, reserving the right to contest
the Indemnitee's right to indemnity pursuant to this Agreement,
(iii) disapprove the settlement and assume in writing all past and future
responsibility for such Third Party Claim (including all of Indemnitee's
prior expenditures in connection therewith), or
(iv) disapprove the settlement and continue to refrain from participation
in the defense of such Third Party Claim, in which event the Indemnifying
Party shall have no further right to contest the amount or reasonableness
of the settlement if the Indemnitee elects to proceed therewith.
In the event the Indemnifying Party does not respond to such written notice
from the Indemnitee within such 15 business-day period, the Indemnifying Party
shall be deemed to have elected option (i).
(d) OTHER CLAIMS. Any claim on account of an Indemnifiable Loss which does
not result from a Third Party Claim shall be asserted by written notice given
by the Indemnitee to the applicable Indemnifying Party. Such Indemnifying
Party shall have a period of 15 business days after the receipt of such notice
within which to respond thereto. If such Indemnifying Party does not respond
within such 15 business-day period, such Indemnifying Party shall be deemed to
have refused to accept responsibility to make payment. If such Indemnifying
Party does not respond within such 15 business-day period or rejects such
claim in whole or in part, such Indemnitee shall be free to pursue such
remedies as may be available to such party under applicable Law or under this
Agreement.
SECTION 7.06. INDEMNIFICATION PAYMENTS. Indemnification required by this
ARTICLE VII shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
loss, liability, claim, damage or expense is incurred.
SECTION 7.07. OTHER ADJUSTMENTS.
(a) ADJUSTMENTS FOR TAXES. The amount of any Indemnifiable Loss shall be:
(i) increased to take into account any net Tax cost actually incurred by
the Indemnitee arising from any payments received from the Indemnifying
Party (grossed up for such increase); and
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(ii) reduced to take account of any net Tax benefit actually realized by
the Indemnitee arising from the incurrence or payment of any such
Indemnifiable Loss.
In computing the amount of such Tax cost or Tax benefit, the Indemnitee shall
be deemed to recognize all other items of income, gain, loss, deduction or
credit before recognizing any item arising from the receipt of any payment
with respect to an Indemnifiable Loss or the incurrence or payment of any
Indemnifiable Loss.
(b) REDUCTIONS FOR SUBSEQUENT RECOVERIES OR OTHER EVENTS. In addition to any
adjustments required pursuant to SECTION 7.04 hereof or SECTION 7.07(A) above,
if the amount of any Indemnifiable Losses shall, at any time subsequent to any
indemnification payment made by the Indemnifying Party pursuant to this
ARTICLE VII, be reduced by recovery, settlement or otherwise, the amount of
such reduction, less any expenses incurred in connection therewith, shall
promptly be repaid by the Indemnitee to the Indemnifying Party, up to the
aggregate amount of any payments received from such Indemnifying Party
pursuant to this Agreement in respect of such Indemnifiable Losses.
SECTION 7.08. OBLIGATIONS ABSOLUTE. The foregoing contractual obligations of
indemnification set forth in this ARTICLE VII shall:
(i) also apply to any and all Third Party Claims that allege that any
Indemnitee is independently, directly, vicariously or jointly and severally
liable to such third party;
(ii) to the extent permitted by applicable law, apply even if the
Indemnitee is partially negligent or otherwise partially culpable or at
fault, whether or not such liability arises under any doctrine of strict
liability; and
(iii) be in addition to any liability or obligation that an Indemnifying
Party may have other than pursuant to this Agreement.
SECTION 7.09. SURVIVAL OF INDEMNITIES. The obligations of Tenneco,
Industrial Company and Shipbuilding Company under this ARTICLE VII shall
survive the sale or other transfer by any of them of any assets or businesses
or the assignment by any of them of any Liabilities, with respect to any
Indemnifiable Loss of any Indemnitee related to such assets, businesses or
Liabilities.
SECTION 7.10. REMEDIES CUMULATIVE. The remedies provided in this ARTICLE VII
shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
SECTION 7.11. COOPERATION OF THE PARTIES WITH RESPECT TO ACTIONS AND THIRD
PARTY CLAIMS.
(a) IDENTIFICATION OF PARTY IN INTEREST. Any party to this Agreement that
has responsibility for an Action or Third Party Claim shall identify itself as
the true party in interest with respect to such Action or Third Party Claim
and shall use its commercially reasonable efforts to obtain the dismissal of
any other party to this Agreement from such Action or Third Party Claim.
(b) DISPUTES REGARDING RESPONSIBILITY FOR ACTIONS AND THIRD PARTY CLAIMS. If
there is uncertainty or disagreement concerning which party to this Agreement
has responsibility for any Action or Third Party Claim, the following
procedure shall be followed in an effort to reach agreement concerning
responsibility for such Action or Third Party Claim:
(i) The parties in disagreement over the responsibility for an Action or
Third Party Claim shall exchange brief written statements setting forth
their position concerning which party has responsibility for the Action or
Third Party Claim in accordance with the provisions of this ARTICLE VII.
These statements shall be exchanged within 5 days of a party putting
another party on written notice that the other party is or may be
responsible for the Action or Third Party Claim.
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(ii) If within 5 days of the exchange of the written statement of each
party's position agreement is not reached on responsibility for the Action
or Third Party Claim, the General Counsel for each of the parties in
disagreement over responsibility for the Action or Third Party Claim shall
speak either by telephone or in person to attempt to reach agreement on
responsibility for the Action or Third Party Claim.
(c) EFFECT OF FAILURE TO FOLLOW PROCEDURE. Failure to follow the procedure
set forth in clause (b) above shall not affect the rights and responsibilities
of the parties as established by the other provisions of this ARTICLE VII.
(d) EXCHANGE OF INFORMATION. In connection with the handling of current or
future Actions or Third Party Claims, the parties may determine that it is in
their mutual interest to exchange privileged or confidential information. If
so, the parties agree to discuss whether it is in their mutual interest to
enter into a joint defense agreement or information exchange agreement to
maintain the confidentiality of their communications and to permit them to
maintain the confidentiality of proprietary information or information that is
otherwise confidential or subject to an applicable privilege, including but
not limited to the attorney-client, work product, executive, deliberative
process, or self-evaluation privileges.
SECTION 7.12. CONTRIBUTION. To the extent that any indemnification provided
for under SECTION 7.01, SECTION 7.02 or SECTION 7.03 is unavailable to an
Indemnified Party or is insufficient in respect of any the Indemnifiable
Lossess of such Indemnified Party then the Indemnifying Party under such
Section, in lieu of indemnifying such Indemnified Party thereunder, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Indemnifiable Losses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Indemnifying Party on the one
hand and the Indemnified Party on the other hand from the transaction or other
matter which resulted in the Indemnifiable Losses or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other
hand in connection with the action, inaction, statements or omissions that
resulted in such Indemnifiable Losses as well as any other relevant equitable
considerations.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. COMPLETE AGREEMENT; CONSTRUCTION. This Agreement, including
the Exhibits and Schedules hereto, and the Ancillary Agreements shall
constitute the entire agreement between the parties with respect to the
subject matter hereof and shall supersede all previous negotiations,
commitments and writings with respect to such subject matter. In the event of
any inconsistency between this Agreement and any Schedule or Exhibit hereto,
the Schedule or Exhibit, as the case may be, shall prevail. Notwithstanding
any other provisions in this Agreement to the contrary, in the event and to
the extent that there shall be a conflict between the provisions of this
Agreement and the provisions of any Ancillary Agreement, such Ancillary
Agreement shall control.
SECTION 8.02. ANCILLARY AGREEMENTS. This Agreement is not intended to
address, and should not be interpreted to address, the matters specifically
and expressly covered by the Ancillary Agreements.
SECTION 8.03. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other parties.
SECTION 8.04. SURVIVAL OF AGREEMENTS. Except as otherwise expressly provided
herein, all covenants and agreements of the parties contained in this
Agreement shall survive the Distribution Date.
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SECTION 8.05. RESPONSIBILITY FOR EXPENSES.
(a) EXPENSES INCURRED ON OR PRIOR TO DISTRIBUTION DATE. Subject to the
provisions of SECTION 8.05(C) below and except as otherwise set forth in this
Agreement or any Ancillary Agreement, all costs and expenses incurred on or
prior to the Distribution Date (whether or not paid on or prior to the
Distribution Date) in connection with the preparation, execution, delivery and
implementation of this Agreement and any Ancillary Agreement, the Information
Statements and the Distribution, and the consummation of the transactions
contemplated hereby and thereby shall be charged to and paid by Tenneco;
provided, however, that (i) such amounts shall be included in the calculation
of the Actual Energy Debt Amount to the extent expressly provided in the Debt
and Cash Allocation Agreement, and (ii) each of Industrial Company and
Shipbuilding Company shall be solely responsible and liable for any expenses,
fees, or other costs that it separately and directly incurs in connection with
any of the transactions contemplated under this Agreement or any of the
Ancillary Agreements.
(b) EXPENSES INCURRED OR ACCRUED AFTER DISTRIBUTION DATE. Subject to the
provisions of SECTION 8.05(C) below and except as otherwise set forth in this
Agreement or any Ancillary Agreement, each party shall bear its own costs and
expenses first incurred or accrued after the Distribution Date.
(c) ENVIRONMENTAL EXPENSES. Notwithstanding the provisions of SECTION
8.05(A) and SECTION 8.05(B) above, expenses and other costs incurred in
connection with compliance with any Environmental Laws applicable to the
transactions contemplated hereby shall be paid by the party that after the
Distribution Date will, or that this Agreement contemplates will, own the
assets or operate the business subject to such Environmental Laws.
SECTION 8.06. NOTICES. All notices and other communications to a party
hereunder shall be in writing and hand delivered or mailed by registered or
certified mail (return receipt requested) or sent by any means of electronic
message transmission with delivery confirmed (by voice or otherwise) to such
party (and will be deemed given on the date on which the notice is received by
such party) at the address for such party set forth below (or at such other
address for the party as the party shall, from time to time, specify by like
notice to the other parties):
If to Tenneco, at:1010 Milam Street
Houston, Texas 77002
Telecopier:
Attention: Corporate Secretary
If to Industrial Company, at:1275 King Street
Greenwich, CT 06831
Telecopier:
Attention: Corporate Secretary
If to Shipbuilding Company, at:4101 Washington Avenue
Newport News, Virginia 23607
Telecopier:
Attention: Corporate Secretary
SECTION 8.07. WAIVERS. The failure of any party hereto to require strict
performance by any other party of any provision in this Agreement will not
waive or diminish that party's right to demand strict performance thereafter
of that or any other provision hereof.
SECTION 8.08. AMENDMENTS. Subject to the terms of SECTION 8.11 hereof, this
Agreement may not be modified or amended except by an agreement in writing
signed by the parties hereto; provided, however, any such amendments or
modifications prior to the termination of the Merger Agreement or consummation
of the Merger may only be made with the prior consent of Acquiror unless such
modifications or amendments do not, individually or in the aggregate,
adversely affect the Energy Business (other than to a de minimis extent) or
materially delay or prevent the consummation of the Merger.
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SECTION 8.09. ASSIGNMENT. This Agreement shall be assignable in whole in
connection with a merger or consolidation or the sale of all or substantially
all the assets of a party hereto so long as the resulting, surviving or
transferee entity assumes all the obligations of the relevant party hereto by
operation of law or pursuant to an agreement in form and substance reasonably
satisfactory to the other parties to this Agreement. Otherwise this Agreement
shall not be assignable, in whole or in part, directly or indirectly, by any
party hereto without the prior written consent of the others, and any attempt
to assign any rights or obligations arising under this Agreement without such
consent shall be void.
SECTION 8.10. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
be binding upon, inure to the benefit of and be enforceable by the parties and
their respective permitted successors and permitted assigns.
SECTION 8.11. TERMINATION. This Agreement may be terminated and the
Distributions may be amended, modified or abandoned at any time prior to the
Distributions by and in the sole discretion of Tenneco without the approval of
Industrial Company or Shipbuilding Company or the stockholders of Tenneco;
provided, however, any such termination, abandonment, amendments or
modifications prior to the termination of the Merger Agreement or consummation
of the Merger may only be made with the prior written consent of Acquiror
unless, in the case of a modification or amendment only, such modification or
amendment does not, individually or in the aggregate, adversely affect the
Energy Business (other than to a de minimis extent) or materially delay or
prevent the consummation of the Merger. In the event of such termination, no
party shall have any liability of any kind to any other party or any other
person. After the Distributions, this Agreement may not be terminated except
by an agreement in writing signed by all of the parties hereto; provided,
however, that ARTICLE VIII shall not be terminated or amended after the
Distributions in respect of the third party beneficiaries thereto without the
consent of such persons. Nothing in this SECTION 8.11 shall relieve Tenneco of
its obligations, under Section 6.13 of the Merger Agreement.
SECTION 8.12. THIRD PARTY BENEFICIARIES. Except as provided in ARTICLE VII
hereof (relating to Indemnitees), this Agreement is solely for the benefit of
the parties hereto, the members of their respective Groups and Affiliates and
the Acquiror, after giving effect to the Distributions, and should not be
deemed to confer upon third parties any remedy, claim, liability, right of
reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement.
SECTION 8.13. ATTORNEY FEES. A party in breach of this Agreement shall, on
demand, indemnify and hold harmless the other parties hereto for and against
all out-of-pocket expenses, including, without limitation, reasonable legal
fees, incurred by such other party by reason of the enforcement and protection
of its rights under this Agreement. The payment of such expenses is in
addition to any other relief to which such other party may be entitled
hereunder or otherwise.
SECTION 8.14. TITLE AND HEADINGS. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Agreement.
SECTION 8.15. EXHIBITS AND SCHEDULES. The Exhibits and Schedules attached
hereto shall be construed with and as an integral part of this Agreement to
the same extent as if the same had been set forth verbatim herein.
SECTION 8.16. SPECIFIC PERFORMANCE. Each of the parties hereto acknowledges
that there is no adequate remedy at law for the failure by such parties to
comply with the provisions of this Agreement and that such failure would cause
immediate harm that would not be adequately compensable in damages.
Accordingly, each of the parties hereto agrees that their agreements contained
herein may be specifically enforced without the requirement of posting a bond
or other security, in addition to all other remedies available to the parties
hereto under this Agreement.
SECTION 8.17. GOVERNING LAW. ALL QUESTIONS AND/OR DISPUTES CONCERNING THE
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE SCHEDULES
AND EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND NOT THE LAW
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OF CONFLICTS, OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO THIS AGREEMENT
HEREBY IRREVOCABLY AND UNCONDITIONALLY (i) AGREES TO BE SUBJECT TO, AND HEREBY
CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE STATE OF
DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE, (ii) TO
THE EXTENT SUCH PARTY IS NOT OTHERWISE SUBJECT TO SERVICE OF PROCESS IN THE
STATE OF DELAWARE, HEREBY APPOINTS THE CORPORATION TRUST COMPANY, AS SUCH
PARTY'S AGENT IN THE STATE OF DELAWARE FOR ACCEPTANCE OF LEGAL PROCESS AND
(iii) AGREES THAT SERVICE MADE ON ANY SUCH AGENT SET FORTH IN (ii) ABOVE SHALL
HAVE THE SAME LEGAL FORCE AND EFFECT AS IF SERVED UPON SUCH PARTY PERSONALLY
WITHIN THE STATE OF DELAWARE.
SECTION 8.18. SEVERABILITY. In the event any one or more of the provisions
contained in this Agreement should be held invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions contained herein and therein shall not in any way be affected or
impaired thereby. The parties shall endeavor in good-faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid
provisions, the economic effect of which comes as close as possible to that of
the invalid, illegal or unenforceable provisions.
SECTION 8.19. SUBSIDIARIES. Each of the parties hereto shall cause to be
performed, and hereby guarantee the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such
party which is contemplated to be a Subsidiary of such party on and after the
Distribution Date.
SECTION 8.20. SHIPBUILDING HEDGING TRANSACTIONS. Notwithstanding any other
provisions of this Agreement or any other document or instrument (including
any of the other Ancillary Agreements), any gains or losses relating to
hedging or similar transactions undertaken by Shipbuilding Company or any
other member of the Shipbuilding Group which are in effect on the date hereof
or at any time hereafter through the Distribution Date shall be for the
account of Shipbuilding Company, and, without limiting the generality of the
foregoing, (i) Shipbuilding Company and the other members of the Group shall
finance and fund any such losses through their own finance facilities, and
(ii) no cash or debt relating to any such gains or losses shall be taken into
account in making any of the determinations under the Debt and Cash Allocation
Agreement, including determinations regarding the amount of the Allocated
Shipbuilding Debt and/or the Guaranteed Shipbuilding Cash Amount.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
TENNECO INC.
By __________________________________
Name:
Title:
NEW TENNECO INC.
By __________________________________
Name:
Title:
NEWPORT NEWS SHIPBUILDING INC.
By __________________________________
Name:
Title:
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EXHIBIT C
TO
DISTRIBUTION AGREEMENT
DEBT AND CASH ALLOCATION AGREEMENT
THIS DEBT AND CASH ALLOCATION AGREEMENT (this "Agreement") is made and
entered into as of this day of , 1996 by and among Tenneco
Inc., a Delaware corporation ("Tenneco"), Newport News Shipbuilding Inc.
(formerly known as Tenneco InterAmerica Inc.), a Delaware corporation
("Shipbuilding Company"), and New Tenneco Inc., a Delaware corporation
("Industrial Company").
WHEREAS, pursuant to the terms of that certain Distribution Agreement by and
among the parties hereto and dated as of , 1996 (the "Distribution
Agreement"), the parties have entered into this Agreement regarding the
allocation of the Cash and Cash Equivalents and Consolidated Debt of Tenneco
and its consolidated subsidiaries as of the Effective Time. For purposes of
this Agreement only, the "Effective Time" means 12:01 AM, Houston time, on the
date on which the Merger Effective Time occurs.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement and the Distribution Agreement, each of
the parties hereto, on behalf of itself and each of the other members of its
Group over which it has direct or indirect legal or effective control, hereby
agrees as follows:
1. Certain Definitions. Capitalized terms which are used herein but which
are not defined below in this SECTION 1 or in any of the other provisions or
Sections of this Agreement or in the Distribution Agreement, shall have the
meaning ascribed to such terms in the Debt Realignment Plan attached as
Exhibit C to the Merger Agreement.
(a) "Actual Energy Debt Amount" means the aggregate amount, as of the
Effective Time, of the following, without duplication:
(i) the then outstanding amount of the Tenneco Revolving Debt plus
accrued and accreted interest and fees and expenses in respect thereof
(as reflected on the Energy Adjusted Closing Balance Sheet) ; plus
(ii) the Consolidated Public Debt Value; plus
(iii) the then outstanding principal amount of Consolidated Debt of
Tenneco and the Energy Subsidiaries other than that which is described
in clauses (i) and (ii) above (for this purpose undrawn letters of
credit and guarantees shall not be treated as outstanding) plus accrued
and accreted interest and fees and expenses in respect thereof as
reflected on the Energy Adjusted Closing Balance Sheet; plus
(iv) except as otherwise expressly provided in the Merger Agreement
or the Distribution Agreement, the unpaid amount of all direct and out
of pocket fees, costs and expenses (as reflected on the Energy Adjusted
Closing Balance Sheet) incurred on or prior to the Effective Time by
Tenneco and its subsidiaries in respect of the transactions
contemplated under the Debt Realignment, with respect to the Merger
Agreement, the NPS Issuance and with respect to the Distribution
Agreement, including, without limitation, the Corporate Restructuring
Transactions, the Distributions, the Merger and the other related
transactions, including by way of example items specifically set forth
on Schedule 1 to the extent incurred in respect of the aforesaid
transactions (collectively, the "Tenneco Transaction Expenses");
(v) any sales and use, gross receipts or other transfer Taxes
(including Gains Taxes and Transfer Taxes, as defined in the Merger
Agreement) imposed as a result of the Corporate Restructuring
Transactions or otherwise occurring pursuant to the Distribution
Agreement or the Merger Agreement, excluding, however, any stamp duty
imposed by the Stamp Act 1894 (Queensland) as a result of the Merger;
plus
(vi) Restructuring Taxes (as defined in the Tax Sharing Agreement),
except (A) for Taxes resulting from the deferred intercompany items on
Schedule 2, and (B) to the extent the IRS ruling provides the
Transactions (as defined in the Tax Sharing Agreement) are tax-free;
plus
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(vii) the then outstanding amount of any off-balance sheet
indebtedness incurred after June 19, 1996 and before the Effective Time
to finance the acquisition of any additional interest in the Oasis
Pipeline;
(viii) dividends declared by Tenneco on its common stock, $4.50
Preferred Stock and $7.40 Preferred Stock which have not been paid
prior to the Effective Time but as to which the record date is before
the Effective Time; plus
(ix) the total amount of dividends accrued on the shares of New
Preferred Stock issued pursuant the NPS Issuance that remain unpaid as
of the Effective Time.
The parties hereto hereby acknowledge and agree that the Actual Energy Debt
Amount shall include any amounts (including interest, fees and other charges)
that may be due and owing ASCC under or as a result of the factoring
arrangement between ASCC and Tenneco (and/or any of its Subsidiaries) other
than the amount of Factored Proceeds (the "ASCC Amount").
(b) "Actual Energy Expenditures Amount" means the actual amount of
capital expenditures (determined on a basis consistent with the past
accounting practices of the Energy Business and the 1996 capital budget
provided to Acquiror) made and paid for by the Energy Business from and
after January 1, 1996 to and including the Effective Time, including,
without limitation any capital expenditures in respect of the 70 MW
Dunaferr power project in Hungary; provided, however, that any amount paid
for the acquisition of any additional interest in either Tenneco Energy
Resources Inc. or the Oasis Pipeline or to repair any gas pipeline shall
not be capital expenditures for any purpose under this Agreement and shall
not be included in the Actual Energy Expenditures Amount.
(c) "Allocated Energy Debt" means the total amount of indebtedness
(including accrued and accreted interest and fees and expenses) outstanding
as of the Effective Time under each of the Tenneco Revolving Debt, the
Consolidated Debt (other than the Tenneco Revolving Debt) of Tenneco and
the Energy Subsidiaries and the Tenneco Transaction Expenses, and any and
all such indebtedness outstanding or other obligations and liabilities
incurred or accrued under any of the foregoing from time to time and at any
time after the Effective Time.
(d) "Allocated Industrial Debt" means the total amount of indebtedness
(including accrued and accreted interest and fees and expenses) outstanding
under the Industrial Debt Securities as of the Effective Time, any and all
such indebtedness outstanding from time to time thereafter and all other
obligations and liabilities incurred or accrued at any time under the
Industrial Debt Securities.
(e) "Allocated Shipbuilding Debt" means the total amount of indebtedness
(including accrued and accreted interest and fees and expenses) outstanding
under the Shipbuilding Credit Facility as of the Effective Time, any and
all such indebtedness outstanding from time to time at any time thereafter
and all other obligations and liabilities incurred or accrued at any time
under the Shipbuilding Credit Facility.
(f) "Auditors" has the meaning ascribed to such term in SECTION 6 below.
(g) "Base Amount" means an amount equal to $2,650,000,000, (i) plus,
without duplication, the sum of (A) with respect to Tenneco gas purchase
contracts, the amount of all cash payments made by Tenneco and/or any of
its Subsidiaries during the period commencing on the date of Merger
Agreement and ending as of the Effective Time as a result or in respect of
any settlement, judgment or satisfaction of a bond in excess of the market
price for gas received by Tenneco and/or any of its Subsidiaries reduced by
the amount of any cash payments received from customers, insurers or other
third parties with respect thereto (other than ones refunded prior to the
Effective Time) or with respect to any gas supply realignment costs which
are so recovered (and not refunded) on or prior to the Effective Time, (B)
the purchase price paid by Tenneco and/or any of its subsidiaries to
acquire any additional interest in the Oasis Pipeline, (C) the amount of
all cash payments made by Tenneco and/or any of the Energy Subsidiaries
during the period commencing on the date of the Merger Agreement and ending
on the Closing Date in settlement of any significant claim, action, suit or
proceeding to the extent such matter would be an Energy Liability and with
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the consent of Acquiror, which shall not be arbitrarily withheld
(including, without limitation, cash payments in settlement of claims
against Tenneco and/or any of its affiliates arising from the Stock
Purchase Agreement dated as of July 31, 1986 by and between Tenneco Inc.
and I.C.H. Corporation) reduced by the amount of any cash payments received
by Tenneco or any of the Energy Subsidiaries during such period from
customers, insurers or other third parties with respect thereto, and (D)
the total amount of the specific additions or increases to the Base Amount
set forth on SCHEDULE 4 attached hereto, (ii) less, without duplication,
the sum of (A) the gross amount of cash proceeds from the NPS Issuance (as
defined in the Merger Agreement) less the amount of any expenses, fees or
other out-of-pocket costs related thereto which are included in the Actual
Energy Debt Amount), and (B) the total amount of the specific subtractions
and reductions to the Base Amount set forth on SCHEDULE 4 attached hereto.
(h) "Cash and Cash Equivalents" has the meaning ascribed to such term
under United States generally accepted accounting principles; provided,
that in all events checks issued by Tenneco and the Energy Subsidiaries
which remain unpaid as of the Effective Time shall be deducted from Cash
and Cash Equivalents, and checks received by Tenneco and the Energy
Subsidiaries which remain uncollected prior to the Effective Time (other
than checks that have been dishonored) shall be included in Cash and Cash
Equivalents.
(i) "Consolidated Public Debt Value" means the value (including any
accrued and unpaid interest thereon) of publicly-held Consolidated Debt of
Tenneco and the Energy Subsidiaries outstanding as of the Effective Time
(as reflected on the Energy Adjusted Closing Balance Sheet), calculated and
determined by Tenneco and Acquiror or if, they are unable to agree, by a
nationally recognized investment banking firm selected by mutual agreement
between Tenneco and Acquiror, as of the close of business on the fifth
(5th) business day preceding the Effective Time based on the applicable
spreads to treasuries and the applicable benchmark treasury securities
listed on Schedule 3.
(j) "Closing Calendar Month" means the calendar month in which the
Effective Time occurs.
(k) "Debt Realignment" has the meaning ascribed to such term in the
Merger Agreement.
(l) "Dispute" has the meaning ascribed to such term in SECTION 6 below.
(m) "Energy Adjusted Closing Balance Sheet" has the meaning ascribed to
such term in SECTION 6 below.
(n) "Energy Closing Balance Sheet" has the meaning ascribed to such term
in SECTION 6 below.
(o) "Energy Receivables" means any and all accounts receivable of the
Energy Business (after giving effect to the Corporate Restructuring
Transactions and the Distributions and, therefore, specifically excluding
receivables relating to the business of Case Corporation and the Industrial
Business).
(p) "Factored Proceeds" means the total amount of outstanding cash
proceeds received by Tenneco from ASCC, as of the last business day of the
month preceding the Closing Calendar Month, through the factoring of Energy
Receivables, which amount shall not exceed $100,000,000.
(q) "Guaranteed Energy Cash Amount" has the meaning ascribed to such term
in SECTION 5 below.
(r) "Guaranteed Shipbuilding Cash Amount" has the meaning ascribed to
such term in SECTION 5 below.
(s) "Independent Auditors" has the meaning ascribed to such term in
SECTION 6 below.
(t) "Industrial Debt Securities" means, collectively, the notes,
debentures and other debt securities issued by Industrial Company in
exchange for certain issues of the Consolidated Debt pursuant to and in
accordance with the debt exchange by Industrial Company contemplated under
the Debt Realignment.
(u) "Merger Closing Date" means the date on which the Merger is
consummated.
(v) "Required Energy Expenditures Amount" means an aggregate amount of
capital expenditures (determined on a basis consistent with the past
accounting practices of the Energy Business and the 1996
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capital budget provided to Acquiror) by the Energy Business for 1996 equal
to $333,200,000, plus an amount of capital expenditures by the Energy
Business for 1997 equal to $27,750,000 per month for each month (or pro
rata portion thereof) from January 1, 1997 to the Effective Time.
(w) "Shipbuilding Adjusted Closing Balance Sheet" has the meaning
ascribed to such term in SECTION 6 below.
(x) "Shipbuilding Closing Balance Sheet" has the meaning ascribed to such
term in SECTION 6 below.
(y) "Shipbuilding Credit Facility" has the meaning ascribed to such term
in SECTION 3 below.
(z) "Tenneco Allocation Percentage" means a fraction, the numerator of
which is the total number of business days remaining in the Closing
Calendar Month from and after the Effective Time (including the day on
which the Effective Time occurs), and the denominator of which is the total
number of business days in the Closing Calendar Month.
(aa) "Tenneco Revolving Debt" has the meaning ascribed to such term in
SECTION 2 below.
2. Tenneco Credit Facility and Tenneco Revolving Debt. Tenneco shall, at its
expense, have the sole right and authority to, and will use its commercially
reasonable efforts to, have in place prior to the Distribution Date a credit
facility for itself (with such guarantees of its obligations thereunder by the
Energy Subsidiaries as it deems necessary) in an aggregate principal amount
sufficient (together with other available funds to Tenneco) to fund the
tenders, redemptions, prepayments, defeasances and maturities contemplated
under the Debt Realignment; to pay all the fees, costs and expenses incurred
by Tenneco and its subsidiaries in preparing for, negotiating and effecting
the Distributions, the Merger and the Debt Realignment and any financings in
connection therewith; and for other general corporate purposes (including,
without limitation, working capital, the repayment or refinancing of
Consolidated Debt and the payments of dividends). This facility shall be in
effect at, and shall have a remaining stated maturity of at least 180 days
following, the closing of the Merger and the Distributions. The aggregate
amount of debt (including accrued and accreted interest and fees and expenses)
outstanding as of the Effective Time under this facility is hereinafter called
the "Tenneco Revolving Debt".
Notwithstanding anything contained herein, (a) contemporaneously with the
Distributions, Tenneco and the Energy Subsidiaries shall be removed as obligor
under (and released from liability with respect to) any indebtedness for
borrowed money for which Tenneco or its subsidiaries are liable and which are
assumed by the Industrial Company or the Shipbuilding Company pursuant to the
terms hereof and the Distribution Agreement, (b) any Tenneco Revolving Debt
shall be prepayable without penalty, subject to customary notice provisions,
(c) in respect of publicly-traded Consolidated Debt, between the date of the
Merger Agreement and the Effective Time there shall be no (i) extension of
maturity or average life, (ii) increase in interest rates or (iii) adverse
change in defeasance or redemption provisions with respect to any indebtedness
for borrowed money for which Tenneco or the Energy Subsidiaries will be liable
on or after the Effective Time and (d) except for the Tenneco Revolving Debt,
no indebtedness for borrowed money of Tenneco or the Energy Subsidiaries at
the Effective Time shall contain any affirmative or negative financial or
operational covenants other than ones that are (x) mutually acceptable to
Tenneco and Acquiror or (y) no more restrictive in the aggregate and
substantially equivalent to those set forth in the Indenture dated as of
January 1, 1992 of El Paso Natural Gas Company as in effect as of the date of
the Merger Agreement (other than Section 10.05 of the Indenture).
3. Shipbuilding Credit Facility and Shipbuilding Revolving Debt. Prior to
the Distributions (and at such time as Tenneco shall request), Shipbuilding
Company shall, at its expense, obtain and have in place a credit facility (the
"Shipbuilding Credit Facility") for itself (with such guarantees of its
obligations thereunder by the Shipbuilding Subsidiaries as is necessary to
obtain the Shipbuilding Credit Facility) in an aggregate principal amount of
at least $600 million (the "Minimum Debt Amount") and shall borrow the Minimum
Debt Amount thereunder and distribute the proceeds of such borrowing to
Tenneco (or such subsidiary of Tenneco as Tenneco shall designate) at such
time on or prior to the consummation of the Distributions as Tenneco shall
request.
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4. Allocation and Assumption of Debt.
(a) Allocated Energy Debt. On the Distribution Date, Tenneco shall assume,
and shall thereafter be solely liable and responsible for, the Allocated
Energy Debt. Tenneco hereby acknowledges and agrees that the Allocated Energy
Debt shall constitute an Energy Group Liability as defined in the Distribution
Agreement.
(b) Allocated Industrial Debt. On the Distribution Date, Industrial Company
shall assume, and shall thereafter be solely liable and responsible for, the
Allocated Industrial Debt. Industrial Company hereby acknowledges and agrees
that the Allocated Industrial Debt shall constitute an Industrial Group
Liability as defined in the Distribution Agreement.
(c) Allocated Shipbuilding Debt. On the Distribution Date, Shipbuilding
Company shall assume, and shall thereafter be solely liable and responsible
for, the Allocated Shipbuilding Debt. Shipbuilding Company hereby acknowledges
and agrees that the Allocated Shipbuilding Debt shall constitute a
Shipbuilding Group Liability as defined in the Distribution Agreement.
5. Allocation of Cash and Cash Equivalents. Prior to or contemporaneously
with the consummation of the Distributions, each of the parties hereto shall
make such transfers of the Cash and Cash Equivalents of Tenneco and its
consolidated subsidiaries (prior to giving effect to the Distributions) so
that to the extent possible, based on estimates of the aggregate amount of
Cash and Cash Equivalents of Tenneco and its consolidated subsidiaries then on
hand, (a) Tenneco and the Energy Subsidiaries, on a consolidated basis, shall,
as of the Effective Time, have an aggregate amount of Cash and Cash
Equivalents equal to the sum of the following:
(i) $25.0 million,
(ii) the product of (A) the Tenneco Allocation Percentage, and (B) the
lesser of (I) $100 million and (II) the total amount of the Factored
Proceeds (the lesser of such amounts being referred to as the "Section 5
Amount") and
(iii) should the Effective Time occur after the day of the month on which
Tenneco generally collects receivables from customers of its regulated
pipeline business (typically, the 25th day of a month), the lesser of the
amount of (A) the Section 5 Amount owing to ASCC as of the Effective Time,
and (B) the total amount of such receivables actually collected by Tenneco
or any of its Subsidiaries during the period beginning on the day such
receivables are first collected and ending at the Effective Time (the
"Actual Collection Amount"), so long as that amount is owing to ASCC as of
the Effective Time. It is expressly understood that as of the Effective
Time all payables and receivables are for the account of Acquiror.
(the sum of the amounts described in the immediately preceding clause (i),
(ii) and (iii) is hereinafter, referred to as the "Guaranteed Energy Cash
Amount"), and (b) Shipbuilding Company and the Shipbuilding Subsidiaries, on a
consolidated basis, shall, as of the close of business on the Merger Closing
Date, have an aggregate of $5 million of Cash and Cash Equivalents (the
"Guaranteed Shipbuilding Cash Amount"). All remaining Cash and Cash
Equivalents of Tenneco and its consolidated subsidiaries shall be allocated to
Industrial Company and the Industrial Subsidiaries.
6. Post Distribution Audit.
(a) Preparation of Closing Balance Sheets. As soon as practicable after the
Merger Closing Date, but in any event within 60 days following the Merger
Closing Date, Industrial Company shall cause Arthur Andersen LLP (the
"Auditors") to:
(i) conduct an audit of Tenneco and the Energy Subsidiaries to determine
the aggregate amount, as of the Effective Time, of each of the Factored
Proceeds, the Section 5 Amount, the Actual Collection Amount, the Tenneco
Revolving Debt, the Consolidated Debt (other than the Tenneco Revolving
Debt) of Tenneco and the Energy Subsidiaries, the Tenneco Transaction
Expenses, the Cash and Cash Equivalents of Tenneco
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and the Energy Subsidiaries and the Actual Energy Expenditures Amount, and
to prepare and deliver to each of Industrial Company and Tenneco a
consolidated balance sheet for Tenneco and the Energy Subsidiaries as of
the Effective Time reflecting (x) the amount of each of the foregoing
(other than the aggregate amount of the Factored Proceeds, the Section 5
Amount, the Actual Collection Amount (which shall be set forth in a
footnote to such consolidated balance sheet) and the Consolidated Debt
valued as part of the Consolidated Public Debt Value) and (y) the
Consolidated Public Debt Value (the "Energy Closing Balance Sheet"); and
(ii) conduct an audit of Shipbuilding Company and the Shipbuilding
Subsidiaries to determine the aggregate amount of the Cash and Cash
Equivalents of Shipbuilding Company and the Shipbuilding Subsidiaries as of
the Effective Time, and to prepare and deliver to each of Industrial
Company and Shipbuilding Company a consolidated balance sheet for
Shipbuilding Company and the Shipbuilding Subsidiaries as of the Effective
Time reflecting the aggregate amount of such Cash and Cash Equivalents (the
"Shipbuilding Closing Balance Sheet").
The Energy Closing Balance Sheet and the Shipbuilding Closing Balance Sheet
shall each be prepared on the basis of an audit conducted by the Auditors in
accordance with generally accepted auditing standards and prepared in
accordance with generally accepted accounting principles consistently applied
and without giving effect to any change in accounting principles required on
account of the consummation of the Merger or the Distributions, except that,
to the extent that any definition contained herein contemplates inclusion or
exclusion of an item that would not be included or excluded under generally
accepted accounting principles, the Auditors shall compute such item in
accordance with such definition. During the course of the preparation of the
Energy Closing Balance Sheet and the Shipbuilding Closing Balance Sheet by the
Auditors, and during any period in which there is a dispute regarding either
the Energy Closing Balance Sheet or the Shipbuilding Closing Balance Sheet,
each of Tenneco, Industrial Company and Shipbuilding Company, as the case may
be, shall cooperate with the Auditors and each other and shall have access to
all work papers of the Auditors and all pertinent accounting and other records
of Tenneco and the Energy Subsidiaries and Shipbuilding Company and the
Shipbuilding Subsidiaries, as applicable. Tenneco shall pay the fees and
expenses of the Auditors. Notwithstanding any provision of this Agreement or
the Distribution Agreement, the Claims Deposit (as defined in Insurance
Agreement) shall not be included as Cash and Cash Equivalents of Tenneco and
the Energy Subsidiaries.
(b) Disputes Regarding Closing Balance Sheet. Unless (i) in the case of the
Energy Closing Balance Sheet, Tenneco delivers written notice to Industrial
Company on or prior to the 30th day after its receipt of the Energy Closing
Balance Sheet that it disputes any of the amounts set forth on the Energy
Closing Balance Sheet (hereinafter, an "Energy Dispute"), or (ii) in the case
of the Shipbuilding Closing Balance Sheet, Shipbuilding Company delivers
written notice to Industrial Company on or prior to the 30th day after its
receipt of the Shipbuilding Closing Balance Sheet that it disputes the amount
of Cash and Cash Equivalents set forth on the Shipbuilding Closing Balance
Sheet (hereinafter, a "Shipbuilding Dispute") then, as applicable, Tenneco
and/or Shipbuilding Company shall be deemed to have accepted and agreed to the
Energy Closing Balance Sheet or the Shipbuilding Closing Balance Sheet, as
applicable, in the form in which it was delivered to it by the Auditors. If
such a notice of an Energy Dispute is given by Tenneco or a notice of a
Shipbuilding Dispute is given by Shipbuilding Company (in either case such
party being hereinafter referred to as the "Disputing Party") within such 30-
day period, then Industrial Company and the Disputing Party shall, within 15
days after the giving of any such notice, attempt to resolve such Energy
Dispute or Shipbuilding Dispute, as the case may be, and agree in writing upon
the final content of the Energy Closing Balance Sheet or Shipbuilding Closing
Balance Sheet, as the case may be. In the event that the Disputing Party and
Industrial Company are unable to resolve any Energy Dispute or Shipbuilding
Dispute, as the case may be, within such 15-day period, then the certified
public accounting firm of Ernst & Young or another mutually acceptable
independent accounting firm (the "Independent Auditors") shall be employed as
arbitrator hereunder to settle such Energy Dispute and/or Shipbuilding
Dispute, as the case may be, as soon as practicable. The Independent Auditors
shall have access to all documents and facilities necessary to perform its
function as arbitrator. The determination of the Independent Auditors with
respect to any Energy Dispute and/or Shipbuilding Dispute, as the case may be,
shall be final and binding on the applicable parties hereto. Industrial
Company and the Disputing Party shall each pay one-half ( 1/2) of the fees and
expenses of the Independent Auditors for such services. Industrial Company and
the
6
<PAGE>
Disputing Party each agree to execute, if requested by the Independent
Auditors, a reasonable engagement letter. The term "Energy Adjusted Closing
Balance Sheet," as used herein, shall mean the definitive Energy Closing
Balance Sheet agreed to by Tenneco and Industrial Company or, as the case may
be, the definitive Energy Closing Balance Sheet resulting from the
determinations made by the Independent Auditors in accordance with this
Section 6(b) (in addition to the matters theretofore agreed to by Tenneco and
Industrial Company). The term "Shipbuilding Closing Balance Sheet," as used
herein, shall mean the definitive Shipbuilding Closing Balance Sheet agreed to
by Shipbuilding Company and Industrial Company or, as the case may be, the
definitive Shipbuilding Closing Balance Sheet resulting from the
determinations made by the Independent Auditors in accordance with this
SECTION 6(B) (in addition to the matters theretofore agreed to by Shipbuilding
Company and Industrial Company). The date on which the Energy Adjusted Closing
Balance Sheet is determined and provided to each of Industrial Company and
Tenneco pursuant to this SECTION 6(B) is hereinafter referred to as the
"Energy Determination Date". The date on which the Shipbuilding Adjusted
Closing Balance Sheet is determined and provided to each of Industrial Company
and Shipbuilding Company pursuant to this SECTION 6(B) is hereinafter referred
to as the "Shipbuilding Determination Date".
7. Post Distribution Adjustments and Cash Payments.
(a) Adjustments and Payments Relating to Consolidated Debt. If the Actual
Energy Debt Amount exceeds the Base Amount, Industrial Company shall pay
Tenneco the amount of such excess in cash within 10 days after the Energy
Determination Date. If, on the other hand, the Actual Energy Debt Amount is
less than the Base Amount, Tenneco shall pay Industrial Company the amount of
such deficiency in cash within 10 days after the Energy Determination Date.
(b) Adjustments and Payments Relating to Cash and Cash Equivalents.
(i) Adjustments and Payments Relating to Shipbuilding Company. If the
amount of Cash and Cash Equivalents of Shipbuilding Company and the
Shipbuilding Subsidiaries as reflected on the Shipbuilding Adjusted
Closing Balance Sheet is less than the Guaranteed Shipbuilding Cash
Amount, Industrial Company shall pay Shipbuilding Company the amount of
such deficiency in cash within 10 days after the Shipbuilding
Determination Date. If, on the other hand, the amount of Cash and Cash
Equivalents of Shipbuilding Company and the Shipbuilding Subsidiaries
as reflected on the Shipbuilding Adjusted Closing Balance Sheet exceeds
the Guaranteed Shipbuilding Cash Amount, Shipbuilding shall pay
Industrial Company the amount of such excess in cash within 10 days
after the Shipbuilding Determination Date.
(ii) Adjustments and Payments Relating to Tenneco. (A) If the amount
of Cash and Cash Equivalents of Tenneco and the Energy Subsidiaries as
reflected on the Energy Adjusted Closing Balance Sheet is less than the
Guaranteed Energy Cash Amount, Industrial Company shall pay Tenneco the
amount of such deficiency in cash within 10 days after the Energy
Determination Date. If, on the other hand, the amount of Cash and Cash
Equivalents of Tenneco and the Energy Subsidiaries as reflected on the
Energy Adjusted Closing Balance Sheet exceeds the Guaranteed Energy
Cash Amount, Tenneco shall pay Industrial Company the amount of such
excess in cash within 10 days after the Energy Determination Date.
(B) If the Actual Energy Expenditures Amount as reflected on the
Energy Adjusted Closing Balance Sheet is less than the Required Energy
Expenditures Amount, Industrial Company shall pay Tenneco the amount of
such deficiency in cash within 10 days after the Energy Determination
Date. If, on the other hand, the Actual Energy Expenditures Amount as
reflected on the Energy Adjusted Closing Balance Sheet is greater than
the Required Energy Expenditures Amount, Tenneco shall pay to
Industrial Company the amount of such excess in cash within 10 days
after the Energy Determination Date.
(C) Each of Tenneco and Industrial Company hereby agrees that the
amount of any cash payment otherwise due it under any provision of this
SECTION 7 may be offset against and reduced, on a dollar for dollar
basis, in respect of any cash payment it may otherwise be required to
make to the other pursuant to and in accordance with any other
provision of this SECTION 7, and that the amount of such offset and
reduction shall be treated as payment of its obligations under any
provision of this SECTION 7 to the extent of such offset and reduction.
7
<PAGE>
8. Miscellaneous Provisions.
(a) Termination. This Agreement may not be terminated except upon the
written agreement of each of the parties hereto.
(b) Best Efforts. If at any time after the Merger Closing Date any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of Tenneco, Industrial Company and Shipbuilding Company shall, on the
written request of any of them, take (or cause the appropriate member of its
Group over which it has direct or indirect legal or effective control to take)
all such reasonably necessary or desirable action.
(c) Cooperation. The parties hereto agree to use their reasonable best
efforts to cooperate with respect to the various matters contemplated by this
Agreement.
(d) Successors and Assigns. Except as otherwise expressly provided herein,
no party hereto may assign or delegate, whether by operation of law or
otherwise, any of such party's rights or obligations under or in connection
with this Agreement without the written consent of each other party hereto. No
assignment will, however, release the assignor of any of its obligations under
this Agreement or waive or release any right or remedy the other parties may
have against such assignor hereunder. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto will be binding upon and enforceable
against the respective successors and assigns of such party and will be
enforceable by and will inure to the benefit of the respective successors and
permitted assigns of such party.
(e) Modification; Waiver; Severability. This Agreement may not be amended or
modified except in a writing executed by each of the parties hereto. The
failure by any party to exercise or a delay in exercising any right provided
for herein shall not be deemed a waiver of any right hereunder. Whenever
possible, each provision of this Agreement will be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of
this Agreement is held to be prohibited by or invalid under applicable law,
such provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement.
(f) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which
taken together shall constitute one and the same Agreement.
(g) Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
(h) Notices. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally or
five business days after mailing by certified or registered mail, return
receipt requested and postage prepaid, to the recipient at such recipient's
address as indicated in the Distribution Agreement or to such other address or
to the attention of such other person as the recipient party has specified by
prior written notice to the sending party.
(i) Survival. Each of the agreements of the parties herein shall survive the
Merger Closing Date.
(j) No Third Party Beneficiaries. This Agreement is made solely for the
benefit of the parties hereto and the other members of their respective
Groups, and shall not give rise to any rights of any kind to any other third
parties.
(k) Governing Law and Consent to Jurisdiction. ALL QUESTIONS AND/OR DISPUTES
CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND
THE SCHEDULES AND EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND
NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO
THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES TO BE SUBJECT TO,
AND HEREBY CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE
STATE OF DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
TENNECO INC.
By __________________________________
Name:
Title:
NEW TENNECO INC.
By __________________________________
Name:
Title:
NEWPORT NEWS SHIPBUILDING INC.
(formerly known as Tenneco
InterAmerica Inc.)
By __________________________________
Name:
Title:
9
<PAGE>
Schedule 1
to Debt and Cash Allocation Agreement
Accounting fees and expenses
Actuarial fees and expenses
Appraisal fees and expenses
Audit fees and expenses
Broker/dealer fees and expenses
Consulting fees and expenses
Exchange/paying agent fees and expenses
Exit consent fees
Fees and expenses incurred in connection with arranging the Revolving Debt,
including commitment fees, drawdown fees, agent's fees, facility fees and
similar fees and expenses, and lender's costs and expenses payable by the
borrower
Filing fees, including SEC, NYSE, NASD, HSR and other similar fees
Information agent fees and expenses
Investment banking fees and expenses, dealer manager fees and expenses, and
similar fees and expenses
Fees and expenses with respect to legal matters pertaining to the transactions
Mailing expenses
Newspaper advertising costs
Printing fees and expenses
Proxy solicitation fees and expenses
Soliciting dealer fees and expenses
Rating Agency fees
Underwriting, placement, registration and similar fees, commissions and
discounts payable in connection with the NPS Preferred Stock
10
<PAGE>
Schedule 2
to Debt and Cash Allocation Agreement
The deferred intercompany items referred to in SECTION 1(A)(VI) of the Debt
and Cash Allocation agreement are the following intercompany transactions
<TABLE>
<CAPTION>
SELLER BUYER PROPERTY TRANSFERRED
- ------ ----- --------------------
<S> <C> <C>
Tenneco Corporation Tenneco Inc. Stock of Kern County Land Co.
Tenneco Corporation Tenneco Inc. Stock of Tenneco Credit Corp.
Tenneco Corporation Tennessee Gas Pipeline Co. Stock of Tenneco International Inc.
Channel Gas Marketing Channel Industries Gas DT Line
Tenngasco Gas Supply Channel Industries Gas Transmission facilities
Tennessee Gas Pipeline
Co. Energy TRACS Software assignment agreement
</TABLE>
11
<PAGE>
TENNECO INC.
Schedule 3
<TABLE>
<CAPTION>
PRE-DETERMINED
------------------------------------------------
SECURITY DESCRIPTION BENCHMARK TREASURY SPREAD TO TREASURY(1)
- ------------------------------------------------ ------------------------- ----------------------
INDENTURE FACE COUPON MATURITY COUPON MATURITY CASE A CASE B
--------- ------ ------ -------- ---------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Inc. ................... $300.0 6.500% 12/15/05 5.875% 11/05 84 bp 76 bp
Inc. ................... 300.0 7.250% 12/15/25 pricing 30yr UST 125 113
Inc. ................... 500.0 7.875% 10/01/02 6.375% 08/02 73 66
Inc. ................... 250.0 8.000% 11/15/99 7.750% 11/99 58 52
Inc. ................... 150.0 9.000% 11/15/12 pricing 30yr UST 95 86
Inc. ................... 200.0 9.875% 02/01/01 7.750% 02/01 66 59
Inc. ................... 250.0 10.000% 03/15/08 pricing 30yr UST 91 82
Inc. ................... 500.0 10.000% 08/01/98 5.875% 08/98 51 46
Inc. ................... 175.0 10.375% 11/15/00 5.625% 11/00 64 58
TGP..................... 400.0 6.000% 12/15/11 pricing 30yr UST 95 86
TGP..................... 75.0 8.000% 05/15/97 NA NA NA NA
TGP..................... 250.0 9.000% 01/15/97 NA NA NA NA
TCC..................... 7.5 8.500% 01/30/97 NA NA NA NA
TCC..................... 0.5 8.500% 03/17/97 NA NA NA NA
TCC..................... 3.0 8.500% 03/24/97 NA NA NA NA
TCC..................... 5.0 8.520% 03/28/97 NA NA NA NA
TCC..................... 6.6 8.570% 03/18/97 NA NA NA NA
TCC..................... 150.0 9.250% 11/01/96 NA NA NA NA
TCC..................... 12.0 9.470% 09/21/98 5.875% 08/98 48 43
TCC..................... 10.0 9.480% 01/28/02 7.500% 11/01 69 62
TCC..................... 250.0 9.625% 08/15/01 7.875% 08/01 68 61
TCC..................... 7.6 9.720% 09/15/01 7.875% 08/01 68 61
TCC..................... 10.0 9.720% 09/25/01 7.875% 08/01 69 62
TCC..................... 5.0 9.900% 12/02/96 7.500% 12/96 45 41
TCC..................... 3.0 9.900% 08/19/98 5.875% 08/98 48 43
TCC..................... 4.5 10.000% 08/19/98 5.875% 08/98 48 43
TCC..................... 5.0 10.000% 12/13/01 7.500% 11/01 70 63
TCC..................... 50.0 10.500% 08/17/98 5.875% 08/98 48 43
TCC..................... 150.0 10.125% 12/01/97 5.250% 12/97 48 43
Inc. ................... $2,625
TGP..................... 725
TCC..................... 680
------
$4,030
------
</TABLE>
NOTE: (1) Case A represents the spread to treasury for each security in the
event that the percentage of the aggregate principal amount of the bonds
participating in any tender or exchange, measured as a group for all
bonds tendered or exchanged for, equals or exceeds 80% of all such bonds
eligible to participate. In the event that the percentage of bonds
participating in any tender or exchange falls short of 80% (calculated as
aforesaid), the market value of all bonds remaining outstanding will be
determined by using the spread to treasury indicated in Case B.
12
<PAGE>
SCHEDULE 4
TO
DEBT AND CASH ALLOCATION AGREEMENT
ADDITIONAL ADJUSTMENTS TO BASE AMOUNT
1. Indonesia (the South Sulawesi Project)
(a) All expenditures made by Acquiror at any time from and after June 19,
1996 with respect to this project shall have no effect whatsoever on the Base
Amount or the calculation thereof.
(b) All expenditures actually incurred and paid by any of Tenneco or its
consolidated subsidiaries at any time between June 19, 1996 and the Effective
Time (the "PRE-CLOSING PERIOD") shall be added to the Base Amount (but shall
not be included as a capital expenditure for purposes of determining the
Actual Energy Expenditures Amount); provided, however, the Base Amount will be
reduced by the amount of any Net Cash Proceeds (as defined) received by
Tenneco or any of its consolidated subsidiaries during the Pre-Closing Period
from any monetization of this project during the Pre-Closing Period. As used
in the Schedule 4, the term "Net Cash Proceeds" means the total amount of cash
proceeds actually received by the party in question during the Pre-Closing
Period from the consummation during the Pre-Closing Period of the transaction
or transactions in question, less the sum of any and all costs, expenses and
taxes related to the transaction or transactions in question which either are
(i) actually incurred and paid by Tenneco or any of its consolidated
subsidiaries prior to or at the Effective Time (other than taxes based upon
income, which shall not be deducted from cash proceeds in determining Net Cash
Proceeds), or (ii) incurred but not paid prior to or at the Effective Time by
any member of either the Industrial Group and/or Shipbuilding Group and which
will remain an obligation or liability of such entity (or any member of its
Group) after giving effect to the Distributions without reimbursement therefor
by Tenneco or any other member of the Energy Group.
2. Orange Cogeneration Project
(a) All expenditures made by Acquiror at any time from and after June 19,
1996 with respect to this project shall have no effect whatsoever on the Base
Amount or the calculation thereof.
(b) All expenditures actually incurred and paid by any of Tenneco or its
consolidated subsidiaries at any time during the Pre-Closing Period shall be
added to the Base Amount (but shall not be included as a capital expenditure
for purposes of determining the Actual Energy Expenditures Amount); provided,
however, the Base Amount will be reduced by the amount of any Net Cash
Proceeds received by Tenneco or any of its consolidated subsidiaries during
the Pre-Closing Period from any monetization of this project during the Pre-
Closing Period.
3. Australian Infrastructure Bonds
(a) The Base Amount shall be reduced by any Net Cash Proceeds received by
Tenneco or any of its consolidated subsidiaries during the Pre-Closing Period
from any off-balance sheet financing in respect of this project.
4. Asset Sales
(a) Microwave Licenses. The Base Amount shall be reduced by the aggregate
amount of Microwave Net Cash Proceeds (as defined below) from any sale or
assignment during the Pre-Closing Period of private operational-fixed
microwave licenses issued by the Federal Communications Commission. As used
herein, "Microwave Net Cash Proceeds" means the gross cash proceeds actually
received by Tenneco or any of its consolidated subsidiaries less the sum of
(i) the total amount of relocation costs and cost and expenses of rebuilding
an acceptable replacement communication system that are actually incurred and
paid by Tenneco or any of its consolidated subsidiaries during the Pre-Closing
Period (or incurred by any member of the Industrial Group or Shipbuilding
Group and remain unpaid as of the Effective Time), and (ii) the amount of any
taxes incurred in connection with any such sale or assignment which are either
(A) actually incurred and paid by Tenneco or any of its consolidated
subsidiaries prior to the Effective Time (other than taxes based upon income,
which shall not be deducted from cash proceeds in determining Net Cash
Proceeds), or (B) incurred by any member of the Shipbuilding Group or
Industrial Group and remain unpaid as of the Effective Time and which will
remain an obligation or liability of such entity (or any member of its Group)
after giving effect to the Distributions without reimbursement therefor by
Tenneco or any other member of the Energy Group.
13
<PAGE>
5. Land Sales
(a) 960 Acre Parcel Located Along Galveston Bay at Ingleside, Texas. The
Base Amount shall be reduced by the total amount of Net Cash Proceeds actually
received by Tenneco or any of its consolidated subsidiaries at any time during
the Pre-Closing Period, in connection with the sale of the above referenced
property.
(b) Westchase Development in West Houston (also known as Tract 6A). The Base
Amount shall be reduced by the total amount of Net Cash Proceeds actually
received by Tenneco or any of its consolidated subsidiaries at any time during
the Pre-Closing Period in connection with the sale of the above referenced
property.
(c) 1625 West Loop (also known as Post Oak Ranch). The Base Amount shall be
reduced by the total amount of Net Cash Proceeds actually received by Tenneco
or any of its consolidated subsidiaries at any time during the Pre-Closing
Period in connection with the sale of the above referenced property.
6. Sales of Gas Turbines
The Base Amount shall be reduced by the total amount of Net Cash Proceeds
actually received by Tenneco or any of its consolidated subsidiaries (and
credited to the account of Industrial Company under the Debt and Cash
Allocation Agreement) from its sale of any gas turbines at any time during the
Pre-Closing Period.
7. ICH Tax Indemnity Matter
The Base Amount shall be increased (without duplication) by any cash payment
(up to a maximum amount, however, of $19.0 million) made by Tenneco or any of
its consolidated subsidiaries during the Pre-Closing Period in respect of the
settlement of the ICH tax indemnity matter.
8. Payments due on Settlement of Certain Lawsuits During the Pre-Closing
Period
All cash payments actually received by Tenneco or any of its consolidated
subsidiaries during the Pre-Closing Period in respect of any settlement of any
of the lawsuits or other proceedings identified and referred to in paragraph 9
of, and Schedule G-2 to, Exhibit G to the Merger Agreement shall, to the
extent provided for under the terms described under paragraph 9 of such
Exhibit G, be for the account of Industrial Company and shall not be included
in the Guaranteed Energy Cash Amount or have any effect on the Base Amount or
the calculation thereof.
9. Hedging Transactions
Any hedging transactions and all costs and expenses with respect thereto
that are entered into in connection with or in anticipation of the Debt
Realignment shall be for the benefit or detriment of Industrial Company and
shall have no effect whatsoever on the Base Amount or the calculation thereof.
10. Rate Refunds Payable to Customers
The Base Amount shall be reduced by the amount, calculated as of the
Effective Time, of any rate refunds, including interest, which would be
payable to customers pursuant to the rate settlement filed with the Federal
Energy Regulatory Commission at Docket No. RP95-112 and have not been paid as
of the Effective Time, whether such amounts are to be paid to customers or
credited against gas supply realignment costs pursuant to a settlement with
customers.
11. Sale of Tenneco Ventures
The Base Amount shall be reduced by the aggregate amount of Net Cash
Proceeds actually received by Tenneco or any of its subsidiaries from any sale
of Tenneco Ventures during the Pre-Closing Period.
12. Bonuses for Energy Employees
(a) The total amount of cash bonuses for Energy Employees for the calendar
year 1996 (the "1996 Bonus Amount") shall be pro rated based on the date on
which the Effective Time occurs and shall be shared between Tenneco and
Industrial Company based on such pro ration as follows:
14
<PAGE>
(i) Tenneco shall be responsible and liable for the payment of that
portion (the "Tenneco Bonus Portion") of the 1996 Bonus Amount that equals
the product of (A) the 1996 Bonus Amount, and (B) a fraction, the numerator
of which is the number of days remaining in the 1996 calendar year
following the day on which the Effective Time occurs (the "Effective Day"),
and the denominator of which is 365.
(ii) New Tenneco shall be responsible and liable for the payment of that
portion of the 1996 Bonus Amount that equals the amount by which the 1996
Bonus Amount exceeds the Tenneco Bonus Portion.
(b) Each of Tenneco's and New Tenneco's liability for its share of the 1996
Bonus Amount shall be accounted for in the Merger as follows:
(i) If 100% of the 1996 Bonus Amount is paid on or before the Effective
Time, the Base Amount shall be increased by the Tenneco Bonus Portion.
(ii) If as of the Effective Time, the amount of the 1996 Bonus Amount
that has not been paid exceeds the Tenneco Bonus Portion, the Base Amount
shall be reduced by the amount of such excess.
(iii) If as of the Effective Time, the amount of the 1996 Bonus Amount
that has not been paid equals the Tenneco Bonus Portion, the Base Amount
shall not be increased or decreased in respect of the 1996 Bonus Amount.
(c) The 1996 Bonus Amount shall be determined by Tenneco prior to the
Effective Time with the consent of Acquiror which shall not be unreasonably
withheld.
13. Non Cash Proceeds
Any proceeds received by Tenneco or any of its subsidiaries from the
transactions described in paragraphs 1, 2, 3, 4, 5, 6 and 11 other than cash
proceeds shall be for the account of Acquiror and shall be retained by or
distributed to the Energy Business.
15
<PAGE>
APPENDIX B
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF
JUNE 19, 1996
AMONG
EL PASO NATURAL GAS COMPANY,
EL PASO MERGER COMPANY
AND
TENNECO INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I DEFINITIONS................................................. 2
ARTICLE II THE MERGER.................................................. 7
2.1 Merger...................................................... 7
2.2 Effects of the Merger....................................... 7
2.3 Certificate of Incorporation and Bylaws..................... 8
2.4 Directors................................................... 8
2.5 Conversion of Shares........................................ 8
2.6 Exchange of Certificates.................................... 9
2.7 New Preferred Stock......................................... 11
ARTICLE III CLOSING AND FILING.......................................... 11
3.1 Closing..................................................... 11
3.2 Effective Time.............................................. 11
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF TENNECO................... 12
4.1 Organization and Existence.................................. 12
4.2 Capitalization.............................................. 12
4.3 Authority and Approval...................................... 12
4.4 Financial Statements........................................ 13
4.5 Consents and Approvals; No Violations....................... 13
4.6 Litigation.................................................. 14
4.7 Tenneco SEC Documents; Accuracy of Information.............. 14
4.8 No Material Adverse Effect.................................. 14
4.9 Advisors.................................................... 14
4.10 Opinion of Financial Advisor................................ 14
4.11 Amendments to Rights Agreement.............................. 15
ARTICLE V REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUBSIDIARY... 15
5.1 Organization and Existence.................................. 15
5.2 Capitalization.............................................. 15
5.3 Authority and Approval...................................... 16
5.4 Financial Statements........................................ 16
5.5 Consent and Approvals; No Violation......................... 16
5.6 Litigation.................................................. 17
5.7 Acquiror SEC Documents; Accuracy of Information............. 17
5.8 No Material Adverse Effect.................................. 17
5.9 Advisors.................................................... 17
5.10 Opinion of Financial Advisor................................ 17
5.11 Due Authorization........................................... 17
5.12 No Active Business.......................................... 17
5.13 Ownership of Tenneco Stock.................................. 17
ARTICLE VI COVENANTS OF THE PARTIES.................................... 17
6.1 Conduct of Tenneco and its Subsidiaries..................... 17
6.2 Conduct of the Business of Acquiror and its Subsidiaries.... 21
6.3 Access to Information; Confidentiality...................... 22
6.4 Directors' and Officers' Indemnification and Insurance...... 22
6.5 Notification of Certain Matters............................. 24
6.6 Tax Treatment............................................... 25
Registration Statement; Joint Proxy Statement; NPS
6.7 Materials................................................... 25
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
6.8 Stockholders' Meetings..................................... 28
6.9 Further Action; Reasonable Best Efforts.................... 28
6.10 Public Announcements....................................... 29
6.11 Listing of Acquiror Stock.................................. 30
6.12 Rights Agreement........................................... 30
6.13 The Spinoffs............................................... 30
6.14 Antitrust Matters.......................................... 30
6.15 Employee Matters........................................... 31
6.16 Debt Realignment........................................... 31
6.17 No Solicitations........................................... 31
6.18 Performance of Agreement and Distribution Agreement........ 31
6.19 Affiliates of Tenneco...................................... 32
6.20 Antitakeover Statutes...................................... 32
6.21 Equity Issuance by Acquiror................................ 32
6.22 Ruhrgas AG................................................. 32
6.23 Additional Covenants of Acquiror........................... 32
ARTICLE VII CONDITIONS PRECEDENT....................................... 33
Conditions to Obligations of Each Party to Effect the
7.1 Merger..................................................... 33
Additional Conditions to Obligations of Acquiror and
7.2 Subsidiary................................................. 35
7.3 Additional Conditions to Obligations of Tenneco............ 35
ARTICLE VIII TERMINATION................................................ 36
8.1 Grounds for Termination.................................... 36
8.2 Effect of Termination...................................... 38
8.3 Waiver..................................................... 38
ARTICLE IX EXTENT AND SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS.................................. 38
9.1 Scope of Representations................................... 38
9.2 Survival................................................... 38
ARTICLE X MISCELLANEOUS.............................................. 38
10.1 Expenses................................................... 38
10.2 Notices.................................................... 39
10.3 Remedies................................................... 40
10.4 Consent to Amendments...................................... 40
10.5 Successors and Assignors................................... 40
10.6 Severability............................................... 40
10.7 Counterparts............................................... 40
10.8 Descriptive Headings....................................... 40
10.9 No Third-Party Beneficiaries............................... 40
10.10 Entire Agreement........................................... 40
10.11 Construction............................................... 41
10.12 Incorporation of Exhibits.................................. 41
10.13 Governing Law.............................................. 41
</TABLE>
ii
<PAGE>
EXHIBITS
EXHIBIT ADistribution Agreement--[Intentionally Omitted]
EXHIBIT BCertificate of Designation Respecting Acquiror Preferred Stock--
[Intentionally Omitted]
EXHIBIT CDebt Realignment Plan
EXHIBIT D[Intentionally Omitted]
EXHIBIT ECertificate of Designation Respecting New Preferred Stock--
[Intentionally Omitted]
EXHIBIT F Pro Forma Financial Information Concerning the Energy Business
--[Intentionally Omitted]
EXHIBIT G Certain Permitted Actions, Transactions and Other Matters--
[Intentionally Omitted]
EXHIBIT H Text of Section 14 of Article IV of the By-Laws of the
Surviving Corporation --[Intentionally Omitted]
EXHIBIT I Certain Deferred Intercompany Gains--[Intentionally Omitted]
EXHIBIT J Representations in Connection with IRS Ruling Letter--
[Intentionally Omitted]
EXHIBIT KBenefits for Employees of the Energy Business--[Intentionally
Omitted]
EXHIBIT LGuarantees--[Intentionally Omitted]
EXHIBIT MForm of Rule 145 Letter--[Intentionally Omitted]
EXHIBIT NForm of Jenner & Block Tax Opinion--[Intentionally Omitted]
EXHIBIT OForm of Depositary Agreement--[Intentionally Omitted]
ANNEX 1 Form of Amendment to Tenneco Certificate of Incorporation--
[Intentionally Omitted]
iii
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER is entered into as of
June 19, 1996 (the "AGREEMENT EFFECTIVE DATE"), by and among Tenneco Inc., a
Delaware corporation ("TENNECO"), El Paso Natural Gas Company, a Delaware
corporation ("ACQUIROR"), and El Paso Merger Company, a Delaware corporation
and an indirect wholly-owned subsidiary of Acquiror ("SUBSIDIARY").
W I T N E S S E T H:
WHEREAS, the board of directors of Tenneco has approved a plan of
distribution set forth in the form of agreement attached hereto as EXHIBIT A
(which, together with any exhibits, schedules or attachments thereto, is
hereinafter referred to as the "DISTRIBUTION AGREEMENT") which will be entered
into prior to the Effective Time (as defined below) and pursuant to which,
prior to the Effective Time,
(i) Tenneco and its subsidiaries will, through various intercompany
transfers and distributions, restructure, divide and separate their
existing automotive, packaging and shipbuilding businesses so that all of
the assets, liabilities and operations of
(a) the automotive and packaging businesses will be owned, directly
and indirectly, by a wholly-owned subsidiary of Tenneco (the
"INDUSTRIAL SUBSIDIARY"), and
(b) the shipbuilding business will be owned, directly and indirectly,
by a wholly-owned subsidiary of Tenneco (the "SHIPBUILDING
SUBSIDIARY"), and
(ii) all of the shares of capital stock of each of the Industrial
Subsidiary and the Shipbuilding Subsidiary will be distributed on a pro
rata basis as a dividend to the holders of Tenneco's issued and outstanding
common stock (the "SPINOFFS");
WHEREAS, Acquiror (which is the ultimate parent company of its consolidated
group) desires to acquire Tenneco and its direct and indirect subsidiaries
remaining immediately following the Spinoffs pursuant to the merger of
Subsidiary with and into Tenneco (the "MERGER"), with Tenneco surviving as an
indirect subsidiary of Acquiror (the "SURVIVING CORPORATION");
WHEREAS, the respective boards of directors of Acquiror, Subsidiary and
Tenneco, deeming the Merger to be advisable and in the best interests of their
respective stockholders, have authorized and approved the execution and
delivery of this Agreement and the performance of their respective obligations
hereunder;
WHEREAS, for federal income tax purposes, the parties hereto intend that
(i) the Spinoffs will qualify as tax-free distributions within the
meaning of Section 355 of the Internal Revenue Code of 1986, as amended
(the "CODE"), and
(ii) the Merger will be treated as a reorganization pursuant to the
provisions of Section 368(a)(1)(B) of the Code;
WHEREAS, this Agreement is intended to be, and is adopted as, a plan of
reorganization.
WHEREAS, the parties entered into an Agreement and Plan of Merger (the
"PRIOR AGREEMENT") as of June 19, 1996, and now desire to amend and restate
the Prior Agreement in its entirety effective as of the Agreement Effective
Date.
NOW, THEREFORE, in consideration of the premises and of the mutual and
dependent promises, representations, warranties and covenants herein
contained, the parties agree as follows:
1
<PAGE>
ARTICLE I
DEFINITIONS
Unless otherwise defined herein or unless the context otherwise requires,
the following terms shall have the meanings set forth below:
"ACQUIROR COMMON STOCK" means the Common Stock, par value $3.00 per
share, of Acquiror.
"ACQUIROR PREFERRED STOCK" means the series of voting preferred stock of
Acquiror to be designated as Adjustable Rate Cumulative Preferred Stock and
described in the form of Certificate of Designation therefor attached
hereto as EXHIBIT B; provided, however, that if either Tenneco or Acquiror
determines, in good faith after consultation with the other party and its
advisors, that there exists a reasonable likelihood that the issuance of
Acquiror Preferred Stock (or Depositary Shares (as defined below) in
respect thereof) in connection with the Merger would cause the Merger to be
taxable to the stockholders of Tenneco, Acquiror shall have the absolute
obligation (at Acquiror's sole cost) to amend, if legally possible, the
terms of the Acquiror Preferred Stock in a manner reasonably acceptable to
Tenneco so that the issuance would not cause the Merger to be so taxable.
In the event that the terms of the Acquiror Preferred Stock are amended
pursuant to the proviso in the immediately preceding sentence, the parties
hereto hereby agree, if required by applicable Law, they shall (i) prepare
and execute an appropriate amendment to this Agreement reflecting said
amendment to the terms of the Acquiror Preferred Stock, (ii) subject to
SECTIONS 6.7(A) and 6.8 hereof, prepare, file and mail an appropriate
supplement to the Joint Proxy Statement reflecting the terms of this
Agreement and of the Merger as so amended, and (iii) if such amendment is
made after the approval of the Merger by the stockholders of Tenneco,
resubmit for the approval of the stockholders of Tenneco this Agreement and
the Merger as so amended.
"ACQUIROR COMMON STOCKHOLDERS' MEETING" has the meaning set forth in
SECTION 6.8 hereof.
"ACQUIROR SEC DOCUMENTS" means all filings made by Acquiror or its
subsidiaries, including Subsidiary, with the SEC from January 1, 1995
through the Agreement Effective Date, including notes, schedules,
amendments and exhibits thereto.
"ACQUIROR STOCK" means the Acquiror Common Stock and the Acquiror
Preferred Stock.
"ACQUIROR STOCK FUND" has the meaning set forth in SECTION 2.6(A) hereof.
"ACQUISITION TRANSACTION" has the meaning set forth in SECTION 6.17
hereof.
"ADJUSTED COMMON EQUITY CONSIDERATION" means the product of (i) the
Average Acquiror Price, and (ii) the quotient determined by dividing the
Common Equity Consideration by the Average Acquiror Common Equity Price.
"AFFILIATE" means, when used with respect to a specified Person, another
Person that directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the Person
specified.
"AGREEMENT" means this Amended and Restated Agreement and Plan of Merger,
as the same may be amended from time to time in accordance with the terms
hereof.
"AGREEMENT EFFECTIVE DATE" means June 19, 1996, the date on which the
Prior Agreement was entered into.
"ALLOCATION AGREEMENT" means the Debt and Cash Allocation Agreement
included in the Distribution Agreement as an exhibit.
"APPRAISAL CONSIDERATION" has the meaning set forth in SECTION 2.6(H)
hereof.
"ACQUIROR PRICE" means the closing price of the Acquiror Common Stock on
the NYSE Composite Transactions Reporting System, as reported in The Wall
Street Journal, for the trading day immediately
2
<PAGE>
preceding the day on which the holders of Tenneco Stock entitled to vote at
the Tenneco Stockholders' Meeting vote with respect to Merger; provided,
however, if there is no closing price for Acquiror Common Stock on such
trading day, the Acquiror Price shall be the closing price for Acquiror
Common Stock on the next preceding trading day on which a trade of Acquiror
Common Stock occurred.
"AVERAGE ACQUIROR PRICE" means the average of the closing prices of the
Acquiror Common Stock on the NYSE Composite Transactions Reporting System,
as reported in The Wall Street Journal, for the Average Period (but subject
to correction for typographical or other manifest errors in such
reporting), rounded to four decimal places.
"AVERAGE ACQUIROR COMMON EQUITY PRICE" means the Average Acquiror Price;
provided that if the Average Acquiror Price is greater than $38.3625, the
Average Acquiror Common Equity Price shall be $38.3625 and if the Average
Acquiror Price is less than $31.3875, the Average Acquiror Common Equity
Price shall be $31.3875; provided further, however, that the aforesaid
dollar amounts shall be subject to appropriate adjustments, reasonably
satisfactory to Tenneco and Acquiror in all respects, to reflect any
recapitalization, reclassification, stock split, combination of shares,
issuance of equity (other than issuances of shares pursuant to the exercise
of employee stock options) or options for less than full market value or
the like of or involving Acquiror.
"AVERAGE PERIOD" means the 20 trading days on the NYSE immediately
preceding the second trading day prior to the Effective Time.
"BENEFITS AGREEMENT" means the Benefits Agreement attached to the
Distribution Agreement as Exhibit A.
"BLACK-OUT PERIOD" means the Average Period and the 20 trading days
preceding the Average Period.
"CERTIFICATES" has the meaning set forth in SECTION 2.6(B) hereof.
"CLAIM" has the meaning set forth in SECTION 6.4(B) hereof.
"CLAIMS ADMINISTRATION" means the handling of claims made under the D&O
Policies, including the management, defense and settlement of claims.
"CLOSING" has the meaning set forth in SECTION 3.1 hereof.
"CLOSING DATE" has the meaning set forth in SECTION 3.1 hereof.
"COMMISSION" means the United States Securities and Exchange Commission.
"COMMON CONVERSION NUMBER CASE A" means the number of shares (rounded to
the nearest one-thousandth of a share) of Acquiror Common Stock to be
issued upon conversion of a single share of Tenneco Common Stock at the
Effective Time pursuant to SECTION 2.5 hereof and the other terms and
conditions of this Agreement, determined by dividing the Common Equity
Consideration by the Average Acquiror Common Equity Price and dividing the
result by the number of shares of Tenneco Common Stock outstanding
immediately prior to the Effective Time as certified to Acquiror by
Tenneco's principal registrar and transfer agent, which are to be converted
into the right to receive Acquiror Stock pursuant to the provisions of
SECTION 2.5 hereof.
"COMMON CONVERSION NUMBER CASE B" means the number of shares (rounded to
the nearest one-thousandth of a share) of Acquiror Common Stock to be
issued upon conversion of a single share of Tenneco Common Stock at the
Effective Time pursuant to SECTION 2.5 hereof and the other terms and
conditions of this Agreement, determined by dividing (x) the excess of (i)
7,000,000 over (ii) the number of shares of Acquiror Common Stock issued in
exchange for shares of $4.50 Preferred Stock and $7.40 Preferred Stock in
the Merger by (y) the number of shares of Tenneco Common Stock outstanding
immediately prior to the Effective Time as certified to Acquiror by
Tenneco's principal registrar and transfer agent, which are to be converted
into the right to receive Acquiror Stock pursuant to the provisions of
SECTION 2.5 hereof.
"COMMON EQUITY CONSIDERATION" means the Equity Consideration less the
Preferred Stock Amount.
"CORPORATE RESTRUCTURING TRANSACTIONS" has the meaning ascribed to that
term in the Distribution Agreement.
3
<PAGE>
"DEBT" means any indebtedness representing an obligation for the
repayment of money borrowed by a subject Person (including short-term debt
and current maturities of long-term obligations), and any accrued but
unpaid or accreted interest related to such indebtedness.
"DEBT REALIGNMENT" means the plan for repayment, exchange and/or
modification of the indebtedness of Tenneco, as described in EXHIBIT C
attached hereto.
"DEPOSITARY" means The First National Bank of Boston, N.A.
"DEPOSITARY AGREEMENT" means the Depositary Agreement attached hereto as
EXHIBIT O.
"DEPOSITARY RECEIPT" means a depositary receipt issued by the Depositary
to evidence a Depositary Share.
"DEPOSITARY SHARE" means a unit representing a one twenty-fifth
fractional interest in a whole share of Acquiror Preferred Stock which
shall be evidenced by a Depositary Receipt issued to the Person entitled to
such fractional interest and which shall entitle the holder thereof,
pursuant to the Depositary Agreement, to rights equivalent to those of a
holder of a whole share of Acquiror Preferred Stock (to the extent of such
one twenty-fifth fractional interest therein).
"DISSENTING SHARES" has the meaning set forth in SECTION 2.6(H) hereof.
"DGCL" means the Delaware General Corporation Law, as amended.
"D&O POLICIES" has the meaning set forth in SECTION 6.4(D) hereof.
"EFFECTIVE TIME" has the meaning set forth in SECTION 3.2 hereof.
"ENERGY ASSETS" has the meaning ascribed to that term in the Distribution
Agreement.
"ENERGY BUSINESS" has the meaning ascribed to that term in the
Distribution Agreement.
"ENERGY GROUP" has the meaning ascribed to that term in the Distribution
Agreement.
"ENERGY SUBSIDIARIES" means the direct and indirect consolidated
subsidiaries of Tenneco immediately following the Spinoffs, including the
Major Subsidiaries.
"EQUITY CONSIDERATION" means $750,000,000.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"EXCHANGE AGENT" means First Chicago Trust Company of New York, or such
other trust company or bank designated by Acquiror and acceptable to
Tenneco, who shall act as agent for the holders of Tenneco Stock in
connection with the Merger to receive the Exchange Fund (as defined in
SECTION 2.6(A) hereof).
"$4.50 PREFERRED STOCK" means the $4.50 Cumulative Preferred Stock of
Tenneco.
"$4.50 PREFERRED CONVERSION NUMBER" means the number of shares (rounded
to the nearest one-thousandth of a share) of Acquiror Common Stock to be
issued upon conversion of a single share of $4.50 Preferred Stock at the
Effective Time pursuant to SECTION 2.5 and the other terms and conditions
of this Agreement, determined by dividing (i) $115, by (ii) the Acquiror
Price.
"GAAP" means United States generally accepted accounting principles and
practices, as in effect on the date of this Agreement, as promulgated by
the Financial Accounting Standards Board and its predecessors.
"GAINS TAX" has the meaning set forth in SECTION 10.1(C) hereof.
"GOVERNMENTAL AUTHORITY" means any government or any agency, bureau,
board, commission, court, department, official, political subdivision,
tribunal or other instrumentality of any government, whether federal, state
or local, domestic or foreign.
4
<PAGE>
"HIGHER PROPOSAL" has the meaning set forth in SECTION 6.17 hereof.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"INDEMNIFIED PARTIES" has the meaning set forth in SECTION 6.4(B) hereof.
"INDUSTRIAL BUSINESS" has the meaning ascribed to that term in the
Distribution Agreement.
"INDUSTRIAL GROUP" has the meaning ascribed to that term in the
Distribution Agreement.
"INSURANCE ADMINISTRATION" means, with respect to a D&O Policy, the
accounting for premiums, defense costs, indemnity payments, deductibles and
retentions, as appropriate, under the terms and conditions of such D&O
Policy, and the distribution of Insurance Proceeds.
"INSURANCE PROCEEDS" means, with respect to an insured party, those
monies, net of any applicable premium adjustment, deductible, retention or
similar cost paid or held by or for the benefit of such insured party,
which are either
(i) received by an insured from an insurance carrier, or
(ii) paid by an insurance carrier on behalf of an insured.
"IRS RULING LETTER" has the meaning set forth in SECTION 7.1(G) hereof.
"JOINT PROXY STATEMENT" has the meaning set forth in SECTION 6.7 hereof.
"LAW" means any constitutional provision, statute, law, ordinance, rule,
regulation, permit, decree, injunction, judgment, order, decree, ruling,
determination, finding or writ of any Governmental Authority.
"LAZARD" means Lazard Freres & Co. LLC.
"MAJOR SUBSIDIARIES" means the following subsidiaries of Tenneco after
giving effect to the Spinoffs:
<TABLE>
<CAPTION>
JURISDICTION
NAME OF ORGANIZATION
---- ---------------
<S> <C>
Tennessee Gas Pipeline Company Delaware
Tenneco Energy Resources Corporation Delaware
Tenneco Gas Australia, Inc. Delaware
Tenneco Corporation Delaware
Tenneco Ventures Corporation Delaware
Midwestern Gas Transmission Company Delaware
East Tennessee Natural Gas Company Tennessee
</TABLE>
"MATERIAL ADVERSE EFFECT ON ACQUIROR" means an event, change or effect
that:
(i) is or is reasonably likely to be materially adverse to the
business, operations, properties or financial condition of Acquiror and
its consolidated subsidiaries, taken as a whole; or
(ii) prevents Acquiror or Subsidiary from consummating the
transactions contemplated hereby, including the Merger, prior to the
date specified in SECTION 8.1(II) hereof.
"MATERIAL ADVERSE EFFECT ON TENNECO" means an event, change or effect
that:
(i) is or is reasonably likely to be materially adverse to the
business, operations, properties or financial condition of the Energy
Business, taken as a whole; or
(ii) prevents Tenneco from consummating the transactions contemplated
hereby, including the Spinoffs and the Merger, prior to the date
specified in SECTION 8.1(II) hereof.
"NEW CERTIFICATES" has the meaning set forth in SECTION 2.6(A) hereof.
"NEW PREFERRED STOCK" means the series of junior preferred stock of
Tenneco to be issued prior to the Closing Date as set forth in SECTION
6.1(D) hereof and described in the form of Certificate of Designation
therefor attached hereto as EXHIBIT E.
5
<PAGE>
"NPS MATERIALS" means any registration statement, private placement
memorandum and/or other documents or filings prepared by or on behalf of
Tenneco or Acquiror (or their Affiliates or representatives) and
(i) distributed to prospective purchasers or other receivers of New
Preferred Stock, or
(ii) filed with the Commission or other Governmental Authority, or
the NYSE or other stock exchange, relating to the issuance of New
Preferred Stock.
"NPS VALUE" means the market value of the New Preferred Stock issued and
outstanding at and as of the Effective Time, as jointly determined by the
financial advisors identified in SECTIONS 4.10 and 5.10 below on the
Closing Date (or, if they are unable to so agree, by Morgan Stanley & Co.
Incorporated later on the Closing Date). If the New Preferred Stock is
issued pursuant to a public issuance or private placement (as opposed to a
stock dividend), the gross proceeds of the issuance or placement shall be
presumptive evidence of the NPS Value (subject only to adjustment for
changes in value, if any, occurring between the date of the issuance or
placement and the Closing Date).
"NYSE" means the New York Stock Exchange.
"1981 STOCK PLAN" means the 1981 Tenneco Inc. Key Employee Stock Option
Plan.
"1994 STOCK PLAN" means the 1994 Tenneco Inc. Stock Ownership Plan.
"OPTION PLANS" means the 1981 Stock Plan and the 1994 Stock Plan.
"PERSON" means any natural person, corporation, business trust, joint
venture, association, company, partnership, limited liability company or
other entity, or any government, or any agency or political subdivision
thereof.
"PREFERRED STOCK AMOUNT" means an amount equal to the Acquiror Price
times the number of shares of Acquiror Common Stock issued to the holders
of the $4.50 Preferred Stock and the $7.40 Preferred Stock pursuant to the
terms of SECTION 2.5 hereof.
"PREFERRED STOCK CONVERSION NUMBER" means the result obtained by (x)
subtracting from the Adjusted Common Equity Consideration the product of
(i) the excess of (A) 7,000,000 over (B) the number of shares of Acquiror
Common Stock issued in exchange for shares of $4.50 Preferred Stock and
$7.40 Preferred Stock in the Merger and (ii) the Average Acquiror Price,
(y) dividing the result obtained pursuant to clause (x) by the "Assigned
Value" (as set forth in EXHIBIT B attached hereto) (being the liquidation
value) of the Acquiror Preferred Stock and (z) dividing the result obtained
pursuant to clause (y) by the number of shares of Tenneco Common Stock
outstanding immediately prior to the Effective Time as certified to
Acquiror by Tenneco's principal registrar and transfer agent.
"RIGHTS" shall mean the preferred stock purchase rights issued pursuant
to the Rights Agreement.
"RIGHTS AGREEMENT" shall mean the Rights Agreement dated as of May 24,
1988, as amended and restated as of October 1, 1989, between Tenneco and
First Chicago Trust Company of New York.
"REGISTRATION STATEMENT" has the meaning set forth in SECTION 6.7 hereof.
"REPLACEMENT D&O POLICY" has the meaning set forth in SECTION 6.4(D)
hereof.
"SECT" means the Stock Employee Compensation Trust currently maintained
by Tenneco.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"$7.40 PREFERRED STOCK" means the $7.40 Cumulative Preferred Stock of
Tenneco.
"$7.40 PREFERRED CONVERSION NUMBER" means the number of shares (rounded
to the nearest one-thousandth of a share) of Acquiror Common Stock to be
issued upon conversion of a single share of $7.40
6
<PAGE>
Preferred Stock at the Effective Time pursuant to SECTION 2.5 and the other
terms and conditions of this Agreement, determined by dividing (i) $115, by
(ii) the Acquiror Price.
"S/I TRANSACTION" has the meaning set forth in SECTION 6.13 hereof.
"SHIPBUILDING BUSINESS" has the meaning ascribed to that term in the
Distribution Agreement.
"SHIPBUILDING GROUP" has the meaning ascribed to that term in the
Distribution Agreement.
"STOCKHOLDERS' MEETINGS" has the meaning set forth in SECTION 6.8 hereof.
"TAKEOVER STATUTE" means any "fair price," "moratorium," "control share
acquisition" or other similar antitakeover statute or regulation enacted
under state or federal laws in the United States or any foreign
jurisdiction.
"TENDER AND EXCHANGE MATERIALS" means any registration statement, private
placement memorandum, offer to purchase and/or other documents or filings
prepared by or on behalf of Tenneco or Acquiror (or their Affiliates or
representatives), either separately or jointly, and
(i) distributed to the record and/or beneficial holders of Tenneco
consolidated Debt in connection with the Debt Realignment, and/or
(ii) filed with the Commission or other Governmental Authority, or
the NYSE or other stock exchange, relating to Debt Realignment.
"TENNECO COMMON STOCK" means the Common Stock, par value $5.00 per share,
of Tenneco.
"TENNECO SEC DOCUMENTS" means all filings made by Tenneco or its
subsidiaries with the SEC since January 1, 1995 through the Agreement
Effective Date, including notes, schedules, amendments and exhibits
thereto.
"TENNECO STOCK" means the Tenneco Common Stock, the $7.40 Preferred Stock
and the $4.50 Preferred Stock (but not the New Preferred Stock).
"TENNECO STOCKHOLDERS' MEETING" has the meaning set forth in SECTION 6.8
hereof.
"TRANSFER TAXES" has the meaning set forth in SECTION 10.1(C) hereof.
"$" is a reference to United States dollars. All monetary amounts set
forth in this Agreement are intended to be United States currency amounts.
ARTICLE II
THE MERGER
2.1 MERGER. Upon the terms and subject to the conditions herein set forth,
Subsidiary shall be merged with and into Tenneco at the Effective Time.
2.2 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the DGCL. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time the separate existence and corporate
organization of Subsidiary shall cease and Tenneco shall continue as the
Surviving Corporation, and all the identity, purposes, properties, rights,
privileges, powers, assets, franchises, debts and duties of Tenneco and
Subsidiary shall, except as expressly provided herein or in the DGCL, vest in
the Surviving Corporation and become the identity, purposes, properties,
rights, privileges, powers, assets, franchises, debts and duties of the
Surviving Corporation.
7
<PAGE>
2.3 CERTIFICATE OF INCORPORATION AND BYLAWS.
(a) At the Effective Time, the certificate of incorporation of Tenneco in
effect immediately prior to the Effective Time shall be amended as set forth
in ANNEX 1 hereto, and as so amended shall be the certificate of incorporation
of the Surviving Corporation.
(b) From and after the Effective Time, the by-laws of Subsidiary, as in
effect immediately prior to the Effective Time (but, in any event, to be in
form and substance reasonably acceptable to Tenneco), shall, until further
amended as provided by law, constitute the by-laws of the Surviving
Corporation, except that the by-laws of the Surviving Corporation shall
include the provisions specified in SECTION 6.4(A)(I) of this Agreement.
2.4 DIRECTORS. The directors of Subsidiary at the Effective Time shall be
the initial directors of the Surviving Corporation, each to hold office from
the Effective Time in accordance with the certificate of incorporation and
bylaws of the Surviving Corporation and until his or her successor is duly
elected and qualified.
2.5 CONVERSION OF SHARES. At the Effective Time, by virtue of the Merger and
without any action on the part of any stockholder of either Tenneco or
Subsidiary, as applicable, but subject to SECTION 2.6 hereof, each outstanding
share of Subsidiary's capital stock and Tenneco Stock (but not New Preferred
Stock) shall be cancelled or converted in accordance with the following
provisions of this SECTION 2.5:
(a) CAPITAL STOCK OF SUBSIDIARY. Each share of Subsidiary's capital stock
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one fully paid and nonassessable share of Common
Stock, par value $5.00 per share, of the Surviving Corporation.
(b) CANCELLATION OF TREASURY AND ACQUIROR-OWNED STOCK. Each share of
Tenneco Stock owned immediately prior to the Effective Time (after giving
effect to the Spinoffs) by Tenneco, directly as treasury stock or
indirectly through one or more of its wholly-owned subsidiaries, or by
Acquiror or any direct or indirect wholly-owned subsidiary of Acquiror,
shall be cancelled and retired and shall cease to exist and no Acquiror
Stock or other consideration shall be delivered in exchange therefor or
with respect thereto.
(c) CONVERSION OF $7.40 PREFERRED STOCK. Each share of $7.40 Preferred
Stock issued and outstanding immediately prior to the Effective Time (other
than shares to be cancelled in accordance with SECTION 2.5(B) above) shall
be converted into the right to receive that number of fully paid and
nonassessable shares of Acquiror Common Stock that is equal to the $7.40
Preferred Conversion Number.
(d) CONVERSION OF $4.50 PREFERRED STOCK. Each share of $4.50 Preferred
Stock issued and outstanding immediately prior to the Effective Time (other
than shares to be cancelled in accordance with SECTION 2.5(B) above) shall
be converted into the right to receive that number of fully paid and
nonassessable shares of Acquiror Common Stock that is equal to the $4.50
Preferred Conversion Number.
(e) CONVERSION OF TENNECO COMMON STOCK. Each share of Tenneco Common
Stock issued and outstanding immediately prior to the Effective Time (other
than shares to be cancelled in accordance with SECTION 2.5(B) above) shall
be converted into the right to receive (i) that number of fully paid and
nonassessable shares of (i) Acquiror Common Stock that is equal to the
Common Conversion Number Case A if the issuance of Acquiror Common Stock as
contemplated by this SECTION 2.5(E)(I) is approved by the requisite vote of
the holders of the Acquiror Common Stock, or if such vote is not required
by law or the rules of any national securities exchange on which the
Acquiror Common Stock is listed, or (ii) if the issuance of shares of
Acquiror Common Stock as contemplated by SECTION 2.5(E)(I) is not approved
by the requisite vote of the holders of the Acquiror Common Stock and is
not permissible as aforesaid without such vote, (A) that number of fully
paid and nonassessable shares of Acquiror Common Stock that is equal to the
Common Conversion Number Case B and (B) that number of Depositary Shares
representing interests in that fraction of a fully paid and nonassessable
share of Acquiror Preferred Stock that is equal to the Preferred Stock
Conversion Number.
(f) REDEMPTION OF PREFERRED STOCK. Subject to the consent of Acquiror
(which shall not be unreasonably withheld or delayed), Tenneco may at any
time hereafter, prior to the Effective Time, redeem the $4.50 Preferred
Stock and/or the $7.40 Preferred Stock in accordance with their respective
terms.
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2.6 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Promptly after the Effective Time, Acquiror shall
deposit with the Exchange Agent, for the benefit of the holders of shares of
Tenneco Stock, for exchange in accordance with this SECTION 2.6, certificates
and Depositary Receipts, if any (together, the "NEW CERTIFICATES")
representing shares of Acquiror Stock and any Depositary Shares, respectively,
in amounts sufficient to allow the Exchange Agent to make all deliveries of
New Certificates that may be required in exchange for Certificates (as defined
below) pursuant to this SECTION 2.6 (the "ACQUIROR STOCK FUND") (such Acquiror
Stock Fund, together with any dividends or distributions with respect thereto
contemplated by SECTION 2.6(D) hereof and cash in lieu of fractional shares or
any fractional Depositary Shares contemplated by SECTION 2.6(C) hereof, being
hereinafter referred to as the "EXCHANGE FUND").
(b) EXCHANGE PROCEDURES. As soon as practicable after the Effective Time,
the Surviving Corporation shall cause the Exchange Agent to mail to each
holder of record of a certificate or certificates which immediately prior to
the Effective Time represented outstanding shares of Tenneco Stock which were
converted pursuant to SECTION 2.5 hereof into the right to receive shares of
Acquiror Stock and Depositary Shares, if any (the "CERTIFICATES")
(i) a letter of transmittal (which shall be in such form and have such
provisions as Acquiror and Tenneco may reasonably specify), and
(ii) instructions for use in effecting the surrender of the Certificates
in exchange for New Certificates.
Upon surrender of a Certificate for cancellation to the Exchange Agent
together with such letter of transmittal, duly completed in accordance with
the instructions thereto and executed, the holder of such Certificate shall be
entitled to receive in exchange therefor a New Certificate or New Certificates
representing that number of whole shares of Acquiror Stock (and any whole
Depositary Shares) which such holder has the right to receive pursuant to the
provisions of SECTION 2.5 hereof (after giving effect to SECTIONS 2.6(C) and
2.6(H) hereof) and any cash paid in lieu of fractional shares (or any
fractional Depositary Shares) and any dividends or distributions with respect
thereto as contemplated by SECTIONS 2.6(C) and 2.6(D) hereof, after giving
effect to any required tax withholdings, and the Certificate so surrendered
shall forthwith be cancelled. In the event of a transfer of ownership of
Tenneco Stock that is not registered in the transfer records of Tenneco, a New
Certificate representing the proper number of shares of Acquiror Stock (and
any Depositary Shares) may be issued to a transferee if the Certificate
formerly representing such Tenneco Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this SECTION 2.6(B), each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender a New Certificate or New Certificates representing
such whole shares of Acquiror Stock (and any whole Depositary Shares), any
dividends or distributions in respect of such shares of Acquiror Stock (and
any Depositary Shares) and cash in lieu of any fractional shares of Acquiror
Stock (or any fractional Depositary Shares), as is contemplated by SECTIONS
2.5 and 2.6 of this Agreement.
(c) FRACTIONAL SHARES. Notwithstanding anything to the contrary contained
herein (but except for the issuance of Depositary Receipts), no scrip or
certificates for fractional shares of Acquiror Stock or for any fractional
Depositary Shares shall be issued, and no Person otherwise entitled to any
such fractional share or fractional Depositary Share shall be entitled to
vote, to receive dividends, or to any other rights of a holder of a share or
Depositary Share with respect to such fractional interest. Instead, the
Exchange Agent shall act as agent for the holders of Tenneco Stock and shall
sell on the NYSE, as promptly as possible, but in any event not later than 30
days after the Closing Date, for the account of the Persons otherwise entitled
to such fractional shares or fractional Depositary Shares, shares of Acquiror
Stock or Depositary Shares equivalent to the aggregate of such fractional
interests. The Exchange Agent shall, until December 31, 1998, pay to such
Persons upon surrender of their Certificate(s) their respective pro rata
shares of the net proceeds of such sale, without interest. On December 31,
1998, any remaining proceeds of the sale shall be paid over to Acquiror, after
which the Persons otherwise entitled to such fractional interests represented
by such proceeds shall look only to Acquiror for payment, subject to the
requirements of escheat laws of the various states that may be applicable.
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(d) DIVIDENDS AND OTHER DISTRIBUTIONS. Any dividend or other distribution
declared or made after the Effective Time with a record date after the
Effective Time in respect of Acquiror Stock issuable hereunder to the holder
of a Certificate not then surrendered pursuant to SECTION 2.6(B) hereof shall
be paid to the Exchange Agent (or, if payable after December 31, 1998, shall
be set aside and retained by Acquiror), and no such dividend or other
distribution payable in respect of such Acquiror Stock shall be paid to the
holder of such outstanding Certificate until such Certificate shall have been
so surrendered to the Exchange Agent (or, if after December 31, 1998, to
Acquiror). Upon surrender of such outstanding Certificate, there shall be paid
by the Exchange Agent (or, if after December 31, 1998, by Acquiror) to or at
the direction of the holder of the New Certificate(s) issued in exchange
therefor the amount (without interest thereon) of all dividends or
distributions which have theretofore been paid to the Exchange Agent (or, if
after December 31, 1998, set aside and retained by Acquiror) with respect to
the number of shares of Acquiror Stock and any Depositary Shares represented
by the New Certificate(s) issued upon such surrender and exchange.
(e) NO FURTHER OWNERSHIP RIGHTS IN TENNECO STOCK. All shares of Acquiror
Stock and any Depositary Shares issued upon the surrender for exchange of
shares of Tenneco Stock in accordance with the terms hereof (including any
cash paid pursuant to SECTION 2.6(C) hereof) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Tenneco
Stock, and there shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of Tenneco Stock
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be cancelled and exchanged as provided in this SECTION
2.6.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund held by
the Exchange Agent that remains undistributed to the stockholders of Tenneco
after December 31, 1998, shall be delivered to Acquiror, and any stockholders
of Tenneco who have not theretofore complied with this SECTION 2.6 shall
thereafter look only to Acquiror for payment of their claims for Acquiror
Stock, any Depositary Shares, any cash in lieu of fractional shares of
Acquiror Stock or in lieu of any fractional Depositary Shares and any
dividends or distributions with respect to Acquiror Stock.
(g) NO LIABILITY. None of Acquiror, Subsidiary, Tenneco, the Industrial
Subsidiary or the Shipbuilding Subsidiary (or any of their respective direct
or indirect subsidiaries or Affiliates) shall be liable to any holder of
shares of Tenneco Stock, Acquiror Stock or any Depositary Shares, as the case
may be, for such shares (or dividends or distributions with respect thereto)
or cash for payment in lieu of fractional shares or in lieu of any fractional
Depositary Shares delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. The Industrial Subsidiary, the
Shipbuilding Subsidiary and their respective direct and indirect subsidiaries
and Affiliates shall be deemed third party beneficiaries of this SECTION
2.6(G) and all other provisions of this Agreement necessary or appropriate for
purposes of enforcing this SECTION 2.6(G).
(h) DISSENTING HOLDERS OF $4.50 PREFERRED STOCK AND DISSENTING HOLDERS OF
NEW PREFERRED STOCK. Notwithstanding anything in this Agreement to the
contrary, shares of $4.50 Preferred Stock and New Preferred Stock that are
issued and outstanding immediately prior to the Effective Time and are held by
stockholders who are entitled to appraisal rights in respect thereof under
Section 262 of the DGCL and who have
(i) not voted such shares in favor of the adoption of this Agreement or
otherwise waived or lost their right to demand appraisal of such shares and
(ii) properly demanded appraisal of such shares in accordance with
Section 262 of the DGCL (the "DISSENTING SHARES")
shall not be converted as described in SECTION 2.5(D) above or remain
outstanding as described in SECTION 2.7 hereof, as the case may be, but shall
become the right to receive such consideration as may be determined to be due
to such stockholders pursuant to Section 262 of the DGCL ("APPRAISAL
CONSIDERATION"). If, after the Effective Time, any such stockholder withdraws
his demand for appraisal or fails to perfect or otherwise loses his right of
appraisal, in any case pursuant to the DGCL, his Dissenting Shares shall be
deemed to be converted as of the Effective Time into the right to receive
shares of Acquiror Common Stock (without any interest thereon)
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<PAGE>
as provided in SECTION 2.5(D) hereof or shall be deemed to have remained
outstanding as provided in SECTION 2.7 hereof, as the case may be. Promptly
upon receiving any demands for appraisal, withdrawals of demand for appraisal
or any other instrument served pursuant to Section 262 of the DGCL, Tenneco
shall so notify Acquiror and shall give Acquiror the opportunity to
participate in and direct all negotiations and proceedings with respect to any
such appraisal demands. Tenneco shall not, without the prior written consent
of Acquiror, make any payment with respect to, or settle, offer to settle or
otherwise negotiate, any such appraisal demands. From and after the Effective
Time, the Surviving Corporation shall be solely responsible for the payment of
any and all Appraisal Consideration, and shall indemnify, defend, protect and
hold harmless the Industrial Subsidiary, the Shipbuilding Subsidiary and their
respective direct and indirect subsidiaries from and against any and all
claims, losses, expenses, payments, liabilities and damages (including
attorneys' fees) relating to any Dissenting Shares or claims of stockholders
holding Dissenting Shares. In order to effect the payment of any Appraisal
Consideration, the Surviving Corporation shall establish an escrow with the
Exchange Agent (or other escrow agent reasonably acceptable to the Industrial
Subsidiary) consisting of an adequate amount of cash from the $25,000,000 of
cash required to be on hand at Tenneco as of the Effective Time pursuant to
the Allocation Agreement. The Industrial Subsidiary, the Shipbuilding
Subsidiary and their respective direct and indirect subsidiaries shall be
deemed third party beneficiaries of this SECTION 2.6(H) and all other
provisions of this Agreement necessary or appropriate for purposes of
enforcing this SECTION 2.6(H).
2.7 NEW PREFERRED STOCK. Subject to SECTION 2.6(H) hereof, the shares of New
Preferred Stock outstanding immediately prior to the Effective Time shall not
be converted or otherwise exchanged pursuant to the Merger and shall remain
outstanding immediately after the Effective Time, held by the Persons who were
holders of the New Preferred Stock immediately prior to the Effective Time.
ARTICLE III
CLOSING AND FILING
3.1 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to SECTION
8.1 hereof, and subject to the satisfaction or, if permissible, waiver of the
conditions set forth in ARTICLE VII hereof, the closing of the Merger (the
"CLOSING") shall take place as promptly as practicable (and in any event
within two business days) after satisfaction or waiver of the conditions set
forth in ARTICLE VII hereof, at the offices of Tenneco Inc., 1010 Milam
Street, Houston, Texas, unless another date, time or place is agreed to in
writing by the parties hereto; provided, however, that if, (i) during the
Black-out Period there occurs an event or series of events that, in the
opinion of either Tenneco or Acquiror, could reasonably be expected to have a
temporary effect on the price of Acquiror Stock, and (ii) but for the
provisions of this proviso the Average Acquiror Price would be greater than
$38.3625 or less than $31.3875 (said dollar amounts to be adjusted on the same
basis as is described in the definition of Average Acquiror Common Equity
Price), then either Tenneco (in the case the Average Acquiror Price would be
greater than $38.3625 as aforesaid) or Acquiror (in the case the Average
Acquiror Price would be less than $31.3875 as aforesaid) may, by written
notice to the other, elect to delay or to restart the commencement of the
Average Period (and thereby the Closing) until such day as such temporary
effect has ended (but in no event shall the Closing be delayed by more than 15
days and in no event beyond the dated specified in SECTION 8.1(II) hereof), as
determined and specified by the notifying party. The date on which the Closing
occurs is referred to in this Agreement as the "CLOSING DATE".
3.2 EFFECTIVE TIME. As promptly as practicable after the satisfaction or, if
permissible, waiver of the conditions set forth in ARTICLE VII hereof, but
subject to the terms of SECTION 3.1 hereof, the parties hereto shall cause the
Merger to be consummated by filing a certificate of merger with the Secretary
of State of the State of Delaware in such form as required by, and executed in
accordance with the relevant provisions of, the DGCL (the date and time of the
acceptance of such filing, or such later date or time as set forth therein,
being the "EFFECTIVE TIME").
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<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TENNECO
Tenneco hereby represents and warrants to Acquiror and Subsidiary as
follows:
4.1 ORGANIZATION AND EXISTENCE. Each of Tenneco and the Major Subsidiaries
is a corporation validly existing and in good standing under the laws of the
jurisdiction of its organization with the corporate power and authority to own
its properties and assets and to carry on its business as now being conducted,
except where the failure to be so existing and in good standing or to have
such power and authority would not have a Material Adverse Effect on Tenneco.
4.2 CAPITALIZATION.
(a) As of the dates indicated below, the authorized and outstanding capital
stock of Tenneco was as follows:
<TABLE>
<CAPTION>
AUTHORIZED
AS OF THE
CLASS DATE HEREOF OUTSTANDING AS OF MARCH 31, 1996
----- ----------- --------------------------------
<S> <C> <C>
Common Stock 350,000,000 191,354,932 shares (including 17,358,445
shares held in treasury or by subsidiaries
of Tenneco)
Preferred Stock 15,000,000 803,723 shares of $4.50 Preferred Stock;
391,519 shares of $7.40 Preferred Stock
Junior Preferred 50,000,000 none
Stock
</TABLE>
(b) Between March 31, 1996 and the Agreement Effective Date, Tenneco has
issued no shares of its capital stock except for shares of Tenneco Common
Stock issued upon the exercise of options granted pursuant to the Option Plans
or to executives of Tenneco outside the Option Plans.
(c) As of March 31, 1996, except for
(i) Rights issued pursuant to the Rights Agreement and
(ii) options to acquire an aggregate of 5,207,655 shares of Tenneco
Common Stock,
there were no outstanding options, warrants, rights, puts, calls, commitments
or other contracts, arrangements, or understandings issued by or binding upon
Tenneco requiring or providing for, and there were no outstanding securities
of Tenneco or its subsidiaries which upon the conversion, exchange or exercise
thereof would require or provide for, the issuance by Tenneco of any new or
additional equity interests in Tenneco or any other securities of Tenneco
which, with notice, lapse of time and/or payment of monies, are or would be
convertible into or exercisable or exchangeable for equity interests in
Tenneco (each, a "TENNECO EQUITY RIGHT"). Between March 31, 1996 and the
Agreement Effective Date, Tenneco has not issued or granted any Tenneco Equity
Right except for
(i) Rights issued in connection with the issuance of Tenneco Common Stock
as described in SECTION 4.2(B) hereof and
(ii) options to purchase 11,000 shares of Tenneco Common Stock granted
pursuant to the 1994 Stock Plan.
(d) As of the Agreement Effective Date all outstanding shares of Tenneco
Stock are, and immediately prior to the Effective Time all outstanding shares
of Tenneco Stock and New Preferred Stock will be, validly issued, fully paid
and nonassessable and free of any preemptive (or similar) right.
4.3 AUTHORITY AND APPROVAL. Tenneco has the corporate power and authority,
and no other corporate proceedings on the part of Tenneco are necessary, to
execute and deliver this Agreement and the Distribution Agreement and to
consummate the transactions contemplated hereby and thereby (subject to
securing the
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<PAGE>
approval of the stockholders of Tenneco as contemplated by SECTION 6.8 hereof,
and formal declaration of the dividends necessary to effectuate the Spinoffs
and the issuance of the New Preferred Stock). This Agreement has been duly
executed and delivered by Tenneco and, assuming this Agreement constitutes a
valid and binding obligation of each of Acquiror and Subsidiary, this
Agreement constitutes a valid and binding obligation of Tenneco, enforceable
against Tenneco in accordance with its terms.
4.4 FINANCIAL STATEMENTS. The audited financial statements of Tenneco and
consolidated subsidiaries as of December 31, 1995 and 1994 and for the three
years ended December 31, 1995, included in Tenneco's 1995 Annual Report on
Form 10-K, as filed with the Commission, (i) were prepared in accordance with
GAAP applied on a consistent basis (except as indicated therein or in the
notes thereto) and (ii) fairly present the financial position of Tenneco and
consolidated subsidiaries as of the dates thereof and the results of their
operations and cash flows for the periods then ended. The unaudited financial
statements of Tenneco and consolidated subsidiaries as of March 31, 1996 and
1995 and for the three-month periods ended on each of such dates, included in
Tenneco's March 31, 1996 Quarterly Report on Form 10-Q as filed with the
Commission, (A) comply in all material respects with the published rules and
regulations of the Commission with respect thereto, (B) were prepared in
accordance with GAAP, except as otherwise permitted under the Exchange Act and
the rules and regulations thereunder, on a consistent basis (except as
indicated therein or in the notes thereto) and (C) fairly present the
financial position of Tenneco and consolidated subsidiaries as of the dates
thereof and the results of their operations and cash flows for the periods
then ended, subject to normal year-end adjustments and any other adjustments
described herein or in the notes or schedules thereto.
The unaudited pro forma financial information of the Energy Business
(including related notes thereto) as of December 31, 1995 included in EXHIBIT
F-1 attached to this Agreement (which were prepared without cash flow
statements and treating the Energy Business as if it were a separate entity
for the purpose of estimates and judgments of materiality) appropriately
reflects all significant pro forma adjustments necessary to and does fairly
present the financial position of the Energy Business as of December 31, 1995
and for the year then ended, except that such financial information was
prepared on the assumption that the Energy Business had no long-term debt as
of December 31, 1995. The historical financial balances included in the
unaudited pro forma financial balances included in EXHIBIT F-1 have been
derived from amounts included in the consolidated balances presented in the
audited financial statements of Tenneco and consolidated subsidiaries included
in Tenneco's December 31, 1995 Annual Report on Form 10-K as filed with the
Commission.
The unaudited pro forma financial information of the Energy Business
(including related notes thereto) as of March 31, 1996 included in EXHIBIT F-2
attached to this Agreement (which were prepared without cash flow statements
and treating the Energy Business as if it were a separate entity for the
purpose of estimates and judgments of materiality) appropriately reflects all
significant pro forma adjustments necessary to and does fairly present the
financial position of the Energy Business as of March 31, 1996, except that
such financial information was prepared on the assumption that the Energy
Business had no long-term debt as of March 31, 1996. The historical financial
balances included in the unaudited pro forma financial balances included in
EXHIBIT F-2 have been derived from amounts included in the consolidated
balances presented in the audited financial statements of Tenneco and
consolidated subsidiaries included in Tenneco's March 31, 1996 Quarterly
Report on Form 10-Q as filed with the Commission.
The financial statements of Tennessee Gas Pipeline Company, Midwestern Gas
Transmission Company and East Tennessee Natural Gas Company as of and for the
years ended December 31, 1995 and 1994 included on pages 110 through 123 of
each company's respective Federal Energy Regulatory Commission Form 2 were
prepared in all material respects in accordance with the accounting
requirements of the Federal Energy Regulatory Commission as set forth in its
applicable Uniform System of Accounts and published accounting releases.
4.5 CONSENTS AND APPROVALS; NO VIOLATIONS. The execution, delivery and,
subject to securing the approval of the stockholders of Tenneco as
contemplated by SECTION 6.8 hereof, formal declaration of the dividends
necessary to effectuate the Spinoffs and the issuance of the New Preferred
Stock, performance by Tenneco of
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<PAGE>
this Agreement and the Distribution Agreement and the consummation by Tenneco
of the transactions contemplated hereby or thereby do not or will not:
(i) conflict with or result in any breach of any provisions of the
certificate of incorporation or bylaws of Tenneco;
(ii) except as contemplated by this Agreement or the Distribution
Agreement, require any filing by Tenneco or any Energy Subsidiary with any
Governmental Authority, or require Tenneco or any Energy Subsidiary to
obtain any permit, authorization, consent or approval from any Governmental
Authority;
(iii) after giving effect to the Debt Realignment, result in a violation
or breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, license,
contract, agreement, franchise, permit, concession or other instrument,
obligation, understanding, commitment or other arrangement to which Tenneco
or any Energy Subsidiary is a party or by which any of them or any of their
respective material properties or assets may be bound or affected; or
(iv) violate any Law applicable to Tenneco or any Energy Subsidiary;
except, in the case of each of clauses (ii) through (iv) above, for failures
to make filings or obtain permits, authorizations, consents or approvals,
violations, breaches or defaults that could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on
Tenneco.
4.6 LITIGATION. Except as previously disclosed in writing to Acquiror, as of
the Agreement Effective Date there are no actions, suits, proceedings or, to
the knowledge of Tenneco, governmental investigations or inquiries pending
against Tenneco or any of its subsidiaries or their respective properties,
assets, operations or businesses which could reasonably be expected to delay,
prevent or hinder the consummation of the transactions contemplated hereby or
by the Distribution Agreement, and to the knowledge of Tenneco as of the
Agreement Effective Date, no such actions, suits, proceedings or governmental
investigations or inquiries are threatened.
4.7 TENNECO SEC DOCUMENTS; ACCURACY OF INFORMATION. The information relating
to the Energy Business contained in the Tenneco SEC Documents (A) complied, as
of the date of filing thereof (or, in the case of any registration statement,
on the date it was declared effective), in all material respects with the
applicable requirements of the Exchange Act or Securities Act and (B) did not
contain, as of the date of filing thereof (or, in the case of any registration
statement, on the date it was declared effective), any untrue statement of a
material fact or omit to state any material fact necessary in order to have
the statements made therein, in light of the circumstances under which they
were made, not misleading.
4.8 NO MATERIAL ADVERSE EFFECT. Except as previously disclosed to Acquiror
in writing prior to the date of this Agreement, between December 31, 1995 and
the Agreement Effective Date, there has occurred no Material Adverse Effect on
Tenneco.
4.9 ADVISORS. Except for Lazard, Morgan Stanley & Co. Incorporated, and J.P.
Morgan Securities Incorporated, which have been retained by Tenneco to assist
and advise Tenneco in connection with the transactions contemplated by this
Agreement and the Distribution Agreement, Tenneco has not employed any broker,
finder or intermediary in connection with such transactions who might be
entitled to a fee or commission upon the consummation of this Agreement, the
Distribution Agreement or the transactions contemplated hereby or thereby. A
copy of the engagement letter between Tenneco and each such advisor has been
provided to Acquiror.
4.10 OPINION OF FINANCIAL ADVISOR. Tenneco has received the opinion of
Lazard, dated as of the Agreement Efffective Date, to the effect that, as of
such date, the consideration to be received in the Merger by Tenneco's
stockholders is fair to Tenneco's stockholders from a financial point of view
(and Tenneco has the right to refer
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<PAGE>
to that opinion, so long as such reference is in form and substance
satisfactory to Lazard, in the Joint Proxy Statement and other appropriate
filings with the Commission and mailings to its stockholders).
4.11 AMENDMENTS TO RIGHTS AGREEMENT. Tenneco has caused the Rights Agreement
to be amended such that
(i) neither a "Triggering Event" nor a "Distribution Date" (in each case
as defined in the Rights Agreement) will occur solely by reason of the
execution of this Agreement and the consummation of the transactions
contemplated hereby, and
(ii) the Rights will expire at the Effective Time.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUBSIDIARY
Acquiror and Subsidiary hereby represent and warrant, jointly and severally,
to Tenneco as follows:
5.1 ORGANIZATION AND EXISTENCE. Each of Acquiror and Subsidiary is a
corporation validly existing and in good standing under the laws of the
jurisdiction of its organization with the corporate power and authority to own
its properties and assets and to carry on its business as now being conducted,
except where the failure to be so existing and in good standing or to have
such power and authority would not have a Material Adverse Effect on Acquiror.
5.2 CAPITALIZATION.
(a) ACQUIROR.
(i) As of the Agreement Effective Date, the authorized capital stock of
Acquiror consists of:
(A) 100,000,000 shares of Acquiror Common Stock of which, at June 18,
1996, 35,582,074 shares were issued and outstanding and 1,769,151 shares
were held in treasury (including shares held in Acquiror's Benefits
Protection Trust); and
(B) 25,000,000 shares of Preferred Stock , $.01 par value, none of which
are issued and outstanding.
(ii) As of the Agreement Effective Date, except for rights issued pursuant
to the Shareholders Rights Agreement, dated as of July 7, 1992, between
Acquiror and The First National Bank of Boston and options to acquire an
aggregate of 4,066,487 shares of Acquiror Common Stock, there were no
outstanding options, warrants, rights, puts, calls, commitments or other
contracts, arrangements, or understandings issued by or binding upon Acquiror
requiring or providing for, and there were no outstanding securities of
Acquiror or its subsidiaries which upon the conversion, exchange or exercise
thereof would require or provide for, the issuance by Acquiror of any new or
additional equity interests in Acquiror or any other securities of Acquiror
which, with notice, lapse of time and/or payment of monies, are or would be
convertible into or exercisable or exchangeable for equity interests in
Acquiror (each, an "ACQUIROR EQUITY RIGHT").
(iii) As of the Agreement Effective Date all outstanding shares of the
capital stock of Acquiror are, and immediately prior to the Effective Time all
outstanding shares of the capital stock of Acquiror will be, validly issued,
fully paid and nonassessable and free of any preemptive (or similar) right.
(b) SUBSIDIARY.
(i) The authorized capital stock of Subsidiary consists of 1,000 shares of
common stock, $1.00 par value, all of which are issued and outstanding.
(ii) There are no outstanding options, warrants, rights, puts, calls,
commitments or other contracts, arrangements, or understandings issued by or
binding upon Subsidiary requiring or providing for, and there were
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<PAGE>
no outstanding securities of Subsidiary which upon the conversion, exchange or
exercise thereof would require or provide for, the issuance by Subsidiary of
any new or additional equity interests in Subsidiary or any other securities
of Subsidiary which, with notice, lapse of time and/or payment of monies, are
or would be convertible into or exercisable or exchangeable for equity
interests in Subsidiary.
(iii) All outstanding shares of the capital stock of Subsidiary are, and
immediately prior to the Effective Time all outstanding shares of the capital
stock of Subsidiary will be, validly issued, fully paid and nonassessable and
free of any preemptive (or similar) right.
5.3 AUTHORITY AND APPROVAL. Each of Acquiror and Subsidiary has the
corporate power and authority, and no other corporate proceedings on the part
of Acquiror or Subsidiary are necessary, to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. This Agreement has
been duly executed and delivered by each of Acquiror and Subsidiary and,
assuming this Agreement constitutes a valid and binding obligation of Tenneco,
this Agreement constitutes the valid and binding obligation of Acquiror and
Subsidiary, enforceable against each of them in accordance with its terms.
5.4 FINANCIAL STATEMENTS. Acquiror has heretofore delivered to Tenneco
complete and correct copies of all filings made by Acquiror pursuant to the
Exchange Act since January 1, 1995. The audited consolidated financial
statements of Acquiror included in such filings (i) were prepared in
accordance with GAAP applied on a consistent basis (except as indicated
therein or in the notes thereto) during the periods presented and (ii) fairly
present the financial position of Acquiror and its consolidated subsidiaries
as of the dates thereof and the results of their operations and cash flows for
the periods then ended. The unaudited financial statements included in such
filings
(i) comply in all material respects with the published rules and
regulations of the Commission with respect thereto,
(ii) were prepared in accordance with GAAP, except as otherwise permitted
under the Exchange Act and the rules and regulations thereunder, on a
consistent basis (except as may be indicated therein or in the notes or
schedules thereto) during the periods presented and
(iii) fairly present the financial position of Acquiror and its
consolidated subsidiaries as at the dates thereof and the results of their
operations and cash flows for the periods then ended, subject to normal
year-end adjustments and any other adjustments described therein or in the
notes or schedules thereto.
5.5 CONSENT AND APPROVALS; NO VIOLATION. The execution, delivery and
performance by Acquiror and Subsidiary of this Agreement and the consummation
by Acquiror and Subsidiary of the transactions contemplated hereby do not and
will not:
(i) conflict with or result in any breach of any provisions of the
certificate of incorporation, bylaws or other governing documents of
Acquiror or Subsidiary,
(ii) except as contemplated by this Agreement, require any filing by
Acquiror or any of its subsidiaries (including Subsidiary) with any
Governmental Authority or require Acquiror or any of its subsidiaries
(including Subsidiary) to obtain any permit, authorization, consent or
approval of any Governmental Authority;
(iii) result in a violation or breach of, or constitute (with or without
due notice or lapse of time or both) a default (or give rise to any right
of termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, license, contract, agreement, franchise, permit, concession or other
instrument, obligation, understanding, commitment or other arrangement to
which Acquiror or any of its subsidiaries (including Subsidiary) is a party
or by which any of them or any of their respective material properties or
assets may be bound or affected; or
(iv) violate any Law applicable to Acquiror or any of its subsidiaries
(including Subsidiary);
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except, in the case of each of clauses (ii) through (iv) above, for failures
to make filings or obtain permits, authorizations, consents or approvals,
violations, breaches or defaults which could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on
Acquiror.
5.6 LITIGATION. Except as previously disclosed in writing to Tenneco, as of
the Agreement Effective Date, there are no actions, suits, proceedings or, to
Acquiror's knowledge, governmental investigations or inquiries pending against
Acquiror or any of its subsidiaries (including Subsidiary) or their respective
properties, assets, operations or businesses which could reasonably be
expected to delay, prevent or hinder the consummation of the transactions
contemplated hereby and, to the knowledge of Acquiror, no such actions, suits,
proceedings or governmental investigations or inquiries are threatened.
5.7 ACQUIROR SEC DOCUMENTS; ACCURACY OF INFORMATION. The information
regarding Acquiror and its consolidated subsidiaries contained in the Acquiror
SEC Documents (A) complied, as of the date of filing thereof (or, in the case
of any registration statement, on the date it was declared effective), in all
material respects with the applicable requirements of the Exchange Act or
Securities Act and (B) did not contain, as of the date of filing thereof (or,
in the case of any registration statement, on the date it was declared
effective), any untrue statement of a material fact or omit to state any
material fact necessary in order to have the statements made therein, in light
of the circumstances under which they were made, not misleading.
5.8 NO MATERIAL ADVERSE EFFECT. Except as previously disclosed to Tenneco in
writing prior to the date of this Agreement, between December 31, 1995 and the
Agreement Effective Date, there has occurred no Material Adverse Effect on
Acquiror.
5.9 ADVISORS. Except for Donaldson, Lufkin & Jenrette ("DLJ"), which has
been retained by Acquiror to assist and advise Acquiror in connection with the
transactions contemplated by this Agreement, Acquiror has not employed any
broker, finder or intermediary in connection with such transactions who might
be entitled to a fee or commission upon the consummation of this Agreement or
the transactions contemplated hereby.
5.10 OPINION OF FINANCIAL ADVISOR. Acquiror has received the opinion of DLJ,
dated as of the Agreement Effective Date, to the effect that, as of such date,
the consideration to be paid in the Merger by Acquiror is fair to Acquiror's
stockholders from a financial point of view (and Acquiror has the right to
refer to that opinion, so long as such reference is in form and substance
satisfactory to DLJ, in the Joint Proxy Statement and other appropriate
filings with the Commission and mailings to its stockholders).
5.11 DUE AUTHORIZATION. The shares of Acquiror Stock and any Depositary
Shares issued in connection with the Merger as contemplated by this Agreement
will be duly authorized and will be validly issued, fully paid and
nonassessable.
5.12 NO ACTIVE BUSINESS. Subsidiary has not engaged in any business and does
not have any contractual liabilities, commitments, or obligations (other than
pursuant to this Agreement) or any assets (other than cash representing its
initial capitalization). Subsidiary has been formed solely for purposes of
effectuating the transactions contemplated by this Agreement and having such
transactions treated for federal income tax purposes as an acquisition of the
outstanding Tenneco Stock by Acquiror in exchange for Acquiror Stock through
the Merger of Subsidiary with and into Tenneco pursuant to this Agreement.
5.13 OWNERSHIP OF TENNECO STOCK. Neither Acquiror nor Subsidiary is
(i) an "Interested Stockholder" of Tenneco as defined in Article NINTH of
the Certificate of Incorporation of Tenneco or
(ii) an "interested stockholder" of Tenneco as defined in Section 203 of
the DGCL.
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As of the Agreement Effective Date, Acquiror and its Affiliates own
(directly or indirectly, beneficially or of record) no shares of Tenneco Stock
and neither Acquiror nor any of its Affiliates own any rights to acquire any
shares of Tenneco Stock, except pursuant to this Agreement.
ARTICLE VI
COVENANTS OF THE PARTIES
6.1 CONDUCT OF TENNECO AND ITS SUBSIDIARIES.
(a) Between the Agreement Effective Date and the Effective Time, unless
Acquiror shall have consented in writing (such consent not to be unreasonably
withheld), and except for
(i) actions taken that either affect solely the Industrial Business or
the Shipbuilding Business or only adversely affect the Energy Business to a
de minimis extent and do not materially delay or prevent consummation of
the transactions contemplated hereby,
(ii) actions taken by Tenneco and its Affiliates and subsidiaries
(including the Energy Subsidiaries) in order to consummate any of the
Merger, the Spinoffs and the other transactions contemplated by this
Agreement or the Distribution Agreement, which actions are taken in good
faith and either are contemplated by this Agreement or the Distribution
Agreement (including the Corporate Restructuring Transactions described
therein) or do not have more than a de minimis effect on Tenneco or do not
materially delay or prevent consummation of the transactions contemplated
hereby, or
(iii) actions or matters set forth in EXHIBIT G attached hereto,
Tenneco shall, and shall cause each of the Energy Subsidiaries to:
(A) use its reasonable best efforts to
(I) operate the Energy Business in good faith and in the ordinary
course, consistent with past practices, including, without limitation,
with respect to the payment and administration of accounts payable and
the collection and administration of accounts receivable, inventory
management and control policies and implementation of capital programs
for the Energy Business in a timely manner,
(II) preserve substantially intact the present business organization
of the Energy Business,
(III) keep available, consistent with the past practices of the
Energy Business, the services of the present officers, employees and
consultants of Tenneco and each of the Energy Subsidiaries (to the
extent they customarily provide services to the Energy Business), and
(IV) preserve the relationships with customers, suppliers and others
having business dealings with the Energy Business,
it being understood that
(x) certain employees of Tenneco and the Energy Subsidiaries will
also be engaged in activities for the Industrial Business and the
Shipbuilding Business, and
(y) the failure of any officer, employee or consultant of the Energy
Business to remain an officer, employee or consultant of the Energy
Business or to become an officer, employee or consultant of Acquiror or
any subsidiary of Acquiror shall not constitute a breach of this
covenant;
(B) not amend or otherwise change the certificate of incorporation or
bylaws of Tenneco (except as may be necessary or appropriate to effect the
transactions contemplated hereby or by the Distribution Agreement);
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(C) not issue or authorize the issuance of (except, as to Tenneco, in the
ordinary course of business consistent with past practices or as
contemplated in this Agreement) or the Distribution Agreement, any shares
of any class of the capital stock of Tenneco or any Energy Subsidiary
(other than New Preferred Stock) or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of such
capital stock, or any other ownership interest (including, without
limitation, any phantom interest), of Tenneco or any of the Energy
Subsidiaries (other than the issuance of Rights and shares of Tenneco
Common Stock either
(I) in connection with any dividend reinvestment plan,
(II) upon the exercise of options granted prior to the Agreement
Effective Date,
(III) pursuant to the terms of any other Tenneco employee benefit
plan with an employee stock fund or employee stock ownership plan
feature,
(IV) in accordance with the Rights Agreement, or
(V) as is otherwise permitted pursuant to this Agreement or the
Distribution Agreement);
(D) not reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any class of the capital stock
of Tenneco or of any of the Energy Subsidiaries other than acquisitions by
a dividend reinvestment plan or by any Tenneco employee benefit plan with
an employee stock fund or employee stock ownership plan feature, consistent
with the terms thereof and applicable securities laws;
(E) not declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any class of the capital stock of Tenneco or any of the Energy
Subsidiaries, except:
(I) in the case of Tenneco, regular dividends (including the regular
dividend for the dividend period in which the Effective Time occurs)
with respect to the $4.50 Preferred Stock, the $7.40 Preferred Stock
and the New Preferred Stock and regular quarterly dividends on the
Tenneco Common Stock at such times and in such amounts as the Board of
Directors of Tenneco in its sole discretion determines;
(II) the Spinoffs;
(III) the issuance of New Preferred Stock; and
(IV) cash dividends declared and paid by any of the Energy
Subsidiaries;
(F) with respect to the individuals who will be executive officers or
employees of the Energy Business after the Effective Time, not:
(I) increase the compensation payable or to become payable to any of
such executive officers or employees except for increases in the
ordinary course of business in accordance with past practices;
(II) grant any severance or termination pay to, or enter into any
employment or severance agreement with, any executive officer of the
Energy Subsidiaries; or
(III) except as contemplated in this Agreement or in the Distribution
Agreement, establish, adopt, enter into or amend or take action to
accelerate any rights or benefits under, any collective bargaining,
bonus, profit sharing, thrift, compensation, stock option, restricted
stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any such director, executive officer or
employee;
provided, however, that Tenneco may continue to provide benefits under
employee benefit plans and incentive compensation plans that are in effect
on the Agreement Effective Date;
(G) not take, or permit any of its subsidiaries in respect of which it
has the direct or indirect voting power to control to take, any action that
would reasonably likely result in any of the conditions to the
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Merger set forth in ARTICLE VII of this Agreement not being satisfied or
that would materially impair the ability of Tenneco to consummate the
Spinoffs in accordance with the terms of the Distribution Agreement or the
Merger in accordance with the terms hereof or would materially delay such
consummation or that would disqualify either of the Spinoffs as a tax free
distribution within the meaning of Section 355 of the Code;
(H) not implement any change in its accounting principles, practices or
methods, other than as (X) may be required by GAAP, the Financial
Accounting Standards Board, the Commission or any other Governmental
Authority or oversight agency and (Y) relating solely to the Shipbuilding
Group and/or the Industrial Group;
(I) except in the ordinary course of business, consistent with past
practices, with respect to inventory or services or except where the effect
on the Energy Business would be de minimis, not, with respect to the Energy
Business, transfer, lease, license, sell, mortgage, pledge or dispose of
any property or assets included in the Energy Assets or otherwise encumber
any property or assets included in the Energy Assets;
(J) not release any third party from, or amend, modify or waive any
provisions of, any confidentiality or standstill agreement to which Tenneco
is a party (except any that relate solely to the Industrial Business or the
Shipbuilding Business);
(K) file on or before the due date therefor all tax returns required to
be filed by Tenneco or any Energy Subsidiary, which tax returns shall, to
the extent such tax returns relate to the Energy Business, be (i) complete
and correct in all material respects and (ii) prepared in accordance and on
a basis consistent with the elections, accounting methods, conventions and
principles of tax returns used for the most recent taxable periods for
which tax returns involving similar tax items have been filed; and
(L) not make, change or revoke any tax election relating to the Energy
Business to the extent such election may have more than a de minimis effect
on the Energy Business or Acquiror, or enter into any material agreement or
settlement regarding taxes relating to the Energy Business with any tax
authority to the extent such settlement or agreement may have a more than
de minimis effect on the Energy Business or Acquiror.
(b) Prior to the Effective Time, Tenneco shall cause all stock options
issued under the Option Plans (or to executives outside the Option Plans) to
be
(i) converted to options to acquire the stock of the Industrial Company
or the Shipbuilding Company;
(ii) exercised; and/or
(iii) cancelled.
Tenneco shall also cause all such options not held by employees of the Energy
Business to be so converted if not exercised or cancelled prior to the
Effective Time in accordance with their terms. All such options held by
employees of the Energy Business shall become exercisable prior to the
Effective Time and, if not exercised by the Effective Time, shall be
cancelled.
(c) Between the Agreement Effective Date and the Effective Time, Tenneco
shall cause the Industrial Subsidiary to succeed to sponsorship of the SECT.
To the extent the SECT continues to own Tenneco Stock, the SECT will
participate in the Merger, the Spinoffs and the conversion of shares pursuant
to SECTION 2.5 hereof (and the other transactions contemplated by this
Agreement and/or the Distribution Agreement) as any other stockholder of
Tenneco.
(d) Tenneco shall have the right, and shall use its reasonable best efforts
to, issue shares of New Preferred Stock prior to the Effective Time on the
following basis:
(i) the issuance may be effected through public sale or private placement
(either United States or foreign, but with a placement agent mutually and
reasonably acceptable to both Tenneco and Acquiror), or
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if such sale or placement is not reasonably practicable under the
circumstances, through a dividend-in-kind to the holders of Tenneco Common
Stock, but shall in any event be in accordance with all applicable
securities and other Laws (and, if publicly issued or issued as a dividend-
in-kind, shall be listed on the NYSE);
(ii) the NPS Value shall be approximately 25% (but in no event 20% or
less) of the sum of:
(x) the NPS Value, plus
(y) the market value of all outstanding Tenneco Common Stock (as
determined as of the Effective Time pursuant to the same procedure as
applies to determining the NPS Value).
(e) Prior to the Effective Time, Tenneco shall cause the elimination of all
intercompany accounts (including accounts and notes receivable and payable)
between members of the Energy Group, the Shipbuilding Group and the Industrial
Group, as the case may be (except trade accounts incurred in the ordinary
course of business), as set forth in the Distribution Agreement.
(f) From and after the Agreement Effective Date, Tenneco shall afford
Acquiror and its officers, employees, representatives and agents the
opportunity to participate with Tenneco in the process of obtaining the
rulings set forth in the IRS Ruling Request, including the right to
participate in the submission of written materials by Tenneco to the Internal
Revenue Service, and in-person and telephonic conferences between Tenneco and
the Internal Revenue Service, to the extent such communications relate to the
IRS Ruling Request. Notwithstanding the foregoing, Tenneco shall have the
right, subject to prior consultation with Acquiror, to determine, in its
reasonable discretion, that Acquiror's participation in certain communications
with the Internal Revenue Service (or any other aspects of the rulings
process) may hinder or delay Tenneco's ability to obtain the rulings requested
in the IRS Ruling Request, in which case Acquiror will be precluded from such
participation; provided, that Tenneco shall promptly inform Acquiror of the
substance of any matter in which Acquiror does not participate.
(g) In the event that, between the Agreement Effective Date and the Closing
Date, the General Counsel or an Executive Vice President of Tenneco becomes
aware that the Energy Business has the realistic opportunity to exercise its
right of first refusal with respect to the acquisition of additional interests
in the Oasis pipeline or otherwise to acquire additional interests in the
Oasis pipeline, Tenneco shall notify Acquiror thereof and shall consult and
cooperate with Acquiror prior to exercising its right of first refusal or
making any acquisition proposal. Any exercise of such right of first refusal
or other acquisition of interests in the Oasis pipeline by the Energy Business
shall be subject to the consent of Acquiror, which consent shall not be
unreasonably withheld or delayed.
6.2 CONDUCT OF THE BUSINESS OF ACQUIROR AND ITS SUBSIDIARIES.
(a) Between the Agreement Effective Date and the Effective Time, neither
Acquiror nor Subsidiary nor any of their Affiliates shall:
(i) take any action that would be reasonably likely to result in any of
the conditions to the Merger set forth in ARTICLE VII of this Agreement not
being satisfied or that would impair the ability of Acquiror or Subsidiary
to consummate the Merger in accordance with the terms hereof or delay such
consummation;
(ii) acquire (directly or indirectly, beneficially or of record), any
shares of Tenneco Stock (or any rights to acquire any such shares, except
pursuant to this Agreement); or
(iii) amend or otherwise change its certificate of incorporation (except
as is contemplated by this Agreement in respect of the designation of the
Acquiror Preferred Stock), bylaws or other organizational documents;
provided, however, that the provisions of this clause (iii) shall not apply
to any Affiliate of Acquiror or Subsidiary if the amendment or other change
would not adversely effect any of the rights or benefits hereunder or under
any of the Ancillary Agreements of Tenneco or the holders of Tenneco Stock
(other than to a de minimis extent) or otherwise materially delay or
prevent the consummation of the transactions contemplated hereby.
(b) Acquiror shall not, and shall not permit any of its subsidiaries
(including Subsidiary) to, take or cause or permit to be taken any action that
would disqualify either of the Spinoffs as a tax-free distribution within the
meaning of Section 355 of the Code.
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(c) Between the Agreement Effective Date and the Effective Time, Subsidiary
shall not engage in any activities of any nature except as provided in, or in
connection with the transactions contemplated by, this Agreement.
6.3 ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) Between the date of this Agreement and the Effective Time, and except as
may otherwise be required by applicable law, each of Tenneco and Acquiror
shall (and shall cause its subsidiaries and officers, directors, employees,
auditors and agents to) afford the officers, employees and agents of the other
party (the "RESPECTIVE REPRESENTATIVES") reasonable access at all reasonable
times to its officers, employees, agents, properties, offices, plants and
other facilities, books and records, and shall furnish such Respective
Representatives with all financial, operating and other data and information
as may be reasonably requested, in each case to the extent that such access
and disclosure would not:
(i) violate the terms of any agreement to which the disclosing party or
any of its Affiliates is bound or any applicable law or regulation; or
(ii) impair any attorney-client privilege of the disclosing party.
Notwithstanding the foregoing, Tenneco shall not be required (and shall not
be required to cause its subsidiaries and officers, directors, employees,
auditors and agents) to provide the access, data and information described in
the preceding sentence with respect to the Industrial Business or the
Shipbuilding Business unless Acquiror has a reasonable interest in obtaining
such access, data or information in connection with the Merger.
(b) All information obtained by Tenneco, Acquiror or their Respective
Representatives pursuant to SECTION 6.3(A) hereof shall be kept confidential
in accordance with the confidentiality agreement, dated March 28, 1996,
executed by Acquiror and the confidentiality agreement, dated June 12, 1996,
executed by Tenneco.
(c) The Industrial Subsidiary and the Shipbuilding Subsidiary (and their
respective direct and indirect subsidiaries and Affiliates) shall be deemed
third party beneficiaries of this SECTION 6.3 and all other provisions of this
Agreement necessary or appropriate for purposes of enforcing this SECTION 6.3.
6.4 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE.
(a) For a period of six years after the Effective Time, Acquiror shall not
cause or permit any amendment, repeal or other modification of the provisions
of
(i) Article IV, Section 14 of the by-laws of the Surviving Corporation,
as set forth in EXHIBIT H attached hereto, or
(ii) Article Eighth of the certificate of incorporation of the Surviving
Corporation,
in either case in any manner that would adversely affect the rights thereunder
of individuals who at any time prior to the Effective Time were directors,
officers or employees of Tenneco or any of its subsidiaries or Affiliates or
who are otherwise entitled to indemnification pursuant to such provisions in
respect of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by this
Agreement and the Distribution Agreement), unless such modification is
required by the DGCL or applicable federal law, and then only to the extent of
such applicable requirements of the DGCL or federal law. To the extent the
Surviving Corporation is unable for any reason to fulfill its obligations
under the bylaw provisions set forth in EXHIBIT H attached hereto, Acquiror
agrees to pay, perform and discharge all such obligations.
(b) Prior to the Effective Time, Tenneco shall, and from and after the
Effective Time the Acquiror and the Surviving Corporation jointly and
severally shall, indemnify, defend and hold harmless each Person who is now,
has been at any time prior to the date of this Agreement or who becomes prior
to Effective Time an officer, director or employee of Tenneco or any of its
subsidiaries (collectively, the "INDEMNIFIED PARTIES") against all losses,
expenses, claims, damages, liabilities or amounts that are paid in settlement
of, with the approval of the
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indemnifying party (which approval shall not unreasonably be withheld), or
otherwise in connection with any claim, action, suit, proceeding or
investigation (a "CLAIM"), based in whole or in part on the fact that such
Person is or was a director, officer or employee of Tenneco or any of its
subsidiaries and arising out of actions or omissions occurring at or prior to
the Effective Time (including, without limitation, the transactions
contemplated by this Agreement and the Distribution Agreement), whether or not
such Claim was asserted prior to, at or after the Effective Time, in each case
to the fullest extent permitted under the DGCL or other applicable law (and
shall pay expenses in advance of the final disposition of any such Claim to
each Indemnified Party to the fullest extent permitted under the DGCL or other
applicable law, upon receipt from the Indemnified Party to whom expenses are
advanced of any undertaking to repay such advances required by Section 145(e)
of the DGCL or other applicable law). Notwithstanding anything contained
herein, Tenneco's obligation to indemnify any such person pursuant to this
SECTION 6.4 shall not affect the allocation of liability among the Energy
Group, the Industrial Group and Shipbuilding Group pursuant to the
Distribution Agreement and any corresponding indemnification rights
thereunder.
(c) Without limiting the generality of the foregoing, in the event any Claim
is brought against any Indemnified Party (whether arising before or after the
Effective Time):
(i) the Indemnified Party may retain counsel satisfactory to him with the
consent of Tenneco (or the consent of Acquiror and the Surviving
Corporation after the Effective Time) which consent of Tenneco (or, after
the Effective Time, Acquiror and the Surviving Corporation) with respect to
such counsel retained by the Indemnified Party may not be unreasonably
withheld or delayed;
(ii) Tenneco (or, after the Effective Time, Acquiror and the Surviving
Corporation) shall pay all reasonable fees and expenses of such counsel for
the Indemnified Party promptly as statements therefor are received; and
(iii) Tenneco (or, after the Effective Time, Acquiror and the Surviving
Corporation) will use all reasonable efforts to assist in the vigorous
defense of any such matter, provided that none of Tenneco, Acquiror or the
Surviving Corporation shall be liable for any settlement of any Claim
effected without its written consent, which consent, however, shall not be
unreasonably withheld.
Any Indemnified Party wishing to claim indemnification under this SECTION 6.4,
upon learning of any such Claim, shall notify Tenneco (or, after the Effective
Time, Acquiror and the Surviving Corporation) (but any failure so to notify
shall not relieve Tenneco, Acquiror or the Surviving Corporation from any
liability which it may have under this SECTION 6.4, except to the extent such
failure materially prejudices such party), and shall deliver to Tenneco (or,
after the Effective Time, Acquiror and the Surviving Corporation) any
undertaking required by Section 145(e) of the DGCL or other applicable law.
The Indemnified Parties as a group may retain only one law firm to represent
them with respect to each such Claim unless there is, under applicable
standards of professional conduct, a conflict on any significant issue between
the positions of any two or more Indemnified Parties.
(d) (i) MAINTENANCE OF D&O POLICIES. On or prior to the Closing Date,
Tenneco shall provide Acquiror with copies and a schedule of those Directors'
and Officers' Liability Insurance Policies which Tenneco shall enter into
effective as of the Closing Date (the "D&O POLICIES"). For a period of seven
years after the Effective Time, Acquiror and the Surviving Corporation shall
cause to be maintained in full force and effect the D&O Policies. Acquiror and
the Surviving Corporation shall be jointly and severally responsible for
payment of all premiums due as respects the D&O Policies and shall take all
other actions necessary or appropriate to maintain the D&O Policies in full
force and effect (other than to the extent the available limit of liability of
any such D&O Policy may be reduced or exhausted solely as the result of the
payment of claims thereunder) for the agreed term of seven years after the
Effective Time. If at any time an insurance carrier under any of the D&O
Policies becomes unable or unwilling, or it becomes probable that such
insurance carrier will be unable or unwilling (which determination shall be
made in the reasonable discretion of the Industrial Subsidiary), to fulfill
any of its obligations under any D&O Policy, whether due to such insurance
carrier's dissolution, bankruptcy, insolvency or otherwise, then Acquiror and
the Surviving Corporation shall obtain a directors' and officers' liability
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insurance policy in substitution (with an insurance carrier acceptable to the
Industrial Subsidiary) of each D&O Policy under which such insurance carrier
was to provide coverage (a "REPLACEMENT D&O POLICY"), which shall provide at
least the same coverage and amounts, and contain terms and provisions which
are no less favorable to the insured parties, as existed under the D&O Policy
so replaced. Acquiror and the Surviving Corporation shall pay any costs
associated with the obtaining and maintenance of any Replacement D&O Policy as
contemplated hereby.
(ii) OWNERSHIP AND ADMINISTRATION OF POLICIES. The parties hereto agree that
the D&O Policies and any Replacement D&O Policy shall be owned by the
Industrial Subsidiary. From and after the Effective Time, the Industrial
Subsidiary shall be solely responsible for all aspects of service and
administration of such policies (other than the payment of any premiums due),
including the notification to insurers, and the management, negotiation and
settlement, of any claims made under the D&O Policies and any Replacement D&O
Policy. From and after the Effective Time, Acquiror and the Surviving
Corporation shall have the right to participate in the negotiation and
participate in and consent to settlement (such consent not to be unreasonably
withheld or delayed) of any claim under the D&O Policies and any Replacement
D&O Policy for which, and then only to the extent, that either is obligated to
indemnify any of the present or former directors or officers of Tenneco or any
of its present or past subsidiaries ("DIRECTORS OR OFFICERS") for liabilities
associated with such claim. The Industrial Subsidiary's responsibilities for
administering and servicing the D&O Policies and any Replacement D&O Policy
shall in no manner restrict, reduce, limit or impair any of the Directors' or
Officers' rights to indemnification from Acquiror, the Surviving Corporation
or their respective successors or assigns in accordance with any applicable
Law, statute, charter or bylaw provision.
(iii) COOPERATION. Acquiror and the Surviving Corporation shall cooperate
with the Directors and Officers in the defense and settlement of any claim
made against them based upon or arising out of any actual or alleged wrongful
act (as such term may be defined in the applicable D&O Policies or Replacement
D&O Policy) occurring at or prior to the Effective Time. Acquiror and the
Surviving Corporation shall provide any reasonable assistance or information
that may be required by a Director or Officer in connection with any such
claim. Neither Acquiror, the Surviving Corporation nor any of their respective
representatives shall cause any action or inaction that could reasonably be
expected to jeopardize or otherwise impair the rights or ability of the
Directors or Officers to recover loss amounts due under the D&O Policies or
any Replacement D&O Policy.
(e) Neither Acquiror nor the Surviving Corporation shall take any action
that could reasonably be expected to jeopardize or otherwise interfere with
the ability of any of the Indemnified Parties to collect any proceeds payable
under any of the D&O Policies.
(f) Each of Tenneco, Acquiror and Subsidiary acknowledges and agrees that
the Industrial Subsidiary's responsibilities hereunder for Claims
Administration and Insurance Administration shall not relieve any Person
submitting an insured claim under any of the D&O Policies of
(i) the primary responsibility for giving notice of such insured claim
accurately, completely and in a timely manner, or
(ii) any other right or responsibility which such Person may have
pursuant to the terms of any of the D&O Policies.
(g) This SECTION 6.4 (and all other provisions of this Agreement necessary
or appropriate for purposes of enforcing this SECTION 6.4) is intended to be
for the benefit of, and shall be enforceable by, the Industrial Subsidiary and
the Indemnified Parties, their heirs and personal representatives and shall be
binding on Tenneco, the Surviving Corporation and Acquiror and each of their
respective successors and assigns.
6.5 NOTIFICATION OF CERTAIN MATTERS. Between the Agreement Effective Date
and the Effective Time, Tenneco and Acquiror shall give prompt notice to the
other of :
(i) the occurrence or nonoccurrence of any event, the occurrence or
nonoccurrence of which would likely cause
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(A) any of its representations or warranties contained in this
Agreement to be untrue or inaccurate, or
(B) any of its covenants, conditions or agreements contained in this
Agreement not to be complied with or satisfied; and
(ii) its (or in the case of Acquiror, Acquiror's or Subsidiary's) failure
to comply with or satisfy any of its covenants, conditions or agreements to
be complied with or satisfied by it (or, in the case of Acquiror, Acquiror
or Subsidiary) at or prior to the Effective Time;
provided, however, that the delivery of any notice pursuant to this SECTION
6.5 shall not limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
6.6 TAX TREATMENT.
(a) Each of Tenneco, on the one hand, and Acquiror and Subsidiary, on the
other hand, intend the Merger to qualify as a reorganization under Code
Section 368(a)(1)(B) and the Spinoffs to be treated as tax-free distributions
under Code Section 355, and each such party shall use its reasonable best
efforts to cause the Merger and Spinoffs to so qualify. Neither Tenneco, on
the one hand, nor Acquiror or Subsidiary, on the other hand, shall take any
action which might cause
(i) the Merger to fail to qualify as a reorganization under Code Section
368(a)(1)(B),
(ii) the Spinoffs to fail to qualify as tax free distributions under Code
Section 355,
(iii) any other transfer described in the Corporate Restructuring
Transactions that is intended (as described in Tenneco's request for
rulings from the Internal Revenue Service) to qualify as a tax free
transfer under Code Sections 332, 351, 355 or 368 to fail to so qualify, or
(iv) Tenneco or any Energy Subsidiary to recognize any gains relating to
deferred intercompany transactions or excess loss accounts between or among
any members of the affiliated group of corporations of which Tenneco is the
common parent (other than those deferred intercompany gains listed on
EXHIBIT I attached hereto).
(b) In furtherance of SECTION 6.6(A) above, Tenneco shall make the
representations set forth in EXHIBIT J attached hereto, and such other
representations as are reasonably necessary to ensure the tax-free treatment
of the Merger, Spinoffs and related transactions described in SECTION 6.6(A)
above, and shall assure the continuing accuracy of such representations.
(c) In furtherance of SECTION 6.6(A) above, Acquiror and Subsidiary shall
each make the representations set forth in EXHIBIT J attached hereto, and such
other representations as are reasonably necessary to ensure the tax-free
treatment of the Merger, Spinoffs and related transactions described in
SECTION 6.6(A) above, and shall assure the continuing accuracy of such
representations.
(d) The Industrial Subsidiary and the Shipbuilding Subsidiary (and their
respective direct and indirect subsidiaries and Affiliates) shall be deemed
third party beneficiaries of this SECTION 6.6 and all other provisions of this
Agreement necessary or appropriate for purposes of enforcing this SECTION 6.6.
6.7 REGISTRATION STATEMENT; JOINT PROXY STATEMENT; NPS MATERIALS; TENDER AND
EXCHANGE MATERIALS.
(a) As promptly as practicable after the Agreement Effective Date, Tenneco
and Acquiror shall prepare and file, or cause to be prepared and filed, with
the Commission a joint proxy statement (the "JOINT PROXY STATEMENT") and other
proxy solicitation materials relating to the Stockholders' Meeting (as defined
in SECTION 6.8 hereof), and Acquiror shall prepare and file, or cause to be
prepared and filed, with the Commission a registration statement on Form S-4
in which the Joint Proxy Statement shall be included as a prospectus (the
"REGISTRATION STATEMENT"), in connection with the registration under the
Securities Act of the shares of Acquiror Stock (and any Depositary Shares) to
be issued to the stockholders of Tenneco pursuant to the Merger.
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Each of Acquiror and Tenneco shall furnish or cause to be furnished to the
other party all information concerning itself and its subsidiaries as the
other party may reasonably request in connection with such actions and the
preparation of the Registration Statement and the Joint Proxy Statement (and
in connection with the preparation of the NPS Materials and the Tender and
Exchange Materials). Each of Acquiror and Tenneco hereby agree to take, and to
cause their respective subsidiaries to take,
(i) such actions as may be required to have the Registration Statement
and, to the extent applicable, the NPS Materials and the Tender and
Exchange Materials declared effective under the Securities Act and to have
the Joint Proxy Statement cleared by the Commission, in each case as
promptly as practicable, including by consulting with each other as to, and
responding promptly to, any Commission comments with respect thereto, and
(ii) such actions as may be required to be taken under applicable state
securities or "blue sky" laws in connection with the issuance of shares of
Acquiror Stock (and any Depositary Shares) pursuant to the Merger.
As promptly as practicable after the Registration Statement shall have become
effective, each of Tenneco and Acquiror shall mail the Joint Proxy Statement
to its respective stockholders (and Tenneco and Acquiror shall attempt to
effect their respective mailings on the same date), and the Joint Proxy
Statement shall include the recommendation of the board of directors of
Tenneco in favor of adoption and approval of this Agreement and the Merger and
the Spinoffs, and of the board of directors of Acquiror in favor of approval
of the Stock Issuance (as defined in SECTION 6.8 hereof); provided, however,
that no obligation of Tenneco pursuant to this SECTION 6.7(A) shall be
required to be performed if there is a substantial risk that the performance
thereof would constitute a breach of the fiduciary duties of the board of
directors of Tenneco as determined by the board of directors of Tenneco in
good faith after consultation with and based upon the advice of its
independent legal counsel (who may be its regularly engaged independent legal
counsel).
(b) Acquiror covenants that the information supplied by or on behalf of
Acquiror for inclusion in the Registration Statement and the Joint Proxy
Statement shall not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading, at any of:
(i) the time the Registration Statement (or any amendment or supplement
thereto) is declared effective;
(ii) the time the Joint Proxy Statement (or any amendment or supplement
thereto) is first mailed to the stockholders of Tenneco and Acquiror;
(iii) the time of each of the Stockholders' Meetings; and
(iv) the Effective Time.
Likewise, Acquiror covenants that the information and data supplied by or on
behalf of Acquiror for inclusion in the NPS Materials and Tender and Exchange
Materials (including, without limitation, all information and financial data
(pro forma or otherwise) relating to the business and operations of Tenneco
following consummation of the Merger supplied by or on behalf of Acquiror)
shall not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, at all times through the completion of (A)
in the case of the NPS Materials, the offering and sale of the New Preferred
Stock, and (B) in the case of the Tender and Exchange Materials, the tender
and exchange offers pursuant to the Debt Realignment.
(c) Tenneco covenants that the financial information (including pro forma
financial data and information) supplied or to be supplied by Tenneco or its
representatives for inclusion or incorporation by reference in the
Registration Statement or the Joint Proxy Statement (or the NPS Materials
and/or Tender and Exchange Materials) shall comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the Commission with respect thereto, shall be prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto
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or, in the case of unaudited financial information, as permitted by the rules
of the Commission) and shall fairly present (subject, in the case of unaudited
financial information, to normal, recurring audit adjustments) the financial
information reflected therein as of the dates thereof or for the periods then
ended. The Joint Proxy Statement shall, as it relates to the Tenneco
Stockholders' Meeting, comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder,
except that no representation is herein made by Tenneco with respect to
statements made in the Joint Proxy Statement based on information supplied by
Acquiror or any of its representatives for inclusion in the Joint Proxy
Statement or with respect to information concerning Acquiror or any of its
subsidiaries (including Subsidiary) incorporated by reference in the Joint
Proxy Statement. If at any time prior to the Effective Time any event or
circumstance relating to Acquiror or any of its subsidiaries (including
Subsidiary), their respective officers or directors, or Acquiror's plans and
intentions regarding its operation of the Surviving Corporation after the
Merger should be discovered by Acquiror or any of its subsidiaries (including
Subsidiary) that should be set forth in an amendment or a supplement to the
Registration Statement or Joint Proxy Statement (or in any of the NPS
Materials or Tender and Exchange Materials), Acquiror shall promptly inform
Tenneco in writing.
(d) Tenneco covenants that the information supplied by or on behalf of
Tenneco for inclusion in the Registration Statement and the Joint Proxy
Statement shall not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading, at
(i) the time the Registration Statement (or any amendment or supplement
thereto) is declared effective,
(ii) the time the Joint Proxy Statement (or any amendment or supplement
thereto) is first mailed to the stockholders of Tenneco and Acquiror,
(iii) the time of each of the Stockholders' Meetings, and
(iv) the Effective Time.
Likewise, Tenneco covenants that the NPS Materials and Tender and Exchange
Materials shall not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading, at all times through the
completion of (A) in the case of the NPS Materials, the offering and sale of
the New Preferred Stock, and (B) in the case of the Tender and Exchange
Materials, the tender and exchange offers pursuant to the Debt Realignment;
provided, that the foregoing provisions of this sentence shall not apply to
any information or financial data (including pro forma financial information
and data) supplied by or on behalf of Acquiror, including information and data
relating to the business and operations of Tenneco following consummation of
the Merger.
(e) Acquiror covenants that the financial information (including pro forma
financial data and information regarding Acquiror or Tenneco) supplied or to
be supplied by Acquiror or its representatives for inclusion or incorporation
by reference in the Registration Statement or the Joint Proxy Statement (or
the NPS Materials or Tender and Exchange Materials) shall comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the Commission with respect thereto, shall
be prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited financial information, as permitted by the rules of the
Commission) and shall fairly present (subject, in the case of unaudited
financial information, to normal, recurring audit adjustments) the financial
information reflected therein as of the dates thereof or for the periods then
ended. Each of the Joint Proxy Statement, as it relates to the Acquiror Common
Stockholders' Meeting, and the Registration Statement will comply as to form
in all material respects with the provisions of the Exchange Act and the rules
and regulations thereunder or the Securities Act and the rules and regulations
thereunder, as applicable, except that no representation is herein made by
Acquiror with respect to statements made in the Joint Proxy Statement or
Registration Statement based on information supplied by Tenneco or any of its
representatives for inclusion in the Joint Proxy Statement or Registration
Statement or with respect to information concerning Tenneco or any of its
subsidiaries incorporated by reference in the Joint Proxy Statement or
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Registration Statement. If at any time prior to the Effective Time any event
or circumstance relating to Tenneco or any of its subsidiaries, or their
respective officers or directors, should be discovered by Tenneco or any of
its subsidiaries which should be set forth in an amendment or a supplement to
the Registration Statement or Joint Proxy Statement (or in any of the NPS
Materials or Tender and Exchange Materials), Tenneco shall promptly inform
Acquiror in writing.
(f) None of the Joint Proxy Statement, the Registration Statement, the NPS
Materials or the Tender and Exchange Materials shall be filed or distributed,
and, prior to the termination of this Agreement, no amendment or supplement to
the Joint Proxy Statement or the Registration Statement shall be filed or
distributed, by or on behalf of Tenneco or Acquiror, without consultation with
the other party and its counsel.
6.8 STOCKHOLDERS' MEETINGS. Tenneco shall call and hold a meeting of its
stockholders (the "Tenneco Stockholders' Meeting") for the purpose of voting
upon the adoption and approval of this Agreement, the Merger and the Spinoffs.
Acquiror shall call and hold a meeting of its stockholders (the "Acquiror
Common Stockholders' Meeting") for the purpose of voting upon the approval of
the issuance of Acquiror Common Stock in connection with the Merger as
contemplated by this Agreement (the "Stock Issuance") (the Acquiror Common
Stockholders' Meeting and the Tenneco Stockholders' Meeting being collectively
referred to herein as the "Stockholders' Meetings"). Each of Tenneco and
Acquiror shall use its reasonable best efforts to schedule and hold their
respective Stockholders' Meetings so that the Acquiror Common Stockholders'
Meeting occurs at least one business day prior to the Tenneco Stockholders'
Meeting, and otherwise so as not to delay the transactions contemplated hereby
(it being intended that the Joint Proxy Statement shall be mailed and the
Stockholders' Meetings shall be scheduled to occur as soon as practicable
after the receipt of the IRS Ruling Letter). Each of Tenneco and Acquiror
shall use its reasonable best efforts to solicit from its stockholders proxies
in favor of the approval and adoption of this Agreement, the Merger and the
Spinoffs or the Stock Issuance, as applicable, and shall take all other action
necessary or advisable to secure the vote or consent of stockholders required
therefor by applicable Law and/or its certificate of incorporation or other
governing instrument or document. The stockholders of Tenneco will vote on the
Spinoffs and the Merger as a single transaction. Notwithstanding the
foregoing, Tenneco shall not be required to take any action if there is a
substantial risk that the subject action would constitute a breach of the
fiduciary duties of the board of directors of Tenneco as determined by the
board of directors of Tenneco in good faith after consultation with and based
upon the advice of independent legal counsel (who may be its regularly engaged
independent legal counsel).
6.9 FURTHER ACTION; REASONABLE BEST EFFORTS.
(a) Upon the terms and subject to the provisions of this Agreement, each of
the parties hereto shall use its reasonable best efforts to take, or cause to
be taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations promptly
to consummate and make effective the transactions contemplated hereby and by
the Distribution Agreement (subject, however, to the vote of the stockholders
of Tenneco and, to the extent required, Acquiror as provided herein),
including, without limitation, using its reasonable best efforts to obtain all
licenses, permits, consents, approvals, authorizations, qualifications and
orders of Governmental Authorities and parties to contracts with Tenneco and,
to the extent required, Acquiror and their respective subsidiaries as are
necessary for the consummation of the transactions contemplated by this
Agreement. Each party hereto shall promptly consult with each other party with
respect to, and provide to each other party all such information or
documentation which shall be reasonably requested with respect to, all filings
made by such party with any Governmental Authority in connection with this
Agreement and the transactions contemplated hereby. In case at any time after
the Effective Time any further action is necessary or desirable to carry out
the purposes of this Agreement, the proper officers and directors of each
party to this Agreement shall use their reasonable best efforts to take all
such action.
(b) Between the Agreement Effective Date and the Closing Date,
(i) Tenneco and Acquiror shall, and shall cause their respective
Affiliates and representatives to, consult, cooperate and work together in
good faith and with reasonable best efforts and all deliberate speed to
attempt jointly to obtain a favorable resolution prior to the Effective
Time with respect to pending
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regulatory proceedings affecting the Energy Business, including sharing
ideas and information concerning alternative approaches to resolving such
regulatory proceedings and coordinating the timing and content of
communications with customers of the Energy Business, affecting the Energy
Business, and regulatory authorities having jurisdiction over the
operations of the Energy Business; provided, that any settlement (or
proposed settlement) of any such regulatory proceedings shall require the
consent of both Tenneco and Acquiror, such consent not to be arbitrarily
withheld; and
(ii) Tenneco shall, and shall cause its Affiliates and representatives
to, consult and work with Acquiror and its Affiliates and representatives
to attempt to obtain favorable resolutions of material litigation affecting
the Energy Business; provided that, except as otherwise set forth on
EXHIBIT G attached hereto, any settlement (or proposed settlement) of any
such litigation shall require the consent of Acquiror, such consent not to
be arbitrarily withheld.
(c) Except as set forth on EXHIBIT G attached hereto, between the Agreement
Effective Date and the Closing Date, the Energy Business shall not incur any
additional off balance sheet indebtedness for the purpose of monetization of
any Energy Assets. Subject to the terms of the previous sentence, Acquiror and
Tenneco shall consult and cooperate with each other with respect to off-
balance sheet financing opportunities for the Australian assets of the Energy
Business, the Orange Cogeneration Project and the South Sulawesi Project and
any such off-balance sheet financing may be incurred by mutual agreement
between Acquiror and Tenneco.
Between the Agreement Effective Date and the Closing Date, Tenneco shall
attempt to cooperate with Acquiror to the extent reasonably requested by
Acquiror in connection with sales by the Energy Business after the Closing
Date of material Energy Assets; provided that any such transactions shall be
subject to the covenants, restrictions and limitations set forth in SECTION
6.6 hereof.
(d) Between the Agreement Effective Date and the Closing Date, Tenneco
shall, to the extent permitted by law, consult and work in good faith with
Acquiror with respect to the payment and administration of accounts payable,
inventory levels and policies and the collection and administration of
accounts receivable of the Energy Business and the making of capital
expenditures by the Energy Business to preserve the value of the Energy
Business and not to artificially delay payment of accounts payable, accelerate
collections of accounts receivable, alter inventory levels or unreasonably
delay capital expenditures; provided, however, that Tenneco shall have the
right to effect the actions and transactions identified on EXHIBIT G attached
hereto. To the extent permitted by Law, Tenneco shall consult with Acquiror
with respect to other matters pertaining to the operation of the Energy
Business. Each of Tenneco and Acquiror shall designate one or more members of
management to act as coordinators with respect to the matters covered by this
SECTION 6.9.
(e) Each party shall use its reasonable best efforts to not take any action,
or enter into any transaction, that would cause any of its representations or
warranties contained in this Agreement to be untrue or result in a breach of
any covenant made by it in this Agreement.
(f) The Industrial Subsidiary shall be a deemed third party beneficiary of
this SECTION 6.9 and all other provisions of this Agreement necessary or
appropriate for purposes of enforcing this SECTION 6.9.
6.10 PUBLIC ANNOUNCEMENTS. Each party hereto shall consult with each other
before issuing any press release or otherwise issuing any other similar
written public statement with respect to this Agreement or the Merger and
shall not issue any such press release or make any such public statement
without the prior consent of each other party, which shall not be unreasonably
withheld; provided, however, that a party may, without the prior consent of
any other party, issue such press release or other similar written public
statement as may be required by law or any listing agreement with a national
securities exchange to which Tenneco or Acquiror is a party if it has used all
reasonable efforts to consult with such other party and to obtain such party's
consent but has been unable to do so in a timely manner. Further, the parties
shall use their respective reasonable best efforts to coordinate and jointly
schedule and interface with the various Governmental Authorities and ratings
agencies and other applicable bodies and groups involved or otherwise
interested in the transactions contemplated by this Agreement.
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6.11 LISTING OF ACQUIROR COMMON STOCK AND DEPOSITARY SHARES. Acquiror shall
use its reasonable best efforts to cause the shares of Acquiror Common Stock
and any Depositary Shares to be issued in or in connection with the Merger to
be approved for listing on the NYSE and any other national securities exchange
on which shares of Acquiror Common Stock may at such time be listed, subject
to official notice of issuance prior to the Effective Time.
6.12 RIGHTS AGREEMENT. Except as contemplated by this Agreement, prior to
the Effective Time the Board of Directors of Tenneco shall not, without the
prior written approval of Acquiror,
(i) amend or supplement the Rights Agreement in any manner that would
cause either a "Triggering Event" or a "Distribution Date" (in each case as
defined in the Rights Agreement) to occur or to be deemed to have occurred
solely by reason of the execution of this Agreement and the consummation of
the transactions contemplated hereby, or
(ii) redeem the Rights.
6.13 THE SPINOFFS. Prior to the Closing, Tenneco shall enter into the
Distribution Agreement (with only such amendments or modifications as are not
prejudicial, other than to a de minimis extent, to the Energy Business or do
not materially delay or prevent consummation of the Merger) and shall cause
the Industrial Subsidiary and the Shipbuilding Subsidiary to enter into the
Distribution Agreement (with only such amendments), and Tenneco shall take, or
cause to be taken, all actions and do, or cause to be done, all things
necessary to effect the Spinoffs pursuant to the terms of the Distribution
Agreement (with only such amendments). Notwithstanding the foregoing, after
prior notice to Acquiror, Tenneco may furnish information or enter into
negotiations regarding, or enter into an agreement for, any sale, merger or
other disposition transaction(s) involving either or both of the Shipbuilding
Business and/or the Industrial Business, or any portion of either (an "S/I
TRANSACTION"), which may render either or both of the Spinoffs (or any portion
thereof) impossible or impracticable; provided, that Tenneco shall not solicit
any S/I Transaction involving the Industrial Subsidiary, the Shipbuilding
Subsidiary, the Industrial Business as a whole, the Shipbuilding Business as a
whole or any other S/I Transaction which could be reasonably predicted to
render the Merger impossible or impracticable or materially delay or prevent
consummation thereof. Tenneco may enter into any such S/I Transaction in its
sole discretion if the subject S/I Transaction would not be adverse, other
than to a de minimis extent, to Acquiror or the Energy Business (including
with respect to any covenants or obligations of a party under this Agreement
or the Distribution Agreement) and would not render the Merger impossible or
impracticable or materially delay or prevent consummation thereof. If the S/I
Transaction would be so adverse to Acquiror or the Energy Business, or would
render the Merger impossible or impracticable or materially delay or prevent
consummation thereof, then S/I Transaction may be pursued and/or entered into
only (a) prior to the approval of this Agreement, the Merger and the Spinoffs
by the Tenneco stockholders and (b) if Tenneco's board of directors determines
in good faith, after consultation with and based upon the advice of
independent legal counsel (which may be Tenneco's regularly engaged
independent legal counsel), that there is a substantial risk that the failure
to do so would constitute a breach of its fiduciary duties under applicable
Law.
6.14 ANTITRUST MATTERS.
(a) Tenneco and Acquiror shall file with the Federal Trade Commission and
the Department of Justice, as promptly as practicable but in any event within
20 business days of the Agreement Effective Date, the notification and report
form required for the transactions contemplated hereby and shall promptly
provide any supplemental information which may be reasonably requested in
connection therewith pursuant to the HSR Act, which notification, report and
supplemental information shall comply in all material respects with the
requirements of the HSR Act.
(b) Although the parties do not believe that the Merger has any antitrust
implications, Acquiror shall use all reasonable efforts to resolve antitrust
objections, if any, that may be asserted with respect to the transactions
contemplated hereby by the Federal Trade Commission, the Antitrust Division of
the Department of Justice or any other federal or state agency. Acquiror shall
make such divestitures, or enter into such hold-separate
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agreements, as may be necessary to prevent the entry of, or effect the
dissolution of, any injunction, temporary restraining order or other order
that has the effect of preventing for any period of time the consummation of
the Merger in any respect. Acquiror shall reimburse Tenneco for reasonable
attorneys' fees and costs incurred by Tenneco in connection with defending any
antitrust investigation or other proceeding brought by any of the above
identified entities.
6.15 EMPLOYEE MATTERS.
(a) Prior to the Effective Time, Tenneco shall enter into the Benefits
Agreement and shall take the actions with respect to compensation and benefits
described elsewhere in this Agreement or in the Distribution Agreement.
(b) Acquiror shall provide, or shall cause the Surviving Corporation (or any
of its subsidiaries, as appropriate) to provide, to the employees and former
employees of the Energy Business and the dependents of either, as applicable,
the benefits described in EXHIBIT K attached hereto.
6.16 DEBT REALIGNMENT. Each of Tenneco and Acquiror shall use its reasonable
best efforts so that, immediately prior to the Spinoffs, the Debt Realignment
has been effected (with only such modifications as are not adverse, except to
a de minimis extent, to Acquiror, the Energy Business, the Industrial
Subsidiary or the Shipbuilding Subsidiary).
6.17 NO SOLICITATIONS. Tenneco shall immediately cease any existing
discussions or negotiations with any third parties conducted prior to the date
hereof with respect to any merger, consolidation, business combination, sale
of the Energy Business, sale of a Major Subsidiary, tender or exchange offer
or similar transaction involving the Energy Business as a whole or any Major
Subsidiary as a whole, other than the transactions contemplated by this
Agreement or the Distribution Agreement (an "ACQUISITION TRANSACTION").
Neither Tenneco nor any of its subsidiaries nor any of their respective
directors and officers shall, and Tenneco shall use its best efforts to ensure
that none of its or its subsidiaries' Affiliates, representatives or agents
shall, directly or indirectly, solicit any person, entity or group concerning
any Acquisition Transaction; provided, however, that, after prior notice to
Acquiror and prior to the approval of this Agreement, the Merger and the
Spinoffs by the Tenneco stockholders, Tenneco may furnish information or enter
into negotiations regarding, or enter into an agreement for, an Acquisition
Transaction if Tenneco's board of directors determines in good faith, after
consultation with and based upon the advice of independent legal counsel
(which may be Tenneco's regularly engaged independent legal counsel), that
there is a substantial risk that the failure to do so would be found to
constitute a breach of its fiduciary duties under applicable Law, but only in
response to a proposal (which may be subject to due diligence) for an
Acquisition Transaction received by Tenneco which the board of directors of
Tenneco determines in good faith after consultation with its financial
advisors is reasonably likely to result in consummation of an Acquisition
Transaction more favorable, from a financial point of view, to the
stockholders of Tenneco than the transactions contemplated hereby, taking into
account the financial responsibility of the party making such proposal, as
then reasonably determinable by Tenneco, and such party's ability, as then
reasonably determinable by Tenneco, to obtain regulatory approvals for such
Acquisition Transaction (a "HIGHER PROPOSAL"). Tenneco shall advise Acquiror
immediately if any proposal of or other indication of interest in a Higher
Proposal is received by Tenneco and the terms and conditions thereof and keep
Acquiror promptly informed of the status thereof.
6.18 PERFORMANCE OF AGREEMENT AND DISTRIBUTION AGREEMENT. After the
Effective Time, Acquiror shall, and shall cause the Surviving Corporation and
the Energy Subsidiaries to, perform their respective obligations under this
Agreement and the Distribution Agreement and their respective obligations
under each and every other agreement to be entered into pursuant to the
Distribution Agreement and/or the Spinoffs, and Acquiror hereby guarantees the
full and timely payment and performance of all of the respective obligations
and covenants of Tenneco, the Surviving Corporation and the Energy
Subsidiaries under this Agreement and the Distribution Agreement and their
respective obligations under each and every other agreement to be entered into
pursuant to the Distribution Agreement and/or the Spinoffs, which are to be
performed from and after the Effective Time. Without limiting the generality
of the foregoing sentence, the foregoing covenant and guarantee of Acquiror
shall
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specifically be deemed to apply to the obligations of the Surviving
Corporation to make any payments due to the Industrial Subsidiary pursuant to
Section 6 of the Tax Sharing Agreement attached to the Distribution Agreement
in respect of any Tax Benefit attributable to any Debt Discharge Item (as
those terms are defined in the Tax Sharing Agreement). The Industrial
Subsidiary and the Shipbuilding Subsidiary are hereby designated as, and
deemed to be, third party beneficiaries of this SECTION 6.18 (and all other
provisions of this Agreement necessary or appropriate for purposes of
enforcing the terms of this SECTION 6.18). The covenants and guarantees of
Acquiror set forth in this SECTION 6.18 are not in limitation of or
substitution for, but are in addition to, the Guarantees attached hereto as
EXHIBIT L, which shall be executed by Acquiror and delivered to the Industrial
Subsidiary and the Shipbuilding Subsidiary on the Closing Date.
6.19 AFFILIATES OF TENNECO. Tenneco shall promptly deliver to Acquiror a
letter
(i) identifying all Persons who may be deemed affiliates of Tenneco under
Rule 145 of the Securities Act, including, without limitation, all
directors and executive officers of Tenneco, and
(ii) representing to Acquiror that Tenneco has advised the Persons
identified in such letter of the resale restrictions with respect to shares
of Acquiror Common Stock and any Depositary Shares received in connection
with the Merger imposed by applicable securities laws. Tenneco shall use
its reasonable best efforts to obtain from each Person identified in such
letter a written agreement, substantially in the form of EXHIBIT M.
Tenneco shall use its reasonable best efforts to obtain as soon as practicable
from any Person who may be deemed to have become an Affiliate of Tenneco after
Tenneco's delivery of the letter referred to above and prior to the Effective
Time, a written agreement substantially in the form of EXHIBIT M.
6.20 ANTITAKEOVER STATUTES. If any Takeover Statute is or may become
applicable to the transactions contemplated hereby, each of the parties hereto
and the members of its board of directors shall grant such approvals and take
such actions as are necessary so that the transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated hereby and otherwise act to eliminate or minimize the effects of
any Takeover Statute on any of the transactions contemplated by this
Agreement; provided however, that no party hereto shall be required to take
any action if there is a substantial risk that the subject action would be
held to constitute a breach of the fiduciary duties of the board of directors
of the subject party, as determined by the subject board of directors in good
faith after consultation with and based upon the advice of independent legal
counsel (who may be the subject party's regularly engaged independent
counsel).
6.21 EQUITY ISSUANCE BY ACQUIROR. Acquiror intends, subject to market
conditions, to issue, after the Closing Date, $150,000,000 to $250,000,000 of
equity securities. The initial press release with respect to the transactions
contemplated hereby will include disclosure of Acquiror's intention to effect
such issuances of additional equity securities.
6.22 RUHRGAS AG. Between the Agreement Effective Date and the Closing Date,
Tenneco shall use its reasonable best efforts to repurchase for cash the
equity interest of Ruhrgas AG in Tenneco Energy Resources Corporation,
provided that the terms of any such repurchase shall be acceptable to
Acquiror. Acquiror shall have the right to participate in any discussions or
negotiations with Ruhrgas AG with respect to the foregoing.
6.23 ADDITIONAL COVENANTS OF ACQUIROR.
(a) From the Agreement Effective Date through the Effective Time, Acquiror
shall not take, enter into or propose, or allow any of its subsidiaries to
take, enter into or propose, any action or transaction (other than actions or
transactions expressly permitted under this Agreement) which is primarily for
the purpose of reducing the value of the transactions contemplated by this
Agreement and the Distribution Agreement to the stockholders of Tenneco.
(b) From the Agreement Effective Date through the Effective Time, Acquiror
shall not enter into any internal corporate restructuring involving Acquiror
and one or more of its direct or indirect subsidiaries.
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(c) During the Black-out Period, except as expressly contemplated by this
Agreement or the Distribution Agreement in order to effect the transactions
described herein or therein:
(i) Acquiror and its subsidiaries shall carry on their respective
businesses in the usual, regular and ordinary course in substantially the
same manner as heretofore conducted and use all reasonable efforts to
preserve intact their present business organizations, and preserve their
relationships with customers, suppliers and others having business dealings
with them to the end that their goodwill and ongoing businesses shall not
be impaired in any material respect at the Effective Time.
(ii) Acquiror shall not, nor shall Acquiror permit any of its
subsidiaries to, nor shall Acquiror or any of its subsidiaries propose to,
(A) declare or pay any dividends on or make other distributions in respect
of any of its capital stock (other than intercompany dividends and regular
quarterly dividends on Acquiror Common Stock), (B) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or (C) repurchase or otherwise
acquire any shares of capital stock.
(iii) Except for the issuance of shares of Acquiror Common Stock upon the
exercise of outstanding stock options disclosed in Section 5.2 hereof,
Acquiror shall not issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock of any
class, any debt or securities convertible into, or any rights, warrants or
options to acquire, any such shares or convertible securities or debt.
(iv) Acquiror shall not amend or propose to amend its Certificate of
Incorporation or By-laws or other organizational documents.
(v) Acquiror shall not, nor shall it permit any of its subsidiaries to,
acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof
or otherwise acquire or agree to acquire any assets, in each case which are
material, individually or in the aggregate, to Acquiror and its
subsidiaries taken as a whole.
(vi) Except for sales of inventory and services in the ordinary course of
business, Acquiror shall not, nor shall it permit any of its subsidiaries
to, sell, lease, encumber or otherwise dispose of, or agree to sell, lease,
encumber or otherwise dispose of, any of its assets, which are material,
individually or in the aggregate, to Acquiror and its subsidiaries taken as
a whole.
(d) If the Stock Issuance is not approved by the requisite vote of the
holders of Acquiror Common Stock at the Acquiror Common Stockholders' Meeting,
Acquiror, prior to or as of the Effective Time, shall: (i) enter into the
Depositary Agreement with the Depositary so that the holders of Tenneco Common
Stock are issued Depositary Shares in connection with the Merger and such
holders of Depositary Shares will have rights equivalent to those of holders
of whole shares of Acquiror Preferred Stock (to the extent of their fractional
interest therein); and (ii) issue to the Depositary, and deliver to the
Depositary certificates for, the number of shares of Acquiror Preferred Stock
provided for in the SECTION 2.5 (E) (II) (B) hereof.
(e) From and after the Agreement Effective Date, Acquiror shall use its
reasonable best efforts, and shall cause its subsidiaries and Affiliates to
use their respective reasonable best efforts, to cause each of the "EPNGC
Facilities" (as defined in that certain $3 Billion Revolving Credit and
Competitive Advance Facility Agreement (the "$3 Billion Credit Agreement")
among Tenneco Inc., the several banks and other financial institutions (the
"Bank Group") from time to time parties to the $3 Billion Credit Agreement and
The Chase Manhattan Bank, as agent ("Chase"), to become in full force and
effect no later than the "Effective Date" under Section 3.1 of the $3 Billion
Credit Agreement, and to remain in full force and effect from said Effective
Date through the "Closing Date" under Section 3.2 of the $3 Billion Credit
Agreement. From and after the Agreement Effective Date, Tenneco shall use its
reasonable best efforts, and shall cause its subsidiaries and Affiliates to
use their respective reasonable best efforts, to cause the $3 Billion Credit
Agreement to become in full force and effect in order to effect the
transactions contemplated by the Debt Realignment.
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ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party hereto to effect the Merger and the other
transactions contemplated herein shall be subject to the satisfaction, at or
prior to the Closing, of the following conditions, any or all of which may be
waived, in whole or in part, to the extent permitted by applicable law:
(a) EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Registration
Statement shall have been declared effective by the Commission under the
Securities Act, no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the Commission and no
proceedings for that purpose shall have been initiated or, to the knowledge
of Tenneco or Acquiror, threatened by the Commission.
(b) STOCKHOLDER APPROVAL. This Agreement, the Merger and the Spinoffs
(and/or any S/I Transaction, if requiring such approval) shall have been
approved and adopted by the requisite vote of the stockholders of Tenneco
in accordance with the certificate of incorporation of Tenneco and the
DGCL.
(c) HSR ACT. The waiting period under the HSR Act applicable to the
transactions contemplated hereby shall have expired or been terminated.
(d) OTHER APPROVALS. All authorizations, consents, orders and approvals
of, and declarations or filings with, and expirations of waiting periods
imposed by, any Governmental Authority or other Person which if not
obtained or filed would have a Material Adverse Effect on Acquiror or a
Material Adverse Effect on Tenneco shall have been obtained or filed, as
applicable, and shall be in full force and effect.
(e) NO ORDER. No Governmental Authority of competent jurisdiction shall
have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and which
materially restricts, prevents or prohibits consummation of the Merger or
any transaction contemplated by this Agreement; it being understood that
the parties hereto hereby agree to use their reasonable best efforts to
cause any such decree, judgment, injunction or other order to be vacated or
lifted as promptly as possible.
(f) NYSE LISTING. The Acquiror Common Stock and any Depositary Shares
issuable to stockholders of Tenneco in accordance with SECTION 2.5 hereof
shall have been authorized for listing on the NYSE upon official notice of
issuance.
(g) TAX RULING. Tenneco shall have received rulings from the Internal
Revenue Service (the "IRS RULING LETTER"), reasonably acceptable to Tenneco
and Acquiror, to the effect that:
(i) the distribution of the capital stock of the Industrial
Subsidiary on a pro rata basis to the stockholders of Tenneco as
contemplated under the Distribution Agreement will be tax-free for
federal income tax purposes to Tenneco under Section 355(c)(1) of the
Code and to the stockholders of Tenneco under Section 355(a) of the
Code;
(ii) the distribution of the capital stock of the Shipbuilding
Subsidiary on a pro rata basis to the stockholders of Tenneco as
contemplated under the Distribution Agreement will be tax-free for
federal income tax purposes to Tenneco under Section 355(c)(1) of the
Code and to the stockholders of Tenneco under Section 355(a) of the
Code;
(iii) The following distributions will be tax free to the respective
transferor corporations under Section 355(c)(1) or 361a) of the Code
and to the respective stockholders of the transferor corporation under
Section 355(a) of the Code: (A) the distribution by the Shipbuilding
Subsidiary of the capital stock of Tenneco Packaging Inc. to Tenneco
Corporation as contemplated under the Distribution Agreement, (B) the
distribution by Tenneco Corporation of the capital stock of the
Shipbuilding Subsidiary and the Industrial Subsidiary to Tennessee Gas
Pipeline Company as contemplated under
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the Distribution Agreement and (C) the distribution by Tennessee Gas
Pipeline Company of the capital stock of the Shipbuilding Subsidiary
and the Industrial Subsidiary to Tenneco Inc. as contemplated under the
Distribution Agreement.
(h) SPINOFFS CONSUMMATED. The Distribution Agreement, in substantially the
form attached hereto with such changes as do not adversely affect, other than
to a de minimis extent, the Energy Business, shall have been duly executed and
delivered by each of Tenneco, the Industrial Subsidiary and the Shipbuilding
Subsidiary, and the transactions contemplated thereby, including the Spinoffs
(and/or any S/I Transaction) and the Debt Realignment, shall have been
consummated (with only such changes).
(i) TAX OPINION. Tenneco shall have received an opinion of Jenner & Block,
in form and substance substantially as set forth in EXHIBIT N attached hereto,
dated the Closing Date, which opinion may be based on appropriate
representations of Tenneco and Acquiror that are in form and substance
reasonably satisfactory to Jenner & Block. The condition set forth in this
SECTION 7.1(I) shall be deemed satisfied to the extent the matters referred to
as to be covered by the tax opinion are instead covered by the IRS Ruling
Letter.
(j) NEW PREFERRED STOCK. The New Preferred Stock shall have been issued by
Tenneco and shall be outstanding as set forth in SECTION 6.1(D) hereof and, if
publicly issued or issued as a dividend-in-kind to the stockholders of
Tenneco, shall have been authorized for listing on the NYSE upon official
notice of issuance.
(k) DEBT REALIGNMENT. The Debt Realignment shall have been effected in
accordance with EXHIBIT C attached hereto.
(l) CHARTER AMENDMENT. The Charter Amendment shall have become effective.
7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF ACQUIROR AND SUBSIDIARY. The
obligations of Acquiror and Subsidiary to consummate the Merger and the other
transactions contemplated herein are also subject to the satisfaction, at the
Closing, of all of the following conditions, any one or more of which may be
waived, in whole or in part, by Acquiror and Subsidiary:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Tenneco contained in this Agreement, without giving effect to
any notification to Acquiror delivered pursuant to SECTION 6.5 hereof,
shall be true and correct as of the Closing Date as though made on and as
of the Closing Date, except
(i) for changes specifically permitted by this Agreement, and
(ii) that those representations and warranties which address matters
only as of a particular date shall remain true and correct as of such
date,
except in any case for such failures to be true and correct which would
not, individually or in the aggregate, have a Material Adverse Effect on
Tenneco.
(b) AGREEMENTS AND COVENANTS. Tenneco shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the
Closing.
(c) OFFICERS' CERTIFICATES. Acquiror shall have received certificates,
dated the Closing Date, of
(i) the President or any Vice President of Tenneco certifying as to
the matters specified in SECTIONS 7.2(A) and (B) hereof and
(ii) the Secretary of Tenneco certifying as to (A) the content and
continuing effectiveness as of the Closing Date of the resolutions of
the board of directors of Tenneco approving this Agreement and the
transactions contemplated hereby, and (B) the fact that this Agreement
and the transactions contemplated hereby have been duly approved by the
requisite vote of the stockholders of Tenneco in accordance with the
certificate of incorporation of Tenneco and the DGCL and that such
approval is in full force and effect.
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(d) CERTAIN LEGISLATION. There shall not have occurred any announcement
or introduction of legislation by an Appropriate Person as a result of
which Acquiror reasonably determines, in good faith after consultation with
Tenneco and its advisors, that there exists a reasonable likelihood that
the Spinoffs or the Merger would not be tax free for federal income tax
purposes to Tenneco and Acquiror. For purposes of this SECTION 7.2(D), an
"Appropriate Person" is a member of the House Ways and Means Committee or
the Senate Finance Committee, the President or a President-elect, a
cabinet-level member of the Executive Branch, an Assistant Secretary of the
Treasury, the Reporting Assistant Secretary of the Treasury for Tax Policy,
the Tax Legislation Counsel, the Chief of Staff of the Joint Committee of
Taxation or a current or presumptive Majority or Minority Leader of the
House or Senate.
7.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF TENNECO. The obligations of
Tenneco to consummate the transactions contemplated hereby are also subject to
the satisfaction, at the Closing, of all of the following conditions, any one
or more of which may be waived, in whole or in part, by Tenneco:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Acquiror and Subsidiary contained in this Agreement, without
giving effect to any notification made by Acquiror to Tenneco pursuant to
SECTION 6.5 hereof, shall be true and correct as of the Closing Date, as
though made on and as of the Closing Date, except
(i) for changes specifically permitted by this Agreement, and
(ii) that those representations and warranties which address matters
only as of a particular date shall remain true and correct as of such
date,
except in any case for such failures to be true and correct which would not,
individually or in the aggregate, have a Material Adverse Effect on Acquiror.
(b) AGREEMENTS AND COVENANTS. Each of Acquiror and Subsidiary shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it
at or prior to the Closing.
(c) OFFICERS' CERTIFICATES. Tenneco shall have received certificates,
dated the Closing Date, of
(i) the President or any Vice President of each of Acquiror and
Subsidiary certifying as to the matters specified in SECTIONS 7.3(A)
and (B) hereof and
(ii) the Secretaries or Assistant Secretaries of Acquiror and
Subsidiary certifying as to (A) the content and continuing
effectiveness as of the Closing Date of the resolutions of the sole
stockholder of Subsidiary and of the boards of directors of Acquiror
and Subsidiary approving this Agreement and the transactions
contemplated hereby, and (B) the fact that the Stock Issuance has been
duly approved, if required, by the requisite vote of the stockholders
of Acquiror in accordance with the rules and regulations of the NYSE,
any other applicable Law and the certificate of incorporation and/or
other governing document or instrument of Acquiror, and that such
approval is in full force and effect, or, alternatively, that no such
vote of the stockholders is so required.
ARTICLE VIII
TERMINATION
8.1 GROUNDS FOR TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after adoption and approval of
this Agreement, the Merger and the Spinoffs by the stockholders of Tenneco and
approval of the Stock Issuance by the stockholders of Acquiror:
(i) by the mutual written agreement of Tenneco and Acquiror authorized by
their respective boards of directors;
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(ii) by Tenneco or by Acquiror if the Merger shall not have been
consummated prior to June 30, 1997 unless such eventuality shall be due to
the failure of the party seeking to terminate this Agreement to perform or
observe any of the covenants, agreements and conditions hereof to be
performed or observed by such party on or prior to the Closing Date;
(iii) by Tenneco or by Acquiror if Tenneco enters into an S/I Transaction
pursuant to the last sentence of SECTION 6.13 above;
(iv) by Acquiror if
(A) there has been a material breach on the part of Tenneco in the
representations, warranties or covenants of Tenneco set forth herein,
or any failure on the part of Tenneco to comply with its obligations
hereunder or any other events or circumstances shall have occurred such
that, in any such case, any of the conditions to the consummation of
the Merger set forth in SECTIONS 7.1 or 7.2 hereof could not be
satisfied on or prior to the termination date contemplated by paragraph
(ii) of this SECTION 8.1,
(B) Tenneco's stockholders entitled to vote thereat do not adopt and
approve this Agreement, and the Merger and the Spinoffs as contemplated
by Section 7.1(B) hereof at the Tenneco Stockholders' Meeting,
(C) the board of directors of Tenneco withdraws, amends, or modifies
in a manner materially adverse to Acquiror its favorable recommendation
of this Agreement or the Merger, or approves an agreement for or
recommends to the stockholders of Tenneco an Acquisition Transaction,
provided that any action taken by Tenneco pursuant to PARAGRAPH (V)(A)
of this SECTION 8.1 or any public announcement by Tenneco relating
thereto shall not give rise to any right of termination by Acquiror, or
(D) there has occurred since the Agreement Effective Date of any
event, change or effect which, in the aggregate with all other events,
changes or effects (giving effect to both positive and negative events,
changes and events), reduces the value of the Energy Business as of the
Agreement Effective Date by more than $75,000,000, but excluding any
negative events, changes or effects which result from (A) any action by
Acquiror or any of its subsidiaries, Affiliates, officers, employees,
agents or representatives, (B) changes in general economic, financial
(including, without limitation, equity and debt) markets or industrial
conditions, and (C) any ruling by the Federal Energy Regulatory
Commission Administrative Law Judge in the proceedings regarding the
Energy Business pending as of the Agreement Effective Date before the
Federal Energy Regulatory Commission Administrative Law Judge, or
(v) by Tenneco if
(A) there has been a material breach on the part of Acquiror or
Subsidiary in the representations, warranties or covenants of Acquiror
or Subsidiary set forth herein, or any failure on the part of Acquiror
or Subsidiary to comply in any material respect with its obligations
hereunder or any other events or circumstances shall have occurred such
that, in any such case, any of the conditions to the consummation of
the Merger set forth in SECTIONS 7.1 or 7.3 hereof could not be
satisfied on or prior to the termination date contemplated by paragraph
(ii) of this SECTION 8.1,
(B) Tenneco's stockholders entitled to vote thereat do not adopt and
approve this Agreement,the Merger and the Spinoffs as contemplated by
SECTION 7.1(B) hereof at the Tenneco Stockholders' Meeting,
(C) the board of directors of Acquiror withdraws, amends, or modifies
in a manner materially adverse to Tenneco its favorable recommendation
of this Agreement, the Merger or the Stock Issuance, or approves an
agreement for or recommends to the stockholders of Acquiror an
Acquisition Transaction, provided that any action taken by Acquiror
pursuant to PARAGRAPH (IV)(A) of this SECTION 8.1 or any public
announcement by Acquiror relating thereto shall not give rise to any
right of termination by Tenneco, or
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(D) there has occurred since the Agreement Effective Date any event,
change or effect which, in the aggregate with all other events, changes
or effects (giving effect to both positive and negative events, changes
and events), reduces the value of Acquiror as of the Agreement
Effective Date by more than $75,000,000, but excluding any negative
events, changes or effects which result from (i) any action by Tenneco
or any of its subsidiaries, Affiliates, officers, employees, agents or
representatives, and (ii) changes in general economic, financial
(including, without limitation, equity and debt) market or industrial
conditions; or
(vi) by Tenneco or by Acquiror (but only prior to the approval of this
Agreement by Tenneco's stockholders) if
(1) Tenneco receives a Higher Proposal that it advises Acquiror in
writing Tenneco wishes to accept and
(2) Acquiror does not make, within five business days of receipt of
written notice of Tenneco's desire to accept such Higher Proposal, an
offer that the board of directors of Tenneco believes, in good faith
after consultation with its financial advisors, is at least as
favorable, from a financial point of view, to the stockholders of
Tenneco as the Higher Proposal.
8.2 EFFECT OF TERMINATION. If this Agreement is terminated by Tenneco or by
Acquiror as permitted under SECTION 8.1 hereof, except as provided in SECTION
10.1(B) such termination shall be without liability to the terminating party,
or any stockholder, director, officer, employee, agent, consultant or
representative of such party, but such termination shall not relieve any other
party of any damages or other amounts for which it would otherwise be liable.
8.3 WAIVER. Any time prior to the Effective Time any party hereto, by action
taken or authorized by its board of directors, may, to the extent legally
allowed:
(i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties of the
other parties contained herein or in any document delivered pursuant
hereto, and
(iii) waive compliance by any of the other parties hereto with any of the
agreements or conditions contained herein. Any waiver of rights by any
party hereto shall be valid only if set forth in a written instrument
signed on behalf of such party.
ARTICLE IX
EXTENT AND SURVIVAL OF REPRESENTATIONS,
WARRANTIES, COVENANTS AND AGREEMENTS
9.1 SCOPE OF REPRESENTATIONS. Except as set forth in ARTICLES IV and V
hereof, the parties make no representations or warranties whatsoever, and each
party disclaims all liability and responsibility for any other representation,
warranty, statement or information made or communicated (orally or in writing)
to another party (including, but not limited to, any opinion, information or
advice which may have been provided to Acquiror or Subsidiary by any officer,
stockholder, director, employee, agent or consultant of Tenneco, Lazard or any
other agent or representative of Tenneco). Acquiror acknowledges and affirms
that it has made its own independent investigation, analysis and evaluation of
Tenneco and its subsidiaries, their properties and assets, operations,
business and prospects, and that it is relying exclusively upon such
investigation, analysis and evaluation in entering into this Agreement.
9.2 SURVIVAL. The representations, warranties, covenants and agreements set
forth in this Agreement and in any certificate delivered in connection
herewith shall survive until the Effective Time and, except for SECTIONS 2.3,
2.6, 6.2(B), 6.3(B), 6.4, 6.6, 6.9(A) AND (F), 6.10, 6.14(B), 6.15, 6.18, 9.1
AND 9.2 and ARTICLE X hereof and
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EXHIBIT J attached hereto, shall terminate and expire at the Effective Time
and shall be of no force or effect thereafter. If the Merger is consummated,
no party to this Agreement (or any of its present or former Affiliates) shall
have any liability to any other party (or any of its present or former
Affiliates) for any breaches of this Agreement that occurred prior to the
Effective Time, whether or not known at the Effective Time.
ARTICLE X
MISCELLANEOUS
10.1 EXPENSES.
(a) All legal and other costs and expenses shall be paid by Acquiror,
Subsidiary or Tenneco, as the case may be, depending upon which party incurred
such expenses. Subsequent to the Merger, Acquiror shall cause the Surviving
Corporation promptly to pay any and all such costs and expenses (including,
without limitation, the fees and expenses of the Exchange Agent and Tenneco's
financial advisors, and all legal, accounting and actuarial fees and expenses
incurred by Tenneco in connection with this Agreement and the transactions
contemplated hereby) incurred by Tenneco prior to the Effective Time which
have not been paid as of such time.
(b) In the event that this Agreement shall be terminated pursuant to SECTION
8.1(III), 8.1(IV)(B), 8.1(V)(B) or 8.1(VI), Tenneco shall pay to Acquiror, as
liquidated damages, in exchange for a complete release of any liabilities of
Tenneco hereunder, the amount of $25,000,000 plus actual out of pocket
expenses (up to $10,000,000) incurred by Acquiror to third parties in
connection with the transactions contemplated hereby, payable to an account
specified by Acquiror in writing by wire transfer of immediately available
funds within 5 business days after the effective date of the subject
termination (except that (i) no such amounts shall be payable unless
concurrently therewith, Tenneco receives the aforesaid complete release (other
than with respect to the items referred to in clause (ii), as to which
Acquiror shall deliver a complete release concurrently with the receipt of
payment therefor) and (ii) the aforesaid payment for Acquiror's out of pocket
expenses shall not be payable unless and until 5 business days after receipt
of reasonably satisfactory documentation of the subject expenses).
Notwithstanding the foregoing, Tenneco shall have no obligations under this
SECTION 10.1(B) due to any termination of this Agreement pursuant to either
SECTION 8.1(IV)(B) or 8.1(V)(B) unless Tenneco's Board of Directors has
withdrawn, amended or modified in a manner materially adverse to Acquiror
(other than by reason of a matter referred to in SECTION 8.1(V)(A) hereof) its
recommendation concerning the Merger or the Spinoffs prior to the vote of
Tenneco's stockholders which is the subject of SECTION 8.1(IV)(B) or
8.1(V)(B), as the case may be.
(c) Acquiror shall cause the Surviving Corporation to pay any New York State
Tax on Gains Derived from Certain Real Property Transfers (the "Gains Tax"),
New York State Real Estate Transfer Tax and New York City Real Property
Transfer Tax (the "Transfer Taxes") and any similar taxes in any other
jurisdiction (and any penalties and interest with respect to such taxes) that
become payable in connection with the Merger, on behalf of the stockholders of
Tenneco. Tenneco and Acquiror shall cooperate in the preparation, execution
and filing of any required returns with respect to such taxes (including
returns on behalf of the stockholders of Tenneco) and in the determination of
the portion of the consideration allocable to the real property of Tenneco and
the Tenneco subsidiaries in New York State and City (or in any other
jurisdiction, if applicable). In order to effect the payment of any transfer
taxes subject to this SECTION 10.1(C), Tenneco shall establish a separately
maintained escrow account consisting of an adequate amount of cash from the
$25,000,000 of cash required to be on hand at Tenneco as of the Effective Time
pursuant to the Allocation Agreement. The terms of the Joint Proxy Statement
shall provide that the stockholders of Tenneco shall be deemed to have agreed
to be bound by the allocation established pursuant to this SECTION 10.1(C) in
the preparation of any return with respect to the Gains Tax and the Transfer
Taxes and any similar taxes, if applicable.
(d) This SECTION 10.1 (and all other provisions of this Agreement necessary
or appropriate for purposes of enforcing this SECTION 10.1) shall be
enforceable by the Industrial Subsidiary, which is hereby deemed a third party
beneficiary hereof.
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<PAGE>
10.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or mailed by
registered or certified mail, return receipt requested, to the parties at the
following addresses:
(A) If to Tenneco, to:
Tenneco Inc.
1275 King Street
Greenwich, Connecticut 06831
Attention: Corporate Secretary
(B) If to the Acquiror or Subsidiary, to:
El Paso Natural Gas Company
One Paul Kayser Center
100 North Stanton Street
El Paso, Texas 79901
Attention: William A. Wise
Chairman and Chief Executive Officer
10.3 REMEDIES. Any party having any rights under any provision of this
Agreement will have all rights and remedies set forth in this Agreement and
all rights and remedies which such party may have been granted at any time
under any other agreement or contract and all of the rights which such party
may have under any law. Any party having any rights or remedies under this
Agreement will be entitled to enforce such rights specifically, without
posting a bond or other security, to recover damages by reason of any breach
of any provision of this Agreement and to exercise all other rights granted by
law.
10.4 CONSENT TO AMENDMENTS. Prior to the Effective Time, whether before or
after approval and adoption of this Agreement by the stockholders of Tenneco,
the provisions of this Agreement may be amended by a written agreement
executed and delivered by the parties hereto, subject to applicable law (and
shall be so amended if expressly required by the terms of this Agreement).
After the Effective Time, the provisions of this Agreement may be amended only
by a written agreement executed and delivered by Acquiror, the Surviving
Corporation and the Industrial Subsidiary. Any purported amendment to this
Agreement that does not strictly comply with the foregoing provisions of this
SECTION 10.4 shall be null and void ab initio. This SECTION 10.4 (and all
other provisions of this Agreement necessary or appropriate for purposes of
enforcing this SECTION 10.4) shall be enforceable by the Industrial
Subsidiary, which is hereby deemed a third party beneficiary hereof.
10.5 SUCCESSORS AND ASSIGNORS. No party hereto may assign or delegate any of
such party's rights or obligations under or in connection with this Agreement
without the written consent of the other parties hereto, and any attempted
assignment without such consent shall be null and void ab initio. All
covenants and agreements contained in this Agreement by or on behalf of any of
the parties hereto will be binding upon and enforceable against the respective
successors and assigns of such party and will be enforceable by and will inure
to the benefit of the respective successors and permitted assigns of such
party.
10.6 SEVERABILITY. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
10.7 COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together will constitute one
and the same Agreement.
10.8 DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
40
<PAGE>
10.9 NO THIRD-PARTY BENEFICIARIES. Except as expressly provided in SECTIONS
2.6(G), 2.6(H), 6.3, 6.4, 6.6, 6.9, 6.18, 10.1 and 10.4 hereof, this Agreement
will not confer any rights or remedies upon any person other than the parties
hereto and their respective successors and permitted assigns.
10.10 ENTIRE AGREEMENT. Except for the Confidentiality Agreements identified
in SECTION 6.3(B) hereof, this Agreement constitutes the entire agreement
among the parties and supersedes any prior understandings, agreements or
representations by or among the parties, written or oral, that may have
related in any way to the subject matter hereof.
10.11 CONSTRUCTION. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent and no rule
of strict construction will be applied against any party. The use of the word
"including" in this Agreement means "including without limitation" and is
intended by the parties to be by way of example rather than limitation.
10.12 INCORPORATION OF EXHIBITS. The Exhibits identified in this Agreement
are incorporated herein by reference and made a part hereof.
10.13 GOVERNING LAW. ALL QUESTIONS AND/OR DISPUTES CONCERNING THE
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS
HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND NOT THE LAW OF CONFLICTS,
OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY
IRREVOCABLY AND UNCONDITIONALLY AGREES TO BE SUBJECT TO, AND HEREBY CONSENTS
AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE STATE OF DELAWARE AND OF
THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE.
41
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement, as of the
date first written above.
TENNECO INC.
/s/ ROBERT G. SIMPSON
By __________________________________
Title: Vice President
EL PASO NATURAL GAS COMPANY
/s/ BRITTON WHITE, JR.
By___________________________________
Title: Senior Vice President and
General Counsel
EL PASO MERGER COMPANY
/s/ BRITTON WHITE, JR.
By___________________________________
Title: Vice President
42
<PAGE>
EXHIBIT C TO
AGREEMENT AND PLAN OF MERGER
DEBT REALIGNMENT PLAN
(Capitalized terms used but not otherwise defined herein have the meanings
ascribed to them in the Agreement and Plan of Merger to which this is
attached.)
1. On or prior to the effectiveness of the Spinoffs (which will occur prior to
the Merger), Tenneco shall, or shall cause Tennessee Gas Pipeline Company
("TGP") and/or Tenneco Credit Corporation ("TCC") to, tender for, redeem,
prepay, defease or let mature, or cause Industrial Subsidiary to offer to
exchange its debt for, one or more of the issues of Consolidated Debt (as
defined below) (collectively, the "Debt Realignment"). Concurrently with
the Debt Realignment, Tenneco, TGP and TCC will solicit the consent of the
holders of such Consolidated Debt to provide that the relevant debt
instruments are amended and that the tendered-for debt is accepted in each
case immediately before the Spinoffs. Tenneco reserves the right to
determine whether or not it, TGP and/or TCC tenders for, redeems, prepays,
defeases, lets mature or leaves outstanding, or causes Industrial
Subsidiary to offer to exchange its debt for, any particular issue of
Consolidated Debt. The term "Consolidated Debt" means indebtedness for
money borrowed of Tenneco and its consolidated Energy Subsidiaries
(including accrued and accreted interest and fees and expenses).
2. There will not be any restriction on the right of Tenneco and/or its
consolidated subsidiaries to incur after the date of the Agreement and Plan
of Merger and on or prior to the closing of the Merger additional
Consolidated Debt.
3. Tenneco shall, at its expense, have the sole right and authority to, and
will use its commercially reasonable efforts to, have in place a credit
facility for itself (with such guarantees of its obligations thereunder by
the Energy Subsidiaries as it deems necessary) in an aggregate principal
amount sufficient (together with other funds available to Tenneco) to fund
such tenders, redemptions, prepayments, defeasances and maturities; to pay
all the fees, costs and expenses incurred by Tenneco and its subsidiaries
in preparing for, negotiating and effecting the Spinoffs, the Merger and
the Debt Realignment and any financings in connection therewith; and for
other general corporate purposes (including, without limitation, working
capital, the repayment or refinancing of Consolidated Debt and the payments
of dividends). This facility shall be in effect at, and have a maturity
date at least 180 days following, the Effective Time. The aggregate amount
of debt including accrued and accreted interest and fees and expenses
outstanding as of the Effective Time under this facility is hereinafter
called the "Tenneco Revolving Debt". Acquiror shall cooperate with Tenneco
in arranging such facility and will provide, effective as of the Effective
Time, such credit support and undertakings as shall be reasonably requested
of it by the providers thereof.
4. All aspects of (x) the Debt Realignment and any financing thereof, and (y)
the terms of any consents solicited in respect of or amendments with
respect to Consolidated Debt, shall be controlled solely and exclusively by
Tenneco. As appropriate, Tenneco shall consult with and update Acquiror
from time to time in respect thereof, and Acquiror shall cooperate with
Tenneco in connection therewith. Tenneco shall select in its sole
discretion the dealer manager for any and all consent solicitations, debt
tenders and debt exchanges in respect of Consolidated Debt.
Tenneco and Industrial Subsidiary shall have the right, in their sole
discretion, to fix the timing, tender and/or exchange prices, conditions
and other terms of and the strategy and amounts of the fees, costs and
expenses payable with respect to any and all such consent solicitations,
tenders and exchanges.
5. Tenneco, Industrial Subsidiary and Acquiror shall comply with all
applicable securities, blue sky and other laws in connection with the Debt
Realignment Plan and the other transactions contemplated hereunder.
6. Industrial Subsidiary shall transfer to Tenneco on or prior to the
Effective Time all Consolidated Debt acquired by it in any exchange offer
undertaken by it.
1
<PAGE>
7. Adjustments shall be made in respect of Consolidated Debt outstanding as of
the Effective Time as set forth in the Debt and Cash Allocation Agreement
attached as Exhibit C to the Distribution Agreement.
8. Notwithstanding anything contained herein, (a) contemporaneously with the
Spinoffs, Tenneco and the Energy Subsidiaries shall be removed as obligor
under (and released from liability with respect to) any indebtedness for
borrowed money for which Tenneco or its subsidiaries are liable and which
are assumed by the Industrial Subsidiary or the Shipbuilding Subsidiary,
(b) any Tenneco Revolving Debt shall be prepayable without penalty, subject
to customary notice provisions, (c) in respect of publicly-traded
Consolidated Debt, between the date of the Merger Agreement and the
Effective Time there shall be no (i) extension of maturity or average life,
(ii) increase in interest rates or (iii) adverse change in defeasance or
redemption provisions with respect to any indebtedness for borrowed money
for which Tenneco or the Energy Subsidiaries will be liable on or after the
Effective Time and (d) except for the Tenneco Revolving Debt, no
indebtedness for borrowed money of Tenneco or the Energy Subsidiaries at
the Effective Time shall contain any affirmative or negative financial or
operational covenants other than ones that are (x) mutually acceptable to
Tenneco and Acquiror or (y) no more restrictive in the aggregate and
substantially equivalent to those set forth in the Indenture dated as of
January 1, 1992 of El Paso Natural Gas Company as in effect as of the date
of the Merger Agreement (other than Section 10.05 of the Indenture).
2
<PAGE>
APPENDIX C
INFORMATION STATEMENT
NEW TENNECO INC.
LOGO (TO BE RENAMED TENNECO INC.)
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
This Information Statement is being furnished to stockholders of Tenneco
Inc., a Delaware corporation ("Tenneco"), in connection with the distribution
(the "Industrial Distribution") by Tenneco to holders of its Common Stock, par
value $5.00 per share ("Tenneco Common Stock"), of all the outstanding shares
of Common Stock, par value $.01 per share ("Company Common Stock"), of its
wholly owned subsidiary, New Tenneco Inc., a Delaware corporation (the
"Company"). Concurrently, Tenneco will distribute to holders of Tenneco Common
Stock all of the outstanding shares of Common Stock, par value $.01 per share
("Newport News Common Stock"), of Newport News Shipbuilding Inc., a Delaware
corporation ("Newport News") (individually, the "Shipbuilding Distribution"
and, together with the Industrial Distribution, the "Distributions"). The
Distributions will occur immediately prior to the effective time (the "Merger
Effective Time") of the proposed merger (the "Merger"), pursuant to an
Agreement and Plan of Merger dated as of June 19, 1996, as amended (the
"Merger Agreement"), of a wholly owned subsidiary of El Paso Natural Gas
Company, a Delaware corporation ("El Paso"), with and into Tenneco (which upon
consummation of the Merger will be renamed El Paso Tennessee Pipeline Co.).
Pursuant to the Merger, Tenneco stockholders will receive Common Stock, par
value $3.00 per share, of El Paso ("El Paso Common Stock") and, under certain
circumstances, depositary shares each representing a 1/25th fractional
interest in a share of Preferred Stock of El Paso ("El Paso Preferred
Depositary Shares"). The Distributions, the Merger and the other transactions
contemplated thereby are collectively referred to herein as the "Transaction."
Unless the context otherwise requires, as used herein the term "Company"
refers: (i) for periods prior to the Industrial Distribution, to the Tenneco
Automotive, Tenneco Packaging and Tenneco Business Services businesses of
Tenneco (collectively, the "Industrial Business") which New Tenneco Inc. will
own and operate after the Industrial Distribution and (ii) for periods after
the Industrial Distribution, to New Tenneco Inc. and its consolidated
subsidiaries. See "The Industrial Distribution--Corporate Restructuring
Transactions."
The Company is a newly formed, wholly owned subsidiary of Tenneco that will
conduct the Industrial Business. As part of the Transaction, the Industrial
Business has been consolidated into the Company and disaffiliated with the
other businesses of Tenneco as described under "The Industrial Distribution--
Corporate Restructuring Transactions."
The consummation of the Transaction is conditioned upon, among other things,
approval thereof by Tenneco stockholders. The consummation of the
Distributions is subject to the satisfaction or waiver of a number of other
conditions as described under "The Industrial Distribution--Conditions to
Consummation of the Industrial Distribution."
It is expected that the Industrial Distribution will be made on or about
December 11, 1996 to holders of record of Tenneco Common Stock on the
Distribution Record Date (as defined herein) on the basis of one share of
Company Common Stock for each share of Tenneco Common Stock held of record. In
addition, the Board of Directors of the Company will adopt a stockholder
rights plan and cause to be issued, with each share of Company Common Stock to
be distributed in the Industrial Distribution, one Right (as defined herein),
entitling the holder thereof to, among other things, purchase under certain
circumstances, and as described more fully herein, one one-hundredth of a
share of Company Junior Preferred Stock (as defined herein). No consideration
will be required to be paid by holders of Tenneco Common Stock for the shares
of Company Common Stock to be distributed in the Industrial Distribution or
the Rights associated therewith, nor will holders of Tenneco Common Stock be
required to surrender or exchange their shares of Tenneco Common Stock in
order to receive such shares of Company Common Stock and the Rights associated
therewith.
There is no current public market for Company Common Stock, although a "when
issued" market is expected to develop prior to the effective date of the
Industrial Distribution (the "Distribution Date"). The Company has applied to
the New York Stock Exchange for the listing of the Company Common Stock upon
notice of issuance and expects to receive approval of such listing prior to
the Distributions. The Company is also applying to the Chicago, Pacific and
London Stock Exchanges for approval of the listing of Company Common Stock
upon notice of issuance.
RECIPIENTS OF COMPANY COMMON STOCK SHOULD NOTE THE FACTORS DISCUSSED IN
"RISK FACTORS" BEGINNING ON PAGE 31.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS INFORMATION STATEMENT IS , 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 1
SUMMARY OF CERTAIN INFORMATION............................................ 3
INTRODUCTION.............................................................. 15
THE INDUSTRIAL DISTRIBUTION............................................... 16
Manner of Distribution.................................................. 16
Corporate Restructuring Transactions.................................... 16
Debt and Cash Realignment............................................... 17
Relationships Among Tenneco, the Company and Newport News after the Dis-
tributions............................................................. 20
Reasons for the Distributions........................................... 25
Conditions to Consummation of the Industrial Distribution............... 25
Amendment or Termination of the Distributions........................... 26
Trading of Company Common Stock......................................... 26
Certain Federal Income Tax Aspects of the Industrial Distribution....... 26
Reasons for Furnishing the Information Statement........................ 30
RISK FACTORS.............................................................. 31
No Current Public Market for Company Common Stock....................... 31
Uncertainty Regarding Trading Prices of Stock Following the Transaction. 31
Uncertainty Regarding Future Dividends.................................. 31
Potential Federal Income Tax Liabilities................................ 31
Certain Antitakeover Features........................................... 33
Potential Liabilities Due to Fraudulent Transfer Considerations and Le-
gal Dividend Requirements.............................................. 33
THE COMPANY............................................................... 35
Introduction............................................................ 35
Business Strategy....................................................... 35
FINANCING................................................................. 38
CAPITALIZATION............................................................ 39
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS......................... 40
COMBINED SELECTED FINANCIAL DATA.......................................... 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 47
Proposed Merger with El Paso............................................ 47
Results of Operations for the Six Months Ended June 30, 1996 and 1995... 48
Results of Operations for the Years 1995, 1994 and 1993................. 54
BUSINESS AND PROPERTIES................................................... 62
Tenneco Automotive...................................................... 62
Tenneco Packaging....................................................... 70
Tenneco Business Services............................................... 76
Properties.............................................................. 76
Environmental Matters................................................... 77
LEGAL PROCEEDINGS......................................................... 78
MANAGEMENT................................................................ 79
Board of Directors...................................................... 79
Executive Officers...................................................... 81
Stock Ownership of Management........................................... 82
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Committees of the Board of Directors.................................... 83
Executive Compensation.................................................. 83
Compensation of Directors............................................... 89
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements........................................................... 89
Transactions with Management and Others................................. 90
Compensation Committee Interlocks and Insider Participation............. 90
Benefit Plans Following the Industrial Distribution..................... 90
DESCRIPTION OF CAPITAL STOCK.............................................. 92
Authorized Capital Stock................................................ 92
Company Common Stock.................................................... 92
Company Preferred Stock................................................. 93
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS................................ 93
Classified Board of Directors........................................... 93
Number of Directors; Removal; Filling Vacancies......................... 94
Special Meetings........................................................ 94
Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals.............................................................. 94
Record Date Procedure for Stockholder Action by Written Consent......... 95
Stockholders Meetings................................................... 96
Company Preferred Stock................................................. 96
Business Combinations................................................... 96
Amendment of Certain Provisions of the Certificate and By-laws.......... 97
Rights.................................................................. 97
Antitakeover Legislation................................................ 99
Comparison with Rights of Holders of Tenneco Common Stock............... 100
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS................... 103
Elimination of Liability of Directors................................... 103
Indemnification of Directors and Officers............................... 104
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE................................ F-1
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
Tenneco is (and, following the Industrial Distribution, the Company will be)
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith files (and
the Company will file) reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Tenneco (and to be filed by the
Company) with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the Commission's Regional
Offices, including the following: Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such information may be obtained by
mail at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W. Street, N.W., Washington, D.C. 20549 or accessed
electronically on the Commission's Web site at (http://www.sec.gov). The
Company Common Stock has been approved for listing on the New York Stock
Exchange and reports and other information concerning the Company can be
inspected at the New York Stock Exchange offices, 20 Broad Street, New York,
New York, 10005.
The Company intends to furnish holders of Company Common Stock with annual
reports containing consolidated financial statements prepared in accordance
with United States generally accepted accounting principles and audited and
reported on, with an opinion expressed, by an independent public accounting
firm, as well as quarterly reports for the first three quarters of each fiscal
year containing unaudited financial information.
The Company has filed with the Commission a Registration Statement on Form
10 (as amended, this "Registration Statement") under the Exchange Act covering
Company Common Stock and the associated Rights.
This Information Statement does not contain all of the information in the
Registration Statement and the related exhibits and schedules. Statements in
this Information Statement as to the contents of any contract, agreement or
other document are summaries only and are not necessarily complete. For
complete information as to these matters, refer to the applicable exhibit or
schedule to the Registration Statement. The Registration Statement and the
related exhibits filed by the Company with the Commission may be inspected at
the public reference facilities of the Commission listed above.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS INFORMATION
STATEMENT OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED
BY REFERENCE HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR TENNECO.
NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT NOR CONSUMMATION OF THE
INDUSTRIAL DISTRIBUTION CONTEMPLATED HEREBY SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY OR TENNECO SINCE THE DATE HEREOF, OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Information Statement contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, the Company's prospects, developments and business
strategies for its operations, all of which are subject to risks and
uncertainties. These forward-looking statements are identified by their use of
terms and phrases such as "intends," "intend," "intended," "goal," "expects,"
"expect," "expected," "plans," "anticipates," "anticipated," "should,"
"designed to," "foreseeable future," "believe" and "believes" and similar
terms and phrases, and in many cases are followed by a cross reference to
"Risk Factors." The Company's actual results may differ significantly
<PAGE>
from the results discussed in the forward-looking statements. Factors that
might cause such a difference include (a) the factors discussed in the section
or sections under "Risk Factors" and particularly, in cases where the forward-
looking statement is followed by a cross reference to "Risk Factors," the
factors discussed in the section or sections under "Risk Factors" that are
referred to in the cross reference, (b) the factors discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business and Properties" and (c) the following additional
factors: (i) the general economic and competitive conditions in the markets
and countries where the Company operates; (ii) changes in capital availability
or costs such as changes in interest rates, market perceptions of the
industries in which the Company operates or security ratings;
(iii) fluctuations in demand for certain of the Company's products; (iv) the
cost of compliance with changes in regulations, including environmental
regulations; (v) employee workforce factors, including collective bargaining
agreements or work stoppages; (vi) growth strategies through acquisitions and
investments in joint ventures may face legal and regulatory delays and other
unforeseeable obstacles beyond the Company's control; (vii) cost control
efforts may be affected by the timing of related work force reductions and
might be further offset by unusual and unexpected items resulting from such
events as unexpected environmental remediation costs in excess of reserves;
(viii) future operating results and success of business ventures in the United
States and foreign markets may be subject to the effects of, and changes in,
United States and foreign trade and monetary policies, laws and regulations,
political and governmental changes, inflation and exchange rates, taxes, and
operating conditions; and (ix) authoritative generally accepted accounting
principle or policy changes from such standard setting bodies as the Financial
Accounting Standards Board and the Commission.
When a forward-looking statement includes a statement of the assumptions or
basis underlying the forward-looking statement, the Company cautions that,
while it believes such assumptions or basis to be reasonable and makes them in
good faith, assumed facts or basis almost always vary from actual results, and
the differences between assumed facts or basis and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, the Company or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
2
<PAGE>
SUMMARY OF CERTAIN INFORMATION
This Summary is qualified by the more detailed and other information and
financial statements set forth elsewhere in this Information Statement, which
should be read in its entirety. Capitalized terms used but not defined in this
Summary are defined elsewhere in this Information Statement. Unless the context
otherwise requires, the term "Company" refers (i) for periods prior to the
Industrial Distribution, to Tenneco's Industrial Business and (ii) for periods
after the Industrial Distribution, to the Company and its consolidated
subsidiaries.
THE COMPANY
The Company is a newly formed Delaware corporation which, upon completion of
the Industrial Distribution, will be an independent, publicly held company
(symbol "TEN"). The Company will own and operate, directly and through its
direct and indirect subsidiaries, substantially all of the assets of, and will
assume substantially all of the liabilities associated with, the principal
industrial businesses of Tenneco: the Tenneco Automotive business ("Tenneco
Automotive") and the Tenneco Packaging business ("Tenneco Packaging"). The
Company will also own and operate the administrative services business of
Tenneco: Tenneco Business Services ("TBS"). Upon consummation of the Merger,
the Company will change its name to Tenneco Inc.
Although the separation of the Industrial Business from the remainder of the
businesses, operations and companies currently constituting the "Tenneco Group"
has been structured as a "spin-off" of the Company pursuant to the Industrial
Distribution for legal, tax and other reasons, the Company will succeed to
certain important aspects of the existing Tenneco business, organization and
affairs, namely: (i) the Company will be renamed "Tenneco Inc." upon the
consummation of the Merger; (ii) the Company will be headquartered at Tenneco's
current headquarters in Greenwich, Connecticut; (iii) the Company's Board of
Directors (the "Company Board") will consist of those persons currently
constituting the Tenneco Board of Directors (the "Tenneco Board"); (iv) the
Company's executive management will consist substantially of the current
Tenneco executive management; and (v) the Industrial Business to be conducted
by the Company will consist largely of Tenneco Automotive and Tenneco
Packaging.
Tenneco Automotive is one of the world's leading manufacturers of automotive
exhaust and ride control systems for both the original equipment market and the
replacement market, or aftermarket. Tenneco Automotive is a global business
that sells its products in over 100 countries. Tenneco Automotive manufactures
and markets its automotive exhaust systems primarily under the Walker(R) brand
name and its ride control systems primarily under the Monroe(R) brand name.
Tenneco Packaging is among the world's leading and most diversified packaging
companies, manufacturing packaging products for consumer, institutional and
industrial markets. The paperboard business group manufactures corrugated
containers, folding cartons and containerboard, has a joint venture in recycled
paperboard, and offers high value-added products such as enhanced graphics
packaging and displays and kraft honeycomb products. Its specialty products
group produces disposable aluminum, foam and clear plastic food containers,
molded fiber and pressed paperboard products, as well as polyethylene bags and
industrial stretch wrap. Tenneco Packaging's consumer products include such
recognized brand names as Hefty(R), Baggies(R) and E-Z Foil(R).
TBS designs, implements and administers shared administrative service
programs for the Tenneco businesses as well as, on an "as requested" basis, for
former Tenneco business entities.
The Company's principal executive offices are located at 1275 King Street,
Greenwich, Connecticut 06831; telephone: (203) 863-1000.
3
<PAGE>
BUSINESS STRATEGY
The Company
The Distributions and the Merger represent the most important step to date in
accomplishing Tenneco's overall strategic objective of transforming itself from
a highly diversified industrial corporation to a global manufacturing company
focused on Tenneco Automotive and Tenneco Packaging. For the past several
years, Tenneco's management team has redeployed resources from slower growth,
more cyclical businesses to these higher growth businesses. The Distributions
are expected to provide the Company with greater flexibility to pursue
additional growth opportunities for Tenneco Automotive and Tenneco Packaging as
a result of the increased management focus and additional financial flexibility
at the Company. These additional growth opportunities are expected to include,
among other things, strategic acquisitions, joint ventures, strategic alliances
and further organic growth from additional product development and
international expansion initiatives.
Management Focus. As a result of the Distributions and the Merger, Tenneco's
executive management team will be able to focus all of its efforts on exploring
and implementing the most appropriate growth opportunities for Tenneco
Automotive and Tenneco Packaging.
Implementation of Management Programs. Tenneco's strategy of focusing on the
Industrial Business will allow the Company to further refine and implement
certain management processes that have been developed over the past several
years in order to improve operating performance. These programs include: (i)
the Cost of Quality program through which the Company has successfully reduced
the failure costs in its manufacturing and administrative processes; (ii) the
working capital initiative through which the Company plans to further reduce
its working capital requirements; and (iii) the shared services program,
administered by TBS, through which the Company plans on further improving
efficiency and reducing the cost of general and administrative support
functions. The Company believes that Tenneco Automotive and Tenneco Packaging
are particularly well-suited to benefit from these types of programs due to the
fragmented, non-regulated nature of the industries in which they operate.
Strategic Acquisitions. Strategic acquisitions have been, and will continue
to be, an important element of the Company's overall growth strategy. Tenneco's
current executive management team, which will continue to serve as the
Company's executive management team following the Industrial Distribution, has
a proven track record of identifying, structuring and integrating strategic
acquisitions. As a result of management's experience in implementing strategic
acquisitions, the Company has developed comprehensive plans to efficiently
integrate new companies into its existing corporate infrastructure. The Company
intends to continue to pursue appropriate acquisition opportunities in which
management can substantially improve the profitability of strategically related
businesses by, among other things, rationalizing similar product lines and
eliminating certain lower margin product lines; reconfiguring and upgrading
manufacturing facilities; moving production to the lowest cost facilities;
reducing selling, distribution, purchasing and administrative costs; increasing
market share within either a geographic or product market; and acquiring
businesses that possess leading brand name products.
Continued growth in revenues and earnings at the pace sought by the Company
will require continued success in completing major acquisitions and similar
expansion efforts, and then successfully integrating the acquired businesses
and operations into the Company. The identity, timing, frequency, terms and
other factors involved in the overall acquisition/expansion program, and those
relating to any particular major acquisition, will impact, positively or
negatively, the Company's success in achieving its financial and other goals.
Although certain factors in this regard will be beyond the Company's control,
its executive management team believes that the Company will have the requisite
significant opportunities, and the expertise, resources and commitment to
successfully act on an appropriate number of those opportunities, to achieve
its goals.
Employee Incentives. In addition, the Distributions and the Merger will allow
Tenneco's executive management team to develop incentive compensation systems
for employees that are more closely aligned with the operational success of
Tenneco Automotive and Tenneco Packaging.
4
<PAGE>
Tenneco Automotive
Tenneco Automotive's primary goal is to enhance its leadership position in
the global automotive parts industry in which it is currently one of the
world's leading manufacturers of exhaust and ride control systems. Tenneco
Automotive intends to capitalize on certain significant existing and emerging
trends in the automotive industry, including (i) the consolidation and
globalization of the original equipment manufacturers' ("OEMs") supplier base,
(ii) increased OEM outsourcing, particularly of more complex components,
assemblies, modules and complete systems to sophisticated, independent
suppliers and (iii) growth of emerging markets for both original equipment and
replacement markets. Key components of Tenneco Automotive's strategy include:
(a) capitalizing on brand-name strength; (b) retaining and enhancing market
share; (c) continuing development of high value-added products; (d) increasing
ability to deliver full-system capabilities (rather than merely component
parts); (e) continuing international expansion and strategic acquisitions; (f)
maintaining operating cost leadership; and (g) continuing focus on the
customer.
Tenneco Packaging
Tenneco Packaging's primary goal is to maintain and enhance its position as a
leading specialty packaging company offering a broad line of products suited to
provide customers with the best packaging solutions. Tenneco Packaging intends
to capitalize on certain significant existing and emerging trends in the
packaging industry, including (i) increasing materials substitution, (ii)
changing fiber availability and (iii) global demand growth. Key components of
Tenneco Packaging's strategy include: (a) continued development and growth of
multi-material uses, broad product lines and packaging offering customers
enhanced functionality and value; (b) fiber flexibility (primarily in the mix
of virgin and recycled fiber sources); (c) growth through domestic and
international acquisitions and joint ventures; (d) internal growth in base
businesses; (e) reduction of sensitivity to changes in economic cyclicality
through the pursuit of specialty and other high value-added product growth; and
(f) maintenance of market leadership positions in its primary business groups.
----------------
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA OF THE COMPANY
The summary combined financial data as of December 31, 1995 and 1994 and for
the years ended December 31, 1995, 1994 and 1993 were derived from the audited
Combined Financial Statements of the Company. The summary combined financial
data as of December 31, 1993, 1992 and 1991 and for the years ended December
31, 1992 and 1991 are unaudited and were derived from the accounting records of
Tenneco. The summary combined financial data as of and for each of the six-
month periods ended June 30, 1996 and 1995 were derived from the unaudited
Combined Financial Statements of the Company. In the opinion of the Company's
management, the summary combined financial data of the Company as of December
31, 1993, 1992 and 1991 and for the years ended December 31, 1992 and 1991, and
as of and for the six months ended June 30, 1996 and 1995 include all adjusting
entries (consisting only of normal recurring adjustments) necessary to present
fairly the information set forth therein. The results of operations for the six
months ended June 30, 1996 should not be regarded as indicative of the results
that may be expected for the full year.
The summary pro forma combined financial data as of and for the six months
ended June 30, 1996 and for the year ended December 31, 1995, have been
prepared to reflect: (i) the acquisition of The Pullman Company and its Clevite
products division ("Clevite") in July 1996 and the acquisition of the Amoco
Foam Products Company, a unit of Amoco Chemical Company ("Amoco Foam
Products"), in August 1996; (ii) the effect on the Company of the Cash
Realignment and Debt Realignment (as each are defined herein); (iii) the effect
on the Company of the Corporate Restructuring Transactions, and other
transactions pursuant to the provisions of the Distribution Agreement and
Merger Agreement; and (iv) the issuance of Company Common Stock as part of the
Industrial Distribution. The unaudited pro forma combined financial data for
the year ended December 31, 1995 also reflects the pro forma results of
operations of the Mobil Plastics Division of Mobil Oil Corporation ("Mobil
Plastics") prior to its acquisition in November 1995. The Clevite and Amoco
Foam Products acquisitions do not meet the Commission's criteria for inclusion
of separate historical financial statements. The unaudited pro forma combined
Statements of Income Data have been prepared as if the transactions occurred on
January 1, 1995; the unaudited pro forma combined Balance Sheet Data have been
prepared as if the transactions occurred on June 30, 1996. The summary pro
forma combined financial data are not necessarily indicative of the results of
operations of the Company had the transactions reflected therein actually been
consummated on the dates assumed and are not necessarily indicative of the
results of operations for any future period.
This information should be read in conjunction with "Unaudited Pro Forma
Combined Financial Statements," "Combined Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements, and notes thereto, included
elsewhere in this Information Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- ---------------------------------------------------------
PRO FORMA PRO FORMA
(MILLIONS EXCEPT PER 1996 1996(A) 1995(A) 1995 1995(A) 1994(A) 1993(A) 1992 1991
SHARE AMOUNTS) --------- ------- ------- --------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA(B):
Net sales and operating
revenues from continuing
operations--
Automotive............. $1,583 $1,463 $1,263 $2,710 $2,479 $1,989 $1,785 $1,763 $1,668
Packaging.............. 1,927 1,775 1,318 4,556 2,752 2,184 2,042 2,078 1,934
Intergroup sales and
other................. (5) (5) (4) (10) (10) (7) (7) (5) (5)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total.................. $3,505 $3,233 $2,577 $7,256 $5,221 $4,166 $3,820 $3,836 $3,597
====== ====== ====== ====== ====== ====== ====== ====== ======
Income from continuing
operations before
interest expense, income
taxes and minority
interest--
Automotive............. $ 170 $ 163 $ 134 $ 258 $ 240 $223 $ 222 $ 237 $ 188
Packaging.............. 280 256 244 548 430 209 139 221 139(e)
Other.................. (5) (5) -- 2 2 24 20 7 3
------ ------ ------ ------ ------ ------ ------ ------ ------
Total.................. 445 414 378 808 672 456 381 465 330
Interest expense (net of
interest capitalized)... 83 100 74 166 160 104 101 102 111
Income tax expense....... 147 126 124 291 231 114 115 154 80
Minority interest........ 10 10 12 23 23 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from continuing
operations.............. 205 178 168 328 258 238 165 209 139
Loss from discontinued
operations, net of
income tax.............. -- -- -- -- -- (31) (7) (7) (12)
Cumulative effect of
changes in accounting
principles, net of
income tax.............. -- -- -- -- -- (7)(d) -- (99)(d) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income............... $ 205 $ 178 $ 168 $ 328 $ 258 $ 200 $ 158 $ 103 $ 127
====== ====== ====== ====== ====== ====== ====== ====== ======
Income from continuing
operations per share.... $ 1.20 N/A N/A $ 1.89 N/A N/A N/A N/A N/A
====== ======
Net income per share..... $ 1.20 N/A N/A $ 1.89 N/A N/A N/A N/A N/A
====== ======
BALANCE SHEET DATA(B):
Total assets............. $7,617 $6,523 $4,430 N/A $6,117 $3,940 $3,029 $2,812 $2,792
Short-term debt(e)....... 13 530 205 N/A 384 108 94 182 758
Long-term debt(e)........ 2,132 1,573 1,246 N/A 1,648 1,039 1,178 1,675 1,555
Minority interest........ 301 301 297 N/A 301 301 1 1 2
Combined equity.......... 2,988 2,168 1,163 N/A 1,852 987 533 (87) (553)
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided (used)
by operating
activities............. N/A $ 199 $ (9) N/A $ 489 $ 571 $ 324 $ 121 $ 503
Net cash provided (used)
by investing
activities............. N/A (340) (206) N/A (2,041) (303) (152) (78) (237)
Net cash provided (used)
by financing
activities............. N/A 169 (52) N/A 1,297 50 (165) (41) (251)
OTHER DATA:
EBITDA(f)................ $ 603 $ 551 $ 458 $1,023 $ 845 $ 598 $ 518 $ 595 $ 463
</TABLE>
(continued on next page)
6
<PAGE>
(continued from previous page)
- -------
(a) For a discussion of the significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
Information Statement.
(b) During 1995 and 1994, Tenneco Automotive and Tenneco Packaging each
completed several acquisitions, the most significant of which was Tenneco
Packaging's acquisition of Mobil Plastics for $1.3 billion in late 1995.
See Note 4 to the Combined Financial Statements, included elsewhere in this
Information Statement, for further information on the Company's
acquisitions.
(c) Includes a gain of $42 million recorded by Tenneco Packaging related to the
sale of three short-line railroads.
(d) In 1994, the Company adopted Statement of Financial Accounting Standards
("FAS") No. 112, "Employers' Accounting for Postemployment Benefits." In
1992, the Company adopted FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and FAS No. 109, "Accounting
for Income Taxes."
(e) Historical amounts include debt allocated to the Company from Tenneco based
on the portion of Tenneco's investment in the Company which is deemed to be
debt, generally based upon the ratio of the Company's net assets to Tenneco
consolidated net assets plus debt. Tenneco's historical practice has been
to incur indebtedness for its consolidated group at the parent company
level or at a limited number of subsidiaries, rather than at the operating
company level, and to centrally manage various cash functions. Management
believes that the historical allocation of corporate debt and interest
expense is reasonable; however, it is not necessarily indicative of the
Company's debt upon completion of the Debt Realignment (as defined), nor
debt and interest that may be incurred by the Company as a separate public
entity. See the Combined Financial Statements, and notes thereto, included
elsewhere in this Information Statement.
(f) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon generally accepted accounting principles
("GAAP"); however, the amounts included in the EBITDA calculation are
derived from amounts included in the combined historical or pro forma
Statements of Income. In addition, EBITDA should not be considered as an
alternative to net income or operating income, as an indicator of the
operating performance of the Company or as an alternative to operating cash
flows as a measure of liquidity.
7
<PAGE>
THE INDUSTRIAL DISTRIBUTION
Distributing Company.... Tenneco Inc. (which will be renamed El Paso Tennessee
Pipeline Co. upon consummation of the Merger).
Distributed Company..... New Tenneco Inc. (a wholly owned subsidiary of
Tenneco) which will, upon consummation of the
Industrial Distribution, directly and indirectly
through its consolidated subsidiaries, own and
operate Tenneco Automotive, Tenneco Packaging, and
TBS. Immediately following consummation of the
Industrial Distribution, Tenneco will not have an
ownership interest in the Company and, upon
consummation of the Merger, the Company will be
renamed "Tenneco Inc."
Distribution Ratio...... One share of Company Common Stock for each share of
Tenneco Common Stock held of record on the
Distribution Record Date (as defined herein).
Securities to be
Distributed............. Based on 170,755,576 shares of Tenneco Common Stock
outstanding on September 30, 1996, 170,755,576 shares
of Company Common Stock (and Rights associated
therewith) will be distributed. Company Common Stock
to be distributed will constitute all of the
outstanding Company Common Stock immediately
following the Industrial Distribution. See
"Description of Capital Stock--Company Common Stock"
and "Antitakeover Effects of Certain Provisions--
Rights."
Distribution Record December 11, 1996.
Date....................
Distribution Date....... December 11, 1996.
Distribution Agent and
Transfer Agent for the
Shares.................
First Chicago Trust Company of New York.
Mailing Date............ Certificates representing the shares of Company
Common Stock to be distributed pursuant to the
Industrial Distribution will be delivered to the
Distribution Agent on the Distribution Date. The
Distribution Agent will mail certificates
representing the shares of Company Common Stock to
holders of Tenneco Common Stock as soon as
practicable thereafter. Holders of Tenneco Common
Stock should not send stock certificates to Tenneco,
the Company or the Distribution Agent in connection
with the Industrial Distribution (however, holders
will receive instructions from the Distribution Agent
with respect to the disposition of their certificates
in connection with the Merger). See "The Industrial
Distribution--Manner of Distribution."
Conditions to the
Industrial
Distribution...........
The Transaction (and, accordingly, the Industrial
Distribution) is conditioned upon, among other
things, declaration of the special distributions by
the Tenneco Board authorizing the Distributions and
approval by the stockholders of Tenneco of the
Transaction. The Transaction is also conditioned upon
receipt of a private letter ruling (the "IRS Ruling
Letter") from the Internal Revenue Service (the
"IRS") in form and substance satisfactory to the
Tenneco Board (see "The Industrial Distribution--
Certain Federal Income Tax Aspects of the Industrial
Distribution"), which IRS Ruling Letter was issued on
October 30, 1996. The Distributions and the Merger
are part of a unified transaction and will not be
effected separately (although Tenneco may elect
subsequently to
F
8
<PAGE>
proceed with one or more of the transactions included
in the Transaction which do not require stockholder
approval if the Transaction is not approved by
Tenneco stockholders). See "The Industrial
Distribution--Conditions to Consummation of the
Industrial Distribution" and "The Industrial
Distribution--Amendment or Termination of the
Distributions."
Reasons for the The Distributions and the Merger are designed to
Distributions........... separate three types of businesses, namely the
Industrial Business, the Shipbuilding Business (as
defined below) and the Energy Business (as defined
below), which have distinct financial, investment and
operating characteristics, so that each can adopt
strategies and pursue objectives appropriate to its
specific needs. The Distributions will (i) enable the
management of each company to concentrate its
attention and financial resources on the core
businesses of such company, (ii) permit investors to
make more focused investment decisions based on the
specific attributes of each of the three businesses,
(iii) facilitate employee compensation programs
custom-tailored to the operations of each business,
including stock-based and other incentive programs,
which will more directly reward employees of each
business based on the success of that business and
(iv) tailor the assets of Tenneco to facilitate the
acquisition of the Energy Business by El Paso. Upon
consummation of the Industrial Distribution, the
Company will, primarily through its consolidated
subsidiaries, own and operate Tenneco Automotive,
Tenneco Packaging and TBS and Newport News will,
primarily through its consolidated subsidiaries
(principally Newport News Shipbuilding and Dry Dock
Company), own and operate substantially all of the
shipbuilding and related businesses of Tenneco (the
"Shipbuilding Business"). Immediately following
consummation of the Distributions, a subsidiary of El
Paso will be merged with and into Tenneco, and
thereafter the energy and other remaining businesses
and operations of Tenneco, including liabilities and
assets relating to discontinued Tenneco operations
not related to the Industrial Business or the
Shipbuilding Business (collectively, the "Energy
Business") will be owned and operated by El Paso. See
"The Industrial Distribution--Reasons for the
Distributions."
Federal Income Tax
Consequences............
The Tenneco Board has conditioned the Industrial
Distribution on receipt of the IRS Ruling Letter
substantially to the effect, among other things, that
the Industrial Distribution and the receipt of shares
of Company Common Stock by holders of Tenneco Common
Stock will be tax-free to Tenneco and its
stockholders, respectively, for federal income tax
purposes. The IRS Ruling Letter received on October
30, 1996 satisfies the foregoing condition. Tenneco
has also requested a ruling from the IRS as to the
tax-free treatment of certain transactions to be
effected as part of the Corporate Restructuring
Transactions (as defined herein) and the Merger which
was received as part of the IRS Ruling Letter. See
"The Industrial Distribution--Certain Federal Income
Tax Aspects of the Industrial Distribution" and "Risk
Factors--Certain Federal Income Tax Considerations."
Trading Market.......... There is currently no public market for Company
Common Stock, although a "when issued" market is
expected to develop prior to the Distribution Date.
The Company has applied to the New York Stock
9
<PAGE>
Exchange for listing of the Company Common Stock upon
notice of issuance and the Company expects to receive
approval of such listing prior to the Distributions.
The Company is also applying to the Chicago, Pacific
and London Stock Exchanges for approval of the
listing of Company Common Stock upon notice of
issuance. The combined market value/trading prices of
(i) Company Common Stock, (ii) Newport News Common
Stock and (iii) El Paso Common Stock and, under
certain circumstances, El Paso Preferred Depositary
Shares after the Transaction may be less than, equal
to or greater than the market value/trading price of
Tenneco Common Stock prior to the Transaction. See
"The Industrial Distribution--Trading of Company
Common Stock" and "Risk Factors--No Current Public
Market for Company Common Stock."
Dividends............... The Company's dividend policy will be established by
the Company Board from time to time based on the
results of operations and financial condition of the
Company and such other business considerations as the
Company Board considers relevant. There can be no
assurances that the combined annual dividends on (i)
El Paso Common Stock and, if issued in connection
with the Merger, El Paso Preferred Depositary Shares,
(ii) Company Common Stock and (iii) Newport News
Common Stock after the Transaction will be equal to
the annual dividends on Tenneco Common Stock prior to
the Transaction (and it is unlikely that the
dividends would be greater than the annual dividends
on Tenneco Common Stock prior to the Transaction).
See "Risk Factors--Dividends" and "Description of
Capital Stock--Company Common Stock."
Antitakeover The Restated Certificate of Incorporation and the
Provisions.............. Amended and Restated By-laws of the Company, as well
as the Company's stockholder rights plan (which will
expire on June 10, 1998 unless extended with
stockholder approval) and Delaware statutory law,
contain provisions that may have the effect of
discouraging an acquisition of control of the Company
in a transaction not approved by the Company Board.
These provisions, which are substantially the same as
those provisions which are currently applicable to
Tenneco (see "Antitakeover Effects of Certain
Provisions--Comparison with Rights of Holders of
Tenneco Common Stock"), should better enable the
Company to develop its business and foster its long-
term growth without the disruptions that can be
caused by the threat of certain types of takeovers
not deemed by the Company Board to be in the best
interests of the Company and its stockholders. Such
provisions may also have the effect of discouraging
third parties from making proposals involving an
acquisition or change of control of the Company,
although such proposals, if made, might be considered
desirable by a majority of the Company's
stockholders. Such provisions could further have the
effect of making it more difficult for third parties
to cause the immediate removal and replacement of the
members of the then current Company Board or the then
current management of the Company without the
concurrence of the Company Board. See "Risk Factors--
Certain Antitakeover Features," "Description of
Capital Stock," and "Antitakeover Effects of Certain
Provisions."
Risk Factors............ Stockholders of Tenneco should be aware that the
Industrial Distribution and ownership of Company
Common Stock involve certain risk factors, including
those described under "Risk Factors," as well as
elsewhere in this Information Statement, which could
adversely affect the value of their
10
<PAGE>
holdings. Such matters include, among others, the
lack of a current public market for Company Common
Stock, the absence of assurance that the combined
market value/trading prices of, and dividends on, El
Paso Common Stock and any El Paso Preferred
Depositary Shares, Company Common Stock and Newport
News Common Stock held by stockholders after the
Transaction will be equal to or greater than the
market value/trading price of or dividends on Tenneco
Common Stock prior to the Transaction, the risk that
the Industrial Distribution may not qualify as a tax-
free distribution under Section 355 of the Code (as
defined herein), certain antitakeover effects of
certain provisions of the Company's Restated
Certificate of Incorporation, the Amended and
Restated By-laws, the Company's stockholder rights
plan and Delaware statutory law, and the risk that
the Transaction is subject to review under federal
and state fraudulent conveyance laws. See "Risk
Factors."
Corporate Restructuring
Transactions...........
Prior to the consummation of the Industrial
Distribution, Tenneco and its subsidiaries will
undertake various intercompany transfers and
distributions designed to restructure Tenneco's
existing businesses, assets and liabilities so that
substantially all of the assets, liabilities and
operations of (i) the Industrial Business will be
directly and indirectly owned and operated by the
Company, (ii) the Shipbuilding Business will be
directly and indirectly owned and operated by Newport
News and (iii) the Energy Business will be directly
and indirectly owned and operated by Tenneco, which
will, upon consummation of the Merger, be a
subsidiary of El Paso and be renamed El Paso
Tennessee Pipeline Co. (the "Corporate Restructuring
Transactions"). See "The Industrial Distribution--
Corporate Restructuring Transactions."
Debt and Cash
Realignment; Exchange
Offer; Revolving
Credit Financing.......
The Merger Agreement, the Distribution Agreement to
be entered into pursuant to the Merger Agreement (the
"Distribution Agreement") and certain of the other
agreements and documents attached as exhibits to the
Merger Agreement or the Distribution Agreement (the
"Ancillary Agreements") provide for (i) the
restructuring (through debt tender and exchange
offers, defeasances, prepayments, refinancings and
the like), immediately prior to the Distributions, of
the outstanding indebtedness for money borrowed
("Tenneco Energy Consolidated Debt") of Tenneco and
certain of its consolidated subsidiaries (the "Debt
Realignment") and (ii) the allocation of cash and
cash equivalents of Tenneco and its consolidated
subsidiaries (the "Cash Realignment"). As of June 30,
1996, the total book value of Tenneco Energy
Consolidated Debt was $4,443 million, including
$3,734 million book value ($3,955 million principal
amount) of publicly held debt ("Tenneco Public
Debt").
Tenneco will be allocated (and thereby retain)
certain of the Tenneco Energy Consolidated Debt, as
so restructured pursuant to the Debt Realignment. A
post-Transaction audit will be conducted and if the
amount of Tenneco Energy Consolidated Debt (together
with the proceeds (which is currently expected to be
approximately $275 million) of the public offering of
one or more new series of junior preferred stock (the
11
<PAGE>
"Tenneco Junior Preferred Stock") issued by Tenneco
(the "NPS Issuance") prior to the Distributions) so
retained by Tenneco exceeds $2.65 billion (subject to
certain adjustments as more fully described in this
Information Statement), the Company will pay the
excess to Tenneco in cash, and conversely, if the
amount of Tenneco Energy Consolidated Debt (together
with the proceeds of the NPS Issuance) so retained by
Tenneco is less than $2.65 billion (subject to the
same adjustments), Tenneco will pay the difference to
the Company in cash.
As part of the Debt Realignment, the Company will
offer to exchange (the "Debt Exchange Offers") $1,950
million aggregate principal amount of new, publicly
traded debt securities of the Company ("Company
Public Debt") for an equal amount of Tenneco Public
Debt. The Company Public Debt will have similar
maturities, but higher interest rates than the
Tenneco Public Debt for which it is being exchanged.
Upon consummation of the Debt Exchange Offers,
Tenneco will purchase (and thereafter extinguish) the
Tenneco Public Debt held by the Company, and the
Company will then distribute such proceeds as a
dividend to Tenneco.
In addition, the Company will enter into a $1,750
million Revolving Credit Facility (the "Company
Credit Facility"). The Company will use the Company
Credit Facility primarily for working capital,
acquisitions and other general corporate purposes;
however, the Company may borrow funds under the
Company Credit Facility and declare and pay a
dividend to Tenneco of such amount in connection with
the Debt Realignment. See "The Industrial
Distribution--Debt and Cash Realignment."
Also as part of the Debt Realignment, Tenneco has
agreed with El Paso that Tenneco will make certain
minimum capital expenditures with respect to the
Energy Business pending consummation of the
Transaction. If the actual amount of such capital
expenditures exceeds the required amount, after
consummation of the Transaction Tenneco will be
required to pay the excess to the Company in cash.
Likewise, the Company will be required to pay to
Tenneco in cash the amount, if any, by which such
actual capital expenditures are less than the
required amount. The required amount of Energy
Business capital expenditures is equal to
$333,200,000 for 1996, plus $27,750,000 per month for
each month (or pro rata portion thereof) from January
1, 1997 to the Merger Effective Time.
Pursuant to the Cash Realignment, Tenneco will be
allocated $25 million of cash and cash equivalents,
Newport News will be allocated $5 million of cash and
cash equivalents and the Company will be allocated
all remaining cash and cash equivalents on hand as of
the Merger Effective Time, which would have totalled
approximately $200 million if the Transaction had
been consummated as of June 30, 1996. Following the
post-Transaction audit described above, the Company
will be required to pay to each of Tenneco or Newport
News, as the case may be, the amount by which such
company's total cash and cash equivalents on hand as
of the Merger Effective Time is less than the above-
described allocation to such company. Likewise,
Tenneco and Newport News will each be required to pay
to the Company the amount of any excess as of the
Merger Effective Time from the above-described
allocation.
See "The Industrial Distribution--Debt and Cash
Realignment."
12
<PAGE>
Relationships Among
Tenneco, the Company
and Newport News after
the Distributions......
Tenneco will have no stock ownership in the Company
upon consummation of the Industrial Distribution. The
Company, Newport News and Tenneco will enter into the
Distribution Agreement prior to the Industrial
Distribution for the purposes of governing certain
ongoing relationships among Tenneco, the Company and
Newport News after the Industrial Distribution and to
provide for an orderly transition in the
disaffiliation of the Industrial Business, the Energy
Business and the Shipbuilding Business. The
Distribution Agreement provides for, among other
things, the Distributions and the allocation among
the Company, Tenneco and Newport News of assets and
liabilities. The parties will also enter into the
Ancillary Agreements, including: (i) the Benefits
Agreement, providing for allocations of
responsibilities with respect to employee
compensation, benefits and labor matters; (ii) the
Tax Sharing Agreement pursuant to which Tenneco, the
Company and Newport News will allocate liabilities
for taxes arising prior to, as a result of, and
subsequent to the Distribution Date; (iii) the Debt
Realignment plan pursuant to which the Tenneco Energy
Consolidated Debt will be restructured, paid and/or
refinanced by Tenneco, the Company and Newport News;
(iv) the Debt and Cash Allocation Agreement,
providing for, among other things, the allocation of
cash among, and the restructuring and refinancing of
certain of the debt of Tenneco existing prior to the
Distributions by (or with funds provided by) the
Company, Tenneco and Newport News; (v) the TBS
Services Agreement, pursuant to which TBS will
continue to provide certain administrative and other
services to Tenneco and Newport News for a certain
period of time; (vi) the Tenneco Transition Trademark
License and the Shipbuilding Transition Trademark
License Agreement, which will allow Tenneco and
Newport News to use the trademark and tradenames of
the Company for certain specified periods of time for
certain purposes; and (vii) the Insurance Agreement,
providing for, among other things, coverage
arrangements for Tenneco, the Company and Newport
News in respect of various insurance policies. In
addition, pursuant to a Transition Services
Agreement, the Company may also provide certain
services to Tenneco and El Paso on a transitional
basis at prevailing market rates.
In addition, the Company and Newport News will share
one common director, Dana G. Mead, and the Company
and El Paso (which will be the parent of Tenneco)
will share one common director, Peter T. Flawn. The
Company, Newport News and El Paso will adopt policies
and procedures to be followed by the Board of
Directors of each company to limit the involvement of
Mr. Mead and Dr. Flawn in situations that could give
rise to potential conflicts of interest, including
requesting them to abstain from voting as a director
of either the Company or Newport News, with respect
to Mr. Mead, or either the Company or El Paso, with
respect to Dr. Flawn, on certain matters which
present a conflict of interest between the Company
and Newport News or El Paso, as the case might be.
The Company believes that such conflict situations
will be minimal.
See "The Industrial Distribution--Relationships Among
Tenneco, the Company and Newport News After the
Distributions."
13
<PAGE>
RECENT DEVELOPMENTS
On October 22, 1996, Tenneco announced consolidated earnings for the nine
months ended September 30, 1996. The Company's earnings, on a stand alone
basis, for the nine months ended September 30, 1996 and 1995, are summarized
below (amounts in millions).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues............................................... $ 4,886 $ 3,839
======== ========
Income before interest expense, income taxes and minor-
ity interest.......................................... $ 585 $ 551
Interest expense....................................... 145 113
Income tax expense..................................... 171 180
Minority interest...................................... 15 17
-------- --------
Net income............................................. $ 254 $ 241
======== ========
</TABLE>
Tenneco Automotive's revenues for the year to date period increased
approximately $360 million. Recent acquisitions contributed $136 million of the
increase while the remainder resulted primarily from volume increases. Tenneco
Packaging's revenues were $2,671 million for the first nine months of 1996
compared with $1,983 million in 1995. Lower price realizations in the
paperboard business were more than offset by revenues from recent acquisitions
of approximately $966 million.
Operating income for Tenneco Automotive for the first nine months of 1996 was
$245 million, an increase of $50 million from the same period in 1995. Of the
increase, approximately $21 million was due to recent acquisitions with the
remainder primarily due to volume increases. Tenneco Packaging reported
operating income of $341 million compared to $355 million in 1995. The lower
pricing realizations in the paperboard business were offset by operating income
of approximately $127 million from recent acquisitions and a $50 million gain
on the sale of two recycled paperboard mills and a recovered fiber recycling
and brokerage business to a joint venture.
Interest expense increased due to higher borrowings resulting from
acquisitions completed late in 1995 and during 1996.
14
<PAGE>
INTRODUCTION
This Information Statement is being furnished to stockholders of Tenneco in
connection with the Industrial Distribution pursuant to which Tenneco intends
to distribute to holders of Tenneco Common Stock all of the outstanding shares
of Company Common Stock. Concurrently, Tenneco will distribute to holders of
Tenneco Common Stock all of the outstanding shares of Newport News Common
Stock. The Distributions will occur prior to the consummation of the Merger
pursuant to which a subsidiary of El Paso will merge with and into Tenneco
(which will, upon consummation of the Merger, be renamed El Paso Tennessee
Pipeline Co.) and whereby Tenneco will become a subsidiary of El Paso.
It is expected that the Distribution Date of the Industrial Distribution
will be on or about December 11, 1996 to holders of record of Tenneco Common
Stock on December 11, 1996 (the "Distribution Record Date") on the basis of
one share of Company Common Stock for each share of Tenneco Common Stock held
of record. In addition, prior to the Industrial Distribution the Company Board
will adopt a stockholder rights plan and cause to be issued, with each share
of Company Common Stock to be distributed in the Industrial Distribution, one
Right, entitling the holder thereof to, among other things, purchase under
certain circumstances, and as described more fully herein, one one-hundredth
of a share of Company Junior Preferred Stock. No consideration will be
required to be paid by holders of Tenneco Common Stock for the shares of
Company Common Stock to be distributed in the Industrial Distribution or the
Rights associated therewith, nor will holders of Tenneco Common Stock be
required to surrender or exchange their shares of Tenneco Common Stock in
order to receive such shares of Company Common Stock and the Rights associated
therewith.
Upon consummation of the Distributions and the Merger (i) holders of Tenneco
Common Stock as of the Distribution Record Date and Merger Effective Time will
receive the securities of three publicly held companies--the Company, Newport
News and El Paso and (ii) holders of Tenneco Preferred Stock (as defined
herein) as of the Merger Effective Time will receive El Paso Common Stock.
Immediately thereafter, the Company will own and operate the Industrial
Business, Newport News will own and operate the Shipbuilding Business and El
Paso will own and operate the Energy Business.
The Industrial Distribution, the Shipbuilding Distribution and the Merger
are separate components of the Transaction. However, the Industrial
Distribution, the Shipbuilding Distribution and the Merger as described herein
will not be consummated unless the Transaction as a whole is approved at a
special meeting of the Tenneco stockholders (although Tenneco may elect
subsequently to proceed with one or more of the transactions included in the
Transaction which do not require stockholder approval if the Transaction is
not approved by Tenneco stockholders). Furthermore, the Industrial
Distribution will not be consummated until all other conditions to the Merger
have been satisfied (or can be contemporaneously satisfied) other than the
filing of a Certificate of Merger with the Secretary of State of Delaware. See
"The Industrial Distribution--Conditions to Consummation of the Industrial
Distribution" and "The Industrial Distribution--Amendment or Termination of
the Distributions."
Stockholders of Tenneco with inquiries relating to the Industrial
Distribution should contact the Distribution Agent at (800) 446-2617, or
Tenneco Inc., Shareholders Services, 1275 King Street, Greenwich, Connecticut
06831; telephone: (203) 863-1170.
15
<PAGE>
THE INDUSTRIAL DISTRIBUTION
The following descriptions of certain provisions of the Distribution
Agreement and certain of the Ancillary Agreements are only summaries and do
not purport to be complete. These descriptions are qualified in their entirety
by reference to the complete text of the Distribution Agreement and the
Ancillary Agreements. A copy of the Distribution Agreement and each of the
Ancillary Agreements as currently agreed to is included as an exhibit to the
Company's Registration Statement on Form 10 under the Exchange Act relating to
Company Common Stock, and the following discussion with respect to such
agreements is qualified in its entirety by reference to the subject agreement
as filed.
MANNER OF DISTRIBUTION
Pursuant to the Distribution Agreement, the Tenneco Board will declare the
special distribution necessary to effect the Industrial Distribution and will
set the Distribution Record Date and the Distribution Date (which will be
prior to the Merger Effective Time). Subject to the conditions summarized
below, on the Distribution Date Tenneco will distribute, pro rata to all
holders of record of Tenneco Common Stock as of the Distribution Record Date,
one share of Company Common Stock for each share of Tenneco Common Stock so
held (including the Right associated therewith). Pursuant to the Distribution
Agreement as soon as practicable on or after the Distribution Date, Tenneco
will deliver to the Distribution Agent, as agent for holders of Tenneco Common
Stock as of the Distribution Record Date, certificates representing such
shares of Company Common Stock as are required for the Industrial
Distribution.
If any shares of Company Common Stock are returned to the Distribution Agent
as unclaimed or cannot be distributed by the Distribution Agent, any post-
Distribution dividends or distributions thereon will be paid to the
Distribution Agent (or set aside and retained by the Company). On the 180th
day following the Distribution Date, the Distribution Agent will return to
Tenneco all unclaimed shares of Company Common Stock and dividends or other
distributions with respect thereto. Thereafter, holders of Tenneco Common
Stock as of the Distribution Date will be entitled to look only to Tenneco for
such amounts to which they are entitled, subject to applicable escheat or
other abandoned property laws.
NO HOLDER OF TENNECO COMMON STOCK WILL BE REQUIRED TO PAY CASH OR OTHER
CONSIDERATION FOR THE SHARES OF COMPANY COMMON STOCK TO BE RECEIVED IN THE
INDUSTRIAL DISTRIBUTION, OR TO SURRENDER OR EXCHANGE SHARES OF TENNECO COMMON
STOCK IN ORDER TO RECEIVE COMPANY COMMON STOCK.
CORPORATE RESTRUCTURING TRANSACTIONS
Prior to consummation of the Distributions (and pursuant to the Distribution
Agreement), Tenneco will effect the Corporate Restructuring Transactions. Upon
completion of the Corporate Restructuring Transactions, Tenneco's existing
businesses and assets will be restructured so that, in general, substantially
all of the assets, liabilities and operations of (i) the Industrial Business
will be owned and operated, directly or indirectly, by the Company and (ii)
the Shipbuilding Business will be owned and operated, directly or indirectly,
by Newport News. The remaining assets, liabilities and operations of Tenneco
and its remaining subsidiaries will then consist solely of those related to
the Energy Business, which includes liabilities and assets relating to
discontinued Tenneco operations not related to the Industrial Business or the
Shipbuilding Business.
The assets which will be owned by the Company upon consummation of the
Corporate Restructuring Transactions (the "Industrial Assets") are generally
those related to the conduct of the past and current Industrial Business, as
reflected on the Unaudited Pro Forma Combined Balance Sheet of the Company as
of June 30, 1996 included herein under "Unaudited Pro Forma Combined Financial
Statements" which is also attached as an exhibit to the Distribution Agreement
(the "Pro Forma Balance Sheet") (plus any subsequently acquired asset which is
of a nature or type that would have resulted in such asset being included on
the Pro Forma Balance Sheet had it been acquired prior to the date thereof),
plus all rights expressly allocated to the Company and its subsidiaries under
the Distribution Agreement or any of the Ancillary Agreements. As part of the
Corporate Restructuring Transactions, the Company will acquire various
corporate assets of Tenneco such as the "Tenneco" trademark and associated
rights. The assets which will be owned by Newport News (the "Shipbuilding
Assets") upon consummation of the Corporate Restructuring Transactions are
generally those related to the conduct of the past and current Shipbuilding
Business, as reflected on the Newport News pro forma
16
<PAGE>
balance sheet attached as an exhibit to the Distribution Agreement (plus any
subsequently acquired asset which is of a nature or type that would have
resulted in such asset being included thereon had it been acquired prior to
the date thereof), plus all rights expressly allocated to Newport News and its
subsidiaries under the Distribution Agreement or any Ancillary Agreement. The
remaining assets (the "Energy Assets") will continue to be owned and operated
by Tenneco (as a subsidiary of El Paso) following the Transaction.
The liabilities to be retained or to be assumed by the Company and for which
the Company will be responsible pursuant to the Distribution Agreement (the
"Industrial Liabilities") generally include (i) those liabilities related to
the Industrial Assets and the current and past conduct of the Industrial
Business, including liabilities reflected on the Pro Forma Balance Sheet which
remain outstanding as of the Distribution Date (plus subsequently incurred or
accrued liabilities determined on a basis consistent with the determination of
liabilities thereon), (ii) certain liabilities for possible violations of
securities laws in connection with the Transaction and (iii) those liabilities
expressly allocated to the Company or its subsidiaries under the Distribution
Agreement or any Ancillary Agreement.
The liabilities to be retained or assumed by Newport News and for which
Newport News will be responsible pursuant to the Distribution Agreement (the
"Shipbuilding Liabilities") generally include (i) those liabilities related to
the Shipbuilding Assets and the current and past conduct of the Shipbuilding
Business, including liabilities reflected on the aforementioned Newport News
pro forma balance sheet which remain outstanding as of the Distribution Date
(plus subsequently incurred or accrued liabilities determined on a basis
consistent with the determination of liabilities thereon), (ii) certain
liabilities for possible violations of securities laws in connection with the
Transaction and (iii) those liabilities expressly allocated to Newport News or
its subsidiaries under the Distribution Agreement or any Ancillary Agreement.
The liabilities to be retained or assumed by Tenneco and for which Tenneco
will be responsible pursuant to the Distribution Agreement (the "Energy
Liabilities") generally include (i) those liabilities related to the Energy
Assets and the current and past conduct of the Energy Business, including
liabilities reflected on the Tenneco pro forma balance sheet attached as an
exhibit to the Distribution Agreement which remain outstanding as of the
Distribution Date (plus subsequently incurred or accrued liabilities
determined on a basis consistent with the determination of liabilities
thereon), (ii) those liabilities expressly allocated to Tenneco or its
subsidiaries under the Distribution Agreement or any Ancillary Agreement and
(iii) all other liabilities of Tenneco or any other member of the Energy Group
which do not constitute Industrial Liabilities or Shipbuilding Liabilities.
In connection with the Corporate Restructuring Transactions, the Company
expects to obtain all consents relating to its material contracts necessary to
effect the Transaction.
For a description of certain liabilities that will be expressly allocated
among Tenneco, the Company and Newport News by the Distribution Agreement and
Ancillary Agreements, including liability for the Tenneco Consolidated Debt,
taxes and certain employee benefits, see "--Debt and Cash Realignment" and "--
Relationships Among Tenneco, the Company and Newport News After the
Distributions."
DEBT AND CASH REALIGNMENT
From and after the Distributions, each of Tenneco, the Company and Newport
News will, in general, be responsible for the debts, liabilities and
obligations related to the business or businesses that it owns and operates
following consummation of the Corporate Restructuring Transactions. See "--
Corporate Restructuring Transactions." However, Tenneco's historical practice
has been to incur indebtedness for its consolidated group at the parent
company level or at a limited number of subsidiaries, rather than at the
operating company level, and to centrally manage various cash functions.
Accordingly, the Merger Agreement, the Distribution Agreement and the
Ancillary Agreements provide for (i) the pre-Distribution restructuring of the
Tenneco Energy Consolidated Debt pursuant to the Debt Realignment, (ii) the
allocation among each of Tenneco, the Company and Newport News of the total
amount of the cash and cash equivalents on hand as of the Merger Effective
Time pursuant to the Cash Realignment and (iii) settlement payments with
respect to certain capital expenditures related to the Energy Business, all as
described below.
The Debt Realignment is intended to facilitate the disaffiliation of the
Industrial Business, the Energy Business and the Shipbuilding Business in
connection with the Distributions and to facilitate the Merger.
17
<PAGE>
Additionally, the Debt Realignment is intended to reduce the total amount of
the Tenneco Energy Consolidated Debt to an amount that, when added to certain
other liabilities and obligations of Tenneco outstanding as of the Merger
Effective Time (the "Actual Energy Debt Amount"), equals $2.65 billion, less
the proceeds of the NPS Issuance and subject to certain other specified
adjustments (the "Base Amount"). As of June 30, 1996, the total book value of
Tenneco Energy Consolidated Debt was $4,443 million, including $3,734 million
book value ($3,955 million principal amount) of Tenneco Public Debt. The Debt
and Cash Allocation Agreement to be entered into among the Company, Tenneco
and Newport News (the "Debt and Cash Allocation Agreement") contemplates that,
as of the Merger Effective Time, the Actual Energy Debt Amount be limited to
the Base Amount. The "Base Amount" will equal $2.65 billion less the proceeds
to Tenneco from the sale of Tenneco Junior Preferred Stock issued pursuant to
the NPS Issuance plus (i) the sum of (a) the amount of all cash payments made
by Tenneco and any of its subsidiaries after the date of the Merger Agreement
to the Merger Effective Time with respect to Tenneco gas purchase contracts as
a result or in respect of any settlement, judgment or satisfaction of a bond
in excess of the market price for gas received by Tenneco and/or any of its
subsidiaries reduced by the amount of any cash payments received by Tenneco
and its subsidiaries from customers, insurers or other third parties with
respect thereto (other than ones refunded prior to the Merger Effective Time)
or with respect to any gas supply realignment costs which are so recovered
(and not refunded) on or prior to the Merger Effective Time, (b) the amount of
any purchase price paid by Tenneco or its subsidiaries to acquire an
additional interest in certain pipeline operations prior to the Merger
Effective Time and (c) the amount of all cash payments made from the date of
the Merger Agreement to the Merger Effective Time by any member of the Energy
Business in settlement of any significant claim, action, suit or proceeding to
the extent such matter would be an Energy Liability with the consent of El
Paso (less the amount of related recoveries in respect thereof from third
parties), and less (ii) the amount, calculated as of the Merger Effective
Time, of any rate refunds, including interest, which become payable to
customers pursuant to the finally approved settlement of a certain gas rate
case which have not been paid as of the Merger Effective Time. The Actual
Energy Debt Amount is defined by the Debt and Cash Allocation Agreement to
consist of (1) outstanding amounts of borrowings by Tenneco under a new credit
facility to be entered into by Tenneco in connection with the Transaction
(plus accrued and accreted interest and fees), (2) the value of remaining
Tenneco Public Debt after the Tenneco Debt Tender Offers (as defined below)
and the Debt Exchange Offers, (3) the outstanding amount of other Tenneco
Energy Consolidated Debt (plus accrued and accreted interest and fees), (4)
the unpaid amount of Transaction expenses incurred by Tenneco and its
subsidiaries, (5) any sales and use, gross receipt or other transfer taxes
applicable to the Transaction, (6) certain income taxes resulting from the
Transaction, (7) the outstanding amount of any off-balance sheet indebtedness
incurred after the date of the Merger Agreement to finance the acquisition by
Tenneco of an additional interest in the aforesaid pipeline assets and
(8) unpaid dividends on Tenneco Common Stock and Tenneco Preferred Stock (as
defined herein) which have a record date before the Merger Effective Time.
A post-Transaction audit will be conducted and if the Actual Energy Debt
Amount as of the Merger Effective Time exceeds the Base Amount, the Company
will be required to pay the excess to Tenneco in cash. Likewise, Tenneco will
be required to pay to the Company in cash the amount, if any, by which such
Actual Energy Debt Amount is less than the Base Amount.
The Debt Realignment is expected to create tax benefits to Tenneco of
approximately $120 million. Pursuant to the tax sharing agreement to be
entered into by Tenneco, the Company and Newport News in connection with the
Distribution, any such tax benefits will be allocated to the Company. For a
description of this tax sharing arrangement, see "The Industrial
Distribution--Relationships Among Tenneco, the Company and Newport News After
the Distributions--Tax Sharing Agreement."
Also as part of the Debt Realignment, Tenneco has agreed to make certain
minimum capital expenditures with respect to the Energy Business pending
consummation of the Transaction. If the actual amount of such capital
expenditures exceeds the required amount, after consummation of the
Transaction, Tenneco will be required to pay the excess to the Company in
cash. Likewise, the Company will be required to pay to Tenneco in cash the
amount, if any, by which such actual capital expenditures are less than the
required amount. The required amount of Energy Business capital expenditures
is equal to $333,200,000 for 1996, plus $27,750,000 per month for each month
(or pro rata portion thereof) from January 1, 1997 to the Merger Effective
Time.
18
<PAGE>
Pursuant to the Cash Realignment, as of the Merger Effective Time Tenneco
will be allocated $25 million of cash and cash equivalents, Newport News will
be allocated $5 million of cash and cash equivalents and the Company will be
allocated all remaining cash and cash equivalents on hand which would total
approximately $200 million if the Transaction had been consummated as of June
30, 1996. Following the post-Transaction audit described above, the Company
will be required to pay to each of Tenneco or Newport News, as the case may
be, the amount by which such company's total cash and cash equivalents on hand
as of the Merger Effective Time is less than the above-described allocation to
such company, as the case may be. Likewise, Tenneco and Newport News will each
be required to pay to the Company the amount of any excess cash and cash
equivalents as of the Merger Effective Time from the above-described
allocation determined pursuant to such audit.
The Merger Agreement contemplates that Tenneco, in its discretion, will, or
will cause its relevant subsidiaries to, (i) defease or let mature
approximately $428 million of Tenneco Public Debt and (ii) offer to purchase
for cash approximately $1,580 million of aggregate principal amount of Tenneco
Public Debt prior to the Distributions (the "Tenneco Debt Tender Offers"). As
of June 30, 1996, there was outstanding approximately $4,443 million in net
book value of Tenneco Energy Consolidated Debt. The defeasences and Tenneco
Debt Tender Offers described above, as well as the retirement of existing
short-term and certain non-public debt, will be financed by internally
generated cash, borrowings by Tenneco under a new credit facility to be
entered into by Tenneco in connection with the Transaction, the net proceeds
received by Tenneco from the NPS Issuance, the sale of certain Tenneco Credit
Corporation receivables and a cash dividend of $600 million to be paid by
Newport News to Tenneco or one or more of its subsidiaries principally using
borrowings under one or more credit facilities and/or financings to be entered
into by Newport News in connection with the Transaction. The balance of the
funding will be financed by a cash dividend to be paid by the Company to
Tenneco principally using borrowings under the $1,750 million Company Credit
Facility. See "Financing."
Also in connection with the Debt Realignment, the Company will offer to
exchange up to $1,950 million of aggregate principal amount of Company Public
Debt for an equal amount of Tenneco Public Debt pursuant to the Debt Exchange
Offers. The Company Public Debt will have similar maturities, but higher
interest rates than the Tenneco Public Debt for which it is being exchanged.
Upon consummation of the Debt Exchange Offer, Tenneco will purchase for cash
(and thereafter extinguish) the Tenneco Public Debt held by the Company, and
the Company will then distribute such proceeds as a dividend to Tenneco.
Assuming all of the Tenneco Public Debt subject to the Debt Exchange Offers is
tendered and accepted for exchange, the Company will have $1,950 million
aggregate principal amount of Company Public Debt outstanding bearing interest
at a weighted average of approximately 8.38% and with a weighted average
maturity of approximately 11 years.
Concurrently with the Debt Exchange Offer, the Company will solicit consents
from the holders of the Tenneco Public Debt to certain amendments to the
indenture governing such Tenneco Public Debt which would specifically permit
Tenneco to consummate the Distributions and the transactions contemplated
thereby without compliance with a covenant that, if held to apply, might
otherwise require each of the Company and Newport News to become a co-obligor
of the Tenneco Public Debt issued under such indenture in connection therewith
(the application of which the Company and Tenneco believe, in any event, is
uncertain in these circumstances).
Consummation of the Debt Exchange Offers is conditioned on, among other
things, acceptance of the Debt Exchange Offers and the Tenneco Debt Tender
Offers by holders of at least a majority of the aggregate principal amount of
the Tenneco Public Debt of all series taken together such that the necessary
amendments to the relevant indenture have been approved.
The offering of the Company Public Debt in the Debt Exchange Offers will be
made by means of a separate prospectus that constitutes a part of the
Company's Registration Statement on Form S-4 (File No. 333-14003) which has
been filed with the SEC.
If the Debt Realignment and the acquisitions of Clevite and Amoco Foam
Products had been consummated on June 30, 1996, on a pro forma basis the
Company would have had total indebtedness for money borrowed of approximately
$2,145 million. See "Unaudited Pro Forma Consolidated Financial Statements."
19
<PAGE>
RELATIONSHIPS AMONG TENNECO, THE COMPANY AND NEWPORT NEWS AFTER THE
DISTRIBUTIONS
The businesses to be owned and operated by the Company following
consummation of the Industrial Distribution have historically been included in
Tenneco's consolidated financial results. After the Transaction, neither the
Company, Tenneco nor Newport News will have an ownership in the others. The
Company and Newport News will be independent, publicly held companies, while
Tenneco will become a subsidiary of El Paso.
Prior to the Distributions Tenneco, the Company and Newport News will enter
into the Distribution Agreement which governs certain aspects of their
relationships both prior to and following the Distributions. In addition,
prior to the Distributions, Tenneco, the Company and/or Newport News (and
their appropriate subsidiaries) will enter into the Ancillary Agreements which
are intended to further effect the disaffiliation of the Energy Business, the
Industrial Business and the Shipbuilding Business and to govern certain
additional aspects of their ongoing relationships.
Terms of the Distribution Agreement
In addition to providing for the terms of the Distributions and the various
actions to be taken prior to the Distributions, the Distribution Agreement
contains other provisions governing the relationship among Tenneco, the
Company and Newport News prior to and following the Distributions.
The Distribution Agreement provides that from and after the Distribution
Date (i) Tenneco will (and will cause the other members of the Energy Business
to) assume, pay, perform and discharge all Energy Liabilities in accordance
with their terms, (ii) the Company will (and will cause the other members of
the Industrial Business to) assume, pay, perform and discharge all of the
Industrial Liabilities in accordance with their terms and (iii) Newport News
will (and will cause the other members of the Shipbuilding Business to)
assume, pay, perform and discharge all Shipbuilding Liabilities in accordance
with their terms.
In addition, the Distribution Agreement provides for cross-indemnities such
that (i) Tenneco must indemnify the Company and Newport News (and their
respective subsidiaries, their directors, officers, agents and employees, and
certain other related parties) against all losses arising out of or in
connection with the Energy Liabilities or the breach of the Distribution
Agreement or any Ancillary Agreement by Tenneco, (ii) the Company must
indemnify Tenneco and Newport News (and their respective subsidiaries, their
directors, officers, agents and employees, and certain other related parties)
against all losses arising out of or in connection with the Industrial
Liabilities or the breach of the Distribution Agreement or any Ancillary
Agreement by the Company and (iii) Newport News must indemnify Tenneco and the
Company (and their respective subsidiaries, their directors, officers, agents
and employees, and certain other related parties) against all losses arising
out of or in connection with the Shipbuilding Liabilities or the breach of the
Distribution Agreement or any Ancillary Agreement by Newport News.
Notwithstanding the foregoing cross-indemnification provisions, the Company
and Newport News have agreed to certain other arrangements with respect to
certain inquiries from the Defense Contract Audit Agency (the "DCAA")
concerning the disposition of the Tenneco Inc. Retirement Plan (the "Tenneco
Retirement Plan"), which covers salaried employees of Newport News and other
Tenneco divisions. The DCAA has been advised that (i) the Tenneco Retirement
Plan will retain the liability for all benefits accrued by Newport News'
employees through the Distribution Date, (ii) Newport News' employees will not
accrue additional benefits under the Tenneco Retirement Plan after the
Distribution Date and (iii) no liabilities or assets of the Tenneco Retirement
Plan will be transferred from the Tenneco Retirement Plan to any plan
maintained by Newport News. A determination of the ratio of assets to
liabilities of the Tenneco Retirement Plan attributable to Newport News will
be based on facts, assumptions and legal issues which are complicated and
uncertain; however, it is likely that the Government will assert a claim
against Newport News and/or the Company with respect to the amount, if any, by
which the assets of the Tenneco Retirement Plan attributable to Newport News'
employees are alleged to exceed the liabilities. The Company, with the full
cooperation of Newport News, will defend against any claim
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by the Government and, in the event there nevertheless is a determination that
an amount with respect to this matter is due to the Government, the Company
and Newport News will share the obligation for such amount and related defense
expenses in the ratio of 80% and 20%, respectively. Although at this
preliminary stage it is impossible to predict with certainty any eventual
outcome regarding this matter, the Company does not believe that this matter
will have a material adverse effect on its financial condition or results of
operations.
Pursuant to the Distribution Agreement, each of the parties has agreed to
use all reasonable efforts to take or cause to be taken all action, and do or
cause to be done all things, reasonably necessary, proper or advisable to
consummate the transactions contemplated by and carry out the purposes of the
Distribution Agreement. As such, the Distribution Agreement provides that if
any contemplated pre-Distribution transfers and assignments have not been
effected on or prior to the Distribution Date, the parties will cooperate to
effect such transfers as quickly thereafter as practicable. The entity
retaining any asset or liability which should have been transferred prior to
the Distribution Date will continue to hold that asset for the benefit of the
party entitled thereto or that liability for the account of the party required
to assume it, and must take such other action as may be reasonably requested
by the party to whom such asset was to be transferred or by whom such
liability was to be assumed in order to place such party, insofar as
reasonably possible, in the same position as would have existed had such asset
or liability been transferred or assumed as contemplated by the Distribution
Agreement.
The Distribution Agreement provides for the transfer of books and records
among Tenneco, the Company and Newport News and their respective subsidiaries
and grants to each party access to certain information in the possession of
the others (subject to certain confidentiality requirements). In addition, the
Distribution Agreement provides for the allocation of shared privileges with
respect to certain information and requires each party to obtain the consent
of the others prior to waiving any shared privilege.
Terms of the Ancillary Agreements
Below are descriptions of the principal Ancillary Agreements to be entered
into by Tenneco, the Company and/or Newport News (and, in certain
circumstances, their appropriate subsidiaries) prior to consummation of the
Distributions, as required under the terms of the Distribution Agreement. The
Ancillary Agreements are intended to further effectuate the disaffiliation of
the Industrial Business and the Shipbuilding Business from the Energy Business
and to facilitate the operation of each of Tenneco, the Company and Newport
News as a separate entity.
Benefits Agreement. The Benefits Agreement to be entered into among Tenneco,
the Company and Newport News (the "Benefits Agreement") will define certain
labor, employment, compensation and benefit matters in connection with the
Distributions and the transactions contemplated thereby. Pursuant to the
Benefits Agreement, from and after the Distribution Date, each of Tenneco, the
Company and Newport News will continue employment of each of their respective
retained employees (subject to their rights to terminate said employees) with
the same compensation as prior to the Distribution Date, continue to honor all
related existing collective bargaining agreements, recognize related incumbent
labor organizations and continue sponsorship of hourly employee benefit plans.
The Company will become the sole sponsor of the Tenneco Retirement Plan and of
the Tenneco Inc. Thrift Plan (the "Tenneco Thrift Plan") from and after the
Distribution Date, and Tenneco and Newport News will establish defined
contribution plans for the benefit of each of their respective employees to
which the account balances of retained and former employees of Tenneco and
Newport News in the Tenneco Thrift Plan will be transferred. The benefits
accrued by Tenneco and Newport News employees in the Tenneco Retirement Plan
will be frozen as of the last day of the calendar month including the
Distribution Date, and the Company will amend the Tenneco Retirement Plan to
provide that all benefits accrued through that day by Tenneco and Newport News
employees are fully vested and non-forfeitable. Tenneco will retain and assume
employment contracts with certain individuals related to the Energy Business.
All liabilities under the Tenneco Inc. Benefit Equalization Plan and the
Supplemental Executive Retirement Plan will be assumed by the Company pursuant
to the Benefits Agreement; however, the Company is entitled to reimbursement
for certain payments thereunder from Tenneco and Newport News. Generally, each
of Tenneco, the Company and Newport News will retain liabilities with respect
to the welfare benefits of its current and former employees and their
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dependents, but Tenneco will assume all liabilities for retiree medical
benefits of the employees of discontinued operations and their dependents. In
addition, as of the Distribution Date, participation by retained and former
employees of Tenneco and Newport News in the Tenneco Inc. Deferred
Compensation Plan and the Tenneco Inc. 1993 Deferred Compensation Plan will be
discontinued. See "Management."
Debt and Cash Allocation Agreement. The Debt and Cash Allocation Agreement
will govern the allocation among the parties of cash and cash equivalents of
Tenneco and its subsidiaries on hand as of the Merger Effective Time, the
Tenneco Consolidated Debt and settlement payments with respect to certain
capital expenditures related to the Energy Business pursuant to the Cash
Realignment and Debt Realignment, as described above. See "--Debt and Cash
Realignment."
Insurance Agreement. Tenneco has historically maintained at the parent-
company level various insurance policies for the benefit or protection of
itself and its subsidiaries. The Insurance Agreement to be entered into among
Tenneco, the Company and Newport News (the "Insurance Agreement") will provide
for the respective continuing rights and obligations from and after the
Distribution Date of the parties with respect to these insurance policies
other than directors' and officers' liability insurance policies (which are
addressed by the Merger Agreement).
In general, following consummation of the Transaction policies which relate
exclusively to the Energy Business will be retained by and be the sole
responsibility of Tenneco, policies which relate exclusively to the Industrial
Business will be retained by the Company and policies which relate exclusively
to the Shipbuilding Business will be retained by Newport News.
Pursuant to the Insurance Agreement, any non-exclusive Tenneco policies
which are in effect as of the Distribution Date (other than those which are
cost plus, fronting, high deductible or retrospective premium programs, as
described below) will either be transferred into the name of the Company or
cancelled, at the Company's option. In general, "go-forward" coverage under
these policies for the Energy Business and Shipbuilding Business (and certain
related persons) will be terminated as follows: (i) coverage under "claims-
made" policies (i.e., those policies which provide coverage for claims made
during a specified period) will be terminated on the Distribution Date for any
claims not made prior thereto and (ii) coverage under "occurrence-based"
policies (i.e., those policies which provide coverage for acts or omissions
occurring during a specified period) will be terminated on the Distribution
Date for acts or omissions occurring thereafter. However, the Energy Business,
Industrial Business and Shipbuilding Business (and certain related persons)
will all continue to have access to these policies ("go-backward" coverage)
for claims made prior to the Distribution Date, in the case of claims-made
policies, and for acts or omissions which occurred prior to the Distribution
Date, in the case of occurrence-based policies (subject to certain obligations
to replace any policy limits exhausted by it). Each respective group will be
liable for premiums, costs and charges under these policies that relate to its
coverage thereunder (and will likewise get the benefit of any refunded
amounts).
Pursuant to the Insurance Agreement, policies which are cost plus, fronting,
high deductible or retrospective premium programs will be retained by the
Energy Business following the Distributions and will provide no go-forward
coverage to the Industrial Business or Shipbuilding Business. However, go-
backward coverage will continue to be available to these groups, subject to an
obligation to reimburse Tenneco for premiums, costs and charges under these
policies related to their respective coverages following the Distributions.
Following the Transaction, Tenneco will be required to maintain in place
certain letters of credit and surety bonds securing obligations under these
policies.
Tax Sharing Agreement. The Tax Sharing Agreement to be entered into among
Tenneco, the Company, Newport News and El Paso (the "Tax Sharing Agreement")
will provide for the allocation of tax liabilities among the parties arising
prior to, as a result of, and subsequent to the Distributions. As a general
rule, Tenneco will be liable for all taxes not specifically allocated to the
Company or Newport News under the specific terms of the Tax Sharing Agreement.
Generally, the Company will be liable for taxes imposed exclusively on the
Company and its affiliates engaged in the Industrial Business (the "Industrial
Group"), and Newport News will
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be liable for taxes imposed exclusively on Newport News and its affiliates
engaged in the Shipbuilding Business (the "Shipbuilding Group") (including for
pre-Transaction periods, taxes imposed on Newport News). In the case of
federal income taxes imposed on the combined activities of Tenneco, the
Industrial Group and the Shipbuilding Group, each of the Company and Newport
News will be liable to Tenneco for federal income taxes attributable to their
activities, and each will be allocated an agreed-upon share of estimated tax
payments made by the Tenneco consolidated group, except that (i) tax benefits
attributable to the Debt Realignment ("Debt Discharge Items"), presently
anticipated to total approximately $120 million, will be specifically
allocated to the Industrial Group and Tenneco will make a cash payment to the
Company equal to the amount of such tax benefits when and to the extent
realized by Tenneco and (ii) tax benefits attributable to certain items
included in the Base Amount ("Base Amount Adjustment Items") will be
specifically allocated to Tenneco. The Company will also be responsible for
tax items attributable to certain discontinued operations of Tenneco to the
extent that such items exceed forecasted amounts by more than a specified
amount. In the case of state income taxes imposed on the combined activities
of the business groups, Tenneco will be responsible for payment of the
combined tax to the state tax authority, and the Company and Newport News will
pay Tenneco a deemed tax equal to the tax that would be imposed if the
Industrial Group and the Shipbuilding Group had filed combined returns for
their respective groups, except that Debt Discharge Items and Base Amount
Adjustment Items will be specifically allocated to the Company and Tenneco,
respectively.
In general, and except as provided below, Tenneco will be responsible for
any taxes imposed on or resulting from the Transaction ("Transaction Taxes").
The Company will be responsible for any Transaction Taxes resulting from any
inaccuracy in factual statements or representations in connection with the IRS
Ruling Letter or the opinion of counsel contemplated by the Merger Agreement
(the "Tax Opinion") to the extent attributable to facts in existence prior to
the Merger, but excluding facts relating to the Shipbuilding Group or El Paso.
Newport News and El Paso will each be responsible for the accuracy of any
factual statements or representations relating to them or their respective
affiliates. Each of the Company, Newport News and El Paso will be responsible
for any Transaction Tax to the extent such tax is attributable to action taken
by that entity which is inconsistent with tax treatment contemplated in the
IRS Ruling Letter received in the Transaction or the Tax Opinion. Certain
Transaction Taxes (i.e., transfer taxes, and federal and state income taxes
imposed on those Corporate Restructuring Transactions which are known to be
taxable) are included in the determination of the Actual Energy Debt Amount
and consequently may be economically borne by the Company (because the Company
must pay to Tenneco in cash the amount, if any, by which the Actual Energy
Debt Amount exceeds the Base Amount). If between the date of the Merger
Agreement and the Merger Effective Time, there is a change in law (as defined
in the Tax Sharing Agreement) and as a result of such change in law Tenneco is
required to restore certain deferred gains to income, then any resulting tax
will be shared equally between the Company and Tenneco.
Transition Services Agreement. TBS currently provides certain administrative
and other services to Tenneco, including mainframe computing services, backup,
recovery and related operations, consulting services and payroll services.
Under the Transition Services Agreement to be entered into among Tenneco, TBS
and El Paso (the "Transition Services Agreement"), at the request of El Paso
at least 45 days prior to the Merger Effective Time, TBS (which will,
following the Distributions, be a subsidiary of the Company) will continue to
provide the services specified in El Paso's request for a period of 12 months
from the Merger Effective Time at a price to be negotiated among the parties
and based on the market rate for comparable services. If elected, any or all
of the services may be terminated by Tenneco on 45 days notice to TBS.
TBS Services Agreement. TBS will enter into a series of separate services
agreements (the "Service Agreements"), as described below, with Newport News
and the Company (and its subsidiaries other than TBS), which together will
constitute the "TBS Services Agreement" which is to be delivered as an
"Ancillary Agreement" under the Distribution Agreement.
One of the Service Agreements between TBS and Newport News will be for
mainframe data processing services (the "NNS Processing Services Agreement").
Under the NNS Processing Services Agreement, TBS will supply, as a vendor,
mainframe data processing services to Newport News for a period from the
Merger
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Effective Time through December 31, 1998, and thereafter only by mutual
agreement. The rate of compensation to TBS for services will be $9.1 million
in 1997 and $9.6 million in 1998, payable in monthly installments, subject to
adjustment if Newport News requests a change in the scope of services. TBS
will lease the space currently used by it at the Newport News headquarters in
Newport News, Virginia for the period from the Merger Effective Time through
December 31, 1998, with an option for TBS to extend for one month periods for
up to 12 months, for continued use by TBS as its mainframe data processing
facility. The rent under such lease will be approximately $1.2 million per
year plus pass-throughs of certain occupancy-related costs.
TBS has also entered into a Supplier Participation Agreement (the "NNS
Supplier Participation Agreement") with Newport News to govern the procedures
under which Newport News will continue to participate with the Company in
vendor purchase agreements between TBS and various suppliers of goods and
services. The NNS Supplier Participation Agreement will provide for continued
participation of Newport News in various purchase programs, absent a
termination for cause, for the full existing terms of the agreements with each
such vendor. Under this Agreement, as is the case currently, purchases of
goods and services will be made directly by Newport News at prices negotiated
by TBS which are applicable to all participating purchasers. TBS will charge
Newport News a fixed fee of $5,000 per month for TBS contract administration
services including data collection, negotiations, progress reporting, benefits
reporting, follow-up and consulting in connection with the vendor agreements.
Additionally, as described above, a separate Service Agreement may also be
entered into with Tenneco for transitional services to be supplied by TBS to
Tenneco and its subsidiaries. The services covered and the compensation for
such services would depend on the services elected by Tenneco, and
negotiations among the parties pursuant to the Transition Services Agreement.
Trademark Transition License Agreements. Upon consummation of the Corporate
Restructuring Transactions, the Company will hold the rights to various
trademarks, servicemarks, tradenames and similar intellectual property,
including rights in the marks "Tenneco," "Ten" and "Tenn" (but not
"Tennessee"), alone and in combination with other terms and/or symbols and
variations thereof (collectively, the "Trademarks"), in the United States and
elsewhere throughout the world. In connection with the Distributions,
Trademark Transition License Agreements will be entered into as of the
Distribution Date between both (i) the Company and Tenneco and (ii) the
Company and Newport News. Pursuant to these agreements the Company will grant
to each of Tenneco and Newport News a limited, non-exclusive, royalty-free
license to use the Trademarks with respect to specified goods and services as
follows: (a) Tenneco and Newport News will be permitted to use the Trademarks
in their corporate names for 30 days after the date of the agreements (and,
pursuant to the Distribution Agreement, each have agreed to remove the
Trademarks from such corporate names within 30 days after the Distribution
Date); (b) Tenneco and Newport News will be permitted to use their existing
supplies and documents which have the Trademarks imprinted on them for six
months after the date of the agreements; and (c) Tenneco and Newport News will
be permitted to use the Trademarks on existing signs, displays or other
identifications for a period (after the date of the agreements) of two years
(in the case of Tenneco) and one year (in the case of Newport News). However,
so long as Tenneco or Newport News continues to use the Trademarks, it must
maintain certain quality standards prescribed by the Company in the conduct of
business operations in which the Trademarks are used. In addition, under these
agreements each of Tenneco and Newport News will agree to indemnify the
Company from any claims that arise as a result of its use of the Trademarks or
any breach of its agreement and neither Tenneco nor Newport News may adopt or
use at any time a word or mark likely to be similar to or confused with the
Trademarks. Each Trademark Transition License Agreement will be immediately
terminable by the Company upon a material breach of the agreement by Tenneco
or Newport News, as the case may be.
Directors
After the Distribution Date, the Company and Newport News will share one
common director, Dana G. Mead, and the Company and El Paso (which will be the
parent of Tenneco) will share one common director, Peter T. Flawn. The
Company, Newport News and El Paso will adopt policies and procedures to be
followed by
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the Board of Directors of each company to limit the involvement of Mr. Mead
and Dr. Flawn in situations that could give rise to potential conflicts of
interest, including requesting them to abstain from voting as a director of
either the Company or Newport News, with respect to Mr. Mead, or either the
Company or El Paso, with respect to Dr. Flawn, on certain matters which
present a conflict of interest between the Company and Newport News or El
Paso, as the case might be. The Company believes that such conflict situations
will be minimal. See "Management."
Expenses
In general, and except for certain environmental costs and expenses, Tenneco
is responsible for all fees and expenses incurred by Tenneco in connection
with the Transaction for periods prior to the Distribution Date. Any such fees
and expenses which are unpaid as of the Merger Effective Time will be
allocated to and remain the responsibility of Tenneco pursuant to the Debt
Realignment, and El Paso has agreed to pay or cause to be paid all such
amounts. However, because the aggregate amount of debt to be allocated upon
consummation of the Merger to Tenneco is limited to $2.65 billion (subject to
certain adjustments), the amount of unpaid Tenneco transaction fees and
expenses as of the Merger Effective Time may impact the amount of debt
allocated to the Company in connection with the Transaction. See "--Debt and
Cash Realignment." Each party has agreed to bear its own respective fees and
expenses incurred after consummation of the Transaction.
Settlement of Intercompany Accounts
Pursuant to the Merger Agreement and the Distribution Agreement, all
intercompany receivables, payables and loans (unless specifically provided for
in any Ancillary Agreement) among the Energy Business, the Industrial Business
and the Shipbuilding Business will be settled, capitalized or converted into
ordinary trade accounts as of the close of business on the Distribution Date.
Further, all intercompany agreements among such businesses (other than those
contemplated by the Transaction) will be terminated.
REASONS FOR THE DISTRIBUTIONS
The Distributions and the Merger are designed to separate three types of
businesses, namely the Industrial Business, the Shipbuilding Business and the
Energy Business, which have distinct financial, investment and operating
characteristics, so that each can adopt strategies and pursue objectives
appropriate to its specific needs. The Distributions will (i) enable the
management of each company to concentrate its attention and financial
resources on the core businesses of such company, (ii) permit investors to
make more focused investment decisions based on the specific attributes of
each of the three businesses, (iii) facilitate employee compensation programs
custom-tailored to the operations of each business, including stock-based and
other incentive programs, which will more directly reward employees of each
business based on the success of that business and (iv) tailor the assets of
Tenneco to facilitate the acquisition of the Energy Business by El Paso. Upon
consummation of the Industrial Distribution, the Company will, primarily
through its consolidated subsidiaries, own and operate Tenneco Automotive,
Tenneco Packaging and TBS, and Newport News will, primarily through its
consolidated subsidiaries (principally Newport News Shipbuilding and Dry Dock
Company), own and operate the Shipbuilding Business. Immediately following
consummation of the Distributions, a subsidiary of El Paso will be merged with
and into Tenneco, and thereafter the Energy Business will be owned and
operated by El Paso.
CONDITIONS TO CONSUMMATION OF THE INDUSTRIAL DISTRIBUTION
The Industrial Distribution is conditioned on, among other things,
stockholder approval of the Distributions by the holders of Tenneco Stock (as
defined) at a special meeting of the Tenneco stockholders and by holders of
Tenneco Junior Preferred Stock, if issued prior to the effectiveness of the
Charter Amendment, and formal declaration of the Distributions by the Tenneco
Board. Other conditions to the Industrial Distribution include (i) execution
and delivery of the Distribution Agreement and the Ancillary Agreements and
consummation of the various pre-Distribution transactions (such as the
Corporate Restructuring Transactions, the Debt Realignment and the Cash
Realignment), (ii) receipt of the IRS Ruling Letter to the effect that for
federal income tax purposes
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the Distributions qualify as tax-free distributions to Tenneco and its
stockholders under Section 355 of the Code (as defined herein) and that
certain internal spin-off transactions involving Tenneco or its subsidiaries
to be effected pursuant to the Corporate Restructuring Transactions will
qualify as tax-free (see "--Certain Federal Income Tax Aspects of the
Industrial Distribution"), (iii) approval for listing on the New York Stock
Exchange of Company Common Stock and Newport News Common Stock to be
distributed, (iv) registration of Company Common Stock and Newport News Common
Stock under the Exchange Act, (v) receipt of all material consents to the
Corporate Restructuring Transactions, the Distributions and transactions
contemplated in the Distribution Agreement, (vi) performance of the various
covenants required to be performed prior to the Distribution Date (see "--
Corporate Restructuring Transactions," "--Debt and Cash Realignment" and "--
Relationships Among Tenneco, the Company and Newport News After the
Distributions") and (vii) lack of prohibition of the Distributions by any law
or governmental authority. The IRS Ruling Letter was issued on October 30,
1996 and covered the matters referred to in clause (ii) above. Even if all the
conditions to the Distributions are satisfied, Tenneco has reserved the right,
under certain circumstances, to amend or terminate the Distribution Agreement
and to modify or abandon the transactions contemplated thereby. The Tenneco
Board has not attempted to identify or establish objective criteria for
evaluating the particular types of events or conditions that would cause the
Tenneco Board to consider amending or terminating the Distributions. See "--
Amendment or Termination of the Distributions." Although the foregoing
conditions (other than declaration of the Distributions) may be waived by
Tenneco (to the extent permitted by law), the Tenneco Board presently has no
intention to proceed with either of the Distributions unless each of these
conditions is satisfied. See "Introduction."
AMENDMENT OR TERMINATION OF THE DISTRIBUTIONS
Prior to the Distributions, the Distribution Agreement may be terminated and
the Distributions may be amended, modified or abandoned by Tenneco without the
approval of the Company or Newport News or the stockholders of Tenneco,
subject to the consent of El Paso as described below. Any amendment or
modification prior to the termination of the Merger Agreement or consummation
of the Merger which adversely affects the Energy Business (other than to a de
minimis extent) or materially delays or prevents the consummation of the
Merger can be effectuated only with the prior consent of El Paso. Termination
of the Distribution Agreement prior to the termination of the Merger Agreement
or consummation of the Merger can be effectuated only with the prior written
consent of El Paso.
After consummation of the Distributions, the Distribution Agreement may be
amended or terminated only by a written agreement signed by Tenneco, the
Company and Newport News. Certain amendments or terminations after the
Distributions also require the consent of third-party beneficiaries to the
extent that the Distribution Agreement has expressly granted them such rights.
TRADING OF COMPANY COMMON STOCK
See "Risk Factors--No Current Market for Company Common Stock" and "Risk
Factors--Uncertainty Regarding Trading Prices of Stock Following the
Transaction" for a discussion of certain considerations relating to the market
for and trading prices of Company Common Stock following the Industrial
Distribution.
Shares of Company Common Stock received by shareholders of Tenneco pursuant
to the Industrial Distribution will be freely transferable, except for shares
received by persons who may be deemed to be "affiliates" of the Company under
the Securities Act of 1933, as amended (the "Securities Act"). Persons who are
affiliates of the Company will be permitted to sell their shares of Company
Common Stock, only pursuant to an effective registration statement under the
Securities Act or an exemption from the registration requirements of the
Securities Act. There would not, however, be any 90-day waiting period before
sales could be made by affiliates under Rule 144 of the Securities Act, as
long as the other provisions of Rule 144 are met.
CERTAIN FEDERAL INCOME TAX ASPECTS OF THE INDUSTRIAL DISTRIBUTION
General
The following is a summary description of the material federal income tax
aspects of the Industrial Distribution. This summary is for general
informational purposes only and is not intended as a complete
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description of all of the tax consequences of the Industrial Distribution, the
Shipbuilding Distribution, the Merger or the other transactions contemplated
as part of the Transaction and does not discuss tax consequences under the
laws of state or local governments or any other jurisdiction. Moreover, the
tax treatment of a stockholder may vary depending upon his, her or its
particular situation. In this regard, certain stockholders (including
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers, persons who are not citizens or residents of the United States
or who are foreign corporations, foreign partnerships or foreign trusts or
estates, as defined for United States federal income tax purposes,
stockholders that hold shares as part of a position in a "straddle" or as part
of a "hedging" or "conversion" transaction for United States federal income
tax purposes and stockholders with a "functional currency" other than the
United States dollar) may be subject to special rules not discussed below. In
addition, this summary applies only to shares which are held as capital
assets. The following discussion may not be applicable to a stockholder who
acquired his or her shares pursuant to the exercise of stock options or
otherwise as compensation.
THE FOLLOWING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), EXISTING, PROPOSED AND
TEMPORARY TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS
AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE, WHICH MAY OR
MAY NOT BE RETROACTIVE, AND ANY SUCH CHANGES COULD AFFECT THE VALIDITY OF THE
FOLLOWING DISCUSSION. SEE "POSSIBLE FUTURE LEGISLATION" BELOW.
EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE TRANSACTION DESCRIBED
HEREIN, INCLUDING, THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND THE POSSIBLE EFFECTS OF CHANGES OF APPLICABLE TAX LAWS.
Tax Rulings
On October 30, 1996, the IRS issued the IRS Ruling Letter to the effect,
among other things, that:
(i) the Industrial Distribution will be tax-free for federal income tax
purposes to Tenneco under Section 355(c)(1) of the Code and to the
stockholders of Tenneco under Section 355(a) of the Code;
(ii) the Shipbuilding Distribution will be tax-free for federal income
tax purposes to Tenneco under Section 355(c)(1) of the Code and to the
stockholders of Tenneco under Section 355(a) of the Code; and
(iii) the following distributions to be effected as part of the Corporate
Restructuring Transactions will be tax-free for federal income tax purposes
to the respective transferor corporations under Section 355(c)(1) or 361(c)
of the Code and to the respective stockholders of the transferor
corporations under Section 355(a) of the Code: (a) the distribution by
Newport News of the capital stock of Tenneco Packaging Inc. to Tenneco
Corporation; (b) the distribution by Tenneco Corporation of the capital
stock of the Company and Newport News to Tennessee Gas Pipeline Company
("TGP"); and (c) the distribution by TGP of the capital stock of the
Company and Newport News to Tenneco.
Receipt of the IRS Ruling Letter satisfied a condition to consummation of
the Industrial Distribution.
A ruling from the IRS, while generally binding on the IRS, may under certain
circumstances be retroactively revoked or modified by the IRS. The rulings
obtained from the IRS will be based on certain facts and representations, some
of which will have been made by El Paso. Generally, the IRS Ruling Letter
would not be revoked or modified retroactively provided that (i) there has
been no misstatement or omission of material facts, (ii) the facts at the time
of the Transaction are not materially different from the facts upon which the
IRS private letter ruling was based and (iii) there has been no change in the
applicable law.
The Distributions
It is expected that the Distributions will qualify as tax-free distributions
under Section 355 of the Code. Assuming that the Distributions so qualify, (i)
the holders of Tenneco Common Stock will not recognize gain or
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loss upon receipt of shares of Company Common Stock or shares of Newport News
Common Stock, (ii) each holder of Tenneco Common Stock will allocate his, her
or its aggregate tax basis in the Tenneco Common Stock immediately before the
Distributions among Tenneco Common Stock, Company Common Stock and Newport
News Common Stock in proportion to their respective fair market values, (iii)
the holding period of each holder of Tenneco Common Stock for Company Common
Stock and Newport News Common Stock will include the holding period for his,
her or its Tenneco Common Stock, provided that Tenneco Common Stock is held as
a capital asset at the time of the Distributions and (iv) Tenneco will not
recognize any gain or loss on its distribution of Company Common Stock or
Newport News Common Stock to its stockholders.
No fractional shares of Company Common Stock or Newport News Common Stock
will be distributed in the Distributions. A holder of Tenneco Common Stock
who, pursuant to the Distributions, receives cash in lieu of fractional shares
of Newport News Common Stock will be treated as having received such
fractional shares of Newport News Common Stock pursuant to the Distributions
and then as having received such cash in a sale of such fractional shares of
Newport News Common Stock. Such holders will generally recognize capital gain
or loss on such deemed sale equal to the difference between the amount of cash
received and such holders' adjusted tax basis in the fractional share of
Newport News Common Stock received. Such gain or loss will be capital
(provided Tenneco Common Stock is held as a capital asset at the time of the
Distributions) and will be treated as a long-term capital gain or loss if the
holding period for the fractional shares of Newport News Common Stock deemed
to be received and then sold is more than one year.
If the Distributions were not to qualify as tax-free distributions under
Section 355 of the Code, then in general a corporate level federal income tax
would be payable by the consolidated group of which Tenneco is the common
parent, which tax (assuming the internal spin-off transactions included in the
Corporate Restructuring Transactions also failed to qualify under Code Section
355) would be based upon the gain (computed as the difference between the fair
market value of the stock distributed and the distributing corporation's
adjusted basis in such stock) realized by each of the distributing
corporations upon its distribution of the stock of one or more controlled
corporations to its stockholders in the Transaction. The corporate level
federal income tax would be payable by Tenneco. Under the terms of the Tax
Sharing Agreement, the Company will not be liable to indemnify Tenneco for any
additional taxes incurred by reason of the Industrial Distribution being
taxable, unless the Industrial Distribution fails to qualify for tax-free
treatment under Section 355 of the Code as a result of the inaccuracy of
certain factual statements or representations made by the Company in
connection with the requests for the IRS private letter ruling or the Tax
Opinion or the Company takes any action which is inconsistent with any factual
statements or representations or the tax treatment of the Transaction as
contemplated in the IRS private letter ruling request or the Tax Opinion. See
the discussion of the Tax Sharing Agreement under "--Relationships Among
Tenneco, the Company and Newport News After the Distributions."
Furthermore, if the Distributions do not qualify as tax-free distributions
under Section 355 of the Code, then each holder of Tenneco Common Stock who
receives shares of Company Common Stock and Newport News Common Stock in the
Distributions would be treated as if such stockholder received taxable
distributions in an amount equal to the fair market value of Company Common
Stock and Newport News Common Stock received, which would result in (i) a
dividend to the extent paid out of Tenneco's current and accumulated earnings
and profits; then (ii) a reduction in such stockholder's basis in Tenneco's
Common Stock to the extent the amount received exceeds the amount referenced
in clause (i); and then (iii) gain from the sale or exchange of Tenneco Common
Stock to the extent the amount received exceeds the sum of the amounts
referenced in clauses (i) and (ii). Each stockholder's basis in his, her or
its Company Common Stock and Newport News Common Stock would be equal to the
fair market value of such stock at the time of the Distributions.
Possible Future Legislation
The Administration's Budget Proposal issued March 19, 1996 (the "Budget
Proposal") contains several revenue proposals, including a proposal (the
"Anti-Morris Trust Proposal") which would require a distributing corporation
in a transaction otherwise qualifying as a tax-free distribution under Section
355 of the Code to recognize gain on the distribution of the stock of the
controlled corporation unless the direct and indirect
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stockholders of the distributing corporation own more than 50% of the
distributing corporation and controlled corporations at all times during the
four-year period commencing two years prior to the distribution. The Anti-
Morris Trust Proposal would apply to any distributions occurring after March
19, 1996, unless such distribution was (i) pursuant to a binding contract on
such date, (ii) described in a ruling request submitted to the IRS on or
before such date or (iii) described in a public announcement or Commission
filing on or before such date.
On March 29, 1996, Senator William V. Roth, Chairman of the Senate Finance
Committee and Congressman Bill Archer, Chairman of the House Ways and Means
Committee, issued a joint statement (the "Roth-Archer Statement") to the
effect that should certain of the revenue proposals included in the
Administration's Budget Proposal, including the Anti-Morris Trust Proposal, be
enacted, the effective date will be no earlier than the date of "appropriate
Congressional action." As of the date of this Information Statement, no
legislation has been introduced relating to the Anti-Morris Trust Proposal. On
June 27, 1996, Tenneco submitted its request for rulings (including rulings on
the tax-free treatment of the Distributions) to the IRS. Accordingly, in view
of the Roth-Archer Statement, any future Anti-Morris Trust legislation should
not apply to the Distributions assuming that the effective date of such
legislation contains a grandfather clause for transactions for which a ruling
request has been filed with the IRS prior to the date of "appropriate
Congressional action." Nevertheless, there can be no assurances that Congress
will not adopt Anti-Morris Trust legislation which would apply retroactively
to the Distributions. In the event such legislation is announced or introduced
prior to the consummation of the Transaction, under the terms of the Merger
Agreement El Paso may elect not to proceed with the Merger if it reasonably
determines that there exists a reasonable likelihood that the Distributions or
the Merger would not be tax-free for federal income tax purposes. If El Paso
elects to proceed with the Merger notwithstanding the announcement or
introduction of Anti-Morris Trust legislation, the Distributions, if
ultimately subject to such legislation, may result in significant taxable gain
to the Tenneco consolidated group under Section 355(c) of the Code. Although
Tenneco stockholders would not recognize taxable gain or loss on the receipt
of the stock of the Company and Newport News under the current Anti-Morris
Trust Proposal, the taxable gain required to be recognized by the Tenneco
consolidated group under Code Section 355(c) would significantly reduce the
value of the El Paso Common Stock and any Depositary Shares received by the
Tenneco stockholders in the Merger.
The Budget Proposal also contains a proposal (the "Nonqualified Preferred
Stock Proposal") that would, among other things, treat certain preferred stock
received in a reorganization as "other property" (boot) resulting in gain (but
not loss) recognition to the recipient of such stock. The Nonqualified
Preferred Stock Proposal would apply to transactions entered into after
December 7, 1995, with certain exceptions, including an exception for stock
issued pursuant to a written agreement binding (subject to customary
conditions) on such date.
The Roth-Archer Statement provides that should certain revenue proposals
included in the Budget Proposal (including the Nonqualified Preferred Stock
Proposal) be enacted, their effective date will be no earlier than the date of
"appropriate congressional action." As of the date of this Information
Statement, no legislation has been introduced relating to the Nonqualified
Preferred Stock Proposal. The Merger Agreement which provides for the issuance
of preferred stock of El Paso (the "El Paso Preferred Stock"), was entered
into on June 19, 1996 and amended and restated on November 1, 1996 (effective
as of June 19, 1996). Accordingly, in view of the Roth-Archer Statement, any
future legislation including the Nonqualified Preferred Stock Proposal should
not apply to the El Paso Preferred Stock, if issued, assuming the effective
date of such legislation contains a grandfather clause for stock issued
pursuant to a binding agreement (subject to customary conditions) entered into
on or before the date of such Congressional action.
Nevertheless, there can be no assurances that Congress will not adopt
legislation containing the Nonqualified Preferred Stock Proposal that would
apply retroactively to the issuance of El Paso Preferred Stock. In the event
such legislation is announced or introduced prior to the consummation of the
Transaction, if either Tenneco or El Paso determines that there exists a
reasonable likelihood that issuance of the El Paso Preferred Stock would cause
the Merger to be taxable to holders of Tenneco stock, El Paso is obligated,
under the terms of the Merger Agreement, at its own cost, to amend the terms
of the El Paso Preferred Stock in a manner so as
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not to cause the Merger to be taxable to holders of Tenneco stock. If, however,
legislation containing the Nonqualified Preferred Stock Proposal were enacted
following the Transaction, and such legislation applied retroactively to the
issuance of the El Paso Preferred Stock, it is possible that the Merger would
not qualify as a reorganization within the meaning of Section 368(a)(1)(B) of
the Code and holders of Tenneco stock receiving El Paso Common Stock or El Paso
Preferred Stock in the Merger would recognize gain on the exchange. Even if the
issuance of El Paso Preferred Stock did not prevent qualification of the Merger
as a tax-free reorganization, holders of Tenneco stock receiving El Paso
Preferred Depository Shares would recognize gain on the exchange that might be
taxable as ordinary income to the extent of the earnings and profits of
Tenneco. The failure of the Merger to qualify as a reorganization within the
meaning of Code Section 368(a)(1)(B) of the Code or the recognition of gain by
shareholders as a result of the receipt of El Paso Preferred Depository Shares
may also cause the Industrial Distribution to not qualify as a tax-free
distribution under Section 355 of the Code.
Back-up Withholding Requirements
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of Company Common Stock, unless
the stockholder (i) is a corporation or comes within certain other exempt
categories, and, when required, demonstrates these facts or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A stockholder who does not supply the Company
with his, her or its correct taxpayer identification number may be subject to
penalties imposed by the IRS. Any amount withheld under these rules will be
creditable against the stockholder's federal income tax liability. Stockholders
should consult their tax advisors as to their qualification for exemption from
backup withholding and the procedure for obtaining such an exemption. If
information reporting requirements apply to a stockholder, the amount of
dividends paid with respect to such shares will be reported annually to the IRS
and to such stockholder.
These backup withholding tax and information reporting rules currently are
under review by the United States Treasury Department and proposed Treasury
Regulations issued on April 15, 1996 would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules could be changed.
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by Tenneco solely to provide
information to Tenneco stockholders who will receive Company Common Stock in
the Industrial Distribution. It is not, and is not to be construed as, an
inducement or encouragement to buy or sell any securities of Tenneco or the
Company. The information contained in this Information Statement is believed by
Tenneco and the Company to be accurate as of the date set forth on its cover.
Changes may occur after that date, and neither the Company nor Tenneco will
update the information except in the normal course of their respective public
disclosure practices.
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RISK FACTORS
Stockholders of Tenneco should be aware that the Industrial Distribution and
ownership of Company Common Stock involves certain risk factors, including
those described below and elsewhere in this Information Statement, which could
adversely affect the value of their holdings. Neither the Company nor Tenneco
makes, nor is any other person authorized to make, any representation as to the
future market value of Company Common Stock.
NO CURRENT PUBLIC MARKET FOR COMPANY COMMON STOCK
Currently, there is no public market for Company Common Stock, although a
"when issued" market is expected to develop prior to the Distribution Date.
There can be no assurance as to the prices at which trading in Company Common
Stock will occur after the Industrial Distribution. Until Company Common Stock
is fully distributed and an orderly market develops, the prices at which
trading in such stock occurs may fluctuate significantly. The Company has
applied to the New York Stock Exchange to list Company Common Stock upon notice
of issuance and the Company expects to receive approval of such listing prior
to the Distributions. The Company is also applying to the Chicago, Pacific and
London Stock Exchanges for approval of the listing of Company Common Stock upon
notice of issuance. See "The Industrial Distribution--Trading of Company Common
Stock."
UNCERTAINTY REGARDING TRADING PRICES OF STOCK FOLLOWING THE TRANSACTION
Upon consummation of the Transaction, the then-outstanding shares of Tenneco
Common Stock will be cancelled and holders of Tenneco Common Stock will receive
(i) in connection with the Merger, shares of El Paso Common Stock and, under
certain circumstances, El Paso Preferred Depositary Shares and (ii) in
connection with the Distributions, Company Common Stock and Newport News Common
Stock. Tenneco Common Stock is currently listed and traded and, following the
Distributions, Company Common Stock will be listed and traded on the New York,
Chicago, Pacific and London Stock Exchanges. El Paso Common Stock, El Paso
Preferred Depositary Shares, if any, and Newport News Common Stock will be
listed and traded on the New York Stock Exchange. There can be no assurance
that the combined market value/trading prices of El Paso Common Stock and any
Depositary Shares, Company Common Stock and Newport News Common Stock held by
stockholders after the Transaction will be equal to or greater than the market
value/trading prices of Tenneco Common Stock prior to the Transaction. See "The
Industrial Distribution--Trading of Company Common Stock."
UNCERTAINTY REGARDING FUTURE DIVIDENDS
The Company's dividend policy will be established by the Company Board from
time to time based on the results of operations and financial condition of the
Company and such other business considerations as the Company Board considers
relevant. There can be no assurances that the combined annual dividends on El
Paso Common Stock and any El Paso Preferred Depositary Shares, Company Common
Stock and Newport News Common Stock after the transaction will be equal to the
annual dividends on Tenneco Common Stock prior to the Transaction (and it is
unlikely that the dividends would be greater than the annual dividends on
Tenneco Common Stock prior to the Transaction).
POTENTIAL FEDERAL INCOME TAX LIABILITIES
On October 30, 1996, the IRS issued the IRS Ruling Letter to the effect,
among other things, that the Industrial Distribution will qualify as a tax-free
distribution under Section 355 of the Code. Receipt of the IRS Ruling Letter
satisfied a condition to consummation of the Industrial Distribution. See "The
Industrial Distribution--Certain Federal Income Tax Aspects of the Industrial
Distribution." Such a ruling, while generally binding upon the IRS, is based
upon certain factual representations and assumptions. If any of such factual
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representations and assumptions were incomplete or untrue in a material
respect, or the facts upon which such ruling was based are materially
different from the facts at the time of the Distributions, the IRS could
modify or revoke such ruling retroactively. Tenneco is not aware of any facts
or circumstances which would cause any of such representations and assumptions
to be incomplete or untrue. The Company, Tenneco, Newport News and El Paso
have each agreed to certain covenants on its future actions to provide further
assurances that the Industrial Distribution will be tax-free for federal
income tax purposes. See "The Industrial Distribution--Relationships Among
Tenneco, the Company and Newport News After the Distributions."
If the Distributions were not to qualify as tax-free distributions under
Section 355 of the Code, then in general a corporate level federal income tax
would be payable by the consolidated group of which Tenneco is the common
parent, which tax (assuming the internal spin-off transactions included in the
Corporate Restructuring Transactions also failed to qualify under Code Section
355) would be based upon the gain (computed as the difference between the fair
market value of the stock distributed and the distributing corporation's
adjusted basis in such stock) realized by each of the distributing
corporations upon its distribution of the stock of one or more controlled
corporations to its stockholders in the Transaction. In this regard, the
failure of the Merger to qualify as a reorganization within the meaning of
Code Section 368(a)(1)(B) could cause the Industrial Distribution to be
taxable to Tenneco and its stockholders. The corporate level federal income
tax would be payable by Tenneco. Under certain limited circumstances, however,
the Company has agreed to indemnify Tenneco for a defined portion of such tax
liabilities. See "The Industrial Distribution--Relationships Among Tenneco,
the Company and Newport News After the Distributions--Terms of the Ancillary
Agreements--Tax Sharing Agreement." In addition, under IRS regulations, each
member of the consolidated group (including the Company) is severally liable
for such tax liability.
The Budget Proposal contains a provision that would require a distributing
corporation in a transaction otherwise qualifying as a tax-free distribution
under Section 355 of the Code to recognize gain on the distribution of the
stock of one or more controlled corporations under certain circumstances. If
such legislation were enacted, the Industrial Distribution, if ultimately
subject to such legislation, may result in significant taxable gain to Tenneco
under Section 355(c) of the Code. The Budget Proposal also contains a
provision under which the receipt by a stockholder of certain preferred stock
in an otherwise tax-free reorganization would result in gain recognition to
the stockholder. If such legislation were enacted, it is possible that the
receipt of the El Paso Preferred Depositary Shares would cause the Merger to
fail to qualify as a reorganization within the meaning of Section 368(a)(1)(B)
of the Code resulting in the recognition of gain by Tenneco stockholders as
described below. Even if the issuance of El Paso Preferred Stock and El Paso
Preferred Depositary Shares did not prevent qualification of the Merger as a
tax-free reorganization, holders of Tenneco Stock receiving El Paso Preferred
Depositary Shares would recognize gain on the exchange that might be taxable
as ordinary income to the extent of the earnings and profits of Tenneco. The
failure of the Merger to qualify as a reorganization within the meaning of
Section 368(a)(1)(B) of the Code or the recognition of gain by shareholders as
a result of the receipt of El Paso Preferred Depositary Shares, may also cause
the Industrial Distribution to not qualify as tax-free distributions under
Section 355 of the Code. See "Certain Federal Income Tax Consequences--
Possible Future Legislation."
Furthermore, if the Industrial Distribution were not to qualify as tax-free
distributions under Section 355 of the Code, then each holder of Tenneco
Common Stock who receives shares of Company Common Stock and Newport News
Common Stock in the Distributions would be treated as if such stockholder
received a taxable distribution in an amount equal to the fair market value of
Company Common Stock and Newport News Common Stock received, which would
result in: (i) a dividend to the extent paid out of Tenneco's current and
accumulated earnings and profits; then (ii) a reduction in such stockholder's
basis in Tenneco Common Stock to the extent the amount received exceeds the
amount referenced in clause (i); and then (iii) gain from the sale or exchange
of Tenneco Common Stock to the extent the amount received exceeds the sum of
the amounts referenced in clauses (i) and (ii). See "The Industrial
Distribution--Certain Federal Income Tax Aspects of the Industrial
Distribution."
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CERTAIN ANTITAKEOVER FEATURES
Upon consummation of the Industrial Distribution, certain provisions of the
Company's Restated Certificate of Incorporation and its Amended and Restated
By-laws, along with the Company's stockholder rights plan and Delaware
statutory law, could discourage potential acquisition proposals and could delay
or prevent a change in control of the Company. Such provisions could diminish
the opportunities for a stockholder to participate in tender offers, including
tender offers at a price above the then current market value of Company Common
Stock. Such provisions may also inhibit fluctuations in the market price of
Company Common Stock that could result from takeover attempts. The provisions
could also have the effect of making it more difficult for third parties to
cause the immediate removal and replacement of the members of the then current
Company Board or the then current management of the Company without the
concurrence of the Company Board. See "Antitakeover Effects of Certain
Provisions."
POTENTIAL LIABILITIES DUE TO FRAUDULENT TRANSFER CONSIDERATIONS AND LEGAL
DIVIDEND REQUIREMENTS
The Corporate Restructuring Transactions, the Debt Realignment and the
Distributions are subject to review under federal and state fraudulent
conveyance laws. Under these laws, if a court in a lawsuit by an unpaid
creditor or a representative of creditors (such as a trustee or debtor-in-
possession in bankruptcy of Tenneco, the Company, Newport News or any of their
subsidiaries) were to determine that Tenneco did not receive fair consideration
or reasonably equivalent value for distributing Company Common Stock and
Newport News Common Stock or that Tenneco, the Company, Newport News or any of
their subsidiaries did not receive fair consideration or reasonably equivalent
value for incurring indebtedness or transferring assets in connection with the
Debt Realignment and Corporate Restructuring Transactions and, at the time of
such distribution, incurrence of indebtedness or transfer of assets, Tenneco,
the Company, Newport News or any of their subsidiaries (i) was insolvent or
would be rendered insolvent, (ii) had unreasonably small capital with which to
carry on its business and all businesses in which it intended to engage, or
(iii) intended to incur, or believed it would incur, debts beyond its ability
to repay such debts as they would mature, then such court could order the
holders of Company Common Stock and the Newport News Common Stock to return the
value of the stock and any dividends paid thereon, bar future dividend and
redemption payments on the stock, and invalidate, in whole or in part, the
Corporate Restructuring Transactions, Debt Realignment or Distributions, as
fraudulent conveyances.
The measure of insolvency for purposes of the fraudulent conveyance laws will
vary depending on which jurisdiction's law is applied. Generally, however, an
entity would be considered insolvent if the present fair saleable value of its
assets is less than (i) the amount of its liabilities (including contingent
liabilities) or (ii) the amount that will be required to pay its probable
liabilities on its existing debts as they become absolute and mature. No
assurance can be given as to what standard a court would apply in determining
insolvency or that a court would not determine that Tenneco, the Company,
Newport News or any of their subsidiaries was "insolvent" at the time of or
after giving effect to the Corporate Restructuring Transactions, the Debt
Realignment and the Distributions.
In addition, the Distributions and the distributions pursuant to the
Corporate Restructuring Transactions and Debt Realignment, are subject to
review under state corporate distribution statutes. Under the General
Corporation Law of the State of Delaware (the "DGCL"), a corporation may only
pay dividends to its stockholders either (i) out of its surplus (net assets
minus capital) or (ii) if there is no such surplus, out of its net profits for
the fiscal year in which the dividend is declared and/or the preceding fiscal
year. Although all distributions are intended to be made entirely from surplus,
no assurance can be given that a court will not later determine that some or
all of the distributions were unlawful.
Prior to the Industrial Distribution the Tenneco Board expects to obtain an
opinion regarding the solvency of the Company and Tenneco and the
permissibility of the Industrial Distribution and the dividend which may be
paid by the Company to Tenneco under Section 170 of the DGCL. The Tenneco Board
and management believe that, in accordance with this opinion which is expected
to be rendered in connection with the Industrial Distribution, (i) the Company
and Tenneco each will be solvent (in accordance with the foregoing definitions)
at
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the time of the Transaction (including after the payment of any dividend by the
Company to Tenneco and after the consummation of the Industrial Distribution),
will be able to repay its debts as they mature following the Transaction and
will have sufficient capital to carry on its businesses and (ii) the Industrial
Distribution and the distribution to Tenneco will be made entirely out of
surplus in accordance with Section 170 of the DGCL. There is no certainty,
however, that a court would find the solvency opinion rendered by Tenneco's
financial advisor to be binding on creditors of the Company or Tenneco or that
a court would reach the same conclusions set forth in such opinion in
determining whether the Company or Tenneco was insolvent at the time of, or
after giving effect to, the Transaction or whether lawful funds were available
for the Industrial Distribution and the distribution to Tenneco.
The Distribution Agreement, the Merger Agreement and certain of the Ancillary
Agreements provide for the allocation, immediately prior to the Distributions,
of the Tenneco Energy Consolidated Debt remaining following consummation of the
Corporate Restructuring Transactions. Further, pursuant to the Distribution
Agreement, from and after the Distribution Date, each of Tenneco, the Company
and Newport News will be responsible for the debts, liabilities and other
obligations related to the business or businesses which it owns and operates
following the consummation of the Transaction. Although the Company does not
expect to be liable for any such obligations not expressly assumed by it
pursuant to the Distribution Agreement and the Debt Realignment, it is possible
that a court would disregard the allocation agreed to among the parties, and
require the Company to assume responsibility for obligations allocated to
Tenneco or Newport News (for example, tax and/or environmental liabilities),
particularly if one of such other parties were to refuse or were to be unable
to pay or perform the subject allocated obligations. See "The Industrial
Distribution--Relationships Among Tenneco, the Company and Newport News After
the Distributions."
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THE COMPANY
INTRODUCTION
The Company is a newly formed Delaware corporation which, upon completion of
the Industrial Distribution, will be an independent, publicly held company
(symbol "TEN"). The Company will own and operate, directly and through its
direct and indirect subsidiaries, substantially all of the assets of, and will
assume substantially all of the liabilities associated with, the principal
industrial businesses of Tenneco: Tenneco Automotive and Tenneco Packaging. The
Company will also own and operate the administrative services unit of Tenneco:
TBS.
Although the separation of the Industrial Business from the remainder of the
businesses, operations and companies currently constituting the "Tenneco Group"
has been structured as a "spin-off" of the Company pursuant to the Industrial
Distribution for legal, tax and other reasons, the Company will succeed to
certain important aspects of the existing Tenneco business, organization and
affairs, namely: (i) the Company will be renamed "Tenneco Inc." upon the
consummation of the Merger; (ii) the Company will be headquartered at Tenneco's
current headquarters in Greenwich, Connecticut; (iii) the Company Board will
consist of those persons currently constituting the Tenneco Board; (iv) the
Company's executive management will consist substantially of the current
Tenneco executive management; and (v) the Industrial Business to be conducted
by the Company will consist largely of Tenneco Automotive and Tenneco
Packaging.
Tenneco Automotive is one of the world's leading manufacturers of automotive
exhaust and ride control systems for both the original equipment market and the
replacement market, or aftermarket. Tenneco Automotive is a global business
that sells its products in over 100 countries. Tenneco Automotive manufactures
and markets its automotive exhaust systems primarily under the Walker(R) brand
name and its ride control systems primarily under the Monroe(R) brand name.
Tenneco Packaging is among the world's leading and most diversified packaging
companies, manufacturing packaging products for consumer, institutional and
industrial markets. The paperboard business group manufactures corrugated
containers, folding cartons and containerboard, has a joint venture in recycled
paperboard, and offers high value-added products such as enhanced graphics
packaging and displays and kraft honeycomb products. Its specialty products
group produces disposable aluminum, foam and clear plastic food containers,
molded fiber and pressed paperboard products, as well as polyethylene bags and
industrial stretch wrap. Tenneco Packaging's consumer products include such
recognized brand names as Hefty(R), Baggies(R) and E-Z Foil(R).
TBS designs, implements and administers shared administrative service
programs for the Tenneco businesses as well as, on an "as requested" basis, for
former Tenneco business entities.
BUSINESS STRATEGY
The Company
The Distributions and the Merger represent the most important step to date in
accomplishing Tenneco's overall strategic objective of transforming itself from
a highly diversified industrial corporation to a global manufacturing company
focused on Tenneco Automotive and Tenneco Packaging. For the past several
years, Tenneco's management team has redeployed resources from slower growth,
more cyclical businesses to these higher growth businesses. The Distributions
are expected to provide the Company with greater flexibility to pursue
additional growth opportunities for Tenneco Automotive and Tenneco Packaging as
a result of the increased management focus and additional financial flexibility
at the Company. These additional growth opportunities are expected to include,
among other things, strategic acquisitions, joint ventures, strategic alliances
and further organic growth from additional product development and
international expansion initiatives.
Management Focus. As a result of the Distributions and the Merger, Tenneco's
executive management team will be able to focus all of its efforts on exploring
and implementing the most appropriate growth opportunities for Tenneco
Automotive and Tenneco Packaging.
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Implementation of Management Programs. Tenneco's strategy of focusing on the
Industrial Business will allow the Company to further refine and implement
certain management processes that have been developed over the past several
years in order to improve operating performance. These programs include: (i)
the Cost of Quality program through which the Company has successfully reduced
the failure costs in its manufacturing and administrative processes; (ii) the
working capital initiative through which the Company plans to further reduce
its working capital requirements; and (iii) the shared services program,
administered by TBS, through which the Company plans on further improving
efficiency and reducing the cost of general and administrative support
functions. The Company believes that Tenneco Automotive and Tenneco Packaging
are particularly well-suited to benefit from these types of programs due to the
fragmented, non-regulated nature of the industries in which they operate.
Strategic Acquisitions. Strategic acquisitions have been, and will continue
to be, an important element of the Company's overall growth strategy. Tenneco's
current executive management team, which will continue to serve as the
Company's executive management team following the Industrial Distribution, has
a proven track record of identifying, structuring and integrating strategic
acquisitions. As a result of management's experience in implementing strategic
acquisitions, the Company has developed comprehensive plans to efficiently
integrate new companies into its existing corporate infrastructure. The Company
intends to continue to pursue appropriate acquisition opportunities in which
management can substantially improve the profitability of strategically related
businesses by, among other things, rationalizing similar product lines and
eliminating certain lower margin product lines; reconfiguring and upgrading
manufacturing facilities; moving production to the lowest cost facilities;
reducing selling, distribution, purchasing and administrative costs; increasing
market share within either a geographic or product market; and acquiring
businesses that possess leading brand name products.
Continued growth in revenues and earnings at the pace sought by the Company
will require continued success in completing major acquisitions and similar
expansion efforts, and then successfully integrating the acquired businesses
and operations into the Company. The identity, timing, frequency, terms and
other factors involved in the overall acquisition/expansion program, and those
relating to any particular major acquisition, will impact, positively or
negatively, the Company's success in achieving its financial and other goals.
Although certain factors in this regard will be beyond the Company's control,
its executive management team believes that the Company will have the requisite
significant opportunities, and the expertise, resources and commitment to
successfully act on an appropriate number of those opportunities, to achieve
its goals.
Employee Incentives. In addition, the Distributions and the Merger will allow
Tenneco's executive management team to develop incentive compensation systems
for employees that are more closely aligned with the operational success of
Tenneco Automotive and Tenneco Packaging.
Tenneco Automotive
Tenneco Automotive's primary goal is to enhance its leadership position in
the global automotive parts industry in which it is currently one of the
world's leading manufacturers of exhaust and ride control systems. Tenneco
Automotive intends to capitalize on certain significant existing and emerging
trends in the automotive industry, including (i) the consolidation and
globalization of the OEMs' supplier base, (ii) increased OEM outsourcing,
particularly of more complex components, assemblies, modules and complete
systems to sophisticated, independent suppliers and (iii) growth of emerging
markets for both original equipment and replacement markets. Key components of
Tenneco Automotive's strategy include: (a) capitalizing on brand-name strength;
(b) retaining and enhancing market shares; (c) continuing development of high
value-added products; (d) increasing ability to deliver full-system
capabilities (rather than merely component parts); (e) continuing international
expansion and strategic acquisitions; (f) maintaining operating cost
leadership; and (g) continuing focus on the customer.
Tenneco Packaging
Tenneco Packaging's primary goal is to maintain and enhance its position as a
leading specialty packaging company offering a broad line of products suited to
provide customers with the best packaging solutions.
36
<PAGE>
Tenneco Packaging intends to capitalize on certain significant existing and
emerging trends in the packaging industry, including (i) increasing materials
substitution, (ii) changing fiber availability and (iii) global demand growth.
Key components of Tenneco Packaging's strategy include: (a) continued
development and growth of multi-material uses, broad product lines and
packaging offering customers enhanced functionality and value; (b) fiber
flexibility (primarily in the mix of virgin and recycled fiber sources); (c)
growth through domestic and international acquisitions and joint ventures; (d)
internal growth in base businesses; (e) reduction of sensitivity to changes in
economic cyclicality through the pursuit of specialty and other high value-
added product growth; and (f) maintenance of market leadership positions in its
primary business groups.
37
<PAGE>
FINANCING
The Company intends to enter into the Company Credit Facility in connection
with the Transaction, under which it is expected that a syndicate of banks (the
"Lenders") will commit to provide up to $1,750 million of financing to the
Company on an unsecured basis. It is expected that Morgan Guaranty Trust
Company of New York will arrange the Company Credit Facility and will act as
Administrative Agent for the Lenders. It is expected that Bank of America
Illinois will act as Documentation Agent. The Company Credit Facility is
expected to be a revolving credit facility, which will terminate in November
2001, the proceeds of which will be used to effect the Debt Realignment and for
other general corporate purposes.
Initial borrowings under the Company Credit Facility are expected to occur on
or shortly before the Merger Effective Time. See "Unaudited Pro Forma Combined
Financial Information" for a description of the application of the proceeds of
such borrowings.
Borrowings under the Company Credit Facility are expected to bear interest at
a rate per annum equal to, at the Company's option, either (i) a rate
consisting of the higher of Morgan Guaranty Trust Company of New York's prime
rate or the federal funds rate plus 50 basis points; (ii) a rate of LIBOR plus
a margin determined pursuant to a pricing schedule; or (iii) a rate based on
money market rates pursuant to competitive bids by the Lenders.
It is expected that the Company Credit Facility will require that the
Company's ratio of total indebtedness to total indebtedness plus net worth not
exceed 70%. Failure to satisfy the foregoing minimum requirement will be a
prepayment event under the Company Credit Facility that will enable the Lenders
to refuse to loan funds to the Company and to require prepayment of the
indebtedness thereunder after a 30 day cure period.
It is also expected that the Company Credit Facility will impose prohibitions
or limitations on liens (other than agreed permitted liens), subsidiary
indebtedness and guarantee obligations, and dispositions of substantially all
of its assets, among others.
It is expected that the Company Credit Facility will contain certain default
provisions, including, among other things, (i) nonpayment of any amount due to
the Lenders under the Company Credit Facility, (ii) material breach of
representations and warranties, (iii) default in the performance of covenants
following a 30 day cure period, (iv) bankruptcy or insolvency, (v) cross-
default with respect to indebtedness for borrowed money and related guaranty
obligations in excess of $100 million in any one instance or $200 million of
aggregate indebtedness (but only aggregating any single item of indebtedness of
at least $20 million) and (vi) a judgment suffered by the Company in excess of
$100 million not covered by insurance and which judgment shall not have been
vacated, discharged, stayed or bonded pending appeal within 30 days.
Also in connection with the Debt Realignment, the Company will offer to
exchange up to $1,950 million of aggregate principal amount of Company Public
Debt for an equal amount of Tenneco Public Debt pursuant to the Debt Exchange
Offers. The Company Public Debt will have similar maturities, but higher
interest rates than the Tenneco Public Debt for which it is being exchanged.
Upon consummation of the Debt Exchange Offers, Tenneco will purchase (and
thereafter extinguish) the Tenneco Public Debt held by the Company, and the
Company will then distribute such proceeds as a dividend to Tenneco. Assuming
all of the Tenneco Public Debt subject to the Debt Exchange Offers is tendered
and accepted for exchange, the Company will have $1,950 million aggregate
principal amount of Company Public Debt outstanding bearing interest at a
weighted average of approximately 8.38% and with a weighted average maturity of
approximately 11 years.
See "The Industrial Distribution--Debt and Cash Realignment" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
38
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited historical capitalization of the
Company as of June 30, 1996, and unaudited pro forma capitalization as of June
30, 1996, after giving effect to the transactions described in the "Unaudited
Pro Forma Combined Financial Statements." The capitalization of the Company
should be read in conjunction with the Combined Financial Statements, and notes
thereto, the "Combined Selected Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," each contained
elsewhere in this Information Statement.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Short-term debt:
Allocated from Tenneco........................... $ 523(a) $ --
Other............................................ 7 13
------ ------
Total........................................... 530 13
------ ------
Long-term debt:
Allocated from Tenneco........................... 1,510(a) --
Company Public Debt.............................. -- 2,069(b)
Other............................................ 63 63
------ ------
1,573 2,132
------ ------
Minority interest................................. 301 301
------ ------
Common stock...................................... -- 2
Paid-in capital................................... -- 2,986
Retained earnings................................. -- --
Combined equity................................... 2,168 --
------ ------
Total equity.................................... 2,168 2,988
------ ------
Total capitalization.............................. $4,572 $5,434
====== ======
</TABLE>
- --------
(a) Represents debt allocated to the Company from Tenneco based on the portion
of Tenneco's investment in the Company which is deemed to be debt,
generally based on the portion of the Company's net assets to Tenneco's
consolidated net assets plus debt. Tenneco's historical practice has been
generally to incur indebtedness for its consolidated group at the parent
company level or at a limited number of subsidiaries, rather than at the
operating company level, and to centrally manage various cash functions.
Management believes that the historical allocation of corporate debt is
reasonable; however, it is not necessarily indicative of the Company's debt
upon completion of the Debt Realignment, nor debt that may be incurred by
the Company as a separate public entity.
(b) Represents the $1,950 million aggregate principal amount of Company Public
Debt assumed to be exchanged pursuant to the Debt Exchange Offers which
will be recorded based on the fair value of the Company Public Debt
(estimated to be $2,069 million) upon consummation of the Debt Exchange
Offers. At this time, the Company and Tenneco cannot determine the ultimate
amount of Tenneco Public Debt which will be exchanged by Tenneco Public
Debt holders into Company Public Debt pursuant to the Debt Exchange Offers,
and such amount could vary significantly. For purposes of the pro forma
capitalization, it is assumed that 100% of the Tenneco Public Debt subject
to the Debt Exchange Offers will be exchanged for Company Public Debt
pursuant to the Debt Exchange Offers.
39
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Balance Sheet of the Company as of
June 30, 1996 and the Unaudited Pro Forma Combined Statements of Income for the
six months ended June 30, 1996 and the year ended December 31, 1995 have been
prepared to reflect: (i) the acquisition of Clevite in July 1996 and the
acquisition of Amoco Foam Products in August 1996; (ii) the effect on the
Company of the Cash Realignment and Debt Realignment; (iii) the effect on the
Company of the Corporate Restructuring Transactions, and other transactions
pursuant to the provisions of the Distribution Agreement and Merger Agreement;
and (iv) the issuance of Company Common Stock as part of the Industrial
Distribution. The "Combined Acquisitions" caption in the Unaudited Pro Forma
Combined Statement of Income for the year ended December 31, 1995 also reflects
the pro forma results of operations of Mobil Plastics prior to its acquisition
in November 1995.
The acquisitions of Clevite and Amoco Foam Products have been included in the
accompanying Unaudited Pro Forma Combined Financial Statements for the
respective periods under the caption "Combined Acquisitions." The Combined
Acquisitions have been accounted for under the purchase method of accounting.
As such, pro forma adjustments are reflected in the accompanying Unaudited Pro
Forma Combined Financial Statements to reflect a preliminary allocation of the
Company's purchase cost for the assets acquired and liabilities assumed as well
as additional depreciation and amortization resulting from the Company's
purchase cost.
The historical Combined Financial Statements reflect the financial position
and results of operations for the Industrial Business whose net assets will be
transferred to the Company pursuant to the Corporate Restructuring
Transactions, and other transactions pursuant to the provisions of the
Distribution Agreement and Merger Agreement. The accounting for the transfer of
assets and liabilities pursuant to the Corporate Restructuring Transactions
represents a reorganization of companies under common control and, accordingly,
all assets and liabilities are reflected at their historical cost in the
Combined Financial Statements of the Company.
The Unaudited Pro Forma Combined Balance Sheet has been prepared as if such
transactions occurred on June 30, 1996; the Unaudited Pro Forma Combined
Statements of Income have been prepared as if such transactions occurred as of
January 1, 1995. The Unaudited Pro Forma Combined Financial Statements set
forth on the following pages are unaudited and not necessarily indicative of
the results that would have actually occurred if the transactions had been
consummated as of June 30, 1996, or January 1, 1995, or results which may be
attained in the future.
The pro forma adjustments, as described in the Notes to the Unaudited Pro
Forma Combined Financial Statements, are based upon available information and
upon certain assumptions that management believes are reasonable. The Unaudited
Pro Forma Combined Financial Statements should be read in conjunction with the
Combined Financial Statements, and notes thereto, and the pre-acquisition
Combined Financial Statements of Mobil Plastics, and notes thereto, included
elsewhere in this Information Statement. The Clevite and Amoco Foam Products
acquisitions do not meet the Commission's criteria for inclusion of separate
historical financial statements.
40
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
COMBINED ACQUISITIONS
-----------------------
POST-
ACQUISITIONS TRANSACTION
COMPANY PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ----------- ----------- ------------ ----------- ---------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and temporary
cash investments..... $ 129 $ 2 $ $ 131 $ 36 (e) $ 205
38 (f)
Receivables........... 829 74 903 (113)(a) 1,044
182 (b)
(48)(c)
120 (d)
Inventories........... 820 46 6 (i) 872 872
Deferred income taxes. 28 28 28
Other current assets.. 196 8 204 (5)(c) 204
5 (e)
------ ---- ---------- ------ ------- ------
Total Current Assets. 2,002 130 6 2,138 215 2,353
------ ---- ---------- ------ ------- ------
Goodwill and
intangibles............ 965 384 (i) 1,349 1,349
Other Assets............ 808 9 817 9 (c) 836
10 (g)
Plant, property and
equipment, net......... 2,748 148 144 (i) 3,040 39 (c) 3,079
------ ---- ---------- ------ ------- ------
Total Assets......... $6,523 $287 $ 534 $7,344 $ 273 $7,617
====== ==== ========== ====== ======= ======
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt....... $ 530 $ $ 638 (i) $1,168 $(1,155)(g) $ 13
Payables.............. 622 28 650 (23)(a) 629
2 (b)
Other current
liabilities.......... 558 76 634 17 (c) 651
------ ---- ---------- ------ ------- ------
Total Current
Liabilities......... 1,710 104 638 2,452 (1,159) 1,293
------ ---- ---------- ------ ------- ------
Long-term debt.......... 1,573 1 1,574 558 (g) 2,132
Deferred income taxes... 451 (5)(i) 446 13 (b) 459
Deferred credits and
other liabilities...... 320 53 30 (i) 403 41 (e) 444
Minority interest....... 301 301 301
------ ---- ---------- ------ ------- ------
Total Liabilities..... 4,355 158 663 5,176 (547) 4,629
------ ---- ---------- ------ ------- ------
Equity:
Combined equity....... 2,168 129 (129)(i) 2,168 (90)(a) --
167 (b)
(22)(c)
120 (d)
38 (f)
607 (g)
(2,988)(h)
Common Stock.......... -- -- -- 2 (h) 2
Paid-in Capital....... -- -- -- 2,986 (h) 2,986
Retained Earnings..... -- -- -- -- (h) --
------ ---- ---------- ------ ------- ------
Total Liabilities
and Equity......... $6,523 $287 $ 534 $7,344 $ 273 $7,617
====== ==== ========== ====== ======= ======
</TABLE>
- --------
* Certain amounts have been reclassified to conform to the Company's
classification.
See the accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
41
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED ACQUISITIONS
-----------------------
POST-
ACQUISITIONS TRANSACTION
COMPANY PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales and Operating
Revenues............... $ 3,233 $272 $ $3,505 $ $3,505
Other Income, Net....... 71 -- 71 71
Costs and Expenses...... 2,890 232 9 (j) 3,131 3,131
------- ---- ------- ------ ------- -----------
Income Before Interest
Expense,
Income Taxes and Minor-
ity
Interest............... 414 40 (9) 445 445
Interest Expense........ 100 12 7 (j) 119 (36)(k) 83
Income Tax Expense...... 126 8 (1)(j) 133 14 (k) 147
Minority Interest....... 10 10 10
------- ---- ------- ------ ------- -----------
Income from continuing
operations ............ $ 178 $ 20 $ (15) $ 183 $ 22 $ 205
======= ==== ======= ====== ======= ===========
Average number of common
shares outstanding..... 170,351,740
===========
Income from continuing
operations per share... $ 1.20
===========
</TABLE>
- --------
* Certain amounts have been reclassified to conform to the Company's
classification.
See the accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
42
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED ACQUISITIONS
-----------------------
POST-
ACQUISITIONS TRANSACTION
COMPANY PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Sales and Operating
Revenues............... $5,221 $2,035 $ $7,256 $ $7,256
Other Income, Net....... 39 6 45 45
Costs and Expenses...... 4,588 1,888 17 (j) 6,493 6,493
------ ------ ---- ------ -------- -----------
Income Before Interest
Expense,
Income Taxes and Minor-
ity Interest........... 672 153 (17) 808 808
Interest Expense........ 160 126 5 (j) 291 (125)(k) 166
Income Tax Expense...... 231 19 (9)(j) 241 50 (k) 291
Minority Interest....... 23 -- 23 23
------ ------ ---- ------ -------- -----------
Income from continuing
operations ............ $ 258 $ 8 $(13) $ 253 $ 75 $ 328
====== ====== ==== ====== ======== ===========
Average number of common
shares outstanding..... 173,995,941
===========
Income from continuing
operations per share... $ 1.89
===========
</TABLE>
- --------
* Certain amounts have been reclassified to conform to the Company's
classification.
See the accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
43
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) To reflect the settlement or capitalization of intercompany accounts
receivable and payable with Tenneco affiliates pursuant to the Corporate
Restructuring Transactions.
(b) To reflect the acquisition by the Company of certain receivables from
Tenneco Credit Corporation, a Tenneco affiliate, in connection with the
Merger.
(c) To reflect the allocation between the Company, Newport News and Tenneco of
certain corporate assets and liabilities in connection with the Corporate
Restructuring Transactions, the Distributions and the Merger.
(d) To reflect a $120 million receivable from El Paso pursuant to the Merger
Agreement and Distribution Agreement for certain tax benefits to be
realized as a result of the Debt Realignment.
(e) To reflect the transfer to the Company of insurance liabilities and the
related portfolio of short-term cash investments and other assets
previously held by Eastern Insurance Company Limited, a Tenneco affiliate,
in connection with the Corporate Restructuring Transactions and the Merger.
(f) To reflect the cash contribution from Tenneco to the Company pursuant to
the Cash Realignment provisions of the Distribution Agreement and Merger
Agreement. The contribution of cash between Tenneco and the Company as part
of the Cash Realignment may be adjusted by the sale of Energy Business
receivables prior to the Merger Effective Time.
(g) To reflect adjustments to the Company's indebtedness for the pre-
Distribution restructuring and refinancing of debt pursuant to the Debt
Realignment. If the Debt Realignment had been consummated on June 30, 1996,
on a pro forma basis, the Company would have had total long-term debt of
$2,132 million, and short-term debt of $13 million. The total pro forma
long-term debt includes $2,069 million of Company Public Debt ($1,950
million aggregate principal amount) assumed to be exchanged in the Debt
Exchange Offers, which will be recorded based on the fair values of the
Company Public Debt, and $63 million of long-term debt of Company
subsidiaries. At this time, the Company and Tenneco cannot determine the
ultimate amount of Tenneco Public Debt which will be exchanged by the
applicable Tenneco Public Debt holders into Company Public Debt pursuant to
the Debt Exchange Offers and such amount could vary significantly. For
purposes of these pro forma adjustments, it is assumed that 100% of the
Tenneco Public Debt subject to the Debt Exchange Offers will be exchanged
for Company Public Debt pursuant to the Debt Exchange Offers. Tenneco
expects to incur an extraordinary charge as a result of the Debt
Realignment. Tenneco estimates that this cost will be approximately $300
million after-tax based on current market rates of interest. Certain other
costs will also be incurred in connection with the Corporate Restructuring
Transactions and the Distributions which Tenneco estimates will be
approximately $100 million after tax. The effect on the Company's debt of
these costs has been reflected in this pro forma adjustment. However, such
charges have not been reflected in the pro forma income statement.
(h) To reflect the distribution of Company Common Stock to the holders of
Tenneco Common Stock at an exchange ratio of one share of Company Common
Stock for each share of Tenneco Common Stock.
(i) To reflect short-term debt issued to complete the Combined Acquisitions and
the preliminary allocation of purchase price to the assets acquired and
liabilities assumed related to the Combined Acquisitions. These purchase
accounting adjustments for Clevite and Amoco Foam Products are based on
preliminary estimates of fair values and will be adjusted when more
complete evaluations of fair values are received. The preliminary
allocations have been made solely for purposes of developing these
Unaudited Pro Forma Combined Financial Statements.
(j) To reflect additional depreciation and amortization related to the Combined
Acquisitions resulting from the Company's purchase accounting adjustments,
interest expense at an assumed rate of 5.90% on the debt issued to complete
the acquisitions, and the related tax effects at an assumed effective tax
rate of 40%. The excess of the Company's purchase cost over the fair value
of assets acquired and liabilities assumed is amortized over 40 years for
Clevite and 30 years for Amoco Foam Products.
44
<PAGE>
(k) To reflect the adjustment to interest expense, and related tax effects at
an assumed effective tax rate of 40%, from the changes in the debt of the
Company pursuant to the Debt Realignment as discussed in (g) above. For
purposes of this pro forma adjustment, the Company Public Debt are assumed
to bear interest at a weighted average annual effective interest rate of
7.5%. In addition, the pro forma adjustment to interest expense includes
commitment fees on the unused borrowing capacity of the Company Credit
Facility and amortization of deferred debt financing costs incurred in
connection with the Debt Exchange Offers and the Company Credit Facility. A
1/8% change in the assumed interest rates would change annual pro forma
interest expense by approximately $2.7 million, before the effect of income
taxes.
(l) EBITDA, on a pro forma basis, was $603 million and $1,023 million for the
six months ended June 30, 1996 and the year ended December 31, 1995,
respectively. EBITDA represents income from continuing operations before
interest expense, income taxes and depreciation, depletion and
amortization. EBITDA is not a calculation based upon GAAP; however, the
amounts included in the EBITDA calculation are derived from amounts
included in the combined pro forma Statements of Income. In addition,
EBITDA should not be considered as an alternative to net income or
operating income, as an indicator of the operating performance of the
Company or as an alternative to operating cash flows as a measure of
liquidity.
45
<PAGE>
COMBINED SELECTED FINANCIAL DATA
The following combined selected financial data as of December 31, 1995 and
1994 and for the years ended December 31, 1995, 1994 and 1993 were derived from
the audited Combined Financial Statements of the Company. The combined selected
financial data as of December 31, 1993, 1992 and 1991 and for the years ended
December 31, 1992 and 1991 are unaudited and were derived from the accounting
records of Tenneco. The combined selected financial data as of and for each of
the six-month periods ended June 30, 1996 and 1995 were derived from the
unaudited Combined Financial Statements of the Company. In the opinion of the
Company's management, the combined selected financial data of the Company as of
December 31, 1993, 1992 and 1991 and for the years ended December 31, 1992 and
1991, and as of and for the six months ended June 30, 1996 and 1995 include all
adjusting entries (consisting only of normal recurring adjustments) necessary
to present fairly the information set forth therein. The results of operations
for the six months ended June 30, 1996 should not be regarded as indicative of
the results that may be expected for the full year. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined Financial Statements, and
notes thereto, included elsewhere in this Information Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------- -----------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
(MILLIONS) ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
DATA(B):
Net sales and operating
revenues from
continuing
operations--
Automotive............ $1,463 $1,263 $ 2,479 $1,989 $1,785 $1,763 $1,668
Packaging............. 1,775 1,318 2,752 2,184 2,042 2,078 1,934
Intergroup sales and
other................ (5) (4) (10) (7) (7) (5) (5)
------ ------ ------- ------ ------ ------ ------
Total................ $3,233 $2,577 $ 5,221 $4,166 $3,820 $3,836 $3,597
====== ====== ======= ====== ====== ====== ======
Income from continuing
operations before in-
terest
expense, income taxes
and minority inter-
est--
Automotive............ $ 163 $ 134 $ 240 $ 223 $ 222 $ 237 $ 188
Packaging............. 256 244 430 209 139 221 139(c)
Other................. (5) -- 2 24 20 7 3
------ ------ ------- ------ ------ ------ ------
Total................ 414 378 672 456 381 465 330
Interest expense (net
of interest
capitalized).......... 100 74 160 104 101 102 111
Income tax expense..... 126 124 231 114 115 154 80
Minority interest...... 10 12 23 -- -- -- --
------ ------ ------- ------ ------ ------ ------
Income from continuing
operations............ 178 168 258 238 165 209 139
Loss from discontinued
operations, net of
income tax............ -- -- -- (31) (7) (7) (12)
Cumulative effect of
changes in accounting
principles,
net of income tax..... -- -- -- (7)(d) -- (99)(d) --
------ ------ ------- ------ ------ ------ ------
Net income............. $ 178 $ 168 $ 258 $ 200 $ 158 $ 103 $ 127
====== ====== ======= ====== ====== ====== ======
BALANCE SHEET DATA(B):
Total assets........... $6,523 $4,430 $ 6,117 $3,940 $3,029 $2,812 $2,792
Short-term debt(e) .... 530 205 384 108 94 182 758
Long-term debt(e) ..... 1,573 1,246 1,648 1,039 1,178 1,675 1,555
Minority interest...... 301 297 301 301 1 1 2
Combined equity........ 2,168 1,163 1,852 987 533 (87) (553)
STATEMENT OF CASH FLOWS
DATA(B):
Net cash provided
(used) by operating
activities............ $ 199 $ (9) $ 489 $ 571 $ 324 $ 121 $ 503
Net cash provided
(used) by investing
activities............ (340) (206) (2,041) (303) (152) (78) (237)
Net cash provided
(used) by financing
activities............ 169 (52) 1,297 50 (165) (41) (251)
Capital expenditures
for continuing
operations............ 263 179 562 280 217 159 202
OTHER DATA:
EBITDA(f).............. $ 551 $ 458 $ 845 $ 598 $ 518 $ 595 $ 463
</TABLE>
- -------
(a)For a discussion of the significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
Information Statement.
(b) During 1995 and 1994, Tenneco Automotive and Tenneco Packaging each
completed several acquisitions, the most significant of which was Tenneco
Packaging's acquisition of Mobil Plastics for $1.3 billion in late 1995.
See Note 4 to the Combined Financial Statements, included elsewhere in this
Information Statement, for further information on the Company's
acquisitions.
(c) Includes a gain of $42 million recorded by Tenneco Packaging related to the
sale of three short-line railroads.
(d) In 1994, the Company adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits". In 1992, the Company adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and FAS No. 109, "Accounting for Income Taxes."
(e) Historical amounts include debt allocated to the Company from Tenneco based
on the portion of Tenneco's investment in the Company which is deemed to be
debt, generally based upon the ratio of the Company's net assets to Tenneco
consolidated net assets plus debt. Tenneco's historical practice has been
to incur indebtedness for its consolidated group at the parent company
level or at a limited number of subsidiaries, rather than at the operating
company level, and to centrally manage various cash functions. Management
believes that the historical allocation of corporate debt and interest
expense is reasonable; however, it is not necessarily indicative of the
Company's debt upon completion of the Debt Realignment, nor debt and
interest that may be incurred by the Company as a separate public entity.
See the Combined Financial Statements, and notes thereto, included
elsewhere in this Information Statement.
(f) EBITDA represents income from continuing operations before interest
expense, income taxes and depreciation, depletion and amortization. EBITDA
is not a calculation based upon GAAP; however, the amounts included in the
EBITDA calculation are derived from amounts included in the Statements of
Income. In addition, EBITDA should not be considered as an alternative to
net income or operating income, as an indicator of the operating
performance of the Company or as an alternative to operating cash flows as
a measure of liquidity.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following review of the Company's financial condition and results of
operations should be read in conjunction with the Combined Financial Statements
of the Company, and notes thereto, presented on pages F-3 to F-27. Reference is
made to the "Basis of Presentation" section of Note 1 to such Combined
Financial Statements for the definition of the "Company" as utilized herein.
PROPOSED MERGER WITH EL PASO
In the first quarter of 1996, Tenneco announced its intention to focus
Tenneco on its automotive parts and packaging businesses. This strategic action
included the spin-off of the Shipbuilding Business to the holders of Tenneco
Common Stock and the development of options to separate the Energy Business
from the Industrial Business. On June 19, 1996, Tenneco announced that it
signed a definitive agreement to merge a subsidiary of El Paso into Tenneco.
Prior to the Merger, Tenneco will effect the Industrial Distribution and the
Shipbuilding Distribution.
The Merger represents a total value for Tenneco stockholders of approximately
$4 billion which includes:
. New shares of El Paso equity valued at approximately $750 million
(subject to the effect of a collar on the market price of El Paso Common
Stock issuable in connection with the Merger).
. Assumption by El Paso of $2.65 billion (subject to certain adjustments)
of Tenneco Energy Consolidated Debt and Tenneco Junior Preferred Stock.
. Other payments and certain liability retentions by El Paso which El Paso
estimated at an aggregate of approximately $600 million.
Consequently, after the Transaction is consummated, current holders of
Tenneco Common Stock will hold shares of Newport News, the Company (to be
renamed Tenneco Inc.) and El Paso. The Company would then consist of two
industrial manufacturing businesses, Tenneco Packaging and Tenneco Automotive,
both of which reported record earnings and revenues in 1995, and TBS, the
Company's administrative services unit.
. Tenneco Automotive is one of the world's leading manufacturers of
automotive exhaust and ride control systems for both the original
equipment market and the replacement market, or aftermarket. Tenneco
Automotive is a global business that sells its products in over 100
countries. Tenneco Automotive manufactures and markets its automotive
exhaust systems primarily under the Walker(R) brand name and its ride
control systems primarily under the Monroe(R) brand name.
. Tenneco Packaging is among the world's leading and most diversified
packaging companies, manufacturing packaging products for consumer,
institutional and industrial markets. The paperboard business group
manufactures corrugated containers, folding cartons and containerboard,
has a joint venture in recycled paperboard, and offers high value-added
products such as enhanced graphics packaging and displays and kraft
honeycomb products. Its specialty products group produces disposable
aluminum, foam and clear plastic food containers, molded fiber and
pressed paperboard products, as well as polyethylene bags and industrial
stretch wrap. Tenneco Packaging's consumer products include such
recognized brand names as Hefty(R), Baggies(R) and E-Z Foil(R).
. TBS designs, implements and administers shared administrative service
programs for the Tenneco businesses as well as, on an "as requested"
basis, for former Tenneco business entities.
The consummation of the Transaction is conditioned upon approval thereof by
Tenneco stockholders. In addition, the consummation of the Transaction is
conditioned upon receipt of a favorable ruling by the IRS that the spin-offs of
Newport News and New Tenneco will be tax-free for federal income tax purposes
to Tenneco and its stockholders, which ruling was issued on October 30, 1996.
The consummation of the Transaction is also subject to the satisfaction or
waiver of a number of other conditions as described under "The Industrial
Distribution--Conditions to Consummation of the Industrial Distribution."
47
<PAGE>
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
1996 STRATEGIC ACTIONS
In the second quarter of 1996, the Company continued its strategy to redeploy
capital to faster-growing, more profitable and less cyclical business
operations. In June, Tenneco Packaging and Caraustar Industries ("Caraustar")
entered into an agreement to jointly operate clay-coated recycled paperboard
mills in Rittman, Ohio and Tama, Iowa and a recovered fiber recycling and
brokerage business with operations in Rittman and Cleveland, Ohio. Tenneco
Packaging sold these assets to the joint venture for cash and an equity
ownership position in the new venture. This strategic action resulted in a pre-
tax gain of $50 million.
In addition, the Company initiated several other strategic actions:
. In early 1996, Tenneco Automotive acquired two ride control companies,
National Springs, the largest manufacturer of automotive coil and leaf
springs in Australia and New Zealand, and ATESO s.a., one of the largest
automotive equipment manufacturing groups in the Czech Republic, for an
aggregate of $31 million.
. In July 1996, Tenneco Automotive acquired Clevite for approximately $330
million. Clevite is a leading North American original equipment
manufacturer of automotive vibration control components, including
bushings and engine mounts for the auto, light truck and heavy truck
markets. Clevite will be integrated into Monroe to form an operation with
the ability to design, manufacture, test and sell a complete automotive
suspension system.
. In June 1996, Tenneco Packaging announced that it had reached an
agreement to acquire the stock of Amoco Foam Products for $310 million.
Amoco Foam Products manufactures expanded polystyrene tableware,
including cups, plates and carrying trays; hinged-lid food containers;
packaging trays, primarily for meat and poultry and industrial products
for residential and commercial construction applications. The transaction
closed in August 1996.
. In August 1996, Tenneco Automotive acquired Luis Minuzzi e Hijos
("Minuzzi"), an Argentinian exhaust system manufacturer. The acquisition
will establish Walker's presence in the rapidly growing Argentinean and
South American automobile markets.
RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1996 AND 1995
The Company's income from continuing operations for the 1996 first half of
$178 million improved by six percent compared with $168 million in the first
half of 1995 due to improved results from both Tenneco Packaging (which
included the $50 million pre-tax gain on the sale of two recycled paperboard
mills and a recovered fiber recycling and brokerage business to a joint
venture) and Tenneco Automotive, all of which are discussed below.
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
--------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Tenneco Automotive........................................ $1,463 $1,263
Tenneco Packaging......................................... 1,775 1,318
Intergroup sales and other................................ (5) (4)
------ ------
$3,233 $2,577
====== ======
</TABLE>
The Company's revenues for the first six months of 1996 increased $656
million or 25 percent, and benefited from higher sales volumes in the
automotive business along with revenues from recent acquisitions. The results
of each business group are discussed in detail below.
48
<PAGE>
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
--------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Tenneco Automotive......................................... $ 163 $ 134
Tenneco Packaging.......................................... 256 244
Other...................................................... (5) --
------ ------
$ 414 $ 378
====== ======
</TABLE>
The Company's operating income for the first half of 1996 increased by $36
million compared with the 1995 period. Tenneco Automotive benefited from
improved results in both the exhaust and ride control operations. Also, Tenneco
Packaging recognized a gain from the sale of the recycled paperboard mills to a
joint venture of $50 million in the Company's 1996 second quarter. The results
of each segment are discussed in detail below.
TENNECO AUTOMOTIVE
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
-------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Revenues.................................................... $1,463 $1,263
Operating income............................................ 163 134
</TABLE>
Tenneco Automotive's revenues increased in both the exhaust and ride control
operations. Revenues for exhaust increased 16 percent to $847 million. North
American and European original equipment volumes were up, contributing $84
million in additional revenues driven by a record number of new product
launches and new vehicle production. Exhaust aftermarket volumes also increased
primarily due to the third quarter 1995 acquisition of Manufacturas Fonos, S.L.
("Fonos"). Fonos added $22 million in revenue in the first half of 1996.
Ride control reported an increase in revenues of $83 million or 16 percent.
Ride control's North American aftermarket revenues increased 13 percent as a
result of new customers and consumer response to aggressive marketing programs.
The European original equipment revenues improved $25 million driven by new
vehicle production. Revenues in Australia increased $10 million as a result of
the 1996 acquisition of National Springs.
Exhaust's operating income for the 1996 first half improved 30 percent to $74
million primarily due to increased volumes, which contributed $10 million, and
improved manufacturing efficiencies. Ride control's operating income increase
of $12 million was due primarily to higher sales volumes and product mix.
OUTLOOK
Tenneco Automotive's aggressive acquisition and business initiative strategy
is helping it to maintain its market leadership positions around the world. The
Company has committed substantial resources to improve and expand production
capacity, expand existing businesses and enter new markets in order to serve
its customers throughout the world. During the first half of 1996, Tenneco
Automotive announced an exhaust system joint venture in China and the
acquisition of Clevite. The Clevite acquisition is expected to produce positive
results immediately, impacting the second half of 1996. In addition, Tenneco
Automotive continues to develop business opportunities in emerging markets such
as China, India, Eastern Europe, and Latin America. Tenneco Automotive expects
the North American aftermarket to remain at 1995 activity levels for the
remainder of 1996. Original equipment volumes are expected to increase as a
result of the high level of new product launches undertaken in 1995 and early
1996 and continued interest by original equipment customers in hydroforming
technology. The Company believes it is well positioned to respond to the many
changes currently underway in the original equipment market.
49
<PAGE>
TENNECO PACKAGING
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
-------------
1996 1995
------ ------
(MILLIONS)
<S> <C> <C>
Revenues.................................................... $1,775 $1,318
Operating income............................................ 256 244
</TABLE>
Tenneco Packaging's operating income was $256 million in the first half of
1996 compared with $244 million in the prior year period. The results for the
1996 first half included a $50 million pre-tax gain on the sale of two recycled
paperboard mills and a recovered fiber recycling and brokerage business to a
new joint venture between Tenneco Packaging and Caraustar. The results were
also driven by a strong performance from its plastics business. The recently
acquired plastics business contributed $73 million in operating income on
revenues of $516 million for the first half of 1996.
In Tenneco Packaging's paperboard business, revenues were down $75 million to
$903 million compared with the 1995 first half. Operating income in the
paperboard business declined $107 million to $98 million compared with the 1995
first half, excluding the 1996 second quarter $50 million pre-tax gain on the
sale of assets to the joint venture with Caraustar. 1995 acquisitions
contributed $88 million to revenues and $5 million to operating income in 1996.
Excluding acquisitions, lower volume and price realization resulted in $157
million in lower revenues and $100 million in lower operating income for the
paperboard business. The 1996 operating income was also reduced by a $14
million cost related to downtime at mills taken to match inventories to market
demand. In addition, the first half of 1995 included a $14 million gain on the
sale of a mill in North Carolina.
Revenues in Tenneco Packaging's specialty packaging business increased $532
million to $872 million compared with the 1995 first half, primarily as a
result of the recently acquired plastics business which provided $516 million
of this improvement.
The specialty packaging business earned $108 million in operating income for
the 1996 first half, an $83 million increase compared with the 1995 first half
results. Operating income from the plastics business acquired in November 1995
contributed $73 million of this increase. The plastics, aluminum and molded
fiber units also continued to improve due to lower raw material cost of
aluminum and lower operating cost as a result of productivity improvements.
Plastics volumes improved 5 percent for the first half of 1996 and demand
continued to be strong.
OUTLOOK
Tenneco Packaging anticipates strong revenue growth in the second half of
1996 in the specialty packaging unit. Tenneco Packaging will continue to make
strong progress in lessening the effects on it of cyclicality in the paperboard
industry as shown in the first half of 1996. The Amoco Foam Products
acquisition, which was finalized in the third quarter, will be beneficial to
building the specialty packaging product lines. In addition, Tenneco Packaging
continues to achieve productivity improvements, to streamline manufacturing,
and to obtain benefits from the recent restructuring in the molded fiber and
aluminum product operations.
OTHER
The Company's other operations reported an operating loss of $5 million
during the first half of 1996 compared with breakeven in the 1995 first half.
This decrease in operating income resulted from decreased interest income
resulting from lower cash investments.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense has been
50
<PAGE>
allocated to the Company based on the portion of Tenneco's investment in the
Company which is deemed to be debt, generally based upon the ratio of the
Company's net assets to Tenneco consolidated net assets plus debt. Interest
expense was allocated at a rate equivalent to the weighted-average cost of all
corporate debt, which was 7.7 percent, 8.3 percent and 7.4 percent for 1995,
1994 and 1993, respectively. Although interest expense, and the related tax
effects, have been allocated to the Company for financial reporting on a
historical basis, the Company has not been billed for these amounts. The
changes in allocated corporate debt and the after-tax allocated interest have
been included as a component of the Company's combined equity. Although
management believes that the historical allocation of corporate debt and
interest is reasonable, it is not necessarily indicative of the Company's debt
upon completion of the Debt Realignment nor debt and interest that may be
incurred by the Company as a separate public company. For additional
information, see "The Industrial Distribution--Debt and Cash Realignment."
Interest expense increased from $74 million in the 1995 first half to $100
million in the 1996 first half. The increase was primarily attributable to
higher levels of allocated corporate debt. Interest capitalized was $5 million
for the 1996 first half compared with $1 million for the prior year period.
INCOME TAXES
Income tax expense for the first half of 1996 was $126 million compared with
$124 million for the 1995 first half. The effective tax rate for the first half
of 1996 was 40 percent compared with 41 percent in the prior year first half.
In connection with the Industrial Distribution, the current tax sharing
agreement will be cancelled and the Company will enter into a tax sharing
agreement with Tenneco, Newport News and El Paso. The tax sharing agreement
will provide, among other things, for the allocation of taxes among the parties
of tax liabilities arising prior to, as a result of, and subsequent to the
Distributions. Generally, the Company will be liable for taxes imposed on the
Company and its affiliates engaged in the automotive and packaging businesses.
In the case of federal income taxes imposed on the combined activities of the
consolidated group, the Company and Newport News will be liable to Tenneco for
federal income taxes attributable to their activities, and each will be
allocated an agreed-upon share of estimated tax payments made by the Tenneco
consolidated group.
CHANGE IN ACCOUNTING PRINCIPLES
The Company adopted FAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," in the first quarter of
1996. FAS No. 121 establishes new accounting standards for measuring the
impairment of long-lived assets. The adoption of the new standard did not have
a material effect on the Company's financial position or results of operations.
In June 1996, the Financial Accounting Standards Board issued FAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which establishes new accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of liabilities.
The statement is effective for transactions occurring after December 31, 1996.
The impact of the new standard has not been determined.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
CASH PROVIDED (USED) BY: 1996 1995
------------------------ -------- --------
(MILLIONS)
<S> <C> <C>
Operating activities................................ $ 199 $ (9)
Investing activities................................ (340) (206)
Financing activities................................ 169 (52)
</TABLE>
51
<PAGE>
The Company's operating results, combined with proceeds from sales of assets
and businesses, contributions from Tenneco and short-term borrowings, have
provided funds for acquisitions and capital investments in existing businesses.
Operating Activities
Operating cash flow for the first six months of 1996 increased due to higher
income from operations and improvements in working capital. Working capital
improved $147 million compared with the 1995 first half primarily due to lower
inventories and the Company's working capital initiatives. Inventories dropped
as a result of downtime taken at the mills to keep inventories in line and
higher exhaust and ride control revenues driven by new vehicle production.
Investing Activities
The Company invested $263 million in capital expenditures in its existing
businesses during the first half of 1996. Capital expenditures during the first
six months of 1996 included $84 million for Tenneco Automotive, $155 million
for Tenneco Packaging and $24 million related to the Company's other
operations. For Tenneco Packaging, these expenditures related to the paper
machine upgrade at the Counce, Tennessee mill and the expansion of specialty
packaging facilities. Capital expenditures were $179 million for continuing
operations during the first half of 1995.
Financing Activities
Cash provided by financing activities was $169 million during the first six
months of 1996, compared with cash used by financing activities of $52 million
for the same period in the previous year. The Company had a net decrease in
short-term debt of $23 million in the first six months of 1996 compared to $2
million for the same period in 1995. The Company also received $200 million in
cash contributions from Tenneco in the first six months of 1996 compared to a
$39 million cash contribution to Tenneco in the first six months of 1995. See
"Liquidity" below for further discussion of cash contributions to and from
Tenneco.
CAPITALIZATION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------- ------------
(MILLIONS)
<S> <C> <C>
Short-term debt and current maturities.................... $ 530 $ 384
Long-term debt............................................ 1,573 1,648
Minority interest......................................... 301 301
Combined equity........................................... 2,168 1,852
------ ------
Total capitalization...................................... $4,572 $4,185
====== ======
</TABLE>
Debt increased $71 million at June 30, 1996 compared with December 31, 1995
primarily due to higher levels of allocated debt. For additional information on
corporate debt allocation, see "Interest Expense (net of interest capitalized)"
above.
OTHER
The increase in the Company's plant, property and equipment and receivables
balances at June 30, 1996 when compared to December 31, 1995 is the result of
the acquisitions of ATESO and National Springs by Tenneco Automotive and
capital expenditures in the first half of 1996, as well as an increase in
receivables due to higher sales revenues from those acquisitions in the first
half of 1996.
LIQUIDITY
Historically, the Company's excess net cash flows from operating and
investing activities have been used by its parent, Tenneco, to meet
consolidated debt and other obligations. Conversely, when the Company's cash
52
<PAGE>
requirements have been in excess of cash flows from operations, Tenneco has
utilized its consolidated credit facilities to fund the Company's obligations.
Also, depending on market and other conditions, the Company has utilized
external sources of capital to meet specific funding requirements. Management
of the Company believes that cash flows from operations will generally be
sufficient to meet future capital requirements. However, during 1995, the
Company received on a net basis $1.3 billion from Tenneco primarily to fund its
strategic acquisitions discussed below.
Prior to the Transaction as discussed under the caption "Proposed Merger with
El Paso," Tenneco intends to initiate a realignment of its existing
indebtedness. As part of the Debt Realignment, certain Company Public Debt will
be offered in exchange for certain issues of Tenneco Public Debt. Tenneco will
initiate tender offers for other Tenneco Public Debt, and certain debt issues
may be defeased. These tender offers and defeasances will be financed by a
combination of new lines of credit of Tenneco, the Company (which may declare
and pay a dividend to Tenneco, as discussed below) and Newport News (which will
declare and pay a dividend of approximately $600 million to Tenneco). Upon
completion of the Debt Realignment, Tenneco will have responsibility for $2.65
billion of debt and preferred stock, subject to certain adjustments, Newport
News will have responsibility for the borrowings under its credit lines and the
Company will have responsibility for any remaining Tenneco Energy Consolidated
Debt.
The Company will enter into the Company Credit Facility, a portion of which
may be borrowed by the Company and distributed to Tenneco as a dividend for use
by Tenneco in retiring certain of the Tenneco Energy Consolidated Debt. The
remainder of the Company Credit Facility, along with cash flows from
operations, will be available by the Company to fund its future financing needs
including working capital and possible acquisitions.
For additional information, see "The Industrial Distribution--Debt and Cash
Realignment" and "Financing."
ENVIRONMENTAL MATTERS
The Company and certain of its subsidiaries and affiliates are parties to
environmental proceedings. Expenditures for ongoing compliance with
environmental regulations that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and that do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments indicate that remedial efforts are probable and the costs can be
reasonably estimated. Estimates of the liability are based upon currently
available facts, existing technology, and presently enacted laws and
regulations taking into consideration the likely effects of inflation and other
societal and economic factors. All available evidence is considered, including
prior experience in remediation of contaminated sites, other companies' cleanup
experience and data released by the United States Environmental Protection
Agency ("EPA") or other organizations. These estimated liabilities are subject
to revision in future periods based on actual costs or new circumstances. These
liabilities are included in the balance sheet at their undiscounted amounts.
Recoveries are evaluated separately from the liability and, when recovery is
assured, are recorded and reported separately from the associated liability in
the financial statements.
At July 1, 1996, the Company had been designated as a potentially responsible
party in 12 "Superfund" sites. With respect to its pro rata share of the
remediation costs of certain of these sites, the Company is fully indemnified
by third parties. With respect to certain other of these sites, the Company has
sought to resolve its liability through settlements which provide for payments
of the Company's allocable share of the remediation costs. For the remaining
sites, the Company has estimated its share of the remediation costs to be
between $3 million and $23 million or .003 percent to .020 percent of the total
remediation costs for those sites and has provided reserves it believes are
adequate for such costs. Because the clean-up costs are estimates and are
subject to revision as more information becomes available about the extent of
remediation required, the Company's estimate of its share of remediation costs
could change. Moreover, liability under the Comprehensive Environmental
Response, Compensation and Liability Act is joint and several, meaning that the
Company could
53
<PAGE>
be required to pay in excess of its pro rata share of remediation costs. The
Company's understanding of the financial strength of other potentially
responsible parties has been considered, where appropriate, in the Company's
determination of its estimated liability. The Company believes that the costs
associated with its current status as a potentially responsible party in the
Superfund or other waste disposal sites referenced above will not be material
to its financial position or results of operations.
RESULTS OF OPERATIONS FOR THE YEARS 1995, 1994 AND 1993
1995 STRATEGIC ACTIONS
The Company acquired or announced intentions to acquire several new
businesses during 1995, as part of its strategy to redeploy capital to less
cyclical, higher-growth businesses, including:
. On November 17, 1995 Tenneco Packaging acquired Mobil Plastics, which is
one of the largest North American producers of polyethylene and
polystyrene packaging, for $1.3 billion. Its consumer products are
marketed under the Hefty(R), Kordite(R), Baggies(R) and Hefty OneZip(TM)
brand names. The acquired plastics business is also a leader in
polystyrene foam packaging, thermoformed polystyrene packaging and
polyethylene film products for food service and industrial consumers. In
addition to this acquisition, during 1995 Tenneco Packaging acquired two
plastics packaging operations in the United Kingdom for an aggregate of
$25 million, making Tenneco Packaging a leading supplier of single-use,
thermoformed plastic packaging in that market.
. During 1995 Tenneco Packaging also completed eight acquisitions in the
paperboard packaging business for an aggregate of $171 million in cash,
notes and Tenneco Common Stock. Four of these acquisitions are in
enhanced graphics which helps reduce sensitivity to raw material prices
and offers greater opportunities to add value. Tenneco Packaging also
acquired Hexacomb Corporation ("Hexacomb"), one of the world's largest
suppliers of paper honeycomb products, for $58 million. These
acquisitions present many opportunities for internal and external
synergies.
. During 1995 Tenneco Automotive acquired an exhaust company in Spain and a
catalytic converter company in the United States for an aggregate of $40
million and entered into two ride control joint ventures in India and
China for an aggregate of $14 million.
RESULTS OF OPERATIONS--YEARS 1995 AND 1994
The Company's income from continuing operations in 1995 of $258 million
increased by 8 percent compared with $238 million in 1994 due to improved
results from both Tenneco Packaging and Tenneco Automotive, as discussed below.
In 1994, the Company recorded a loss of $31 million from the discontinued
operations of Tenneco Automotive's brakes operations. Also, 1994 results
included a charge of $7 million for the adoption of a new accounting principle,
FAS No. 112, "Employers' Accounting for Postemployment Benefits." No similar
costs were incurred in 1995.
NET SALES AND OPERATING REVENUES
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Tenneco Automotive........................................ $2,479 $1,989
Tenneco Packaging......................................... 2,752 2,184
Intergroup sales and other................................ (10) (7)
------ ------
$5,221 $4,166
====== ======
</TABLE>
54
<PAGE>
The Company's 1995 revenues increased $1,055 million, or 25 percent and
benefited from strong market conditions in its automotive and packaging
businesses along with revenues from acquisitions made in late 1994 and 1995.
The results of each segment are discussed in detail below.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
<TABLE>
<CAPTION>
1995 1994
----- -----
(MILLIONS)
<S> <C> <C>
Tenneco Automotive............................................ $ 240 $ 223
Tenneco Packaging............................................. 430 209
Other......................................................... 2 24
----- -----
$672 $ 456
===== =====
</TABLE>
The Company's 1995 operating income increased by $216 million, or 47 percent
compared with 1994. Tenneco Packaging benefited from favorable market
conditions in the packaging industry and Tenneco Automotive improved as
European original equipment and aftermarkets both performed well. The results
of each segment are discussed in detail below.
Significant transactions affecting the comparability of operating income
between 1995 and 1994 are:
. Pre-tax gains on sales of assets and businesses of $15 million in 1995
(primarily a mill in North Carolina) compared with gains of $5 million in
1994.
. Reserves established in 1995 of $30 million for restructuring at Tenneco
Packaging's molded fiber and aluminum foil packaging operations.
. Charges in 1994 of $22 million at Tenneco Automotive for a plant closing
in Ohio and consolidations in Europe associated with the acquisition of
Heinrich Gillet GmbH & Company ("Gillet"), the German exhaust
manufacturer.
TENNECO AUTOMOTIVE
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Revenues....................................................... $2,479 $1,989
Operating income............................................... $ 240 $ 223
</TABLE>
Revenues from Tenneco Automotive's exhaust operations increased during 1995
by $392 million to $1,466 million. Eighty-eight percent, or $346 million of
this increase resulted from revenues at Gillet. European original equipment
volumes were up significantly in 1995 where Gillet is the leading original
equipment manufacturer of exhaust components. European exhaust business
revenues were also stronger in the aftermarket. Of the 23% increase in European
aftermarket revenues, $14 million resulted from volume increases and $10
million from the acquisition of Fonos while positive foreign exchange rate
movements contributed $28 million. North American exhaust revenues declined
slightly in 1995. The 7 percent decrease in the North American aftermarket was
caused by an unusually mild winter in the northeast and midwest which slowed
automotive parts replacement rates. In addition, the U.S. automakers' continued
migration toward stainless steel exhaust systems has negatively impacted North
American aftermarket revenues. The aftermarket decrease was partially offset by
increased original equipment unit volumes, resulting in a $15 million increase
in revenues, due to increased demand for light truck and sport-utility vehicle
exhaust systems.
Operating income for the exhaust operations increased during 1995 by $14
million to $114 million. The 1994 operating income included a $5 million charge
recorded for a plant closing and a $17 million charge related to plant
consolidations as part of the Gillet acquisition. The Gillet operations
contributed $16 million to operating income in 1995. The remainder of the
operating income change in 1995 is due primarily to a high level of costs
related to new product launches. Tenneco Automotive's exhaust business launched
50 products for 1996 model year vehicles in 1995, more than twice the normal
levels which adversely affected 1995 earnings. In connection with the new
product launches, Tenneco Automotive incurred additional costs of $10 million
in 1995 including
55
<PAGE>
those related to a new process, hydroforming. Hydroforming is a liquid, high-
pressure process for bending and shaping metal parts in ways not feasible
using traditional manufacturing technology.
Revenues from Tenneco Automotive's ride control operations increased during
1995 by $98 million to $1,013 million. Fifty-seven percent or $56 million of
this increase resulted from increased original equipment volumes in North
America and Europe. Original equipment volumes increased due to higher demand
for light truck and sport-utility vehicles in North America and improved
economic conditions in Europe. An increase in aftermarket revenues in Europe
more than offset the decrease in North American aftermarket revenues which
declined due to the overall decline in the North American aftermarket.
Operating income for the ride control operations increased in 1995 by $3
million to $126 million. The increased revenues in 1995 did not result in
higher operating income primarily due to increased costs associated with the
large number of new product launches for 1996 model year vehicles. These 18
launches, a significant increase over 1994 launches, adversely affected 1995
earnings.
Tenneco Automotive's margins decreased to 9.7 percent from 11.2 percent in
1994. North American margins decreased to 10.2 percent in 1995 compared with
12.1 percent in 1994 due to higher costs related to new product launches and
lower North American aftermarket sales volumes. European operations margins
improved to 8.1 percent from 7.8 percent as a result of improved economic
conditions in Europe and higher earnings associated with the Gillet
acquisition.
TENNECO PACKAGING
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Revenues....................................................... $2,752 $2,184
Operating income............................................... $ 430 $ 209
</TABLE>
Tenneco Packaging's paperboard operations experienced excellent results
during 1995. Revenues were up $399 million to $1,928 million in 1995,
primarily as a result of strong pricing improvements in linerboard prices
during 1995 that began in late 1994 and continued to drive the paperboard
business until the end of 1995. As a result of the move into higher margin
graphics and specialty corrugated segments, Tenneco Packaging realized higher
revenues on comparable volumes. In addition, strong industry demand for
linerboard and corrugated products served to substantially increase prices for
those products in 1995 and contributed to record revenues.
Operating income in the paperboard operations improved by $260 million to
$399 million in 1995. This improvement includes the 1995 pre-tax gain of $14
million on the sale of a recycled medium mill in North Carolina. Effective mix
management allowed Tenneco Packaging to absorb rapidly rising raw material
prices for corrugated products while posting increased margins. Additionally,
Tenneco Packaging continued to post new productivity gains, especially in the
operation of its containerboard mills, resulting in record operating margins
in 1995.
Revenues in Tenneco Packaging's specialty packaging operations increased by
$169 million to $824 million during 1995. Revenues of $106 million from the
recently acquired plastics business (November 1995) are included in the
results of the specialty packaging business. The remainder of the revenue
increase over 1994 resulted from price realizations in the aluminum product
line.
The specialty packaging business earned $31 million in operating income in
1995, a $39 million decrease compared with 1994 results. Specialty packaging
recorded a restructuring charge of $30 million in 1995 for its molded fiber
and aluminum foil packaging operations and recognized income from the recently
acquired plastics business of $15 million. Excluding these two items, the
decline in operating income for specialty packaging resulted from 20 percent
raw material cost increases that more than offset the positive effects of the
pricing increases initiated during the year. The major contributors to the raw
material cost increases were higher prices for polystyrene, aluminum and old
newspaper. However, these prices declined during the second half of the year.
56
<PAGE>
OTHER
The Company's other operations reported operating income of $2 million during
1995. During 1994, other operations reported operating income of $24 million.
This decrease in operating income resulted from lower interest income on
temporary cash investments.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
The Company's interest expense in 1995 was $160 million compared with $104
million in 1994. The higher interest expense in 1995 compared to 1994 is
principally due to higher levels of allocated corporate debt. Interest
capitalized was $5 million in 1995 compared with $2 million in 1994 due to
higher levels of capital spending in 1995. For a discussion of the historical
allocation of indebtedness of Tenneco and its subsidiaries, see "Results of
Operations--Six Months Ended June 30, 1996 and 1995--Interest Expense (Net of
Interest Capitalized)."
MINORITY INTEREST
Minority interest of $23 million in 1995 related to dividends on preferred
stock of a U.S. subsidiary which was issued in December 1994.
INCOME TAXES
Income tax expense for 1995 was $231 million compared with $114 million in
1994. The Company's effective tax rate was 45 percent in 1995, compared with 32
percent in 1994.
The increased tax expense in 1995 was primarily from higher pre-tax income
and higher foreign tax expense. In 1994, the Company recorded tax benefits from
the realization of deferred tax assets resulting from consolidation of the
Company's German operations.
DISCONTINUED OPERATIONS
Loss from discontinued operations in 1994 of $31 million, net of income tax
benefit of $20 million, resulted from the sale of Tenneco Automotive's brakes
business. The loss on the sale of the brakes business was $26 million, net of
income tax benefit of $15 million. Net loss in 1994 from the brakes operations
was $5 million, net of income tax benefit of $5 million.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits," using the cumulative catch-up method.
It requires employers to account for postemployment benefits for former or
inactive employees after employment but before retirement on the accrual basis
rather than the "pay-as-you-go" basis. As a result of adopting this statement,
an after-tax charge of $7 million was recorded in 1994.
In October 1995, the Financial Accounting Standards Board issued FAS No. 123,
"Accounting for Stock-Based Compensation." This statement defines a fair value
based method of accounting for stock issued to employees and others but also
allows companies to choose to continue to measure compensation cost for such
plans as it is measured currently. The Company has elected to continue to use
the current method of accounting for stock issued to employees. Consequently,
FAS No. 123 will have no impact on the Company's consolidated financial
position or results of operations.
57
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
<TABLE>
<CAPTION>
CASH PROVIDED (USED) BY: 1995 1994
------------------------ ------ ----
(MILLIONS)
<S> <C> <C>
Operating activities...................................... $ 489 $571
Investing activities...................................... (2,041) (303)
Financing activities...................................... 1,297 50
</TABLE>
The Company's operating results, combined with proceeds from sales of assets
and businesses, and supplemented by contributions from Tenneco, have provided
funds for acquisitions and capital investments in existing businesses.
Operating Activities
Operating cash flow for 1995 declined compared with 1994 primarily due to the
build up of paperboard inventories at Tenneco Packaging as a result of a
planned mill shut-down in Counce, Tennessee in early 1996 and a net increase in
other working capital balances.
Investing Activities
Cash used for business acquisitions during 1995 totaled approximately $1.5
billion. The largest single transaction was the acquisition of Mobil Plastics
by Tenneco Packaging for $1.3 billion, which was financed by a cash
contribution from Tenneco. Also, Tenneco Packaging and Tenneco Automotive made
other key acquisitions during the year. Further, the Company invested $562
million in capital expenditures in its existing businesses during the year.
Capital expenditures during the year included $208 million for Tenneco
Automotive, $316 million for Tenneco Packaging and $38 million related to the
Company's other operations. For Tenneco Packaging, these expenditures included
$60 million for a paper machine addition at the Counce, Tennessee mill as well
as $33 million for a new container plant in Salt Lake City, Utah. Tenneco
Automotive's capital spending included $22 million related to new product
launches in plants related to Gillet, which Tenneco Automotive acquired in 1994
for $44 million, and $24 million for expanding a key exhaust plant and
distribution center. Capital expenditures increased in 1995 compared with the
prior year in all businesses. Net proceeds from sales of businesses and assets
during 1995 were $56 million, which included the $30 million proceeds from the
sale of a mill in North Carolina.
Financing Activities
Cash flows from financing activities was $1.3 billion in 1995 and primarily
included a $1.3 billion cash contribution from Tenneco for the acquisition of
Mobil Plastics in November 1995. Cash provided from financing activities during
1994 was $50 million. In December 1994 Tenneco sold a 25 percent preferred
stock interest in a subsidiary which resulted in net cash proceeds of $293
million. This was included in the balance sheet as minority interest at
December 31, 1994. Furthermore, in 1994 the Company had a net decrease in
short- term debt of $94 million and retired $152 million of long-term debt. See
"Results of Operations--Six Months Ended June 30, 1996 and 1995--Liquidity" for
further discussion of cash contributions to and from Tenneco.
CAPITALIZATION
<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Short-term debt and current maturities..................... $ 384 $ 108
Long-term debt............................................. 1,648 1,039
Minority interest.......................................... 301 301
Combined equity............................................ 1,852 987
------ ------
Total capitalization....................................... $4,185 $2,435
====== ======
</TABLE>
58
<PAGE>
For additional information on corporate debt allocation, see "Interest
Expense (net of interest capitalized)" above.
OTHER
As a result of the acquisition of Mobil Plastics in November 1995 for $1.3
billion and other acquisitions made by the Company in 1995, the Company's
plant, property and equipment, goodwill and intangibles, inventories and
receivables increased at December 31, 1995 when compared to December 31, 1994.
RESULTS OF OPERATIONS--YEARS 1994 AND 1993
NET SALES AND OPERATING REVENUES
Revenues for 1994 were $4.17 billion, up from $3.82 billion in 1993. Tenneco
Automotive revenues were $1,989 million, a $204 million, or an 11 percent
increase, compared with 1993 primarily due to increased new vehicle production
in North America and an improving European economy. Aftermarket revenues also
benefited from the introduction of Monroe's new premium ride control product,
Sensa-Trac(R). A major trade and consumer promotion in North America of the new
Sensa-Trac(R) products helped lead to an 11 percent increase in revenues for
the ride control replacement business worldwide. Packaging revenues increased
$142 million, or seven percent, to $2.18 billion in 1994, as prices in the
paperboard business recovered from the seven-year low reached in the third
quarter of 1993.
INCOME BEFORE INTEREST EXPENSE, INCOME TAXES AND MINORITY INTEREST (OPERATING
INCOME)
Operating income was $456 million for 1994. This was an improvement of $75
million compared with 1993's operating income of $381 million. Excluding gains
from asset sales and other special items including plant consolidations, 1994
operating income increased $126 million, or 36 percent, compared with 1993
primarily due to improved pricing in Tenneco Packaging's containerboard
business.
Tenneco Automotive operating income for 1994 was $223 million, compared with
$222 million in 1993. The 1994 operating income included a $17 million charge
for plant consolidations in Europe associated with acquiring Gillet and a $5
million charge taken in the second quarter for closing a plant in Ohio.
Excluding special items, operating income increased $23 million, or 10 percent,
compared with 1993. This increase is a result of higher volumes in North
America and Europe and was partially offset by higher costs for new product
development and new facility start-up.
Tenneco Automotive's margins were 11.2 percent in 1994 compared with 12.4
percent in 1993. North American margins decreased to 12.1 percent in 1994
compared with 13.6 percent in 1993 due to higher costs related to new product
development and new facility start-up. European operations margins decreased to
7.8 percent from 9.5 percent as a result of costs for plant consolidations
associated with the Gillet acquisition.
In November 1994, Tenneco Automotive acquired Gillet for $44 million in cash
and $69 million in assumed debt. Gillet is the leading manufacturer of original
equipment exhaust systems and components for European automakers.
Tenneco Packaging's operating income for 1994 was $209 million, compared with
$139 million in 1993. The 1993 operating income included $29 million from gains
related to asset realignment. Excluding these gains, operating income increased
$99 million, or 90 percent, compared with 1993 primarily because of improved
paperboard pricing.
The paperboard business earned $139 million, up $104 million compared with
1993, excluding the 1993 asset realignment gains. Prices rose from depressed
levels in 1993 and contributed $125 million, excluding the recycling business,
of increased operating income. This was partially offset by higher raw material
costs of $32 million, but improved productivity helped counter rising raw
material costs. Paperboard productivity rose 1.6
59
<PAGE>
percent, with mill operating rates exceeding rated capacity for the full year.
The specialty business operating income for 1994 declined $5 million to $70
million, excluding the asset realignment gains in 1993. Both the aluminum and
plastic packaging businesses reported improved operating income. Plastic
packaging volumes grew seven percent in 1994 and demand continued to be strong.
Operating income for plastics rose 40 percent in 1994, reflecting increased
volumes and higher pricing. The increase in operating income provided by the
aluminum and plastic businesses was more than offset by weak performance in the
molded fiber business, where higher raw material costs had a negative effect on
operating income. Prices for recycled newspaper, a major raw material for
molded fiber, rose to over $100 per ton, compared with $26 per ton in 1993.
The Company's other operations reported operating income of $24 million in
1994, compared with operating income of $20 million for 1993.
INTEREST EXPENSE (NET OF INTEREST CAPITALIZED)
The Company's interest expense in 1994 was $104 million compared with $101
million in 1993. Interest capitalized increased to $2 million in 1994 from $1
million in 1993 due to higher levels of major capital spending. For a
discussion of the historical allocation of indebtedness of Tenneco and its
subsidiaries, see "Results of Operations--Six Months Ended June 30, 1996 and
1995--Interest Expense (Net of Interest Capitalized)."
INCOME TAXES
Income tax expense was $114 million for 1994 compared with $115 million for
1993. The Company's effective tax rate was 32 percent in 1994, compared with 41
percent in 1993. The lower effective tax rate in 1994 was the result of tax
benefits from the realization of deferred tax assets resulting from
consolidation of the Company's German operations.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." As a result, an after-tax charge of $7
million was recorded in 1994.
DISCONTINUED OPERATIONS
Loss from discontinued operations in 1994 of $31 million, net of income tax
benefit of $20 million resulted from the Company's brakes business. Loss from
discontinued operations in 1993 of $7 million, net of income tax benefit of $4
million, was also attributable to the Company's brakes business.
CASH FLOW
Operating Activities
Net cash provided by operating activities was $571 million for the year 1994,
compared with $324 million for 1993, an increase of $247 million. This increase
was due to higher income from operations and improved receivable collections.
Investing Activities
Net cash used by investing activities in 1994 was $303 million, compared with
$152 million in 1993. Net proceeds from the sale of businesses in 1993 of $83
million resulted from the sales of various international aluminum ventures.
Expenditures for plant, property and equipment from continuing operations for
1994 were $280 million, compared with $217 million for 1993. Increased
expenditures were reported for Tenneco Automotive ($20 million), Tenneco
Packaging ($42 million) and the Company's other operations ($1 million).
60
<PAGE>
Financing Activities
Cash flows used by financing activities in 1993 was $165 million compared
with cash flows provided by financing activities of $50 million in 1994. Cash
flows used by financing activities in 1993 included a net decrease of short-
term debt of $29 million, the retirement of $21 million of long-term debt, and
a cash contribution to Tenneco of $115 million. Cash flows from financing
activities in 1994 primarily included net cash proceeds of $293 million from
the sale of a 25 percent preferred stock interest in a subsidiary, offset by a
net decrease in short-term debt of $94 million and the retirement of $152
million of long-term debt. See "Results of Operations--Six Months Ended June
30, 1996 and 1995--Liquidity" for further discussion of cash contributions to
and from Tenneco.
61
<PAGE>
BUSINESS AND PROPERTIES
TENNECO AUTOMOTIVE
Tenneco Automotive is one of the world's leading manufacturers of automotive
exhaust and ride control systems for the original equipment market and
aftermarket. Tenneco Automotive is a global business that sells its products in
over 100 countries, manufacturing and marketing its automotive exhaust systems
primarily under the Walker(R) brand name and its ride control equipment
primarily under the Monroe(R) brand name.
Overview of Automotive Parts Industry
The global market for automotive parts was approximately $435.3 billion in
1995, comprised of $352 billion in original equipment ("OE") sales and $83.3
billion in aftermarket sales. This market is expected to grow by 7.6% to $468.4
billion in 1996 and by approximately 7.2% per year through 2000 resulting in a
total market size of approximately $617.6 billion in that year. As the North
American and Western European automotive markets are relatively mature
(expected to grow at an estimated rate of 7.0% and 6.0%, respectively through
2000), original equipment manufacturers ("OEMs") and automotive parts suppliers
are increasingly focusing on emerging markets for additional growth
opportunities, particularly China, Eastern Europe, India and Latin America.
Automotive parts are generally segmented into two categories: (i) OE sales in
which parts are sold in large quantities directly to the vehicle manufacturers
and (ii) aftermarket sales in which parts are sold in varying quantities to a
wide range of wholesalers, retailers and repair shops as replacement parts in
the aftermarket. Demand for automotive parts in the OE market is driven by the
number of new vehicle sales which in turn are determined by prevailing economic
conditions. Factors affecting demand in the aftermarket include the number of
vehicles on the road, the average useful life of parts, the average age of such
vehicles and number of miles driven.
Industry Trends
Currently, there are significant existing and emerging trends that are
dramatically reshaping the automotive industry. As the dynamics of the
automotive industry change, so do the roles, responsibilities and relationships
of its participants. Key trends affecting automotive parts suppliers include:
Consolidation of Parts Suppliers. The automotive parts industry, particularly
with respect to OE suppliers, has been rapidly consolidating for the last
several years. The number of Tier I suppliers has decreased from 3,000 to 1,500
since 1990. By the year 2000, the number of suppliers is expected to decrease
by nearly 75%, leaving approximately 400 Tier I suppliers. The primary reasons
for this consolidation include: (i) an increasing desire by OEMs to work with
fewer, larger suppliers that can provide fully-integrated systems and (ii) the
inability of smaller suppliers to compete on price with the larger companies
who benefit from purchasing and distribution economies of scale.
Full-System Integration by Parts Suppliers. OEMs are moving towards
outsourcing entire automotive parts systems in order to take advantage of the
lower cost structure of the automotive parts suppliers. Development of advanced
electronics has enabled formerly independent components to become
"interactive," leading to a shift in demand from individual parts to fully-
integrated systems. OEMs seem to have accepted the need to work more closely
with suppliers, whose roles are now being transformed from "parts suppliers" to
"developers of modules and systems." This shift has created the role of the
systems integrator, who will increasingly have the ability to execute a number
of activities, such as design, product development, engineering, testing of
component systems, and purchasing from Tier II suppliers. It is estimated that
there will be approximately 60 systems integrators by the year 2005. This
emerging structure should allow the vehicle manufacturers to concentrate on the
activities which are core to their success such as product planning and
marketing, thus limiting their involvement to setting the "look and feel" and
cost parameters for new vehicle platforms. OEMs are also stimulating further
manufacturing cost improvements by implementing strategies that would provide
parts suppliers with greater
62
<PAGE>
input and allow them to share in the benefits of cost savings and productivity
enhancements, thus strengthening the role and potential margins of the
surviving Tier I suppliers.
Globalization of the Automotive Industry. As a result of several factors,
OEMs are increasingly requiring "global" parts suppliers with global management
expertise. As the customer base of OEMs changes, and emerging markets become
more important to achieving growth, suppliers must be prepared to provide
products any place in the world. This requires a worldwide approach to
engineering, sales and distribution.
. Location of Production Closer to End Markets. OEMs have relocated
production globally on an "on-site" basis that is closer to end markets.
This international expansion allows suppliers to pursue sales in
developing markets, to take advantage of relatively lower labor costs
and, to some extent, to offset the counter-cyclicality of the European
and North American markets.
. Growing Importance of Emerging Markets. As the North American and Western
European automotive markets are relatively mature, OEMs are increasingly
focusing on emerging markets for growth opportunities, particularly
China, Eastern Europe, India and Latin America. The increased focus on
the OE markets has in turn increased the growth opportunities in the
aftermarket.
. Increasing Requirement of Government for Local Parts Content. Many
governments are beginning to require certain percentages of local
content.
Standardization of OEM Vehicle Platforms. OEMs are increasingly designing
"world cars" with standard bases and localized features, while also developing
niche market products such as multipurpose vehicles, four-wheel drive and
sports cars for mature markets. OEMs have learned that they can realize
significant economies of scale by limiting variations across items such as
steering columns, brake systems, transmissions, axles, exhaust systems, support
structures, fasteners, and power window and door lock mechanisms. This shift
towards standardization will have a large impact on components manufacturers,
who should experience a reduction in production costs if the OEMs reduce
components variations. This should result in not only higher production volumes
per unit and greater economies of scale, but also lower investment costs for
molds and dies, reduced development and prototype costs and more efficient die
changes and retooling.
Aftermarket. There are several factors that are positively affecting the
North American demand for automotive parts in the aftermarket, including:
. The average age of vehicles on the road is at an industry record-high of
8.4 years.
. The aggregate number of annual miles driven by all vehicles has increased
by 38% from 1,925 billion miles in 1988 to 2,360 billion miles in 1995.
. The size of the vehicle fleet has increased from approximately 157
million registrations in 1988 to approximately 188 million registrations
in 1995.
On the other hand, a factor negatively affecting the demand for aftermarket
parts is the increasing average useful life of most OEM automotive parts as a
result of technological advancements.
Emphasis on Clean Air and Efficiency. The enactment of strict environmental
regulations regarding both pollution and recycling content has led suppliers
and OEMs to design products and develop materials to comply with increasingly
stringent requirements. The Clean Air Act Amendments of 1990 require
substantial reductions in automobile tailpipe emissions, longer warranties on
certain parts of an automobile's pollution-control equipment and additional
equipment to control fuel-vapor emissions. Manufacturers have responded by
focusing their efforts towards technological development, thus lowering costs
while minimizing industrial waste and pollution. Automakers are designing
vehicles that will be easier to dismantle and recycle at the end of their
useful lives and nearly all component manufacturers now deliver parts and
components in reusable shipping containers to reduce the amount of waste
produced at an assembly plant.
63
<PAGE>
Overview of Tenneco Automotive
Tenneco Automotive is one of the world's leading manufacturers of automotive
exhaust and ride control systems for the OE market and the aftermarket. Tenneco
Automotive is a global business that sells its products in over 100 markets
worldwide. Tenneco Automotive manufactures and markets its automotive exhaust
systems primarily under the Walker(R) brand name, and its ride control
equipment is primarily manufactured under the Monroe(R) brand name.
The following table sets forth information relating to the net sales of both
of Tenneco Automotive's primary product groups:
<TABLE>
<CAPTION>
NET SALES ($ IN MILLIONS)
----------------------------------
SIX MONTHS YEAR ENDED DECEMBER
ENDED 31,
JUNE 30, 1996 1995 1994 1993
------------- ------ ------ ------
<S> <C> <C> <C> <C>
EXHAUST SYSTEMS PRODUCTS GROUP
Aftermarket............................... $ 348 $ 637 $ 609 $ 562
OE Market................................. 499 829 465 385
------ ------ ------ ------
$ 847 $1,466 $1,074 $ 947
------ ------ ------ ------
RIDE CONTROL PRODUCTS GROUP
Aftermarket............................... $ 406 $ 687 $ 644 $ 580
OE Market................................. 210 326 271 258
------ ------ ------ ------
$ 616 $1,013 $ 915 $ 838
------ ------ ------ ------
Total Tenneco Automotive................ $1,463 $2,479 $1,989 $1,785
====== ====== ====== ======
</TABLE>
Brands. Tenneco Automotive has established leading brand-name products.
Monroe(R) and Walker(R) are two of the most recognized brand names in the
automotive parts industry. As Tenneco Automotive acquires related product
lines, it is envisioned that they will be incorporated within these existing
product families.
Customers. Tenneco Automotive has developed long-standing business
relationships with many of its customers around the world, working with its
customers in all stages of production, including design, development, component
sourcing, quality assurance, manufacturing and delivery. Tenneco Automotive has
a strong and established reputation with its customers for providing high
quality products at competitive prices as well as for timely delivery and
customer service. Attention to these customer priorities has been recognized by
numerous customers who have awarded Tenneco Automotive supplier quality awards.
64
<PAGE>
Tenneco Automotive serves both the OE market and the aftermarket since the
investment and technology required to produce products for the OEMs can be
profitably parlayed into the higher margin aftermarket. Tenneco Automotive
serves over 25 different OEM customers on a global basis, including the
following:
NORTH AMERICA EUROPE JAPAN
CAMI BMW Mazda
Chrysler DAF Nissan
Ford Daihatsu Suzuki
General Motors Fiat Toyota
Honda Ford
Mazda Jaguar AUSTRALIA
Mitsubishi Lada Ford
Nissan Leyland General Motors
NUMMI Mercedes-Benz Mitsubishi
Toyota Mitsubishi Toyota
Nissan
SOUTH AMERICA Opel
Fiat Peugeot/Citroen
Ford Porsche
General Motors Renault/Matra
Volkswagen Rover/Land Rover
Saab/Scania
Toyota
Volkswagen/Audi/SEAT/Skoda
Volvo
Tenneco Automotive's aftermarket customers include such wholesalers and
retailers as National Auto Parts Association (NAPA), Big A Stores, Midas
International Corp. ("Midas"), Speedy Muffler King and Western Auto in North
America and Midas, Pit Stop and Kwik-Fit in Europe.
Exhaust Systems
Tenneco Automotive designs, manufactures and distributes exhaust systems
primarily under the Walker(R) brand name. These products include a variety of
automotive exhaust systems and emission control products, including mufflers,
catalytic converters, tubular exhaust manifolds, pipe, exhaust accessories and
electronic noise cancellation products. Founded in 1888 and a division of
Tenneco Automotive since 1967, Walker is the replacement market leader for
exhaust systems in North America, Europe and Australia. Walker is a leading
supplier in the OE market in the U.S. as well, supplying exhaust systems used
in 7 of the 10 top-selling 1996 new car models sold in the U.S. Walker has long
been the European market leader in the replacement market for exhaust systems,
and with the acquisition of Gillet in 1994, Walker became Europe's leading OE
supplier.
Exhaust systems play a critical role in safely conveying noxious gases away
from the passenger compartment, reducing the level of pollutants and reducing
engine exhaust noise to an acceptable level. Precise engineering of the
manifold, pipe, catalytic converter and muffler leads to a pleasant, tuned
engine sound, minimal pollutants and optimized engine performance.
Manufacturing and Engineering. With plants in North America, Europe, South
America, South Africa, Asia and Australia, Walker locates its manufacturing
facilities in close proximity to its OE customers to provide just-in-time
delivery. In the U.S., Walker operates 10 manufacturing facilities and seven
distribution centers, three of which are located at manufacturing facilities.
Walker also has two research and development facilities in the U.S. In
addition, Walker operates 26 manufacturing facilities located in Argentina,
Australia, Canada, China, the Czech Republic, the United Kingdom, Mexico,
Denmark, Germany, France, Spain, Portugal, South Africa and Sweden. Walker is
in the process of establishing a production line in Brazil. It also has one
engineering and
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<PAGE>
technical center at its facility in Germany and one at its facility in
Australia. Its engineering facilities include full anechoic chambers in the
U.S. and Europe.
Strategic Acquisitions/Joint Ventures. As part of its international growth
strategy, Walker acquired ownership of Gillet, a manufacturer of exhaust
systems, in November 1994. The acquisition of Gillet, Europe's largest OE
exhaust supplier, recast Tenneco Automotive as the market leader in exhaust
systems for the OE market in Europe. The acquisition also brought many new OE
customers and orders to the Walker business. Before Gillet, Walker had only
Toyota as a European OE exhaust customer. As a result of the acquisition of
Gillet, a variety of new customers have been added, including: Audi, Ford-
Europe, Opel (General Motors), Mercedes Benz, Peugeot/Citroen, Renault, Seat,
Skoda and Volkswagen. Significantly, following the Gillet acquisition, Ford
selected Walker as a supplier for its 1997 "world" car.
In 1995, Walker acquired ownership of Fonos, Spain's largest participant in
the exhaust systems aftermarket, and Perfection Automotive Products, a U.S.
catalytic converter producer, further expanding Walker's presence in the
exhaust systems replacement market. In 1996, Walker established a joint venture
in China (Dalian) to supply exhaust systems to the northern Chinese automotive
market.
The following table sets forth information relating to Tenneco Automotive's
sales of exhaust systems:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
--------------------------------------
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ---------------------------
JUNE 30,
1996 1995 1994 1993
---------- ------- ------- -------
<S> <C> <C> <C> <C>
United States Sales
Aftermarket.................... 42% 46% 48% 52%
OE Market...................... 58 54 52 48
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Foreign Sales
Aftermarket.................... 40% 42% 68% 70%
OE Market...................... 60 58 32 30
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Total Sales by Geographic Area
United States.................. 42% 42% 58% 60%
European Union................. 44 45 24 23
Canada......................... 8 7 10 12
Other areas.................... 6 6 8 5
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
</TABLE>
Ride Control Products
Tenneco Automotive designs, manufactures and distributes ride control
equipment primarily under the Monroe(R) brand name. Tenneco Automotive's ride
control equipment consists of hydraulic shock absorbers, air adjustable shock
absorbers, spring assisted shock absorbers, gas charged shock absorbers and
struts, replacement cartridges and electronically adjustable suspension
systems. Tenneco Automotive manufactures and markets replacement shock
absorbers for virtually all domestic and foreign makes of automobiles. In
addition, Tenneco Automotive manufactures and markets shock absorbers and
struts for use as original equipment on passenger cars and trucks, as well as
for other uses. Founded in 1916, Monroe introduced the world's first shock
absorber in 1926 and became part of Tenneco Automotive in 1977. Tenneco
Automotive is the market leader for ride control equipment in the aftermarket
in North America, Europe and Australia, as well as in the OE market in
Australia.
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Superior ride control is governed by a vehicle's suspension system, including
its shocks and struts. Shocks and struts are components that help maintain
vertical loads placed on a vehicle's tires to help keep the tires in contact
with the road. A vehicle's ability to steer, brake and accelerate depends on
the adhesion, or friction, between the vehicle's tires and the road. Adhesion
is directly influenced by shock absorber and strut performance. Worn or low
quality shocks and struts allow weight to transfer from side to side (roll),
from front to rear (sway) and up and down (bounce). Monroe shocks maintain
vertical loads placed on tires by providing resistance to vehicle bounce, sway
and roll. Variations in tire to road contact affect a vehicle's handling and
braking performance and the safe operation of a vehicle; thus, by enhancing the
tire to road contact, Monroe's ride control products actually function as
safety components of a vehicle rather than merely providing a comfortable ride.
Manufacturing and Engineering. Monroe has ten manufacturing facilities in the
United States and 14 foreign manufacturing operations in Australia, Belgium,
Brazil, Canada, the Czech Republic, Mexico, the United Kingdom, Spain, Turkey
and New Zealand. Monroe also has controlling interests in joint ventures that
own manufacturing operations in China and India as described below. In
designing its shock absorbers and struts, Monroe uses advanced engineering and
test capabilities to provide product reliability, endurance and performance.
Monroe's engineering capabilities feature state-of-the-art testing equipment,
advanced computer aided design equipment, and the talents of over 100
engineers. Monroe's dedication to innovative solutions has led to such
technological advances as adaptive dampening systems; manual, hydraulic and
electronically adjustable suspensions; semi-active and active systems; and air
and hydraulic leveling systems. Conventional shocks and struts were only able
to provide either ride comfort or vehicle control. Monroe's innovative new
grooven-tube, gas-charged shocks and struts enable both ride comfort and
vehicle control, resulting in improved handling (less roll), reduced vibration,
a wider range of vehicle control and a lessening of the reduction in
performance as the struts become overheated (fade). This new technology,
together with Monroe's Position Sensitive Dampening(R) valve can be found in
Monroe's premium quality Sensa-Trac(R) shocks.
Strategic Acquisitions/Joint Ventures. As a means of expanding its product
lines and offering OEMs a complete modular ride control system, in July 1996,
Tenneco Automotive acquired Clevite. Clevite is a leading OE manufacturer of
elastomeric vibration control components, including bushings and engine mounts,
for the auto, light truck and heavy truck markets. With this acquisition,
Tenneco Automotive now has full capability to deliver complete suspension
systems to the OEMs. The Clevite acquisition also complements Tenneco
Automotive's interest in global growth opportunities, as both Clevite and
Monroe have manufacturing operations in Mexico and Brazil. In addition to the
operations mentioned in the preceding paragraph, Tenneco Automotive has a 51%
interest in a joint venture that has three ride control manufacturing
facilities in India and has a 51% interest in a joint venture that has one ride
control manufacturing facility in China. It is anticipated that the joint
venture in India will also manufacture exhaust systems.
The following table sets forth information relating to Tenneco Automotive's
sales of ride control equipment:
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<TABLE>
<CAPTION>
PERCENTAGE OF SALES
--------------------------------------
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ---------------------------
JUNE 30,
1996 1995 1994 1993
---------- ------- ------- -------
<S> <C> <C> <C> <C>
United States Sales
Aftermarket.................... 72% 70% 72% 72%
OE Market...................... 28 30 28 28
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Foreign Sales
Aftermarket.................... 61% 66% 69% 63%
OE Market...................... 39 34 31 37
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
Total Sales by Geographic Area
United States.................. 45% 48% 49% 50%
European Union................. 36 36 32 29
Canada......................... 4 3 5 7
Other areas.................... 15 13 14 14
--- ------- ------- -------
100% 100% 100% 100%
=== ======= ======= =======
</TABLE>
Sales and Marketing
Both of the exhaust and ride control systems groups utilize similar sales and
marketing systems to distribute Tenneco Automotive products. Both groups take
advantage of a dedicated sales force and consumer brand marketing professionals
together with extensive marketing support, including trade and consumer
marketing, promotions and general advertising. Tenneco Automotive maintains a
customer order fill rate consistently exceeding 95%, which it believes is among
the highest in the industry.
Tenneco Automotive sells its OEM products directly. With respect to the
aftermarket, Tenneco Automotive employs three primary distribution techniques:
(i) the traditional three-step distribution system: warehouse distributors,
jobbers and installers; (ii) direct sales to retailers; and (iii) sales to
buying groups.
Strategy
Tenneco Automotive's primary goal is to enhance its leadership position in
the global automotive parts industry in which it is currently one of the
leading manufacturers of exhaust and ride control systems. Tenneco Automotive
intends to capitalize on certain significant existing and emerging trends in
the automotive industry, including (i) the consolidation and globalization of
the OEM supplier base, (ii) increased OEM outsourcing, particularly of more
complex components, assemblies, modules and complete systems to sophisticated,
independent suppliers and (iii) growth of emerging markets for both original
equipment and replacement markets. Key components of Tenneco Automotive's
strategy include:
Branding. Tenneco Automotive, whose major strategic strength is the
performance of its leading Monroe and Walker brand names and their market
shares, intends to emphasize product differentiation to give consumers added
reasons for specifying their brands. For example, Monroe introduced a premium
grade shock and strut called Sensa-Trac(R) in 1994, which helped it regain its
technological leadership in the ride control market, and Walker's Advantage(TM)
and Dyno Max(TM) brands are the leading brands in their product categories.
Tenneco Automotive also plans on capitalizing on its brand strength by
incorporating newly acquired product lines within existing product families, as
it did with Gillet.
Maintain Focus on Core Business. Tenneco Automotive intends to retain market
share in its core businesses with its primary customers while increasing market
share with customers with whom it has not fully realized its potential market
penetration. These objectives are designed to enable Tenneco Automotive to
respond better to
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the OEMs' evolving purchasing requirements, where in addition to manufacturing,
the supplier is required to provide design, engineering and project management
support for a complete package of integrated products.
Continue to Develop High Value-Added Products. Tenneco Automotive intends to
continue to manufacture high value-added products and to develop strategic
alliances with Tier I and Tier II suppliers in order to facilitate development
of these value-added products, including the development of highly engineered
or complex assemblies or systems. Tenneco Automotive intends to expand its
product lines by continuing to identify and fill new fast-growing niche
markets, by developing new products for existing markets, by acquiring
companies with product portfolios that complement the products currently
applied by Tenneco Automotive and by establishing strategic alliances with
other suppliers.
Increase Ability to Provide Full-System Capabilities. The automotive parts
industry is encountering a consolidation of parts suppliers as OEMs require
suppliers to provide design assistance and innovation and full-system
capabilities rather than just specific parts. In response to this trend, the
Company plans to dedicate more resources towards strengthening technical
capability and design expertise and pursue appropriate strategic acquisitions,
joint ventures and strategic alliances in order to increase Tenneco
Automotive's ability to deliver such full-system capability. For example, the
recent acquisition of Clevite now gives Tenneco Automotive the ability to
deliver complete suspension systems to OEMs.
International Expansion. As Tenneco Automotive's OE customers expand their
assembly operations globally and in response to the development of global
aftermarkets, Tenneco Automotive plans to continue its international expansion
through joint ventures, acquisitions and strategic alliances. For example,
since August 1995, Tenneco Automotive has made eight acquisitions and entered
into four international joint ventures. These strategic initiatives have given
Tenneco Automotive an enhanced presence in Argentina, Brazil, China, Australia,
the Czech Republic, Spain, India and most recently, Turkey, In September 1996,
Tenneco Automotive acquired ownership of its Borusan Amortisor shock absorber
joint venture in Turkey ("Borusan Amortisor"). Borusan Amortisor currently has
approximately 23% of the OE market and 30% of the aftermarket in Turkey. Both
markets are expected to grow significantly by the year 2000. The recent
international acquisitions complement the November 1994 acquisitions of Gillet,
Europe's largest supplier of automotive exhaust equipment for the OEM market,
which has already been successfully integrated into Tenneco Automotive. Rather
than segment the world, Tenneco Automotive plans to integrate its international
operations through the standardization of products and processes, improvements
in information technology and the global coordination of purchasing, costing
and quoting procedures.
Strategic Acquisitions. Strategic acquisitions have been, and management
believes will continue to be, an important element of Tenneco Automotive's
growth. Through such acquisitions, Tenneco Automotive can expand its product
portfolio, gain access to new customers and achieve leadership positions within
new geographic markets, while drawing on the strengths of existing distribution
channels with OEM relationships. Tenneco Automotive has developed comprehensive
integration plans to quickly integrate new companies into its infrastructure.
Tenneco Automotive intends to continue to pursue acquisition opportunities in
which management can substantially improve the profitability of strategically
related businesses by, among other things, rationalizing similar product lines
and eliminating certain lower margin product lines; reconfiguring and upgrading
manufacturing facilities; moving production to the lowest cost facilities; and
reducing selling, distribution, purchasing and administrative costs.
Operating Cost Leadership. Tenneco Automotive will continue to seek cost
reductions as it standardizes it product and processes throughout its
international operations, improves its information technology, increases
employee training, invests in more efficient machinery and enhances the global
coordination of purchasing, costing and quoting procedures.
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<PAGE>
Other
As of July 1, 1996, Tenneco Automotive had approximately 21,000 employees.
Tenneco Automotive believes that its relations with its employees are good.
The principal raw material utilized by Tenneco Automotive is steel. Tenneco
Automotive believes that an adequate supply of steel can presently be obtained
from a number of different domestic and foreign suppliers.
Tenneco Automotive holds a number of domestic and foreign patents and
trademarks relating to its products and businesses. It manufactures and
distributes its products primarily under the names Walker(R) and Monroe(R),
which are well recognized in the marketplace. The patents, trademarks and other
intellectual property owned by Tenneco Automotive are important in the
manufacturing and distribution of its products.
The operations of Tenneco Automotive face competition from other
manufacturers of automotive equipment, including affiliates of certain of its
customers, in both the OE market and the aftermarket.
Tenneco Automotive is headquartered in Deerfield, Illinois.
TENNECO PACKAGING
Tenneco Packaging is among the world's leading and most diversified packaging
companies, manufacturing packaging products for consumer, institutional and
industrial markets. The paperboard business group manufactures corrugated
containers, folding cartons and containerboard, has a joint venture in recycled
paperboard, and offers high value-added products such as enhanced graphics
packaging and displays and kraft honeycomb products. Its specialty products
group produces disposable aluminum, foam and clear plastic food containers,
molded fiber and pressed paperboard products, as well as polyethylene bags and
industrial stretch wrap. Tenneco Packaging's consumer products include such
recognized brand names as Hefty(R), Baggies(R) and E-Z Foil(R).
Overview of Packaging Industry
The global packaging market is estimated at nearly $360 billion with about
one quarter in North America, slightly less in Europe and the balance spread
throughout the rest of the world. Tenneco Packaging now ranks as the fourth
largest packaging manufacturer in North America by sales and the tenth largest
in the world. Packaging remains one of the most fragmented major industries,
with the top five companies comprising only a 10% worldwide market share.
Within packaging material categories, Tenneco Packaging participates in the
three growing segments of paper, plastic and aluminum, with substantial or
leading market shares in virtually all of its product segments.
Business Strategy
Tenneco Packaging has embarked upon an aggressive growth plan to be the
leading specialty packaging company offering a broad line of packaging products
to provide customers with the best packaging solutions. In the past two years,
Tenneco Packaging has doubled its size to nearly $4 billion in annualized
revenues through internal growth in its base businesses, productivity gains and
12 acquisitions that have been completed since early 1995.
As a result of these redeployment activities, Tenneco Packaging has
significantly reduced its sensitivity to changes in economic cyclicality:
. Tenneco Packaging's business is now over half specialty (including the full
year impact of the Mobil Plastic acquisition and the recently announced
Amoco Foam Products purchase), which reduces exposure to business cycles.
. On the paperboard side, four acquisitions in specialty graphics and the
purchase of Hexacomb, the world's largest supplier of kraft paper
honeycomb products used for protective packaging, have reduced
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its sensitivity to raw material prices and offer greater opportunities to
add value. Currently, over 20% of Tenneco Packaging's paperboard business
is in higher margin, enhanced graphics including folding cartons, point-
of-purchase displays and point-of-sale packaging, as well as protective
packaging products.
In the future, Tenneco Packaging will continue to pursue value-added, non-
cyclical growth opportunities, maintain market leadership positions in its
primary business groups and leverage its new product development expertise.
As with any manufacturing company whose product demand is sensitive to
general economic conditions, Tenneco Packaging's business results may be
adversely impacted by several uncertainties including raw material cost
fluctuations and pricing variability related to industry supply/demand
dynamics. In addition, potential packaging legislation or regulatory changes,
material substitution, new packaging technologies and changes in consumer
preferences or distribution channels could have an adverse impact on the
Company. However, Tenneco Packaging has positioned itself to deal strategically
with these challenges through its:
. Multi-material focus, broad product line and concentration of growth in
packaging that offers customers greater functionality and value;
. Fiber flexibility, which enables Tenneco Packaging's paperboard business to
manage its mix of virgin and recycled fiber sources to take advantage of
changing market conditions;
. Raw material purchasing leverage in both fiber and plastic resin;
. Technology and new product development expertise, offering innovative
packaging design and materials applications; and
. Global expansion strategy of growing its international business through
value-added acquisitions, joint ventures, and multi-national customer
partnerships.
Tenneco Packaging believes that factors critical to its success include a
focused strategic direction, operating cost leadership, management expertise, a
committed and skilled workforce and a systems infrastructure to meet stringent
customer quality requirements and service needs. Tenneco Packaging will spend
approximately $110 million by the end of 1998 to provide state-of-the-art
customer linked manufacturing systems, shop floor scheduling and real-time data
for marketing and production management.
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Overview of Tenneco Packaging
Tenneco Packaging is an industry leader in the manufacture and sale of
packaging products, offering a wide range of fiber-based materials and
packaging for consumer, institutional and industrial applications, as well as
aluminum and plastic-based specialty packaging for consumer, retail, food
service and food processing applications.
The following tables set forth information relating to the net sales of both
of Tenneco Packaging's primary business groups, in dollars and by percentages:
<TABLE>
<CAPTION>
NET SALES (MILLIONS)
------------------------------------
YEAR ENDED DECEMBER
SIX MONTHS 31,
ENDED ----------------------
JUNE 30, 1996 1995 1994 1993
------------- ------ ------ ------
<S> <C> <C> <C> <C>
PAPERBOARD PRODUCTS GROUP
Corrugated shipping containers and
containerboard products............... $ 751 $1,589 $1,214 $1,086
Folding cartons and recycled paperboard
mill products......................... 92 204 196 196
Paper Stock and other.................. 60 135 119 100
------ ------ ------ ------
903 1,928 1,529 1,382
------ ------ ------ ------
SPECIALTY PRODUCTS GROUP
Disposable plastic and aluminum packag-
ing products.......................... 756 593 434 442
Molded fiber products.................. 100 191 186 183
Other.................................. 16 40 35 35
------ ------ ------ ------
872 824 655 660
------ ------ ------ ------
Total Tenneco Packaging.............. $1,775 $2,752 $2,184 $2,042
====== ====== ====== ======
<CAPTION>
PERCENTAGE OF NET SALES
------------------------------------
YEAR ENDED DECEMBER
SIX MONTHS 31,
ENDED ----------------------
JUNE 30, 1996 1995 1994 1993
------------- ------ ------ ------
<S> <C> <C> <C> <C>
PAPERBOARD PRODUCTS GROUP
Corrugated shipping containers and
containerboard products............... 42% 58% 56% 53%
Folding cartons and recycled paperboard
mill products......................... 5 7 9 10
Paper Stock and other.................. 4 5 5 5
------ ------ ------ ------
51 70 70 68
------ ------ ------ ------
SPECIALTY PRODUCTS GROUP
Disposable plastic and aluminum
packaging products.................... 43% 22% 20% 22%
Molded fiber products.................. 5 7 9 9
Other.................................. 1 1 1 1
------ ------ ------ ------
49 30 30 32
------ ------ ------ ------
Total Tenneco Packaging.............. 100% 100% 100% 100%
====== ====== ====== ======
SALES BY GEOGRAPHIC AREA(A)
United States.......................... 92% 91% 90% 88%
European Union......................... 5 5 6 8
Canada................................. 1 1 1 2
Other areas............................ 2 3 3 2
------ ------ ------ ------
100% 100% 100% 100%
====== ====== ====== ======
</TABLE>
- --------
(a) Restated 1995, 1994 and 1993 to reflect countries included in European
Union as of December 31, 1995: Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain
and Sweden.
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Paperboard Products
The paperboard business group manufactures and sells corrugated containers,
folding cartons, containerboard, lumber and building products, and has a joint
venture in recycled paperboard. The group's product line includes high value-
added products such as enhanced graphics packaging and displays and kraft
honeycomb products. It produces over 2 million tons of containerboard that is
converted by its corrugated container plants and sold to both domestic and
export customers. Over 80% of the containerboard used by the corrugated
converting operations is either produced by Tenneco Packaging's own mills or
supplied through trade partnerships for other grades in exchange for product
produced at Tenneco Packaging's mills, which helps assure a secure supply of
product in a wide variety of grades to meet the requirements of its customers.
It also produces high quality, innovative folding carton products utilizing the
latest in printing and cutting technology for the sheet-fed offset, narrow-web
flexo and rotogravure processes. Finally, Tenneco Packaging participates in the
wood products business and has access to over 1.0 million acres of timberland
in the United States through both owned and leased properties.
Sales and Marketing. Tenneco Packaging maintains a sales and marketing
organization of over 400 sales personnel. Tenneco Packaging also has four
graphics design centers with two more planned which help it meet its customers'
design and functional requirements.
New Product Development and Design. Tenneco Packaging's paperboard group is
establishing a nationwide network of new product development and creative
packaging design centers to develop and manufacture product packaging and
product display solutions to meet more sophisticated, complex customer needs.
This network includes four regional design centers, 22 primary and mid-range
graphics facilities and almost 100 sales personnel, new product development
engineers, and product graphics and design specialists. These centers offer
state-of-the-art computer and design equipment for 24-hour turnaround and
reduced product delivery times.
Manufacturing and Engineering. Tenneco Packaging has two kraft linerboard
mills and two medium mills, located in Tennessee, Georgia, Michigan and
Wisconsin, which together account for 7% of annual U.S. production, or 2.1
million tons. As of June 30, 1996, Tenneco Packaging had invested $75 million
at the Counce, Tennessee mill, which added 120,000 tons annually of capacity
and enabled the mill to meet a growing demand for lighter weight board. Each of
the mills has a strong focus on quality and is ISO 9002 certified. Two
paperstock recycling facilities provide some of the mills' recycled fiber
requirements.
Domestically, Tenneco Packaging's corrugated container network includes 64
geographically dispersed plants that manufacture approximately 7% of the total
annual U.S. corrugated shipments based on revenue, as well as seven kraft paper
honeycomb product plants, making it one of the top six integrated producers.
Tenneco Packaging also operates six folding carton plants located primarily in
the Midwest.
Tenneco Packaging has access to 1.0 million acres of timberland in the United
States through both owned and leased properties. To maximize the value of the
timber harvested, Tenneco Packaging operates four wood products operations
which produce hardwood dimensional lumber and utility poles. Further, Tenneco
Packaging is a party to a joint venture in a chip mill, as well as a wood
drying facility.
Tenneco Packaging's paperboard group operates a manufacturing and technical
support center located in Skokie, Illinois which provides engineering,
manufacturing and technical support to its corrugated operations. In addition,
it currently has a network of four design centers and a design organization
which includes more than 60 structural, graphic and package engineering
specialists for its corrugated and folding carton converting operations.
Strategic Acquisitions/Joint Ventures. As part of Tenneco Packaging's value-
added growth strategy, eight acquisitions were made during 1995 in the
Paperboard Products Group. Tenneco Packaging expanded its graphics and printing
capabilities to that of a full service supplier of point-of-purchase displays
and point-of-sale packaging by acquiring four facilities with expertise in high
impact graphics and design. The addition of Lux Packaging, in Waco, Texas; the
United Group in Los Angeles, California; Menasha Corporation's South
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Brunswick, New Jersey plant; and DeLine Box in Windsor, Colorado have broadened
Tenneco Packaging's offering of products and services to include permanent
point-of-purchase displays, rotogravure preprint, litho-lamination and advanced
graphics design.
Tenneco Packaging added to its network of specialty sheet plants through the
acquisition of Mid-Michigan Container in Michigan; Sun King Container in El
Paso, Texas; and Domtar Packaging's Watertown, New York facility. It also
increased its protective packaging capabilities through the purchase of
Hexacomb, the world's largest supplier of honeycomb corrugated products used
for protective packaging, materials handling and specialized structural
applications.
In June 1996, Tenneco Packaging and Caraustar entered a joint venture
pursuant to which Tenneco Packaging contributed its two recycled paperboard
mills (Rittman, Ohio and Tama, Iowa) and a recovered paper stock and brokerage
operation for cash and a 20% equity position in the business. The mills will
continue to supply recycled paperboard to Tenneco Packaging's six folding
carton plants.
Specialty Products
Tenneco Packaging's Specialty Products Group produces disposable aluminum,
foam and clear plastic products for the food processing, food preparation and
food service industries. It also manufactures molded fiber and pressed
paperboard products, as well as polyethylene bags and industrial stretch film.
Consumer products are sold under such recognized brand names of Hefty(R),
Baggies(R), Hefty OneZip(TM) and E-Z Foil(R).
Tenneco Packaging's lightweight, durable plastic packaging for in-store deli,
produce, bakery and catering applications maintain quality and enhance
presentation. Plastic food storage and trash bags, foam and molded fiber
dinnerware, disposable aluminum baking pans and related products are sold
through a variety of retail outlets. Tenneco Packaging also manufactures molded
fiber for produce and egg packaging, food service items and institutional
tableware.
Sales and Marketing. Specialty packaging products are marketed to five
primary market segments: food service, supermarkets, institutional, packer
processor and industrial users. The sales organization is specialized by user
segment and its teams work in alliance with strategic customers to build sales.
Approximately 85% of specialty packaging products are sold to its distributors,
while the remainder are sold directly to retailers.
Consumer products are marketed primarily through three classes of retailers
or channels of trade: grocery (supermarkets and convenience stores), non-food
(mass merchandisers, drug stores, hardware stores, home centers), and warehouse
clubs with sales distributed 66%, 30%, and 4%, respectively, based on 1994 net
revenues. Consumer products' internal sales management personnel are augmented
by a national network of grocery brokers and manufacturing representatives to
provide headquarter and in-store sales coverage for the grocery channel.
Consumer products covers warehouse clubs and selected non-food retailers on a
direct basis. The overall sales breakdown is approximately 19% direct and 81%
broker/representative.
Manufacturing and Engineering. In North America, Tenneco Packaging operates
30 specialty products facilities. With the acquisitions of the Mobil Plastics
division and Amoco Foam Products, Tenneco Packaging now has polystyrene
production in 18 locations in 13 states. It produces polyethylene products in
six locations including a Canadian facility. Aluminum roll stock is converted
at five locations, including three locations shared with polystyrene
production. Molded fiber packaging is produced in six locations. Finally,
pressed paperboard products are manufactured at one facility in Columbus, Ohio.
Research and development centers for packaging and process development are
located in Macedon, New York and Northbrook, Illinois.
Within the Specialty Products Group there are two major types of plastic
manufacturing plants, offering excellent process technology and high quality
equipment in polystyrene extrusion/thermoforming/automation, consumer waste
bags and stretch films. Tenneco Packaging's polyethylene plants produce liners,
food bags, grocery sacks and stretch film, as well as retail waste and food
bags for consumer applications. Most of the Specialty Products Group's
polyethylene processes are in-line. Polystyrene plants make foam products
including
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<PAGE>
consumer tableware, foodservice disposables, meat trays and clear containers.
With multiple production lines, each plant is generally capable of making
several product types. Polystyrene pellets are marketed and extruded and
subsequently thermoformed and converted into finished products.
Strategic Acquisitions. Tenneco Packaging acquired Mobil Plastics in late
1995 which more than doubled the size of its Specialty Products Group and added
new technologies and product development capabilities. It provides strong
consumer branded products such as Hefty(R) trash bags, Baggies(R) food bags,
and Hefty OneZip(TM) food storage bags. In addition, it manufactures clear and
foam polystyrene food service containers; plates and meat trays; and,
polyethylene film products including can liners, produce and retail bags, and
medical and industrial disposable packaging.
In August 1996, Tenneco Packaging purchased Amoco Foam Products. Amoco Foam
Products, with 1995 sales of $288 million, manufactures foam polystyrene
tableware including cups, plates, carrying trays; hinged-lid food containers;
packaging trays, primarily for meat and poultry; and industrial products for
residential and commercial construction applications.
International
Tenneco Packaging has a growing international presence with a revenue base of
nearly $200 million and an additional $100 million in export sales to
approximately 38 countries, manufacturing products that serve a wide range of
packaging needs. It expects to significantly enlarge its international
operations by growing its base businesses, strengthening its export
capabilities for both fiber-based and plastic products, and by growing
selectively in new markets, geographies or channels that represent high-
potential opportunities.
Manufacturing and Engineering. Tenneco Packaging currently operates or has an
ownership interest in 12 international manufacturing locations. Omni-Pac is
Europe's leading manufacturer of molded fiber packaging with facilities in
Elsfleth, Germany and Great Yarmouth, England. Tenneco Packaging's Alupak
operation in Belp, Switzerland is a major producer of smoothwall aluminum
portion packs. In plastic, Tenneco Packaging has the leading share of single-
use thermoformed plastic food containers in the United Kingdom, with four
manufacturing operations in England, Scotland and Wales.
Tenneco Packaging also operates a folding carton plant in Budapest, Hungary
and is building a wood products operation in Romania. It participates in
several international joint ventures, including folding carton plants in
Donngguan, China and Bucharest, Romania and a corrugated converting facility in
Zhejiang, China.
Acquisitions/Business Development. In 1995, Tenneco Packaging purchased
Penlea and Delyn, two plastic thermoforming operations in the United Kingdom.
In 1996, it entered the European wood products business with the startup of a
venture in Buchin, Romania. In addition to harvesting rights in excess of 1.8
million cubic meters of timber, Tenneco Packaging is constructing a wood
processing plant for value-added furniture components, to be supported by a
full sawmill operation.
Other
As of June 30, 1996, Tenneco Packaging had approximately 19,000 employees.
Tenneco Packaging believes that its relations with its employees are good.
Tenneco Packaging holds a number of domestic and foreign patents and
trademarks relating to its products and businesses. The patents, trademarks and
other intellectual property owned by Tenneco Packaging are important in the
manufacturing, marketing and distribution of its products.
The principal raw materials used by Tenneco Packaging in its manufacturing
operations are virgin pulp, recycled fiber, plastic resin and aluminum roll
stock. Tenneco Packaging obtains its virgin pulp from timberland owned or
controlled by it as well as from outside purchases. Recycled fiber is supplied
from both outside contractual sources as well as internally from its two
recycling centers and its own containerboard clippings and trim. Tenneco
Packaging obtains plastic resin and aluminum roll stock from various suppliers.
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As of June 30, 1996, Tenneco Packaging owned approximately 188,000 acres of
timberland in Alabama, Michigan, Mississippi and Tennessee and leased, managed
or had cutting rights on an additional 808,000 acres of timberland in Alabama,
Mississippi, Tennessee, Florida, Wisconsin and Georgia. In 1995, 1994, and
1993, approximately 30%, 28% and 28%, respectively, of the virgin fiber used by
Tenneco Packaging in its mill operations was obtained from Tenneco Packaging-
controlled timberlands.
The operations of Tenneco Packaging face competition from other manufacturers
of packaging products, including manufacturers of alternative products, in each
of its geographic and product markets.
Tenneco Packaging is headquartered in Evanston, Illinois.
TENNECO BUSINESS SERVICES
TBS designs, implements and administers shared administrative service
programs for the various Tenneco businesses as well as, on an "as requested"
basis, for former Tenneco business entities.
Primary service areas of TBS include (i) Financial Accounting Services,
including asset management, general accounting, purchasing and payables, travel
and entertainment, tax compliance and reporting and other applications; (ii)
Supplier Development and Administration, including vendor negotiations and
contract administration; (iii) Employee Benefits Administration for all major
salaried and hourly benefit plans; (iv) Technology Services, including main
frame computing services, telecommunication services and distributed processing
services; (v) Human Resources and Payroll Services, including payroll
processing, relocation services, government compliance services and expatriate
relocation and repatriation services; and (vi) Environmental Health and Safety
Services, including remediation consultation, operations risk analysis and
compliance audits.
TBS has to date only serviced other Tenneco businesses and, on an as
requested basis, former Tenneco businesses such as Case Corporation. However,
TBS is in the process of investigating opportunities to provide similar
services to outside businesses. It is anticipated that after the Distributions,
TBS will continue to provide services to Newport News and Tenneco pursuant to
the terms of the TBS Services Agreement. See "The Industrial Distributions--
Relationships Among Tenneco, the Company and Newport News After the
Distributions--Terms of the Ancillary Agreements--TBS Services Agreement."
In connection with its operations, TBS holds numerous software licenses, owns
and operates computer equipment and has agreements with numerous vendors for
supplies and services.
As of June 30, 1996, TBS had approximately 300 employees. TBS believes that
its relations with its employees are good.
Although to date TBS has provided its administrative programs exclusively to
current and former Tenneco businesses, once TBS attempts to begin providing
similar services to outside businesses it will face intense competition from
other providers of administrative services, many of whom are larger and have
more experience providing administrative services in a competitive environment.
TBS is headquartered in The Woodlands, Texas.
PROPERTIES
Corporate Headquarters
The Company's corporate offices are located in Greenwich, Connecticut.
Tenneco Automotive
In the United States, Walker operates 10 manufacturing facilities and seven
distribution centers, three of which are located at manufacturing facilities,
and also has two research and development facilities. In addition, Walker
operates 25 manufacturing facilities located in Australia, Canada, China, the
Czech Republic, the United Kingdom, Mexico, Denmark, Germany, France, Spain,
Portugal, South Africa and Sweden, and also has one engineering and technical
center in Germany.
76
<PAGE>
Monroe has seven manufacturing facilities and one research and development
facility and three distribution centers. In addition, Monroe has 14 foreign
manufacturing operations in Australia, Belgium, Brazil, Canada, China, the
Czech Republic, India, Mexico, the United Kingdom, Spain, Turkey and New
Zealand.
Overall, Tenneco Automotive now operates 65 facilities in 21 countries in
North America, Europe, South America, Australia and the Asia-Pacific region.
Tenneco Packaging
In North America, Tenneco Packaging operates or has an ownership interest in
a total of 122 facilities. The paperboard business group has 71 corrugated
products plants, six folding carton plants and nine containerboard machines at
four mills. Two of the mills (located in Georgia and Wisconsin), including
substantially all of the equipment associated with both mills, are leased from
third parties. Additionally, the paperboard business group operates a wood
products group including two hardwood facilities, one dimensional lumber plant,
one utility pole facility, one air drying facility for wood, and a joint
venture in a chip mill. Two recycled paperstock facilities provide furnish for
the mills. Tenneco Packaging also has a minority equity position in two
recycled paperboard mills and one recycling center and brokerage operation.
In July 1996, Tenneco Packaging exercised its early termination and purchase
options under the leases of the two mills located in Georgia and Wisconsin
discussed above, pursuant to which Tenneco Packaging has the right to purchase
the mills at an agreed cost of approximately $750 million in January 1997.
Tenneco Packaging has reached an agreement in principle pursuant to which
another lessor will acquire the mills directly from Tenneco's original lessor
and thereafter enter into a new lease with Tenneco Packaging. This agreement is
subject to the completion of definitive documentation and the consent of the
original lessor to allow the assignment of Tenneco Packaging's rights under the
purchase option. In the event this new lease transaction is not consummated,
Tenneco Packaging would be required to complete the purchase of both mills.
Tenneco Packaging's Specialty Products Group operates six molded fiber
plants, one pressed paperboard plant and 23 disposable plastic and aluminum
packaging products plants in North America.
Internationally, Tenneco Packaging operates or has an ownership position in
15 locations. These include three folding carton operations, one corrugated
container plant and a wood products operation. Additionally, it also
manufactures plastics products at four locations, aluminum portion packs at one
facility, molded fiber products at two locations and protective packaging at
two locations.
TBS
TBS operates out of its headquarters in The Woodlands, Texas, as well as
offices in Evanston, Illinois, Newport News, Virginia and Houston, Texas.
The Company believes that substantially all of its plants and equipment are,
in general, well maintained and in good operating condition. They are
considered adequate for present needs and as supplemented by planned
construction are expected to remain adequate for the near future.
The Company is of the opinion that it and its subsidiaries have generally
satisfactory title to the properties owned and used in their respective
businesses, subject to liens for current taxes and easements, restrictions and
other liens which do not materially detract from the value of such property or
the interests therein or the use of such properties in their businesses.
ENVIRONMENTAL MATTERS
The Company estimates that its subsidiaries will make capital expenditures
for environmental matters of approximately $15 million in 1996 and that capital
expenditures for environmental matters will be approximately $71 million in the
aggregate for the years 1996 through 2006.
For information regarding environmental matters, see "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Note 14, "Commitments and Contingencies," to the Combined
Financial Statements of the Company.
77
<PAGE>
LEGAL PROCEEDINGS
On August 2, 1993, the U.S. Department of Justice filed suit against Tenneco
Packaging Inc. in the Federal District Court for the Northern District of
Indiana, alleging that wastewater from Tenneco Packaging's molded fiber
products plant in Griffith, Indiana, interfered with or damaged the Town of
Griffith's municipal sewage pumping station on two occasions in 1991 and 1993,
resulting in discharges by the Town of Griffith of untreated wastewater into a
river. Tenneco Packaging and the Department of Justice have executed a consent
decree which has been lodged with the court and published for public notice and
comment. The Company believes that the resolution of this matter will not have
a material adverse effect on the financial condition or results of operations
of the Company and its subsidiaries.
In 1993 and 1995, the EPA issued notices of violation for particulate and
opacity violations at the three coal-fired boilers of the Rittman, Ohio
paperboard mill (owned by Tenneco Packaging until June 1996). Tenneco Packaging
filed responses disputing the alleged violations. Stack testing has
demonstrated Tenneco Packaging's compliance. In July 1996, Tenneco Packaging
received an EPA administrative complaint seeking a $126,997 penalty for alleged
emissions violations. Tenneco Packaging has filed its answer to the complaint.
The Company believes that the resolution of this matter will not have a
material adverse effect on the financial condition or results of operations of
the Company and its subsidiaries.
At July 1, 1996, the Company had been designated as a potentially responsible
party in 12 "Superfund" sites. With respect to its pro rata share of the
remediation costs of certain sites, the Company is fully indemnified by third
parties. With respect to certain other of these sites, the Company has sought
to resolve its liability through settlements which provide for payments of the
Company's allocable share of remediation costs. For the remaining sites, the
Company has estimated its share of the remediation costs to be between $3
million and $23 million or .003% to .020% of the total remediation costs for
those sites and has provided reserves that it believes are adequate for such
costs. Because the clean-up costs are estimates and are subject to revision as
more information becomes available about the extent of remediation required,
the Company's estimate of its share of remediation costs could change.
Moreover, liability under the Comprehensive Environmental Response,
Compensation and Liability Act is joint and several, meaning that the Company
could be required to pay in excess of its pro rata share of remediation costs.
The Company's understanding of the financial strength of other potentially
responsible parties has been considered, where appropriate, in the Company's
determination of its estimated liability. The Company believes that the costs
associated with its current status as a potentially responsible party in the
Superfund or other waste sites referenced above will not be material to its
consolidated financial position or results of operations.
For additional information concerning environmental matters, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business and Properties" and the caption "Environmental Matters"
under Note 14, in the Combined Financial Statements of the Company.
The Company and its subsidiaries are parties to numerous other legal
proceedings arising from their operations. The Company believes that the
outcome of these other proceedings, individually and in the aggregate, will
have no material effect on the Company's combined financial condition or
results of operations.
78
<PAGE>
MANAGEMENT
BOARD OF DIRECTORS
Upon consummation of the Industrial Distribution, the Company Board will
consist of eleven members. Each director will serve for a term expiring at the
annual meeting of stockholders in the year indicated below and until his or her
successor shall have been elected and qualified. Pursuant to the Certificate
(as defined herein), the Company Board is divided into three classes.
Information concerning the individuals who will serve as directors of the
Company as of the Distribution Date is set forth below.
Term Expiring at the 1997 Annual Meeting of Stockholders (Class I)
MARK ANDREWS has been Chairman of Andrews Associates, Inc., a government
consulting firm, since February 1987. From 1963 to 1980, he served in the U.S.
House of Representatives, and from 1980 to 1986 he served in the U.S. Senate.
He is also a director of Union Storage Co. and Case Corporation. Mr. Andrews is
70 years old and has been a director of Tenneco since 1987. He has served as a
member of the Compensation and Benefits Committee and the Nominating and
Management Development Committee of Tenneco, and will serve as a member of the
Compensation and Benefits Committee and the Nominating and Management
Development Committee of the Company.
W. MICHAEL BLUMENTHAL has been a consultant to Lazard Freres & Co. L.L.C., an
investment banking firm, since January 1995 and was a limited partner of that
firm from April 1990 through December 1994. Prior to that time he was Chairman
of Unisys Corporation, a manufacturer of business information systems, and had
been an executive officer of that company for more than five years. He is also
a director of Daimler-Benz InterServices (Debis) AG. Mr. Blumenthal is 70 years
old and has been a director of Tenneco since 1985. He has served as a member
and the Chairman of the Nomination and Management Development Committee of
Tenneco, and will serve as a member and the Chairman of the Nomination and
Management Development Committee of the Company.
BELTON K. JOHNSON is engaged in farming, ranching and investments and has
pursued such interest for more than five years. He is also a director of AT&T
Corp. Mr. Johnson is 66 years old and has been a director of Tenneco since
1979. He has served as a member of the Executive Committee and the Compensation
and Benefits Committee of Tenneco, and will serve as a member of the Executive
Committee and the Compensation and Benefits Committee of the Company.
WILLIAM L. WEISS has been Chairman Emeritus of Ameritech Corporation, a
telecommunications and information services company, since 1994, formerly
serving as Chairman and Chief Executive Officer of that company for more than
five years. Mr. Weiss is a director of Abbott Laboratories, Inc., Merrill Lynch
& Co., Inc. and the Quaker Oats Company. Mr. Weiss is 67 years old and has been
a director of Tenneco since January 1994. He has served as a member of the
Audit Committee of Tenneco and will serve as a member of the Audit Committee of
the Company.
Term Expiring at the 1998 Annual Meeting of Stockholders (Class II)
M. KATHRYN EICKHOFF has been President of Eickhoff Economics, Inc., a
consulting firm, since 1987. From 1985 to 1987 she was Associate Director for
Economic Policy for the U.S. Office of Management and Budget, and prior to 1985
was Executive Vice President and Treasurer of Townsend-Greenspan & Co., Inc.,
an economic consulting firm. She is also a director of AT&T Corp., Pharmacia &
Upjohn, Inc. and Fleet N.A. Ms. Eickhoff is 57 years old and has been a
director of Tenneco since 1987. She has served as a member of the Executive
Committee, Audit Committee and Nominating and Management Development Committee
of Tenneco, and will serve as a member of the Executive Committee, Audit
Committee and Nominating and Management Development Committee of the Company.
She previously served as a member of the Tenneco Board from 1982 until her
resignation to join the Office of Management and Budget in 1985.
79
<PAGE>
PETER T. FLAWN is a former President of The University of Texas at Austin,
having served in such capacity for more than five years preceding his
retirement in 1985. He is also a director of National Instruments Corp., Harte-
Hanks Communications, Inc., Global Marine Inc. and Input/Output, Inc. Dr. Flawn
is 70 years old and has been a director of Tenneco since 1980. He has served as
a member of the Executive Committee and is a member and the Chairman of the
Audit Committee of Tenneco, and will serve as a member of the Executive
Committee and as a member and Chairman of the Audit Committee of the Company.
JOHN B. MCCOY is Chairman and Chief Executive Officer of Banc One
Corporation, a bank holding company, and has served in that position since
1987, prior to which he was President of that company from 1983. He is a
director of Cardinal Health, Inc., the Federal Home Loan Mortgage Corporation,
and Ameritech Corporation. He also serves on the advisory council of the
American Bankers Association. Mr. McCoy is 53 years old and has been a director
of Tenneco since 1992. He has served as a member of the Compensation and
Benefits Committee of Tenneco, and will serve as a member of the Compensation
and Benefits Committee of the Company.
DANA G. MEAD is Chairman and Chief Executive Officer of the Company and has
served as an executive officer of Tenneco since April 1992, when he joined
Tenneco as Chief Operating Officer. Prior to joining Tenneco, Mr. Mead served
as an Executive Vice President of International Paper Company, a manufacturer
of paper, pulp and wood products, from 1988, and served as Senior Vice
President of that company from 1981. He is also a director of Alco Standard
Corporation, Baker Hughes Incorporated, Case Corporation and Textron Inc. Mr.
Mead is 60 years old and has been a director of Tenneco since April 1992. He
has served as a member and Chairman of the Executive Committee and an ex
officio member of the Audit, and Nominating and Management Development
Committees of Tenneco, and will serve as a member and Chairman of the Executive
Committee and as an ex officio member of the Audit and Nominating and
Management Development Committees of the Company.
Term Expiring at the 1999 Annual Meeting of Stockholders (Class III)
HENRY U. HARRIS, JR., since 1992, has been Vice Chairman Emeritus of Smith
Barney Inc., an investment banking firm, and for more than five years prior to
which he served as an executive officer of that firm. Mr. Harris is 69 years
old and has been a director of Tenneco since 1968. He has served as a member of
the Executive Committee, Audit Committee and the Nominating and Management
Development Committee of Tenneco, and will serve as a member of the Executive
Committee, Audit Committee and the Nominating and Management Development
Committee of the Company.
CLIFTON R. WHARTON, JR., served as Chairman and Chief Executive Officer of
Teachers Insurance and Annuity Association and the College Retirement Equities
Fund from 1987 to 1993 and as Deputy Secretary of State, U.S. Department of
State, from January to November of 1993. From 1978 to 1987 he served as
Chancellor of the State University of New York System. From 1970 to 1978 Mr.
Wharton served as President of Michigan State University. Prior to 1970 he
spent 22 years working in foreign economic and agricultural development in
Latin America and Southeast Asia for the Rockefeller family philanthropic
interests. He is also a director of the TIAA Board of Overseers, Ford Motor
Company, the New York Stock Exchange, Inc. and Harcourt General, Inc. Mr.
Wharton is 69 years old and has been a director of Tenneco since June 1994. He
has served as a member and Chairman of the Compensation and Benefits Committee
of Tenneco, and will serve as a member and Chairman of the Compensation and
Benefits Committee of the Company.
SIR DAVID PLASTOW is Chairman of the Medical Research Council, which promotes
and supports research and post-graduate training in the biomedical and other
sciences. He served as Chairman of Inchcape plc from June 1992 to December 1995
and Chairman and Chief Executive Officer of Vickers plc, an engineering and
manufacturing company headquartered in London, from January 1987 to May 1992.
He is also a director of Lloyds TSB Group plc. Sir David Plastow is 64 years
old and has been a director of Tenneco since May 14, 1996. He previously served
as a member of the Tenneco Board from 1985 until his resignation in 1992. He
has served as a member of the Compensation and Benefits Committee and
Nominating and Management Development Committee of Tenneco, and will serve as a
member of the Compensation and Benefits Committee and Nominating and Management
Development Committee of the Company.
80
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the persons who
have served as executive officers of Tenneco and, upon consummation of the
Industrial Distribution, will serve as executive officers of the Company after
the Industrial Distribution. Each such person will be elected to the indicated
office with the Company in anticipation of the Industrial Distribution and will
serve at the discretion of the Company Board. Those persons who have been
officers and/or employees of Tenneco and/or Newport News will relinquish such
positions in connection with the Industrial Distribution.
<TABLE>
<CAPTION>
EFFECTIVE DATE OF TERM
NAME (AND AGE AT JULY AS EXECUTIVE OFFICER
31, 1996) OFFICES HELD* OF TENNECO
- --------------------- ------------- ----------------------
<S> <C> <C>
Dana G. Mead (60)....... Chairman May 1994
Chief Executive Officer February 1994
Director April 1992
Chairman of the Executive Committee February 1994
Member of the Executive Committee May 1992
Theodore R. Tetzlaff General Counsel July 1992
(51)...................
Robert T. Blakely (54).. Executive Vice President May 1996
Chief Financial Officer July 1981
Stacy S. Dick (39)...... Executive Vice President January 1996
John J. Castellani (45). Senior Vice President--Government March 1995
Relations
Arthur H. House (54).... Senior Vice President--Corporate Affairs March 1995
Barry R. Schuman (55)... Senior Vice President--Human Resources March 1993
Kenneth D. Allen (57)... Vice President March 1987
David T. Ellis (43)..... Vice President--Environment, Health and July 1995
Safety
Ilene S. Gordon (43).... Vice President--Operations May 1994
Jack Lascar (42)........ Vice President--Investor Relations July 1994
Mark A. McCollum (37)... Vice President and Controller May 1995
Robert S. McKinney (54). Vice President and Chief Information Officer May 1996
Thomas G. Oakley (43)... Vice President May 1996
Karen R. Osar (47)...... Vice President and Treasurer January 1994
Robert G. Simpson (44).. Vice President--Tax May 1990
Stephen J. Smith (51)... Vice President--Human Resources July 1994
Karl A. Stewart (53).... Vice President May 1991
Secretary May 1986
R. A. Snell (54)........ President and Chief Executive Officer-- September 1993
Tenneco Automotive
Paul T. Stecko (51)..... President and Chief Executive Officer-- December 1993
Tenneco Packaging
</TABLE>
- --------
*Unless otherwise indicated, all offices held are with Tenneco.
Each of the executive officers of Tenneco has been continuously engaged in
the business of Tenneco, its subsidiaries, affiliates or predecessor companies
during the past five years except that: (i) from 1986 to 1992, Dana G. Mead was
employed by International Paper Co., last serving in the capacity of Executive
Vice President; (ii) Theodore R. Tetzlaff has been a partner in the law firm of
Jenner & Block, Chicago, for more than five years; (iii) from 1985 to 1992,
Stacy S. Dick was employed by The First Boston Corporation, last serving in the
capacity of Managing Director and from August 1992 to January 1996 he served as
Senior Vice President--Strategy of Tenneco; (iv) from 1980 to 1992, John J.
Castellani was employed by TRW Inc., last serving in the capacity of Vice
President of Government Relations and from August 1992 to March 1995 he served
as Vice President--Government Relations of Tenneco; (v) from 1988 until his
employment by Tenneco in 1992, Barry
81
<PAGE>
R. Schuman was employed by Union Pacific Railroad Company, last serving in the
capacity of Vice President of Human Resources; (vi) from 1990 until 1992,
Arthur H. House served as Vice President, Corporate Communications of Aetna
Life & Casualty Company; from June 1992 until March 1995, he served as Vice
President--Corporate Affairs of Tenneco; (vii) from 1990 to May 1996, Robert S.
McKinney was chief information officer and a member of the board of directors
of Paine Webber; (viii) from 1975 to 1994, Karen R. Osar was employed by J.P.
Morgan & Co., Inc., last serving in the capacity of Managing Director--
Corporate Finance Group; (ix) from 1980 to 1994, Mark A. McCollum was employed
by Arthur Andersen LLP, last serving as an Audit Partner and from January 1995
to May 1995 he served as Vice President--Financial Analysis and Planning of
Tenneco; and (x) from 1977 to 1993, Paul T. Stecko was employed by
International Paper Co., last serving as Vice President and General Manager of
Publications Papers, Bristols and Converting Papers.
STOCK OWNERSHIP OF MANAGEMENT
Set forth below is the ownership as of September 30, 1996 (without giving
effect to the Transaction) of the number of shares and percentage of Tenneco
Common Stock beneficially owned by (i) each director of the Company, (ii) each
of the executive officers of the Company whose names are set forth on the
Summary Compensation Table and (iii) all executive officers and directors of
the Company.
<TABLE>
<CAPTION>
PERCENT OF
SHARES OF TENNECO COMMON TENNECO COMMON
DIRECTORS STOCK OWNED(A)(B) STOCK OUTSTANDING
--------- ------------------------ -----------------
<S> <C> <C>
Mark Andrews.................. 5,404 (c)
W. Michael Blumenthal......... 3,555 (c)
M. Kathryn Eickhoff........... 3,697 (c)
Peter T. Flawn................ 3,850 (c)
Henry U. Harris, Jr........... 5,802 (c)
Belton K. Johnson............. 6,111 (c)
John B. McCoy................. 2,850 (c)
Dana G. Mead.................. 199,310 (c)
Sir David Plastow............. 2,100 (c)
William L. Weiss.............. 4,850 (c)
Clifton R. Wharton, Jr........ 2,350 (c)
<CAPTION>
EXECUTIVE OFFICERS
------------------
<S> <C> <C>
Theodore R. Tetzlaff.......... 33,637 (c)
Robert T. Blakely............. 55,262 (c)
Stacy S. Dick................. 32,062 (c)
Paul T. Stecko................ 28,151 (c)
All executive officers and di-
rectors as a group........... 690,753(d) (c)
</TABLE>
- --------
(a) Each director and executive officer has sole voting and investment power
over the shares beneficially owned (or has the right to acquire shares as
set forth in note (b) below) as set forth in this column, except for (i)
shares that are held in trust for each director and executive officer under
Tenneco's restricted stock plans and (ii) shares that executive officers of
the Company have the right to acquire pursuant to Tenneco's stock option
plans. It is anticipated that all restricted stock held by employees
(including executive officers) will be vested prior to the consummation of
the Distributions except that a small number of TBS employees will be given
cash in lieu of vesting of their restricted stock. It is also anticipated
that restricted stock held by directors will be vested prior to the
consummation of the Distributions, and the directors will be paid an amount
in cash to defray taxes incurred on such vesting. As described in footnote
(f) to the Option Grant Table, it is anticipated that Tenneco options held
by Company employees will be replaced by options to acquire Company Common
Stock upon consummation of the Industrial Distribution.
82
<PAGE>
(b) Includes shares that are: (i) held in trust under Tenneco's restricted
stock plans; at September 30, 1996, Messrs. Mead, Tetzlaff, Blakely, Dick,
and Stecko held 24,500; 15,000; 7,775; 7,000; and 5,000 restricted shares,
respectively; and (ii) subject to options, which were granted under
Tenneco's stock option plans, and are exercisable at September 30, 1996 or
within 60 days of said date, for Messrs. Mead, Tetzlaff, Blakely, Dick, and
Stecko to purchase 133,335; 16,667; 16,259; 12,667; and 18,667 shares,
respectively.
(c) Less than one percent.
(d) Includes 305,231 shares of Tenneco Common Stock that are subject to options
that are exercisable at September 30, 1996 or within 60 days of said date
by all executive officers of the Company as a group, and includes 198,250
shares that are held in trust under the Tenneco restricted stock plans, for
all executive officers and directors of the Company as a group.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company Board will establish four standing committees as permitted by the
By-laws, which will have the following described responsibilities and
authority:
The Audit Committee will have the responsibility, among other things, to (i)
recommend the selection of the Company's independent public accountants, (ii)
review and approve the scope of the independent public accountants' audit
activity and extent of non-audit services, (iii) review with management and
such independent public accountants the adequacy of the Company's basic
accounting system and the effectiveness of the Company's internal audit plan
and activities, (iv) review with management and the independent public
accountants the Company's certified financial statements and exercise general
oversight of the Company's financial reporting process and (v) review with the
Company litigation and other legal matters that may affect the Company's
financial condition and monitor compliance with the Company's business ethics
and other policies.
The Compensation and Benefits Committee will have the responsibility, among
other things, to (i) establish the salary rate of officers and employees of the
Company and its subsidiaries, (ii) examine periodically the compensation
structure of the Company and (iii) supervise the welfare and pension plans and
compensation plans of the Company.
The Nominating and Management Development Committee will have the
responsibility, among other things, to (i) review possible candidates for
election to the Company Board and recommend a slate of nominees for election as
directors at the Company's annual stockholders' meeting, (ii) review the
function and composition of the other committees of the Company Board and
recommend membership on such committees and (iii) review the qualifications and
recommend candidates for election as officers of the Company.
Other than matters assigned to the Compensation and Benefits Committee, the
Executive Committee will have, during the interval between the meetings of the
Company Board, the authority to exercise all the powers of the Company Board
that may be delegated legally to it by the Company Board in the management and
direction of the business and affairs of the Company.
EXECUTIVE COMPENSATION
Prior to the Industrial Distribution, the Industrial Business was owned and
operated by Tenneco through its direct and indirect subsidiaries and as such,
the management of the Company has been employed by Tenneco and its direct and
indirect subsidiaries. The following table sets forth the remuneration paid by
Tenneco and/or its direct and indirect subsidiaries (i) to the Chairman of the
Board and Chief Executive Officer of the Company and (ii) to each of the four
key executive officers expected to be the most highly compensated executive
officers of the Company, other than the Chief Executive Officer, whose salary
and bonus exceeded $100,000, for the years indicated in connection with his
position with Tenneco:
83
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------------
RESTRICTED
NAME AND OTHER ANNUAL STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY(A) BONUS COMPENSATION(B) AWARDS(C) OPTIONS COMPENSATION(D)
- ------------------ ---- --------- -------- --------------- ---------- ------- --------------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dana G. Mead 1995 $957,375 $800,000 $143,970 -- 100,000(e) $149,972(f)
Chairman and Chief 1994 $878,177 $900,000 $149,110 $647,256 100,000 $142,966
Executive Officer 1993 $664,839 $700,000 $ 60,007 $582,813 50,000 $ 93,979
Theodore R. Tetzlaff 1995 $400,000 $350,000 $ 14,400 -- 18,000(e) -- (f)
General Counsel 1994 $400,000 $300,000 $ 307 $539,380 16,000 --
1993 $350,000 $250,000 -- $243,440 -- --
Robert T. Blakely 1995 $422,760 $230,000 $ 33,684 -- 16,000 $ 44,570
Executive Vice President 1994 $407,640 $230,000 $ 10,704 $230,585 15,675 $ 44,144
and Chief Financial 1993 $393,846 $200,000 $ 11,288 $163,188 -- $ 49,616
Officer
Stacy S. Dick 1995 $377,736 $280,000 $ 31,317 -- 14,000 $ 31,432
Executive Vice President 1994 $343,560 $235,000 $ 582 $215,752 12,000 $ 24,926
1993 $325,214 $200,000 $ 95,392 $139,875 -- $ 23,744
Paul T. Stecko 1995 $381,545 $300,000 $ 21,027 -- 24,000 $ 31,974
President and Chief 1994 $320,004 $200,000 $200,724 $269,690 16,000 $ 30,605
Executive Officer 1993 $ 23,188 $500,000 -- -- -- --
Tenneco Packaging
</TABLE>
- --------
(a) Includes base salary plus amounts paid in lieu of Tenneco matching
contributions to the Tenneco Thrift Plan.
(b) Includes amounts attributable to (i) the value of personal benefits
provided by Tenneco to its executive officers, which have an aggregate
value in excess of $50,000, such as the personal use of Tenneco owned
property, membership dues, and assistance provided to such person with
regard to financial, tax and estate planning, (ii) reimbursement for taxes
and (iii) amounts paid as dividend equivalents on performance share
equivalent units ("Dividend Equivalents"). The amount of each such personal
benefit that exceeds 25% of the estimated value of the total personal
benefits provided by Tenneco, reimbursement for taxes and amounts paid as
Dividend Equivalents to the individuals named in the table was as follows:
During 1995: $38,984 for use of Tenneco owned property, $29,750 for
financial planning services, $28,706 for reimbursement for taxes, and
$40,000 in Dividend Equivalents paid to Mr. Mead; $4,437, $16,917 and
$1,827 for reimbursement for taxes and $14,400, $14,400 and $19,200 in
Dividend Equivalents for Messrs. Blakely, Dick, and Stecko, respectively;
and $14,400 in Dividend Equivalents paid to Mr. Tetzlaff; During 1994:
$57,540 for use of Tenneco owned property and $50,606 for reimbursement for
taxes for Mr. Mead; $100,794 in relocation expenses and $59,954 in
reimbursement for taxes for Mr. Stecko; and $307, $582, and $582 for
reimbursement for taxes for Messrs. Tetzlaff, Blakely, and Dick,
respectively; During 1993: $34,832 for use of Tenneco owned property,
$19,950 for financial planning services and $824 for reimbursement for
taxes for Mr. Mead; $823 for reimbursement for taxes for Mr. Blakely; and
$50,000 in relocation expenses and $35,266 for reimbursement for taxes for
Mr. Dick.
(c) Includes the dollar value of grants of restricted stock made pursuant to
Tenneco's restricted stock plans based on the price of Tenneco Common Stock
on the date of grant. At December 31, 1995, Messrs. Mead, Tetzlaff,
Blakely, Dick and Stecko held 49,500; 24,000; 20,280; 31,000; and 17,000
restricted shares and/or performance share equivalent units, respectively,
under such plans. The value at December 31, 1995 (based on a per share
price of $49.625 on that date) of all restricted shares and/or performance
share equivalent units held was $2,456,438 for Mr. Mead; $1,191,000 for Mr.
Tetzlaff; $1,006,395 for Mr. Blakely;
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$1,538,375 for Mr. Dick; and $843,625 for Mr. Stecko. Dividends/Dividend
Equivalents will be paid on the restricted shares and performance share
equivalent units held by each individual.
(d) Includes amounts attributable during 1995 to benefit plans of Tenneco as
follows:
(i) The amounts contributed pursuant to the Tenneco Thrift Plan for the
accounts of Messrs. Mead, Blakely, Dick, and Stecko were $4,625;
$9,240; $4,626; and $6,000, respectively.
(ii) The amounts accrued under the Tenneco Inc. Deferred Compensation Plan,
together with adjustments based upon changes in the Consumer Price
Index for All Urban Households, as computed by the Bureau of Labor
Statistics, for Messrs. Mead, Blakely, Dick, and Stecko were $108,405;
$32,167; $23,764; and $23,132, respectively.
(iii) Amounts imputed as income for federal income tax purposes under
Tenneco's group life insurance plan for Messrs. Mead, Blakely, Dick,
and Stecko were $36,942; $3,163; $3,041; and $2,842, respectively.
(e) In addition to the options granted by Tenneco in 1995, Messrs. Mead and
Tetzlaff, each in his capacity as a director of Case Corporation (an
affiliate of Tenneco during 1995) ("Case"), was granted an option by Case
to acquire 1,000 shares of Case common stock. Information on terms of
Tenneco options and the Case options is set forth in "Option Grants in
1995."
(f) As directors of Case, Messrs. Mead and Tetzlaff each received a director's
fee of $20,000 and meeting attendance fees of $4,000. In addition, Mr.
Tetzlaff received from Case an additional $3,000 for attendance at the Case
Compensation Committee meetings. Messrs. Mead and Tetzlaff elected to
receive their director fees in common stock of Case. The amounts in the
above table do not include the payments from Case.
OPTION GRANTS IN 1995
The following table sets forth the number of options to acquire Tenneco
Common Stock that were granted by Tenneco during 1995 to the persons named in
the Summary Compensation Table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(D)
--------------------------------------------------------- ---------------------
% OF TOTAL EXERCISE
OPTIONS OR BASE
OPTIONS GRANTED GRANTED TO PRICE
(NO. OF EMPLOYEES PER
NAME SHARES)(A)(B)(F) IN FISCAL YEAR SHARE(C) EXPIRATION DATE 5% 10%
- ---- ---------------- -------------- -------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dana G. Mead............ 100,000(e) 6.7% $42.875 January 10, 2005 $2,696,000 $6,833,000
Theodore R. Tetzlaff.... 18,500(e) 1.2% $42.875 January 10, 2005 $ 485,280 $1,229,940
Robert T. Blakely....... 16,000 1.1% $42.875 January 10, 2005 $ 431,360 $1,093,280
Stacy S. Dick........... 14,000 .9% $42.875 January 10, 2005 $ 377,440 $ 956,620
Paul T. Stecko.......... 24,000 1.6% $42.875 January 10, 2005 $ 647,040 $1,639,920
</TABLE>
- --------
(a) The options reported in this column and in the Summary Compensation Table
consist of non-qualified options. The options become exercisable at the
rate of one-third per year on January 10 of 1996, 1997 and 1998,
respectively. As described in footnote (f) below, it is anticipated that
Tenneco options held by Company employees will be replaced by options to
acquire Company Common Stock upon consummation of the Industrial
Distribution.
(b) These options provide that a grantee who delivers shares of Tenneco Common
Stock to pay the option exercise price will be granted, upon such delivery
and without further action by Tenneco, an additional option to purchase the
number of shares so delivered. These "reload" options are granted at 100%
of the fair market value (as defined in the plan) on the date they are
granted, become exercisable six months from that date and expire coincident
with the options they replace. Grantees are limited to 10 reload options
and the automatic grant of such reload options is limited to twice during
any one calendar year.
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<PAGE>
(c) All options were granted at 100% of the fair market value on the date of
grant.
(d) The dollar amounts under these columns are the result of calculations for
the period from the date of grant to the expiration of the option at the 5%
and 10% annual appreciation rates set by the Commission and, therefore, are
not intended to forecast possible future appreciation, if any, in the price
of Tenneco Common Stock. No gain to the optionee is possible without an
increase in price of the underlying stock. In order to realize the
potential values set forth in the 5% and 10% columns of this table, the per
share price of Tenneco Common Stock would be $69.84 and $111.21,
respectively, or 63% and 160%, respectively, above the exercise or base
price. As described in footnote (f) below, however, it is anticipated that
options to acquire Tenneco Common Stock held by Company employees will be
replaced by options to acquire Company Common Stock upon consummation of
the Industrial Distribution.
(e) In addition, Messrs. Mead and Tetzlaff, each in his capacity as a director
of Case, were granted an option to purchase 1,000 shares of Case common
stock at a purchase of $21.125 per share. These options, which are each
less than 1% of the total options granted by Case to employees in 1995,
become exercisable on January 1, 1998 and expire January 1, 2005. The
potential realizable value, calculated for the period from the date of
grant to the expiration of the respective option, at 5% and 10% assumed
annual rates of stock price appreciation for the term of the options would
be $13,285 and $33,665, respectively. In order to realize these potential
values, the per share price of the Case common stock would be $34.41 and
$54.79, respectively, or 63% and 160%, respectively, above the exercise or
base price. The 5% and 10% annual appreciation rates are not intended to
forecast possible future appreciation, if any, in the price of Case common
stock. No gain to the optionee is possible without an increase in the price
of the Case common stock.
(f) All Tenneco stock options held by employees of the Company will be
cancelled as of the Industrial Distribution. The Company has adopted a plan
(the "Company Stock Ownership Plan") which is substantially similar to the
1994 Tenneco Inc. Stock Ownership Plan. Prior to the Industrial
Distribution, Tenneco will have approved the Company Stock Ownership Plan
as the sole shareholder of the Company. Options will be granted under the
Company Stock Ownership Plan as of the Distribution Date to all employees
of the Company who formerly held Tenneco options. Each such employee will
receive options of the Company under which the excess of the fair market
value of the shares subject to the options immediately after the grant over
the aggregate option price is not more than the excess of the aggregate
fair market value of all Tenneco shares subject to his or her Tenneco stock
options immediately before such cancellation over the aggregate option
price under such Tenneco options. The terms of the Company options will be
the same as if the Tenneco options had remained outstanding except to the
extent that the Company Stock Ownership Plan reflects legal changes adopted
after the Tenneco options were granted. These options provide that a
grantee who delivers shares of Company Common Stock to pay the option
exercise price will be granted, upon such delivery and without further
action by the Company, an additional option to purchase the number of
shares so delivered. These "reload" options are granted at 100% of the fair
market value (as defined in the Company Stock Ownership Plan) on the date
they are granted, become exercisable six months from that date and expire
at the same time as the options they replace. Grantees are limited to 10
reload options and automatic grant of such reload options is limited to
twice during any one calendar year.
OPTIONS EXERCISED IN 1995 AND 1995 YEAR-END VALUES
The following table sets forth the number of options to acquire Tenneco
Common Stock held, as of December 31, 1995, by the persons named in the Summary
Compensation Table. No options to acquire shares of Tenneco Common Stock were
exercised during 1995.
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<PAGE>
<TABLE>
<CAPTION>
TOTAL NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS HELD IN-THE-MONEY OPTIONS HELD
AT DECEMBER 31, 1995(A) AT DECEMBER 31, 1995(A)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dana G. Mead................ 66,667 183,333 $31,233 $690,617
Theodore R. Tetzlaff........ 5,334 28,666 -- $121,500
Robert T. Blakely........... 5,700 26,450 $ 4,038 $108,000
Stacy S. Dick............... 4,000 22,000 -- $ 94,500
Paul T. Stecko.............. 5,344 34,666 -- $162,000
</TABLE>
- --------
(a) As described in footnote (f) to the Option Grant Table, the options to
acquire Tenneco Common Stock will be replaced by options to acquire Company
Common Stock.
LONG-TERM INCENTIVE PLANS
PERFORMANCE SHARE EQUIVALENT UNIT AWARDS IN LAST FISCAL YEAR
The following table sets forth information concerning performance based
awards made to the persons named in the Summary Compensation Table during 1995
by Tenneco.
<TABLE>
<CAPTION>
PERFORMANCE
OR OTHER ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF PERIOD NON-STOCK PRICE BASED PLANS(A)
SHARES, UNTIL ---------------------------------
UNITS OR MATURATION
OTHER OR
NAME RIGHTS(B) PAYOUT(C) THRESHOLD(D) TARGET(D) MAXIMUM(D)
- ---- --------- ----------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Dana G. Mead............ 25,000 4 years -- 12,500 25,000
Theodore R. Tetzlaff.... 9,000 4 years -- 4,500 9,000
Robert T. Blakely....... 9,000 4 years -- 4,500 9,000
Stacy S. Dick........... 9,000 4 years -- 4,500 9,000
Paul T. Stecko.......... 12,000 4 years -- 6,000 12,000
</TABLE>
- --------
(a) Estimated Future Payouts are based on earnings per share ("EPS") from
continuing operations as shown in the record of progress included in the
published financial statements of Tenneco. Earnings per share for 1995 were
$4.16 and represent achievement of 25% of the performance goal applicable
to this award. Messrs. Mead, Tetzlaff, Blakely, Dick, and Stecko each were
provisionally credited with 100% of their performance goal for 1995 and
6,250; 2,250; 2,250; 2,250; and 3,000 shares were credited to their
respective Plan accounts, subject to adjustment, for payout at the end of
the performance cycle.
(b) Each performance share equivalent unit represents one share of Tenneco's
Common Stock that may be earned under this award and the number of
performance share equivalent units listed in this column represents the
maximum number of performance share equivalent units that may be earned
under this award.
(c) Performance share equivalent units are earned at the rate of 25% per year
based on achievement of annual EPS goals. However, it is anticipated that
prior to the consummation of the Industrial Distribution the conditions to
issuance of all shares of Tenneco Common Stock underlying the performance
share unit equivalent awards will be waived and the maximum number of
shares of Tenneco Common Stock subject thereto will be issued.
(d) Represents maximum performance share equivalent units earned where the
goals were consistently within the indicated performance range on an
individual year and accumulated four year basis.
The following table sets forth the aggregate estimated annual benefits
payable upon normal retirement pursuant to the Tenneco Retirement Plan, the
Tenneco Inc. Benefit Equalization Plan (the "Tenneco Benefit Equalization
Plan"), and the Tenneco Inc. Supplemental Executive Retirement Plan (the
"Tenneco Supplemental Executive Retirement Plan") to persons in specified
remuneration and years of credited participation classifications, each of which
plans were assumed by the Company pursuant to the Benefits
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Agreement. Under the Distribution Agreement and the Benefits Agreement, the
Company will continue to sponsor those plans, but all other entities will cease
to sponsor them, and the benefits that the employees of such entities have
accrued under those plans will be frozen.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF CREDITED PARTICIPATION
----------------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 350,000 $ 82,500 $110,000 $137,500 $ 165,000 $ 192,500
400,000 94,300 125,700 157,100 188,600 220,000
450,000 106,100 141,400 176,800 212,100 247,500
500,000 117,900 157,100 196,400 235,700 275,000
550,000 129,600 172,900 216,100 259,300 302,500
600,000 141,400 188,600 235,700 282,900 330,000
650,000 153,200 204,300 255,400 306,400 357,000
700,000 165,000 220,000 275,000 330,000 365,000
750,000 176,800 235,700 294,600 353,600 412,500
800,000 188,600 251,400 314,300 377,100 440,000
850,000 200,400 267,100 333,900 400,700 467,500
900,000 212,100 282,900 353,600 424,300 495,000
950,000 223,900 298,600 373,200 447,900 522,500
1,000,000 235,700 314,300 392,900 471,400 550,000
1,100,000 259,300 345,700 432,100 518,600 605,000
1,200,000 282,900 377,100 471,400 565,700 660,000
1,300,000 306,400 408,600 510,700 612,900 715,000
1,400,000 330,000 440,000 550,000 660,000 770,000
1,500,000 353,600 471,400 589,300 707,100 825,000
1,600,000 377,100 502,900 628,600 754,300 880,000
1,700,000 400,700 534,300 667,900 801,400 935,000
1,800,000 424,300 565,700 707,100 848,600 990,000
1,900,000 447,900 597,100 746,400 895,700 1,045,000
2,000,000 471,400 628,600 785,700 942,900 1,100,000
2,100,000 495,000 660,000 825,000 990,000 1,155,000
2,200,000 518,600 691,400 864,300 1,037,100 1,210,000
</TABLE>
The benefits set forth above are computed as a straight life annuity and are
based on years of credited participation in the Tenneco Retirement Plan and the
employee's average base salary during the final five years of credited
participation in the Tenneco Retirement Plan; such benefits are not subject to
any deduction for Social Security or other offset amounts. The years of
credited participation under the Tenneco Retirement Plan (or any supplemental
plan) For Messrs. Mead, Blakely, Dick and Stecko are 3, 14, 3 and 2,
respectively. (See the paragraph below for additional information relating to
Messrs. Mead, Dick and Stecko; and the "Summary Compensation Table" for salary
and bonus information for Messrs. Mead, Blakely, Dick and Stecko).
Pursuant to employment agreements with Messrs. Mead, Dick and Stecko
described under the heading "Employment Contracts and Termination of Employment
and Change-in-Control Arrangement" the Company has agreed to pay Messrs. Mead,
Dick and Stecko such supplemental payments (in addition to any benefits payable
under the Company's qualified and non-qualified pension plans) as may be
necessary to make each person's total payments equal to the amount each would
have received had he continued to be covered under pension plans maintained by
his former employer (based on his credited service with the Company plus 14.6,
15 and 17 years, respectively, of credited service with each person's former
employer, and on the compensation received from the Company as salary and
bonuses).
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The Company provides Mr. Tetzlaff with an individual pension benefit. The
benefit is based on Mr. Tetzlaff's salary and bonus and also provides for
guaranteed graduated minimum annual benefits of $100,000 beginning in 1998,
$200,000 per year beginning in 2003 and $300,000 per year beginning in 2008
(See "Summary Compensation Table" for salary and bonus information on Mr.
Tetzlaff).
COMPENSATION OF DIRECTORS
Following the Industrial Distribution, all directors who are not also
officers of the Company or its subsidiaries will each be paid a director's fee
of $32,000 per annum and receive 300 restricted shares of Company Common Stock
(discussed below) and each will be paid an attendance fee of $1,500 plus
expenses for each meeting of the Company Board attended. Each director who
serves as a Chairman of the Audit, Compensation and Benefits, or Nominating and
Management Development Committees of the Company Board will be paid an
additional fee of $7,000 per Chairmanship, and directors who serve as members
of such committees will be paid an additional fee of $4,000 per committee
membership. Members of the Executive Committee will receive an additional
$1,500 attendance fee plus expenses for each meeting of that committee
attended. Payment of all or a portion of such fees, together with interest and
an adjustment based upon changes in the Consumer Price Index For All Urban
Households as computed by the Bureau of Labor Statistics, may be deferred at
the election of the director until the earliest of (i) the year next following
the date upon which he or she ceases to be a director of the Company or (ii)
the year selected by the director for commencement of payment of the deferred
amount. The foregoing compensation structures and amounts are the same as
currently apply to the Tenneco Board.
During 1995, Tenneco had a retirement plan for directors who are not also
officers of the Company which provided retirement payments based on years of
service and the aggregate amount of director and committee fees being received
at the time of retirement. Prior to the Industrial Distribution, Tenneco
eliminated this retirement plan, and increased the amount of restricted stock
each director will receive each year in conjunction with their annual
directors' fees. Messrs. Flawn, Harris and Johnson are vested under this prior
retirement plan and, therefore, have the option to continue under such plan and
to receive monthly payments upon retirement. This plan will be assumed by the
Company.
Directors who are not also officers of the Company will receive annually 300
restricted shares of Company Common Stock. Such restricted shares may not be
sold, transferred, assigned, pledged or otherwise encumbered and are subject to
forfeiture should the director cease to serve on the Company Board prior to the
expiration of the restricted period that ends upon such director's normal
retirement from the Company Board, unless such director is disabled, dies, or
the Compensation and Benefits Committee of the Company Board, at its
discretion, determines otherwise. During such restricted period, holders of
restricted shares are entitled to vote the shares and receive dividends.
It is anticipated that restricted shares of Tenneco Common Stock held by
directors will be vested prior to the consummation of the Distributions, and
the directors will be paid an amount in cash to defray taxes incurred on such
vesting.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Tenneco has an employment agreement and a supplemental pension agreement with
Mr. Mead which will be continued by the Company providing for the payment to
Mr. Mead of a salary of not less than $575,000 per year (with such increases as
determined by the Compensation and Benefits Committee of the Company Board) and
the supplemental pension payments described above. Also, the Company has agreed
that in the event Mr. Mead's employment is terminated for any reason other than
for cause, death or permanent disability, the Company will pay to Mr. Mead an
amount equal to three times his annual salary plus $300,000.
Tenneco also has an employment agreement with Mr. Dick which will also be
continued by the Company providing for the payment to Mr. Dick of a salary of
not less than $325,000 per year (with such increases as
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determined by the Compensation and Benefits Committee of the Company Board).
Also, the Company has agreed that in the event Mr. Dick's employment is
terminated for any reason other than for cause, death or permanent disability,
the Company will pay to Mr. Dick an amount equal to his annual salary.
The Company has an employment agreement with Mr. Stecko which will also be
continued by the Company providing for the payment to Mr. Stecko of a salary of
not less than $320,000 per year (with such increases as determined by the
Compensation and Benefits Committee of the Company Board). Mr. Stecko is
entitled to reimbursement for the cost of financial and estate planning up to
$20,000 per year and to be provided a country club membership related to his
performance as President and CEO of Tenneco Packaging. The Company has also
agreed that, in the event Mr. Stecko's employment is terminated for any reason
other than for cause, death or permanent disability, the Company will pay to
Mr. Stecko an amount equal to three times his base salary and will purchase his
home in accordance with the Company's home purchase program. Additionally, in
the event Mr. Stecko's employment is terminated within 3 years of the date of a
change in control of Tenneco Packaging, the Company will pay Mr. Stecko an
amount equal to three times his base salary. The Transaction is not deemed to
constitute a change in control of Tenneco Packaging under Mr. Stecko's
employment agreement.
The Company will succeed to sponsorship of the Tenneco Benefits Protection
Program (the "Tenneco Benefits Protection Program") established by Tenneco to
enable the Company to continue to attract, retain and motivate highly qualified
employees by eliminating (to the maximum practicable extent) any concern on the
part of such employees that their job security or benefit entitlements will be
jeopardized by a "Change-in-Control" of the Company (as such term is defined in
the Tenneco Benefits Protection Program). The Tenneco Benefits Protection
Program is designed to achieve this purpose through (i) the establishment of a
severance plan for the benefit of certain employees and officers whose position
is terminated under certain circumstances following such Change-in-Control and
(ii) the establishment of a trust fund designed to ensure the payment of
benefits accrued under certain plans. Under the Tenneco Benefits Protection
Program, Messrs. Mead, Tetzlaff, Blakely, Dick and Stecko would have become
entitled to receive payments from the Company in the amount of $5,175,000;
$2,151,000; $1,860,000; $1,839,000; and $1,980,000, respectively, had their
position been terminated on December 31, 1995, and, in addition, restricted
shares held in the name of such individuals under Tenneco's restricted stock
plans would have automatically reverted to Tenneco, and Tenneco would have been
obliged to pay such individuals the fair market value thereof all as provided
by such plans. The performance share equivalent units would also have been
fully vested and paid. The Transaction is not deemed to constitute a "Change in
Control" for purposes of the Tenneco Benefits Protection Program.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
During 1995 Tenneco and its subsidiaries paid the law firm of Jenner & Block,
of which Theodore R. Tetzlaff, General Counsel of Tenneco, is a partner,
approximately $9.4 million for legal services (pursuant to an agreement with
Tenneco, Mr. Tetzlaff has agreed to devote whatever time is necessary to attend
to the responsibilities of General Counsel of Tenneco, and will not receive
from Jenner & Block any part of the fees paid by Tenneco to that firm during
such period he serves as General Counsel); and paid the firm Eickhoff
Economics, Inc., of which Ms. Eickhoff is the sole owner, approximately $31,000
for financial consulting services. All such transactions discussed above were
in the ordinary course of business.
Tenneco and certain of its subsidiaries held, as of December 31, 1995,
approximately 21% of the outstanding common stock of Case, of which Mr. Mead is
a director. During 1995, Tenneco received payments from Case of approximately
$8.6 million in fixed charges for administrative and other services provided to
Case by Tenneco and its subsidiaries. Additionally, a subsidiary of Tenneco
paid Case approximately $11.8 million for retail receivable services. The fee
for such services is based on the amount of outstanding receivables. Tenneco
and Case have an agreement which provides for the allocation of obligations for
income and franchise taxes with respect to Case and its subsidiaries for years
preceding the 1994 reorganization and public offering of Case common stock.
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Certain executive officers of Tenneco are indebted to Tenneco and, upon
consummation of the Industrial Distribution, will be indebted to the Company.
Such indebtedness was incurred in connection with relocation of such persons
and all amounts outstanding are secured by a subordinated mortgage note which
accrues interest at the rate of 3% per year on the unpaid balance and matures
at the earlier of the individual's termination of employment or the year 2026.
Principal is payable in full at maturity and the payment of interest has been
deferred for 1996. The following sets forth the approximate aggregate amount
outstanding as of September 30, 1996 (and is the largest aggregate amount
outstanding during 1996); Robert T. Blakely, $404,000; Stacy S. Dick, $405,000;
Barry R. Schuman, $404,000; Jack Lascar, $403,000; Mark A. McCollum, $405,000;
Karen R. Osar, $404,000; Stephen J. Smith, $407,000; and Karl A. Stewart,
$410,000.
Transactions involving Mr. McCoy are set out below under the caption
"Compensation Committee Interlocks and Insider Participation."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Andrews, Johnson, McCoy and Wharton are members of the Compensation
and Benefits Committee of the Tenneco Board and each will serve as members of
the Compensation and Benefits Committee of the Company Board.
During 1995, an investment fund, of which a subsidiary of Tenneco owns 50%,
paid approximately $558,000 to a subsidiary of Banc One Corporation, of which
Mr. McCoy is a director and an executive officer, under a line of credit in an
amount of approximately $10 million under which approximately $9.4 million is
outstanding. Such line of credit is guaranteed 80% by a subsidiary of Tenneco
and is due to mature in 1997. All such transactions involving Banc One
Corporation were in the ordinary course of business.
BENEFIT PLANS FOLLOWING THE INDUSTRIAL DISTRIBUTION
As described above, the Company will succeed to sponsorship of two plans
qualified under Section 401(a) of the Code: the Tenneco Retirement Plan and the
Tenneco Thrift Plan. The Tenneco Retirement Plan is a defined benefit pension
plan. The Tenneco Thrift Plan is a 401(k) plan with an employer matching
contribution. The Company will also succeed to sponsorship of the Tenneco
Supplemental Executive Retirement Plan and Tenneco Benefit Equalization Plan,
both of which are non-qualified plans designed to provide covered individuals
with benefits which they would receive under the Tenneco Retirement Plan absent
legal limitations. The Company will also succeed to sponsorship of the Tenneco
Benefits Protection Program as well as the Tenneco Inc. Deferred Compensation
Plan and 1993 Deferred Compensation Plan, both of which are non-qualified
deferred compensation plans.
Prior to the consummation of the Industrial Distribution, the Company will
adopt the Company Stock Ownership Plan, which will be approved by Tenneco as
the sole stockholder of the Company. The Company Stock Ownership Plan will be
substantially similar to the Tenneco Inc. 1994 Stock Ownership Plan and will
provide for the grant of stock options, restricted stock, performance shares
and other forms of awards. The Company will adopt, and Tenneco will approve as
its sole stockholder, an employee stock purchase plan which will be
substantially similar to the Tenneco employee stock purchase plan.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Prior to the Distribution Date, the Company Board and Tenneco, as sole
stockholder of the Company, will approve and adopt the Company's Restated
Certificate of Incorporation (the "Certificate"), and Tenneco, as sole
stockholder of the Company, will approve and adopt the Amended and Restated By-
laws of the Company (the "By-laws"). Under the Certificate, the Company's
authorized capital stock will consist of 350,000,000 shares of Company Common
Stock and 50,000,000 shares of Preferred Stock, par value $.01 per share
("Company Preferred Stock"). In addition, it is anticipated that the Company
Board will adopt resolutions pursuant to the Certificate designating 3,500,000
shares of Company Preferred Stock as Series A Participating Junior Preferred
Stock, par value $.01 per share, of the Company ("Company Junior Preferred
Stock") and reserving 3,500,000 shares of Company Junior Preferred Stock for
issuance in connection with the Rights to be issued in connection with the
Industrial Distribution. No Company Preferred Stock will be issued in the
Industrial Distribution. Based on the number of shares of Tenneco outstanding
on September 30, 1996, up to approximately 170,755,576 shares of Company Common
Stock will be issued in the Industrial Distribution.
COMPANY COMMON STOCK
The holders of Company Common Stock will be entitled to one vote for each
share on all matters on which stockholders generally are entitled to vote, and
except as otherwise required by law or provided in any resolution adopted by
the Company Board with respect to any series of Company Preferred Stock, the
holders of Company Common Stock will possess 100% of the voting power. The
Certificate does not provide for cumulative voting.
Subject to the preferential rights of any outstanding Company Preferred Stock
which may be created by the Company Board under the Certificate, the holders of
Company Common Stock will be entitled to such dividends as may be declared from
time to time by the Company Board and paid from funds legally available
therefor, and the holders of Company Common Stock will be entitled to receive
pro rata all assets of the Company available for distribution upon liquidation.
All shares of Company Common Stock received in the Industrial Distribution will
be fully paid and nonassessable, and the holders thereof will not have any
preemptive rights.
There is no established public trading market for Company Common Stock,
although a "when issued" market is expected to develop prior to the
Distribution Date. The Company has applied to the New York Stock Exchange for
the listing of the Company Common Stock upon notice of issuance and the Company
expects to receive approval of such listing prior to the Distribution. The
Company is also applying to the Chicago, Pacific and London Stock Exchanges for
approval of the listing of Company Common Stock upon notice of issuance.
The declaration of dividends on Company Common Stock will be at the
discretion of the Company Board. The Company Board has not adopted a dividend
policy as such. Subject to legal and contractual restrictions, its decisions
regarding dividends will be based on all considerations that in its business
judgment are relevant at the time, including past and projected earnings, cash
flows, economic, business and securities market conditions and anticipated
developments concerning the Company's business and operations. For additional
information concerning the payment of dividends by the Company, see "Risk
Factors--Dividends" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company's cash flow and the consequent ability of the Company to pay any
dividends on Company Common Stock will be substantially dependent upon the
Company's earnings and cash flow available after its debt service and the
availability of such earnings to the Company by way of dividends,
distributions, loans and other advances.
Under the DGCL, dividends may be paid by the Company out of "surplus" (as
defined under Section 154 of the DGCL) or, if there is no surplus, out of net
profits for the fiscal year in which the dividends are declared and/or the
preceding fiscal year. On a pro forma basis, at June 30, 1996, the Company had
surplus of
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approximately $3,051 million (on a book value basis) for the payment of
dividends, and the Company will also be able to pay dividends out of any net
profits for the current and/or prior fiscal year, if any.
COMPANY PREFERRED STOCK
Under the Certificate, the Company Board is authorized to issue Company
Preferred Stock, in one or more series, and to fix the number of shares
constituting such series and the designation of such series, the voting powers
(if any) of the shares of such series, and the preferences and relative,
participating, optional or other special rights, if any, and any
qualifications, limitations or restrictions thereof, of the shares of such
series. See "Antitakeover Effects of Certain Provisions."
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS
The Certificate, the By-laws, the Rights and Delaware statutory law contain
certain provisions, which are substantially the same as those provisions which
are currently applicable to Tenneco, that could make the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise more
difficult. The description set forth below is intended as a summary only and is
qualified in its entirety by reference to the Certificate, the By-laws and the
Rights Agreement which are attached as exhibits to the Company's Registration
Statement on Form 10 under the Exchange Act relating to Company Common Stock.
CLASSIFIED BOARD OF DIRECTORS
The Certificate provides that the Company Board will be divided into three
classes of directors, with the classes to be as nearly equal in number as
possible. The Company Board consists of the persons referred to in
"Management--Board of Directors" above. The Certificate provides that, of the
initial directors of the Company, approximately one-third will continue to
serve until the first succeeding annual meeting of the Company's stockholders,
approximately one-third will continue to serve until the second succeeding
annual meeting of the Company's stockholders and approximately one-third will
continue to serve until the third succeeding annual meeting of the Company's
stockholders. Of the initial directors, Messrs. Andrews, Blumenthal, Johnson
and Weiss will serve until the first succeeding annual meeting of the Company's
stockholders, Ms. Eickhoff and Messrs. Flawn, McCoy and Mead will serve until
the second succeeding annual meeting of the Company's stockholders and Messrs.
Harris, Wharton and Plastow will serve until the third succeeding annual
meeting of the Company's stockholders. At each annual meeting of the Company's
stockholders, one class of directors will be elected for a term expiring at the
third succeeding annual meeting of stockholders.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Company Board. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the members of the Company Board.
Such a delay may help ensure that the Company's directors, if confronted by a
stockholder attempting to force a proxy contest, a tender or exchange offer, or
an extraordinary corporate transaction, would have sufficient time to review
the proposal as well as any available alternatives to the proposal and to act
in what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Company Board would be
beneficial to the Company and its stockholders and whether or not a majority of
the Company's stockholders believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its stockholders. The classification of the
Company Board could thus increase the likelihood that incumbent directors will
retain their positions. In addition, because the classification provisions may
discourage accumulations of large blocks of the Company's stock by purchasers
whose objective is to take control of the Company and remove a majority of the
members of the Company Board,
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the classification of the Company Board could tend to reduce the likelihood of
fluctuations in the market price of Company Common Stock that might result from
accumulations of large blocks for such a purpose. Accordingly, stockholders
could be deprived of certain opportunities to sell their shares of Company
Common Stock at a higher market price than might otherwise be the case.
Notwithstanding the foregoing, the Certificate provides that whenever the
holders of any one or more series of Company Preferred Stock have the right,
voting separately as a class or series, to elect directors, such directors will
not be classified, unless expressly provided by the terms of such series of
Company Preferred Stock.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Certificate provides that the business and affairs of the Company will be
managed by or under the direction of a Board of Directors, consisting of not
less than eight nor more than sixteen directors, the exact number thereof to be
determined from time to time by affirmative vote of a majority of the entire
Board of Directors. In addition, the Certificate provides that any vacancy on
the Company Board that results from an increase in the number of directors may
be filled by a majority of the Company Board then in office, provided that a
quorum is present, and any other vacancy occurring in the Company Board may be
filled by a majority of the directors then in office, even if less than a
quorum, or by a sole remaining director.
Under the DGCL, unless otherwise provided in the Certificate, directors
serving on a classified board may only be removed by the stockholders for
cause. The Certificate does not provide that directors may be removed without
cause.
Notwithstanding the foregoing, the Certificate provides that whenever the
holders of any one or more series of Company Preferred Stock have the right,
voting separately as a class or series, to elect directors, the election,
removal, term of office, filling of vacancies and other features of such
directorships will be governed by the terms of the Certificate applicable
thereto.
SPECIAL MEETINGS
The By-laws provide that special meetings of stockholders will be called by
the Company Board. Moreover, the business permitted to be conducted at any
special meeting of stockholders is limited to the purposes specified in the
notice of meeting given by the Company.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The By-laws establish an advance notice procedure for stockholders to make
nominations of candidates for election of directors, or to bring other business
before an annual meeting of stockholders of the Company (the "Stockholder
Notice Procedure").
The Stockholder Notice Procedure provides that only persons who are nominated
by, or at the direction of, the Company Board, or by a stockholder who has
given timely written notice to the Secretary of the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors of the Company. The Stockholder Notice Procedure provides that at an
annual meeting only such business may be conducted as has been brought before
the meeting by, or at the direction of, the Company Board or by a stockholder
who has given timely written notice to the Secretary of the Company of such
stockholder's intention to bring such business before such meeting. Under the
Stockholder Notice Procedure, for stockholder notice in respect of the annual
meeting of the Company's stockholders to be timely, such notice must be
delivered to the Secretary of the Company not less than 50 days nor more than
75 days prior to the annual meeting; provided, however, that in the event that
less than 65 days' notice or prior public announcement of the date of the
meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the 15th day
following the day on which such notice of the date of the annual meeting was
mailed or such public announcement was made, whichever first occurs.
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Under the Stockholder Notice Procedure, a stockholder's notice to the Company
proposing to nominate a person for election as a director must contain certain
information, including, without limitation, the identity and address of the
nominating stockholder, the class and number of shares of stock of the Company
which are beneficially owned by such stockholder, and as to each person whom
the stockholder proposes to nominate for election or reelection as a director,
(i) the name, age, business address and residence of the person, (ii) the
principal occupation or employment of the person, (iii) the class and number of
shares of capital stock of the Company which are beneficially owned by the
person and (iv) any other information relating to the person that is required
to be disclosed in solicitations for proxies for election of directors pursuant
to Rule 14A under the Exchange Act. Under the Stockholder Notice Procedure, a
stockholder's notice relating to the conduct of business other than the
nomination of directors must contain certain information about such business
and about the proposing stockholder, including, without limitation, a brief
description of the business the stockholder proposes to bring before the
meeting, the reasons for conducting such business at such meeting, the name and
address of such stockholder, the class and number of shares of stock of the
Company beneficially owned by such stockholder, and any material interest of
such stockholder in the business so proposed. If the Chairman of the meeting
determines that a person was not nominated, or other business was not brought
before the meeting, in accordance with the Stockholder Notice Procedure, such
person will not be eligible for election as a director, or such business will
not be conducted at any such meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the Stockholder
Notice Procedure will afford the Company Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the Company Board, to inform stockholders about such
qualifications. By requiring advance notice of other proposed business, the
Stockholder Notice Procedure will also provide a more orderly procedure for
conducting annual meetings of stockholders and, to the extent deemed necessary
or desirable by the Company Board, will provide the Company Board with an
opportunity to inform stockholders, prior to such meetings, of any business
proposed to be conducted at such meetings, together with any recommendations as
to the Company Board's position regarding action to be taken with respect to
such business, so that stockholders can better decide whether to attend such a
meeting or to grant a proxy regarding the disposition of any such business.
Although the By-laws do not give the Company Board any power to approve or
disapprove stockholder nominations for the election of directors or proper
stockholder proposals for action, they may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals if the proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal, without regard to
whether consideration of such nominees or proposals might be harmful or
beneficial to the Company and its stockholders.
RECORD DATE PROCEDURE FOR STOCKHOLDER ACTION BY WRITTEN CONSENT
The By-laws establish a procedure for the fixing of a record date in respect
of action proposed to be taken by the Company's stockholders by written consent
in lieu of a meeting. The By-laws provide that any person seeking to have the
stockholders authorize or take corporate action by written consent without a
meeting shall, by written notice addressed to the Secretary and delivered to
the Company, request that a record date be fixed for such purpose. The By-laws
state that the Company Board may fix a record date for such purpose which shall
be no more than 10 days after the date upon which the resolution fixing the
record date is adopted by the Company Board and shall not precede the date such
resolution is adopted. If the Company Board fails within 10 days after the
Company receives such notice to fix a record date for such purpose, the By-laws
provide that the record date shall be the day on which the first written
consent is delivered to the Company unless prior action by the Company Board is
required under the DGCL, in which event the record date shall be at the close
of business on the day on which the Company Board adopts the resolution taking
such prior action. The By-laws also provide that the Secretary of the Company
or, under certain circumstances, two inspectors designated by the Secretary
shall promptly conduct such ministerial review of the sufficiency of any
written consents of stockholders duly delivered to the Company and of the
validity of the action to be taken by stockholder consent as he deems necessary
or appropriate, including, without limitation, whether the holders of a number
of shares having the requisite voting power to authorize or take the action
specified in the written consents have given consent.
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STOCKHOLDER MEETINGS
The By-laws provide that the Company Board and the chairman of a meeting may
adopt rules for the conduct of stockholder meetings and specify the types of
rules that may be adopted (including the establishment of an agenda, rules
relating to presence at the meeting of persons other than stockholders,
restrictions on entry at the meeting after commencement thereof and the
imposition of time limitations for questions by participants at the meeting).
COMPANY PREFERRED STOCK
The Certificate authorizes the Company Board to provide for series of Company
Preferred Stock and, with respect to each such series, to fix the number of
shares constituting such series and the designation of such series, the voting
powers (if any) of the shares of such series, and the preferences and relative,
participating, optional or other special rights, if any, and any
qualifications, limitations or restrictions thereof, of the shares of such
series.
Tenneco and the Company believe that the ability of the Company Board to
issue one or more series of Company Preferred Stock will provide the Company
with flexibility in structuring possible future financings and acquisitions,
and in meeting other corporate needs which might arise. The authorized shares
of the Company Preferred Stock, as well as shares of Company Common Stock, will
be available for issuance without further action by the Company's stockholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may be
listed or traded. The NYSE currently requires stockholder approval as a
prerequisite to listing shares in several instances, including where the
present or potential issuance of shares could result in a 20% increase in the
number of shares of common stock outstanding or in the amount of voting
securities outstanding. If the approval of the Company's stockholders is not
required for the issuance of shares of Company Preferred Stock or Company
Common Stock, the Company Board may determine not to seek stockholder approval.
Although the Company Board has no intention at the present time of doing so,
it could issue a series of Company Preferred Stock that could, depending on the
terms of such series, impede the completion of a merger, tender offer or other
takeover attempt. The Company Board will make any determination to issue such
shares based on its judgment as to the best interests of the Company and its
stockholders. The Company Board, in so acting, could issue Company Preferred
Stock having terms that could discourage an acquisition attempt through which
an acquiror may be able to change the composition of the Company Board,
including a tender offer or other transaction that some, or a majority, of the
Company's stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
BUSINESS COMBINATIONS
The Certificate prohibits "Business Combinations" (as defined in the
Certificate) with "Interested Stockholders" (as defined in the Certificate)
without the approval of the holders of at least 66 2/3% in voting power of the
outstanding shares of stock entitled to vote in the election of directors
("Voting Stock") not owned by an Interested Stockholder unless (i) approved by
a majority of the "Continuing Directors" (as defined in the Certificate) or
(ii) certain detailed requirements as to, among other things, the value and
type of consideration to be paid to the Company's stockholders, the maintenance
of the Company's dividend policy, the public disclosure of the Business
Combination and the absence of any major change in the Company's business or
equity capital structure without the approval of a majority of the Continuing
Directors, have been satisfied. The Certificate generally defines an
"Interested Stockholder" as any person (other than the Company or any
subsidiary, any employee benefit plan of the Company or any subsidiary or any
trustee or fiduciary with respect to any such plan or holding Voting Stock for
the purpose of funding any such plan or funding other employee benefits for
employees of the Company or any subsidiary when acting in such capacity) who
(a) is or has announced or publicly disclosed a plan or intention to become the
beneficial owner of Voting Stock representing five percent or more of the votes
entitled to be cast by the holders of all then outstanding shares of Voting
Stock or (b) is an affiliate or associate of the Company and at any time within
the two-year period immediately prior to the date in
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question was the beneficial owner of Voting Stock representing five percent or
more of the votes entitled to be cast by the holders of all then outstanding
shares of Voting Stock. The Certificate defines a "Continuing Director" as any
member of the Company Board, while such person is a member of the Company
Board, who is not an affiliate or associate or representative of the Interested
Stockholder and was a member of the Company Board prior to the time that the
Interested Stockholder became an Interested Stockholder, and any successor
thereto who is not an affiliate or associate or representative of the
Interested Stockholder and is recommended or elected to succeed the Continuing
Director by a majority of Continuing Directors.
AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE AND BY-LAWS
Under the DGCL, the stockholders of a corporation have the right to adopt,
amend or repeal the by-laws and, with the approval of the board of directors,
the certificate of incorporation of a corporation. In addition, if the
certificate of incorporation so provides, the by-laws may be adopted, amended
or repealed by the board of directors. The Certificate provides that the By-
laws may be amended by the Company Board or by the stockholders.
The Certificate also provides that, in addition to approval by the Company
Board and notwithstanding that a lesser percentage or separate class vote may
be specified by law, the Certificate or the By-laws, any proposal to amend or
repeal, or adopt any provision inconsistent with, the provisions of the
Certificate regarding Business Combinations proposed by or on behalf of an
Interested Stockholder or affiliate thereof requires the affirmative vote of
the holders of 66 2/3% in voting power of the outstanding shares of Voting
Stock, excluding Voting Stock beneficially owned by any Interested Stockholder,
unless the amendment or repeal of, or the adoption of any provision
inconsistent with, the provisions regarding Business Combinations is
unanimously recommended by the members of the Company Board and each of the
members of the Company Board qualifies as a Continuing Director. Approval by
the Company Board, together with the affirmative vote of the holders of a
majority in voting power of the outstanding shares of Voting Stock, is required
to amend all other provisions of the Certificate. The Business Combination
supermajority voting requirement could have the effect of making more difficult
any amendment by stockholders of the Business Combination provisions of the
Certificate described above, even if a majority of the Company's stockholders
believe that such amendment would be in their best interest.
RIGHTS
The Company Board will adopt a stockholder rights plan and cause to be
issued, with each share of Company Common Stock to be distributed in the
Industrial Distribution, one preferred share purchase right (a "Right"). Each
Right will entitle the registered holder to purchase from the Company a unit
consisting of one one-hundredth of a share (a "Unit") of Company Junior
Preferred Stock, at a price of $130 per Unit (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement"), between the Company and First Chicago Trust
Company of New York, as Rights Agent (the "Rights Agent").
Initially, the Rights will be represented by Company Common Stock
certificates, and no separate certificates representing the Rights ("Rights
Certificates") will be distributed. The Rights will separate from the Company
Common Stock and a distribution date (a "Rights Distribution Date") will occur
upon the earlier of (i) 10 business days following the first date of public
announcement (the "Stock Acquisition Date") that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding shares of Company Common Stock, (ii) 10 business days (or such
later date as may be determined by the Company Board) following the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning 20% or more of such outstanding shares of Company
Common Stock or (iii) 10 business days after the Company Board determines that
any person, alone or together with its affiliates and associates, has become
the Beneficial Owner of an amount of Company Common Stock which the Company
Board determines to be substantial (which amount shall in no event be less than
10% of the shares of Company Common Stock outstanding) and at least a majority
of the Company Board who are not officers of the Company, after reasonable
inquiry and investigation, including
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consultation with such persons as such directors shall deem appropriate, shall
determine that (a) such beneficial ownership by such person is intended to
cause the Company to repurchase the Company Common Stock beneficially owned by
such person or to cause pressure on the Company to take action or enter into a
transaction or series of transactions intended to provide such person with
short-term financial gain under circumstances where the Company Board
determines that the best long-term interests of the Company and its
stockholders would not be served by taking such action or entering into such
transactions or series of transactions at that time or (b) such beneficial
ownership is causing or is reasonably likely to cause a material adverse impact
(including, but not limited to, impairment of relationships with customers or
impairment of the Company's ability to maintain its competitive position) on
the business or prospects of the Company (any such person being referred to
herein and in the Rights Agreement as an "Adverse Person").
Until the Rights Distribution Date, (i) the Rights will be evidenced by
Company Common Stock certificates and will be transferred with and only with
such Company Common Stock certificates, (ii) Company Common Stock certificates
will contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender for transfer of any certificates for Company Common Stock
outstanding will also constitute the transfer of the Rights associated with
Company Common Stock represented by such certificate.
The Rights will not be exercisable until the Rights Distribution Date and
will expire at the close of business on June 10, 1998 (the "Final Expiration
Date"), unless (i) earlier redeemed by the Company as described below or (ii)
the Rights Agreement is extended (with stockholder approval) as discussed
below. The Final Expiration Date is the same date on which the stockholder
rights issued under the current Tenneco's stockholder's rights plan would have
terminated, but for the Merger.
As soon as practicable after the Rights Distribution Date, Rights
Certificates will be mailed to holders of record of the Company Common Stock as
of the close of business on the Rights Distribution Date and, thereafter, the
separate Rights Certificates alone will represent the Rights. Except as
otherwise determined by the Company Board, only shares of Company Common Stock
issued prior to the Rights Distribution Date will be issued with Rights.
In the event that (i) any person becomes an Acquiring Person (except pursuant
to an offer for all outstanding shares of Company Common Stock that the
independent directors determine to be fair to and otherwise in the best
interests of the Company and its stockholders) or (ii) the Company Board
determines that a person is an Adverse Person, each holder of a Right will
thereafter have the right to receive, upon exercise, Company Common Stock (or,
in certain circumstances, cash, property or other securities of the Company)
having a value equal to two times the exercise price of the Right. Upon the
occurrence of either of the events set forth in the preceding sentence, all
Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by the Acquiring Person or Adverse Person
(or certain related parties) will be null and void. Rights will not be
exercisable following the occurrence of either of such events until such time
as the Rights are no longer redeemable by the Company as set forth below.
For example, at an exercise price of $130 per Right, each Right not owned by
an Acquiring Person or by an Adverse Person (or by certain related parties)
following an event set forth in the preceding paragraph would entitle its
holder to purchase $260 worth of Company Common Stock (or other consideration,
as noted above) for $130. Assuming that Company Common Stock had a per share
value of $50 at such time, the holder of each valid Right would be entitled to
purchase 5.2 shares of Company Common Stock for $130.
In the event that, at any time following the Stock Acquisition Date, (i) the
Company is acquired in a merger or other business combination transaction
(other than a merger meeting prescribed terms and conditions that follows an
offer described in the second preceding paragraph) or (ii) more than 50% of the
Company's assets or earning power is sold or transferred, each holder of a
Right (except Rights that previously have been voided as set forth above) shall
thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
The Purchase Price payable, and the number of Units of Company Junior
Preferred Stock or other securities or property issuable, upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution
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(i) in the event of a stock dividend on, or a subdivision, combination or
reclassification of, Company Junior Preferred Stock, (ii) if holders of Company
Junior Preferred Stock are granted certain rights or warrants to subscribe for
Company Junior Preferred Stock or convertible securities at less than the
current market price of Company Junior Preferred Stock or (iii) upon the
distribution to holders of the Company Junior Preferred Stock of evidences of
indebtedness or assets (excluding regular quarterly cash dividends) or of
subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be required
until cumulative adjustments amount to at least 1% of the Purchase Price. No
fractional Units will be issued and, in lieu thereof, an adjustment in cash
will be made based on the market price of Company Junior Preferred Stock on the
last trading date prior to the date of exercise.
In general, at any time until 10 business days following the Stock
Acquisition Date, the Company may redeem the Rights in whole, but not in part,
at a price of $.02 per Right. The Company may not redeem the Rights if the
Company Board has previously declared a person to be an Adverse Person.
Immediately upon the action of the Company Board ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.02 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders or to the Company, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights became
exercisable for Company Common Stock (or other consideration) of the Company or
for common stock of the acquiring company as set forth above.
Other than those provisions relating to the duration of the Rights Agreement
and the principal economic terms of the Rights, any of the provisions of the
Rights Agreement may be amended by the Company Board prior to the Rights
Distribution Date. After the Rights Distribution Date, the provisions of the
Rights Agreement may be amended by the Company Board in order to cure any
ambiguity, to make changes that do not adversely affect the interests of
holders of Rights, or to shorten or lengthen any time period under the Rights
Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not
redeemable. Notwithstanding the foregoing, unless approved by a vote of the
stockholders of the Company, the Rights Agreement may not be supplemented or
amended to alter the redemption price, the Final Expiration Date, the Purchase
Price or the number of Units for which a Right is exercisable.
The Rights Agreement is designed to protect the stockholders of the Company
in the event of unsolicited offers to acquire the Company and other coercive
takeover tactics which, in the opinion of the Company Board, could impair its
ability to represent stockholder interests. The provisions of the Rights
Agreement may render an unsolicited takeover of the Company more difficult or
less likely to occur, even though such takeover may offer the Company's
stockholders the opportunity to sell their stock at a price above the
prevailing market rate and may be favored by a majority of the Company's
stockholders.
THE FOREGOING SUMMARY OF THE TERMS OF THE RIGHTS IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE RIGHTS AGREEMENT, A COPY OF WHICH HAS BEEN FILED AS AN
EXHIBIT TO THE COMPANY'S REGISTRATION STATEMENT ON FORM 10 UNDER THE EXCHANGE
ACT RELATING TO COMPANY COMMON STOCK. THE RIGHTS ARE BEING REGISTERED UNDER THE
EXCHANGE ACT, TOGETHER WITH COMPANY COMMON STOCK, PURSUANT TO SUCH REGISTRATION
STATEMENT. IN THE EVENT THAT THE RIGHTS BECOME EXERCISABLE, THE COMPANY WILL
REGISTER THE SHARES OF COMPANY JUNIOR PREFERRED STOCK FOR WHICH THE RIGHTS MAY
BE EXERCISED, IN ACCORDANCE WITH APPLICABLE LAW.
ANTITAKEOVER LEGISLATION
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any "business combination"
with any "interested stockholder" for a three-year period following the time
that such stockholder becomes an interested stockholder unless (i) prior to
such time, the board of
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<PAGE>
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding certain shares) or (iii) on or
subsequent to such time, the business combination is approved by the board of
directors of the corporation and by the affirmative vote of at least 66 2/3% of
the outstanding voting stock which is not owned by the interested stockholder.
Section 203 of the DGCL generally defines an "interested stockholder" to
include (x) any person that is the owner of 15% or more of the outstanding
voting stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within three years immediately prior to the
relevant date and (y) the affiliates and associates of any such person. Section
203 of the DGCL generally defines a "business combination" to include (1)
mergers and sales or other dispositions of 10% or more of the assets of the
corporation with or to an interested stockholder, (2) certain transactions
resulting in the issuance or transfer to the interested stockholder of any
stock of the corporation or its subsidiaries, (3) certain transactions which
would result in increasing the proportionate share of the stock of the
corporation or its subsidiaries owned by the interested stockholder and (4)
receipt by the interested stockholder of the benefit (except proportionately as
a stockholder) of any loans, advances, guarantees, pledges, or other financial
benefits.
Under certain circumstances, Section 203 of the DGCL makes it more difficult
for a person who would be an "interested stockholder" to effect various
business combinations with a corporation for a three-year period, although the
certificate of incorporation or stockholder-adopted by-laws may exclude a
corporation from the restrictions imposed thereunder. Neither the Certificate
nor the By-laws exclude the Company from the restrictions imposed under Section
203 of the DGCL. It is anticipated that the provisions of Section 203 of the
DGCL may encourage companies interested in acquiring the Company to negotiate
in advance with the Company Board since the stockholder approval requirement
would be avoided if the Company Board approves, prior to the time the
stockholder becomes an interested stockholder, either the business combination
or the transaction which results in the stockholder becoming an interested
stockholder.
COMPARISON WITH RIGHTS OF HOLDERS OF TENNECO COMMON STOCK
Except as otherwise described herein, the provisions of the Certificate and
the By-laws (including the provisions thereof relating to the classification of
directors, the calling of special meetings of stockholders, the advance notice
requirements for stockholder nominations and proposals, the approval of
Business Combinations, the supermajority voting requirement for amendment of
the Business Combinations provisions and the setting of record dates for
actions by written consent of stockholders in lieu of a meeting) are
substantially the same as the provisions of the Tenneco Certificate of
Incorporation (the "Tenneco Certificate") and the Tenneco By-laws (the "Tenneco
By-laws").
Capitalization
Tenneco's authorized capital stock consists of 350,000,000 shares of Tenneco
Common Stock, 15,000,000 shares of Preferred Stock, without par value ("Tenneco
Preferred Stock"), and 50,000,000 shares of Junior Preferred Stock, without par
value ("Tenneco Junior Preferred Stock"). The Company's authorized capital
stock consists of 350,000,000 shares of Company Common Stock, 50,000,000 shares
of Company Preferred Stock, 3,500,000 shares of which have been designated
Company Junior Preferred Stock.
The Tenneco Board is generally authorized to issue Tenneco Preferred Stock
and Tenneco Junior Preferred Stock in series and to fix the terms of such
series, but such authority is subject to numerous requirements and/or
limitations relating to, among other things, the voting rights of such series
and the ability of Tenneco to pay dividends and acquire its capital stock. The
Company Board is authorized to issue Company Preferred Stock in series and to
fix the terms of such series, without limitation (other than as provided in the
DGCL).
All series of Tenneco Preferred Stock (but not Tenneco Junior Preferred
Stock) must rank on a parity with respect to the payment of dividends. Any of
the terms of a series of Company Preferred Stock may differ from those of any
other series.
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<PAGE>
Class Voting
Under the Tenneco Certificate, approval of 66 2/3% of the outstanding shares
of Tenneco Preferred Stock or Tenneco Junior Preferred Stock, or of a series
thereof, is required for any charter amendment which adversely affects the
rights, powers or preferences of the Tenneco Preferred Stock or Tenneco Junior
Preferred Stock, or of a series thereof, as the case may be. Under the
Certificate, there is no such two-thirds approval requirement; however, the
DGCL generally requires any charter amendment that so adversely affects a
particular class or series of stock be approved by a majority of the
outstanding shares of such class or series, as the case may be.
The Tenneco Certificate requires separate class votes of Tenneco Preferred
Stock and of Tenneco Junior Preferred Stock (i) to create a class of stock
ranking senior thereto, (ii) to sell, lease, transfer or convey all or
substantially all of Tenneco's assets or (iii) to merge with another
corporation (unless Tenneco survives). No such class votes are required under
the Certificate.
Stockholder Meetings
The By-laws provide that the Company Board and the chairman of a meeting may
adopt rules for the conduct of stockholder meetings and specify the types of
rules that may be adopted (including the establishment of an agenda, rules
relating to presence at the meeting of persons other than stockholders,
restrictions on entry at the meeting after commencement thereof and the
imposition of time limitations for questions by participants at the meeting).
Such issues are not expressly addressed by the Tenneco By-laws.
Stockholder Rights Plans
Tenneco adopted a stockholder rights plan on May 24, 1988, which was amended
and restated on October 1, 1989 (the "Tenneco Rights Plan"). Pursuant to and in
accordance with such plan, one preferred share purchase right (a "Tenneco
Right") is attached to each share of Tenneco Common Stock. Each Tenneco Right
entitles the registered holder thereof to, among other things, purchase, under
certain circumstances, from Tenneco a unit consisting of one one-hundredth of a
share of Tenneco Series A Junior Preferred Stock. Tenneco has amended the
Tenneco Rights Plan to exempt El Paso and El Paso Merger Company from becoming
an "acquiring person" thereunder, or otherwise triggering the Tenneco Rights,
solely by reason of the execution of the Merger Agreement and consummation of
the transactions contemplated thereby, and to cause the Tenneco Rights to
expire at the Merger Effective Time.
The Company will adopt the Rights Agreement. The Rights Agreement is, in all
material respects, the same as the Tenneco Rights Plan except that the
Redemption Price (as defined therein), the Final Expiration Date, the Purchase
Price and the number of one one-hundredths of a share of Company Junior
Preferred Stock for which a Right is exercisable (which under the Tenneco
Rights Plan may not be supplemented or amended) may be supplemented or amended
with stockholder approval.
Indemnification
The Tenneco By-laws provide for mandatory indemnification for directors and
officers of Tenneco and for directors and officers of Tenneco serving as
directors and officers of other entities at the request of Tenneco to the
fullest extent permitted by the DGCL. The By-laws provide similar mandatory
indemnification except (i) such indemnification includes directors and officers
of the Company serving as directors, officers, employees or agents of another
entity at the request of the Company and (ii) suits (or parts thereof)
instituted by any such indemnitee without Company Board approval are excluded
from such mandatory indemnification.
The By-laws also provide for mandatory advancement of expenses in defending
any proceeding for which mandatory indemnification may be available. The
Tenneco By-laws do not provide for such mandatory advancement of expenses.
Under the By-laws, persons claiming indemnification or advancement may file
suit in respect thereof if the Company does not pay such a claim within 30 days
after receipt of a written claim therefor and, if successful in
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<PAGE>
whole or in part, are entitled to be paid the expense of prosecuting such
claim. The By-laws provide that in any such action, the Company has the burden
of proving that the indemnitee is not entitled to the requested indemnification
or advancement. Such issues are not expressly addressed by the Tenneco By-laws.
Director Exculpation
Pursuant to Section 102(b)(7) of the DGCL, the Tenneco Certificate provides
that a director thereof shall not be liable to Tenneco or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to Tenneco or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) under Section
174 of the DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit.
The Certificate provides that a director of the Company shall not be liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the DGCL as the same exists or may
thereafter be amended. The Certificate, therefore, affords directors of the
Company the benefit of any subsequent broadening of director exculpation
permitted by the DGCL without the need for a further charter amendment.
Ratification
The Tenneco Certificate provides that a director of Tenneco shall not be
disqualified by his office from dealing or contracting with Tenneco either as a
vendor, purchaser or otherwise, nor shall any transaction or contract of
Tenneco be void or voidable by reason of the fact that any director or any firm
of which any director is a member, or any corporation of which any director is
a shareholder, officer or director, is in any way interested in such
transaction or contract, provided that such transaction or contract is or shall
be authorized, ratified or approved either (i) by a vote of a majority of a
quorum of the Tenneco Board or of the Executive Committee of Tenneco, without
counting in such majority or quorum any director so interested or a member of a
firm so interested, or a shareholder, officer or director of a corporation so
interested or (ii) by the written consent, or by the vote at any stockholders'
meeting, of the holders of record of a majority of all the outstanding shares
of stock of Tenneco entitled to vote, nor shall any director be liable to
account to Tenneco for any profits realized by or from or through any such
transaction or contract of Tenneco authorized, ratified or approved as
aforesaid by reason of the fact that he, or any firm of which he is a member or
any corporation of which he is a shareholder, officer or director was
interested in such transaction or contract.
The Tenneco By-laws provide that any transaction questioned in any
stockholders derivative suit on the ground of lack of authority, defective or
irregular execution, adverse interest of director, officer or stockholder,
nondisclosure, miscomputation, or the application of improper principles or
practices of accounting may be ratified before or after judgment, by the
Tenneco Board or by Tenneco's stockholders. The Tenneco By-laws also provide
that, if so ratified, the transaction shall have the same force and effect as
if it had been originally duly authorized, and said ratification shall be
binding upon Tenneco and shall continue as a bar to any claim or execution of
any judgment in respect of such questioned transaction.
Such issues are not expressly addressed by either the Certificate or the By-
laws. However, Section 144 of the DGCL provides, in relevant part, that no
contract or transaction between a corporation and one or more of its directors
or officers, or between a corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer
is present at or participates in the meeting of the board or committee which
authorizes the contract or transaction, or solely because his or their votes
are counted for such purpose, if: (i) the material facts as to his relationship
or interest and as to the contract or transaction are disclosed or are known to
the board of directors or the committee, and the board or committee in good
faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; (ii) the material facts
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as to his relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the
corporation as of the time it is authorized, approved or ratified, by the board
of directors, a committee or the stockholders.
Contracts
The By-laws provide that, except as otherwise required by law, the
Certificate or the By-laws, any contracts or other instruments may be executed
and delivered in the name and on the behalf of the Company by such officer or
officers of the Company as the Company Board may from time to time direct. The
By-laws state that such authority may be general or confined to specific
instances as the Company Board may determine. The By-laws also provide that (i)
the Chairman of the Board, the President or any Vice President may execute
bonds, contracts, deeds, leases and other instruments to be made or executed
for or on behalf of the Company and (ii) subject to any restrictions imposed by
the Company Board, the Chairman of the Board, the President or any Vice
President of the Company may delegate contractual powers to others under his
jurisdiction, it being understood, however, that any such delegation of power
shall not relieve such officer of responsibility with respect to the exercise
of such delegated power. Such issues are not expressly addressed by the Tenneco
By-laws.
Proxies
The By-laws provide that unless otherwise provided by resolution adopted by
the Company Board, the Chairman of the Board, the President or any Vice
President may from time to time appoint an attorney or attorneys or agent or
agents of the Company, in the name and on behalf of the Company, to cast the
votes which the Company may be entitled to cast as the holder of stock or other
securities in any other corporation or other entity, any of whose stock or
other securities may be held by the Company, at meetings of the holders of the
stock or other securities of such other corporation or other entity, or to
consent in writing, in the name of the Company as such holder, to any action by
such other corporation or other entity, and may instruct the person or persons
so appointed as to the manner of casting such votes or giving such consent, and
may execute or cause to be executed in the name and on behalf of the Company
and under its corporate seal or otherwise, all such written proxies or other
instruments as he may deem necessary or proper in the premises. Such issues are
not expressly addressed by the Tenneco By-laws.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
ELIMINATION OF LIABILITY OF DIRECTORS
The Certificate provides that a director of the Company will not be liable to
the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the DGCL as the same exists or may
thereafter be amended. Based on the DGCL as presently in effect, a director of
the Company will not be personally liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, which concerns unlawful payments of dividends, stock
purchases or redemptions or (iv) for any transactions from which the director
derived an improper personal benefit.
While the Certificate provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Certificate will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care. The provisions of the Certificate described
above apply to an officer of the Company only if he or she is a director of the
Company and is acting in his or her capacity as director, and do not apply to
officers of the Company who are not directors.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
The By-laws provide that the Company will indemnify and hold harmless, to the
fullest extent permitted by applicable law as it presently exists or may
thereafter be amended, any person (an "Indemnitee") who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, or a person for whom he is the
legal representative, is or was a director or officer of the Company or, while
a director or officer of the Company, is or was serving at the request of the
Company as a director, officer, employee or agent of another Company or of a
partnership, joint venture, trust, enterprise or nonprofit entity, including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses (including attorneys' fees) reasonably incurred by such
Indemnitee. The By-laws also provide that, notwithstanding the foregoing, but
except as described in the second following paragraph, the Company will be
required to indemnify an Indemnitee in connection with a proceeding (or part
thereof) commenced by such Indemnitee only if the commencement of such
proceeding (or part thereof) by the Indemnitee was authorized by the Company
Board.
The By-laws further provide that the Company will pay the expenses (including
attorneys' fees) incurred by an Indemnitee in defending any proceeding in
advance of its final disposition; provided, however, that, to the extent
required by law, such payment of expenses in advance of the final disposition
of the proceeding will be made only upon receipt of an undertaking by the
Indemnitee to repay all amounts advanced if it should be ultimately determined
that the Indemnitee is not entitled to be indemnified under the relevant
section of the By-laws or otherwise.
Pursuant to the By-laws, if a claim for indemnification or payment of
expenses thereunder is not paid in full within 30 days after a written claim
therefor by the Indemnitee has been received by the Company, the Indemnitee may
file suit to recover the unpaid amount of such claim and, if successful in
whole or in part, will be entitled to be paid the expense of prosecuting such
claim. The By-laws provide that, in any such action, the Company will have the
burden of proving that the Indemnitee is not entitled to the requested
indemnification or payment of expenses under applicable law.
The By-laws also provide (i) that the rights conferred on any Indemnitee
thereby are not exclusive of any other rights which such Indemnitee may have or
thereafter acquire under any statute, provision of the Certificate, the By-
laws, agreement, vote of stockholders or disinterested directors or otherwise,
(ii) that the Company's obligation, if any, to indemnify or to advance expenses
to any Indemnitee who was or is serving at its request as a director, officer,
employee or agent of another Company, partnership, joint venture, trust,
enterprise or nonprofit entity will be reduced by any amount such Indemnitee
may collect as indemnification or advancement of expenses from such other
Company, partnership, joint venture, trust, enterprise or nonprofit enterprise
and (iii) that any repeal or modification of the relevant provisions of the By-
laws will not adversely affect any right or protection thereunder of any
Indemnitee in respect of any act or omission occurring prior to the time of
such repeal or modification.
The By-laws also expressly state that the provisions thereof will not limit
the right of the Company, to the extent and in the manner permitted by law, to
indemnify and to advance expenses to persons other than Indemnitees when and as
authorized by appropriate corporate action.
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<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE BUSINESSES OF NEW TENNECO
Report of Independent Public Accountants................................ F-2
Combined Statements of Income for each of the three years in the period
ended December 31, 1995 and for the six months ended June 30, 1996 and
1995................................................................... F-3
Combined Balance Sheets--December 31, 1995 and 1994 and June 30, 1996... F-4
Combined Statements of Cash Flows for each of three years in the period
ended December 31, 1995 and for the six months ended June 30, 1996 and
1995................................................................... F-5
Statements of Changes in Combined Equity for each of the three years in
the period ended
December 31, 1995 and the six months ended June 30, 1996............... F-6
Notes to Combined Financial Statements.................................. F-7
THE MOBIL PLASTICS DIVISION OF MOBIL CORPORATION
Report of Independent Auditors.......................................... F-28
Combined Statements of Net Assets--December 28, 1994 and November 17,
1995................................................................... F-29
Combined Statements of Operations Before Income Taxes--Year ended Decem-
ber 28, 1994 and period ended November 17, 1995........................ F-30
Combined Statements of Changes in Net Assets--Year Ended December 28,
1994 and period ended November 17, 1995................................ F-31
Combined Statements of Cash Flows--Year ended December 28, 1994 and pe-
riod ended
November 17, 1995...................................................... F-32
Notes to Combined Financial Statements.................................. F-33
FINANCIAL STATEMENT SCHEDULE
Valuation and Qualifying Accounts--The Businesses of New Tenneco ....... S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tenneco Inc.:
We have audited the accompanying combined balance sheets of the businesses of
New Tenneco (see Note 1) as of December 31, 1995 and 1994, and the related
combined statements of income, cash flows and changes in combined equity for
each of the three years in the period ended December 31, 1995. These combined
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
businesses of New Tenneco as of December 31, 1995 and 1994, and the results of
its combined operations and cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the combined financial statements, effective January
1, 1994, the businesses of New Tenneco changed its method of accounting for
postemployment benefits.
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The supplemental schedule
listed in the index to the combined financial statements and schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic combined financial statements.
The supplemental schedule has been subjected to the auditing procedures
applied in the audits of the basic combined financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic combined financial statements of
the businesses of New Tenneco taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
August 19, 1996
F-2
<PAGE>
THE BUSINESSES OF NEW TENNECO
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
---------------------- ------------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ------ ------ ------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Net sales and operating revenues--
Automotive....................... $2,479 $1,989 $1,785 $ 1,463 $ 1,263
Packaging........................ 2,752 2,184 2,042 1,775 1,318
Intergroup sales and other....... (10) (7) (7) (5) (4)
------ ------ ------ -------- --------
5,221 4,166 3,820 3,233 2,577
Other income, net.................. 39 (2) 42 71 30
------ ------ ------ -------- --------
5,260 4,164 3,862 3,304 2,607
------ ------ ------ -------- --------
COSTS AND EXPENSES
Cost of sales (exclusive of depre-
ciation shown below).............. 3,737 3,050 2,854 2,303 1,828
Engineering, research and develop-
ment expenses..................... 67 43 39 44 33
Selling, general and administra-
tive.............................. 588 473 451 396 276
Depreciation, depletion and amorti-
zation............................ 196 142 137 147 92
------ ------ ------ -------- --------
4,588 3,708 3,481 2,890 2,229
------ ------ ------ -------- --------
Income before interest expense, in-
come taxes and minority
interest.......................... 672 456 381 414 378
Interest expense (net of interest
capitalized)...................... 160 104 101 100 74
------ ------ ------ -------- --------
Income before income taxes and mi-
nority interest................... 512 352 280 314 304
Income tax expense................. 231 114 115 126 124
------ ------ ------ -------- --------
Income before minority interest.... 281 238 165 188 180
Minority interest.................. 23 -- -- 10 12
------ ------ ------ -------- --------
Income from continuing operations.. 258 238 165 178 168
Loss from discontinued operations,
net of income tax................. -- (31) (7) -- --
------ ------ ------ -------- --------
Income before cumulative effect of
change in accounting
principle......................... 258 207 158 178 168
Cumulative effect of change in ac-
counting principle, net of
income tax........................ -- (7) -- -- --
------ ------ ------ -------- --------
Net income......................... $ 258 $ 200 $ 158 $ 178 $ 168
====== ====== ====== ======== ========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined statements of income.
F-3
<PAGE>
THE BUSINESSES OF NEW TENNECO
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
(MILLIONS) 1995 1994 1996
- ---------- ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments............ $ 103 $ 350 $ 129
Receivables--
Customer notes and accounts (net)............ 351 284 477
Affiliated companies......................... 117 53 114
Income taxes................................. 41 2 52
Other........................................ 54 45 186
Inventories.................................... 838 557 820
Deferred income taxes.......................... 23 24 28
Prepayments and other.......................... 168 152 196
------ ------ ------
1,695 1,467 2,002
------ ------ ------
Investments and other assets:
Long-term notes receivables.................... 16 11 16
Goodwill and intangibles, net.................. 1,024 320 965
Deferred income taxes.......................... 52 49 61
Pension assets................................. 433 389 444
Other.......................................... 239 113 287
------ ------ ------
1,764 882 1,773
------ ------ ------
Plant, property and equipment, at cost........... 4,138 3,065 4,332
Less--Reserves for depreciation, depletion and
amortization.................................. 1,480 1,474 1,584
------ ------ ------
2,658 1,591 2,748
------ ------ ------
$6,117 $3,940 $6,523
====== ====== ======
LIABILITIES AND COMBINED EQUITY
Current liabilities:
Short-term debt (including current maturities
on long-term debt)............................ $ 384 $ 108 $ 530
Payables
Trade........................................ 589 465 599
Affiliated companies......................... 47 68 23
Taxes accrued.................................. 45 -- 74
Accrued liabilities............................ 237 129 242
Other.......................................... 257 282 242
------ ------ ------
1,559 1,052 1,710
------ ------ ------
Long-term debt................................... 1,648 1,039 1,573
Deferred income taxes............................ 435 342 451
Postretirement benefits.......................... 156 122 161
Deferred credits and other liabilities........... 166 97 159
Commitments and contingencies
Minority interest................................ 301 301 301
Combined equity.................................. 1,852 987 2,168
------ ------ ------
$6,117 $3,940 $6,523
====== ====== ======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these combined balance sheets.
F-4
<PAGE>
THE BUSINESSES OF NEW TENNECO
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ ------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ------ ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations........... $ 258 $238 $165 $ 178 $ 168
Adjustments to reconcile income from contin-
uing operations to cash provided (used) by
continuing operations--
Depreciation, depletion and amortization.. 196 142 137 147 92
Deferred income taxes..................... 75 19 1 37 15
Gain on sale of businesses and assets,
net...................................... (15) (5) (29) (49) (14)
Allocated interest, net of tax............ 99 61 59 63 44
Changes in components of working capital
(Increase) decrease in receivables....... 30 87 55 (110) (79)
(Increase) decrease in inventories....... (102) (57) (1) 18 (99)
(Increase) decrease in prepayments and
other current assets.................... (39) 8 (38) (19) (10)
Increase (decrease) in payables.......... 7 69 34 (13) (59)
Increase (decrease) in taxes accrued..... 23 (17) (47) 23 (18)
Increase (decrease) in other current lia-
bilities................................ (15) (3) 79 (43) (26)
Other..................................... (28) 20 (85) (33) (23)
------ ---- ---- ----- -----
Cash provided (used) by continuing opera-
tions................................... 489 562 330 199 (9)
Cash provided (used) by discontinued op-
erations................................ -- 9 (6) -- --
------ ---- ---- ----- -----
Net cash provided (used) by operating activ-
ities...................................... 489 571 324 199 (9)
------ ---- ---- ----- -----
INVESTING ACTIVITIES
Net proceeds (expenditures) related to the
sale of discontinued operations............ -- 5 (4) -- --
Net proceeds from sale of businesses and as-
sets....................................... 56 16 83 10 34
Expenditures for plant, property and equip-
ment....................................... (562) (280) (217) (263) (179)
Acquisitions of businesses.................. (1,461) (51) (14) (23) (55)
Investments and other....................... (74) 7 -- (64) (6)
------ ---- ---- ----- -----
Net cash used by investing activities....... (2,041) (303) (152) (340) (206)
------ ---- ---- ----- -----
FINANCING ACTIVITIES
Issuance of equity securities by a combined
subsidiary................................. -- 293 -- -- --
Retirement of long-term debt................ (15) (152) (21) (8) (11)
Net increase (decrease) in short-term debt
excluding current maturities on long-term
debt....................................... 8 (94) (29) (23) (2)
Cash contributions from (distributions to)
Tenneco.................................... 1,304 3 (115) 200 (39)
------ ---- ---- ----- -----
Net cash provided (used) by financing activ-
ities...................................... 1,297 50 (165) 169 (52)
------ ---- ---- ----- -----
Effect of foreign exchange rate changes on
cash and temporary cash investments........ 8 4 (2) (2) 4
------ ---- ---- ----- -----
Increase (decrease) in cash and temporary
cash investments........................... (247) 322 5 26 (263)
Cash and temporary cash investments, January
1.......................................... 350 28 23 103 350
------ ---- ---- ----- -----
Cash and temporary cash investments, Decem-
ber 31 (Note).............................. $ 103 $350 $ 28 $ 129 $ 87
====== ==== ==== ===== =====
Cash paid during the year for interest...... $ 6 $ 14 $ 15 $ 2 $ 6
Cash paid during the year for income taxes
(net of refunds)........................... $ 180 $137 $178 $ 97 $ 137
</TABLE>
Note: Cash and temporary cash investments include highly liquid investments
with a maturity of three months or less at the date of purchase.
The accompanying notes to combined financial statements are an integral
part of these combined statements of cash flows.
F-5
<PAGE>
THE BUSINESSES OF NEW TENNECO
STATEMENTS OF CHANGES IN COMBINED EQUITY
(MILLIONS)
<TABLE>
<S> <C>
Balance, December 31, 1992............................................. $ (87)
Net income........................................................... 158
Translation adjustment............................................... (75)
Allocated interest, net of tax....................................... 59
Change in allocated corporate debt................................... 519
Cash distributions to Tenneco........................................ (115)
Noncash contributions from Tenneco................................... 74
------
Balance, December 31, 1993............................................. $ 533
Net income........................................................... 200
Translation adjustment............................................... 56
Allocated interest, net of tax....................................... 61
Change in allocated corporate debt................................... (5)
Cash contributions from Tenneco...................................... 3
Noncash contributions from Tenneco................................... 139
------
Balance, December 31, 1994............................................. $ 987
Net income........................................................... 258
Translation adjustment............................................... 49
Allocated interest, net of tax....................................... 99
Change in allocated corporate debt................................... (887)
Cash contributions from Tenneco...................................... 1,304
Noncash contributions from Tenneco................................... 42
------
Balance, December 31, 1995............................................. $1,852
Net income........................................................... 178
Translation adjustment............................................... (25)
Allocated interest, net of tax....................................... 63
Change in allocated corporate debt................................... (94)
Cash contributions from Tenneco...................................... 200
Noncash distributions to Tenneco..................................... (6)
------
Balance, June 30, 1996 (unaudited)..................................... $2,168
======
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these
statements of changes in combined equity.
F-6
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying combined financial statements represent the financial
position, results of operations and cash flows for all automotive
(collectively referred to as "Tenneco Automotive") and packaging (collectively
referred to as "Tenneco Packaging") operations owned directly or indirectly by
Tenneco Inc. ("Tenneco") and its subsidiaries (see "Control" below).
Unless the context otherwise requires, as used herein the term "Company"
refers: (i) for periods prior to the Industrial Distribution, as defined
below, to Tenneco Automotive, Tenneco Packaging and certain administrative
service operations of Tenneco (collectively, "New Tenneco") which New Tenneco
Inc. will own and operate after the Industrial Distribution, and (ii) for
periods after the Industrial Distribution, to New Tenneco Inc. and its
consolidated subsidiaries.
Reference is made to Note 13, "Segment and Geographic Area Information" for
a description of the businesses of the Company.
2. THE INDUSTRIAL DISTRIBUTION
On June 19, 1996, Tenneco and El Paso Natural Gas Company ("El Paso")
entered into a merger agreement pursuant to which a subsidiary of El Paso will
be merged into Tenneco (the "Merger"). The Merger is part of a larger Tenneco
reorganization (the "Transaction") which includes the distribution of the
common stock of the Company (the "Industrial Distribution") and Newport News
Shipbuilding Inc. ("Newport News"), a subsidiary of Tenneco which will hold
all of the assets, liabilities and operations of Tenneco's current
shipbuilding business (the "Shipbuilding Distribution") (collectively, the
"Distributions") to the holders of Tenneco common stock. Upon completion of
the Transaction, holders of Tenneco common stock will receive equity
securities of the Company, Newport News and El Paso.
Prior to the Transaction, Tenneco intends to initiate a realignment of its
existing indebtedness. As part of the debt realignment, certain Company debt
will be offered in exchange for certain issues of Tenneco debt. Tenneco will
initiate tender offers for other Tenneco debt, and certain debt issues may be
defeased. These tender offers and defeasances will be financed by a
combination of new lines of credit of Tenneco, the Company (which may declare
and pay a dividend to Tenneco) and Newport News (which will declare and pay a
dividend of approximately $600 million to Tenneco). Upon completion of the
debt realignment, Tenneco will have responsibility for $2.65 billion of debt,
subject to certain adjustments, Newport News will have responsibility for the
borrowings under its credit lines and the Company will have responsibility for
the remaining debt.
The Transaction is subject to certain conditions, including receipt of a
favorable ruling from the Internal Revenue Service to the effect that the
Distributions and certain internal spin-off transactions will be tax-free for
federal income tax purposes and approval by Tenneco stockholders.
In order to assist in the orderly transition of the Company into a separate,
publicly held company, Tenneco intends to modify, amend or enter into certain
contractual agreements with the Company. Such agreements include a tax sharing
agreement between Tenneco and its subsidiaries (see "Income taxes" in Note 3),
an employee benefits agreement, an insurance agreement, an administrative
services agreement and other ancillary agreements. These agreements will
provide, among other things, that (i) the Company will become the sole sponsor
of the Tenneco Inc. Retirement Plan, the Tenneco Inc. Thrift Plan, and various
Tenneco Inc. welfare plans; (ii) the Company will retain specific insurance
policies which relate to its businesses and will retain continuing rights and
obligations for certain parent-company insurance policies of Tenneco; and
(iii) the Company will provide certain corporate services, such as mainframe
data processing and product purchasing services, to Tenneco and Newport News
for a specified period of time.
F-7
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. SUMMARY OF ACCOUNTING POLICIES
Control
All of the outstanding common stock of the Company is owned directly or
indirectly by Tenneco. Thus, the companies which comprise Tenneco Automotive,
Tenneco Packaging and certain administrative service operations are under the
control of Tenneco.
Unaudited Interim Information
The unaudited interim combined financial statements as of June 30, 1996 and
for each of the six month periods ended June 30, 1996 and 1995, included
herein, have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim combined financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The interim financial results are not indicative of
operating results for an entire year.
Research and Development
Research and development costs are expensed as incurred. The amounts charged
to "Engineering, research and development expenses" were $42 million, $27
million, and $38 million for 1995, 1994 and 1993, respectively.
Risk Management Activities
The Company is currently a party to financial instruments to hedge its
exposure to changes in foreign currency exchange rates. These financial
instruments are accounted for on the accrual basis with gains and losses being
recognized based on the type of contract and exposure being hedged. After-tax
net gains or losses on foreign currency contracts designated as hedges of the
Company's net investments in foreign subsidiaries are recognized in the
balance sheet caption "Combined equity." Net gains and losses of foreign
currency contracts designated as hedges of firm commitments or other specific
transactions are deferred and recognized when the offsetting gains or losses
are recognized on the hedged items.
In the Combined Statements of Cash Flows, cash receipts or payments related
to the financial instruments are classified consistent with the cash flows
from the transactions being hedged.
Income Taxes
The Company utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the combined financial statements.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period. The estimates
utilized in the recognition of deferred tax assets are subject to revision in
future periods based on new facts or circumstances.
The Company and Tenneco, together with certain of their respective
subsidiaries which are owned 80% or more, have entered into an agreement to
file a consolidated U.S. federal income tax return. Such agreement provides,
among other things, that (1) each company in a taxable income position will be
currently charged with an amount equivalent to its federal income tax computed
on a separate return basis and (2) each company in a tax loss position will be
reimbursed currently to the extent its deductions, including general business
credits, are utilized in the consolidated return. The income tax amounts
reflected in the combined financial statements of the
F-8
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Company under the provisions of the tax sharing arrangement are not materially
different from the income taxes which would have been provided had the Company
filed a separate tax return. Under the tax sharing agreement, Tenneco pays all
federal taxes directly and bills or refunds, as applicable, its subsidiaries
for the applicable portion of the total tax payments. Cash taxes paid in the
Combined Statement of Cash Flows include payments to Tenneco for U.S. federal
income taxes.
The Company does not provide for U.S. income taxes on unremitted earnings of
foreign subsidiaries as it is the present intention of management to reinvest
the unremitted earnings in its foreign operations. Unremitted earnings of
foreign subsidiaries are approximately $505 million at December 31, 1995. It
is not practicable to determine the amount of U.S. income taxes that would be
payable upon remittance of the assets that represent those earnings.
In connection with the Distributions the current tax sharing agreement will
be cancelled and the Company will enter into a tax sharing agreement with
Tenneco, Newport News and El Paso. The tax sharing agreement will provide,
among other things, for the allocation of taxes among the parties of tax
liabilities arising prior to, as a result of, and subsequent to the
Distributions. Generally, the Company will be liable for taxes imposed on the
Company and its affiliates engaged in the automotive and packaging businesses.
In the case of federal income taxes imposed on the combined activities of the
consolidated group, the Company and Newport News will be liable to Tenneco for
federal income taxes attributable to their activities, and each will be
allocated an agreed-upon share of estimated tax payments made by the Tenneco
consolidated group.
Changes in Accounting Principles
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" which
establishes new accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The statement is
effective for transactions occurring after December 31, 1996. The impact of
the adoption of the new standard has not been determined.
The Company adopted FAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of," in the first
quarter of 1996. FAS No. 121 establishes new accounting standards for
measuring the impairment of long-lived assets. The adoption of this new
standard did not have a significant effect on the Company's combined financial
position or results of operations.
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual basis rather
than the "pay-as-you-go" basis. The Company recorded an after-tax charge of $7
million which was reported as a cumulative effect of change in accounting
principle.
Inventories
At December 31, 1995 and 1994, inventory by major classification was as
follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
---------- ---- ----
<S> <C> <C>
Finished goods.................................................. $396 $267
Work in process................................................. 102 81
Raw materials................................................... 253 137
Materials and supplies.......................................... 87 72
---- ----
$838 $557
==== ====
</TABLE>
F-9
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Inventories are stated at the lower of cost or market. A portion of
inventories are valued using the "last-in, first-out" method (47% and 27% at
December 31, 1995 and 1994, respectively). All other inventories are valued on
the "first-in, first-out" ("FIFO") or "average" methods. If the FIFO or
average method of inventory accounting had been used by the Company for all
inventories, inventories would have been $48 million, $46 million and $40
million higher at December 31, 1995, 1994 and 1993, respectively.
Goodwill and Intangibles
At December 31, 1995 and 1994, goodwill and intangibles by major category
was as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
---------- ------ ----
<S> <C> <C>
Goodwill...................................................... $ 632 $299
Trademarks.................................................... 194 1
Patents....................................................... 160 --
Other......................................................... 38 20
------ ----
$1,024 $320
====== ====
</TABLE>
Goodwill is being amortized on a straight-line basis over periods ranging
from 15 years to 40 years. Such amortization amounted to $10 million, $8
million and $8 million for 1995, 1994 and 1993, respectively, and is included
in the Combined Statements of Income caption, "Depreciation, depletion and
amortization."
The Company has capitalized certain intangible assets, primarily trademarks
and patents, based on their estimated fair value at date of acquisition.
Amortization is provided on these intangible assets on a straight-line basis
over periods ranging from 5 to 40 years and was not significant during any of
the periods presented in the accompanying combined financial statements.
The majority of goodwill and intangibles at December 31, 1995, resulted from
the acquisition of the plastics division of Mobil Corporation in November
1995. See Note 4, "Acquisitions," for further information on the acquisitions.
Plant, Property and Equipment, at Cost
At December 31, 1995 and 1994, plant, property and equipment, at cost, by
major category was as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
---------- ------ ------
<S> <C> <C>
Land, buildings and improvements........................... $1,125 $ 978
Machinery and equipment.................................... 2,446 1,722
Other, including construction in progress.................. 567 365
------ ------
$4,138 $3,065
====== ======
</TABLE>
Depreciation of the Company's properties is provided on a straight-line
basis over the estimated useful lives of the related assets. Useful lives
range from 10 to 40 years for buildings and improvements and from 3 to 25
years for machinery and equipment. Depletion of timber and timberlands is
provided on a unit-of-production basis.
Notes Receivable and Allowance for Doubtful Accounts
Short-term notes receivable of $53 million and $31 million were outstanding
at December 31, 1995 and 1994, respectively.
F-10
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, the allowance for doubtful accounts and notes
receivable was $24 million and $15 million, respectively.
Environmental Liabilities
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations,
and which do not contribute to current or future revenue generation, are
expensed. Liabilities are recorded when environmental assessments indicate
that remedial efforts are probable and the costs can be reasonably estimated.
Estimates of the liability are based upon currently available facts, existing
technology and presently enacted laws and regulations taking into
consideration the likely effects of inflation and other societal and economic
factors. All available evidence is considered including prior experience in
remediation of contaminated sites, other companies' clean-up experience and
data released by the United States Environmental Protection Agency or other
organizations. These estimated liabilities are subject to revision in future
periods based on actual costs or new circumstances. These liabilities are
included in the combined balance sheet at their undiscounted amounts.
Recoveries are evaluated separately from the liability and, when recovery is
assured, are recorded and reported separately from the associated liability in
the combined financial statements.
For further information on this subject, reference is made to Note 14,
"Commitments and Contingencies--Environmental Matters."
Foreign Currency Translation
Financial statements of international operations are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and the weighted average exchange rate for each applicable period
for revenues, expenses and gains and losses. Translation adjustments are
reflected in the balance sheet caption "Combined equity."
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of the Company's assets,
liabilities, revenues and expenses. Reference is made to the "Income Taxes"
section of this footnote and Notes 11, 12 and 14 for additional information on
significant estimates included in the Company's combined financial statements.
4. ACQUISITIONS
In June 1996, the Company entered into agreements to acquire The Pullman
Company and its Clevite products division ("Clevite") for $328 million and
Amoco Foam Products Company, a unit of Amoco Chemical Company ("Amoco Foam
Products"), for $310 million. Clevite makes suspension bushings and other
elastomeric parts for cars and trucks. Upon completion of the Clevite
acquisition in July 1996, Clevite's operations became part of Tenneco
Automotive. Amoco Foam Products manufactures expanded polystyrene tableware,
hinged-lid food containers, packaging trays and industrial products for
residential and commercial construction applications. The Company anticipates
closing the acquisition of Amoco Foam Products by the end of August 1996 and
Amoco Foam Products will become part of Tenneco Packaging.
In November 1995, Tenneco Packaging acquired the plastics division of Mobil
Corporation for $1.3 billion. The plastics business is one of the largest
North American producers of polyethylene and polystyrene consumer and food
service packaging.
F-11
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Tenneco Packaging's acquisition of the plastics business was accounted for
as a purchase; accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based on preliminary estimates of
their fair values. Final purchase price allocations will be based on more
complete evaluations and may differ from the original allocation. The excess
of the purchase price over the fair value of the net assets acquired is
included in the balance sheet caption, "Goodwill and intangibles" and is being
amortized on a straight-line basis over 40 years. The purchase was financed
with a cash contribution from Tenneco.
The following unaudited pro forma information of the Company illustrates the
effect of the plastics business acquisition as if it had occurred at the
beginning of 1994, after giving effect to certain pro forma adjustments
including amortization of the excess purchase price, depreciation and other
adjustments based on the preliminary purchase price allocation related to the
acquisition, together with estimates of the related income tax effects.
<TABLE>
<CAPTION>
(UNAUDITED)
YEARS ENDED
DECEMBER 31,
-------------
(MILLIONS) 1995 1994
---------- ------ ------
<S> <C> <C>
Net sales and operating revenues........................... $6,217 $5,203
Income from continuing operations.......................... $ 268 $ 181
</TABLE>
The summarized pro forma information has been prepared for comparative
purposes only. It is not intended to be indicative of the actual operating
results that would have occurred had the acquisition been consummated at the
beginning of 1994, or the results which may be attained in the future.
Also during 1995, Tenneco Packaging completed the acquisitions of eight
paperboard packaging businesses and two specialty packaging businesses for a
total consideration of approximately $196 million. In addition, Tenneco
Automotive completed four acquisitions for approximately $54 million.
Each of the acquisitions was accounted for as a purchase. If these assets
and investments had been acquired January 1, 1995, net income would not have
been significantly different from the reported amount.
In 1994, Tenneco Automotive acquired Heinrich Gillet GmbH & Co. KG for $44
million in cash and $69 million in assumed debt.
5. TRANSACTIONS WITH TENNECO
Combined Equity
The "Combined equity" caption in the accompanying combined financial
statements represents Tenneco's cumulative investment in the combined
businesses of the Company. Changes in the "Combined equity" caption represent
the net income of the Company, net cash and non-cash contributions from
(distributions to) Tenneco, cumulative translation adjustments, changes in
allocated corporate debt, and allocated interest, net of tax. Reference is
made to the Statements of Changes in Combined Equity for an analysis of the
activity in the "Combined equity" caption for the three years ended December
31, 1995 and six months ended June 30, 1996.
General and Administrative Expenses
General and administrative expenses of $229 million, $154 million and $149
million in 1995, 1994 and 1993, respectively, are included in the "Selling,
general and administrative" caption in the Combined Statements of Income. Of
the total general and administrative expenses for 1995, 1994 and 1993, $61
million, $27 million and $21 million, respectively, represent the Company's
share of Tenneco's corporate general and administrative costs for legal,
financial, communication and other administrative services. Tenneco's
corporate general and
F-12
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
administrative expenses are allocated based on the estimated level of effort
devoted to Tenneco's various operations and their relative size based on
revenues, gross property and payroll. Tenneco's corporate general and
administrative expenses not budgeted for allocation are absorbed by the
Company. The Company's management believes the method for allocating corporate
general and administrative expenses is reasonable. Total general and
administrative expenses reflected in the accompanying combined financial
statements are representative of the total general and administrative costs
the Company would have incurred as a separate entity.
Corporate Debt and Interest Allocation
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense have been allocated to the Company based on the
portion of Tenneco's investment in the Company which is deemed to be debt,
generally based upon the ratio of the Company's net assets to Tenneco
consolidated net assets plus debt. Interest expense was allocated at a rate
equivalent to the weighted-average cost of all corporate debt, which was 7.7%,
8.3% and 7.4% for 1995, 1994, and 1993, respectively. Total pre-tax interest
expense allocated to the Company in 1995, 1994 and 1993 was $152 million, $94
million and $90 million, respectively. The Company has also been allocated tax
benefits approximating 35% of the allocated pre-tax interest expense. Although
interest expense, and the related tax effects, have been allocated to the
Company for financial reporting on a historical basis, the Company has not
been billed for these amounts. The changes in allocated corporate debt and the
after-tax allocated interest have been included as a component of the
Company's Combined equity. Although management believes that the historical
allocation of corporate debt and interest is reasonable, it is not necessarily
indicative of the Company's debt upon completion of the Debt Realignment nor
debt and interest that will be incurred by the Company as a separate public
entity.
Notes and Advances Receivable with Tenneco
"Cash contributions from (distributions to) Tenneco" in the Statements of
Changes in Combined Equity consist of net cash changes in notes and advances
receivable with Tenneco which have been included in combined equity.
Historically, Tenneco has utilized notes and advances to centrally manage cash
funding requirements for its consolidated group.
At December 31, 1995 and 1994, the Company had an interest bearing note
receivable from Tenneco totaling $494 million and $310 million, respectively,
which is payable on demand and is included as a component of the Company's
combined equity.
Accounts Receivable and Accounts Payable--Affiliated Companies
The "Receivables--Affiliated companies" balance primarily includes billings
for general and administrative costs incurred by the Company and charged to
Newport News and Tenneco Energy. The "Payables--Affiliated companies" balance
primarily relates to billings for U.S. income taxes incurred by Tenneco and
charged to the Company. Affiliated accounts receivable and accounts payable
between Tenneco, the Company and Newport News will be settled, capitalized or
converted into ordinary trade accounts, as applicable, as part of the
Distributions.
Employee Benefits
Certain employees of the Company participate in the Tenneco employee stock
option and employee stock purchase plans. The Tenneco employee stock option
plan provides for the grant of Tenneco common stock options and other stock
awards at a price not greater than market value at the date of grant. The
Tenneco employee stock purchase plan allows employees to purchase Tenneco
common stock at a 15% discount subject
F-13
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
to certain thresholds. The Company expects to establish similar plans for its
employees after the Industrial Distribution. In connection with the Industrial
Distribution, outstanding options on Tenneco common stock held by Company
employees will be converted into options of the Company so as to preserve the
aggregate value of the options held prior to the Industrial Distribution.
Employees of the Company also participate in certain Tenneco postretirement
and pension plans. Reference is made to Notes 11 and 12 for a further
discussion of these plans.
Sales of Receivables
At December 31, 1995 and 1994, the Company sold $513 million and $384
million, respectively, of trade receivables to Tenneco Credit Corporation
("TCC"), a wholly-owned subsidiary of Tenneco Inc. TCC sells these trade
receivables to a third party in the ordinary course of its business.
6. DISCONTINUED OPERATIONS AND DISPOSITION OF ASSETS
Discontinued Operations
In 1994, the Company sold its brakes operation. Net proceeds from the sale
of the brakes operation was approximately $18 million. Net assets and results
from discontinued operations as of and for the years ended December 31, 1994
and 1993, are as follows:
<TABLE>
<CAPTION>
1994 1993
(MILLIONS) ---- ----
<S> <C> <C>
Net assets at December 31..................................... $ -- $61
==== ===
Net sales and operating revenues.............................. $ 62 $54
==== ===
Loss before income taxes and interest allocation.............. $ (8) $(8)
Income tax benefit............................................ 5 4
---- ---
Loss before interest allocation............................... (3) (4)
Allocation of interest expense, net of income tax (a)......... (2) (3)
---- ---
Net loss...................................................... (5) (7)
---- ---
Loss on disposition........................................... (41) --
Income tax benefit from loss on disposition................... 15 --
---- ---
Net loss on disposition....................................... (26) --
---- ---
Net loss from discontinued operations......................... $(31) $(7)
==== ===
</TABLE>
- --------
(a) The allocation of interest expense to discontinued operations is based on
the ratio of net assets of discontinued operations to Tenneco consolidated
net assets plus debt.
Disposition of Assets
In the second quarter of 1996, Tenneco Packaging entered into an agreement
to form a joint venture with Caraustar Industries whereby Tenneco Packaging
sold its two recycled paperboard mills and recycling operation to the joint
venture in return for cash and an equity interest in the joint venture. The
Company recognized a $50 million pre-tax gain from the sale in the second
quarter of 1996.
In 1995, the Company sold certain facilities and assets, principally at its
Tenneco Packaging segment. Proceeds from these dispositions were $56 million
resulting in a pre-tax net gain of $15 million.
F-14
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
During 1994, the Company disposed of several assets and investments
including a facility, machinery and equipment at Tenneco Packaging. Proceeds
from these dispositions were $16 million resulting in a pre-tax gain of $5
million.
During 1993, the Company disposed several Tenneco Packaging operations. The
proceeds from dispositions were $83 million and the pre-tax gain was $29
million.
7. LONG-TERM DEBT, SHORT-TERM DEBT AND FINANCING ARRANGEMENTS
Long-Term Debt
A summary of long-term debt outstanding and allocated corporate debt
obligations at December 31, 1995 and 1994, is set forth in the following table
(Note):
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ------ ------
<S> <C> <C>
Notes due 1996 through 2014, average effective interest rate
10.9% in 1995 and 7.9% in 1994 (net of $32 million in 1995
and $33 million in 1994 of unamortized discount)............. $ 41 $ 52
Other obligations due 1996 through 2007, average effective in-
terest rate 8.8% in 1995 and
8.4 % in 1994................................................ 26 20
Current maturities............................................ (6) (5)
------ ------
61 67
------ ------
Allocated corporate debt obligations, average effective inter-
est rate 7.7% in 1995 and 8.3% in 1994....................... 1,587 972
------ ------
$1,648 $1,039
====== ======
</TABLE>
Note: Reference is made to Note 5 for a discussion of allocated corporate debt
obligations.
At December 31, 1995 and 1994, approximately $72 million and $154 million,
respectively, of gross plant, property and equipment was pledged as collateral
to secure $30 million and $31 million, respectively, principal amounts of
long-term debt.
The aggregate maturities applicable to non-allocated issues outstanding at
December 31, 1995, are $6 million, $7 million, $6 million, $5 million and $6
million for 1996, 1997, 1998, 1999 and 2000, respectively.
Short-Term Debt
The Company uses lines of credit and overnight borrowings to finance its
short-term capital requirements. Information regarding short-term credit
agreements for the years ended December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1995 1994
- --------------------- ---- ----
<S> <C> <C>
Outstanding borrowings at end of year............................... $16 $ 22
Weighted average interest rate on outstanding borrowings at end of
year............................................................... 6.8% 8.1%
Approximate maximum month-end outstanding borrowings during year.... $18 $163
Approximate average month-end outstanding borrowings during year.... $11 $ 53
</TABLE>
Note: Includes borrowings under both committed credit facilities and
uncommitted lines of credit and similar arrangements.
The Company had other short-term borrowings outstanding of $17 million at
December 31, 1995, and $8 million at December 31, 1994 and was allocated
short-term corporate debt obligations of $345 million at December 31, 1995 and
$73 million at December 31, 1994.
F-15
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Financing Arrangements
As of December 31, 1995, the Company had arranged committed credit
facilities of $43 million of which approximately $12 million had been
utilized. The credit facilities have various terms and the Company is
generally required to pay commitment fees on the unused portion of the total
commitment and facility fees on the total commitment.
8. FINANCIAL INSTRUMENTS
The carrying and estimated fair values of the Company's financial
instruments by class at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- -------------- --------------
CARRYING FAIR CARRYING FAIR
ASSETS (LIABILITIES) AMOUNT VALUE AMOUNT VALUE
- -------------------- -------- ----- -------- -----
<S> <C> <C> <C> <C>
Asset and Liability Instruments
Cash and temporary cash investments.......... $ 103 $ 103 $ 350 $ 350
Receivables (customer, affiliated and long-
term)....................................... 484 484 348 348
Accounts payable (trade and affiliated)...... (636) (636) (533) (533)
Short-term debt (excluding current maturi-
ties) (Note)................................ (33) (33) (30) (30)
Long-term debt (including current maturities)
(Note)...................................... (67) (52) (72) (74)
Instruments With Off-Balance-Sheet Risk
Derivative
Foreign currency contracts................. 5 4 17 18
Non-derivative
Financial guarantees....................... -- (15) -- (20)
</TABLE>
Note: The carrying amounts and estimated fair values of short-term and long-
term debt are before allocation of corporate debt to the Company from Tenneco.
See Note 5.
Asset and Liability Instruments
The fair value of cash and temporary cash investments, receivables, accounts
payable, and short-term debt in the above table was considered to be the same
as or was not determined to be materially different from the carrying amount.
At December 31, 1995 and 1994, respectively, the Company's aggregate customer
and long-term receivable balance was concentrated by industry segment as
follows: Tenneco Automotive, 77% and 76%, respectively, and Tenneco Packaging,
23% and 24%, respectively.
Long-term debt--The fair value of fixed-rate long-term debt was based on the
market value of debt with similar maturities and interest rates.
Instruments With Off-Balance-Sheet Risk
Derivative
The Company utilizes foreign exchange forward contracts to hedge certain
translation effects of the Company's investment in net assets in certain
foreign affiliated companies. Pursuant to these arrangements, the Company
recognized aggregate after-tax translation gains (losses) of $3 million, $(2)
million and $5 million for 1995, 1994 and 1993, respectively, which have been
included in the balance sheet caption "Combined equity."
The Company routinely enters into various foreign currency forward purchase
and sale contracts to hedge the transaction effect of exchange rate movements
on receivables and payables denominated in foreign currencies. These foreign
currency contracts generally mature in one year or less.
F-16
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In managing its foreign currency exposures, the Company identifies naturally
occurring offsetting positions and then hedges residual exposures. The
following table summarizes by major currency the contractual amounts of
foreign currency contracts utilized by the Company:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
-----------------------------
DECEMBER 31, DECEMBER 31,
1995 1994
------------- ---------------
(MILLIONS) PURCHASE SELL PURCHASE SELL
---------- -------- ---- -------- ------
<S> <C> <C> <C> <C>
Foreign currency contracts (in US$):
Australian Dollars....................... $ 1 $202 $ 94 $ 26
British Pounds........................... 81 125 277 964
Canadian Dollars......................... 23 50 81 74
French Francs............................ 44 16 94 15
U.S. Dollars............................. 240 81 244 377
Other.................................... 127 83 274 123
---- ---- ------ ------
$516 $557 $1,064 $1,579
==== ==== ====== ======
</TABLE>
Based on exchange rates at December 31, 1995 and 1994, the cost of replacing
these contracts in the event of non-performance by the counterparties would
not have been material.
Non-derivative
Guarantees--At December 31, 1995 and 1994, the Company had guaranteed
payment and performance of approximately $15 million and $20 million,
respectively, primarily with respect to letters of credit and other guarantees
supporting various financing and operating activities.
9. INCOME TAXES
The domestic and foreign components of income from continuing operations
before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
U.S. income before income taxes........................... $361 $242 $169
Foreign income before income taxes........................ 151 110 111
---- ---- ----
Income before income taxes................................ $512 $352 $280
==== ==== ====
</TABLE>
Following is a comparative analysis of the components of combined income tax
expense applicable to continuing operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Current--
U.S.................................................... $ 54 $ 42 $ 58
State and local........................................ 38 23 21
Foreign................................................ 64 30 35
---- ---- ----
156 95 114
---- ---- ----
Deferred--
U.S.................................................... 61 31 (9)
Foreign................................................ 14 (12) 10
---- ---- ----
75 19 1
---- ---- ----
Income tax expense....................................... $231 $114 $115
==== ==== ====
</TABLE>
Current U.S. income tax expense for the years ended December 31, 1995, 1994
and 1993, include tax benefits of $53 million, $33 million and $32 million,
respectively, related to the allocation of corporate interest expense to the
Company from Tenneco. See Note 5.
F-17
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Following is a reconciliation of income taxes computed at the statutory U.S.
federal income tax rate (35% for all years presented) to the income tax
expense reflected in the Combined Statements of Income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
- ---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. federal income tax
rate......................................................... $179 $123 $ 98
Increases (reductions) in income tax expense resulting from:
Foreign income taxed at different rates and foreign losses
with no tax benefit........................................ 17 (12) 7
State and local taxes on income, net of U.S. federal income
tax benefit................................................ 25 16 13
U.S. federal income tax rate change......................... -- -- 2
Realization of unrecognized deferred tax assets............. -- (12) --
Other....................................................... 10 (1) (5)
---- ---- ----
Income tax expense............................................ $231 $114 $115
==== ==== ====
</TABLE>
The components of the Company's net deferred tax liability at December 31,
1995 and 1994, were as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
---------- ---- ----
<S> <C> <C>
Deferred tax assets--
Tax loss carryforwards...................................... $ 83 $ 76
Postretirement benefits other than pensions................. 41 39
Other....................................................... 31 54
Valuation allowance......................................... (83) (72)
---- ----
Net deferred tax asset...................................... 72 97
---- ----
Deferred tax liabilities--
Tax over book depreciation.................................. 204 163
Pension..................................................... 158 146
Book versus tax gains and losses on asset disposals......... 63 49
Other....................................................... 7 8
---- ----
Total deferred tax liability................................ 432 366
---- ----
Net deferred tax liability.................................... $360 $269
==== ====
</TABLE>
As reflected by the valuation allowance in the table above, the Company had
potential tax benefits of $83 million and $72 million at December 31, 1995 and
1994, respectively, which were not recognized in the Combined Statements of
Income when generated. These benefits resulted primarily from foreign tax loss
carryforwards which are available to reduce future foreign tax liabilities. At
December 31, 1995, the Company had tax benefits of $83 million from foreign
net operating loss carryforwards which will carry forward indefinitely.
10. MINORITY INTEREST
At both December 31, 1995 and 1994, the Company reported minority interest
in the balance sheet of $301 million. At December 31, 1995, $293 million of
minority interest resulted from the December 1994 sale of a 25% preferred
stock interest in Tenneco International Holding Corp. ("TIHC") to a financial
investor. TIHC holds certain assets including the capital stock of Tenneco
Canada Inc., Monroe Europe N.V., Monroe Australia Proprietary Limited, Walker
France S.A. and other subsidiaries included in the Tenneco Automotive segment.
For financial reporting purposes, the assets, liabilities and earnings of TIHC
and its subsidiaries are combined in the Company's financial statements, and
the investor's preferred stock interest has been recorded as "Minority
interest" in the Combined Balance Sheets.
F-18
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Dividends on the TIHC preferred stock are based on the issue price ($300
million) times a rate per annum equal to 1.12% over LIBOR and are payable
quarterly in arrears on the last business day of each quarter commencing on
March 31, 1995. For 1995, the weighted average rate paid on TIHC preferred
stock was 7.30%. Additionally, beginning in 1996, the holder of the 12,000,000
shares of preferred stock will be entitled to receive, when and if declared by
the Board of Directors of TIHC, participating dividends based on the operating
income growth rate of TIHC. For financial reporting purposes, dividends paid
by TIHC to its financial investors have been recorded in the Company's
Combined Statements of Income as "Minority interest."
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits
The Company's employees participate in Tenneco's postretirement health care
and life insurance plans which cover the Company's employees who meet certain
eligibility requirements. For salaried employees, the plans cover employees
retiring from the Company on or after attaining age 55 who have had at least
10 years service with the Company after attaining age 45. For hourly
employees, the postretirement benefit plans generally cover employees who
retire pursuant to one of the Company's hourly employee retirement plans. All
of these benefits may be subject to deductibles, co-payment provisions and
other limitations, and Tenneco or the Company, as applicable, has reserved the
right to change these benefits. Tenneco's postretirement benefit plans are not
funded.
Generally, the Company will retain liabilities with respect to welfare
benefits of its current and former employees and their dependents in
connection with the Distributions.
The funded status of the postretirement benefit plans reconciles with
amounts recognized in the balance sheet at December 31, 1995 and 1994, as
follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ----- -----
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit ob-
ligation at September 30:
Retirees....................................................... $ 82 $ 76
Fully eligible active plan participants........................ 19 20
Other active plan participants................................. 33 27
----- -----
Total accumulated postretirement benefit obligation.............. 134 123
Plan assets at fair value at September 30........................ -- --
----- -----
Accumulated postretirement benefit obligation in excess of plan
assets at September 30.......................................... (134) (123)
Claims paid during the fourth quarter............................ 2 2
Unrecognized reduction of prior service obligations resulting
from plan amendments............................................ (12) (13)
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions........................................ 30 22
----- -----
Accrued postretirement benefit cost at December 31............... $(114) $(112)
===== =====
</TABLE>
Note: The accrued postretirement benefit cost has been recorded based upon
certain actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
F-19
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The net periodic postretirement benefit cost from continuing operations for
the years 1995, 1994 and 1993 consist of the following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
- ---------- ---- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the year................. $ 3 $ 4 $ 3
Interest cost on accumulated postretirement benefit obligation... 10 10 9
Net amortization of unrecognized amounts......................... (1) (1) --
--- --- ---
Net periodic postretirement benefit cost......................... $12 $13 $12
=== === ===
</TABLE>
The initial weighted average assumed health care cost trend rate used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligation was 7%, 8% and 9%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage-point
in each year would increase the 1995, 1994 and 1993 accumulated postretirement
benefit obligations by approximately $12 million, $10 million and $12 million,
respectively, and would increase the aggregate of the service cost and
interest cost components of the net postretirement benefit cost for 1995, 1994
and 1993 by approximately $1 million, $1 million and $2 million, respectively.
The discount rates (which are based on long-term market rates) used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligations were 7.75%, 8.25% and 7.50%, respectively.
Postemployment Benefits
The Company adopted FAS No. 112, "Employers' Accounting for Postemployment
Benefits," in the first quarter of 1994. This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual basis rather
than the "pay-as-you-go" basis. Implementation of this new rule reduced 1994
net income by $7 million, net of income tax benefits of $5 million, which was
reported as the cumulative effect of a change in accounting principle.
12. PENSION PLANS
The Company has various defined benefit plans which cover substantially all
of its employees. Benefits are based on years of service and, for most
salaried employees, on final average compensation. The Company's funding
policies are to contribute to the plans amounts necessary to satisfy the
funding requirements of federal laws and regulations. Plan assets consist of
listed equity and fixed income securities. Certain employees of the Company
participate in the Tenneco Inc. Retirement Plan (the "TRP"). Also, included in
the table below are pension obligations and assets related to certain former
employees of Tenneco which the Company will retain after the Distributions.
The Company will become the sole sponsor of the TRP after the Distributions.
The benefits accrued by Tenneco and Newport News employees in the TRP will be
frozen as of the last day of the calendar month including the Distributions
and the Company will amend the TRP to provide that all benefits accrued
through that day by Tenneco and Newport News employees are fully vested and
non-forfeitable.
F-20
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plans reconcile with amounts on the Combined
Balance Sheets at December 31, 1995 and 1994, as follows:
<TABLE>
<CAPTION>
PLANS IN
WHICH ASSETS PLANS IN WHICH
EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED ALL PLANS
BENEFITS ASSETS (NOTE)
-------------- ---------------- -------------- -------
(MILLIONS) 1995 1994 1995 1994 1995 1994
- ---------- ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Actuarial present value
of benefits based on
service to date and
present pay levels at
September 30:
Vested benefit obliga-
tion................. $1,793 $1,672 $ 35 $ 24 $1,828 $1,696
Non-vested benefit ob-
ligation............. 38 31 4 2 42 33
------ ------ ------- ------- ------ ------
Accumulated benefit
obligation........... $1,831 $1,703 $ 39 $ 26 $1,870 $1,729
Additional amounts re-
lated to projected sal-
ary increases.......... 72 63 3 4 75 67
------ ------ ------- ------- ------ ------
Total projected benefit
obligation at September
30..................... $1,903 $1,766 $ 42 $ 30 $1,945 $1,796
Plan assets at fair
value at September 30.. 2,233 1,968 8 9 2,241 1,977
------ ------ ------- ------- ------ ------
Plan assets in excess of
(less than) total pro-
jected benefit obliga-
tion at September 30... $ 330 $ 202 $ (34) $ (21) $ 296 $ 181
Contributions during the
fourth quarter......... 4 14 -- -- 4 14
Unrecognized net loss
resulting from plan ex-
perience and changes in
actuarial assumptions.. 142 234 2 3 144 237
Unrecognized prior serv-
ice obligations result-
ing from plan amend-
ments.................. 75 81 1 1 76 82
Remaining unrecognized
net obligation (asset)
at initial application. (80) (96) 1 1 (79) (95)
Adjustment recorded to
recognize minimum lia-
bility................. -- -- (2) (2) (2) (2)
------ ------ ------- ------- ------ ------
Prepaid (accrued) pen-
sion cost at December
31..................... $ 471 $ 435 $ (32) $ (18) $ 439 $ 417
====== ====== ======= ======= ====== ======
</TABLE>
Note: Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid (accrued) pension cost has been recorded based upon
certain actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
Net periodic pension costs (income) from continuing operations for the years
1995, 1994 and 1993 consist of the following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the
year................................... $ 23 $ 29 $ 20
Interest accrued on prior years pro-
jected benefit obligation.............. 144 110 60
Expected return on plan assets--
Actual (return) loss.................. (387) 16 (151)
Unrecognized excess (deficiency) of
actual return over expected return... 188 (175) 53
---- ---- ----
(199) (159) (98)
Net amortization of unrecognized
amounts................................ (3) 1 (7)
----- ----- -----
Net pension income...................... $ (35) $ (19) $ (25)
===== ===== =====
</TABLE>
The weighted average discount rates (which are based on long-term market
rates) used in determining the 1995, 1994 and 1993 actuarial present value of
the benefit obligations were 7.8%, 8.3% and 7.5%, respectively.
F-21
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The rate of increase in future compensation was 5.1%, 5.1% and 4.9% for 1995,
1994 and 1993, respectively. The weighted average expected long-term rate of
return on plan assets was 10% for 1995, 1994 and 1993.
13. SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company is a global manufacturer with the following business segments:
Tenneco Automotive
Manufacture and sale of exhaust and ride control systems, for both the
original equipment and replacement markets.
Tenneco Packaging
Manufacture and sale of packaging materials, cartons, containers and
specialty packaging products for consumer and commercial markets.
F-22
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following tables summarize certain segment and geographic information of
the Company's businesses (Note):
<TABLE>
<CAPTION>
SEGMENT
--------------------------
RECLASS.
AND
(MILLIONS) AUTOMOTIVE PACKAGING OTHER ELIMINATION COMBINED
- ---------- ---------- --------- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1995, AND FOR
THE YEAR THEN ENDED
Net sales and operating
revenues..................... $2,479 $2,752 $ -- $(10) $5,221
====== ====== ===== ==== ======
Operating profit.............. 248 440 44 -- 732
Equity in net income of
affiliated companies......... 1 -- -- -- 1
General corporate expenses.... (9) (10) (42) -- (61)
------ ------ ----- ---- ------
Income before interest
expense, income taxes and
minority interest............ 240 430 2 -- 672
====== ====== ===== ==== ======
Identifiable assets........... 1,874 3,405 925 (94) 6,110
Investment in affiliated
companies.................... 3 4 -- -- 7
------ ------ ----- ---- ------
Total assets................ 1,877 3,409 925 (94) 6,117
====== ====== ===== ==== ======
Depreciation, depletion and
amortization................. 84 110 2 -- 196
====== ====== ===== ==== ======
Capital expenditures for
continuing operations......... 208 316 38 -- 562
====== ====== ===== ==== ======
AT DECEMBER 31, 1994, AND FOR
THE YEAR THEN ENDED
Net sales and operating
revenues..................... $1,989 $2,184 $ -- $ (7) $4,166
====== ====== ===== ==== ======
Operating profit.............. 231 217 35 -- 483
Equity in net income of
affiliated companies......... -- -- -- -- --
General corporate expenses.... (8) (8) (11) -- (27)
------ ------ ----- ---- ------
Income before interest
expense, income taxes and
minority interest............ 223 209 24 -- 456
====== ====== ===== ==== ======
Identifiable assets........... 1,472 1,537 1,082 (156) 3,935
Investment in affiliated
companies.................... 2 3 -- -- 5
------ ------ ----- ---- ------
Total assets................ 1,474 1,540 1,082 (156) 3,940
====== ====== ===== ==== ======
Depreciation, depletion and
amortization................. 51 89 2 -- 142
====== ====== ===== ==== ======
Capital expenditures for
continuing operations......... 113 166 1 -- 280
====== ====== ===== ==== ======
AT DECEMBER 31, 1993, AND FOR
THE YEAR THEN ENDED
Net sales and operating
revenues..................... $1,785 $2,042 $ -- $ (7) $3,820
====== ====== ===== ==== ======
Operating profit.............. 230 146 24 -- 400
Equity in net income of
affiliated companies......... -- 2 -- -- 2
General corporate expenses.... (8) (9) (4) -- (21)
------ ------ ----- ---- ------
Income before interest
expense, income taxes and
minority interest............ 222 139 20 -- 381
====== ====== ===== ==== ======
Identifiable assets........... 987 1,433 576 (46) 2,950
Investment in affiliated
companies.................... 4 6 -- -- 10
Identifiable assets related to
discontinued operations...... 70 -- -- (1) 69
------ ------ ----- ---- ------
Total assets................ 1,061 1,439 576 (47) 3,029
====== ====== ===== ==== ======
Depreciation, depletion and
amortization................. 52 83 2 -- 137
====== ====== ===== ==== ======
Capital expenditures for
continuing operations......... 93 124 -- -- 217
====== ====== ===== ==== ======
</TABLE>
Note: Included in "other" above is the operations of Tenneco Business Services
("TBS"). TBS designs, implements and administers shared administrative service
programs for the Company as well as other Tenneco business entities.
F-23
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
GEOGRAPHIC AREA(B)
-------------------------------
RECLASS.
UNITED EUROPEAN OTHER AND
(MILLIONS) STATES CANADA UNION FOREIGN ELIMINATION COMBINED
- ---------- ------ ------ -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1995, AND
FOR THE YEAR THEN ENDED
Net sales and operating
revenues:
Sales to unaffiliated
customers.............. $3,683 $149 $1,140 $249 $ -- $5,221
Transfers among geo-
graphic areas(a)....... 75 43 27 21 (166) --
------ ---- ------ ---- ---- ------
Total................. 3,758 192 1,167 270 (166) 5,221
====== ==== ====== ==== ==== ======
Operating profit.......... 585 20 102 25 -- 732
Equity in net income
(loss) of affiliated
companies................ 1 -- 1 (1) -- 1
General corporate ex-
penses................... (61) -- -- -- -- (61)
------ ---- ------ ---- ---- ------
Income before interest ex-
pense, income taxes and
minority interest........ 525 20 103 24 -- 672
====== ==== ====== ==== ==== ======
Identifiable assets....... 4,664 207 1,077 241 (79) 6,110
Investment in affiliated
companies................ 3 -- 2 2 -- 7
------ ---- ------ ---- ---- ------
Total assets.......... 4,667 207 1,079 243 (79) 6,117
====== ==== ====== ==== ==== ======
AT DECEMBER 31, 1994, AND
FOR THE YEAR THEN ENDED
Net sales and operating
revenues:
Sales to unaffiliated
customers.............. $3,143 $165 $ 624 $234 $ -- $4,166
Transfers among geo-
graphic areas(a)....... 72 36 39 30 (177) --
------ ---- ------ ---- ---- ------
Total................. 3,215 201 663 264 (177) 4,166
====== ==== ====== ==== ==== ======
Operating profit.......... 376 31 47 29 -- 483
Equity in net income
(loss) of affiliated
companies................ 1 -- -- (1) -- --
General corporate ex-
penses................... (27) -- -- -- -- (27)
------ ---- ------ ---- ---- ------
Income before interest ex-
pense, income taxes and
minority interest........ 350 31 47 28 -- 456
====== ==== ====== ==== ==== ======
Identifiable assets....... 2,729 141 1,149 17 (101) 3,935
Investment in affiliated
companies................ 4 -- -- 1 -- 5
------ ---- ------ ---- ---- ------
Total assets............ 2,733 141 1,149 18 (101) 3,940
====== ==== ====== ==== ==== ======
</TABLE>
See Notes on following page.
F-24
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
GEOGRAPHIC AREA(B)
-------------------------------
RECLASS.
UNITED EUROPEAN OTHER AND
(MILLIONS) STATES CANADA UNION FOREIGN ELIMINATION COMBINED
- ---------- ------ ------ -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1993, AND
FOR THE YEAR THEN ENDED
Net sales and operating
revenues:
Sales to unaffiliated
customers.............. $2,875 $176 $569 $200 $ -- $3,820
Transfers among geo-
graphic areas(a)....... 67 32 35 19 (153) --
------ ---- ---- ---- ---- ------
Total................. 2,942 208 604 219 (153) 3,820
====== ==== ==== ==== ==== ======
Operating profit.......... 293 28 56 23 -- 400
Equity in net income of
affiliated companies..... 1 -- 1 -- -- 2
General corporate ex-
penses................... (21) -- -- -- -- (21)
------ ---- ---- ---- ---- ------
Income before interest ex-
pense, income taxes and
minority interest........ 273 28 57 23 -- 381
====== ==== ==== ==== ==== ======
Identifiable assets....... 2,154 111 583 139 (37) 2,950
Investment in affiliated
companies................ 5 -- 2 3 -- 10
Identifiable assets re-
lated to discontinued op-
erations................. 54 15 1 -- (1) 69
------ ---- ---- ---- ---- ------
Total assets.......... 2,213 126 586 142 (38) 3,029
====== ==== ==== ==== ==== ======
</TABLE>
Notes: (a) Products are transferred between geographic areas on a basis
intended to reflect as nearly as possible the "market value" of the products.
(b) As reflected above, the Company's segments principally market their
products and services in the United States, with significant sales in the
European Union and other foreign countries.
The Company is engaged in the sale of products for export from the United
States. Such sales are reflected in the table below:
<TABLE>
<CAPTION>
(MILLIONS)
GEOGRAPHIC AREA PRINCIPAL PRODUCTS 1995 1994 1993
--------------- ------------------------------------------ ---- ---- ----
<C> <S> <C> <C> <C>
Canada Paperboard products, molded and pressed $ 72 $ 75 $ 80
pulp goods, corrugated boxes, aluminum and
plastics
European Union Molded and pressed pulp goods, paperboard 23 21 22
products, corrugated boxes, aluminum and
plastics
Other Foreign Ride control systems, molded and pressed 69 49 45
pulp goods, paperboard products,
corrugated boxes, aluminum and plastics
---- ---- ----
Total Export Sales $164 $145 $147
==== ==== ====
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
Capital Commitments
The Company estimates that expenditures aggregating approximately $567
million will be required after December 31, 1995, to complete facilities and
projects authorized at such date, and substantial commitments have been made
in connection therewith.
F-25
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Lease Commitments
The Company holds certain of its facilities and equipment under long-term
leases. The minimum rental commitments under non-cancelable operating leases
with lease terms in excess of one year are $134 million, $126 million, $124
million, $113 million and $117 million for the years 1996, 1997, 1998, 1999
and 2000, respectively, and $866 million for subsequent years. Of these
amounts, $81 million for 1996, $84 million for 1997, $93 million for 1998, $86
million for 1999, $92 million for 2000 and $689 million for subsequent years
are lease payment commitments to GECC, John Hancock, Metropolitan Life and
others (collectively, the "Lessors") for assets purchased by these companies
from Georgia-Pacific in January 1991 and leased to Tenneco Packaging.
The Company has the right to purchase from the Lessors the various leased
assets under certain conditions as specified in the agreements. In the event
the purchase options are not exercised, and that no event of default, as
defined, exists at the renewal dates, the Company also has the right to extend
the various lease terms on a basis set forth in the agreements. Throughout the
lease terms, the Company is required to maintain the leased properties which
includes reforestation of the timberlands harvested.
Commitments under capital leases were not significant to the accompanying
combined financial statements. Total rental expense for continuing operations
for the years 1995, 1994 and 1993, was $171 million, $161 million and $131
million, respectively, including minimum rentals under non-cancelable
operating leases of $148 million, $143 million and $138 million for the
corresponding periods.
Tenneco Packaging's various lease agreements require that it comply with
certain covenants and restrictions, including financial ratios that, among
other things, place limitations on incurring additional "funded debt" as
defined by the agreements. Under the provisions of the lease agreements, in
order to incur funded debt, Tenneco Packaging must maintain a pretax cash flow
coverage ratio, as defined, on a cumulative four quarter basis of a minimum of
2.0, subsequently modified to 1.25 through December 31, 1995. Tenneco
Packaging was in compliance with all of its covenants at December 31, 1995.
Litigation
The legal entities which comprise the Company are parties to various legal
proceedings arising from their operations. Management believes that the
outcome of these proceedings, individually and in the aggregate, will have no
material effect on the financial position or results of operations of the
Company.
Environmental Matters
The Company is subject to a variety of environmental and pollution control
laws and regulations in all jurisdictions in which it operates. The potential
costs related to the Company for various environmental matters are uncertain
due to such factors as the unknown magnitude of possible cleanup costs, the
complexity and evolving nature of governmental laws and regulations and their
interpretations, and the timing, varying costs and effectiveness of
alternative cleanup technologies. Liabilities recorded by the Company for
environmental contingencies are estimates of probable costs based upon
available information and assumptions. Because of these uncertainties,
however, the Company's estimates may change. The Company believes that any
additional costs identified as further information becomes available would not
have a material effect on the financial position or results of operations of
the Company.
F-26
<PAGE>
THE BUSINESSES OF NEW TENNECO
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
INCOME BEFORE EFFECT OF
INTEREST LOSS FROM CHANGE IN
NET SALES EXPENSE, INCOME DISCONTINUED ACCOUNTING
AND INCOME TAXES FROM OPERATIONS PRINCIPLE,
QUARTER OPERATING AND MINORITY CONTINUING NET OF NET OF NET
(MILLIONS) REVENUES INTEREST OPERATIONS INCOME TAX INCOMETAX INCOME
- ---------- --------- ------------- ---------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
1996 1st................ $1,539 $161 $ 60 $ -- $-- $ 60
2nd................... 1,694 253 118 -- -- 118
------ ---- ---- ---- --- ----
$3,233 $414 $178 $ -- $-- $178
====== ==== ==== ==== === ====
1995 1st................ $1,237 $177 $ 76 $ -- $-- $ 76
2nd................... 1,340 201 92 -- -- 92
3rd................... 1,263 173 73 -- -- 73
4th................... 1,381 121 17 -- -- 17
------ ---- ---- ---- --- ----
$5,221 $672 $258 $ -- $-- $258
====== ==== ==== ==== === ====
1994 1st................ $ 954 $ 78 $ 51 $ (2) $(7) $ 42
2nd................... 1,071 125 45 (23) -- 22
3rd................... 1,071 149 117 -- -- 117
4th................... 1,070 104 25 (6) -- 19
------ ---- ---- ---- --- ----
$4,166 $456 $238 $(31) $(7) $200
====== ==== ==== ==== === ====
</TABLE>
Notes: Reference is made to Notes 3, 4 and 6 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for items affecting
quarterly results.
The preceding notes are an integral part of the foregoing financial
statements.
F-27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Mobil Oil Corporation
We have audited the accompanying combined statement of net assets of the
Mobil Plastics Division of Mobil Oil Corporation (the "Division") as of
November 17, 1995 and December 28, 1994 and the related combined statements of
operations before income taxes, changes in net assets and cash flows for the
period December 29, 1994 to November 17, 1995 and the year ended December 28,
1994. These financial statements are the responsibility of the Division's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Note 1, the accompanying financial statements were prepared
to present the net assets and operations before income taxes of the Division,
which does not have a separate legal status or existence, and are not intended
to be a complete presentation of the assets and liabilities or the results of
operations of Mobil Oil Corporation.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined net assets of the Division at November
17, 1995 and December 28, 1994 and the combined results of its operations
before income taxes and its cash flows before income taxes for the period
December 29, 1994 to November 17, 1995 and the year ended December 28, 1994 in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Buffalo, New York
August 9, 1996
F-28
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
COMBINED STATEMENT OF NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
<S> <C> <C>
Current assets:
Accounts receivable--net............................ $114,219 $102,930
Inventories......................................... 92,492 73,785
Prepaid expenses and other current assets........... 1,232 552
-------- --------
Total current assets.................................. 207,943 177,267
Properties, plants and equipment--net................. 330,269 306,078
Assets held for sale.................................. 4,263 9,160
-------- --------
Total assets.......................................... 542,475 492,505
Current liabilities:
Accounts payable.................................... 53,788 53,503
Accrued restructuring charges....................... 5,575 28,837
Accrued expenses--other............................. 57,860 81,571
-------- --------
Total current liabilities............................. 117,223 163,911
-------- --------
Net assets............................................ $425,252 $328,594
======== ========
</TABLE>
See notes to combined financial statements.
F-29
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
COMBINED STATEMENT OF OPERATIONS BEFORE INCOME TAXES
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE
DECEMBER 29, 1994 YEAR ENDED
TO DECEMBER 28,
NOVEMBER 17, 1995 1994
----------------- ------------
<S> <C> <C>
Net sales....................................... $994,686 $1,035,884
Other operating revenue......................... 1,028 1,050
-------- ----------
995,714 1,036,934
Operating expenses:
Cost of goods sold............................ 625,330 665,150
Selling, distribution, general and administra-
tive......................................... 259,323 281,544
Research and development...................... 7,879 8,612
Restructuring and other charges............... 9,267 77,716
-------- ----------
901,799 1,033,022
-------- ----------
Operating income................................ 93,915 3,912
Other income.................................... 6,000 695
-------- ----------
Income before income taxes...................... $ 99,915 $ 4,607
======== ==========
</TABLE>
See notes to combined financial statements.
F-30
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
COMBINED STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<S> <C>
Excess of combined assets over liabilities at December 29, 1993...... $ 432,150
Income before income taxes........................................... 4,607
Net change in foreign currency translation adjustment................ (239)
Net change in parent company advances................................ (107,924)
---------
Excess of combined assets over liabilities at December 28, 1994...... 328,594
Income before income taxes........................................... 99,915
Net change in foreign currency transaction adjustment................ (179)
Net change in parent company advances................................ (3,078)
---------
Excess of combined assets over liabilities at November 17, 1995...... $ 425,252
=========
</TABLE>
See notes to combined financial statements.
F-31
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Income before income taxes.......................... $99,915 $ 4,607
Adjustments to reconcile income before income taxes
to net cash flows provided by operating activities:
Depreciation...................................... 34,538 42,184
Write down of properties, plants, equipment and
inventory as a result of restructuring program... 4,842 34,386
Gain (loss) on disposal of machinery and equip-
ment............................................. (20) 3,005
Changes in operating assets and liabilities:
Accounts receivable--net........................ (11,289) (11,605)
Inventories..................................... (18,707) 52,431
Prepaid expenses and other current assets....... (680) 5,056
Accounts payable and accrued expenses........... (23,426) 9,749
Accrued restructuring charges................... (23,262) 28,837
Other........................................... 197 462
------- --------
Cash provided by operating activities............... 62,108 169,112
INVESTING ACTIVITIES
Capital expenditures................................ (63,858) (63,031)
Proceeds from sale of machinery and equipment....... 4,828 1,843
------- --------
Cash used in investing activities................... (59,030) (61,188)
FINANCING ACTIVITIES
Change in parent company investment................. (3,078) (107,924)
------- --------
Cash used in financing activities................... (3,078) (107,924)
------- --------
Net change in cash and cash equivalents............. -- --
Cash and cash equivalents:
Beginning of period............................... -- --
------- --------
End of period..................................... $ -- $ --
======= ========
</TABLE>
See notes to combined financial statements.
F-32
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying combined financial statements present, on a historical cost
basis, the combined assets, liabilities, revenue and expense related to the
Mobil Plastics Division of Mobil Oil Corporation ("The Division" or the
"Plastics Division") as of November 17, 1995 and December 28, 1994. These
statements are presented as if the Division had existed as a separate entity
during the periods presented. Transactions between the businesses included in
these statements have been eliminated.
On November 17, 1995, substantially all of the assets and liabilities of the
Division were purchased by Tenneco Inc. pursuant to the Asset Purchase
Agreement dated October 1, 1995 among Mobil Oil Corporation, Mobil Chemical
Canada, Ltd. and Tenneco Inc. (the "agreement"). In accordance with the
agreement, certain assets and liabilities of the Division were retained by
Mobil Oil Corporation; however, with the exception of income taxes, these
assets and liabilites are included in the accompanying combined financial
statements.
The combined financial statements include the financial position and results
of operations of the Plastics Packaging and Consumer Products business groups,
which, prior to the sale to Tenneco Inc., were 100% owned by Mobil Corporation
("Mobil") through the legal entity, Mobil Oil Corporation ("Mobil Oil"). These
business groups have been organized as part of a division of Mobil Chemical
Company ("Mobil Chemical"), which is an operating entity of Mobil Oil.
The Division incurs certain common costs which relate to both the Division
and other Mobil Chemical operations, and management has made allocations of
these costs to the Division. Also, in order to prepare these combined
financial statements, management has made certain allocations of liabilities
to the Division. Management of Mobil Chemical believes such allocations are
reasonable; however, the amounts could differ from amounts that would be
determined if the Division were operated on a stand-alone basis.
Net assets reflect Mobil's historical cost basis investment in the Division,
accumulated earnings and losses of the Division, cumulative exchange
translation adjustments and intercompany activity with Mobil and other
affiliates which are not settled on a current basis.
Income taxes have been excluded from the accompanying combined financial
statements as the responsibility for such taxes is being retained by Mobil
Oil.
2. SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
All cash and cash equivalents are transferred to Mobil Oil Corporation
through the intercompany account on a current basis and, with the exception of
petty cash, are excluded from assets on the accompanying combined statements
of net assets. The Division is part of a centralized cash management system of
Mobil Oil, whereby all cash disbursements of the Division are funded by, and
all cash receipts are transferred to, Mobil Oil.
Inventories
Inventories are stated at cost, but not in excess of market. The cost of
substantially all product inventories is determined by the last-in, first-out
(LIFO) method. The cost of maintenance and supplies inventories is determined
by the first-in, first-out method.
Properties, Plants and Equipment
Properties, plants and equipment are stated at cost. Depreciation is
computed principally using the straight-line and various accelerated methods
over the estimated useful lives of the assets which range from 3 years to 11
F-33
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
years for machinery and equipment, and 25 years to 32 years for land
improvements and buildings. Expenditures for renewals and improvements that
extend the useful life of an asset are capitalized. Expenditures for routine
repairs and maintenance are charged to operations when incurred. Property
items retired or otherwise disposed of are removed from the property and
related accumulated depreciation accounts. Any profit or loss is included in
operations.
Foreign Currency Translation
Financial statements for the Canadian operations are translated into U.S.
dollars at period-end exchange rates as to assets and liabilities and weighted
average exchange rates as to revenues and expenses. The resulting translation
adjustments are recorded as part of net assets.
Use of Estimates
The financial statements, which are prepared in conformity with generally
accepted accounting principles, include amounts that are based, in part, on
management's best estimates and judgments.
Revenue Recognition
The Division recognizes revenue at the point of passage of title, which is
at the time of shipment to the customer.
Promotional Programs
The Division accrues for the costs of promotional programs, including cents-
off coupons and other trade related programs, at the time the program is made
available to customers. Any adjustments between the original estimate and
ultimate costs are recorded as a change in estimate in the period known. This
change in estimate in 1995 resulted in a reduction of expense of approximately
$9 million.
Environmental Liabilities
The estimated future costs for known environmental remediation requirements
are accrued when it is probable that a liability has been incurred and the
amount of remediation costs can be reasonably estimated. These amounts are the
undiscounted future estimated costs under existing regulatory requirements and
using existing technology.
Allocation of Expenses
The Division shares certain services with other related business groups at
the Divisional level. Services are also performed by Mobil Chemical, Mobil Oil
and Mobil Corporation. These services are allocated to the Plastics Division
primarily on the basis of estimated usage of services. A summary of the
services and the amounts allocated to the Division are described in Note 10.
3. OPERATING ACTIVITIES
The Division is comprised of two primary business groups, Plastics Packaging
and Consumer Products. Plastics Packaging serves food service, supermarkets
and industrial segments while Consumer Products serves the packaged goods
segment of the retail industry. The Division's products include waste bags,
tableware, food bags, food service disposables, meat trays, clear containers,
grocery sacks and stretch film. The Division operates ten manufacturing
facilities in the United States and one in Canada. These facilities consist of
six polyethylene and five polystyrene fabricating plants. The Division
primarily markets its products to customers in North America. There are no
further geographic concentrations of customers, and, generally, collateral is
not required.
F-34
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
(THOUSANDS)
<S> <C> <C>
Accounts receivable--trade............................ $112,239 $101,911
Other receivables..................................... 3,067 2,108
Less: Allowance for doubtful accounts................. (1,087) (1,089)
-------- --------
$114,219 $102,930
======== ========
</TABLE>
5. INVENTORIES
Major classes of inventories are as follows:
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
(THOUSANDS)
<S> <C> <C>
Raw material.......................................... $ 25,068 $24,443
In-process............................................ 12,740 10,637
Finished product...................................... 84,752 63,866
-------- -------
Product inventory at current cost..................... 122,560 98,946
Less: LIFO and other product inventory reserves....... (43,895) (44,893)
-------- -------
78,665 54,053
Other material and supplies........................... 6,427 6,274
Maintenance........................................... 7,400 13,458
-------- -------
$ 92,492 $73,785
======== =======
</TABLE>
As a result of the decrease in the level of inventories in 1994, a LIFO
layer liquidation occurred. The impact of the liquidation was approximately a
$7,340 thousand decrease to cost of goods sold for the year ended December 28,
1994. The reduction to cost of goods sold consists of a decrease of $8,640
thousand for the Consumer Products business group which is offset by an
increase of $1,300 thousand for the Plastics Packaging business group.
6. PROPERTIES, PLANTS AND EQUIPMENT
Major classes of properties, plants and equipment are as follows:
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
(THOUSANDS)
<S> <C> <C>
Land and land improvements............................ $ 17,185 $ 17,092
Buildings............................................. 112,218 111,262
Machinery, equipment, furniture and fixtures.......... 591,343 561,596
Construction in progress.............................. 50,642 31,580
--------- ---------
Properties, plants and equipment--gross............... 771,388 721,530
Less accumulated depreciation......................... (441,119) (415,452)
--------- ---------
Properties, plants and equipment--net................. $ 330,269 $ 306,078
========= =========
</TABLE>
F-35
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. ASSETS HELD FOR SALE
As part of the Division's reengineering program, as described in Note 15,
the Division closed two manufacturing plants and eliminated unprofitable
product lines which resulted in either the sale or disposal of the related
machinery and equipment. The restructuring charge recorded in 1995 and 1994
includes $4,713 thousand and $28,581 thousand to write-down the two plants,
machinery and equipment to their estimated realizable value. These items had
an original cost of approximately $108,700 thousand and accumulated
depreciation of approximately $66,000 thousand prior to the restructuring
charge. The Washington, New Jersey plant was closed in September 1994, and the
Woodland, California plant was closed in March 1995. The items that have not
been sold or disposed of are included as assets held for sale in the
accompanying combined statement of net assets at management's estimate of the
realizable value.
8. ACCRUED EXPENSES--OTHER
Accrued expenses--other consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
(THOUSANDS)
<S> <C> <C>
Promotional programs.................................. $28,861 $42,139
Vacation.............................................. 6,752 7,993
Quantity discounts.................................... 5,791 7,150
Freight............................................... 4,847 6,965
Sales force and other bonuses......................... 2,624 2,331
Benefits.............................................. 2,310 3,442
Commissions........................................... 1,421 1,671
Relocation costs...................................... 1,152 873
Sales and use tax..................................... 1,042 674
Workers compensation insurance........................ 965 2,230
Insurance programs.................................... 769 773
Advertising........................................... 446 1,219
Property taxes........................................ 221 904
Salaries.............................................. -- 2,067
Other accrued expenses................................ 659 1,140
------- -------
$57,860 $81,571
======= =======
</TABLE>
9 FOREIGN CURRENCY TRANSLATION
The cumulative currency translation adjustment included in net assets
consists of the following unrealized gain (loss):
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
Balance at December 29, 1993........................................ $ (770)
Exchange adjustments.............................................. (239)
-------
Balance at December 28, 1994........................................ (1,009)
Exchange adjustments.............................................. (179)
-------
Balance at November 17, 1995........................................ $(1,188)
=======
</TABLE>
F-36
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS
Mobil Chemical Company, Mobil Oil Corporation, and Mobil Corporation have
provided the Plastics Division with various administrative and financial
services. Mobil Chemical Company services include computer systems,
accounting, legal and purchasing functions. Mobil Oil Corporation and Mobil
Corporation services include computer mainframe and networking charges,
payroll and employee benefits administration, health, safety and environmental
compliance programs, and plastics industry trade dues. It is Mobil's policy to
allocate centrally incurred costs primarily on the basis of usage or on
estimated time spent. Management believes these allocations and charges have
been made on a reasonable basis; however, they are not necessarily indicative
of the level of expenses which might have been incurred had the Division been
operating as a stand-alone entity.
Charges allocated to the Division from the above-mentioned sources amounted
to approximately $21,110 thousand and $24,980 thousand for the period December
29, 1994 to November 17, 1995 and the year ended December 28, 1994,
respectively. In addition to the above charges, the Division is allocated a
surcharge based on payroll for various employee benefits, including those
mandated by statute. For U.S. operations these charges amounted to $36,606
thousand and $46,591 thousand, and for Canadian operations these charges
amounted to $502 thousand and $610 thousand for the periods ended November 17,
1995 and December 28, 1994, respectively. In addition, workers' compensation
costs were allocated to the Division from Mobil Oil based on payroll, state
mandated rates, and experience ratings. Workers' compensation costs allocated
to the Division for the periods ended November 17, 1995 and December 28, 1994,
amounted to approximately $4,811 thousand and $7,300 thousand, respectively.
The Division obtains general liability and fire and extended property
insurance coverage from a wholly-owned subsidiary of Mobil Corporation. The
Division is self-insured up to deductible limits; these limits for fire and
extended property insurance were increased effective January 1, 1995.
Insurance premiums charged to the Division were approximately $382 thousand
and $801 thousand for the periods ended November 17, 1995 and December 28,
1994, respectively.
The Division purchased approximately 7% and 10% of its polyethylene resin
raw material from Mobil affiliates during the period ended November 17, 1995
and the year ended December 28, 1994, respectively. These purchases, which
were made at market rates, amounted to approximately $12,240 thousand and
$16,600 thousand for the periods ended November 17, 1995 and December 28,
1994, respectively.
11. DEFINED BENEFIT RETIREMENT PLANS
The majority of the Division's U.S. employees are covered by funded
noncontributory pension plans sponsored by Mobil Oil. These plans are
primarily final average pay plans. Funding for these plans, at the Corporate
level, is based on the projected unit credit actuarial cost method. The assets
of these plans consist primarily of equity and fixed income securities.
The Division receives an intercompany allocation of pension costs from Mobil
or its subsidiaries. The net pension obligation is maintained on Mobil's books
and no amount has been included in the accompanying combined statement of net
assets for the Division's share of the obligation.
Net pension costs allocated by Mobil Oil to the Plastics Division
approximated a credit of $983 thousand for the period December 29, 1994 to
November 17, 1995 and a charge of $4,619 thousand for the year ended December
28, 1994. Amounts allocated are principally determined based on payroll. These
credits and charges are included in the payroll surcharge amount disclosed in
Note 10.
F-37
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
11. DEFINED BENEFIT RETIREMENT PLANS--(CONTINUED)
The Division also provides retirement benefits for its Canadian employees
under pension plans sponsored by a Canadian subsidiary of Mobil Corporation.
Net pension costs allocated to the Plastics Division amounted to approximately
$99 thousand and $170 thousand for the periods ended November 17, 1995 and
December 28, 1994, respectively. These charges are included in the payroll
surcharge amount disclosed in Note 10.
In accordance with certain reporting requirements, actuarial valuations for
the defined benefit retirement plans are performed on an annual basis. Mobil
Oil performed actuarial valuations as of December 31, 1995 and 1994. The
primary assumptions used for the U.S. and Canadian plans actuarial valuations
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 28,
1995 1994
------------ ------------
Percent
<S> <C> <C>
Discount rate......................................... 7.0--7.3 7.5--8.5
Rate of salary increase............................... 4.0--5.3 4.0--5.6
Expected return on plan assets........................ 8.7--9.0 8.2--8.5
</TABLE>
12. OTHER POSTRETIREMENT BENEFITS
The Division, through Mobil Oil, provides certain health care and life
insurance benefits for U.S. retired employees who meet eligibility
requirements. The cost of these benefits is allocated to the Division by Mobil
Oil. The net obligation for these benefits is maintained by Mobil Oil and no
amount has been recorded in the accompanying combined statement of net assets
for the Division's share of the obligation. Premium costs are shared on a
plan-by-plan basis between Mobil Oil and the participants. Postretirement
health care benefits are provided both before and after eligibility for
Medicare. The life insurance plans provide for a single lump-sum payment to a
designated beneficiary.
Charges for postretirement health care and life insurance plans allocated to
the Division by Mobil Oil were $951 thousand and $3,460 thousand for the
period December 28, 1994 to November 17, 1995 and the year ended December 28,
1994, respectively. Amounts allocated are principally determined based on the
Division's payroll and the number of employees. These charges are included in
the payroll surcharge amount disclosed in Note 10.
In accordance with certain reporting requirements, actuarial valuations for
postretirement health care and life insurance plans are performed on an annual
basis. Mobil Oil performed actuarial valuations as of December 31, 1995 and
1994.
The accumulated postretirement benefit obligation is based on a weighted-
average assumed discount rate of 7% and 8.5% as of December 31, 1995 and 1994,
respectively. At December 31, 1995, the health care cost trend used to
calculate the accumulated postretirement benefit obligation is 9.7% for 1996,
and is assumed to decrease generally over 9 years to 5.5%. At December 31,
1994, the health care cost trend rate was assumed to be 10.3% for 1995,
declining to 5.5% after 10 years. The effect of a one percentage point
increase in the assumed health care cost trend rate for each year would
increase the Division's postretirement benefit charge by approximately 15%.
Mobil Corporation's policy is to make contributions to funded plans and
provide book reserves for unfunded plans.
The Division does not provide postretirement benefits for its Canadian
employees because they are covered primarily by local government programs.
F-38
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
13. EMPLOYEE SAVINGS PLAN
The Division, through Mobil Oil, sponsors an Employee Savings Plan, which
covers most U.S. employees. The Plan includes a savings plan, which consists
primarily of an employee stock ownership plan (ESOP) and a 401(k) plan. The
ESOP consists of contributions made by Mobil Oil of 4% of eligible employees'
annual base salary. The 401(k) plan consists of Mobil Oil's contribution of 2%
of eligible employees' annual base salary and employee contributions of 1% to
10% of their base salary subject to IRS limitations. Mobil Oil contributions
to the ESOP are invested in Mobil ESOP Convertible Preferred Stock. Employee
contributions to the savings plan are invested at the employees' discretion in
Mobil Corporation common stock or a variety of mutual funds. The Division was
charged approximately $4,348 thousand and $6,506 thousand for the period
December 29, 1994 to November 17, 1995 and the year ended December 28, 1994,
respectively, for their allocated costs of these plans. These charges are
included in the payroll surcharge amount disclosed in Note 10.
The Division also sponsors, through a Canadian subsidiary of Mobil
Corporation, an Employee Savings Plan for its Canadian employees. For salaried
employees the plan consists of a 3-5% contribution by Mobil (depending on
years of service). This contribution is made only if an employee also
contributes a minimum of 5%. An employee may contribute up to 25% of their
salary. For non-salaried workers the employee has a choice of 2% of additional
wages, or a 2% contribution to the Savings Plan. All contributions are
invested at the employees' discretion in Mobil Corporation common stock or a
variety of mutual funds. Employee Savings Plan contributions allocated to the
Division amounted to approximately $65 thousand and $73 thousand for the
periods ended November 17, 1995 and December 28, 1994, respectively. These
charges are included in the payroll surcharge amount disclosed in Note 10.
14. LEASE COMMITMENTS AND RENTALS
The Division rents certain property and equipment under various operating
leases. Total rental expense for the period December 29, 1994 to November 17,
1995 and the year ended December 28, 1994, amounted to approximately $3,518
thousand and $8,169 thousand, respectively.
Future minimum lease payments under all non-cancelable operating leases
having a remaining term in excess of one year are as follows for the next five
calendar years:
<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
1996................................................................ $2,098
1997................................................................ 1,415
1998................................................................ 930
1999................................................................ --
2000................................................................ --
</TABLE>
15. RESTRUCTURING CHARGE
During 1994, the Division implemented a major reengineering program intent
on reducing the Division's cost structure through a comprehensive redesign of
operating practices and major business processes. The program included the
closing of two manufacturing plants, equipment consolidation, elimination of
unprofitable product lines, closure of outside warehouses, and manpower
reductions made possible by improved processes and consolidating accounting
and other administrative functions. As a result of the reengineering program,
the Division's headcount was reduced by approximately 25% or 1,200 positions.
Included in operating results is a charge of $7,267 and $74,809 thousand
relating to the cost of this program for the period December 29, 1994 to
November 17, 1995 and for the year ended December 28, 1994, respectively.
F-39
<PAGE>
MOBIL PLASTICS DIVISION OF MOBIL OIL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
15. RESTRUCTURING CHARGE--(CONTINUED)
The restructuring charge consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 17, DECEMBER 28,
1995 1994
------------ ------------
(THOUSANDS)
<S> <C> <C>
Employee severance packages......................... $1,102 $37,375
Write-down of equipment and inventory and related
costs of discontinued product lines................ 3,896 27,190
Charges to record closed manufacturing facilities at
estimated realizable value and related closure and
selling costs...................................... 946 9,113
Other............................................... 1,323 1,131
------ -------
$7,267 $74,809
====== =======
</TABLE>
The Division's combined statements of net assets includes accruals for
restructuring of $5,575 thousand and $28,837 thousand at November 17, 1995 and
December 28, 1994, respectively. These accruals consist primarily of employee
severance packages which are paid on an ongoing basis; it is anticipated that
payments relating to this program will be completed in 1996.
The Division also incurred consulting charges relating to the restructuring
program of $2,000 thousand and $2,907 thousand for the period December 29,
1994 to November 17, 1995 and the year ended December 28, 1994, respectively.
16. CONTINGENCIES
Environmental Matters
The Division is subject to loss contingencies pursuant to various federal,
state and local environmental laws and regulations. These include possible
obligations to remove or mitigate the effects on the environment of the
placement, storage, disposal or release of certain chemical or other
substances by the Division or by other parties.
The Division is not aware of any significant environmental obligations and
accordingly has not made any provisions for such obligations related to its
current operating facilities. The Division may, in the future, be involved in
environmental assessments or clean-ups. While the ultimate requirement for any
such remediation, and its cost, is presently not known, the management of the
Division does not expect these costs, based upon currently known information
and existing requirements, to have a material adverse effect on its net assets
and future operating results.
17. PATENT INFRINGEMENT SETTLEMENT
In March 1995 the Division received a $6,000 thousand settlement relating to
a patent infringement suit. This amount is recorded as other income during the
period ended November 17, 1995.
F-40
<PAGE>
SCHEDULE II
THE BUSINESSES OF NEW TENNECO
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts Deducted from
Assets to Which it
Applies:
Year Ended December 31,
1995.................. $15 $20 $-- $11 $24
=== === === === ===
Year Ended December 31,
1994.................. $15 $ 5 $-- $ 5 $15
=== === === === ===
Year Ended December 31,
1993.................. $17 $10 $-- $12 $15
=== === === === ===
</TABLE>
S-1
<PAGE>
APPENDIX D
INFORMATION STATEMENT
NEWPORT NEWS SHIPBUILDING INC.
COMMON STOCK
LOGO (PAR VALUE $.01 PER SHARE)
[LOGO OF NEWPORT NEWS SHIPBUILDING APPEARS HERE]
This Information Statement is being furnished to stockholders of Tenneco
Inc., a Delaware corporation ("Tenneco"), in connection with the distribution
(the "Shipbuilding Distribution") by Tenneco to holders of its Common Stock,
par value $5.00 per share ("Tenneco Common Stock"), of all the outstanding
shares of Common Stock, $.01 par value per share ("NNS Common Stock"), of its
wholly owned subsidiary, Newport News Shipbuilding Inc., a Delaware
corporation. Concurrently with the Shipbuilding Distribution, Tenneco will
also distribute to holders of Tenneco Common Stock (individually, the
"Industrial Distribution" and together with the Shipbuilding Distribution, the
"Distributions") all of the outstanding shares of Common Stock, $.01 par value
per share ("New Tenneco Common Stock"), of New Tenneco Inc., a Delaware
corporation ("New Tenneco"). The Distributions will occur immediately prior to
the effective time (the "Merger Effective Time") of the proposed merger (the
"Merger"), pursuant to an Agreement and Plan of Merger dated as of June 19,
1996, as amended (the "Merger Agreement"), of a wholly-owned subsidiary of El
Paso Natural Gas Company, a Delaware corporation ("El Paso"), with and into
Tenneco (which will be renamed El Paso Tennessee Pipeline Co.). Pursuant to
the Merger, holders of Tenneco Common Stock will receive Common Stock, $3.00
par value per share, of El Paso ("El Paso Common Stock") and, under certain
circumstances, depositary shares each representing a 1/25th fractional
interest in a share of Preferred Stock of El Paso (the "El Paso Preferred
Depositary Shares"). The Distributions, the Merger and the other transactions
contemplated thereby are collectively referred to herein as the "Transaction."
Unless the context otherwise requires, as used herein the term "Company"
refers: (i) for periods prior to the Shipbuilding Distribution, to Newport
News Shipbuilding and Dry Dock Company ("Newport News") and the other
consolidated subsidiaries through which Tenneco conducted its shipbuilding
business (the "Shipbuilding Business") during such periods, and (ii) for
periods after the Shipbuilding Distribution, to Newport News Shipbuilding Inc.
("NNS," formerly known as Tenneco InterAmerica Inc.) and its consolidated
subsidiaries, including Newport News.
The consummation of the Transaction is conditioned upon, among other things,
approval thereof by Tenneco stockholders. The consummation of the
Distributions is subject to the satisfaction or waiver of a number of other
conditions as described under "The Shipbuilding Distribution--Conditions to
Consummation of the Shipbuilding Distribution" in this Information Statement.
It is expected that the Shipbuilding Distribution will be made on or about
December 11, 1996, to holders of record of Tenneco Common Stock on such date
on the basis of one share of NNS Common Stock, for every five shares of
Tenneco Common Stock held of record. In addition, the Board of Directors of
NNS (the "NNS Board") will adopt a stockholder rights plan and cause to be
issued, with each share of NNS Common Stock to be distributed in the
Shipbuilding Distribution, one Right (as defined herein), entitling the holder
thereof to, among other things, purchase under certain circumstances, and as
described more fully herein, one one-hundredth of a share of NNS Junior
Preferred Stock (as defined herein). No consideration will be required to be
paid by holders of Tenneco Common Stock for the shares of NNS Common Stock to
be distributed in the Shipbuilding Distribution or the Rights associated
therewith, nor will holders of Tenneco Common Stock be required to surrender
or exchange their shares of Tenneco Common Stock in order to receive such
shares of NNS Common Stock and the Rights associated therewith.
There is no current public market for NNS Common Stock, although a "when
issued" market is expected to develop prior to the effective date of the
Shipbuilding Distribution (the "Distribution Date"). NNS has applied to the
New York Stock Exchange (the "NYSE") for the listing of the NNS Common Stock
upon notice of issuance and expects to receive approval of such listing prior
to the Distributions.
RECIPIENTS OF NNS COMMON STOCK SHOULD NOTE THE FACTORS DISCUSSED IN "RISK
FACTORS" BEGINNING ON PAGE 29.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS INFORMATION STATEMENT IS , 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 1
SUMMARY OF CERTAIN INFORMATION............................................ 3
INTRODUCTION.............................................................. 15
THE SHIPBUILDING DISTRIBUTION............................................. 16
Manner of Distribution.................................................. 16
Corporate Restructuring Transactions.................................... 16
Debt and Cash Realignment............................................... 18
Relationships Among the Company, Tenneco and New Tenneco after the
Distributions.......................................................... 18
Reasons for the Distributions........................................... 23
Conditions to Consummation of the Shipbuilding Distribution............. 23
Amendment or Termination of the Distributions........................... 24
Trading of NNS Common Stock............................................. 24
Certain Federal Income Tax Aspects of the Shipbuilding Distribution..... 24
Reasons for Furnishing the Information Statement........................ 28
RISK FACTORS.............................................................. 29
Reliance on Major Customer and Uncertainty of Future Work............... 29
Profit Recognition; Government Contracting.............................. 30
Competition and Regulation.............................................. 32
Substantial Leverage.................................................... 33
Potential Liabilities Due to Fraudulent Transfer Considerations and
Legal Dividend Requirements............................................ 34
Government Claims and Investigations.................................... 35
Potential Federal Income Tax Liabilities................................ 35
No Current Public Market for NNS Common Stock........................... 36
Uncertainty Regarding Trading Prices of Stock Following the Transaction. 36
Uncertainty Regarding Future Dividends.................................. 36
Collective Bargaining Agreements........................................ 37
Environmental Matters................................................... 37
Certain Antitakeover Features........................................... 37
FINANCING................................................................. 38
CAPITALIZATION............................................................ 39
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS......................... 40
COMBINED SELECTED FINANCIAL DATA.......................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 46
Business Overview....................................................... 46
Results of Operations--Overview......................................... 47
Results of Operations for the Six Months Ended June 30, 1996 and 1995... 47
Results of Operations for the Years Ended December 31, 1995, 1994, and
1993................................................................... 48
Liquidity and Capital Resources......................................... 50
Debt and Interest Allocation............................................ 52
Income Taxes............................................................ 52
Changes in Accounting Principles........................................ 53
Backlog................................................................. 53
Business Outlook........................................................ 54
Other................................................................... 56
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFENSE INDUSTRY OVERVIEW................................................. 58
BUSINESS.................................................................. 61
Company Overview........................................................ 61
Business Strategy....................................................... 62
General................................................................. 63
Construction............................................................ 63
Repair and Overhauls.................................................... 66
Engineering and Design.................................................. 67
Other................................................................... 67
Materials and Supplies.................................................. 67
Health, Safety and Environmental........................................ 68
Properties.............................................................. 68
Investigations and Legal Proceedings.................................... 69
MANAGEMENT................................................................ 71
Board of Directors...................................................... 71
Executive Officers...................................................... 72
Stock Ownership of Management........................................... 73
Committees of the Board of Directors.................................... 74
Executive Compensation.................................................. 75
Change-in-Control Arrangements.......................................... 79
Compensation of Directors............................................... 79
Benefit Plans Following the Shipbuilding Distribution................... 80
DESCRIPTION OF CAPITAL STOCK.............................................. 81
Authorized Capital Stock................................................ 81
NNS Common Stock........................................................ 81
NNS Preferred Stock..................................................... 82
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS................................ 82
Classified Board of Directors........................................... 82
Number of Directors; Removal; Filling Vacancies......................... 83
Special Meetings........................................................ 83
Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals.............................................................. 83
Record Date Procedure for Stockholder Action by Written Consent......... 84
Stockholder Meetings.................................................... 85
NNS Preferred Stock..................................................... 85
Rights.................................................................. 85
Antitakeover Legislation................................................ 88
Comparison with Rights of Holders of Tenneco Common Stock............... 88
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS................... 93
Elimination of Liability of Directors................................... 93
Indemnification of Directors and Officers............................... 93
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE....................... F-1
INDEX TO EXHIBITS......................................................... E-1
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
Tenneco is (and, following the Shipbuilding Distribution, the Company will
be) subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith files
(and the Company will file) reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The reports,
proxy statements and other information filed by Tenneco (and to be filed by
the Company) with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as at the Commission"s Regional
Offices, including the following: Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such information may be obtained by
mail at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W. Street, N.W., Washington, D.C. 20549 or accessed
electronically on the Commission's Web Site at (http:/www.sec.gov).
The Company intends to furnish holders of NNS Common Stock with annual
reports containing consolidated financial statements prepared in accordance
with United States generally accepted accounting principles and audited and
reported on, with an opinion expressed, by an independent public accounting
firm, as well as quarterly reports for the first three quarters of each fiscal
year containing unaudited financial information.
The Company has filed with the Commission a Registration Statement on Form
10 (as amended, the "Registration Statement") under the Exchange Act covering
NNS Common Stock and the associated Rights.
This Information Statement does not contain all of the information in the
Registration Statement and the related exhibits and schedules. Statements in
this Information Statement as to the contents of any contract, agreement or
other document are summaries only and are not necessarily complete. For
complete information as to these matters, refer to the applicable exhibit or
schedule to the Registration Statement. The Registration Statement and the
related exhibits filed by the Company with the Commission may be inspected at
the public reference facilities of the Commission listed above.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS INFORMATION
STATEMENT OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED
BY REFERENCE HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR TENNECO.
NEITHER THE DELIVERY OF THIS INFORMATION STATEMENT NOR CONSUMMATION OF THE
SHIPBUILDING DISTRIBUTION CONTEMPLATED HEREBY SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY OR TENNECO SINCE THE DATE HEREOF, OR THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
The Company's principal executive offices are located at 4101 Washington
Avenue, Newport News, Virginia 23607; telephone: (757) 380-2000.
----------------
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Information Statement contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, the Company's prospects, developments and business
strategies for its operations, all of which are subject to risks and
uncertainties. These forward-looking statements are identified by their use of
such terms and phrases as "intends," "intend," "intended," "goal," "estimate,"
"estimates," "expects," "expect," "expected," "project," "projects,"
"projected," "projections," "plans," "anticipates," "anticipated," "should,"
"designed to," "foreseeable future," "believe," "believes" and "scheduled" and
in many cases are followed by a cross reference to "Risk Factors."
<PAGE>
When a forward-looking statement includes a statement of the assumptions or
basis underlying the forward-looking statement, the Company cautions that,
while it believes such assumptions or basis to be reasonable and makes them in
good faith, assumed facts or basis almost always vary from actual results, and
the differences between assumed facts or basis and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, the Company or its management expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The Company's actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include (i) the factors discussed under "Risk Factors" and
particularly, in cases where the forward-looking statement is followed by a
cross reference to "Risk Factors," the factors discussed in the section or
sections under "Risk Factors" that are referred to in the cross reference,
(ii) the factors discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Business Outlook" and
"Business" and (iii) the following factors: (a) the general political,
economic and competitive conditions in the United States and other markets
where the Company operates; (b) initiatives to reduce the federal budget
deficit and reductions in defense spending; (c) reductions in the volume of
U.S. Navy contracts awarded to the Company; (d) unanticipated events affecting
designs and manufacturing processes thus impairing the Company's efforts to
reduce production costs and cycle time; (e) changes in capital availability or
costs, such as changes in interest rates, market perceptions of the industry
in which the Company operates, or security ratings; (f) employee workforce
factors, including issues relating to collective bargaining agreements or work
stoppages; and (g) authoritative generally accepted accounting principles or
policy changes from such standard-setting bodies as the Financial Accounting
Standards Board and the Commission.
2
<PAGE>
SUMMARY OF CERTAIN INFORMATION
This Summary is qualified by the more detailed and other information and
financial statements set forth elsewhere in this Information Statement, which
should be read in its entirety. Capitalized terms used but not defined in this
Summary are defined elsewhere in this Information Statement. Unless the context
otherwise requires, the term "Company" refers (i) for periods prior to the
Shipbuilding Distribution, to Newport News Shipbuilding and Dry Dock Company
("Newport News") and the other consolidated subsidiaries through which Tenneco
conducted its Shipbuilding Business during such periods, and (ii) for periods
after the Shipbuilding Distribution, to Newport News Shipbuilding Inc. ("NNS")
and its consolidated subsidiaries, including Newport News.
THE COMPANY
The Company is the largest non-government-owned shipyard in the United
States. Its primary business is the design, construction, repair, overhaul and
refueling of nuclear-powered aircraft carriers and submarines for the United
States Navy. The Company believes it currently is: (i) the only shipyard
capable of building the Navy's nuclear-powered aircraft carriers, (ii) the only
non-government-owned shipyard capable of refueling and overhauling the Navy's
nuclear-powered aircraft carriers, and (iii) one of only two shipyards capable
of building nuclear-powered submarines. Since its inception in 1886, the
Company has developed a preeminent reputation through the construction of 264
naval ships and 542 commercial vessels. For the year ended December 31, 1995
and the six months ended June 30, 1996, the Company had net sales of $1,756
million and $915 million, respectively, and EBITDA (as defined) of $227 million
and $113 million, respectively. In addition, at June 30, 1996 the Company had
$4.1 billion of estimated backlog.
Aircraft carrier and submarine construction contracts with the U.S. Navy have
generated the majority of the Company's net sales. Newport News has built nine
of the 12 active aircraft carriers in the U.S. fleet, including all eight
nuclear-powered aircraft carriers. For the last 35 years, Newport News has been
the sole designer and builder of the U.S. Navy's aircraft carriers. Newport
News currently holds contracts to build two Nimitz-class nuclear-powered
carriers, each representing approximately $2-3 billion in initial contract
revenue: the Harry S Truman, scheduled for delivery in 1998, and the Ronald
Reagan, scheduled for delivery in 2002. Based on current U.S. Navy projections,
the Company anticipates the award in or before 2002 of a contract for the
construction of the last Nimitz-class aircraft carrier for delivery in 2009.
Under contract to the Navy, Newport News is currently performing design concept
studies for the next generation of aircraft carriers. In addition, Newport
News, as one of only two manufacturers of nuclear-powered submarines, has
constructed 53 nuclear-powered submarines comprised of seven different classes.
Newport News has recently been designated by legislation to build two of the
first four of the next generation of the Navy's new nuclear attack submarines
("NSSNs") commencing in late 1998.
As Newport News has built all the active Nimitz-class aircraft carriers and
believes it currently is the only non-government-owned shipyard capable of
refueling and overhauling nuclear-powered aircraft carriers, the Company has
had the leading share of the refueling and overhaul market for aircraft
carriers. A Nimitz-class aircraft carrier must be refueled at approximately the
midpoint of its estimated 50-year life. The Navy often commissions a major
overhaul of each carrier to coincide with a refueling. It normally takes two
years to complete a refueling and overhauling. Currently the Company is
overhauling the USS Dwight D. Eisenhower (an approximate $400 million
contract), and it holds planning contracts to overhaul the USS Theodore
Roosevelt in 1997 and to refuel and overhaul the USS Nimitz beginning in 1998.
The Company believes that, if awarded, the contracts for the Roosevelt and the
Nimitz will be for approximately $230 million and approximately $1 billion,
respectively. In addition, the Navy has announced its schedule to begin the
refueling of the Eisenhower in 2001, the USS Carl Vinson in 2006 and the
Roosevelt in 2009 at an estimated cost of approximately $1 billion each.
Supported by its new Carrier Refueling Complex, the Company believes it is
well-positioned to be awarded future refueling contracts.
3
<PAGE>
Newport News' management is highly regarded in the defense and shipbuilding
industry and has been successful in creating a motivated and experienced
management team and enhancing its position as the premier U.S. shipyard. Led by
William P. Fricks, the Chief Executive Officer of Newport News, who has 30
years of experience, the Company's senior executives average 10 years of
shipbuilding experience. Newport News is a separate operating entity with its
own corporate headquarters, management team and separate financial reporting
systems. Management, therefore, expects an orderly transition to an
independent, publicly-traded company.
BUSINESS STRATEGY
To broaden and strengthen its competitive position, the Company has developed
strategies with the following key elements: (i) maintain a leadership position
in its core business, (ii) further reduce its cost structure, (iii) continue to
reduce cycle time; and (iv) broaden and expand products and markets.
MAINTAIN A LEADERSHIP POSITION IN ITS CORE BUSINESS. Aircraft carriers and
submarines remain vital components of the Navy's strategy for protecting U.S.
global interests. The Navy has stated that it needs to maintain a minimum of 12
aircraft carriers to respond quickly to overseas crises and command a credible
presence around the world. As the aircraft carrier and submarine fleets
continue to age, the Company believes there will be a steady long-term demand
for new construction and for refueling and overhauling services, which it
intends to aggressively pursue.
FURTHER REDUCE ITS COST STRUCTURE. In 1991, the Company embarked on a program
to reduce its cost structure and increase productivity in order to remain a
market leader in its core business as well as to facilitate entry into related
commercial markets. Management initiatives to reduce the overall cost structure
of the Company have included workforce reductions of 38% (from approximately
29,000 employees in 1991 to approximately 18,000 employees in 1996), overhead
and other cost reductions, the successful negotiation of a long-term labor
agreement that stabilizes wages through April 1999, and the closing of certain
facilities. As a second step in its cost reduction program, Newport News has
begun outsourcing low value-added production activities and has been investing
in programs to upgrade and automate its operations. Since 1993, the Company has
spent $177 million on a variety of discretionary capital programs designed to
lower costs and improve efficiency. Recent and ongoing expenditures include new
computing technology ($85 million), an automated steel factory ($71 million),
the extension of a dry dock to accommodate multi-ship construction ($30
million), and the construction of the Carrier Refueling Complex ($19 million).
CONTINUE TO REDUCE CYCLE TIME. The Company plans to continue to reduce the
cycle times for product development and ship delivery by re-engineering key
production processes including design, production planning, materials
management, steel fabrication and outfitting. Process innovation teams have
been assigned to each key production process to implement this strategy. In
connection with these initiatives, the Company delivered the USS John C.
Stennis in November 1995, 7.5 months ahead of schedule and at a savings of over
1,000,000 man-hours compared to the previously delivered aircraft carrier.
BROADEN AND EXPAND PRODUCTS AND MARKETS. The Company has begun to seek to
leverage its existing expertise by expanding its commercial and other
shipbuilding projects. The Company believes that this expansion effort should
create additional growth opportunities. In addition, by allowing for increased
economies of scale, the Company believes its expansion initiatives should help
it reduce per ship costs and thereby make it more competitive in its core U.S.
Navy business, which currently accounts for over 90% of the Company's net
sales. As part of this expansion effort, the Company secured long-term, fixed
price contracts with two purchasers for a total of nine "Double Eagle" product
tankers. The initial ships under contract are being built at a loss, for which
the Company has created a reserve. This new line of double-hulled product
tankers is designed to meet all of the stringent domestic and international
shipping specifications. Additionally, drawing on its nearly four
4
<PAGE>
decades of safe fuel handling and reactor services for the U.S. Navy, the
Company won a contract from the Department of Energy in 1995 to construct a
facility to store damaged fuel from Three Mile Island. The Company is pursuing
bids on additional projects from the Department of Energy.
In order to further strengthen its position as a leading U.S. Navy
contractor, the Company is attempting to broaden its naval portfolio to include
non-nuclear ships by bidding with others in an alliance on the design and
construction of the LPD-17 non-nuclear amphibious assault ship. The Company has
also joined an alliance to develop design concepts for the Navy's new "Arsenal
Ship," a floating missile platform that utilizes a commercially available
double-hulled design, and pursue awards in the construction of such ships.
International military sales are also a key growth opportunity. The Company is
pursuing orders for several versions of its international frigate, the FF-21,
from foreign navies and is currently focusing on naval modernization programs
presently underway in the United Arab Emirates, the Philippines, Norway and
Kuwait.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA OF THE COMPANY
The summary combined financial data as of December 31, 1995 and 1994 and for
the years ended December 31, 1995, 1994 and 1993 were derived from the audited
Combined Financial Statements of the Company. The summary combined financial
data as of December 31, 1993, 1992 and 1991 and for the years ended December
31, 1992 and 1991 are unaudited and were derived from the accounting records of
Tenneco. The summary combined financial data as of and for each of the six-
month periods ended June 30, 1996 and 1995 were derived from the unaudited
Combined Financial Statements of the Company. In the opinion of the Company's
management, the summary combined financial data of the Company as of December
31, 1993, 1992 and 1991 and for the years ended December 31, 1992 and 1991, and
as of and for the six months ended June 30, 1996 and 1995 include all adjusting
entries (consisting only of normal recurring adjustments) necessary to present
fairly the information set forth therein. The results of operations for the six
months ended June 30, 1996 should not be regarded as indicative of the results
that may be expected for the full year.
The summary pro forma combined financial data as of and for the six months
ended June 30, 1996 and for the year ended December 31, 1995, have been
prepared to reflect the Transaction, including: (i) the issuance of
$400 million aggregate principal amount of Notes (as defined herein); (ii)
borrowings of $214 million under the Senior Credit Facility (as defined
herein); (iii) the cash dividend of $600 million to be paid by the Company to
Tenneco or one or more of its subsidiaries pursuant to the Debt Realignment (as
defined herein); (iv) the payment of $14 million of certain fees and expenses
incurred in connection with the Notes and the Senior Credit Facility; and (v)
the issuance of the NNS Common Stock pursuant to the Shipbuilding Distribution.
The unaudited pro forma combined Statements of Earnings Data have been prepared
as if the various components of the Transaction occurred on January 1, 1995;
the unaudited pro forma combined Balance Sheet Data have been prepared as if
the various components of the Transaction occurred on June 30, 1996. The
summary pro forma combined financial data are not necessarily indicative of the
results of operations of the Company had the transactions reflected therein
actually been consummated on the dates assumed and are not necessarily
indicative of the results of operations for any future period.
This information should be read in conjunction with the "Unaudited Pro Forma
Combined Financial Statements," "Combined Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Combined Financial Statements, and notes thereto, included
elsewhere in this Information Statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------------------------------
PRO FORMA PRO FORMA
1996 1996(A) 1995(A) 1995 1995(A) 1994(A) 1993(A) 1992 1991
--------- ------- ------- --------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF EARNINGS DATA:
Net sales.......................... $ 915 $ 915 $ 845 $1,756 $1,756 $1,753 $1,861 $2,265 $2,216
====== ====== ====== ====== ====== ====== ====== ====== ======
Operating earnings................. $ 80 $ 81 $ 90 $ 155 $ 157 $ 201 $ 210 $ 249 $ 224
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings before cumulative effect
of changes in accounting
principles........................ $ 29 $ 37 $ 41 $ 54 $ 73 $ 95 $ 111 (b) $ 143 $ 135
Cumulative effect of changes in
accounting principles, net of
tax............................... -- -- -- -- -- (4)(c) -- (93)(c) --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net earnings....................... $ 29 $ 37 $ 41 $ 54 $ 73 $ 91 $ 111 $ 50 $ 135
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings per share................. $ .85 $ 1.55
====== ======
BALANCE SHEET DATA:
Working capital.................... $ 185 $ 41 $ 4 N/A $ (19) $ (75) $ (121) $ (89) $ (470)
Total assets....................... 1,461 1,452 1,337 N/A 1,380 1,263 1,235 1,450 1,412
Short-term debt(d)................. 28 95 54 N/A 68 30 34 83 36
Long-term debt(d).................. 586 282 326 N/A 292 287 423 761 364
Combined equity.................... 194 349 236 N/A 272 199 105 (173) (30)
STATEMENT OF CASH FLOWS DATA:
Net cash provided (used) by operat-
ing
activities........................ N/A $ (1) $ (18) N/A $ 63 $ 182 $ 215 $ (174) $ 352
Net cash provided (used) by invest-
ing
activities........................ N/A (45) (29) N/A (87) (29) 21 6 (99)
Net cash provided (used) by financ-
ing
activities........................ N/A 45 47 N/A 25 (154) (241) 181 (246)
OTHER DATA:
EBITDA (e)......................... $ 113 $ 113 $ 123 $ 227 $ 227 $ 270 $ 297 $ 323 $ 298
</TABLE>
(continued on next page)
6
<PAGE>
(continued from previous page)
- --------
(a) For a discussion of significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations," included elsewhere in this
Information Statement.
(b) Includes a gain of $15 million related to the sale of Sperry Marine
businesses.
(c) In 1994, the Company adopted Statement of Financial Accounting Standards
("FAS") No. 112, "Employers' Accounting for Postemployment Benefits." In
1992, the Company adopted FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and FAS No. 109, "Accounting
for Income Taxes."
(d) Historical amounts represent debt allocated to the Company from Tenneco
based on the portion of Tenneco's investment in the Company which is deemed
to be debt, generally based upon the ratio of the Company's net assets to
Tenneco's consolidated net assets plus debt. Tenneco's historical practice
has been to incur indebtedness for its consolidated group at the parent
company level or at a limited number of subsidiaries, rather than at the
operating company level, and to centrally manage various cash functions.
Management believes that the historical allocation of corporate debt and
interest expense is reasonable; however, it is not necessarily indicative
of the Company's debt upon completion of the Debt Realignment, nor debt and
interest that may be incurred by the Company as a separate public entity.
See the Combined Financial Statements, and notes thereto, included
elsewhere in this Information Statement.
(e) EBITDA represents earnings before cumulative effect of changes in
accounting principles, income taxes, interest expense and depreciation and
amortization. EBITDA is not a calculation based upon generally accepted
accounting principles ("GAAP"); however, the amounts included in the EBITDA
calculation are derived from amounts included in the combined historical or
pro forma Statements of Earnings. In addition, EBITDA shall not be
considered as an alternative to net income or operating income, as an
indicator of the operating performance of the Company or as an alternative
to operating cash flows as a measure of liquidity.
7
<PAGE>
THE SHIPBUILDING DISTRIBUTION
Distributing Company........ Tenneco Inc. (which will be renamed El Paso
Tennessee Pipeline Co. upon consummation of the
Merger).
Distributed Company......... Newport News Shipbuilding Inc. ("NNS," a wholly-
owned subsidiary of Tenneco and formerly known as
Tenneco InterAmerica Inc.) which will, upon
consummation of the Shipbuilding Distribution,
directly and indirectly through its consolidated
subsidiaries (including Newport News), own and
operate substantially all of the Shipbuilding
Business. Immediately following consummation of
the Shipbuilding Distribution, Tenneco will not
have an ownership interest in the Company.
Distribution Ratio.......... One share of NNS Common Stock for every five
shares of Tenneco Common Stock held of record on
the Distribution Record Date (as defined herein).
Securities to be
Distributed................ Based on 170,755,576 shares of Tenneco Common
Stock outstanding on September 30, 1996,
approximately 34,151,115 shares of NNS Common
Stock (and Rights associated therewith) will be
distributed. NNS Common Stock to be distributed
in the Shipbuilding Distribution will constitute
all of the outstanding NNS Common Stock
immediately following the Shipbuilding
Distribution. See "Description of Capital Stock--
NNS Common Stock" and "Antitakeover Effects of
Certain Provisions--Rights."
Fractional Share Interests.. Fractional shares of NNS Common Stock will not be
distributed. Fractional shares of NNS Common
Stock will be aggregated and sold in the public
market by the Distribution Agent (as defined
herein) and the aggregate net cash proceeds will
be distributed ratably to those stockholders
entitled to fractional interests. See "The
Shipbuilding Distribution--Manner of
Distribution."
Distribution Record Date....
December 11, 1996.
Distribution Date...........
December 11, 1996.
Distribution Agent and
Transfer Agent for the
Shares.....................
First Chicago Trust Company of New York (the
"Distribution Agent").
Mailing Date................ Certificates representing the shares of NNS
Common Stock to be distributed pursuant to the
Shipbuilding Distribution will be delivered to
the Distribution Agent on the Distribution Date.
The Distribution Agent will mail certificates
representing the shares of NNS Common Stock to
holders of Tenneco Common Stock as soon as
practicable thereafter. Holders of Tenneco Common
Stock should not send stock certificates to
Tenneco, the Company or the Distribution Agent in
connection with the Shipbuilding Distribution
(however, holders of Tenneco Common Stock will
receive instructions from the Distribution Agent
with respect to the disposition of their
certificates in connection with the Merger). See
"The Shipbuilding Distribution--Manner of
Distribution."
Conditions to the
Shipbuilding Distribution..
The Transaction (and accordingly, the
Shipbuilding Distribution) is conditioned upon,
among other things, declaration of the special
8
<PAGE>
distributions by the Board of Directors of
Tenneco (the "Tenneco Board") authorizing the
Distributions and approval by the stockholders of
Tenneco of the Transaction. The Transaction is
also conditioned upon receipt of a private letter
ruling (the "IRS Ruling Letter") from the
Internal Revenue Service (the "IRS") in form and
substance satisfactory to the Tenneco Board (see
"The Shipbuilding Distribution--Certain Federal
Income Tax Aspects of the Shipbuilding
Distribution"), which IRS Ruling Letter was
issued on October 30, 1996. The Distributions and
the Merger are part of a unified transaction and
will not be effected separately (although Tenneco
may elect subsequently to proceed with one or
more of the transactions included in the
Transaction which do not require stockholder
approval if the Transaction is not approved by
Tenneco stockholders). See "Introduction," "The
Shipbuilding Distribution--Conditions to
Consummation of the Shipbuilding Distribution"
and "The Shipbuilding Distribution--Amendment or
Termination of the Distributions."
Reasons for the
Distributions.............. The Distributions and the Merger are designed to
separate three types of businesses, namely the
Shipbuilding Business, the Industrial Business
(as defined below) and the Energy Business (as
defined below), which have distinct financial,
investment and operating characteristics, so that
each can adopt strategies and pursue objectives
appropriate to its specific needs. The
Distributions will (i) enable the management of
each company to concentrate its attention and
financial resources on the core businesses of
such company, (ii) permit investors to make more
focused investment decisions based on the
specific attributes of each of the three
businesses, (iii) facilitate employee
compensation programs custom-tailored to the
operations of each business, including stock-
based and other incentive programs, which will
more directly reward employees of each business
based on the success of that business and (iv)
tailor the assets of Tenneco to facilitate
acquisition of the Energy Business by El Paso.
Upon consummation of the Shipbuilding
Distribution, NNS will, primarily through its
consolidated subsidiaries (including Newport
News), own and operate substantially all of the
Shipbuilding Business. New Tenneco will,
primarily through its consolidated subsidiaries,
own and operate the Tenneco Automotive, Tenneco
Packaging and Tenneco Business Services
businesses of Tenneco (collectively, the
"Industrial Business"). Immediately following
consummation of the Distributions, a subsidiary
of El Paso will be merged with and into Tenneco,
and thereafter the energy and other remaining
businesses and operations of Tenneco, including
liabilities and assets relating to discontinued
Tenneco operations not related to the
Shipbuilding Business and the Industrial Business
(collectively, the "Energy Business"), will be
owned and operated by El Paso. See "The
Shipbuilding Distribution--Reasons for the
Distributions."
Federal Income Tax
Consequences............... The Tenneco Board has conditioned the
Shipbuilding Distribution on receipt of the IRS
Ruling Letter substantially to the effect, among
other things, that the Shipbuilding Distribution
and the receipt of shares of NNS Common Stock by
holders of Tenneco Common Stock will be tax-free
to Tenneco and its stockholders (except with
9
<PAGE>
respect to cash received for fractional shares as
discussed above), respectively, for federal
income tax purposes. The IRS Ruling Letter
received on October 30, 1996 satisfies the
foregoing condition. Tenneco also requested a
ruling from the IRS as to the tax-free treatment
of certain transactions to be effected as part of
the Corporate Restructuring Transactions (as
defined herein) and the Merger which was received
as part of the IRS Ruling Letter. See "The
Shipbuilding Distribution--Certain Federal Income
Tax Aspects of the Shipbuilding Distribution,"
and "Risk Factors--Potential Federal Income Tax
Liabilities."
Trading Market..............
There is currently no public market for NNS
Common Stock, although a "when issued" market is
expected to develop prior to the Distribution
Date. NNS has applied to the NYSE for the listing
of NNS Common Stock upon notice of issuance and
expects to receive approval of such listing prior
to the Distributions. Holders of Tenneco Common
Stock should be aware that there can be no
assurance that the combined market value/trading
prices of (i) El Paso Common Stock and, under
certain circumstances, El Paso Preferred
Depositary Shares, (ii) New Tenneco Common Stock
and (iii) NNS Common Stock (plus any cash
received in lieu of fractional shares or any
fractional El Paso Preferred Depositary Shares)
received in respect of their shares of Tenneco
Common Stock pursuant to the Transaction will be
equal to or greater than the market value/trading
prices of their shares of Tenneco Common Stock
immediately prior to the Transaction. See "The
Shipbuilding Distribution--Trading of NNS Common
Stock" and "Risk Factors--No Current Public
Market for NNS Common Stock."
Dividends...................
NNS' dividend policy will be established by the
NNS Board from time to time based on the results
of operations and financial condition of the
Company and such other business considerations as
the NNS Board considers relevant. In addition,
the Senior Credit Facility and the indentures for
the Notes place restrictions, subject to certain
exceptions, upon the right of NNS to declare and
pay dividends. There can be no assurance that the
combined annual dividends on (i) El Paso Common
Stock and, if issued in connection with the
Merger, El Paso Preferred Depositary Shares, (ii)
New Tenneco Common Stock and (iii) NNS Common
Stock after the Transaction will be equal to the
annual dividends on Tenneco Common Stock prior to
the Transaction (and it is unlikely that the
dividends would be greater than the annual
dividends on Tenneco Common Stock prior to the
Transaction). See "Risk Factors--Uncertainty
Regarding Future Dividends," "Description of
Capital Stock--NNS Common Stock" and "Financing."
Antitakeover Provisions..... The Restated Certificate of Incorporation and the
Amended and Restated By-laws of the Company (both
of which will be adopted prior to the
Distribution Date), as well as the Company's
stockholder rights plan (which will expire on
June 10, 1998 unless extended with stockholder
approval) and Delaware statutory law, contain
provisions that may have the effect of
discouraging an acquisition of control of the
Company in a transaction not approved by the NNS
Board. These provisions should better enable the
10
<PAGE>
Company to develop its business and foster its
long-term growth without the disruptions that can
be caused by the threat of certain types of
takeovers not deemed by the NNS Board to be in
the best interests of the Company and its
stockholders. Such provisions may also have the
effect of discouraging third parties from making
proposals involving an acquisition or change of
control of the Company, although such proposals,
if made, might be considered desirable by a
majority of the Company's stockholders. Such
provisions could further have the effect of
making it more difficult for third parties to
cause the immediate removal and replacement of
the members of the then current NNS Board or the
then current management of the Company without
the concurrence of the NNS Board. See "Risk
Factors--Certain Antitakeover Features,"
"Description of Capital Stock," and "Antitakeover
Effects of Certain Provisions."
Risk Factors................ Stockholders of Tenneco should be aware that the
Shipbuilding Distribution and ownership of NNS
Common Stock involve certain risk factors
including those described under "Risk Factors,"
and elsewhere in this Information Statement. Such
matters include, among others, the Company's
reliance on the U.S. Navy for over 90% of its net
sales; the uncertainty of securing future work;
the Company's competitive environment; the
Company's substantial leverage after the
Shipbuilding Distribution; the lack of a current
public market for the NNS Common Stock; the
absence of assurance that the combined market
value/trading prices of and dividends on El Paso
Common Stock and any El Paso Depositary Shares,
NNS Common Stock and New Tenneco Common Stock
held by stockholders after the Transaction will
be equal to or greater than the market
value/trading price of or dividends on Tenneco
Common Stock prior to the Transaction; the risk
that the Transaction may not qualify as a tax-
free distribution under Section 355 of the Code
(as defined herein); certain antitakeover effects
of certain provisions of the Company's Restated
Certificate of Incorporation, its Amended and
Restated By-laws, its stockholder rights plan and
the Delaware statutory law; the fact that the
Transaction is subject to review under federal
and state fraudulent conveyance laws; and other
matters. See "Risk Factors."
Corporate Restructuring
Transactions............... Prior to the consummation of the Shipbuilding
Distribution, Tenneco and its subsidiaries will
undertake various intercompany transfers and
distributions designed to restructure Tenneco's
existing businesses, assets and liabilities so
that substantially all of the assets, liabilities
and operations of (i) the Shipbuilding Business
will be directly and indirectly owned and
operated by the Company, (ii) the Industrial
Business will be directly and indirectly owned
and operated by New Tenneco and (iii) the Energy
Business will be directly and indirectly owned by
Tenneco which will, upon consummation of the
Merger, be a subsidiary of El Paso and be renamed
El Paso Tennessee Pipeline Co. (the "Corporate
Restructuring Transactions"). See "The
Shipbuilding Distribution--Corporate
Restructuring Transactions." In connection with
the Transaction, Newport News Industrial
Corporation, a Virginia corporation and
subsidiary of Newport News, will transfer all of
its assets and trade accounts payable to NNS.
Newport News Shipbuilding Inc. will acquire all
of the assets and liabilities of Newport News
Industrial Corporation as part of the Corporate
Restructuring Transactions.
11
<PAGE>
Debt and Cash Realignment;
Credit/Financing...........
The Merger Agreement, the Distribution Agreement
to be entered into pursuant to the Merger
Agreement (the "Distribution Agreement") and
certain of the other agreements and documents
attached as exhibits to the Merger Agreement or
the Distribution Agreement (the "Ancillary
Agreements") provide for (i) the restructuring
(through debt tender and exchange offers,
defeasances, prepayments, refinancings and the
like), immediately prior to the Distributions, of
the outstanding indebtedness for money borrowed
(the "Tenneco Consolidated Debt") of Tenneco and
certain of its consolidated subsidiaries (the
"Debt Realignment") and (ii) the allocation of
cash and cash equivalents of Tenneco and its
consolidated subsidiaries (the "Cash
Realignment"). See "The Shipbuilding
Distribution--Debt and Cash Realignment."
In connection with the Transaction and to provide
for working capital needs, NNS intends to issue
(the "Offering") $200 million of Senior Notes due
2006 (the "Senior Notes") and $200 million of
Senior Subordinated Notes due 2006 (the "Senior
Subordinated Notes," and together with the Senior
Notes, the "Notes") and enter into a $415 million
senior secured credit facility (the "Senior
Credit Facility") comprised of a $200 million
six-year amortizing term loan (the "Term Loan")
and a $215 million six-year revolving credit
facility (the "Revolving Credit Facility"), of
which $125 million may be used for advances and
letters of credit and $90 million may be used for
standby letters of credit. The Company expects to
utilize the proceeds of the Notes and Term Loan
and borrowings of $14 million under the Revolving
Credit Facility to distribute (i) $600 million as
a dividend to Tenneco or one or more of its
subsidiaries for use in retiring certain Tenneco
Consolidated Debt and (ii) $14 million in payment
of certain fees and expenses incurred in
connection with the Notes and the Senior Credit
Facility. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources",
"Risk Factors--Substantial Leverage" and "The
Shipbuilding Distribution--Debt and Cash
Realignment."
Pursuant to the Cash Realignment, the Company
will be allocated $5 million of cash and cash
equivalents, Tenneco will be allocated $25
million of cash and cash equivalents and New
Tenneco will be allocated all remaining cash and
cash equivalents on hand as of the Merger
Effective Time which would total approximately
$200 million if the Transaction had been
consummated as of June 30, 1996. A post-
Distribution audit will be conducted and
following such audit, New Tenneco will be
required to pay to each of the Company or
Tenneco, as the case may be, the amount by which
such company's total cash and cash equivalents on
hand as of the Merger Effective Time is less than
its above-described allocation to such company.
Likewise, Tenneco and the Company will each be
required to pay to New Tenneco the amount of any
excess as of the Merger Effective Time from the
above-described allocation. See "The Shipbuilding
Distribution--Debt and Cash Realignment."
12
<PAGE>
Relationships with Tenneco
and New Tenneco after the
Shipbuilding Distribution..
Tenneco will have no stock ownership in the
Company upon consummation of the Shipbuilding
Distribution. The Company, New Tenneco and
Tenneco will enter into the Distribution
Agreement prior to the Shipbuilding Distribution,
for the purposes of governing certain ongoing
relationships among the Company, New Tenneco and
Tenneco after the Shipbuilding Distribution and
to provide for an orderly transition in the
disaffiliation of the Shipbuilding Business, the
Energy Business and the Industrial Business. The
Distribution Agreement provides for, among other
things, the Distributions and the allocation
among the Company, Tenneco and New Tenneco of
assets and liabilities. The parties will also
enter into the Ancillary Agreements, including:
(i) the Benefits Agreement (defined herein),
providing for allocations of responsibilities
with respect to employee compensation, benefit
and labor matters; (ii) the Tax Sharing Agreement
(defined herein) pursuant to which the Company,
New Tenneco and Tenneco will allocate liabilities
for taxes arising prior to, as a result of, and
subsequent to the Distribution Date; (iii) the
Debt Realignment plan pursuant to which the
Tenneco Consolidated Debt will be restructured,
paid and/or refinanced by the Company, New
Tenneco and Tenneco; (iv) the Debt and Cash
Allocation Agreement (defined herein) providing
for, among other things, the allocation of cash
among, and the restructuring and refinancing of
certain of the debt of Tenneco existing prior to
the Distributions by (or with funds provided by),
the Company, New Tenneco and Tenneco; (v) the TBS
Services Agreement (defined herein) pursuant to
which Tenneco Business Services Inc. ("TBS"), a
wholly-owned subsidiary of New Tenneco, will
continue to provide certain administrative and
other services to the Company until December 31,
1998; (vi) the Shipbuilding Trademark Transition
License Agreement (defined herein) allowing the
Company to use the trademarks and tradenames of
New Tenneco for certain specified periods of time
for certain purposes; and (vii) the Insurance
Agreement (defined herein), providing for, among
other things, coverage arrangements for Tenneco,
the Company and New Tenneco in respect of various
insurance policies.
In addition, the Company and New Tenneco will
share one common director, Dana G. Mead. The
Company and New Tenneco will adopt policies and
procedures to be followed by the Board of
Directors of each company to limit the
involvement of Mr. Mead in situations that could
give rise to potential conflicts of interest,
including requesting him to abstain from voting
as a director of either the Company or New
Tenneco on certain matters which present a
conflict of interest between the two companies.
The Company believes that such conflict
situations will be minimal.
See "The Shipbuilding Distribution--Debt and Cash
Realignment" and "The Shipbuilding Distribution--
Relationships Among Tenneco, the Company, and New
Tenneco after the Distributions."
13
<PAGE>
RECENT DEVELOPMENTS
On October 22, 1996, Tenneco announced consolidated earnings for the nine
months ended September 30, 1996. The Company's earnings for the nine months
ended September 30, 1996 and 1995 are summarized below (amounts in millions).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Net Sales.................................................... $ 1,437 $ 1,290
======== ========
Operating earnings........................................... $ 117 $ 125
Interest expense............................................. 25 26
Provision for income taxes................................... 40 41
-------- --------
Net earnings................................................. $ 52 $ 58
======== ========
</TABLE>
The Company's net sales increase in 1996 was due primarily to higher carrier
construction activity and activity on the Eisenhower overhaul, which offset
revenue declines from the August completion of the Los Angeles-class submarine
construction program and lower activity on conversion work. Operating earnings
for the Company were down due to $57 million of contract losses on product
tankers (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Business Outlook," "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Other--Significant
Estimates," "Business--Construction--Commercial" and Note 13 to the Combined
Financial Statements of the Company) and lower margins on conversion work,
offset by productivity improvements and higher activity on the Eisenhower
overhaul.
14
<PAGE>
INTRODUCTION
This Information Statement is being furnished to stockholders of Tenneco in
connection with the Shipbuilding Distribution, pursuant to which Tenneco
intends to distribute to holders of Tenneco Common Stock all the outstanding
shares of Common Stock, $.01 par value per share ("NNS Common Stock"), of the
Company. Concurrently with the Shipbuilding Distribution, Tenneco will also
distribute to holders of Tenneco Common Stock (individually, the "Industrial
Distribution" and together with the Shipbuilding Distribution, the
"Distributions") all of the outstanding shares of Common Stock, $.01 par value
per share ("New Tenneco Common Stock"), of New Tenneco. The Distributions will
occur prior to the effective time of the proposed merger (the "Merger") of a
subsidiary of El Paso Natural Gas Company, a Delaware corporation ("El Paso"),
with and into Tenneco (which will, upon consummation of the Merger, be renamed
El Paso Tennessee Pipeline Co.) whereby Tenneco will become a subsidiary of El
Paso. Pursuant to the Merger, holders of Tenneco Common Stock will receive El
Paso Common Stock and, under certain circumstances, El Paso Preferred
Depositary Shares. The Distributions, the Merger and the other transactions
contemplated thereby are collectively referred to herein as the "Transaction."
It is expected that the Shipbuilding Distribution will be made on or about
December 11, 1996 (the "Distribution Date"), to holders of record of Tenneco
Common Stock on December 11, 1996 (the "Distribution Record Date"), on the
basis of one share of NNS Common Stock for every five shares of Tenneco Common
Stock. In addition, the NNS Board will adopt a stockholder rights plan and
cause to be issued, with each share of NNS Common Stock to be distributed in
the Shipbuilding Distribution, one Right, entitling the holder thereof to,
among other things, purchase under certain circumstances, and as described
more fully herein, one one-hundredth of a share of NNS Junior Preferred Stock.
No consideration will be required to be paid by holders of Tenneco Common
Stock for the shares of NNS Common Stock to be distributed in the Shipbuilding
Distribution or the Rights associated therewith, nor will holders of Tenneco
Common Stock be required to surrender or exchange their shares of Tenneco
Common Stock in order to receive such shares of NNS Common Stock and the
Rights associated therewith.
Upon consummation of the Distributions and the Merger (i) holders of Tenneco
Common Stock as of the Distribution Record Date and Merger Effective Time will
receive the securities of three publicly held companies--the Company, New
Tenneco and El Paso and (ii) holders of Tenneco Preferred Stock (as defined
herein) as of the Merger Effective Time will receive El Paso Common Stock.
Immediately thereafter, the Company will own and operate substantially all of
the Shipbuilding Business, New Tenneco will own and operate the Industrial
Business, and El Paso will own and operate the Energy Business.
The Shipbuilding Distribution, the Industrial Distribution and the Merger
are separate components of the Transaction. The Shipbuilding Distribution, the
Industrial Distribution and the Merger, however, as described herein will not
be consummated unless the Transaction as a whole is approved at a special
meeting of the Tenneco stockholders (although Tenneco may elect subsequently
to proceed with one or more of the transactions included in the Transaction
which do not require stockholder approval if the Transaction is not approved
by Tenneco stockholders). Furthermore, the Shipbuilding Distribution will not
be consummated until all other conditions to the Merger have been satisfied
(or can be contemporaneously satisfied) other than the filing of a Certificate
of Merger with the Secretary of State of Delaware. See "The Shipbuilding
Distribution--Conditions to Consummation at the Shipbuilding Distribution" and
"The Shipbuilding Distribution--Amendment or Termination of the
Distributions."
Stockholders of Tenneco with inquiries relating to the Shipbuilding
Distribution or the other components of the Transaction should contact the
Distribution Agent at (800) 446-2617, or Tenneco Inc., Shareholders Services,
1275 King Street, Greenwich, Connecticut 06831, telephone number (203) 863-
1170. After the Distribution Date, stockholders of the Company with inquiries
relating to their investment in NNS should contact Newport News Shipbuilding
Inc., Shareholder Services, 4101 Washington Avenue, Newport News, Virginia
23607; telephone: (757) 380-2000.
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THE SHIPBUILDING DISTRIBUTION
The following descriptions of certain provisions of the Distribution
Agreement and certain of the Ancillary Agreements are only summaries and do
not purport to be complete. These descriptions are qualified in their entirety
by reference to the complete text of the Distribution Agreement and the
Ancillary Agreements. A copy of the Distribution Agreement and each of the
Ancillary Agreements as currently agreed to is included as an exhibit to the
Company's Registration Statement on Form 10 under the Exchange Act, relating
to NNS Common Stock, and the following discussion with respect to such
agreements is qualified in its entirety by reference to the subject agreement
as filed.
MANNER OF DISTRIBUTION
Pursuant to the Distribution Agreement, the Tenneco Board will declare the
special distribution necessary to effect the Shipbuilding Distribution and
will set the Distribution Record Date and the Distribution Date (which will be
prior to the Merger Effective Time). Subject to the conditions summarized
below, on the Distribution Date Tenneco will distribute pro rata to all
holders of record of Tenneco Common Stock as of the Distribution Record Date,
one share of NNS Common Stock (including the Rights associated therewith) for
every five shares of Tenneco Common Stock so held. Pursuant to the
Distribution Agreement, as soon as practicable on or after the Distribution
Date, Tenneco will deliver to the Distribution Agent, as agent for holders of
Tenneco Common Stock as of the Distribution Record Date, certificates
representing such shares of NNS Common Stock as are required for the
Shipbuilding Distribution.
Beneficial holders of Tenneco Common Stock who would be entitled to receive
fractional shares of NNS Common Stock will receive cash in the Shipbuilding
Distribution, in lieu of such fractional shares. To accomplish this, the
Distribution Agreement requires that the Distribution Agent determine the
number of whole and fractional shares of NNS Common Stock to which each
beneficial holder of Tenneco Common Stock as of the Distribution Record Date
is entitled immediately following the Shipbuilding Distribution. Next, the
Distribution Agent will aggregate these fractional share interests and sell
them on the open market at then-prevailing prices. The Distribution Agent will
distribute to each holder of Tenneco Common Stock its ratable share of such
proceeds after deducting appropriate amounts for federal income tax
withholding purposes and any applicable transfer taxes. All brokers' fees and
commissions incurred in connection with such sales shall be paid by Tenneco.
If any shares of NNS Common Stock are returned to the Distribution Agent as
unclaimed or cannot be distributed by the Distribution Agent, any post-
Distribution dividends or distributions thereon will be paid to the
Distribution Agent (or set aside and retained by the Company). On the 180th
day following the Distribution Date, the Distribution Agent will return to
Tenneco all unclaimed shares of NNS Common Stock, cash in lieu of fractional
shares and dividends or other distributions with respect thereto. Thereafter,
holders of Tenneco Common Stock as of the Distribution Date will be entitled
to look only to Tenneco for such amounts to which they are entitled, subject
to applicable escheat or other abandoned property laws.
NO HOLDER OF TENNECO COMMON STOCK WILL BE REQUIRED TO PAY CASH OR OTHER
CONSIDERATION FOR THE SHARES OF NNS COMMON STOCK (OR THE CASH IN LIEU OF
FRACTIONAL SHARES) TO BE RECEIVED IN THE SHIPBUILDING DISTRIBUTION, OR TO
SURRENDER OR EXCHANGE SHARES OF TENNECO COMMON STOCK IN ORDER TO RECEIVE NNS
COMMON STOCK (OR THE CASH IN LIEU OF FRACTIONAL SHARES).
CORPORATE RESTRUCTURING TRANSACTIONS
Prior to consummation of the Distributions (and pursuant to the Distribution
Agreement), Tenneco will effect the Corporate Restructuring Transactions. Upon
completion of the Corporate Restructuring Transactions, Tenneco's existing
businesses and assets will be restructured so that, in general, substantially
all of the assets, liabilities and operations of (i) the Shipbuilding Business
will be owned and operated, directly and indirectly, by the Company and (ii)
the Industrial Business will be owned and operated, directly and indirectly,
by New Tenneco. The remaining assets, liabilities and operations of Tenneco
and its remaining subsidiaries will then consist solely of
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those related to the Energy Business, which includes liabilities and limited
assets relating to discontinued Tenneco operations not related to the
Industrial Business or the Shipbuilding Business. In connection with the
Transaction, NNS will transfer its interest (the "HVO Interest") in certain
entities affiliated with Van Ommeren International BV to New Tenneco. As of
September 30, 1996, NNS had invested $11.8 million in the HVO Interest, which
was funded by Tenneco. A further $7.9 million is scheduled to be invested, of
which $4 million is due in November, 1996 and $3.9 million is due in March,
1997. Entities affiliated with Van Ommeren International BV have agreed to
purchase five of the Company's Double Eagle product tankers (the Company has
contracts for a total of nine Double Eagle product tankers).
The assets which will be owned by the Company upon consummation of the
Corporate Restructuring Transactions (the "Shipbuilding Assets") are generally
those related to the conduct of the past and current Shipbuilding Business, as
reflected on the Unaudited Pro Forma Combined Balance Sheet of the Company as
of June 30, 1996 included herein under "Unaudited Pro Forma Combined Financial
Statements" which is also attached as an exhibit to the Distribution Agreement
(the "Pro Forma Balance Sheet") (plus any subsequently acquired asset which is
of a nature or type that would have resulted in such asset being included on
the Pro Forma Balance Sheet had it been acquired prior to the date thereof),
plus all rights expressly allocated to the Company and its subsidiaries under
the Distribution Agreement or any of the Ancillary Agreements. The assets
which will be owned by New Tenneco upon consummation of the Corporate
Restructuring Transactions (the "Industrial Assets") are generally those
related to the conduct of the past and current Industrial Business, as
reflected on the New Tenneco pro forma balance sheet (plus any subsequently
acquired asset which is of a nature or type that would have resulted in such
asset being included on the New Tenneco pro forma balance sheet had it been
acquired prior to the date thereof), plus all rights expressly allocated to
New Tenneco and its subsidiaries under the Distribution Agreement or any
Ancillary Agreement. As part of the Corporate Restructuring Transactions, New
Tenneco will acquire various corporate assets of Tenneco such as the "Tenneco"
trademark and associated rights. The remaining assets (the "Energy Assets")
will continue to be owned and operated by Tenneco (as a subsidiary of El Paso)
following the Transaction.
The liabilities to be assumed by the Company and for which the Company will
be responsible pursuant to the Distribution Agreement (the "Shipbuilding
Liabilities") generally include (i) those liabilities related to the
Shipbuilding Assets and the current and past conduct of the Shipbuilding
Business, including liabilities reflected on the Pro Forma Balance Sheet which
remain outstanding as of the Distribution Date (plus subsequently incurred or
accrued liabilities determined on a basis consistent with the determination of
liabilities thereon), (ii) certain liabilities for any violations or alleged
violations of securities or other laws arising out of documents relating to,
or filed by or on behalf of, the Company in connection with the Transaction or
the Company's financing arrangements, and (iii) those liabilities expressly
allocated to the Company or its subsidiaries under the Distribution Agreement
or any Ancillary Agreement.
The liabilities to be assumed by New Tenneco and for which New Tenneco will
be responsible pursuant to the Distribution Agreement (the "Industrial
Liabilities") generally include (i) those liabilities related to the
Industrial Assets and the current and past conduct of the Industrial Business,
including liabilities reflected on the New Tenneco pro forma balance sheet
which remain outstanding as of the Distribution Date (plus subsequently
incurred or accrued liabilities determined on a basis consistent with the
determination of liabilities thereon) (ii) certain liabilities for any
violations or alleged violations of securities or other laws arising out of
documents relating to, or filed by or on behalf of, New Tenneco in connection
with the Transaction, and (iii) those liabilities expressly allocated to New
Tenneco or its subsidiaries under the Distribution Agreement or any Ancillary
Agreement.
The liabilities to be retained or assumed by Tenneco and for which Tenneco
will be responsible pursuant to the Distribution Agreement (the "Energy
Liabilities") generally include (i) those liabilities related to the Energy
Assets and the current and past conduct of the Energy Business, including
liabilities reflected on the Tenneco pro forma balance sheet attached as an
exhibit to the Distribution Agreement which remain outstanding as of the
Distribution Date (plus subsequently incurred or accrued liabilities
determined on a basis consistent with the determination of liabilities
thereon), (ii) those liabilities expressly allocated to Tenneco or its
subsidiaries under
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the Distribution Agreement or any Ancillary Agreement, and (iii) all other
liabilities of Tenneco or any other member of the Energy Group which do not
constitute Industrial Liabilities or Shipbuilding Liabilities.
For a description of certain liabilities that will be expressly allocated
among Tenneco, the Company and New Tenneco by the Distribution Agreement and
Ancillary Agreements, including liability for the Tenneco Consolidated Debt,
taxes and certain employee benefits, see "--Debt and Cash Realignment" and "--
Relationships Among Tenneco, the Company and New Tenneco After the
Distributions."
DEBT AND CASH REALIGNMENT
From and after the Distributions, each of the Company, Tenneco and New
Tenneco will, in general, be responsible for the debts, liabilities and
obligations related to the business or businesses that its owns and operates
following consummation of the Corporate Restructuring Transactions. See "--
Corporate Restructuring Transactions." Tenneco's historical practice, however,
has been to incur indebtedness for its consolidated group at the parent
company level or at a limited number of subsidiaries, rather than at the
operating company level, and to centrally manage various cash functions.
Accordingly, the Distribution Agreement, the Merger Agreement and the
Ancillary Agreements provide for (i) the pre-Distribution restructuring of the
Tenneco Consolidated Debt pursuant to the Debt Realignment, (ii) the
allocation among each of Tenneco, the Company and New Tenneco of the total
amount of cash and cash equivalents on hand as of the Merger Effective Time
pursuant to the Cash Realignment and (iii) settlement payments with respect to
certain capital expenditures related to the Energy Business, all as described
below.
The Merger Agreement contemplates that Tenneco, in its discretion, will, or
will cause its relevant subsidiaries to, tender for, defease, mature, redeem,
exchange or prepay the Tenneco Consolidated Debt prior to the Distributions
(the "Tenneco Debt Tender Offers"). As of June 30, 1996, there was outstanding
approximately $4,443 million of Tenneco Consolidated Debt.
In connection with the Transaction and to provide for working capital needs,
NNS intends to issue the Notes, comprised of $200 million of the Senior Notes
due 2006 and $200 million of the Senior Subordinated Notes due 2006, and enter
into a $415 million secured Senior Credit Facility, comprised of the $200
million six-year amortizing Term Loan and the $215 million six-year Revolving
Credit Facility, of which $125 million may be used for advances and letters of
credit and $90 million may be used for standby letters of credit. The Company
expects to utilize the proceeds of the Notes and Term Loan and borrowings of
$14 million under the Revolving Credit Facility to distribute (i) $600 million
as a dividend to Tenneco or one or more of its subsidiaries for use in
retiring certain Tenneco Consolidated Debt and (ii) $14 million in payment of
certain fees and expenses incurred in connection with the Notes and the Senior
Credit Facility. See "Risk Factors--Substantial Leverage" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Pursuant to the Cash Realignment, as of the Merger Effective Time the
Company will be allocated $5 million of cash and cash equivalents. Tenneco
will be allocated $25 million of cash and cash equivalents and New Tenneco
will be allocated all remaining cash and cash equivalents on hand (which would
total approximately $200 million if the Transaction had been consummated as of
June 30, 1996). A post-Distribution audit will be conducted and following the
post-Distribution audit, New Tenneco will be required to pay to each of
Tenneco or the Company, as the case may be, the amount by which such company's
total cash and cash equivalents on hand as of the Merger Effective Time is
less than the above-described allocation. Likewise, Tenneco and the Company
will each be required to pay to New Tenneco any excess cash and cash
equivalents as of the Merger Effective Time from the above-described
allocation determined pursuant to such audit.
RELATIONSHIPS AMONG THE COMPANY, TENNECO AND NEW TENNECO AFTER THE
DISTRIBUTIONS
The Shipbuilding Business to be owned and operated by the Company has
historically been included in Tenneco's consolidated financial results. After
the Transaction, neither Tenneco nor New Tenneco will have an ownership
interest in the Shipbuilding Business owned and operated by the Company and
the Company will not
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have an ownership interest in either the Energy Business or the Industrial
Business. The Company and New Tenneco will be independent, publicly-held
companies, and Tenneco will become a subsidiary of El Paso.
Prior to the Distributions, the Company, Tenneco and New Tenneco will enter
into the Distribution Agreement which governs certain aspects of their
relationships both prior to and following the Distributions. In addition,
prior to the Distributions, the Company, Tenneco and/or New Tenneco (and their
appropriate subsidiaries) will enter into the Ancillary Agreements which are
intended to further effect the disaffiliation of the Shipbuilding Business,
the Energy Business and the Industrial Business and to govern certain
additional aspects of their ongoing relationships.
Terms of the Distribution Agreement
In addition to providing for the terms of the Distributions and the various
actions to be taken prior to the Distributions, the Distribution Agreement
contains other provisions governing the relationship among the Company,
Tenneco and New Tenneco prior to and following the Distributions.
The Distribution Agreement provides that from and after the Distribution
Date: (i) Tenneco will, and will cause its affiliates engaged in the Energy
Business (collectively with Tenneco, the "Energy Group") to, assume, pay,
perform and discharge all Energy Liabilities, (ii) the Company will assume,
pay, perform and discharge all Shipbuilding Liabilities except as described
below, and (iii) New Tenneco will, and will cause its affiliates engaged in
the Industrial Business (collectively with New Tenneco, the "Industrial
Group") to assume, pay, perform and discharge all Industrial Liabilities.
In addition, the Distribution Agreement provides for cross-indemnities under
which (i) Tenneco must indemnify the Company and New Tenneco (and their
respective subsidiaries, their directors, officers, agents and employees, and
certain other related parties) against all losses arising out of or in
connection with the Energy Liabilities or the breach of the Distribution
Agreement or any Ancillary Agreement by Tenneco, (ii) the Company must
indemnify Tenneco and New Tenneco (and their respective subsidiaries, their
directors, officers, agents and employees, and certain other related parties)
against all losses except as described below arising out of or in connection
with the Shipbuilding Liabilities or the breach of the Distribution Agreement
or any Ancillary Agreement by the Company, and (iii) New Tenneco must
indemnify Tenneco and the Company (and their respective subsidiaries, their
directors, officers, agents and employees, and certain other related parties)
against all losses arising out of or in connection with the Industrial
Liabilities or the breach of the Distribution Agreement or any Ancillary
Agreement by New Tenneco. Additionally, Tenneco and the Company have received
letters from the Defense Contract Audit Agency (the "DCAA"), inquiring about
certain aspects of the Distributions, including the disposition of the Tenneco
Inc. Retirement Plan (the "TRP"), which covers salaried employees of the
Company and other Tenneco divisions. The Company and New Tenneco have agreed
to certain indemnities regarding such inquiries. See "Business--Investigations
and Legal Proceedings--Retirement Plan."
Pursuant to the Distribution Agreement, each of the parties has agreed to
use all reasonable efforts to take or cause to be taken all action, and do or
cause to be done all things, reasonably necessary, proper or advisable to
consummate the transactions contemplated by, and carry out the purposes of,
the Distribution Agreement. As such, the Distribution Agreement provides that
if any contemplated pre-Distribution transfers and assignments have not been
effected on or prior to the Distribution Date, the parties will cooperate to
effect such transfers as quickly thereafter as practicable. The entity
retaining any asset or liability which should have been transferred
prior to the Distribution Date will continue to hold that asset for the
benefit of the party entitled thereto or that liability for the account of the
party required to assume it, and must take such other action as may be
reasonably requested by the party to whom such asset was to be transferred or
by whom such liability was to be assumed in order to place such party, insofar
as reasonably possible, in the same position as would have existed had such
asset or liability been transferred or assumed as contemplated by the
Distribution Agreement.
The Distribution Agreement provides for the transfer of books and records
among Tenneco, the Company and New Tenneco and their respective subsidiaries
and grants to each party access to certain information in the possession of
the others (subject to certain confidentiality requirements). In addition, the
Distribution Agreement provides for the allocation of shared privileges with
respect to certain information and requires each party to obtain the consent
of the others prior to waiving any shared privilege.
Terms of the Ancillary Agreements
Below are descriptions of the principal Ancillary Agreements to be entered
into by Tenneco, the Company, New Tenneco and/or El Paso (and, in certain
circumstances, their appropriate subsidiaries) prior to
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consummation of the Distributions, as required under the terms of the
Distribution Agreement. The Ancillary Agreements are intended to further
effectuate the disaffiliation of the Shipbuilding Business and the Industrial
Business from the Energy Business and to facilitate the operation of each of
the Company and New Tenneco as a separate entity.
Benefits Agreement. The Benefits Agreement to be entered into by and among
the Company, Tenneco and New Tenneco (the "Benefits Agreement") will define
certain labor, employment, compensation and benefit matters in connection with
the Distributions and the transactions contemplated thereby. Pursuant to the
Benefits Agreement, from and after the Distribution Date, each of the Company,
Tenneco and New Tenneco will continue employment of each of their respective
retained employees (subject to their rights to terminate said employees) with
the same compensation as prior to the Distribution Date, continue to honor all
related existing collective bargaining agreements, recognize related incumbent
labor organizations and continue sponsorship of hourly employee benefit plans.
New Tenneco will become the sole sponsor of the TRP and of the Tenneco Inc.
Thrift Plan (the "Tenneco Thrift Plan") from and after the Distribution Date,
and the Company and Tenneco will establish defined contribution plans for the
benefit of each of their respective employees to which the account balances of
retained and former employees of the Company and Tenneco in the Tenneco Thrift
Plan will be transferred. The benefits accrued by the Company and Tenneco
employees in the TRP will be frozen as of the last day of the calendar month
including the Distribution Date, and New Tenneco will amend the TRP to provide
that all benefits accrued through that day by Company and Tenneco employees
are fully vested and non-forfeitable. Tenneco will retain and assume
employment contracts with certain individuals. All liabilities under the
Tenneco Inc. Benefit Equalization Plan and the Tenneco Inc. Supplemental
Executive Retirement Plan will be assumed by New Tenneco pursuant to the
Benefits Agreement; however, New Tenneco is entitled to reimbursement for
certain payments thereunder from the Company and Tenneco. Generally, each of
the Company, Tenneco and New Tenneco will retain liabilities with respect to
the welfare benefits of its current and former employees and their dependents,
but Tenneco will assume all liabilities for retiree medical benefits of the
employees of discontinued operations and their dependents. In addition, as of
the Distribution Date, participation by retained and former employees of the
Company and Tenneco in the Tenneco Inc. Deferred Compensation Plan and the
Tenneco Inc. 1993 Deferred Compensation Plan will be discontinued.
Debt and Cash Allocation Agreement. The Debt and Cash Allocation Agreement
will govern the allocation among the parties of the cash and cash equivalents
of Tenneco and its subsidiaries on hand as of the Merger Effective Time, the
Tenneco Consolidated Debt and responsibility for certain capital expenditures
related to the Energy Business pursuant to the Cash Realignment and the Debt
Realignment, as described above (the "Debt and Cash Allocation Agreement").
See "--Debt and Cash Realignment."
Insurance Agreement. Tenneco has historically maintained at the parent-
company level various insurance policies for the benefit or protection of
itself and its subsidiaries. The Insurance Agreement to be entered into among
Tenneco, the Company and New Tenneco (the "Insurance Agreement") will provide
for the respective continuing rights and obligations from and after the
Distributions of the parties with respect to these insurance policies (other
than directors' and officers' liability insurance policies which are addressed
by the Merger Agreement).
In general, following consummation of the Transaction, policies which relate
exclusively to the Shipbuilding Business will be retained by the Company,
policies which relate exclusively to the Energy Business or a member of the
Energy Group will be retained by Tenneco, and policies which relate
exclusively to the Industrial Business or a member of the Industrial Group
will be retained by New Tenneco.
Pursuant to the Insurance Agreement, any non-exclusive Tenneco policies
which are in effect as of the Distribution Date (other than those which are
cost plus, fronting, high deductible or retrospective premium programs, as
described below) will either be transferred into the name of New Tenneco or
cancelled, at New Tenneco's option. In general, "go-forward" coverage under
these policies for the Energy Business and Shipbuilding Business (and certain
related persons) will be terminated as follows: (i) coverage under "claims-
made" policies (i.e., those policies which provide coverage for claims made
during a specified period) will be terminated on the Distribution Date for any
claims not made prior thereto and (ii) coverage under "occurrence-based"
policies (i.e., those policies which provide coverage for acts or omissions
occurring during a specified
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period) will be terminated on the Distribution Date for acts or omissions
occurring thereafter. However, the Energy Business, Shipbuilding Business and
Industrial Business (and certain related persons) will all continue to have
access to these policies ("go-backward" coverage) and for claims made prior to
the Distribution Date, in the case of claims-made policies, and for acts or
omissions which occurred prior to the Distribution Date, in the case of
occurrence-based policies (subject to certain obligations to replace any
policy limits exhausted by it). Each respective group will be liable for
premiums, costs and charges under these policies that relate to its coverage
thereunder (and will likewise get the benefit of any refunded amounts).
Pursuant to the Insurance Agreement, policies which are cost plus, fronting,
high deductible or retrospective premium programs will be retained by the
Energy Business following the Distributions and will provide no go-forward
coverage to the Shipbuilding Business or Industrial Business. However, go-
backward coverage will continue to be available to these groups, subject to an
obligation to reimburse Tenneco for premiums, costs and charges under these
policies related to their respective coverages following the Distributions.
Following the Transaction, Tenneco will be required to maintain in place
certain letters of credit and surety bonds securing obligations under these
policies.
Tax Sharing Agreement. The Tax Sharing Agreement to be entered into among
the Company, Tenneco, New Tenneco and El Paso (the "Tax Sharing Agreement")
will provide for the allocation of tax liabilities among the parties arising
prior to, as a result of, and subsequent to the Distributions. As a general
rule, Tenneco will be liable for all taxes not specifically allocated to the
Company or New Tenneco under the specific terms of the Tax Sharing Agreement.
Generally, the Company will be liable for taxes imposed exclusively on the
Company (including for pre-distribution periods, taxes imposed on the Company)
and New Tenneco will be liable for taxes imposed exclusively on the Industrial
Group. In the case of federal income taxes imposed on the combined activities
of Tenneco, the Industrial Group and the Company, the Company and New Tenneco
will be liable to Tenneco for federal income taxes attributable to their
activities, and each will be allotted an agreed-upon share of estimated tax
payments made by the Tenneco consolidated group, except that (i) tax benefits
attributable to the Debt Realignment ("Debt Discharge Items"), presently
anticipated to total approximately $120 million, will be specifically
allocated to the Industrial Group and Tenneco will make a cash payment to New
Tenneco equal to the amount of such tax benefits when and to the extent
realized by Tenneco, and (ii) tax benefits attributable to certain items
included in the computation of the Base Amount (as defined in the Merger
Agreement) ("Base Amount Adjustment Items") will be specifically allocated to
Tenneco. New Tenneco will also be responsible for tax items attributable to
certain discontinued operations of Tenneco to the extent that such items
exceed forecasted amounts by more than a specified amount. In the case of
state income taxes imposed on the combined activities of the Company and the
other business groups, Tenneco will be responsible for payment of the combined
tax to the state tax authority, and the Company and New Tenneco will pay
Tenneco a deemed tax equal to the tax that would be imposed if the Company and
the Industrial Group had filed combined returns for their respective groups,
except that Debt Discharge Items and Base Amount Adjustment Items will be
specifically allocated to New Tenneco and Tenneco, respectively.
In general and, except as provided below, Tenneco will be responsible for
any taxes imposed on or resulting from the Transaction ("Transaction Taxes").
New Tenneco will be responsible for any Transaction Taxes resulting from any
inaccuracy in factual statements or representations in connection with the IRS
Ruling Letter or the opinion of counsel contemplated by the Merger Agreement
(the "Tax Opinion") to the extent attributable to facts in existence prior to
the Merger, but excluding facts relating to the Company or El Paso. The
Company and El Paso will each be responsible for the accuracy of any factual
statements or representations relating to them or their respective affiliates.
Each of the Company, New Tenneco and El Paso will be responsible for any
Transaction Tax to the extent such tax is attributable to action taken by that
entity which is inconsistent with tax treatment contemplated in the IRS Ruling
Letter received in the Transaction or the Tax Opinion. If between the date of
the Merger Agreement and the Merger Effective Time, there is a change in law
(as defined in the Tax Sharing Agreement) and as a result of such change in
law Tenneco is required to restore certain deferred gains to income, then any
resulting tax will be shared equally between New Tenneco and Tenneco.
TBS Services Agreement. Tenneco Business Services Inc. ("TBS") has entered,
or will enter, into a series of separate services agreements (the "Service
Agreements"), as described below, with the Company, New
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Tenneco (and its subsidiaries other than TBS) and Tenneco (and its
subsidiaries) which, together, constitute the "TBS Services Agreement" which
is to be delivered as an Ancillary Agreement under the Distribution Agreement.
One of the Service Agreements between TBS and the Company is for mainframe
data processing services (the "NNS Processing Services Agreement"). Under the
NNS Processing Services Agreement, TBS will supply, as a vendor, mainframe
data processing services to the Company for a period from the Merger Effective
Time through December 31, 1998, and thereafter only by mutual agreement. The
rate of compensation to TBS for services will be $9.1 million in 1997 and $9.6
million in 1998, payable in monthly installments, subject to adjustment if the
Company requests a change in the scope of services. TBS will lease the space
currently used by it at the Company's headquarters in Newport News, Virginia
for the period from the Merger Effective Time through December 31, 1998, with
an option for TBS to extend for one month periods for up to 12 months per
continued use by TBS as its mainframe data processing facility. The rent under
such lease will be approximately $1.2 million per year, plus pass-throughs of
certain occupancy-related costs.
TBS has also entered into a Supplier Participation Agreement (the "NNS
Supplier Participation Agreement") with the Company to govern the procedures
under which the Company will continue to participate with New Tenneco in
vendor purchase agreements between TBS and various suppliers of goods and
services. The NNS Supplier Participation Agreement provides for continued
participation of the Company in various purchase programs, absent a
termination for cause, for the duration of the agreements with each such
vendor. Under this Agreement, as is the case currently, purchases of goods and
services will be made directly by the Company at prices negotiated by TBS
which are applicable to all participating purchasers. TBS will charge the
Company a fixed fee of $5,000 per month for contract administration services
including data collection, negotiations, progress reporting, benefits
reporting, follow-up and consulting in connection with the vendor agreements.
Trademark Transition License Agreements. Upon consummation of the Corporate
Restructuring Transactions New Tenneco will hold the rights to various
trademarks, servicemarks, tradenames and similar intellectual property,
including rights in the marks "Tenneco", "Ten" and "Tenn" (but not
"Tennessee"), alone and in combination with other terms and/or symbols and
variations thereof (collectively, the "Trademarks"), in the United States and
elsewhere throughout the world. In connection with the Distributions,
Trademark Transition License Agreements will be entered into as of the
Distribution Date between both (i) New Tenneco and the Company (the
"Shipbuilding Trademark Transition License Agreement") and (ii) New Tenneco
and Tenneco (the "Industrial Trademark Transition License Agreement," and
together with the Shipbuilding Trademark Transition License Agreement, the
"Trademark Transition License Agreements"). Pursuant to these agreements, New
Tenneco will grant to each of the Company and Tenneco a limited, non-
exclusive, royalty-free license to use the Trademarks with respect to
specified goods and services as follows: (a) Tenneco and the Company will be
permitted to use the Trademarks in their corporate names for 30 days after the
date of the agreements (and, pursuant to the Distribution Agreement, each have
agreed to remove the Trademarks from such corporate names within 30 days after
the Distribution Date), (b) Tenneco and the Company will be permitted to use
their existing supplies and documents which have the Trademarks imprinted on
them for six months after the date of the agreements and (c) Tenneco and the
Company will be permitted to use the Trademarks on existing signs, displays or
other identifications for a period (after the date of the agreements) of two
years (in the case of Tenneco) and one year (in the case of the Company).
However, so long as Tenneco or the Company continues to use the Trademarks, it
must maintain certain quality standards prescribed by New Tenneco in the
conduct of business operations in which the Trademarks are used. In addition,
under these agreements each of Tenneco and the Company will agree to indemnify
New Tenneco from any claims that arise as a result of its use of the
Trademarks or any breach of its agreement and neither Tenneco nor the Company
may adopt or use at any time a word or mark likely to be similar to or
confused with the Trademarks. Each Trademark Transition License Agreement will
be immediately terminable by New Tenneco upon a material breach of the
agreement by Tenneco or the Company, as the case may be.
Directors
After the Distribution Date, the Company and New Tenneco will share one
common director, Dana G. Mead. The Company and New Tenneco will adopt policies
and procedures to be followed by the Board of
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Directors of each company to limit the involvement of Mr. Mead in situations
that could give rise to potential conflicts of interest, including requesting
him to abstain from voting as a director of either the Company or New Tenneco
on certain matters which present a conflict of interest between the Company
and New Tenneco. The Company believes that such conflict situations will be
minimal. See "Management."
Expenses
In general, and except for certain environmental costs and expenses, Tenneco
is responsible for all fees and expenses incurred by Tenneco in connection
with the Transaction for periods prior to the Distribution Date. Any such fees
and expenses which are unpaid as of the Merger Effective Time will be
allocated to and remain the responsibility of Tenneco pursuant to the Debt
Realignment and El Paso has agreed to pay or cause to be paid all such
amounts. However, because the aggregate amount of debt to be allocated upon
consummation of the Merger to Tenneco is limited to $2.65 billion (subject to
certain adjustments) the amount of unpaid Tenneco transaction fees and
expenses as of the Merger Effective Time may impact the amount of debt
allocated to the Company in connection with the Transaction. See "--Debt and
Cash Realignment." Each party has agreed to bear its own respective fees and
expenses incurred after consummation of the Transaction.
Settlement of Intercompany Accounts
Pursuant to the Merger Agreement and the Distribution Agreement, all
intercompany receivables, payables and loans (unless specifically provided for
in any Ancillary Agreement) among the Energy Business, the Industrial Business
and the Shipbuilding Business will be settled, capitalized or converted into
ordinary trade accounts as of the close of business on the Distribution Date.
Further, all intercompany agreements among such businesses (other than those
contemplated by the Transaction) will be terminated.
REASONS FOR THE DISTRIBUTIONS
The Distributions and the Merger are designed to separate three types of
businesses, namely the Shipbuilding Business, the Industrial Business and the
Energy Business, which have distinct financial, investment and operating
characteristics, so that each can adopt strategies and pursue objectives
appropriate to its specific needs. The Distributions will (i) enable the
management of each company to concentrate its attention and financial
resources on the core business of such company, (ii) permit investors to make
more focused investment decisions based on the specific attributes of each of
the three businesses, (iii) facilitate employee compensation programs custom-
tailored to the operations of each business, including stock-based and other
incentive programs, which will more directly reward employees of each business
based on the success of that business and (iv) tailor the assets of Tenneco to
facilitate acquisition of the Energy Business by El Paso. Upon consummation of
the Shipbuilding Distribution, NNS will, primarily through its consolidated
subsidiaries (including Newport News), own and operate substantially all of
the Shipbuilding Business. New Tenneco will, primarily through its
consolidated subsidiaries, own and operate the Industrial Business.
Immediately following consummation of the Distributions, a subsidiary of El
Paso will be merged with and into Tenneco, and thereafter the Energy Business,
including liabilities and assets relating to discontinued Tenneco operations
not related to the Shipbuilding Business and the Industrial Business, will be
owned and operated by El Paso.
CONDITIONS TO CONSUMMATION OF THE SHIPBUILDING DISTRIBUTION
The Shipbuilding Distribution is conditioned on, among other things,
stockholder approval of the Distributions and formal declaration of the
Distributions by the Tenneco Board. Other conditions to the Shipbuilding
Distribution include (i) execution and delivery of certain of the Ancillary
Agreements and consummation of the various pre-distribution transactions (such
as the Corporate Restructuring Transactions, the Debt Realignment and the Cash
Realignment), (ii) receipt of the IRS Ruling Letter to the effect that for
federal income tax purposes the Distributions qualify as tax-free
distributions to Tenneco and its stockholders under Section 355 of the Code
and that certain internal spin-off transactions included in the Corporate
Restructuring
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Transactions will also be tax-free, (iii) approval for listing on the NYSE of
the NNS Common Stock and the New Tenneco Common Stock, (iv) registration of
NNS Common Stock and New Tenneco Common Stock under the Exchange Act, (v)
receipt of all material consents to the Corporate Restructuring Transactions,
the Distributions and transactions contemplated in the Distribution Agreement,
(vi) performance of the various covenants required to be performed prior to
the Distribution Date (see "--Corporate Restructuring Transactions", "--Debt
and Cash Realignment" and "--Relationships Among Tenneco, the Company and New
Tenneco After the Distributions"), and (vii) lack of prohibition of the
Distributions by any law or governmental authority. The IRS Ruling Letter was
issued on October 30, 1996 and covered the matters referred to in clause (ii)
above. Even if all the conditions to the Distributions are satisfied, Tenneco
has reserved the right, under certain circumstances, to amend or terminate the
Distribution Agreement and to modify or abandon the transactions contemplated
thereby. The Tenneco Board has not attempted to identify or establish
objective criteria for evaluating the particular types of events or conditions
that would cause the Tenneco Board to consider amending or terminating the
Distributions. See "--Amendment or Termination of the Distributions." Although
the foregoing conditions (other than declaration of the Distributions) may be
waived by Tenneco (to the extent permitted by law), the Tenneco Board
presently has no intention to proceed with either of the Distributions unless
each of these conditions is satisfied. See "Introduction."
AMENDMENT OR TERMINATION OF THE DISTRIBUTIONS
Prior to the Distributions, the Distribution Agreement may be amended or
terminated and the Distributions may be amended, modified or abandoned by
Tenneco without the approval of its stockholders, the Company or New Tenneco,
subject to the consent of El Paso as described below. Any amendment or
modification prior to the termination of the Merger Agreement or consummation
of the Merger which adversely affects the Energy Business (other than to a de
minimis extent) or materially delays or prevents the consummation of the
Merger can be effectuated only with the prior consent of El Paso. Termination
of the Distribution Agreement prior to the termination of the Merger Agreement
or consummation of the Merger can be effectuated only with the prior written
consent of El Paso.
After consummation of the Distributions, the Distribution Agreement may be
amended or terminated only by a written agreement signed by Tenneco, the
Company and New Tenneco. Certain amendments or terminations after the
Distributions also require the consent of third party beneficiaries to the
extent that the Distribution Agreement has expressly granted them such rights.
TRADING OF NNS COMMON STOCK
See "Risk Factors--No Current Market for NNS Common Stock" and "Risk
Factors--Uncertainty Regarding Changes in Trading Price of Stock Following the
Transaction" for a discussion of certain considerations relating to the market
for and trading prices of NNS Common Stock following the Distribution.
Shares of NNS Common Stock received by shareholders of Tenneco pursuant to
the Shipbuilding Distribution will be freely transferable, except for shares
received by persons who may be deemed to be "affiliates" of the Company under
the Securities Act of 1933, as amended (the "Securities Act"). Persons who are
affiliates of the Company will be permitted to sell their shares of NNS Common
Stock only pursuant to an effective registration statement under the
Securities Act or an exemption from the registration requirements of the
Securities Act. There would not, however, be any 90-day waiting period before
sales could be made by affiliates under Rule 144 of the Securities Act, as
long as the other provisions of Rule 144 are met.
CERTAIN FEDERAL INCOME TAX ASPECTS OF THE SHIPBUILDING DISTRIBUTION
General
The following is a summary description of the material federal income tax
aspects of the Shipbuilding Distribution. This summary is for general
informational purposes only and is not intended as a complete description of
all the tax consequences of the Shipbuilding Distribution, the Industrial
Distribution, the Merger
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or the other transactions contemplated as part of the Transaction and does not
discuss tax consequences under the laws of state or local governments or any
other jurisdiction. Moreover, the tax treatment of a stockholder may vary
depending upon his, her or its particular situation. In this regard, certain
stockholders (including insurance companies, tax-exempt organizations,
financial institutions or broker-dealers, persons who are not citizens or
residents of the United States or who are foreign corporations, foreign
partnerships or foreign trusts or estates, as defined for United States federal
income tax purposes, stockholders that hold shares as part of a position in a
"straddle" or as part of a "hedging" or "conversion" transaction for United
States federal income tax purposes and stockholders with a "functional
currency" other than the United States dollar) may be subject to special rules
not discussed below. In addition, this summary applies only to shares which are
held as capital assets. The following discussion may not be applicable to a
stockholder who acquired his, her or its shares pursuant to the exercise of
stock options or otherwise as compensation.
THE FOLLOWING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE
INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"), EXISTING, PROPOSED AND
TEMPORARY TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS
AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE, WHICH MAY OR
MAY NOT BE RETROACTIVE, AND ANY SUCH CHANGES COULD AFFECT THE VALIDITY OF THE
FOLLOWING DISCUSSION. SEE "--POSSIBLE FUTURE LEGISLATION" BELOW.
EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE TRANSACTION DESCRIBED
HEREIN, INCLUDING, THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND THE POSSIBLE EFFECTS OF CHANGES OF APPLICABLE TAX LAWS.
Tax Rulings
On October 30, 1996, the IRS issued the IRS Ruling Letter, to the effect,
among other things, that:
(i) the Shipbuilding Distribution will be tax-free for federal income tax
purposes to Tenneco under Section 355(c)(1) of the Code and the
stockholders of Tenneco under Section 355(a) of the Code;
(ii) the Industrial Distribution will be tax-free for federal income tax
purposes to Tenneco under Section 355(c)(1) of the Code and the
stockholders of Tenneco under Section 355(a) of the Code; and
(iii) the following distributions to be effected as part of the Corporate
Restructuring Transactions will be tax-free for federal income tax purposes
to the respective transferor corporations under Section 355(c)(1) or 361
(c) of the Code and to the respective stockholders of the transferor
corporations under Section 355(a) of the Code: (a) the distribution by the
Company of the capital stock of Tenneco Packaging Inc. to Tenneco
Corporation; (b) the distribution by Tenneco Corporation of the capital
stock of the Company and New Tenneco to Tennessee Gas Pipeline Company
("TGP"); and (c) the distribution by TGP of the capital stock of the
Company and New Tenneco to Tenneco.
Receipt of the IRS Ruling Letter satisfied a condition to consummation of the
Shipbuilding Distribution.
A ruling from the IRS, while generally binding on the IRS, may under certain
circumstances be retroactively revoked or modified by the IRS. The rulings
obtained from the IRS will be based on certain facts and representations, some
of which will have been made by El Paso. Generally, the IRS Ruling Letter would
not be revoked or modified retroactively provided that (i) there has been no
misstatement or omission of material facts, (ii) the facts at the time of the
Transaction are not materially different from the facts upon which the IRS
private letter ruling was based and (iii) there has been no change in the
applicable law.
The Distributions
It is expected that the Distributions will qualify as tax-free distributions
under Section 355 of the Code. Assuming that the Distributions so qualify, (i)
the holders of Tenneco Common Stock will not recognize gain or loss upon
receipt of shares of NNS Common Stock or shares of New Tenneco Common Stock,
(ii) each holder
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of Tenneco Common Stock will allocate his, her or its aggregate tax basis in
the Tenneco Common Stock immediately before the Distributions among Tenneco
Common Stock, NNS Common Stock and New Tenneco Common Stock in proportion to
their respective fair market values, (iii) the holding period of each holder
of Tenneco Common Stock for NNS Common Stock and New Tenneco Common Stock will
include the holding period for his, her or its Tenneco Common Stock, provided
that Tenneco Common Stock is held as a capital asset at the time of the
Distributions and (iv) Tenneco will not recognize any gain or loss on its
distribution of NNS Common Stock or New Tenneco Common Stock to its
stockholders.
No fractional shares of NNS Common Stock or New Tenneco Common Stock will be
distributed in the Distributions. A holder of Tenneco Common Stock who,
pursuant to the Distributions, receives cash in lieu of fractional shares of
NNS Common Stock will be treated as having received such fractional shares of
NNS Common Stock pursuant to the Distributions and then as having received
such cash in a sale of such fractional shares of NNS Common Stock. Such
holders will generally recognize capital gain or loss pursuant to such deemed
sale equal to the difference between the amount of cash received and such
holders' adjusted tax basis in the fractional share of NNS Common Stock
received. Such gain or loss will be capital (provided the Tenneco Common Stock
is held as a capital asset at the time of the Distributions) and will be
treated as a long-term capital gain or loss if the holding period for the
fractional shares of NNS Common Stock deemed to be received and then sold is
more than one year.
If the Distributions were not to qualify as tax-free distributions under
Section 355 of the Code, then in general a corporate level federal income tax
would be payable by the consolidated group of which Tenneco is the common
parent, which tax (assuming the internal spin-off transactions included in the
Corporate Restructuring Transactions also failed to qualify under Code Section
355) would be based upon the gain (computed as the difference between the fair
market value of the stock distributed and the distributing corporation's
adjusted basis in such stock) realized by each of the distributing
corporations upon its distribution of the stock of one or more controlled
corporations to its shareholders in the Transaction. The corporate level
federal income tax would be payable by Tenneco. Under the terms of the Tax
Sharing Agreement, the Company will not be liable to indemnify Tenneco for any
additional taxes incurred by reason of the Distributions being taxable, unless
the Distributions fail to qualify for tax-free treatment under Section 355 of
the Code as a result of the inaccuracy of certain factual statements or
representations made by the Company in connection with the requests for the
IRS private letter ruling or Tax Opinion or the Company takes any action which
is inconsistent with any factual statements or representations or the tax
treatment of the Transaction as contemplated in the IRS private letter ruling
request or the Tax Opinion. See the discussion of the Tax Sharing Agreement
under "--Relationships among Tenneco, the Company and New Tenneco After the
Distributions."
Furthermore, if the Distributions do not qualify as tax-free distributions
under Section 355 of the Code then each holder of Tenneco Common Stock who
receives shares of NNS Common Stock and New Tenneco Common Stock in the
Distributions would be treated as if such stockholder received taxable
distributions in an amount equal to the fair market value of NNS Common Stock
and New Tenneco Common Stock received which would result in: (i) a dividend to
the extent paid out of Tenneco's current and accumulated earnings and profits;
then (ii) a reduction in such stockholder's basis in Tenneco Common Stock to
the extent the amount received exceeds the amount referenced in clause (i);
and then (iii) gain from the sale or exchange of Tenneco Common Stock to the
extent the amount received exceeds the sum of the amounts referenced in
clauses (i) and (ii). Each stockholder's basis in his, her or its NNS Common
Stock and New Tenneco Common Stock would be equal to the fair market value of
such stock at the time of the Distributions.
Possible Future Legislation
The Administration's Budget Proposal issued March 19, 1996 (the "Budget
Proposal") contains several revenue proposals, including a proposal (the
"Anti-Morris Trust Proposal") which would require a distributing corporation
in a transaction otherwise qualifying as a tax-free distribution under Section
355 of the Code to recognize gain on the distribution of the stock of the
controlled corporation unless the direct and indirect stockholders of the
distributing corporation own more than 50% of the distributing corporation and
controlled corporations at all times during the four-year period commencing
two years prior to the distribution. The Anti-
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Morris Trust Proposal would apply to any distributions occurring after March
19, 1996, unless such distribution was (i) pursuant to a binding contract on
such date, (ii) described in a ruling request submitted to the IRS on or before
such date, or (iii) described in a public announcement or SEC filing on or
before such date.
On March 29, 1996, Senator William V. Roth, Chairman of the Senate Finance
Committee and Congressman Bill Archer, Chairman of the House Ways and Means
Committee, issued a joint statement (the "Roth-Archer Statement") to the effect
that should certain of the revenue proposals included in the Administration's
Budget Proposal, including the Anti-Morris Trust Proposal, be enacted, the
effective date will be no earlier than the date of "appropriate Congressional
action." As of the date of this Information Statement, no legislation has been
introduced relating to the Anti-Morris Trust Proposal. On June 27, 1996,
Tenneco submitted its request for rulings (including rulings on the tax-free
treatment of the Distributions) to the IRS. Accordingly, in view of the Roth-
Archer Statement, any future Anti-Morris Trust legislation should not apply to
the Distributions assuming that the effective date of such legislation contains
a grandfather clause for transactions for which a ruling request has been filed
with the IRS prior to the date of "appropriate Congressional action."
Nevertheless, there can be no assurances that Congress will not adopt Anti-
Morris Trust legislation which would apply retroactively to the Distributions.
In the event such legislation is announced or introduced prior to the
consummation of the Transaction, under the terms of the Merger Agreement El
Paso may elect not to proceed with the Merger if it reasonably determines that
there exists a reasonable likelihood that the Distributions or the Merger would
not be tax-free for federal income tax purposes. If El Paso elects to proceed
with the Merger notwithstanding the announcement or introduction of Anti-Morris
Trust legislation, the Distributions, if ultimately subject to such
legislation, may result in significant taxable gain to the Tenneco consolidated
group under Section 355(c) of the Code. Although Tenneco stockholders would not
recognize taxable gain or loss on the receipt of the stock of the Company and
New Tenneco under the current Anti-Morris Trust Proposal, the taxable gain
required to be recognized by the Tenneco consolidated group under Code Section
355(c) would significantly reduce the value of the El Paso Common Stock and any
El Paso Preferred Depositary Shares received by the Tenneco stockholders in the
Merger.
The Budget Proposal also contains a proposal (the "Nonqualified Preferred
Stock Proposal") that would, among other things, treat certain preferred stock
received in a reorganization as "other property" (boot) resulting in gain (but
not loss) recognition to the recipient of such stock. The Nonqualified
Preferred Stock Proposal would apply to transactions entered into after
December 7, 1995, with certain exceptions, including an exception for stock
issued pursuant to a written agreement binding (subject to customary
conditions) on such date.
The Roth-Archer Statement provides that should certain revenue proposals
included in the Budget Proposal (including the Nonqualified Preferred Stock
Proposal) be enacted, their effective date will be no earlier than the date of
"appropriate congressional action." As of the date of this Joint Proxy
Statement-Prospectus, no legislation has been introduced relating to the
Nonqualified Preferred Stock Proposal. The Merger Agreement which provides for
the issuance of the El Paso Preferred Stock, was entered into on June 19, 1996
and amended and restated on November 1, 1996 (effective as of June 19, 1996).
Accordingly, in view of the Roth-Archer Statement, any future legislation
including the Nonqualified Preferred Stock Proposal should not apply to the El
Paso Preferred Stock, if issued, assuming the effective date of such
legislation contains a grandfather clause for stock issued pursuant to a
binding agreement (subject to customary conditions) entered into on or before
the date of such Congressional action.
Nevertheless, there can be no assurances that Congress will not adopt
legislation containing the Nonqualified Preferred Stock Proposal that would
apply retroactively to the issuance of the preferred stock of El Paso ("El Paso
Preferred Stock"). In the event such legislation is announced or introduced
prior to the consummation of the Transaction, if either Tenneco or El Paso
determines that there exists a reasonable likelihood that issuance of the El
Paso Preferred Stock would cause the Merger to be taxable to holders of Tenneco
stock, El Paso is obligated, under the terms of the Merger Agreement, at its
own cost, to amend the terms of the El Paso Preferred Stock in a manner so as
not to cause the Merger to be taxable to holders of Tenneco stock. If, however,
legislation containing the Nonqualified Preferred Stock Proposal were enacted
following the Transaction, and such legislation applied retroactively to the
issuance of the El Paso Preferred
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Stock, it is possible that the Merger would not qualify as a reorganization
within the meaning of Section 368(a)(1)(B) of the Code and holders of Tenneco
stock receiving El Paso Common Stock or El Paso Preferred Stock in the Merger
would recognize gain on the exchange. Even if the issuance of El Paso
Preferred Stock did not prevent qualification of the Merger as a tax-free
reorganization, holders of Tenneco stock receiving El Paso Preferred
Depository Shares would recognize gain on the exchange that might be taxable
as ordinary income to the extent of the earnings and profits of Tenneco. The
failure of the Merger to qualify as a reorganization within the meaning of
Code Section 368(a)(1)(B) of the Code or the recognition of gain by
shareholders as a result of the receipt of El Paso Preferred Depository Shares
may also cause the Shipbuilding Distribution to not qualify as a tax-free
distribution under Section 355 of the Code.
Back-up Withholding Requirements
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of NNS Common Stock, unless
the stockholder (i) is a corporation or comes within certain other exempt
categories, and, when required, demonstrates these facts or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A stockholder who does not supply the Company
with his, her or its correct taxpayer identification number may be subject to
penalties imposed by the IRS. Any amount withheld under these rules will be
creditable against the stockholder's federal income tax liability.
Stockholders should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption. If information reporting requirements apply to a stockholder, the
amount of dividends paid with respect to such shares will be reported annually
to the IRS and to such stockholder.
These backup withholding tax and information reporting rules currently are
under review by the United States Treasury Department and proposed Treasury
Regulations issued on April 15, 1996 would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules could be changed.
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by Tenneco and the Company
solely to provide information to Tenneco stockholders who will receive NNS
Common Stock in the Shipbuilding Distribution. It is not, and is not to be
construed as, an inducement or encouragement to buy or sell any securities of
Tenneco or the Company. The information contained in this Information
Statement is believed by Tenneco and the Company to be accurate as of the date
set forth on its cover. Changes may occur after that date, and neither the
Company nor Tenneco will update the information except in the normal course of
their respective public disclosure practices.
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RISK FACTORS
Stockholders of Tenneco should be aware that the Shipbuilding Distribution
and ownership of NNS Common Stock involve certain risk factors, including
those described below and elsewhere in this Information Statement, which could
adversely affect the value of their holdings. Neither the Company nor Tenneco
makes, nor is any other person authorized to make, any representation as to
the future market value of NNS Common Stock.
RELIANCE ON MAJOR CUSTOMER AND UNCERTAINTY OF FUTURE WORK
Reliance on Major Customer. The Company's business is primarily dependent
upon the design, construction, repair, overhaul and refueling of nuclear-
powered aircraft carriers and submarines for the U.S. Navy. The Navy accounted
for approximately 97% and 94% of the Company's net sales for the year ended
December 31, 1995 and for the six months ended June 30, 1996, respectively.
Approximately 85% of its backlog consisted of contracts to build, repair or
overhaul nuclear-powered aircraft carriers as of June 30, 1996.
Uncertainty of Future Work. Although U.S. Government cuts in naval
shipbuilding have continued to put pressure on the Company's backlog, the
Company was successful in adding $1.0 billion in new work during 1995 and $443
million during the first six months of 1996. The Company's total backlog,
however, decreased from $5.6 billion at December 31, 1994 to $4.6 billion at
December 31, 1995 and, as of June 30, 1996, was $4.1 billion. The Company's
total backlog anticipated at December 31, 1996 is $3.4 billion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Backlog." Because much of the Company's business consists of
constructing aircraft carriers, which historically have been purchased by the
Navy every four to six years, the Company's backlog has typically declined
following each carrier contract, and peaked again when the Navy orders a new
aircraft carrier. For example, the Company's backlog dropped well below $3
billion in late 1994, then peaked at $5.6 billion with the signing of the CVN-
76 contract later in that year. The continuing effort of the U.S. Government
to reduce the federal budget deficit and the restructuring of U.S. Naval
forces in the post Cold War environment, however, will affect the level of
funding for shipbuilding programs, which can be revised at any time. The
Report on the Bottom-Up Review by the U.S. Department of Defense in 1993
stated a need for a fleet of 12 aircraft carriers (down from 15 in 1992),
creating demand for a new aircraft carrier every four to six years. Re-
evaluation of this need will continue by both the Department of Defense and
the Congress. Current Navy plans call for the award of a contract for the
construction of a new nuclear-powered aircraft carrier (CVN-77) beginning in
or before 2002 for delivery in 2009. The Navy has not determined whether
subsequent aircraft carriers will be nuclear-powered. If there is an eventual
shift towards building smaller, non-nuclear-powered aircraft carriers, it is
possible that the Company may have to compete with other shipyards in the
future to build such aircraft carriers. Furthermore, in response to the need
for cheaper alternatives and the proliferation of "smart weapons," it is also
possible that future strategy reassessments by the Department of Defense may
result in the need for fewer aircraft carriers. The Company is currently
performing design concept studies for the next generation of aircraft
carriers, which is expected to help the Company in maintaining its role as the
Navy's only aircraft carrier builder. For the year ended December 31, 1995 and
for the first six months of 1996, aircraft carrier construction accounted for
approximately 40.5% and 41% of the Company's revenues, respectively. In
addition, aircraft carrier programs and other government projects can be
delayed, and such delays typically cause loss of income during the period of
delay and retraining costs when work resumes. Any significant reduction in the
level of government appropriations for aircraft carrier or other shipbuilding
programs, or a significant delay of such appropriations, would have a material
adverse effect on the Company's financial condition and results of operations.
The prospects of U.S. shipyards, including the Company, can be materially
affected by their success in securing significant U.S. Navy contract awards.
In 1987, the Company was awarded the lead design contract for the Seawolf
submarine. However, the collapse of the former Soviet Union Navy, with its
several hundred submarines, has greatly reduced the underwater threat to U.S.
and allied vessels. As a result, there was a dramatic cutback in the Seawolf
program (to three submarines), and the Company did not construct any Seawolf
submarines. Construction of the three Seawolf submarines was awarded to
Electric Boat Corporation ("Electric
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Boat"), a competitor of the Company and wholly-owned subsidiary of General
Dynamics Corporation ("General Dynamics"). More recently, Congress
preliminarily approved authorization legislation to have the Company construct
one of the Navy's new nuclear attack submarines ("NSSNs," the class of
submarines following the Seawolf) beginning in late 1998, and another NSSN
beginning in late 2000, although there can be no assurance that the NSSN
program will continue to be funded or proceed on schedule. Two NSSNs were also
authorized to be built by Electric Boat. Electric Boat has also been
designated as the lead design yard for NSSN submarines. Future contract awards
(after the fourth ship) for the construction of NSSNs, if made, are expected
to be determined by competitive bidding.
The Company, Ingalls Shipbuilding, Inc. ("Ingalls Shipbuilding") (the prime
contractor), Lockheed Martin Corporation ("Lockheed Martin") and National
Steel and Shipbuilding Co. ("National Steel") have entered into an alliance to
bid on the LPD-17 non-nuclear amphibious assault ship program, for which
approximately $974 million was recently appropriated for construction of the
first vessel. The U.S. Navy currently anticipates that 12 vessels will be
built for the LPD-17 program. The Navy has stated that it currently expects
that the LPD-17 vessels will be a mainstay of the Navy over the next two
decades, replacing a number of vessels nearing the end of their useful lives.
Funds for the construction of the first LPD-17 vessel have been appropriated
as part of the overall Department of Defense appropriations for 1996. However,
there can be no assurance that the Department of Defense and Congress will
fund the 12 vessels. Furthermore, there can be no assurance that the Company's
alliance will be awarded, assuming the appropriated funds are released, the
LPD-17 contract or that Congress will appropriate funds for any additional
LPD-17 vessels. It is possible that the U.S. Navy may award the program to a
competing bidder or it may allocate the vessels between competing bidders. It
could also delay implementation of the LPD-17 program. Even if the LPD-17
project is awarded to the Company's alliance, the U.S. Navy may decide to
award other work to competitors in order to sustain some level of work at
various shipyards.
An alliance consisting of the Company, Ingalls Shipbuilding and Lockheed
Martin was recently awarded a contract to develop design concepts for the U.S.
Navy's "Arsenal Ship." The Company's alliance was one of five alliances to
receive such an award. Current U.S. Navy plans call for a downselect to two
alliances following evaluation of submitted concepts. Ultimately, one alliance
is expected to prevail in the award of a construction contract. The members of
the Company's alliance initially designated Lockheed Martin as the prime
contractor. Although the Company's alliance was selected to develop design
concepts, there can be no assurance that it will be awarded the construction
work or other aspects of the project. The allocation of responsibilities among
members of the Company's LPD-17 alliance and the Company's Arsenal Ship
alliance is subject to future negotiation among such members, and thus there
has not been a determination of the level of work which may ultimately be
assigned to the Company if its alliances are awarded these projects.
As part of its expansion strategy, the Company has also been pursuing orders
for commercial ships. It has also submitted bids on the fast frigate (FF-21)
military ships to the United Arab Emirates and Kuwait, and is in the process
of developing bids for the Philippines and Norway. With respect to the
commercial nuclear market, the Company is preparing to bid (also with others
in an alliance) on several U.S. Department of Energy site management
contracts. Competition for these contracts and projects is intense and there
can be no assurance that the Company will be successful with its initiatives
in these areas.
With a substantial portion of the Company's current firm backlog scheduled
for completion in 1998 and 2002, the failure of the Company to receive the
contract for the construction of the CVN-77 on a timely basis and other
significant naval work would have a material adverse affect on the Company's
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
PROFIT RECOGNITION; GOVERNMENT CONTRACTING
Similar to other companies principally engaged in long-term construction
projects, the Company recognizes profits under the percentage of completion
method of accounting, with profit recognition commencing when progress under
the contract is sufficient to estimate final results with reasonable accuracy,
and loss recognition
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commencing immediately upon identification of such loss without regard to
percentage of completion. Because contract profit recognition is dependent
upon reliable estimates of the costs to complete the contract, profits
recognized upon completion of the contract may be significantly less than
anticipated, or the Company may incur a loss with respect to the contract, if
it proves necessary to revise cost estimates.
Moreover, the Company's principal U.S. Government business is currently
being performed under fixed price ("FP"), fixed price plus incentive fee
("FPIF"), cost plus incentive fee ("CPIF"), and cost plus fixed fee ("CPFF")
contracts. The risk to the Company of not being reimbursed for its costs
varies with the type of contract. Under FP contracts, the contractor retains
all costs savings on completed contracts but is liable for the full amount of
all expenditures in excess of the contract price. FPIF contracts, on the other
hand, provide for cost sharing between the U.S. Government and the contractor.
The contractor's fee is increased or decreased according to a formula set
forth in the contract which generally compares the amount of costs incurred to
the contract target cost. The Government is liable for all allowable costs up
to a ceiling price. However, the contractor is responsible for all costs
incurred in excess of such contract ceiling price. In addition, FPIF contracts
generally provide for the U.S. Government to pay escalation based on published
indices relating to the shipbuilding industry in order to shift the primary
risk of inflation to the Government. Under both CPIF and CPFF contracts,
generally the contractor is only required to perform the contract to the
extent the Government makes funds available. Under the former, the
contractor's profit is determined by a contractually specified formula which
essentially compares allowable incurred costs to the contract target cost.
Under the latter, with few exceptions, the fee is the same without regard to
the amount of cost incurred.
The Company currently constructs aircraft carriers pursuant to FPIF
contracts but it performs work for the U.S. Government under all of the types
of contracts described above. For example, most of its contracts for ship
design are of the cost type and some of its ship repair contracts are of the
fixed price type.
The costs of performing all such types of contracts include those for labor,
material and overhead. Therefore, unanticipated increases in any such costs as
well as delays in product delivery, poor workmanship requiring correction, and
all other factors which affect the cost of performing contracts, many of which
are long term in nature, affect the profitability of most contracts held or
anticipated by the Company.
In certain circumstances, the Company may submit Requests for Equitable
Adjustment ("REAs") to the U.S. Navy seeking adjustments to contract prices to
compensate the Company when it incurs costs for which it believes the U.S.
Government is responsible. For example, in June, 1996, the Company settled
REAs relating to U.S. Government initiated changes in the requirements for
renovating the container "roll-on, roll-off" heavy armored vehicle Sealift
transportation ships. As part of the settlement, the Sealift contract was
converted from a fixed price incentive contract to a fixed price contract and
the contract price was increased. See Note 13 to the Combined Financial
Statements of the Company. Although the Company pursues REAs and all other
contractual disputes vigorously, there is no assurance that the U.S. Navy will
resolve the REAs or any of these disputes in a manner favorable to the
Company. Under U.S. Government regulations, certain costs, including certain
financing costs and marketing expenses, are not allowable contract costs.
These costs can be substantial. The Government also regulates the methods by
which all costs, including overhead, are allocated to government contracts.
In cases where there are multiple suppliers, contracts for the construction
and conversion of U.S. Navy ships and submarines are subject to competitive
bidding. As a safeguard to anti-competitive bidding practices, the U.S. Navy
sometimes employs the concept of "cost realism," which requires that each
bidder submit information on pricing, estimated costs of completion and
anticipated profit margins. The U.S. Navy uses this and other data to
determine an estimated cost for each bidder. The U.S. Navy then re-evaluates
the bids by using the higher of the bidder's and the U.S. Navy's cost
estimates.
The U.S. Government has the right to suspend or debar a contractor from
government contracting for violations of certain statutes or government
procurement regulations. See "--Government Claims and Investigations." The
U.S. Government may also unilaterally terminate contracts at its convenience
with compensation for work completed.
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COMPETITION AND REGULATION
In the Company's opinion, programs currently planned by the U.S. Navy over
the next several years will not be sufficient to support all the U.S.
shipyards presently engaged in ship construction. The reduced level of
shipbuilding activity by the U.S. Navy during the past decade has resulted in
significant workforce reductions in the industry, but almost no other
significant consolidation. The general result has been fewer contracts awarded
to the same fixed number of large shipyards. The Company believes it currently
is (i) the only shipyard capable of building the Navy's nuclear-powered
aircraft carriers, (ii) the only non-government-owned shipyard capable of
refueling and overhauling the Navy's nuclear-powered aircraft carriers and
(iii) one of only two U.S. shipyards capable of building nuclear-powered
submarines. However, with respect to the market for U.S. military contracts
for other types of vessels, there are principally five major private U.S.
shipyards, including the Company, that compete for contracts to construct,
overhaul or convert other types of surface combatant vessels. Competition for
these vessels, including the LPD-17 and the Arsenal Ship, is extremely
intense. Additionally the Company's products, such as aircraft carriers,
submarines and other ships, compete with each other for defense monies.
With respect to the domestic commercial shipbuilding market, currently the
Jones Act requires that all vessels transporting products between U.S. ports
be constructed by U.S. shipyards. There are approximately 16 private U.S.
shipyards that can accommodate the construction of vessels up to 400 feet in
length, five of which the Company considers to be its direct competitors for
commercial contracts. Potential competitors include Alabama Shipyard, Inc.,
Avondale Industries, Inc. ("Avondale"), National Steel, Ingalls Shipbuilding
and Trinity Industries, Inc. Although the commercial market is growing, a
current overcapacity of suppliers has favored buyers and hindered the
profitability of shipyards. With respect to the international commercial
shipbuilding market, the Company competes with numerous shipyards in several
countries. Overseas firms control almost all of the international commercial
shipbuilding market. In 1995, Japanese, South Korean and European yards each
controlled approximately 30% of this market. Chinese firms held approximately
four percent and the shipyards in the remaining countries held the remaining
six percent. Many foreign shipyards are heavily subsidized by their
governments, and a number of overseas shipyards presently construct ships at a
cost and over a period which is substantially less than the cost and period
applicable to the Company. Although there can be no guarantees, the Company
has undertaken major initiatives to reduce its cost structure and cycle times
for product development and ship delivery in an effort to develop commercial
business. To date the Company has experienced substantial losses in connection
with its first major commercial construction contracts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Business Outlook" and "Business--Construction--Commercial." While the
percentage of the Company's total business for commercial shipbuilding could
increase, the U.S. Navy has historically been and for the foreseeable future
is expected to continue to be the Company's primary customer. See "Business."
The termination of the U.S. construction-differential subsidy program in
1981 significantly curtailed the ability of U.S. shipyards to compete
successfully for international commercial shipbuilding contracts with foreign
shipyards. Currently, the Company's future commercial shipbuilding
opportunities are dependent in part on certain U.S. laws and regulations,
including (i) the Jones Act, which, as noted above, currently requires that
all vessels transporting products between U.S. ports be constructed by U.S.
shipyards, (ii) the Oil Pollution Act of 1990, which beginning January 1,
1995, requires the phased-in transition of single-hulled tankers and product
carriers to double-hulled vessels by 2015 and (iii) the 1993 amendments to the
loan guarantee program under Title XI of the Merchant Marine Act of 1936,
which permit the U.S. Government to guarantee loan obligations of foreign
vessel owners for foreign-flagged vessels built in U.S. shipyards. In
connection with U.S. efforts to implement a 1994 multilateral agreement
designed in part to eliminate foreign government subsidies to overseas
commercial shipbuilders, Congress is currently considering legislation that
would eliminate the competitive advantage afforded to U.S. shipyards under the
1993 amendments to the Title XI loan guarantee program. In addition,
legislative bills seeking to rescind or substantially modify the provisions of
the Jones Act mandating the use of U.S.-built ships for coastwide trade are
introduced from time to time, and are expected to be introduced in the future.
Changes in these laws could have a material adverse effect on the Company's
financial condition and results of operations. See "Business."
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The Company faces competition in the engineering, planning and design market
from other companies which provide lower cost engineering support services and
are located closer to the Washington D.C. area. The Company has established a
new Carrier Innovation Center for the development of the Navy's next generation
of aircraft carriers. The Company believes the Carrier Innovation Center will
offset the geographic and cost advantage of its competitors. There can be no
assurance, however, that the Company will be the successful bidder on future
U.S. Navy engineering work, including new aircraft carrier research and
development funding.
The Company is also directly dependent upon allocation of defense monies to
the U.S. Navy. In addition to competition from other shipyards, the Company
competes with firms providing other defense products and services, such as
tanks and aircraft, to other branches of the armed forces, and with other, non-
defense demands on the U.S. budget.
SUBSTANTIAL LEVERAGE
The Company has historically relied upon Tenneco for working capital
requirements on a short-term basis and for other financial support functions.
After the Shipbuilding Distribution, the Company will not be able to rely on
the earnings, assets or cash flow of Tenneco and the Company will be
responsible for paying dividends, servicing its own debt and obtaining and
maintaining sufficient working capital. The Company will have substantial new
indebtedness upon the consummation of the Transaction. The Company's debt upon
consummation of the Transaction will include (on a pro forma basis at June 30,
1996): (i) the Notes in the aggregate amount of $400 million, and (ii) secured
borrowings of $214 million under the Senior Credit Facility. As of June 30,
1996, on a pro forma basis after giving effect to the Transaction, the Company
would have had outstanding $614 million of total indebtedness and stockholders'
equity of $194 million, with an additional $201 million available for borrowing
under the Senior Credit Facility, consisting of $111 million for advances and
letters of credit and $90 million for standby letters of credit.
The degree to which the Company will be leveraged following the Transaction
could have important consequences to holders of the NNS Common Stock, including
the following: (i) the Company's ability to pay dividends and obtain financing
in the future for working capital, capital expenditures and general corporate
purposes may be impaired; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness; and (iii) the high degree of leverage may limit the Company's
ability to react to changes in the industry, make the Company more vulnerable
to economic downturns and limit its ability to withstand competitive pressures.
The Company's ability to pay dividends on the NNS Common Stock and service
its debt obligations will depend upon its future operating performance, which
will be affected by prevailing economic conditions and financial and business
factors, many of which are beyond the Company's control. If the Company cannot
generate sufficient cash flow from operations to meet its obligations, then the
Company's ability to pay dividends will be impaired and it may be required to
attempt to restructure or refinance its debt, raise additional capital or take
other actions such as selling assets or reducing or delaying capital
expenditures. There can be no assurance, however, that any of such actions
could be effected on satisfactory terms, if at all, or would be permitted by
the terms of the Senior Credit Facility, the trust indentures governing the
Notes (the "Indentures") or the Company's other credit and contractual
arrangements.
The Senior Credit Facility and the Indentures will contain restrictive
covenants that, among other things, limit the Company's ability to pay
dividends on the NNS Common Stock, incur additional indebtedness, create liens
and make investments and capital expenditures. The Senior Credit Facility will
require the Company to comply with certain financial ratios and tests, under
which the Company is required to achieve certain financial and operating
results. The Company's ability to meet these financial ratios and tests may be
affected by events beyond its control, and there can be no assurance that they
will be met. In the event of a default under the Senior Credit Facility, the
lenders thereunder may terminate their lending commitments and declare the
indebtedness immediately due and payable, resulting in a default under the
Notes. There can be no assurance that the Company would have sufficient assets
to pay indebtedness then outstanding thereunder and under the Notes.
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POTENTIAL LIABILITIES DUE TO FRAUDULENT TRANSFER CONSIDERATIONS AND LEGAL
DIVIDEND REQUIREMENTS
The Transaction, including the Shipbuilding Distribution, is subject to
review under various state and federal fraudulent conveyance laws. Under these
laws, if a court in a lawsuit by an unpaid creditor or a representative of
creditors (including a trustee or debtor-in-possession in a bankruptcy by
Tenneco, NNS or any of their subsidiaries) were to determine that Tenneco or
any of its subsidiaries did not receive fair consideration or reasonably
equivalent value for distributing the NNS Common Stock or taking other action
as part of the Transaction, or NNS or any of its subsidiaries did not receive
fair consideration or reasonably equivalent value for making the distribution
to Tenneco, incurring indebtedness, including the Notes and the Senior Credit
Facility, transferring assets or taking other action as part of the Transaction
and, at the time of such action, Tenneco, NNS or any of their subsidiaries (i)
was insolvent or would be rendered insolvent, (ii) had reasonably small capital
with which to carry on its business and all business in which it intended to
engage, or (iii) intended to incur, or believed it would incur, debts beyond
its ability to repay such debts as they would mature, then such court could
order the holders of the NNS Common Stock to return the value of the stock and
any dividends paid thereon, bar future dividend and redemption payments on the
stock, and invalidate, in whole or in part, the Transaction, as a fraudulent
conveyance.
The measure of insolvency for purposes of the fraudulent conveyance laws will
vary depending on which jurisdiction's law is applied. Generally, however, an
entity would be considered insolvent if the present fair saleable value of its
assets is less than (i) the amount of its liabilities (including contingent
liabilities), or (ii) the amount that will be required to pay its probable
liabilities on its existing debts as they become absolute and mature. No
assurance can be given as to what standard a court would apply in determining
insolvency or that a court would not determine that Tenneco, NNS or any of
their subsidiaries was "insolvent" at the time of or after giving effect to the
Transaction, including the distribution of the NNS Common Stock.
NNS' payment of the dividend to Tenneco and dividends to the holders of NNS
Common Stock is also subject to review under state corporate distribution
statutes. Under the General Corporation Law of the State of Delaware (the
"DGCL"), a corporation may only pay dividends to its stockholders either (i)
out of its surplus (net assets minus capital), or (ii) if there is no such
surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Although NNS intends to make the
distribution to Tenneco and pay dividends to the holders of the NNS Common
Stock entirely from surplus, no assurance can be given that a court will not
later determine that some or all of the distribution to Tenneco or a dividend
to the holders of the NNS Common Stock was unlawful.
Prior to the Shipbuilding Distribution, the Tenneco Board expects to obtain
an opinion regarding the solvency of Tenneco and NNS and the permissibility of
the Shipbuilding Distribution and the dividend to be paid by NNS to Tenneco
under Section 170 of the DGCL. The Tenneco Board and management believe that,
in accordance with this opinion which is expected to be rendered in connection
with the Shipbuilding Distribution and the dividend to be paid by NNS to
Tenneco, (i) Tenneco and NNS each will be solvent at the time of the
Transaction (including after the payment of such dividend and the Shipbuilding
Distribution), will be able to repay its debts as they mature following the
Transaction and will have sufficient capital to carry on its businesses and
(ii) the Shipbuilding Distribution and such dividend will be made entirely out
of surplus in accordance with Section 170 of the DGCL. There is no certainty,
however, that a court would find this solvency opinion to be binding on
creditors of Tenneco or NNS or that a court would reach the same conclusions
set forth in such opinion in determining Tenneco or NNS was insolvent at the
time of, or after giving effect to, the Transaction, or whether lawful funds
were available for the Shipbuilding Distribution and the distribution to
Tenneco.
Pursuant to the Distribution Agreement, from and after the Distributions,
each of Tenneco, the Company and New Tenneco will be responsible for the debts,
liabilities and other obligations related to the business or businesses which
it owns and operates following the consummation of the Transaction. Although
the Company does not expect to be liable for any such obligations not expressly
assumed by it pursuant to the Distribution Agreement, it is possible that a
court would disregard the allocation agreed to among the parties, and require
the Company to assume responsibility for obligations allocated to Tenneco or
New Tenneco (for example, tax and/or environmental liabilities), particularly
if one of such other parties were to refuse or were to be unable to pay or
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perform the subject allocated obligations. See "The Shipbuilding
Distribution--Relationships Among Tenneco, the Company and New Tenneco After
the Distributions."
GOVERNMENT CLAIMS AND INVESTIGATIONS
More than 90% of the Company's sales involve contracts entered into with the
U.S. Government. These contracts are subject to possible termination for the
convenience of the U.S. Government, to audit and to possible adjustments
affecting both cost-type and fixed price type contracts. Like many government
contractors, the Company has received audit reports which recommend that
certain contract prices be reduced, or costs allocated to government contracts
be disallowed, to comply with various government regulations. Some of these
audit reports involve substantial amounts. The Company has made adjustments to
its contract prices and the costs allocated to government contracts in those
cases in which it believes such adjustments are appropriate. In addition,
various governmental agencies may at any time be conducting various other
investigations or making specific inquiries concerning the Company. Management
is of the opinion that the ultimate resolution of these matters will not have
a material adverse effect on the Company's financial condition or results of
operations. In May 1996, the Company was subpoenaed by the Inspector General
of the Department of Defense as part of a joint inquiry conducted by the
Department of Defense, the Department of Justice, the U.S. Attorney's Office
for the Eastern District of Virginia and the Naval Criminal Investigation
Service. See "Business--Investigations and Legal Proceedings" and Note 13 of
the Combined Financial Statements.
POTENTIAL FEDERAL INCOME TAX LIABILITIES
On October 30, 1996, the IRS issued the IRS Ruling Letter, to the effect,
among other things, that the Shipbuilding Distribution will qualify as a tax-
free distribution under Section 355 of the Code. Receipt of the IRS Ruling
Letter satisfied a condition to consummation of the Shipbuilding Distribution.
See "The Shipbuilding Distribution--Certain Federal Income Tax Aspects of the
Shipbuilding Distribution." Such a ruling, while generally binding upon the
IRS, is based upon certain factual representations and assumptions. If any
such factual representations and assumptions were incomplete or untrue in a
material respect, or the facts upon which such ruling was based are materially
different from the facts at the time of the Distributions, the IRS could
modify or revoke such ruling retroactively. Tenneco is not aware of any facts
or circumstances which would cause any of such representations and assumptions
to be incomplete or untrue. The Company, Tenneco, New Tenneco and El Paso have
each agreed to certain covenants on its future actions to provide further
assurances that the Shipbuilding Distribution will be tax-free for federal
income tax purposes. See "The Shipbuilding Distribution--Relationships among
Tenneco, the Company and New Tenneco After the Distributions."
If the Distributions were not to qualify as tax-free distributions under
Section 355 of the Code, then in general a corporate level federal income tax
would be payable by the consolidated group of which Tenneco is the common
parent, which tax (assuming the internal spin-off transactions included in the
Corporate Restructuring Transactions also failed to qualify under Code Section
355) would be based upon the gain (computed as the difference between the fair
market value of the stock distributed and the distributing corporation's
adjusted basis in such stock) realized by each of the distributing
corporations upon its distribution of the stock of one or more controlled
corporations to its stockholders in the Transaction. In this regard, the
failure of the Merger to qualify as a reorganization within the meaning of
Code Section 368(a)(1)(B) could cause the Shipbuilding Distribution to be
taxable to Tenneco and its stockholders. The corporate level federal income
tax would be payable by Tenneco. Under certain limited circumstances, however,
the Company has agreed to indemnify Tenneco for a defined portion of such tax
liabilities. See "The Shipbuilding Distribution--Relationships Among Tenneco,
the Company and New Tenneco After the Distributions--Terms of the Ancillary
Agreements--Tax Sharing Agreement." In addition, under IRS regulations, each
member of the consolidated group (including the Company) is severally liable
for such tax liability.
The Budget Proposal contains a provision that would require a distributing
corporation in a transaction otherwise qualifying as a tax-free distribution
under Section 355 of the Code to recognize gain on the distribution of the
stock of one or more controlled corporations under certain circumstances. If
such legislation were enacted, the Shipbuilding Distribution, if ultimately
subject to such legislation, may result in significant taxable gain to
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Tenneco under Section 355(c) of the Code. The Budget Proposal also contains a
provision under which the receipt by a stockholder of certain preferred stock
in an otherwise tax-free reorganization would result in gain recognition to the
stockholder. If such legislation were enacted, it is possible that the receipt
of the El Paso Preferred Depositary Shares would cause the Merger to fail to
qualify as a reorganization within the meaning of Section 368(a)(1)(B) of the
Code resulting in the recognition of gain by Tenneco stockholders as described
below. Even if the issuance of El Paso Preferred Stock and El Paso Preferred
Depositary Shares did not prevent qualification of the Merger as a tax-free
reorganization, holders of Tenneco stock receiving El Paso Preferred Depositary
Shares would recognize gain on the exchange that might be taxable as ordinary
income to the extent of the earnings and profits of Tenneco. The failure of the
Merger to qualify as a reorganization within the meaning of Section
368(a)(1)(B) of the Code or the recognition of gain by shareholders as a result
of the receipt of El Paso Preferred Depositary Shares, may also cause the
Shipbuilding Distribution to not qualify as a tax-free distribution under
Section 355 of the Code. See "Certain Federal Income Tax Consequences--Possible
Future Legislation."
Furthermore, if the Shipbuilding Distribution were not to qualify as a tax-
free distribution under Section 355 of the Code, then each holder of Tenneco
Common Stock who receives shares of NNS Common Stock and New Tenneco Common
Stock in the Distributions would be treated as if such stockholder received a
taxable distribution in an amount equal to the fair market value of NNS Common
Stock and New Tenneco Common Stock received, which would result in: (i) a
dividend to the extent paid out of Tenneco's current and accumulated earnings
and profits; then (ii) a reduction in such stockholder's basis in Tenneco
Common Stock to the extent the amount received exceeds the amount referenced in
clause (i); and then (iii) gain from the sale or exchange of Tenneco Common
Stock to the extent the amount received exceeds the sum of the amounts
referenced in clauses (i) and (ii). See "The Shipbuilding Distribution--Certain
Federal Income Tax Aspects of the Shipbuilding Distribution."
NO CURRENT PUBLIC MARKET FOR NNS COMMON STOCK
There is not currently a public market for NNS Common Stock, although a "when
issued" market is expected to develop prior to the Distribution Date. There can
be no assurance as to the prices at which trading in NNS Common Stock will
occur after the Shipbuilding Distribution. Until NNS Common Stock is fully
distributed and an orderly market develops, the prices at which trading in such
stock occurs may fluctuate significantly. NNS has applied to the NYSE for the
listing of NNS Common Stock upon notice of issuance and expects to receive
approval of such listing prior to the Distributions. See "The Shipbuilding
Distribution--Trading of NNS Common Stock."
UNCERTAINTY REGARDING TRADING PRICES OF STOCK FOLLOWING THE TRANSACTION
Upon consummation of the Transaction, (i) in connection with the Merger, the
then outstanding shares of Tenneco Common Stock will be cancelled and holders
of Tenneco Common Stock will receive shares of El Paso Common Stock and, under
certain circumstances, El Paso Preferred Depositary Shares and (ii) in
connection with the Distributions, New Tenneco Common Stock and NNS Common
Stock. Tenneco Common Stock is currently listed and traded, and following the
Distributions, New Tenneco Common Stock is expected to be listed and traded, on
the New York, Chicago, Pacific and London Stock Exchanges. El Paso Common
Stock, El Paso Preferred Depositary Shares, if any, and NNS Common Stock will
be listed and traded on the NYSE. There can be no assurance that the combined
market value/trading prices of (i) El Paso Common Stock and any El Paso
Preferred Depositary Shares, (ii) New Tenneco Common Stock and (iii) NNS Common
Stock (plus any cash received in lieu of fractional shares or any fractional El
Paso Preferred Depositary Shares) received in respect of shares of Tenneco
Common Stock pursuant to the Transaction will be equal to or greater than the
market value/trading prices of shares of Tenneco Common Stock immediately prior
to the Transaction. See "The Shipbuilding Distribution--Trading of NNS Common
Stock."
UNCERTAINTY REGARDING FUTURE DIVIDENDS
NNS' dividend policy will be established by the NNS Board from time to time
based on the results of operations and financial condition of the Company and
such other business considerations as the NNS Board considers relevant.
Additionally, NNS and certain of its subsidiaries are subject to certain
restrictions on the
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payment of dividends pursuant to its financing and similar arrangements. There
can be no assurance that the combined annual dividends on El Paso Common Stock
and any El Paso Preferred Depositary Shares, New Tenneco Common Stock and NNS
Common Stock after the Transaction will be equal to the annual dividends on
Tenneco Common Stock prior to the Transaction (and it is unlikely that the
dividends would be greater than the annual dividends on Tenneco Common Stock
prior to the Transaction). For certain restrictions on payment of dividends,
see "Financing."
COLLECTIVE BARGAINING AGREEMENTS
The Company has entered into four collective bargaining agreements covering
all of the Company's approximately 10,780 hourly employees. The agreement with
the United Steelworkers of America covers approximately 10,520 employees and
expires April 4, 1999. The agreement with the United Plant Guard Workers of
America and its Amalgamated Local No. 451 covers approximately 100 employees
and expires February 11, 2001. The agreement with the International Association
of Fire Fighters, Local I-45 covers approximately 30 employees and expires
September 24, 2000. The Idaho General President's Project Maintenance Agreement
(a master agreement with approximately twelve craft unions) covers
approximately 130 employees of Newport News Reactor Services, Inc., a
subsidiary of Newport News, working in Idaho. This agreement expires upon
completion of the project. Although the Company believes that its relationships
with these unions are good, there can be no assurance that the Company will not
experience labor disruptions associated with these collective bargaining
agreements. See "Business."
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental laws
and regulations that impose limitations on the discharge of pollutants into the
environment and establish standards for the transportation, storage and
disposal of toxic and hazardous wastes. Stringent fines and penalties may be
imposed for non-compliance and certain environmental laws impose joint and
several "strict liability" for remediation of spills and releases of oil and
hazardous substances rendering a person liable for environmental damage,
without regard to negligence or fault on the part of such person. Such laws and
regulations may expose the Company to liability for the conduct of or
conditions caused by others, including, without limitation, Tenneco and New
Tenneco, or for acts of the Company which are or were in compliance with all
applicable laws at the time such acts were performed.
The nature of shipbuilding operations requires the use of hazardous
materials. The Company's shipyard also generates significant quantities of
wastewater which it treats before discharging pursuant to various permits. In
order to handle these materials, the shipyard has an extensive network of
above-ground and underground storage tanks, some of which have leaked and
required remediation in the past. In addition, the extensive handling of these
materials sometimes results in spills on the shipyard and occasionally in the
adjacent James River. The shipyard also has extensive waste handling programs
which it maintains and, periodically, must close in accordance with applicable
regulations. The cumulative cost of these normal operations are not expected to
have a material adverse effect on the Company's financial condition or results
of operations. See "Business--Health, Safety and Environmental."
CERTAIN ANTITAKEOVER FEATURES
Upon consummation of the Shipbuilding Distribution, certain provisions of the
NNS' Restated Certificate of Incorporation (the "Certificate") and its Amended
and Restated By-laws ("By-laws") (both the Certificate and the By-laws will be
adopted prior to the Distribution Date), along with the Company's stockholder
rights plan and Delaware statutory law, could discourage potential acquisition
proposals and could delay or prevent a change in control of the Company. Such
provisions could diminish the opportunities for a stockholder to participate in
tender offers, including tender offers at a price above the then current market
value of NNS Common Stock. Such provisions may also inhibit fluctuations in the
market price of NNS Common Stock that could result from takeover attempts. The
provisions could also have the effect of making it more difficult for third
parties to cause the immediate removal and replacement of the members of the
then current NNS Board or the then current management of NNS without the
concurrence of the NNS Board. See "Antitakeover Effects of Certain Provisions."
37
<PAGE>
FINANCING
In connection with the Transaction and to provide for working capital needs,
NNS intends to (i) issue Notes in the amount of $400 million and (ii) enter
into the $415 million secured Senior Credit Facility comprised of the $200
million six-year amortizing Term Loan and the $215 million six-year Revolving
Credit Facility, of which $125 million may be used for advances and letters of
credit and $90 million may be used for standby letters of credit.
The Company expects to utilize the proceeds of the Notes and Term Loan and
borrowings of $14 million under the Revolving Credit Facility to distribute
(i) $600 million as a dividend to Tenneco or one or more of its subsidiaries
for use in retiring certain Tenneco Consolidated Debt and (ii) $14 million in
payment of certain fees and expenses incurred in connection with the Senior
Credit Facility and the Notes.
It is expected that the Term Loan will amortize in 24 quarterly
installments, commencing March 31, 1997, with an annual aggregate payment
amount of $27.5 million in each of 1997 through 2001, and $62.5 million in
2002. Borrowings under the Senior Credit Facility are to be secured by
perfected liens on substantially all of the Company's assets. After January 1,
1998, the security interest in the collateral will be released if the Company
meets certain specific financial and other conditions.
Interest on borrowings under the Senior Credit Facility accrues at a
floating rate based on either LIBOR or a base rate. The Senior Credit Facility
will contain customary representations and warranties and financial and other
standard covenants, including minimum net worth, total debt to EBITDA and
EBITDA less capital expenditures to interest expense. The Senior Credit
Facility will also provide for limitations on debt and dividend levels and
specify mandatory prepayments (with certain agreed-upon exceptions), including
100% of the net proceeds from debt issuance, 50% of the net proceeds from
equity issuance and 100% of the net proceeds from asset sales.
The Notes will consist of $200 million of Senior Notes due 2006 and $200
million of Senior Subordinated Notes due 2006. Interest on the Notes is
payable semiannually. The Notes will be redeemable under certain
circumstances. The Senior Credit Facility places restrictions, subject to
certain exceptions, upon the right of NNS to declare and pay dividends and
make certain similar or related kinds of payments, including a cap of (i)
$10,000,000 plus (ii) 10% of consolidated net income (or minus 100% of
consolidated net loss) calculated for the period from the closing date under
the Senior Credit Facility through the end of the most recent fiscal quarter
for NNS and its subsidiaries (which for purposes of this calculation is
treated as a single accounting period). Additionally, the indentures for the
Notes, subject to certain exceptions, generally restrict the right of NNS and
its subsidiaries to declare and pay dividends and certain similar or related
kinds of payments. These restrictions may materially limit the right of NNS to
declare and pay dividends on the NNS Common Stock.
NNS' obligations under the Notes and Senior Credit Facility are guaranteed
by Newport News. Certain other subsidiaries of NNS are excluded as guarantors
pursuant to the indentures for the Notes and the agreements for the Senior
Credit Facility. Separate financial statements of the guarantors are not
included herein because the guarantors are jointly and severally liable for
the Notes and the aggregate assets, earnings and equity of such guarantors are
substantially equivalent to the assets, earnings and equity of NNS and its
combined subsidiaries.
38
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited historical capitalization of
the Company as of June 30, 1996, and unaudited pro forma capitalization as of
June 30, 1996, after giving effect to the Transaction described in the
"Unaudited Pro Forma Combined Financial Statements." The capitalization of the
Company should be read in conjunction with the Combined Financial Statements,
and the notes thereto, "Selected Combined Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
each contained elsewhere herein.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Short-term debt:
Allocated from Tenneco............................ $ 95(a) $--
Term Loan......................................... -- 28(b)
Long-term debt:
Allocated from Tenneco............................ 282(a) --
Revolving Credit Facility......................... -- 14(c)
Term Loan......................................... -- 172
Senior Notes due 2006............................. -- 200
Senior Subordinated Notes due 2006................ -- 200
---- ----
Total debt...................................... 377 614
---- ----
Equity:
Common stock...................................... -- 1
Paid-in capital................................... -- 193
Retained earnings................................. -- --
Combined equity................................... 349 --
---- ----
Total equity.................................... 349 194
---- ----
Total capitalization................................ $726 $808
==== ====
</TABLE>
--------
(a) Represents debt allocated to the Company from Tenneco. Tenneco's
historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited
number of subsidiaries, rather than at the operating company
level, and to centrally manage various cash functions. Management
believes that the historical allocation of corporate debt and
interest expense is reasonable; however, it is not necessarily
indicative of the Company's debt upon completion of the Debt
Realignment, nor debt and interest that may be incurred by the
Company as a separate public entity.
(b) Approximately $28 million of borrowings under the Term Loan will
mature within one year from the consummation of the Transaction,
and such amount is reflected as short-term debt.
(c) On a pro forma basis on June 30, 1996, $201 million of aggregate
principal amount will be unused and available for borrowing as
follows: $111 million for advances and letters of credit and $90
million for standby letters of credit.
39
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Balance Sheet of the Company as
of June 30, 1996 and Unaudited Pro Forma Combined Statements of Earnings for
the six months ended June 30, 1996 and the year ended December 31, 1995 have
been prepared to reflect the Transaction, including: (i) the issuance of $400
million aggregate principal amount of Notes; (ii) borrowings of $214 million
under the Senior Credit Facility; (iii) the cash dividend of $600 million to
be paid by the Company to Tenneco or one or more of its subsidiaries pursuant
to the Debt Realignment; (iv) the payment of $14 million of certain fees and
expenses incurred in connection with the Notes and the Senior Credit Facility;
and (v) the issuance of the NNS Common Stock pursuant to the Shipbuilding
Distribution.
The historical Combined Financial Statements reflect the financial position
and results of operations of the Shipbuilding Business whose net assets will
be transferred to the Company pursuant to the Corporate Restructuring
Transactions. The accounting for such transfer of assets and liabilities
pursuant to the Corporate Restructuring Transactions represents a
reorganization of companies under common control and, accordingly, all assets
and liabilities are reflected at their historical cost in the Combined
Financial Statements.
The Unaudited Pro Forma Combined Balance Sheet has been prepared as if the
various components of the Transaction occurred on June 30, 1996; the Unaudited
Pro Forma Combined Statements of Earnings have been prepared as if the various
components of the Transaction occurred as of January 1, 1995. The Unaudited
Pro Forma Combined Financial Statements set forth on the following pages are
not necessarily indicative of the results that would have actually occurred if
the Transaction had been consummated as of June 30, 1996, or January 1, 1995,
or results which may be attained in the future.
The pro forma adjustments, as described in the Notes to the Unaudited Pro
Forma Combined Financial Statements, are based upon available information and
upon certain assumptions that management believes are reasonable. The
Unaudited Pro Forma Combined Financial Statements should be read in
conjunction with the Combined Financial Statements, and notes thereto,
included elsewhere in this Information Statement.
40
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
(MILLIONS)
<TABLE>
<CAPTION>
COMPANY PRO FORMA PRO FORMA
ASSETS HISTORICAL ADJUSTMENTS COMBINED
------ ---------- ----------- ---------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................... $ 1 $ 4 (a) $ 5
614 (b)
(614)(d)
Contracts in process........................ 282 282
Other current assets........................ 190 190
------ ----- ------
Total current assets...................... 473 4 477
------ ----- ------
NONCURRENT ASSETS
Property, plant and equipment, net.......... 824 824
Other assets................................ 155 (9)(c) 160
14 (d)
------ ----- ------
Total noncurrent assets................... 979 5 984
------ ----- ------
$1,452 $ 9 $1,461
====== ===== ======
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable............................ $ 177 $ (73)(c) $ 104
Short-term debt............................. 95 28 (b) 28
(95)(e)
Other accrued liabilities................... 160 160
------ ----- ------
Total current liabilities................. 432 (140) 292
------ ----- ------
NONCURRENT LIABILITIES
Long-term debt.............................. 282 586 (b) 586
(282)(e)
Deferred income taxes....................... 140 140
Other long-term liabilities................. 249 249
------ ----- ------
Total noncurrent liabilities.............. 671 304 975
------ ----- ------
EQUITY
Common stock................................ 1 (f) 1
Paid-in capital............................. 193 (f) 193
Retained earnings........................... -- (f) --
Combined equity............................. 349 4 (a) --
64 (c)
(600)(d)
377 (e)
(194)(f)
------ ----- ------
Total equity.............................. 349 (155) 194
------ ----- ------
$1,452 $ 9 $1,461
====== ===== ======
</TABLE>
See the accompanying notes to Unaudited Pro Forma Combined Financial
Statements.
41
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF EARNINGS
(MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
-----------------------------------
COMPANY PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................. $ 915 $ $ 915
Operating costs and expenses............... 834 1 (g) 835
------ ---- -----------
Operating earnings......................... 81 (1) 80
Interest expense........................... 17 (17)(e) 28
28 (g)
------ ---- -----------
Earnings before income taxes............... 64 (12) 52
Provision for income taxes................. 27 6 (e) 23
(10)(g)
------ ---- -----------
Net earnings............................... $ 37 $ (8) $ 29
====== ==== ===========
Average number of common shares
outstanding............................... 34,070,348
===========
Earnings per share......................... $ .85
===========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------
COMPANY PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
---------- ----------- -----------
<S> <C> <C> <C>
Net sales.................................. $1,756 $ $ 1,756
Operating costs and expenses............... 1,599 2 (g) 1,601
------ ---- -----------
Operating earnings......................... 157 (2) 155
Interest expense........................... 29 (29)(e) 56
56 (g)
Other (income), net........................ (3) (3)
------ ---- -----------
Earnings before income taxes............... 131 (29) 102
Provision for income taxes................. 58 10 (e) 48
(20)(g)
------ ---- -----------
Net earnings............................... $ 73 $(19) $ 54
====== ==== ===========
Average number of common shares
outstanding............................... 34,799,188
===========
Earnings per share......................... $ 1.55
===========
</TABLE>
See the accompanying notes to Unaudited Pro Forma Combined Financial
Statements.
42
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(a) To reflect a cash contribution from Tenneco to the Company pursuant to the
Cash Realignment provisions in the Distribution Agreement covering the
Shipbuilding Distribution.
(b) To reflect $614 million in total borrowings under various credit
facilities which borrowings will consist of (i) a $200 million six-year
amortizing Term Loan with an estimated annual interest rate of 8%, (ii)
$200 million Senior Notes due 2006 with an estimated annual interest rate
of 9.25%, (iii) $200 million Senior Subordinated Notes due 2006 with an
estimated annual interest rate of 9.75%, and (iv) $14 million in
borrowings under a $215 million six-year Revolving Credit Facility, with
an estimated annual interest rate of 8% and commitment fees due on the
unused portion of the facility, for payment of certain fees and expenses
described in (d) below. Approximately $28 million of the assumed Term Loan
borrowings will mature within one year from the consummation of the
Transaction, and such amount is reflected as short-term debt in the
accompanying Pro Forma Combined Balance Sheet.
(c) To reflect the settlement or capitalization of intercompany accounts
payable with Tenneco affiliates and the transfer of certain assets prior
to the Shipbuilding Distribution pursuant to certain Corporate
Restructuring Transactions.
(d) To reflect: (i) a cash dividend of $600 million to be paid by the Company
to Tenneco or one or more of its subsidiaries, principally using
borrowings under the Senior Credit Facility and the Notes and (ii) a
payment of $14 million for certain fees and expenses in connection with
the Senior Credit Facility and Notes.
(e) To reflect the elimination of corporate debt and related interest expense
allocated by Tenneco to the Company. See the Combined Financial
Statements, and notes thereto, included elsewhere in this Information
Statement.
(f) To reflect the distribution of NNS Common Stock to holders of Tenneco
Common Stock at an exchange ratio of one share of NNS Common Stock for
five shares of Tenneco Common Stock.
(g) To reflect: (i) interest expense related to the borrowings assumed
outstanding under the Senior Credit Facility and the Notes at the assumed
annual interest rates discussed in (b), (ii) the cost of commitment fees
on the unused borrowing capacity under the Revolving Credit Facility, and
(iii) the amortization of deferred debt financing costs incurred in
connection with the Senior Credit Facility and the Notes, as well as the
related tax effects of these items at an assumed statutory rate of 35%. A
1/8% change in these assumed annual interest rates would change pro forma
annual interest expense by $0.8 million, before the effect of income
taxes.
(h) EBITDA, on a pro forma basis, was $113 million and $227 million for the
six months ended June 30, 1996 and the year ended December 31, 1995,
respectively. EBITDA represents earnings before cumulative effect of
changes in accounting principles, income taxes, interest expense and
depreciation and amortization. EBITDA is not a calculation based upon
GAAP; however, the amounts included in the EBITDA calculation are derived
from amounts included in the combined pro forma Statements of Earnings. In
addition, EBITDA shall not be considered as an alternative to net income
or operating income, as an indicator of the operating performance of the
Company or as an alternative to operating cash flows as a measure of
liquidity.
43
<PAGE>
COMBINED SELECTED FINANCIAL DATA
The following combined selected financial data as of December 31, 1995 and
1994 and for the years ended December 31, 1995, 1994 and 1993 were derived
from the audited Combined Financial Statements of the Company. The combined
selected financial data as of December 31, 1993, 1992 and 1991 and for the
years ended December 31, 1992 and 1991 are unaudited and were derived from the
accounting records of Tenneco. The combined selected financial data as of and
for each of the six-month periods ended June 30, 1996 and 1995 were derived
from the unaudited Combined Financial Statements of the Company. In the
opinion of the Company's management, the combined selected financial data of
the Company as of December 31, 1993, 1992 and 1991 and for the years ended
December 31, 1992 and 1991, and as of and for the six months ended June 30,
1996 and 1995 include all adjusting entries (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The results of operations for the six months ended June 30, 1996
should not be regarded as indicative of the results that may be expected for
the full year.
This information should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Combined Financial Statements, and notes thereto, included elsewhere in this
Information Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------- --------------------------------------------------
1996(A) 1995(A) 1995(A) 1994(A) 1993(A) 1992 1991
------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(MILLIONS)
STATEMENTS OF EARNINGS
DATA:
Net sales.............. $ 915 $ 845 $1,756 $1,753 $1,861 $2,265 $2,216
====== ====== ====== ====== ====== ====== ======
Operating earnings..... $ 81 $ 90 $ 157 $ 201 $ 210 $ 249 $ 224
Interest expense (net
of interest
capitalized).......... 17 20 29 30 36 42 23
Other.................. -- -- (3) 1 (15)(b) -- (2)
Provision for income
taxes................. 27 29 58 75 78 64 68
------ ------ ------ ------ ------ ------ ------
Earnings before
cumulative effect of
changes in accounting
principles............ 37 41 73 95 111 143 135
Cumulative effect of
changes in accounting
principles, net of
tax................... -- -- -- (4)(c) -- (93)(c) --
------ ------ ------ ------ ------ ------ ------
Net earnings........... $ 37 $ 41 $ 73 $ 91 $ 111 $ 50 $ 135
====== ====== ====== ====== ====== ====== ======
BALANCE SHEET DATA:
Working capital........ $ 41 $ 4 $ (19) $ (75) $ (121) $ (89) $ (470)
Total assets........... 1,452 1,337 1,380 1,263 1,235 1,450 1,412
Short-term debt(d)..... 95 54 68 30 34 83 36
Long-term debt(d)...... 282 326 292 287 423 761 364
Combined equity........ 349 236 272 199 105 (173) (30)
STATEMENTS OF CASH FLOW
DATA:
Net cash provided
(used) by operating
activities............ $ (1) $ (18) $ 63 $ 182 $ 215 $ (174) $ 352
Net cash provided
(used) by investing
activities............ (45) (29) (87) (29) 21 6 (99)
Net cash provided
(used) by financing
activities............ 45 47 25 (154) (241) 181 (246)
Capital expenditures... 36 29 77 29 35 35 64
OTHER DATA:
EBITDA(e).............. $ 113 $ 123 $ 227 $ 270 $ 297 $ 323 $ 298
</TABLE>
(Continued on next page)
44
<PAGE>
(Continued from previous page)
- --------
(a) For a discussion of significant items affecting comparability of the
financial information for 1995, 1994 and 1993 and for the six months ended
June 30, 1996 and 1995, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Information Statement.
(b) Includes a gain of $15 million related to the sale of Sperry Marine
businesses.
(c) In 1994, the Company adopted FAS No. 112, "Employers' Accounting for
Postemployment Benefits." In 1992, the Company adopted FAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and FAS No. 109, "Accounting for Income Taxes."
(d) Historical amounts represent debt allocated to the Company from Tenneco
based on the portion of Tenneco's investment in the Company which is
deemed to be debt, generally based upon the ratio of the Company's net
assets to Tenneco's consolidated net assets plus debt. Tenneco's
historical practice has been to incur indebtedness for its consolidated
group at the parent company level or at a limited number of subsidiaries,
rather than at the operating company level, and to centrally manage
various cash functions. Management believes that the historical allocation
of corporate debt and interest expense is reasonable; however, it is not
necessarily indicative of the Company's debt upon completion of the Debt
Realignment, nor debt and interest that may be incurred by the Company as
a separate public entity. See the Combined Financial Statements, and notes
thereto, included elsewhere in this Information Statement.
(e) EBITDA represents earnings before cumulative effect of changes in
accounting principles, income taxes, interest expense and depreciation and
amortization. EBITDA is not a calculation based upon GAAP; however, the
amounts included in the EBITDA calculation are derived from amounts
included in the Statements of Earnings. In addition, EBITDA shall not be
considered as an alternative to net income or operating income, as an
indicator of the operating performance of the Company or as an alternative
to operating cash flows as a measure of liquidity.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Combined Selected
Financial Data and Combined Financial Statements, and notes thereto, presented
on pages F-1 to F-21. Reference is made to the "Basis of Presentation and
Description of Business" section of Note 1 to such Combined Financial
Statements for the definition of the "Company" as utilized herein.
BUSINESS OVERVIEW
Newport News Shipbuilding Inc. ("NNS") is the parent of Newport News
Shipbuilding and Dry Dock Company ("Newport News"). Newport News was acquired
by Tenneco in 1968 and since that time has represented the Shipbuilding
Business segment of Tenneco's diversified businesses. As a result of the
Shipbuilding Distribution, the Company will become a separate, publicly-held
corporation. See "The Shipbuilding Distribution" and Note 1 to the Combined
Financial Statements for further discussion.
The Company's primary business is the design, construction, repair, overhaul
and refueling of nuclear-powered aircraft carriers and submarines for the U.S.
Navy. The Company also provides ongoing maintenance for other U.S. Navy
vessels through work in overhauling, lifecycle engineering and repair. The
U.S. Navy accounted for approximately 97% and 94% of the Company's net sales
for the year ended December 31, 1995 and for the six months ended June 30,
1996, respectively. The following table summarizes the percentage of net sales
by contract type.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- -----------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Fixed-Price-Type........................ 67% 78% 75% 75% 67%
Cost-Type............................... 33% 22% 25% 25% 33%
------- ------- ------- ------- -------
Total................................. 100% 100% 100% 100% 100%
======= ======= ======= ======= =======
</TABLE>
The Company's primary activity is constructing ships. Similar to other
companies principally engaged in long-term construction projects, the Company
recognizes profits under the percentage of completion method of accounting,
with profit recognition commencing when costs are incurred under the contract,
and loss recognition commencing immediately upon identification of such loss
without regard to percentage of completion. Because contract profit
recognition is dependent upon reliable estimates of the costs to complete the
contract, profits recognized upon completion of the contract may be
significantly less than anticipated, or the Company may incur a loss with
respect to the contract, if it proves necessary to revise cost estimates.
Moreover, the Company's principal U.S. Government business is currently being
performed under fixed-price or fixed-price incentive contracts, which wholly
or partially shift the risk of construction costs that exceed the contract
target cost to the Company. See "Risk Factors--Profit Recognition; Government
Contracting." In addition to ship construction, the Company also provides
repair and overhaul services and engineering and design services. During 1993,
the "Other" captions presented herein included the Sperry Marine business
("Sperry"), which was involved in the domestic and international design and
manufacture of advanced electronics for maritime and other applications, prior
to the sale of such business. See "--Other--Divestiture" below.
46
<PAGE>
RESULTS OF OPERATIONS -- OVERVIEW
The following tables reflect the net sales, operating earnings and margins
of the Company by activity type for the years ended December 31, 1995, 1994
and 1993 and the six months ended June 30, 1996 and 1995.
NET SALES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------- --------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- ------------ ------------ ------------
NET % OF NET % OF NET % OF NET % OF NET % OF
SALES TOTAL SALES TOTAL SALES TOTAL SALES TOTAL SALES TOTAL
(MILLIONS) ------ ------ ------ ------ ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction............ $ 536 59 $ 545 65 $1,107 63 $1,144 65 $1,046 57
Repair and Overhaul..... 281 31 187 22 414 24 383 22 471 25
Engineering............. 86 9 97 11 202 11 204 12 225 12
Other................... 12 1 16 2 33 2 22 1 119 6
------ ----- ------ ----- ------ --- ------ --- ------ ---
Net sales............. $ 915 100 $ 845 100 $1,756 100 $1,753 100 $1,861 100
====== ===== ====== ===== ====== === ====== === ====== ===
</TABLE>
OPERATING EARNINGS AND MARGINS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------------- -----------------------------------------------------------
1996 1995 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING
EARNINGS MARGIN % EARNINGS MARGIN % EARNINGS MARGIN % EARNINGS MARGIN % EARNINGS MARGIN %
(MILLIONS) --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction....... $38 7 $64 12 $ 95 9 $181 16 $135 13
Repair and
Overhaul.......... 37 13 18 10 45 11 13 3 51 11
Engineering........ 5 6 6 6 13 6 11 5 8 4
Other.............. 1 N.M. 2 N.M. 4 N.M. (4) N.M. 16 N.M.
--- ---- --- ---- ---- ---- ---- ---- ---- ----
Operating earnings. $81 9 $90 11 $157 9 $201 11 $210 11
=== ==== === ==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
N.M.=Not meaningful
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
NET SALES
Construction. The $9 million decrease in construction revenues is due to the
delivery of the aircraft carrier Stennis in late 1995 which decreased revenues
by $161 million, the continued decline in Los Angeles-class submarine
production resulting in decreased revenues of $32 million and lower levels of
revenue on the Sealift conversions in 1996 which decreased revenues by $55
million. These decreases are partially offset by a $43 million increase due to
production on Double Eagle product tankers and an increase in revenue of $112
million and $79 million on the aircraft carriers Reagan and Truman,
respectively.
Repair and Overhaul. The $94 million increase in repair and overhaul
revenues relates primarily to the aircraft carrier Eisenhower in 1996. There
was minimal aircraft carrier overhaul work performed in the first half of 1995
as a result of the delivery of the Enterprise in 1994, with the Eisenhower not
arriving until mid-1995.
Engineering. Engineering revenues decreased by $11 million as a result of
less work on the Seawolf- and Los Angeles-class submarine design programs as
the production of those submarine classes nears an end.
Other. Other revenues decreased by $4 million primarily as a result of lower
industrial products revenue.
47
<PAGE>
OPERATING EARNINGS
Construction. The $26 million decrease in operating earnings and 5% decrease
in operating margin on construction work relates to (i) the delivery of the
Stennis in late 1995 which decreased earnings by $29 million, (ii) additional
costs of $18 million associated with the Sealift conversion contract that were
not recoverable from the U.S. Government, and (iii) $26 million higher than
expected costs associated with the production of commercial product tankers.
Decreases in operating earnings for the period are partially offset by (i)
increased activity and productivity improvements on the aircraft carriers
Reagan and Truman, resulting in $28 million of additional earnings, and (ii)
the recognition of certain change orders related to previously delivered
submarines.
Repair and Overhaul. The $19 million increase in operating earnings and 3%
increase in operating margin for repair and overhaul work is a result of $14
million in work performed on the Eisenhower in 1996 and increased margins on
submarine repair and overhaul work. See "--Net Sales--Repair and Overhaul"
above.
Engineering. The decline in operating earnings for engineering is primarily
the result of less activity related to the Seawolf- and Los Angeles-class
submarine design programs.
Other. Other operating earnings were not significant to either period
presented.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
NET SALES
Construction. The $37 million decrease in construction revenues in 1995 from
1994 is due to a $96 million decrease in submarine construction work as two of
the remaining four Los Angeles-class submarines were delivered during 1995.
The decrease in submarine work is partially offset by increased aircraft
carrier construction activity of $14 million as work on the Reagan replaced
construction of the Stennis which was delivered in the fourth quarter of 1995.
Additionally, work on the Truman continued during 1995 at a level consistent
with 1994. Increased construction activity on the Sealift conversion program
of $28 million and the commercial shipbuilding program also contributed to
offsetting the decrease in submarine construction work. The level of
construction activity on commercial work increased by $18 million during 1995
as the Company began work on the Double Eagle product tankers under contract.
Reference is made to "--Business Outlook" below for a discussion of
construction activity.
The $98 million increase in construction revenues in 1994 from 1993 is due
to several factors, some offsetting. First, there were increased production
efforts in the amount of $106 million on two aircraft carriers (Stennis and
Truman) for 1994 as the keel of the Truman was laid in November 1993. Second,
construction efforts on the Sealift conversions began late in 1993, doubling
in 1994 increasing revenues by $77 million. These increases were offset
primarily by decreased submarine construction work of $71 million with the
delivery of the USS Montpelier and USS Hampton in 1993, and the USS Charlotte
in 1994.
Repair and Overhaul. The $31 million increase in repair and overhaul
revenues in 1995 from 1994 relates primarily to the $32 million repair and
overhaul of the USS Thorn during 1995. There were additional increases of $29
million in other miscellaneous U.S. Navy repairs, partially offset by a $22
million reduction in work as the USS Independence cruise ship repair was
completed in 1994. Aircraft carrier overhauls and related post-shakedown
repairs remained stable with the completion of the overhaul work for the
Enterprise in 1994 replaced by the overhaul work on the Eisenhower in 1995.
The $88 million decrease in repair and overhaul revenues in 1994 from 1993 is
attributable to a decrease of $113 million in aircraft carrier overhaul work
on the Enterprise, partially offset by $22 million in repair work on the
Independence cruise ship in 1994.
Engineering. Engineering revenues declined $2 million in 1995 from 1994 due
primarily to less work on the Seawolf-class submarine design program.
Engineering revenues declined $21 million in 1994 from 1993 due primarily to
$32 million less work on the Seawolf-class submarine design, offset by the
initiation of engineering planning work related to the NSSN program.
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<PAGE>
Other. Other revenues increased $11 million in 1995 from 1994 as a result of
a variety of nonrecurring jobs for miscellaneous services. The decline in
other revenues in 1994 from 1993 is principally due to the revenues of
approximately $113 million from Sperry recorded prior to its sale in November
1993 (see "--Other--Divestiture" below), offset in part by other miscellaneous
items.
OPERATING EARNINGS
Construction. The $86 million decrease in operating earnings and 7% decrease
in operating margin on construction work in 1995 from 1994 relates to (i)
additional costs of $25 million incurred as a result of the Company's re-entry
into the highly competitive commercial shipbuilding market, (ii) $11 million
less in contributions from aircraft carrier work in 1995 as a result of
productivity gains realized and reflected in 1994, and (iii) additional costs
incurred on the Sealift conversion work which management expects to be
substantially complete in the first quarter of 1997.
The $46 million increase in operating earnings and 3% increase in operating
margin on construction work in 1994 from 1993 relates to productivity gains
realized and reflected in 1994, as well as an increase of $34 million in
overall aircraft carrier production, principally involving the Truman.
Additional gains in profitability were realized on submarine contracts
resulting from productivity gains on the Los Angeles-class program. The
productivity gains realized on both the aircraft carrier and submarine
programs reflect the decreasing operating risks as these programs mature or
near completion.
Repair and Overhaul. The $32 million increase in operating earnings and 8%
increase in operating margin for repair and overhaul work in 1995 from 1994 is
due primarily to $12 million of work performed on the USS Long Beach
deactivation in 1995 coupled with the fact the Company experienced additional
costs of $20 million on certain U.S. Navy and commercial repair jobs in 1994.
Operating earnings from carrier overhauls and related post-shakedown repairs
remained stable with the completion of the overhaul work for the Enterprise in
1994 replaced by the overhaul work on the Eisenhower during 1995. Repair and
overhaul operating earnings and operating margin decreased $38 million and 8%,
respectively, in 1994 from 1993, due primarily to a $14 million decrease in
the level of aircraft carrier overhaul work on the Enterprise and $20 million
of additional costs experienced on certain U.S. Naval and commercial repair
jobs during 1994.
Engineering. The operating earnings for engineering work have remained
relatively stable in all years presented with the exception of higher than
anticipated costs to design a propulsion plant trainer in 1993.
Other. The increase in other operating earnings in 1995 from 1994 is
primarily the result of lower expenses related to pensions and other employee
benefits not currently allocable to contracts, but which are expected to be
allocable once funded. The decrease in other operating earnings in 1994 from
1993 is primarily the result of the 1993 operating earnings of $6 million of
Sperry prior to its sale (see "--Other--Divestiture" below), a 1993 benefit of
$14 million from recovering a portion of previously recorded postretirement
benefit costs and higher 1994 expense related to pensions and other employee
benefits not currently allocable to contracts.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table reflects the summarized components of the Company's cash
flow for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------ -------------------
1996 1995 1995 1994 1993
-------- -------- ----- ----- -----
(MILLIONS)
<S> <C> <C> <C> <C> <C>
Net cash provided (used) by operating
activities........................... $ (1) $ (18) $ 63 $ 182 $ 215
Capital expenditures.................. (36) (29) (77) (29) (35)
Other investing cash flows............ (9) -- (10) -- 56
-------- -------- ----- ----- -----
Subtotal.............................. (46) (47) (24) 153 236
Cash transfers (to) from Tenneco...... 45 47 25 (154) (241)
-------- -------- ----- ----- -----
Net cash flow after transactions with
Tenneco.............................. $ (1) $ -- $ 1 $ (1) $ (5)
======== ======== ===== ===== =====
</TABLE>
OPERATING CASH FLOWS
The $119 million decrease in net cash flow from operating activities from
1994 to 1995 is due to several factors, including lower operating earnings,
increased levels of contracts in process and a higher level of payments to
Tenneco for federal and state income taxes. The lower operating earnings is
attributable to the factors discussed in "--Results of Operations for the
Years 1995, 1994, and 1993--Operating Earnings" above. The additional costs
accumulated in contracts in process is due principally to higher levels of
costs on the Sealift conversion work and commencement of the commercial
shipbuilding projects. The higher level of income tax payments to Tenneco
during 1995 is attributable to the Company paying its allocation of 1994
income taxes from Tenneco (see "--Income Taxes" below) during 1995. The
payment of a significant portion of taxes allocated to the Company from
Tenneco has historically occurred in the year subsequent to when such taxes
are incurred and billed. Thus, the higher level of 1994 current income taxes,
due to higher 1994 pretax earnings, is reflected as a 1995 cash outflow. The
higher level of current income tax liability included in "Accounts Payable to
Tenneco" at December 31, 1994, was the principal reason that the Company was
in a working capital deficit position at that date. However, during 1995, the
Company was able to pay the December 31, 1994 current tax liability and other
current liabilities with its cash flows from operations. In addition, the
Company was in a positive working capital position at June 30, 1996.
The $33 million decrease in net cash flow from operating activities from
1993 to 1994 is principally attributable to a lower level of operating
earnings, and offsetting amounts related to higher costs in contracts in
process and lower tax payments in 1994 compared to 1993. The higher unbilled
costs in contracts in process inventory was principally due to the continuing
progression of the Sealift conversion work, which began in late 1993, and the
repair work related to the Independence cruise ship, which began in 1994. The
low tax payments in 1994 compared to 1993 is attributable to a large state tax
payment made in 1993 to Tenneco and lower federal tax payments in 1994
compared to 1993.
The $17 million increase in comparative cash flows from operating activities
for the six month periods ended June 30, 1996 and 1995 is due to several
factors, some offsetting. These factors include less contracts in process
build-up and a lower level of payments to Tenneco, offset by increased levels
of accounts receivable and lower operating earnings. The lower contracts in
process build-up coupled with the increase of accounts receivable is
essentially offsetting and is a result of normal timing differences in the
submission of billings, as well as the settlement and billing of a request for
equitable adjustment in 1996. The lower level of payments to Tenneco in 1996
is due to the higher payments for taxes in 1995 as described above.
Significant changes in accounts receivable, inventory, trade accounts
payable and other accrued liabilities not described above relate to normal
timing differences in the billing cycle, receipt and use of inventory, and
receipt and payment of invoices.
50
<PAGE>
CAPITAL EXPENDITURES
Capital expenditures increased to $77 million in 1995 from $29 million in
1994 due to the initiation of a strategic capital improvement program. The
capital improvement program consists principally of three separate projects:
(i) the development of a state-of-the-art automated steel cutting and
fabrication facility; (ii) the extension of a dry dock facility; and (iii) the
construction of the Carrier Refueling Complex. The automated steel cutting and
fabrication facility should directly support the Company's goals of reducing
the manufacturing cycle time on ship construction projects and reducing the
production cost structure. Portions of this facility are currently functional
and the entire facility is expected to be fully functional in 1997. The
extension of the dry dock facility was completed in June 1996 and allows for
concurrent, multiple-ship construction within the same dry dock. This
improvement is expected to enable construction resources to be utilized on
multiple projects. Lastly, the Carrier Refueling Complex includes a cost-
efficient facility strategically located next to the dry docks used to
overhaul nuclear-powered ships. Management estimates that approximately $39
million and $20 million will be expended in 1996 and 1997, respectively, to
complete the three capital improvement projects which are currently in
process. The Company expects to fund its planned capital expenditures with
cash flows generated from its operations. The 1994 and 1993 capital
expenditures of $29 million and $35 million, respectively, consisted
principally of normal capital improvements and purchases required to maintain
the Company's facilities. Since 1993, the Company has invested approximately
$177 million in modernizing its facilities. The $7 million increase in capital
expenditures for the six month period ended June 30, 1996 compared to the six
month period ended June 30, 1995 is attributable to the ongoing capital
improvement program described above.
OTHER INVESTING CASH FLOWS
Other investing cash flow activities consisted of a $9.6 million investment
as partial payment towards the Company's 40% equity interest in the Abu Dhabi
Ship Building Company joint venture during 1995 (see
"--Business Outlook" below) and $56 million in cash proceeds of the total $61
million in cash proceeds from the sale of Sperry in 1993. See "--Other--
Divestiture" below. The 1996 investing activity relates to a $9 million
investment for a 49% ownership interest in a limited partnership. The Company
is obligated to complete its subscription for the 40% equity interest by
paying an additional $9.6 million to Abu Dhabi Ship Building Company on
December 17, 1996. It expects that this additional payment will be funded with
cash flow from operations in 1996.
NET CASH FLOW
The Company's excess net cash flows from operating and investing activities
have historically been used by its parent to meet other Tenneco obligations.
During 1995, the Company received, on a net basis, $25 million from its
parent, primarily to cover costs of the capital improvement program discussed
above. Management of the Company believes that cash flows from operations will
generally be sufficient to meet its future capital requirements. However,
depending on market and other conditions, the Company may also utilize
external sources of capital to meet specific funding requirements. See "--
Capital Requirements and Resources--Sources of Capital Subsequent to the
Shipbuilding Distribution."
CAPITAL REQUIREMENTS AND RESOURCES
Requirements and Commitments. The Company's Shipbuilding Business requires
that adequate working capital be available at all times. Since an appreciable
portion of the Company's work is "negotiated" or in the form of "extras," the
price of the work must be negotiated, sometimes over a long period of time.
During this period of negotiation, the expended funds are not available for
other current work. Further, while construction and conversion contracts
provide for progress payments, they generally require extensive investment in
work in progress principally because of contract progress payment retentions.
Retainages, generally due upon completion or acceptance of the contracted
work, amounted to $64 million as of June 30, 1996. If the Company is the
successful bidder for the first LPD-17 contract, in order to satisfy the terms
of the contract, it will be required to make capital investments to provide
for, among others, the enhancement of its computer-aided design capabilities
51
<PAGE>
and installation of sophisticated computer-based data systems, which are
necessary for completing the LPD-17, a substantial portion of which
expenditures are expected to be reimbursed by the Navy.
In addition, the Company estimates that expenditures aggregating
approximately $90 million will be required after December 31, 1995, to
complete facilities and projects authorized at such date, and substantial
commitments have been made in connection therewith. Based on current
conditions, the Company also believes it will be required to make significant
tax payments in 1998 upon completion of the Stennis-Truman aircraft carrier
contract with the delivery of the Truman, which payments could be as high as
$124 million.
Sources of Capital Subsequent to the Shipbuilding Distribution. To provide
for working capital needs, the Company intends to enter into a $215 million
six-year Revolving Credit Facility as part of the secured Senior Credit
Facility, of which $125 million may be used for advances and letters of credit
and $90 million may be used for standby letters of credit. The Company expects
to utilize the borrowings of $14 million under the Revolving Credit Facility
to pay certain fees and expenses incurred in connection with the Notes and the
Senior Credit Facility. See "Risk Factors--Substantial Leverage" and "The
Shipbuilding Distribution--Debt and Cash Realignment."
Management believes that capital requirements after the Shipbuilding
Distribution and as described above for overall operations, capital
expenditures, payment of dividends, taxes and debt service can be met by
existing cash, internally generated funds and the Revolving Credit Facility
described above.
DEBT AND INTEREST ALLOCATION
Corporate Debt and Interest Allocation
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and centrally manage
various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense has been allocated to the Company based on the
portion of Tenneco's investment in the Company which is deemed to be debt,
generally based upon the ratio of the Company's net assets to Tenneco
consolidated net assets plus debt. Interest expense was allocated at a rate
equivalent to the weighted-average cost of all corporate debt, which was 7.7%,
8.3% and 7.4% for 1995, 1994, and 1993, respectively. Total pre-tax interest
expense allocated to the Company in 1995, 1994 and 1993 was $28 million, $26
million and $34 million, respectively. The Company has also been allocated tax
benefits approximating 35% of the allocated pre-tax interest expense. Although
interest expense, and the related tax effects, have been allocated to the
Company for financial reporting on a historical basis, the Company has not
been billed for these amounts. The changes in allocated corporate debt and the
after-tax allocated interest have been included as a component of the
Company's combined equity. Although management believes that the historical
allocation of corporate debt and interest is reasonable, it is not necessarily
indicative of the Company's debt upon completion of the Debt Realignment nor
debt and interest that will be incurred by the Company as a separate public
entity. Further, management believes that the Company's interest rate and,
therefore, interest expense as a separate entity will be higher initially.
INCOME TAXES
The Company and Tenneco, together with certain of their respective
subsidiaries which are owned 80% or more, have historically entered into an
agreement to file a consolidated U.S. federal income tax return. Additionally,
the Company has historically filed consolidated income tax returns with other
Tenneco businesses for applicable state and foreign jurisdictions. The income
tax amounts reflected in the Combined Financial Statements under the
provisions of these tax sharing arrangements are not materially different from
the income taxes which would have been provided had the Company filed separate
tax returns. Income tax payments to Tenneco were higher in 1995 compared to
1994. See "--Liquidity and Capital Resources--Operating Cash Flows" above.
52
<PAGE>
The effective tax rate for 1995, 1994 and 1993 was approximately 44%, 44%
and 41%, respectively. The difference between the Company's effective tax rate
in all periods compared to the U.S. federal statutory rate of 35% is
principally due to state income taxes associated with ship deliveries.
In connection with the Distributions, the current tax sharing agreement will
be cancelled and the Company will enter into a new tax sharing agreement with
Tenneco, New Tenneco and El Paso. The new tax sharing agreement will provide,
among other things, for the allocation of taxes among the parties of tax
liabilities arising prior to, as a result of, and subsequent to the
Distributions. Generally, the Company will be liable for taxes imposed on the
Company and its affiliates engaged in the shipbuilding business. In the case
of federal income taxes imposed on the combined activities of the Tenneco
consolidated group, the Company and New Tenneco will be liable to Tenneco for
federal income taxes attributable to their activities, and each will be
allocated an agreed-upon share of estimated tax payments made by the Tenneco
consolidated group.
CHANGES IN ACCOUNTING PRINCIPLES
The Company adopted Statement of Financial Accounting Standards ("FAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in the first quarter of 1996. FAS No. 121
establishes new accounting standards for measuring the impairment of long-
lived assets. The adoption of this new standard did not have any impact on the
Company's combined financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued FAS No.
123, "Accounting for Stock-Based Compensation." This statement defines a fair
value based method of accounting for stock-based awards issued to employees
and others but also allows companies to choose to continue to measure
compensation cost for such plans as it is measured currently. The Company has
elected to continue to use the current method of accounting for stock-based
awards issued to employees. Consequently, FAS No. 123 will have no impact on
the Company's combined financial position or results of operations.
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual versus cash
basis of accounting. The Company recorded an after-tax charge of $4 million,
which was reported as a cumulative effect of change in accounting principle.
BACKLOG
The following table depicts the approximate firm backlog of the Company at
December 31, 1994 and 1995 and June 30, 1996, and the portion of the June 30,
1996 backlog which is anticipated to remain at December 31, 1996:
<TABLE>
<CAPTION>
(BILLIONS) ANTICIPATED DECEMBER 31,
---------- DECEMBER 31, JUNE 30, -------------
1996 1996 1995 1994
------------ -------- ------ ------
<S> <C> <C> <C> <C>
Construction.......................... $3.2 $3.6 $ 4.0 $ 5.2
Repair and Overhaul................... .1 .3 .3 .2
Engineering........................... .1 .2 .3 .2
---- ---- ------ ------
Total backlog....................... $3.4 $4.1 $ 4.6 $ 5.6
==== ==== ====== ======
</TABLE>
Backlog represents the total estimated remaining sales value of work under
contract. Because much of the Company's business consists of constructing
aircraft carriers, which historically have been purchased by the U.S. Navy
every four to six years, the Company's backlog has typically declined
following each carrier contract, and peaked again when the U.S. Navy orders a
new carrier. For example, the Company's backlog dropped well below $3 billion
in late 1994, then peaked at $5.6 billion with the signing of the CVN-76
(Reagan) contract later in that year. Backlog levels can change and U.S.
Government contracts can be unilaterally terminated at the
53
<PAGE>
convenience of the U.S. Government at any time with compensation for work
completed. See "Risk Factors--Reliance on Major Customer and Uncertainty of
Future Work."
More than 90% of the Company's backlog is U.S. Navy-related. The December
31, 1995 construction backlog included two Los Angeles-class submarines, two
Nimitz-class aircraft carriers (Truman and Reagan), the two ship Sealift
conversion contract, as well as contracts to construct four Double Eagle
product tankers. The majority of the June 30, 1996 backlog continued to be
U.S. Navy-related. Construction backlog at June 30, 1996 included one Los
Angeles-class submarine (Cheyenne), two Nimitz-class aircraft carriers (Truman
and Reagan), the two ship Sealift conversion contract and nine Double Eagle
product tankers. Repair and overhaul backlog at June 30, 1996 consisted of
overhauling the aircraft carrier Eisenhower, and repairs to several other
naval and commercial ships. The engineering backlog at June 30, 1996 was
consistent with that of December 31, 1995. The Company delivered its last Los
Angeles-class submarine in August, 1996. Although the Company was not awarded
construction contracts for the Seawolf-class submarine it was awarded the lead
design contract for the Seawolf submarine. Other engineering work is also
being performed related to the NSSNs and the next generation of aircraft
carrier ("CVX"). As of June 30, 1996, the Company had approximately $4.1
billion of backlog which is expected to run through 2002. See "--Business
Outlook" below.
BUSINESS OUTLOOK
The Company believes it is currently the only shipyard in the United States
capable of building nuclear-powered aircraft carriers. There are currently two
Nimitz-class carriers under construction which are scheduled to be delivered
in 1998 and 2002. Based on current U.S. Navy projections, the Company
anticipates the award in or before 2002 of a contract for the construction of
the last Nimitz-class aircraft carrier (CVN-77) for delivery in 2009. The
Company is currently performing design concept studies for the generation of
aircraft carriers to follow the Nimitz-class. The Company anticipates the
demand for a new carrier every four to six years; however, re-evaluation of
this need will continue by both the Department of Defense and the Congress.
See "Risk Factors--Reliance on Major Customer and Uncertainty of Future Work."
The final Los Angeles-class submarine was delivered on August 15, 1996. In
1987, the Company was awarded the lead design contract for the Seawolf
submarine. However, due to the end of the Cold War there was a dramatic
cutback in the Seawolf program (to three submarines), and the Company did not
construct any Seawolf submarines. Construction of the three Seawolf submarines
was awarded to Electric Boat, a competitor of the Company and wholly-owned
subsidiary of General Dynamics. More recently, directives from the U.S.
Congress call for the first four new nuclear attack submarines ("NSSNs," the
class of submarines following the Seawolf) to be equally allocated between the
Company and Electric Boat, with competition on subsequent NSSNs. The Company's
bid to be one of two suppliers for the U.S. Navy's $71 billion NSSN business
was affirmed during the first quarter of 1996 when legislation directing the
second NSSN to the Company became law. See "Risk Factors--Reliance on Major
Customer and Uncertainty of Future Work."
To broaden its base from nuclear-powered carriers and submarines, the
Company is currently marketing a number of new products and services to both
the U.S. and foreign governments and commercial customers. These products
include a new class of amphibious assault ships (LPD-17), surface combatant
ships like the "Arsenal Ship" and the Company's fast frigate (FF-21) and the
Double Eagle product tankers. Although the Company is currently pursuing
opportunities with respect to both LPD-17 and FF-21 sales, there can be no
assurance that the Company will be successful in these pursuits. See "Risk
Factors--Reliance on Major Customer and Uncertainty of Future Work." To better
position itself for international sales of these products, the Company
subscribed to purchase a 40% equity interest in the Abu Dhabi Ship Building
Company ("ADSB"), located in the United Arab Emirates in 1995. The Company is
obligated to complete its payment for its subscription in 1996. See
"--Liquidity and Capital Resources--Other Investing Cash Flows." ADSB is
currently renovating an existing shipyard and designing a new shipyard which
it plans to construct to replace the existing one. Each is intended to service
shipbuilding and repair demands of the United Arab Emirates military and
regional maritime fleets. The Company believes that its interest in ADSB will
provide the Company with a presence in the heavily navigated Persian Gulf. The
Company believes that its equity investment in ADSB may also serve as a means
54
<PAGE>
for the Company to satisfy offset obligations to the United Arab Emirates, if
any, arising from any contracts for sales of FF-21s or other ships it may be
able to secure. Typically, offset obligations, when applicable, require an
investment, capital expenditure, training commitment or other benefit for the
country making the purchase. Under the terms of the agreement relating to the
Company's investment, the Government of the Emirate of Abu Dhabi (the "Abu
Dhabi Government") will have an option to purchase the Company's interest upon
consummation of the Shipbuilding Distribution. The right of the Abu Dhabi
Government to exercise its purchase option in relation to a particular event
is deemed to be waived if not exercised within 90 days of the date the Abu
Dhabi Government becomes aware of such event. See "Business--Construction--
Foreign Military."
In 1994 and 1995, the Company entered into fixed price contracts (which
shift the risks of construction costs that exceed the contract price to the
Company) to construct four Double Eagle product tankers for affiliates of
Eletson Corporation ("Eletson") at a price of $36 million per ship.
Construction of the first tanker is substantially complete; construction has
begun on the second tanker; and a substantial portion of the materials needed
for the construction of the three uncompleted tankers has been ordered. The
Company presently estimates that these ships will be constructed over the
period ending in February, 1998. In connection with the construction of these
four tankers, the Company has incurred or estimates it will incur costs of
approximately $90 million in excess of the fixed contract prices. As of
September 30, 1996, the full amount of these excess costs has been reserved
for by a charge against income. Disagreements have arisen with the purchasers
during the course of construction as to whether the first and second ships
were and are being constructed in compliance with the specifications set forth
in the contracts, and the purchasers sent letters to the Company purporting to
invoke the procedures set forth in the contracts for resolution of this
situation and requested that the Company in the interim stop construction on
the ships. The Company saw no reason to stop construction on the ships because
of its confidence that the ships will be in compliance with all contract and
classification society requirements. The purchasers have withdrawn both their
invocation of the dispute resolution procedures under the contracts and their
request that the Company cease further construction of the ships. Discussions
between the Company and the purchasers to date have resulted in the resolution
of a significant number of these disagreements, although some remain
unresolved and are the subject of further discussions. No assurances can be
given as to the effect the resolution of these remaining disagreements will
have on the Company (although the Company does not believe such resolution
will materially and adversely affect it) or the extent to which the remaining
work on these contracts can be completed without further disagreements with
the purchasers or the incurrence of additional losses in excess of current
estimates, although the Company currently believes it can complete the four
ships within the current estimate of cost. See Note 13 to the Combined
Financial Statements of the Company.
In 1995, the Company entered into fixed price contracts with limited
liability companies ("HVO") comprised principally of Hvide Partners, L.P. and
an affiliate of Van Ommeren International BV to construct an additional five
Double Eagle product tankers having a somewhat different design for the
domestic Jones Act market at a current average price of $43.4 million per
ship. The Company is in the process of completing its design work on these
ships and expects to begin construction in the first half of 1997. These ships
are scheduled for delivery in 1998. The Company presently estimates that it
will break even on these ships on an aggregate basis, but there can be no
assurance that the costs incurred in constructing these ships will not exceed
the contract prices for them.
These double-hull tankers are intended to serve the market currently served
by single-hull product carriers whose retirement is mandated by the Oil
Pollution Act of 1990 ("OPA 90"). The OPA 90 requires, among other things,
that existing single-hull ships must be retired from domestic transportation
of petroleum products between 1995 and 2015 unless retrofitted with double
hulls.
Additional services being developed by the Company include the management
and operation of Department of Energy nuclear sites in the U.S. The Company
hopes to capitalize on its nearly four decades of experience in handling
nuclear materials and is teaming with other companies with complementary
experiences to bid on these site management contracts.
Management has undertaken a number of initiatives to reduce the overall cost
structure at the Company. These initiatives have included a 38% workforce
reduction (from approximately 29,000 employees in 1991 to 18,000 employees in
1996), overhead and other cost reductions, monetizing assets, the successful
negotiation of a labor agreement that stabilizes wages from February 1995
through April 4, 1999 and closing of several facilities. Management has also
made long-term investments in infrastructure and automation which are expected
55
<PAGE>
to impact favorably the future results of operations. In connection with these
initiatives, the Company delivered the aircraft carrier Stennis in November
1995, 7.5 months ahead of schedule and at a savings of over 1,000,000 man-
hours compared to the previously delivered aircraft carrier (despite
accommodating over 1,200 significant U.S. Navy ordered design improvements).
The remaining initiatives relate primarily to projects to reduce cycle times
for product development and ship delivery by reengineering key production and
design processes. Process innovation teams have been assigned to each key
process.
Management continues to reevaluate its strategy and consider additional
opportunities to enhance the value of the Company. The future results of
operations and financial position of the Company are dependent on several
factors including the allocation of defense budget funds to new ship
construction for the U.S. Navy, the successful award and completion of new
shipbuilding contracts from the U.S. Government, and the successful
diversification into the highly competitive commercial shipbuilding and
foreign military markets. Management believes that the Company is well
positioned to receive future U.S. Navy contract awards. However, there are no
guarantees as to the timing or level of future U.S. Navy contract awards to
the Company. Additionally, the level of profitability on such future contracts
will be dependent on the cost structure of the Company. The diversification of
the Company's business into the commercial market creates a heightened level
of risks and rewards. Thus, the future profitability of the proposed
commercial programs is subject to the successful management of such risks.
Additionally, there are no certainties as to the level of future commercial
business which will be secured by the Company.
The information included in this "Business Outlook" section is forward-
looking and involves risks and uncertainties that could significantly impact
expected results. The Company's outlook is based predominantly on its
interpretation of what it considers key economic and market assumptions, many
of which have already been discussed above. Factors that could cause actual
results to differ materially from current expectations include: changes in the
U.S. Navy's budgets; a reevaluation of ship requirements by the U.S. Navy; the
inability to successfully market and sell the new products and services
discussed; the award of contracts to the Company's competitors; the inability
to produce the new products or provide the new services at the costs
anticipated as a result of failure to meet productivity or learning curve
assumptions or increased cost of materials; or the inability to meet
production schedules and productivity improvement goals for contracts
currently being performed.
OTHER
GOVERNMENT CLAIMS AND INVESTIGATIONS
More than 90% of the Company's sales involve contracts entered into with the
U.S. Government. These contracts are subject to possible termination for the
convenience of the U.S. Government, to audit and to possible adjustments
affecting both cost-type and fixed price type contracts. Like many government
contractors, the Company has received audit reports which recommend that
certain contract prices be reduced, or costs allocated to government contracts
be disallowed, to comply with various government regulations. Some of these
audit reports involve substantial amounts. The Company has made adjustments to
its contract prices and the costs allocated to government contracts in those
cases in which it believes such adjustments are appropriate. In addition,
various governmental agencies may at any time be conducting various other
investigations or making specific inquiries concerning the Company. Management
is of the opinion that the ultimate resolution of these matters will not have
a material adverse effect on the Company's financial condition or results of
operations. In May 1996, the Company was subpoenaed by the Inspector General
of the Department of Defense as part of a joint inquiry conducted by the
Department of Defense, the Department of Justice, the U.S. Attorney's Office
for the Eastern District of Virginia and the Naval Criminal Investigation
Service. See "Risk Factors--Government Claims and Investigations," "Business--
Investigations and Legal Proceedings" and Note 13 of the Combined Financial
Statements.
REVENUE RECOGNITION
The Company reports profits on its long-term contracts using the percentage-
of-completion method of accounting, determined on the basis of total costs
incurred to date to estimated final total costs. Losses on
56
<PAGE>
contracts, including allocable general and administrative expenses, are
reported when first estimated. The performance of contracts usually extends
over several years, requiring periodic reviews and revisions of estimated
final contract prices and costs during the term of the contracts. The effect
of these revisions to estimates is included in earnings in the period the
revisions are made. Revenue arising from the claims process is neither
recognized as income nor as an offset against a potential loss until it can be
reliably estimated and its realization is probable.
SIGNIFICANT ESTIMATES
In 1994 and 1995, the Company entered into fixed price contracts with
Eletson and HVO to construct a total of nine of its Double Eagle product
tankers. The Company has recorded losses of approximately $90 million related
to its contracts with Eletson for four of these product tankers. The Company
presently estimates that it will break even on its contracts for the five
tankers from HVO. The Company believes it can complete construction of these
ships based on its current estimate of costs, but there can be no assurance
that the estimate of costs to be incurred will not be revised in the future.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Business Outlook."
Contracting with the U.S. Government can also result in the Company filing a
Request for Equitable Adjustment ("REA") in connection with a contract. REAs
represent claims against the U.S. Government for changes in the original
contract specifications and resulting delays and disruption in contract
performance. All major REAs filed by the Company in connection with its
contracts have been settled as of June 1996 for approximately the same amount
recorded previously by the Company. Through 1995, costs of $18 million had
been recognized on the Sealift REA in excess of the adjudicated REA price.
Cost growth of $36 million that was not recoverable through that REA has been
recognized in the first half of 1996. Due to uncertainties inherent in the
estimation process these contract completion costs could be increased in the
future by $0 to $10 million. The first of two Sealift ships was delivered in
August 1996. Management expects this contract to be substantially complete by
the end of the first quarter of 1997.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operating costs and expenses
as incurred. The amounts charged during the years ended December 31, 1995,
1994 and 1993 are $20 million, $14 million and $15 million, respectively.
Research and development costs for the six months ended June 30, 1996 were $20
million. Research and development costs for the year ending December 31, 1996
are expected to be between $40 million and $50 million. Under current
regulations, research and development costs can be passed through to the U.S.
Government as allowable overhead spread across all of the Company's contracts.
The actual amount of research and development costs allowed to pass through
the Navy contracts is reviewed annually. Research and development costs can
also be directly funded by the U.S. Government through specific contracts.
These contracts produce quantifiable deliverables for the U.S. Navy, for
example, certain research and development projects on aircraft carriers.
DIVESTITURE
During November 1993, the Company sold Sperry, which was part of its
Shipbuilding Business. Sperry was involved in the domestic and international
design and manufacture of advanced electronics for maritime and other
applications and contributed $113 million of net sales and $6 million of
operating earnings to the Company's 1993 results of operations. In accordance
with the sale agreement, the Company received $56 million of the total cash
proceeds of $61 million from the sale of Sperry. The remaining portion of the
cash proceeds was realized by other Tenneco entities. In addition to the cash
proceeds, the Company received $17 million in preferred stock of the
purchaser. A pre-tax gain on the total sale of $15 million was recognized by
the Company
57
<PAGE>
in 1993. An agreement was reached to sell the preferred stock of the purchaser
in late 1995 for $18 million. See Note 5 to the Combined Financial Statements.
UNION AGREEMENT
During 1995, the Company executed a collective bargaining agreement which
covers approximately 60% of its work force and 98% of its hourly employees.
The collective bargaining agreement is effective to April 1999, and generally
provides for static pay rates, promotion of multi-skilling, work teams, joint
cooperation on quality programs, a new managed health care program, reduction
in paid time off and contains "no strike, no lockout" provisions. This
agreement will assist the Company in managing its cost structure and
maintaining its skilled labor force.
ENVIRONMENTAL MATTERS
The Company is subject to stringent environmental laws and regulations in
all jurisdictions in which it operates. Management of the Company believes
that the Company is in substantial compliance with all applicable
environmental regulations, and the historical environmental compliance costs
incurred by the Company have not been significant. Although there can be no
certainties, management does not believe that any future environmental
compliance costs will have a material adverse effect on the Company's combined
financial position, results of operations or cash flows.
INFLATION
The Company's materials costs are impacted by inflation. However, the
majority of the Company's U.S. Government shipbuilding contracts allow
recovery of costs which are escalated due to inflation. Thus, the Company's
net exposure to inflation is minimal.
DEFENSE INDUSTRY OVERVIEW
The end of the Cold War has led to a reduction of the U.S. armed forces. As
a result, the federal defense budget for procurement has been reduced in real
terms by approximately 70% since 1985. The U.S. Navy budget has declined over
the same period of time. However, the Company believes that the U.S. Congress,
which has resisted additional defense budget cuts, and a continued uncertain
geopolitical environment will favor an end of the long decline in military
outlays. Additionally, President Clinton's 1996 Budget establishes the
following defense goals as the basis for recapitalizing the Department of
Defense budget: (i) projecting a presence overseas; (ii) maintaining an
acceptable level of training and readiness; (iii) ability to participate
effectively in two nearly simultaneous regional conflicts; and (iv) providing
a level of demand for equipment and services which will preserve the defense
industrial base.
A shift in military strategy has prompted the U.S. Navy to redefine its
role. Since the collapse of the former Soviet Union, there has been a dramatic
change in the primary global threat to the security of the U.S. As a result,
U.S. defense strategy, which was predicated on defending against a single
major threat, is evolving as well. A policy of protecting against a major
nuclear assault and securing containment of the Soviet Union is evolving to a
strategy requiring the need to address potential regional conflicts, perform
peacekeeping and aid activities in multiple unstable areas, and deter
international terrorism. This shift in U.S. military strategy, together with
the declining number of U.S. bases overseas, has prompted the Navy to
emphasize its role in projecting American military power from ship to shore.
In September 1992, the Navy released a new naval strategy entitled ". . . From
The Sea; Preparing the Naval Service for the 21st Century," Department of the
Navy, Washington, D.C., which stated that: (i) naval forces will be used in a
wide range of responses to crises around the globe; (ii) should the presence
of these forces fail to deter aggression, the Navy must be able to prevent the
U.S. from losing the conflict until the full combat power of the Army and Air
Force can arrive; and (iii) naval forces must also be able to conduct a full-
scale naval campaign in support of a land force.
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<PAGE>
AIRCRAFT CARRIERS
Aircraft carriers have played a major role in the Navy's strategy of
protecting U.S. global interests. From the early strikes in the Gulf War to the
recent American involvement in Bosnia, Haiti, Somalia, the China/Taiwan crisis
as well as to renewed Iraqi aggression, U.S. political and military leaders
have responded to overseas crises by deploying the nearest aircraft carrier.
Not only do aircraft carriers allow the naval forces to project military power
from the safety of the open ocean in times of war, but they also serve as
mobile naval bases that reassure allies and intimidate potential aggressors by
maintaining peacetime military presence in regions critically important to the
U.S.
The Navy currently plans to maintain a minimum of 12 aircraft carriers (down
from 15 in 1992) to respond quickly to overseas crises and command a credible
presence around the globe. The Company believes that even with 12 aircraft
carriers, the Navy is still prone to gaps in peacetime requirements and may not
be able to fulfill the need to confront two simultaneous major conflicts as
envisioned by President Clinton's 1996 Department of Defense budget. Admiral
Jay Johnson, the newly appointed Chief of Naval Operations, has publicly stated
his desire for 15 active carriers to ensure adequate on-station presence in
critical mission areas. As shown in the table below, the Navy currently
operates 12 carriers, seven of which are Nimitz-class carriers built by Newport
News.
CURRENT LIST OF AIRCRAFT CARRIERS
<TABLE>
<CAPTION>
LAUNCH COMMISSION
NUMBER NAME CLASS DATE DATE SHIPYARD
- ------ ---- ----- ------ ---------- --------
<S> <C> <C> <C> <C> <C>
CV-62................... Independence Forrestal 06/06/58 01/10/59 New York Naval Shipyard
CV-63................... Kitty Hawk Kitty Hawk 05/21/60 04/29/61 New York Shipbuilding
CV-64................... Constellation Kitty Hawk 10/08/60 10/27/61 New York Naval Shipyard
CVN-65.................. Enterprise Enterprise 09/24/60 11/25/61 Newport News Shipbuilding
CV-67................... John F. Kennedy JFK 05/27/67 09/07/68 Newport News Shipbuilding
CVN-68.................. Nimitz Nimitz 05/13/72 05/03/75 Newport News Shipbuilding
CVN-69.................. Dwight D. Eisenhower Nimitz 10/11/75 10/18/77 Newport News Shipbuilding
CVN-70.................. Carl Vinson Nimitz 03/15/80 03/18/82 Newport News Shipbuilding
CVN-71.................. Theodore Roosevelt Nimitz 10/27/84 10/25/86 Newport News Shipbuilding
CVN-72.................. Abraham Lincoln Nimitz 02/13/88 11/11/89 Newport News Shipbuilding
CVN-73.................. George Washington Nimitz 07/21/90 07/04/92 Newport News Shipbuilding
CVN-74.................. John C. Stennis Nimitz 11/13/93 12/09/95 Newport News Shipbuilding
CVN-75.................. Harry S Truman Nimitz 09/07/96 07/98 Newport News Shipbuilding
CVN-76.................. Ronald Reagan Nimitz 03/18/00 01/03 Newport News Shipbuilding
</TABLE>
- -------
Source: Jane's Fighting Ships 1996-1997, 98th Edition
At present, the Navy has contracted for two more Nimitz-class aircraft
carriers: the CVN-75 to be delivered in June 1998 and the CVN-76 to be
delivered in December 2002. The Navy also intends to build another Nimitz-class
aircraft carrier, the CVN-77. The Navy's plans to maintain a fleet of 12
carriers translates into an optimal building rate of one carrier every four to
six years to gradually replace the existing Nimitz-class carriers (each has
approximately a 50-year service life and refueling age of approximately 25
years). The Navy is currently planning a next-generation aircraft carrier
("CVX") to follow the nuclear-powered Nimitz-class, the first of which is
expected to begin production in 2006. Newport News is currently developing
concepts for this new class of aircraft carriers. See "Risk Factors--Reliance
on Major Customer and Uncertainty of Future Work."
59
<PAGE>
U.S. NAVY FUTURE CARRIER FLEET
LOGO
As shown in the chart above, there are 12 carriers in 1996 in the Navy's
fleet. These ships range from the newest, Stennis, to the oldest,
Independence. In the year 2000, the Independence will be retired and be
replaced by the Truman. Beyond 2000, the USS Kitty Hawk is scheduled to be
replaced by the Reagan; the USS Constellation by CVN-77; and the Enterprise by
CVX-78.
SUBMARINES
The collapse of the former Soviet Union Navy, with its several hundred
submarines, has dramatically reduced the underwater threat to U.S. and allied
vessels. Currently, most of the U.S. Navy's submarines are Los Angeles-class
vessels which were first commissioned in 1976, and will begin to reach the end
of their service lives starting in 2000. The Los Angeles-class is a high
speed, nuclear-powered fast attack submarine used to locate and destroy
hostile submarines and surface ships. Newport News is the lead design yard for
the Los Angeles-class and has built 28 out of a total of the 61 currently
active submarines in this class. This program reached the end of its
production run when the last submarine, Cheyenne, was completed by Newport
News in 1996.
In the 1980s, the Navy, with the Company as the lead design yard, developed
the Seawolf-class submarine to augment and ultimately replace the Los Angeles-
class. However, the Company did not build any Seawolf submarines. Seawolf's
high unit cost (roughly $2 billion), coupled with the end of the Cold War, led
to calls for a new type of submarine and a truncation of the Seawolf program
after three ships. Consequently, the Navy plans to develop the new nuclear
attack submarine ("NSSN"), a smaller, more cost-effective, nuclear-powered
submarine beginning in 1998. Congress has approved legislation to have Newport
News construct one NSSN beginning in late 1998 and another NSSN beginning in
late 2000. Two contracts were also designated for Electric Boat, a wholly-
owned subsidiary of General Dynamics. Beyond 2001, NSSN contract awards are
expected to be determined by competitive bidding. See "Risk Factors--Reliance
on Major Customer and Uncertainty of Future Work."
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<PAGE>
BUSINESS
COMPANY OVERVIEW
The Company is the largest non-government-owned shipyard in the United
States, as measured by each of net sales, size of facilities and number of
employees. Its primary business is the design, construction, repair, overhaul
and refueling of nuclear-powered aircraft carriers and submarines for the
United States Navy. The Company believes it currently is: (i) the only
shipyard capable of building the Navy's nuclear-powered aircraft carriers,
(ii) the only non-government-owned shipyard capable of refueling and
overhauling the Navy's nuclear-powered aircraft carriers, and (iii) one of
only two shipyards capable of building nuclear-powered submarines. Since its
inception in 1886, the Company has developed a preeminent reputation through
the construction of 264 naval ships and 542 commercial vessels. For the year
ended December 31, 1995 and the six months ended June 30, 1996, the Company
had net sales of $1,756 million and $915 million, respectively, and EBITDA (as
defined) of $227 million and $113 million, respectively. In addition, at June
30, 1996 the Company had $4.1 billion of estimated backlog.
Aircraft carrier and submarine construction contracts with the U.S. Navy
have generated the majority of the Company's net sales. Newport News has built
nine of the 12 active aircraft carriers in the U.S. fleet, including all eight
nuclear-powered aircraft carriers. For the last 35 years, Newport News has
been the sole designer and builder of the U.S. Navy's aircraft carriers.
Newport News currently holds contracts to build two nuclear-powered Nimitz-
class carriers, each representing approximately $2-3 billion in initial
contract revenue: the Truman, scheduled for delivery in 1998, and the Reagan,
scheduled for delivery in 2002. Based on current U.S. Navy projections, the
Company anticipates the award in or before 2002 of a contract for the
construction of the last Nimitz-class aircraft carrier for delivery in 2009.
Under contract to the Navy, Newport News is currently performing design
concept studies for the next generation of aircraft carriers. In addition,
Newport News, as one of only two manufacturers of nuclear-powered submarines,
has constructed 53 nuclear-powered submarines comprised of seven different
classes. Newport News has recently been designated by legislation to build two
of the first four of the next generation of the Navy's new nuclear attack
submarines ("NSSNs") commencing in late 1998.
The Company built all the active Nimitz-class aircraft carriers. The Company
also believes it currently is the only non-government-owned shipyard currently
capable of refueling nuclear-powered aircraft carriers. Puget Sound, a
government-owned shipyard, could refuel nuclear-powered carriers if it made
additional investments in its facilities, and Portsmouth Naval Shipyard, a
government-owned shipyard in Kittery, Maine, is presently involved in nuclear
refueling, overhauling and de-activating Los Angeles-class submarines. As a
result, the Company has had the leading share of the refueling and overhaul
market for aircraft carriers. A Nimitz-class aircraft carrier must be refueled
at approximately the midpoint of its estimated 50-year life. The Navy often
commissions a major overhaul of each carrier to coincide with a refueling. It
normally takes two years to complete a refueling and overhauling. Currently
the Company is overhauling the Eisenhower (an approximate $400 million
contract), and it holds planning contracts to overhaul the Roosevelt in 1997
and to refuel and overhaul the Nimitz beginning in 1998. The Company believes
that, if awarded, the contracts for the Roosevelt and the Nimitz will be for
approximately $230 million and approximately $1 billion, respectively. In
addition, the Navy has announced its schedule to begin the refueling of the
Eisenhower in 2001, the Vinson in 2006 and the Roosevelt in 2009 at an
estimated cost of approximately $1 billion each. Supported by its new Carrier
Refueling Complex, the Company believes it is well-positioned to be awarded
future refueling contracts.
Newport News' management is highly regarded in the defense and shipbuilding
industry and has been successful in creating a motivated and experienced
management team and enhancing its position as the premier U.S. shipyard. Led
by William P. Fricks, the Chief Executive Officer of Newport News, who has 30
years of experience, the Company's senior executives average 10 years of
shipbuilding experience. Newport News is a separate operating entity with its
own corporate headquarters, management team and separate financial reporting
systems. Management therefore expects an orderly transition to an independent,
publicly-traded company.
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<PAGE>
BUSINESS STRATEGY
To broaden and strengthen its competitive position, the Company has
developed strategies with the following key elements: (i) maintain a
leadership position in its core business; (ii) further reduce its cost
structure; (iii) continue to reduce cycle time; and (iv) broaden and expand
products and markets.
MAINTAIN A LEADERSHIP POSITION IN ITS CORE BUSINESS. Aircraft carriers and
submarines remain vital components of the Navy's strategy for protecting U.S.
global interests. The Navy has stated that it needs to maintain a minimum of
12 aircraft carriers to respond quickly to overseas crises and command a
credible presence around the world. As the aircraft carrier and submarine
fleets continue to age, the Company believes there will be a steady long-term
demand for new construction and refueling and overhauling services, which it
intends to aggressively pursue.
FURTHER REDUCE ITS COST STRUCTURE. In 1991, the Company embarked on a
program to reduce its cost structure and increase productivity in order to
remain a market leader in its core business as well as to facilitate entry
into related commercial markets. Management initiatives to reduce the overall
cost structure of the Company have included workforce reductions of 38% (from
approximately 29,000 employees in 1991 to approximately 18,000 employees in
1996), overhead and other cost reductions, the successful negotiation of a
long-term labor agreement that stabilizes wages through April 1999, and the
closing of certain facilities. As a second step in its cost reduction program,
Newport News has begun outsourcing low value-added production activities and
has been investing in programs to upgrade and automate its operations. Since
1993, the Company has spent $177 million on a variety of discretionary capital
programs designed to lower costs and improve efficiency. Recent and ongoing
expenditures include new computing technology ($85 million), an automated
steel factory ($71 million), the extension of a drydock to accommodate multi-
ship construction ($30 million), and the construction of the Carrier Refueling
Complex ($19 million).
CONTINUE TO REDUCE CYCLE TIME. The Company plans to continue to reduce the
cycle times for product development and ship delivery by re-engineering key
production processes, including design, production planning, materials
management, steel fabrication and outfitting. Process innovation teams have
been assigned to each key production process to implement this strategy. In
connection with these initiatives, the Company delivered the Stennis in
November 1995, 7.5 months ahead of schedule and at a savings of over 1,000,000
man-hours compared to the previously delivered aircraft carrier.
BROADEN AND EXPAND PRODUCTS AND MARKETS. The Company has begun to seek to
leverage its existing expertise by expanding its commercial and other
shipbuilding projects. The Company believes that this expansion effort should
create additional growth opportunities. In addition, by allowing for increased
economies of scale, the Company believes its expansion initiatives should help
it reduce per ship costs and thereby make it more competitive in its core U.S.
Navy business, which currently accounts for over 90% of the Company's net
sales. As part of this expansion effort, the Company secured long-term, fixed
price contracts with two purchasers for a total of nine "Double Eagle" product
tankers. The initial ships under contract are being built at a loss, for which
the Company has created a reserve. This new line of double-hulled product
tankers is designed to meet all of the stringent domestic and international
shipping specifications. Additionally, drawing on its nearly four decades of
safe fuel handling and reactor services for the U.S. Navy, the Company won a
contract from the Department of Energy in 1995 to construct a facility to
store damaged fuel from Three Mile Island. The Company is pursuing bids on
additional projects from the Department of Energy.
In order to further strengthen its position as a leading U.S. Navy
contractor, the Company is attempting to broaden its naval portfolio to
include non-nuclear ships by bidding with others in an alliance on the design
and construction of the LPD-17 non-nuclear amphibious assault ship. The
Company has also joined an alliance to develop design concepts for the Navy's
new "Arsenal Ship," a floating missile platform that utilizes a commercially
available double-hulled design, and pursue awards in the construction of such
ships. International
62
<PAGE>
military sales are also a key growth opportunity. The Company is pursuing
orders for several versions of its international frigate, the FF-21, from
foreign navies and is currently focusing on naval modernization programs
presently underway in the United Arab Emirates, the Philippines, Norway and
Kuwait.
GENERAL
Currently, the Company's business centers primarily on three areas involving
U.S. Naval and commercial ships: (i) construction; (ii) repair and overhaul;
and (iii) engineering and design. The Company also engages in certain other
related businesses. In 1993, the Company divested its maritime electronics
manufacturing business.
The following table sets forth information on the percentage of total net
sales contributed by the Company's various classes of products and services:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------------------
JUNE 30, 1996 1995 1994 1993
--------------- ------------ ------------ ------------
NET % OF NET % OF NET % OF NET % OF
SALES TOTAL SALES TOTAL SALES TOTAL SALES TOTAL
------- ------ ------ ----- ------ ----- ------ -----
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Construction............ $536 59 $1,107 63 $1,144 65 $1,046 57
Repair and Overhaul..... 281 31 414 24 383 22 471 25
Engineering and Design.. 86 9 202 11 204 12 225 12
Other................... 12 1 33 2 22 1 119 6
------- ------ ------ --- ------ --- ------ ---
Net sales............. $915 100 $1,756 100 $1,753 100 $1,861 100
======= ====== ====== === ====== === ====== ===
</TABLE>
CONSTRUCTION
The Company's primary activity is constructing ships, with approximately 63%
of net sales for the year ended December 31, 1995 and 59% of net sales for the
six months ended June 30, 1996 being generated from construction work. In
recent history, the Company has relied on major carrier and submarine
contracts with the U.S. Navy, but the Company's current objective is to
selectively add to its core business with contracts for other Naval segments
(e.g. LPD-17 and Arsenal Ship), and in the commercial and foreign military
markets.
The following chart shows the number of naval and commercial ships, and
other vessels built by the Company, including ships currently under
construction.
<TABLE>
<CAPTION>
PRE 1900- 1920- 1940- 1960- 1980-
1900 1919 1939 1959 1979 1996 TOTAL
---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. NAVY SHIPS:
Aircraft Carriers................... -- -- 3 14 3 9 29
Submarines.......................... -- 8 -- -- 29 24 61
Amphibious Cargo; Attack Cargo;
Amphibious Flagship; Ammunition.... -- -- -- 53 5 -- 58
Battleships......................... -- 11 2 1 -- -- 14
Cruisers............................ -- 5 4 9 5 1 24
Destroyers.......................... -- 17 14 -- -- -- 31
Miscellaneous; including Coast Guard
Cutters, Landing Ships (Dock) and
Landing Ships (Tank)............... 3 10 1 31 2 -- 47
--- --- --- --- --- --- ---
Total U.S. Navy Ships............... 3 51 24 108 44 34 264
--- --- --- --- --- --- ---
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
PRE 1900- 1920- 1940- 1960- 1980-
1900 1919 1939 1959 1979 1996 TOTAL
---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL SHIPS:
Cargo Vessels....................... 8 35 4 13 14 -- 74
Freighters.......................... -- -- -- 190 -- -- 190
Passenger Liners.................... 2 17 33 11 -- -- 63
Tankers............................. -- 22 11 42 11 4 90
Miscellaneous, including Dredges,
Ferry Boats, Steamers, (Bay and
River), Tugs and Yachts............ 8 20 22 2 -- -- 52
--- --- --- --- --- --- ---
Total Commercial Ships.............. 18 94 70 258 25 4 469
--- --- --- --- --- --- ---
OTHER VESSELS (Barges, Caissons, Car
Floats, Pilot Boats)................. -- -- -- -- -- -- 73
--- --- --- --- --- --- ---
TOTAL U.S. NAVY, COMMERCIAL AND OTHER
SHIPS................................ 21 145 94 366 69 38 806
=== === === === === === ===
</TABLE>
U.S. Navy
The Company believes it currently is the only manufacturer in the U.S.
capable of constructing nuclear-powered aircraft carriers. Currently, the
Company is constructing two Nimitz-class nuclear-powered aircraft carriers,
the Truman and the Reagan, which are scheduled for delivery in 1998 and 2002,
respectively. A contract for an additional Nimitz-class aircraft carrier is
currently anticipated to be awarded in or before 2002. The first ship in a new
class of aircraft carrier, the CVX-78, is anticipated to be awarded in 2006.
Because of its past experience in manufacturing aircraft carriers, and the
lack of direct competitors, the Company believes it is in a strong competitive
position to be awarded these contracts, although no assurances can be made
that it will be awarded these contracts, that these projects will not be
delayed, or that these contracts will be funded by Congress.
The Company is also one of two producers of nuclear-powered submarines.
Currently, the only other competitor is Electric Boat, a wholly-owned
subsidiary of General Dynamics. The Company delivered its last Los Angeles-
class submarine on August 15, 1996. In 1987, the Company was awarded the lead
design contract for the Seawolf submarine. However, due to the end of the Cold
War, there was a dramatic cutback in the Seawolf program to three submarines
which are being constructed by Electric Boat. More recently the Company was
designated by legislation to build two of the next generation of attack
submarines known as the new nuclear attack submarines or NSSN program. The
Company anticipates that it will construct the second and the fourth NSSN
submarines, and that Electric Boat will construct the first and third NSSN
submarines. After the fourth NSSN submarine, the Company and Electric Boat are
expected to compete against each other for additional NSSN construction
contracts by competitive bidding. The Company has constructed 53 nuclear-
powered submarines, including 39 attack submarines and 14 of the larger, fleet
ballistic missile submarines.
The Company has formed an alliance with Ingalls Shipbuilding (the prime
contractor), Lockheed Martin and National Steel to submit a bid for the LPD-17
program. The LPD-17 is a program for the design and construction of non-
nuclear amphibious assault ships. According to current U.S. Navy estimates,
twelve ships are expected to be built in the LPD-17 program. The U.S. Navy has
stated that it currently expects that the LPD-17 vessels will be a mainstay of
the U.S. Navy over the next two decades, replacing a number of vessels nearing
the end of their useful lives. The Company (with its alliance) submitted its
bid for the LPD-17 program on June 28, 1996. The contract for the LPD-17
program is expected to be awarded prior to the end of 1996. Competing firms
have also formed an alliance and submitted a bid.
An alliance consisting of the Company, Ingalls Shipbuilding and Lockheed
Martin, was recently awarded a contract to develop design concepts for the
Arsenal Ship. The Company's alliance was one of five alliances to receive such
an award. Current U.S. Navy plans call for a downselect to two alliances
following evaluation of submitted concepts. Ultimately, one alliance is
expected to prevail in the award of a construction contract.
The Company is also completing conversion of two container ships to "roll-
on, roll-off" heavy armored vehicle Sealift transportation ships for the U.S.
Navy. The first ship was delivered in August 1996 and the second ship is
scheduled to be delivered in March 1997.
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Commercial
As part of its expansion strategy, the Company has also been pursuing orders
for products and services from commercial customers.
In 1994 and 1995, the Company entered into fixed price contracts (which
shift the risks of construction costs that exceed the contract price to the
Company) to construct four Double Eagle product tankers for affiliates of
Eletson at a price of $36 million per ship. Construction of the first tanker
is substantially complete; construction has begun on the second tanker; and a
substantial portion of the materials needed for the construction of the three
uncompleted tankers has been ordered. The Company presently estimates that
these ships will be constructed over the period ending in February, 1998. In
connection with the construction of these four tankers, the Company has
incurred or estimates it will incur costs of approximately $90 million in
excess of the fixed contract prices. As of September 30, 1996, the full amount
of these excess costs has been reserved for by a charge against income.
Disagreements have arisen with the purchasers during the course of
construction as to whether the first and second ships were and are being
constructed in compliance with the specifications set forth in the contracts,
and the purchasers sent letters to the Company purporting to invoke the
procedures set forth in the contracts for resolution of this situation and
requested that the Company in the interim stop construction on the ships. The
Company saw no reason to stop construction on the ships because of its
confidence that the ships will be in compliance with all contract and
classification society requirements. The purchasers have withdrawn both their
invocation of the dispute resolution procedures under the contracts and their
request that the Company cease further construction of the ships. Discussions
between the Company and the purchasers to date have resulted in the resolution
of a significant number of these disagreements, although some remain
unresolved and are the subject of further discussions. No assurances can be
given as to the effect the resolution of these remaining disagreements will
have on the Company (although the Company does not believe such resolution
will materially and adversely affect it) or the extent to which the remaining
work on these contracts can be completed without further disagreements with
the purchasers or the incurrence of additional losses in excess of current
estimates, although the Company currently believes it can complete the four
ships within the current estimate of cost. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Business Outlook"
and Note 13 to the Combined Financial Statements of the Company.
In 1995, the Company entered into fixed price contracts with HVO to
construct an additional five Double Eagle product tankers having a somewhat
different design for the domestic Jones Act market at a current average price
of $43.4 million per ship. The Company is in the process of completing its
design work on these ships and expects to begin construction in the first half
of 1997. These ships are scheduled for delivery in 1998. The Company presently
estimates that it will break even on these ships on an aggregate basis, but
there can be no assurance that the costs incurred in constructing these ships
will not exceed the contract prices for them.
These double-hull tankers are intended to serve the market currently served
by single-hull product carriers whose retirement is mandated by the OPA 90.
The OPA 90 requires, among other things, that existing single-hull ships must
be retired from domestic transportation of petroleum products between 1995 and
2015 unless retrofitted with double hulls.
On October 8, 1996, the President signed into law, H.R. 1350--the Maritime
Security Act of 1996 (the "Maritime Act"), amending Title XI of the Merchant
Marine Act, 1936. The Maritime Act, among other things, (i) authorizes a $1
billion, 50-ship ten-year subsidy program for ship owners who agree to make
their ships available to the Department of Defense during national
emergencies, (ii) gives the U.S. Maritime Administration greater flexibility
in assigning risk factors to guaranteed loans and (iii) modifies several
aspects of the assessment and payment of loan guarantee fees. The primary
purpose of this Act is to assist ship operators and U.S. seamen, but the
legislation also has provisions which can indirectly assist U.S. shipbuilders.
The effect of these legislative changes is uncertain, but generally more
Title XI loan guarantee authority should be available (assuming Title XI funds
continue to be appropriated), on a facilitated basis, for potential purchasers
of U.S.-built ships. It is
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unclear whether any of the new ships would be purchased from the Company, and
further whether the Company would be in a position to build any such ships at
a significant profit. Accordingly, at this time the Company is unable to
determine that it reasonably expects this development to have a material
impact on its business.
Although the commercial market is growing, a current overcapacity of
suppliers has favored buyers and hindered the profitability of shipyards.
Additionally, overseas firms control almost all of the international
commercial shipbuilding market. Many of the Company's global competitors enjoy
government and/or corporate subsidies. The Company is exploring various
possibilities to penetrate this market; however, there can be no assurance
that the Company's efforts in this market will be successful. See "Risk
Factors--Competition and Regulation."
Foreign Military
Several U.S. allies overseas have or plan to embark on navy modernization
programs. Most of these programs anticipate the purchase of one or more
frigate size ships. The Company has developed a flexible, multi-mission design
frigate called the FF-21 and has submitted bids for the construction of these
ships to the United Arab Emirates and Kuwait, and is in the process of
developing bids for Norway and the Philippines. A number of international
companies compete for these sales, and this market would represent a new
market for the Company. To better position itself for the United Arab Emirates
market, the Company subscribed to purchase a 40% interest in the Abu Dhabi
Ship Building Company ("ADSB") in 1995. ADSB is currently renovating an
existing shipyard and designing a new shipyard which it plans to construct to
replace the existing one. Each is to service shipbuilding and repair demands
of the United Arab Emirates military and regional maritime fleets. The Company
believes that its equity investment in ADSB may also serve as a means for the
Company to satisfy offset obligations to the United Arab Emirates, if any,
arising from contracts for sales of FF-21s or other ships. Typically, offset
obligations, when applicable, require an investment, capital expenditure,
training commitment or other benefit for the country making the purchase. The
Company is obligated to make an additional payment of $9.6 million with
respect to its 40% equity interest in ADSB on December 17, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Other Investing Cash Flows." If
there is a change in control of Newport News, the Abu Dhabi Government has the
right to require the Company to sell all of its shares to the Abu Dhabi
Government or such other person(s) as the Abu Dhabi Government may nominate at
a price determined as set forth in the Founder's Agreement relating to the
Company's investment in ADSB (the "Founder's Agreement"). The right of the Abu
Dhabi Government to exercise its purchase option in relation to a particular
event is deemed to be waived if not exercised within 90 days of the date the
Abu Dhabi Government becomes aware of such event. The Shipbuilding
Distribution will cause a change in control of Newport News under the
Founder's Agreement. The Founder's Agreement reflects the oral agreement of
these matters between the parties thereto but has not yet been executed.
REPAIR AND OVERHAULS
U.S. Navy Nuclear Refueling, Overhaul and Conversion
The Company provides ongoing maintenance for the U.S. Navy's vessels through
overhauling, refueling and
repair work. The Company possesses unique expertise in servicing nuclear naval
systems, and believes it currently is the only non-government-owned shipyard
capable of refueling nuclear-powered aircraft carriers. Puget Sound, a
government-owned shipyard, could refuel nuclear-powered carriers if it made
additional investments in its facilities, and Portsmouth Naval Shipyard, a
government-owned shipyard in Kittery, Maine, is presently involved in nuclear
refueling, overhauling and de-activating Los Angeles-class submarines. As a
result, the Company has had a leading share of the market in aircraft carrier
refueling and overhauls.
Since aircraft carrier work is generally assigned by the U.S. Navy based on
the type of work, location and cost, the Company intends to maintain its
leadership in this area of business by, among other things, positioning the
Company as a low-cost refueling center, and providing unique competencies such
as nuclear fuel handling. The Company completed the overhaul work for the
Enterprise in 1994, and is currently overhauling the Eisenhower. The Company
also completes "Post Shake-Down Availabilities" on submarines. This process
involves making repairs and performing maintenance after sea trials of the
completed submarine.
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Naval Non-Nuclear Surface Ship Repair
The Company was able to diversify its overhaul work by winning its first
contract to overhaul a guided missile cruiser, the Thorn. In 1995, the Company
experienced a $31 million increase from 1994 in repair and overhaul revenues
as a result of the repair and overhaul of the Thorn, together with increases
in other miscellaneous U.S. Navy repairs. Subsequently, it overhauled its
first Aegis radar-equipped ship, the USS Monterey. The Company has a number of
competitors bidding for a substantial share of U.S. Navy non-nuclear repair
and overhaul contracts, such as Norfolk Shipbuilding and Dry Dock Corporation
and Metro Machine.
Commercial Vessels
From February, 1992 through December, 1995, the Company completed over 100
ship repair or overhauls of commercial vessels. The Company believes that the
world's commercial fleet, on average, is approximately 15 years old; repair of
this fleet is undertaken on an ongoing basis. Furthermore, the Company expects
seaborne trade to exhibit steady growth over the next 10 years in all major
segments--oil, dry cargo and general cargo. While some customers are primarily
concerned with price, other customers also give substantial weight to other
factors such as geographic location, dock availability, manpower supply and
the amount of time spent in dock. The Company believes it has successfully
differentiated itself from its competitors as a premium quality repair
shipyard, with specialized facilities and an extensive workforce. The Company
also believes that by engaging in the commercial ship repair market, it should
be able to transfer its experience to new construction of commercial vessels,
as well as to its core U.S. Navy business.
ENGINEERING AND DESIGN
The Company provides engineering planning and design services to both U.S.
Government and commercial customers. The Company maintains a stable level of
funded engineering support for the U.S. Navy. Support services provided by the
Company include new aircraft carrier research and development, aircraft
carrier non-nuclear overhaul planning, the reactor plant planning yard,
aircraft carrier engineering support, and training and logistics. The Company
is a leader in aircraft carrier design, accounting for the majority of ship
integration and related design development for the Naval Sea Systems Command
("NAVSEA"). The Navy's Puget Sound and Norfolk Naval Shipyards, however, are
typically assigned the design contracts for the non-nuclear portions of the
aircraft carriers. The Company has been able to apply its engineering
capabilities in a variety of projects for the U.S. Navy, including being the
lead design yard for the Los Angeles and Seawolf-class submarines. See "Risk
Factors--Competition and Regulation."
The Company also employs its engineering capabilities to successfully secure
and complete commercial and frigate construction contracts. In this respect,
the Company is developing generic class designs and plans to minimize new
product costs, dramatically reduce cycle times for design and production, and
develop commercial ship engineering expertise through selective international
recruiting and strategic alliances.
OTHER
As part of its expansion strategy, the Company also intends to actively
pursue opportunities in the management and operation of U.S. Department of
Energy nuclear sites. The Company believes that, among other things, its
ability to effectively conduct radiological control operations and manage
large integrated sites, its world-class health, safety and environmental
practices, and its experienced personnel in the areas of Spent Nuclear Energy
("SNE") would provide for a strong foundation in pursuing such opportunities.
The Company is also forming alliances with other companies with complementary
experiences to bid on some of these site management contracts.
MATERIALS AND SUPPLIES
The principal materials used by the Company in its shipbuilding, conversion
and repair business are standard steel shapes, steel plate and paint. Other
materials used in large quantities include aluminum, copper-nickel and steel
pipe, electrical cable and fittings. The Company also purchases component
parts such as propulsion systems, boilers, generators and other equipment. All
of these materials and parts are currently available in adequate supply from
domestic and foreign sources. Generally, for all its long-term contracts, the
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Company obtains price quotations for its materials requirements from multiple
suppliers to ensure competitive pricing. In addition, through the cost
escalation provisions contained in its U.S. Government contracts, the Company
is generally protected from increases in its materials costs to the extent
that the increases in the Company's costs are in line with industry indices.
In connection with its government contracts, the Company is required to
procure certain materials and component parts from supply sources approved by
the U.S. Government. The Company has not generally been dependent upon any one
supply source; however, due largely to the consolidation of the defense
industry, there are currently several components for which there is only one
supplier. The Company believes that these sole source suppliers as well as its
overall supplier base are adequate to meet its future needs.
HEALTH, SAFETY AND ENVIRONMENTAL
In 1995, the Company became the only shipyard to be awarded the Star Award
from the Occupational Safety and Health Administration's Voluntary Protection
Program. To earn this award, the Company and its unions joined efforts and
supported the participation in the Voluntary Protection Program in which all
parties help each other to make the Company's shipyard a safer place to work.
The Company is the only shipyard and the largest single site (of any type) in
the United States to earn the Star Award; the next largest facility to earn
this award was approximately one-half the size of the Company.
The Company has also been recognized by its Local Sanitation District
(Hampton Roads Sanitation District) as a Gold Award Winner for its management
of wastes going to the local water treatment system.
The Company is subject to stringent environmental laws and regulations in
all jurisdictions in which it operates. Management of the Company believes
that the Company is in general compliance with all applicable environmental
regulations, and historical environmental compliance costs incurred by the
Company have not been significant. Like all of its competitor shipbuilders,
the Company will be required to upgrade its air emission control facilities
pursuant to recently drafted regulations under the Clean Air Act Amendments of
1990. These regulations call for a phased-in compliance program so that the
Company will incur its expenditures during the years from 1997 through 2000.
The Company's preliminary estimate of the cost of these upgrades is between
$10 million and $15 million. Although there can be no certainties, management
does not believe that future environmental compliance costs for the Company
will have a material adverse effect on the Company's financial condition or
results of operations. The Nuclear Regulatory Commission, the Department of
Energy and the Department of Defense regulate and control various matters
relating to nuclear materials handled by the Company. Subject to certain
requirements and limitations, the Company's government contracts generally
provide for indemnity by the U.S. Government for any loss arising out of or
resulting from certain nuclear risks.
PROPERTIES
The Company's facilities are located in Newport News, Virginia on
approximately 550 acres owned by the Company at the mouth of the James River,
which is part of Chesapeake Bay, the premier deep water harbor on the east
coast of the United States. The Company's shipyard is one of the most
technically advanced in the world. Its facilities include seven graving docks,
a floating dry dock, two outfitting berths and five outfitting piers. Dry Dock
12 is the largest in the Western Hemisphere, and has recently been extended to
662 meters. Dry Dock 12 is serviced by a 900 metric ton capacity gantry crane
that spans the dry dock and work platen.
The Company's shipyard also has a wide variety of other facilities including
an 11-acre all weather on-site steel fabrication shop, accessible by both rail
and transporter, a module outfitting facility which enables the Company to
assemble a ship's basic structural modules indoors and on land, machine shops
totaling 300,000 square feet, and its own school which provides a four-year
accredited apprenticeship program that trains shipbuilders.
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The Company believes that substantially all of its plants and equipment are,
in general, well maintained and in good operating condition. They are
considered adequate for present needs and, as supplemented by planned
construction, are expected to remain adequate for the near future. The
Company's shipbuilding facilities were originally built on dredged fill
material beginning at the southern end of the site. Over the last 100 years,
the facilities expanded northward by sequential filling. A large portion of
the fill material consists of waste generated on-site by shipbuilding
activities.
INVESTIGATIONS AND LEGAL PROCEEDINGS
Retirement Plan
Tenneco and the Company have received letters from the Defense Contract
Audit Agency (the "DCAA"), inquiring about certain aspects of the
Distributions, including the disposition of the Tenneco Inc. Retirement Plan
(the "TRP"), which covers salaried employees of the Company and other Tenneco
divisions. The DCAA has been advised that (i) the TRP will retain the
liability for all benefits accrued by the Company's employees through the
Distribution Date, (ii) the Company's employees will not accrue additional
benefits under the TRP after the Distribution Date and (iii) no liabilities or
assets of the TRP will be transferred from the TRP to any plan maintained by
the Company. A determination of the ratio of assets to liabilities of the TRP
attributable to the Company will be based on facts, assumptions and legal
issues which are complicated and uncertain; however, it is likely that the
Government will assert a claim against the Company with respect to the amount,
if any, by which the assets of the TRP attributable to the Company's employees
are alleged to exceed the liabilities. New Tenneco, with the full cooperation
of the Company, will defend against any claim by the Government, and in the
event there is a determination that an amount is due to the Government, New
Tenneco and the Company will share its obligation for such amount plus the
amount of related defense expenses, in the ratio of 80% and 20%, respectively.
Pending a final determination of any such claim, the Government may, absent an
agreement with the Company to defer the payment of the amounts claimed,
withhold all or a portion of all future progress payments due the Company
under its government contracts until it has recovered its alleged share of the
claimed amount plus interest. In the event of a claim by the Government, the
Company will diligently seek a deferral agreement with the Government;
however, there can be no assurance that the Company will be able to arrange
such an agreement and thus avoid an offset against future progress payments
pending a final determination. At this preliminary stage, it is impossible to
predict with certainty any eventual outcome regarding this matter; however,
the Company does not believe that this matter will have a material adverse
effect on its financial condition or results of operations.
CVN-76 Cost and Pricing Data Submission
In March 1995, the DCAA informed the Company that it would conduct a post-
award audit of the contract to build the aircraft carrier Reagan (CVN-76),
pursuant to federal regulations relating to defective cost and pricing data.
The audit concerns the Company's submission to the U.S. Navy of data relating
to labor and overhead costs in connection with the proposals and negotiations
relating to the CVN-76 contract. The audit is ongoing and the DCAA has not
issued its audit report. In informal discussions with DCAA auditors, however,
the DCAA auditors indicated that the $2.5 billion CVN-76 contract price should
be reduced by approximately $122 million based on an alleged submission of
defective cost and pricing data.
In addition, in May 1996, the Company received a subpoena from the Inspector
General of the Department of Defense requesting documents in connection with a
joint inquiry being conducted by the Department of Defense, the Department of
Justice, the U.S. Attorney's Office for the Eastern District of Virginia, and
the Naval Criminal Investigative Service. Like the DCAA audit, the
investigation appears to focus on whether data relating to labor and overhead
costs that the Company supplied in connection with the proposals and
negotiations relating to the CVN-76 contract were current, accurate, and
complete. In 1995, Inspector General subpoenas were also served on at least
two of the Company's consultants. The Company believes that these subpoenas
are part of this same inquiry.
The Government has not asserted any formal claims against the Company
relating to these CVN-76 contract matters. Based on the Company's present
understanding of the focus of the inquiries, it is the Company's opinion that
it has substantial defenses to claims that the Government might potentially
assert that the Company
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submitted cost or pricing data relating to its labor and overhead costs that
were not current, accurate, and complete in its proposals or during the
negotiations for the CVN-76 contract. It is the Company's intention to
vigorously assert these defenses in the event that the Government should
assert such claims. Based on the Company's present understanding of the claims
the Government might assert concerning the CVN-76 contract, the Company is of
the opinion that the ultimate resolution of such claims will not have a
material adverse effect on the financial condition or results of operations of
the Company.
However, the early stage of the investigation and audit relating to the CVN-
76 contract, and the uncertainties and vagaries attendant to such
investigations and audits and any litigation which may ultimately arise with
respect to these potential claims make it impossible to predict with certainty
any eventual outcome. Construction of the Reagan (CVN-76) is scheduled for
completion in 2002 and the contract represents a substantial portion of the
Company's current backlog of business. Depending on the outcome of the audit
and investigation, the Company could be subject, under various civil and
criminal statutes, to a reduction to the CVN-76 contract price and to fines
and other penalties, including the suspension or debarment from government
contracting work. Any of these in substantial amounts could have a material
adverse effect on the Company's financial condition and results of operations.
Pending the ultimate resolution of the investigation and audit relating to
the CVN-76 contract and to reduce the consequences of an adverse outcome, the
Company has taken steps to adjust its future progress billings on the CVN-76
contract. Although these steps will reduce the Company's cash flow pending a
final resolution, management believes these steps will not have a material
adverse effect on the Company's financial condition or results of operations.
See "Risk Factors--Profit Recognition; Government Contracting."
Other
As a general practice within the defense industry, the DCAA continually
reviews the cost accounting practices of government contractors. In the course
of those reviews, cost accounting issues are identified, discussed and
settled, or resolved through legal proceedings. In addition, various
government agencies may at any time be conducting various other investigations
or making specific inquiries. The Company is currently engaged in discussions
on several cost accounting and other matters in addition to those described
above. The Company is also a party to numerous other legal proceedings
relating to its business and operations. The Company believes that the outcome
of these cost accounting or other matters and proceedings will not have a
material adverse effect on the Company's financial condition or results of
operations.
Additionally, the Kirby Corporation ("Kirby"), an owner and operator of
several tankers with which the Company's Hvide Van Ommeren tankers (the "Van
Ommeren Tankers") will compete, has instituted three legal proceedings
effectively seeking to have construction of the Van Ommeren Tankers stopped
(the "Kirby Proceedings"). The Company is not a party to the Kirby
Proceedings. The first Kirby Proceeding, brought in the United States District
Court for the District of Columbia, was voluntarily dismissed. Kirby
Corporation v. The Honorable Frederico Pena (No. CA 96-0019). The other two
Kirby Proceedings have been consolidated and are currently pending in the
United States Court of Appeals for the Fifth Circuit. Kirby Corporation v. The
Honorable Frederico F. Pena, et al. (No. 96-20582); Kirby Corporation v. The
United States of America, et al. (No. 96-60154). Kirby alleges that the U.S.
Maritime Administration acted unlawfully in guaranteeing, pursuant to Title XI
of the Merchant Marine Act, 1936, as amended ("Title XI"), the $215 million of
ship financing bonds issued to finance the construction of the Van Ommeren
Tankers. Kirby asserts that the U.S. Maritime Administration erroneously
determined that the project is economically sound and that the entities that
will own the vessels are U.S. citizens qualified to operate the vessels in the
coastwide trade. Certain of the entities that will own the vessels have
intervened in the Kirby Proceedings to support the U.S. Department of Justice
in having the first Kirby Proceeding dismissed and in defending and seeking
the dismissal of the remaining Kirby
Proceedings. The Company believes that the Kirby Proceedings are without
merit. Based on discussions with counsel, the Company believes that, even in
the event that Kirby ultimately prevails in the Kirby Proceedings, the matter
is not likely to have a material adverse effect on the Company because the
Kirby Proceedings are expected to extend beyond the delivery dates for some or
all of the Van Ommeren Tankers and the project would be completed or near
completion.
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MANAGEMENT
BOARD OF DIRECTORS
Upon consummation of the Shipbuilding Distribution, the NNS Board will
consist of three members. Each director will serve for a term expiring at the
annual meeting of stockholders in the year indicated below and until his
successor shall have been elected and qualified. Pursuant to the Certificate
(as defined herein), the NNS Board is divided into three classes. Information
concerning the individuals who will serve as directors of NNS as of the
Distribution Date is set forth below.
Term Expiring at the 1997 Annual Meeting of Stockholders (Class I)
WILLIAM P. FRICKS has served as the President of Newport News since
September, 1994, and as its Chief Executive Officer since November, 1995. Mr.
Fricks first joined Newport News in the Industrial Engineering Department
after graduating from college in 1966. He was then appointed Controller and
Treasurer of Newport News in 1979, Vice President-Finance in 1980, Vice
President in charge of various business functions (Marketing, Human Resources
and Technical) from 1983 to 1988, Senior Vice President in 1988, Executive
Vice President in 1992, and President and Chief Operating Officer in 1994. Mr.
Fricks is 52 years old. Mr. Fricks is currently the Vice Chairman of the Board
of Directors of the American Shipbuilding Association and is on the Board of
Directors of the Virginia Manufacturers Association. On July 1, 1996, Mr.
Fricks was appointed to the Board of Visitors of the College of William and
Mary.
Term Expiring at the 1998 Annual Meeting of Stockholders (Class II)
JOSEPH J. SISCO has been a partner of Sisco Associates, a management
consulting firm, since January 1980. From 1976 until January 1980, he served
as President of The American University, and, until February 1981 he was
Chancellor of that University. Prior to 1976, Dr. Sisco was employed by the
United States Department of State for 25 years, last serving as Under
Secretary of State for Political Affairs. He is also a director of The
Interpublic Group of Companies, Inc., Raytheon Company, and Braun AG. Dr.
Sisco is 76 years old and served as a Director of Tenneco from 1977 until his
retirement from the Tenneco Board in May 1996. Prior to his retirement, he
also served as a member of the Executive Committee, the Nominating and
Management Development Committee, and as a member and the Chairman of the
Compensation and Benefits Committee of Tenneco.
Term Expiring at the 1999 Annual Meeting of Stockholders (Class III)
DANA G. MEAD has served as an executive officer of Tenneco since April 1992,
when he joined Tenneco as Chief Operating Officer. Prior to joining Tenneco,
Mr. Mead served as an Executive Vice President of International Paper Company,
a manufacturer of paper, pulp and wood products, from 1988, and served as
Senior Vice President of that company from 1981. He is also a director of Alco
Standard Corporation, Baker Hughes Incorporated, Case Corporation and Textron
Inc. Mr. Mead is 60 years old and has been a director of Tenneco since April
1992. He has served as a member and Chairman of the Executive Committee and an
ex officio member of the Audit, and Nominating and Management Development
Committees of Tenneco.
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EXECUTIVE OFFICERS
The following table sets forth certain information concerning the persons
who will serve as executive officers of the Company after the Shipbuilding
Distribution. Each such person will be elected to the indicated office with
the Company in anticipation of the Shipbuilding Distribution and will serve at
the direction of the NNS Board and the Board of Directors of Newport News.
<TABLE>
<CAPTION>
NAME (AND AGE AT JULY EFFECTIVE
31, 1996) OFFICES HELD* DATE OF TERM
--------------------- ------------- --------------
<S> <C> <C>
William P. Fricks(52)... President and Chief Executive Officer November 1995
President and Chief Operating Officer January 1995
Executive Vice President January 1992
Senior Vice President September 1988
Thomas C.
Schievelbein(43)....... Executive Vice President--Operations October 1995
Vice President--Human Resources and Administration January 1995
Vice President--Strategy and Naval Program Development January 1994
Vice President--Naval Marketing March 1993
Director--Naval Marketing March 1992
Director--Marketing Field Office January 1990
David J. Anderson(47)... Senior Vice President and Chief Financial Officer July 1996
Thomas J. Bradburn(53).. Vice President--Finance and Corporate Controller September 1996
Vice President--Finance September 1986
Stephen B. Clarkson(59). Vice President, General Counsel and Secretary January 1991
Whylen G. Cooper(46).... Vice President--Sourcing November 1995
William G. Cridlin,
Jr.(50)................ Vice President--Marketing January 1995
Vice President--Commercial Shipbuilding April 1992
Vice President--Manufacturing September 1988
T. Michael Hatfield(49). Vice President--Communications October 1995
Director--Public Relations November 1993
Robert C. Hoard(57)..... Vice President--Trades Management and Manufacturing October 1995
Director--Trades and Manufacturing January 1994
Director--Trades August 1993
Director--Steel Fabrication April 1991
Director--Machine Shop and Foundry June 1989
Alfred Little, Jr.(49).. Vice President--Human Resources July 1996
James A. Palmer(59)..... Vice President--Commercial Nuclear October 1995
Vice President--Engineering January 1995
Vice President--Aircraft Carriers April 1992
Director--Engineering Administration January 1991
Marc Y. E. Pelaez(50)... Vice President--Engineering August 1996
John E. Shephard,
Jr.(40)................ Vice President--Strategy and Process Innovation October 1995
Director--Strategic Planning August 1993
Patrick A. Tucker(49)... Vice President--Government Relations December 1996
George A. Wade(52)...... Vice President--Submarine and Refueling Program October 1995
Vice President--Construction January 1995
Vice President--Submarines March 1993
Director--Submarine Construction April 1992
Director--Construction Engineering January 1990
D. R. Wyatt(38)......... Treasurer September 1996
Assistant Treasurer August 1995
Manager of Finance April 1989
</TABLE>
- --------
*Unless otherwise indicated, all offices held are with the Company.
Each of the executive officers of the Company has been continuously engaged
in the business of the Company, its affiliates or predecessor companies during
the past five years except that: (i) from 1991 to 1996, David J. Anderson was
employed by RJ Reynolds Corporation, last serving in the capacity of Executive
Vice President and Chief Financial Officer; from 1987 to 1991, he was employed
by The Quaker Oats Co., last serving
72
<PAGE>
in the capacity of Senior Vice President--Finance and Customer Service; (ii)
from 1991 to 1995, Wylen G. Cooper was employed by GE Power Systems, last
serving in the capacity of Manager of Sourcing; (iii) from 1989 to 1993, T.
Michael Hatfield was employed by Lockheed Co., last serving in the capacity of
Director of Communications; (iv) from 1992 to 1996, Alfred Little, Jr. was
employed by Sun Co., last serving in the capacity of Vice President--Human
Resources and from 1988 to 1992 in the capacity of Director--Human Resources;
(v) from 1993 to 1996, Marc E. Pelaez was employed by the United States Navy,
last serving in the capacity of Chief of Naval Research; and from 1990 to 1993
in the capacity of Assistant Executive Secretary to the Assistant Secretary of
the Navy; (vi) from 1977 to 1991, John E. Shephard, Jr. was employed as an
Infantry Officer by the United States Army, last serving as Assistant G3,
Operations of the 101st Airborne Division; and from 1991 to 1993 was employed
by the U.S. Army Reserves as an Individual Mobilization Augmentee assigned to
the U.S. Military Academy faculty and to the 157th IMA Detachment in
Washington, D.C.; and (vii) from January 1996 to December 1996, Patrick A.
Tucker was and will continue to be employed by Tenneco, last serving in the
capacity of Executive Director--Government Relations, and from 1994 to 1996,
he was employed by Tenneco, serving as Director--Federal Relations; in 1993,
he was Counsel to Senator John Warner; and from 1983 to 1993 he was the
Minority Staff Director and Counsel to the U.S. Senate Armed Services
Committee.
STOCK OWNERSHIP OF MANAGEMENT
Set forth below is the ownership as of September 30, 1996 (without giving
effect to the Transaction) of the number of shares and percentage of Tenneco
Common Stock beneficially owned by (i) each director of NNS, (ii) each of the
executive officers of the Company whose names are set forth on the Summary
Compensation Table and (iii) all executive officers of the Company and
directors of NNS as a group. Pursuant to the Shipbuilding Distribution, NNS
Common Stock will be distributed to holders of Tenneco Common Stock on the
basis of one share of NNS Common Stock for every five shares of Tenneco Common
Stock. See "Summary of Certain Information--The Shipbuilding Distribution."
<TABLE>
<CAPTION>
SHARES OF TENNECO % OF TENNECO
DIRECTORS COMMON STOCK OWNED(A)(B) COMMON STOCK OUTSTANDING
--------- ------------------------ ------------------------
<S> <C> <C>
William P. Fricks 29,350 (c)
Dana G. Mead 199,310 (c)
Joseph J. Sisco 4,185 (c)
<CAPTION>
EXECUTIVE OFFICERS
------------------
<S> <C> <C>
Thomas C. Schievelbein 11,598 (c)
Stephen B. Clarkson 8,921 (c)
James A. Palmer, Jr. 13,806 (c)
George A. Wade 11,073 (c)
All directors and
executive officers as a
group: 330,564(d) (c)
</TABLE>
- --------
(a) Each director and executive officer has sole voting and investment power
over the shares beneficially owned (or has the right to acquire shares as
set forth in note (b) below) as set forth in this column, except for (i)
shares that are held in trust for each director and executive officer
under the Tenneco restricted stock plans, and (ii) shares that executive
officers of the Company have the right to acquire pursuant to the Tenneco
stock option plans. The restricted stock and stock options were granted by
Tenneco. It is anticipated that the restricted stock held by employees
(including executive officers) will be vested prior to the Distributions.
As described in footnote (e) to the Option Grant Table, it is anticipated
that Tenneco stock options held by Company employees will be replaced by
options to purchase NNS Common Stock upon consummation of the Shipbuilding
Distribution.
(b) Includes shares that are: (i) held in trust under the Company's restricted
stock plans (at September 30, 1996, Messrs. Mead, Fricks, Schievelbein,
Clarkson, Palmer and Wade held 24,500; 6,000; 9,100; 6,800; 8,800; and
8,340 restricted shares, respectively, under the Tenneco restricted stock
plans); and (ii) subject to options, which were granted under Tenneco's
stock option plans, and are exercisable at September 30, 1996
73
<PAGE>
or within 60 days after said date, for Messrs. Mead, Fricks and Wade to
purchase 133,335; 213; and 100 shares, respectively.
(c) The percent of the class of Tenneco Common Stock owned by each director
and by all executive officers and directors as a group was less than one
percent.
(d) Includes 134,749 shares of Tenneco Common Stock that are subject to
options that are exercisable at September 30, 1996 or within 60 days after
said date by all directors and executive officers of the Company as a
group, and includes 94,505 shares that are held in trust under the Tenneco
restricted stock plans, for all directors and executive officers of the
Company as a group.
COMMITTEES OF THE BOARD OF DIRECTORS
The NNS Board will establish four standing committees as permitted by the
By-laws, which will have the following described responsibilities and
authority:
Audit Committee. The NNS Board will establish an Audit Committee which will
have the responsibility, among other things, to (i) recommend the selection of
the Company's independent public accountants, (ii) review and approve the
scope of the independent public accountants' audit activity and extent of non-
audit services, (iii) review with management and such independent public
accountants the adequacy of the Company's basic accounting system and the
effectiveness of the Company's internal audit plan and activities, (iv) review
with management and the independent public accountants the Company's certified
financial statements and exercise general oversight of the Company's financial
reporting process and (v) review with the Company litigation and other legal
matters that may affect the Company's financial condition and monitor
compliance with the Company's business ethics and other policies.
Compensation and Benefits Committee. The NNS Board will establish a
Compensation and Benefits Committee which will have the responsibility, among
other things, to (i) establish the salary rate of officers and employees of
the Company, (ii) examine periodically the compensation structure of the
Company and (iii) supervise the welfare and pension plans and compensation
plans of the Company.
Nominating and Management Development Committee. The NNS Board will
establish a Nominating and Management Development Committee which will have
the responsibility, among other things, to (i) review possible candidates for
election to the NNS Board and recommend a slate of nominees for election as
directors at NNS' annual stockholders' meeting, (ii) review the function and
composition of the other committees of the NNS Board and recommend membership
on such committees and (iii) review the qualifications and recommend
candidates for election as officers of the Company.
Executive Committee. The NNS Board will establish an Executive Committee.
Other than matters assigned to the Compensation and Benefits Committee, the
Executive Committee will have, during the interval between the meetings of the
NNS Board, the authority to exercise all the powers of the NNS Board that may
be delegated legally to it by the NNS Board in the management and direction of
the business and affairs of the Company.
74
<PAGE>
EXECUTIVE COMPENSATION
Prior to the Shipbuilding Distribution, the Shipbuilding Business was owned
and operated by Tenneco through its direct and indirect subsidiaries and as
such, the management of the Company has been employed by Tenneco and its
direct and indirect subsidiaries. The following table sets forth the
remuneration paid by Tenneco and/or its direct and indirect subsidiaries (i)
to the President and Chief Executive Officer of the Company and (ii) to each
of the four key executive officers expected to be the most highly compensated
executive officers of the Company, other than the Chief Executive Officer,
whose salary and bonus exceeded $100,000, for the years indicated in
connection with his position with the Company:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------- ------------------
RESTRICTED
NAME AND OTHER ANNUAL STOCK ALL OTHER
PRINCIPAL POSITION(A)(B) YEAR SALARY(C) BONUS COMPENSATION(D) AWARDS(E) OPTIONS COMPENSATION(F)
- ------------------------ ---- --------- -------- --------------- ---------- ------- --------------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William P. Fricks(g) 1995 $323,759 $195,000 $29,591 -- 12,000 $34,680
President and Chief 1994 $276,960 $145,000 $14,156 $161,814 7,000 $35,226
Executive Officer 1993 $265,326 $125,000 $ 2,823 $139,875 0 $31,782
Thomas C. Schievelbein 1995 $188,202 $ 90,000 $ 7,188 $ 90,038 3,300 $ 9,810
Executive Vice President 1994 $125,000 $ 75,000 $ 7,829 $107,876 3,000 $ 8,288
1993 $115,000 $ 55,000 $ 2,109 $ 69,938 0 $ 6,946
David J. Anderson -- -- -- -- -- -- --
Senior Vice President
and Chief Financial
Officer(h)
Stephen B. Clarkson 1995 $200,400 $ 75,000 $ 6,664 $ 85,750 3,000 $13,287
Vice President, General 1994 $199,920 $ 84,000 $ 7,203 $ 80,907 3,000 $11,767
Counsel and Secretary 1993 $190,000 $ 60,000 $ 2,142 $ 69,938 -- $11,431
James A. Palmer, Jr. 1995 $206,760 $ 95,000 $ 6,735 $ 98,613 3,500 $31,735
Vice President 1994 $189,480 $ 95,000 $ 7,732 $107,876 3,150 $30,752
1993 $183,246 $ 80,000 $ 2,434 $102,575 -- $29,902
George A. Wade 1995 $195,960 $ 90,000 $ 6,664 $ 98,613 3,500 $24,299
Vice President 1994 $139,800 $ 95,000 $ 7,227 $107,876 3,150 $22,252
1993 $131,406 $ 80,000 $ 973 $ 95,l15 -- $ 9,946
</TABLE>
- --------
(a) William R. Phillips served as Chairman and Chief Executive Officer of
Newport News from September 13, 1994 until his retirement effective
October 31, 1995. Mr. Phillips will not serve as an executive officer of
the Company.
(b) Dana G. Mead received compensation from Tenneco for services rendered to
Newport News. Mr. Mead will continue to serve as a director of the Company
but will not serve as an executive officer of the Company.
(c) Includes base salary plus amounts paid in lieu of Company matching
contributions to the Tenneco Inc. Thrift Plan.
(d) Includes amounts attributable to (i) the value of personal benefits
provided by the Company to its executive officers, which have an aggregate
value in excess of $50,000, such as the personal use of Company owned
property, membership dues, assistance provided to such persons with regard
to financial, tax and estate planning, (ii) reimbursement for taxes and
(iii) amounts paid as dividend equivalents on performance share equivalent
units under the Company's Stock Ownership Plan ("Dividend Equivalents").
The amount of each such personal benefit that exceeds 25% of the estimated
value of the total personal benefits provided by the Company,
reimbursement for taxes and amounts paid as Dividend Equivalents to the
individuals
75
<PAGE>
named in the table was as follows: During 1995: $15,191 for reimbursement
for taxes, and $14,400 in Dividend Equivalents paid to Mr. Fricks; $7,188,
$6,664, $6,735, and $6,664, for reimbursement for taxes for Messrs.
Schievelbein, Clarkson, Palmer and Wade, respectively; During 1994: $6,130,
$2,938, $2,312, $2,841, and $2,337, for reimbursement for taxes for Messrs.
Fricks, Schievelbein, Clarkson, Palmer and Wade, respectively; During 1993:
$2,823, $2,109, $2,142, $2,434, and $973, for reimbursement for taxes for
Messrs. Fricks, Schievelbein, Clarkson, Palmer and Wade, respectively.
(e) Includes the dollar value of grants of restricted stock made pursuant to
Tenneco restricted stock plans based on the price of the Tenneco Common
Stock on the date of grant. At December 31, 1995, Messrs. Fricks,
Schievelbein, Clarkson, Palmer and Wade, held 20,000; 6,435; 6,330; 8,390;
and 7,450 restricted shares and/or performance share equivalent units,
respectively, under such plans. The value at December 31, 1995, (based on
per equivalent units held) was $992,500 for Mr. Fricks; $319,337 for Mr.
Schievelbein; $314,126 for Mr. Clarkson; $416,354 for Mr. Palmer; and
$369,706 for Mr. Wade. Dividends/Dividend Equivalents will be paid on the
restricted shares and performance share equivalent units held by each
individual.
(f) Includes amounts attributable during 1995 to benefit plans of the Company
as follows:
(1) The amounts contributed pursuant to the Tenneco Inc. Thrift Plan for
the accounts of Messrs. Fricks, Schievelbein, Clarkson, Palmer and Wade
were $9,240, $8,656, $7,500, $9,240, and $9,240 respectively.
(2) The amounts accrued under the Tenneco Inc. Deferred Compensation Plan,
together with adjustments based upon changes in the Consumer Price Index
for All Urban Households, as computed by the Bureau of Labor Statistics,
for Messrs., Fricks, Wade and Palmer were $19,662; $11,566; and $11,566,
respectively.
(3) Amounts imputed as income for federal income tax purposes under the
Company's group life insurance plan for Messrs. Fricks, Schievelbein,
Clarkson, Palmer and Wade were $5,779; $1,154; $5,787; $9,402; and
$3,493, respectively.
(g) William P. Fricks has served as President and Chief Executive Officer of
Newport News since November 1, 1995, prior to which he served as President
and Chief Operating Officer from January 24, 1995. Prior to that time, Mr.
Fricks also served as an Executive Vice President of Newport News from
January 1, 1992 and prior to which he served as a Senior Vice President
from September 1, 1988.
(h) David J. Anderson became the Company's Senior Vice President and Chief
Financial Officer on July 22, 1996 at an annual base salary of $260,000.
76
<PAGE>
OPTION GRANTS IN 1995
The following table sets forth the number of stock options to acquire
Tenneco Company Stock that were granted by Tenneco during 1995 to the persons
named in the Summary Compensation Table.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(D)
--------------------------------------------------------- -----------------
% OF TOTAL EXERCISE
OPTIONS OR BASE
OPTIONS GRANTED GRANTED TO PRICE
(NO. OF EMPLOYEES PER
NAME SHARES)(A)(B)(E) IN FISCAL YEAR SHARE(C) EXPIRATION DATE 5% 10%
---- ---------------- -------------- -------- ---------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
William P. Fricks 12,000 0.8% $42.88 January 10, 2005 $323,520 $819,960
Thomas C. Schievelbein 3,300 0.2% $42.88 January 10, 2005 $ 88,968 $225,489
Stephen B. Clarkson 3,000 0.2% $42.88 January 10, 2005 $ 80,880 $204,990
James A. Palmer, Jr. 3,500 0.2% $42.88 January 10, 2005 $ 94,360 $239,155
George A. Wade 3,500 0.2% $42.88 January 10, 2005 $ 94,360 $239,155
</TABLE>
- --------
(a) The options reported in this column and in the Summary Compensation Table
consist of non-qualified options. The options become exercisable at the
rate of one-third per year on January 10, of 1996, 1997 and 1998,
respectively. As described in footnote (e) below it is anticipated that
Tenneco options held by Company employees will be replaced by options to
acquire NNS Common Stock upon consummation of the Shipbuilding
Distribution.
(b) These options provide that a grantee who delivers shares of Tenneco Common
Stock to pay the option exercise price will be granted, upon such delivery
and without further action by Tenneco, an additional option to purchase
the number of shares so delivered. These "reload" options are granted at
100% of the fair market value (as defined in the plan) on the date they
are granted become exercisable six months from that date and expire
coincident with the options they replace. Grantees are limited to 10
reload options and the automatic grant of such reload options is limited
to twice during any one calendar year.
(c) All options were granted by Tenneco at 100% of the fair market value on
the date of grant.
(d) The dollar amounts under these columns are the result of calculations for
the period from the date of grant to the expiration of the option at the
5% and 10% annual appreciation rates set by the Commission and, therefore,
are not intended to forecast possible future appreciation, if any, in the
price of Tenneco Common Stock. No gain to the optionee is possible without
an increase in price of the underlying stock. In order to realize the
potential values set forth in the 5% and 10% columns of this table, the
per share price of Tenneco Common Stock would be $69.84 and $111.21,
respectively, or 63% and 160%, respectively, above the exercise or base
price. As described in footnote (e) below, however, it is anticipated that
options to acquire Tenneco Common Stock held by Company employees will be
replaced by options to acquire NNS Common Stock upon Consummation of the
Shipbuilding Distribution.
(e) All Tenneco stock options held by employees of the Company will be
cancelled as of the Shipbuilding Distribution. The Company will adopt a
plan (the "Company Stock Ownership Plan") which is substantially similar
to the 1994 Tenneco Inc. Stock Ownership Plan. Prior to the Shipbuilding
Distribution, Tenneco will have approved the Company Stock Ownership Plan
as the sole stockholder of NNS. Options will be granted under the Company
Stock Ownership Plan as of the Shipbuilding Distribution to all employees
of the Company who formerly held Tenneco options. Each such employee will
receive options of the Company under which the excess of the fair market
value of the shares subject to the options immediately after the grant
over the aggregate option price is not more than the excess of the
aggregate fair market value of all Tenneco shares subject to his or her
Tenneco stock options immediately before such cancellation over the
aggregate option price under such Tenneco options. The terms of the
Company options will be the same as if the Tenneco options had remained
outstanding except to the extent that the Company Stock Ownership Plan
reflects legal changes adopted after the Tenneco options were granted.
These options provide that a grantee who delivers shares of Tenneco Common
Stock to pay the option exercise price will be granted, upon such delivery
and without further action by the Company, an additional option to
purchase the number of shares so delivered. These "reload" options are
granted at 100% of the fair market value (as defined in the Company Stock
Ownership Plan) on the date they are granted, become exercisable six
months from that date and expire at the same time as the options they
replace. Grantees are limited to 10 reload options and automatic grant of
such reload options is limited to twice during any one calendar year.
77
<PAGE>
OPTIONS EXERCISED IN 1995 AND 1995 YEAR-END VALUES
The following table sets forth the number of options to acquire Tenneco
Common Stock held, as of December 31, 1995, by the persons named in the
Summary Compensation Table. No options to acquire shares of Tenneco Common
Stock were exercised during 1995.
<TABLE>
<CAPTION>
TOTAL NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS HELD IN-THE-MONEY OPTIONS HELD
AT DECEMBER 31, 1995(A) AT DECEMBER 31, 1995(A)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William P. Fricks 2,546 16,667 $1,811 $81,000
Thomas C. Schievelbein 1,000 5,300 $ -- $22,275
Stephen B. Clarkson 1,000 5,000 $ -- $20,250
James A. Palmer, Jr. 1,050 5,600 $ -- $23,625
George A. Wade 1,150 5,600 $ 850 $23,625
</TABLE>
- --------
(a) As described in footnote (e) to the Option Grant Table, the options to
acquire Tenneco Common Stock will be replaced by options to acquire NNS
Common Stock.
The following table sets forth information concerning performance based
awards made to the persons named in the Summary Compensation Table during 1995
by Tenneco.
LONG-TERM INCENTIVE PLANS
PERFORMANCE SHARE EQUIVALENT UNIT AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE
SHARES, OR OTHER ESTIMATED FUTURE PAYOUTS UNDER
UNITS OR PERIOD UNTIL NON-STOCK PRICE BASED PLANS(A)
OTHER MATURATION OR ---------------------------------
NAME RIGHTS(B) PAYOUT(C) THRESHOLD(D) TARGET(D) MAXIMUM(D)
---- --------- ------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
William P. Fricks 9,000 4 Years -- 4,500 9,000
</TABLE>
- --------
(a) Estimated Future Payouts are based on earnings per share ("EPS") from
continuing operations as shown in the record of progress included in the
published financial statements of the Company. Earnings per share for 1995
were $4.16 and represents achievement of 25% of the performance goal
applicable to this award. Mr. Fricks was provisionally credited with 100%
of his performance goal for 1995 and 2,250 shares were credited to his
Plan account, subject to adjustment, for payout at the end of the
performance cycle.
(b) Each performance share equivalent unit represents one share of Tenneco
Common Stock that may be earned under this award and the number of
performance share equivalent units listed in this column represents the
maximum number of performance share equivalent units that may be earned
under this award.
(c) Performance share equivalent units are earned at the rate of 25% per year
based on achievement of annual EPS goals. However, it is anticipated that
prior to the consummation of the Shipbuilding Distribution the conditions
to issuance of all shares of Tenneco Common Stock underlying the
performance share unit equivalent awards will be waived and the maximum
number of shares of Tenneco Common Stock subject thereto will be issued.
(d) Represents maximum performance share equivalent units earned where the
goals were consistently within the indicated performance range on an
individual year and accumulated four-year basis.
78
<PAGE>
The following table sets forth the aggregate estimated annual benefits
payable upon normal retirement pursuant to the Company's Retirement Plan (the
"Retirement Plan"), the TRP and certain non-qualified structures. The Company
has not yet adopted or made a final decision on the design of its Retirement
Plan; however, it is anticipated that its Retirement Plan will be virtually
identical to the TRP and will count service with Tenneco for benefit accrual
purposes but with an offset for benefits accrued under the TRP. It is
anticipated that the Company will adopt one or more non-qualified structures
to provide employees with the benefits that would be provided under the
Retirement Plan but for applicable legal limits. The numbers set forth in the
following table assume that plans are adopted accordingly.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF CREDITED PARTICIPATION
----------------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------ -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 350,000 $ 82,500 $110,000 $137,500 $ 165,000 $ 192,500
400,000 94,300 125,700 157,100 188,600 220,000
450,000 106,100 141,400 176,800 212,100 247,500
500,000 117,900 157,100 196,400 235,700 275,000
550,000 129,600 172,900 216,100 259,300 302,500
600,000 141,400 188,600 235,700 282,900 330,000
650,000 153,200 204,300 255,400 306,400 357,000
700,000 165,000 220,000 275,000 330,000 365,000
750,000 176,800 235,700 294,600 353,600 412,500
800,000 188,600 251,400 314,300 377,100 440,000
850,000 200,400 267,100 333,900 400,700 467,500
900,000 212,100 282,900 353,600 424,300 495,000
950,000 223,900 298,600 373,200 447,900 522,500
1,000,000 235,700 314,300 392,900 471,400 550,000
</TABLE>
The benefits set forth above are computed as a straight life annuity and are
based on years of credited participation in the Retirement Plan and the
employee's average base salary during the final five years of credited
participation in the Plan; such benefits are not subject to any deduction for
Social Security or other offset amounts.
CHANGE-IN-CONTROL ARRANGEMENTS
The Company has established a severance plan for the benefit of certain
employees and officers whose position is terminated under certain
circumstances following a change in control of the Company. Under the
severance plan, key executives of the rank of Senior Vice President and above
would receive three times their annual compensation and the average of their
incentive and special awards over the last three years if they are terminated
within two years of a change in control. Certain other key employees would
receive two times their annual salaries and the average of their incentive and
special awards over the last three years if they are terminated within two
years of a change in control. The Transaction is not deemed to constitute a
"change in control" for purposes of the plan.
COMPENSATION OF DIRECTORS
Following the Shipbuilding Distribution, all directors who are not also
officers of the Company will each be paid a director's fee of $25,000 per
annum, one-half in cash and one-half in restricted shares of NNS Common Stock,
and each will be paid an attendance fee of $1,000 plus expenses for each
meeting of the NNS Board and each meeting of a committee of the NNS Board
attended. Each director who serves as chairman of a committee of the NNS Board
will be paid an additional fee of $3,000 per chairmanship. Payment of all or a
portion of such fees, as adjusted by hypothetical investment performance, may
be deferred at the election of the director.
79
<PAGE>
Directors who are not also officers of the Company will each receive an
initial grant of 2,000 stock options and 1,000 stock options annually.
Directors who are not also officers of the Company will each receive a one-
time grant of 1,000 shares of restricted stock.
BENEFIT PLANS FOLLOWING THE SHIPBUILDING DISTRIBUTION
The Company will adopt two plans qualified under Section 401(a) of the Code:
a defined benefit pension plan and an employee stock ownership plan which will
also provide for 401(k) salary reduction contributions. It is anticipated that
the Company will adopt non-qualified plans designed to provide covered
individuals with benefits which they would receive under the qualified defined
benefit pension absent legal limitations.
Prior to the consummation of the Shipbuilding Distribution, the Company will
adopt the Company Stock Ownership Plan, which will be approved by Tenneco as
the sole stockholder of the Company. The Company Stock Ownership Plan will be
substantially similar to the Tenneco Inc. 1994 Stock Ownership Plan and will
provide for the grant of stock options, restricted stock, performance shares
and other forms of awards. The Company will adopt, and Tenneco will approve as
its sole stockholder, an employee stock purchase plan which will be
substantially similar to the Tenneco employee stock purchase plan.
80
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Prior to the Distribution Date, the NNS Board and Tenneco, as sole
stockholder of NNS, will approve and adopt the Restated Certificate of
Incorporation ("Certificate"), and Tenneco, as sole stockholder of NNS, will
approve and adopt the Amended and Restated By-laws ("By-laws"). Under the
Certificate, NNS' authorized capital stock will consist of 70,000,000 shares
of NNS Common Stock, and 10,000,000 shares of Preferred Stock, par value $.01
per share ("NNS Preferred Stock"). In addition, it is anticipated that the NNS
Board will adopt resolutions pursuant to the Certificate designating 700,000
shares of NNS Preferred Stock as Series A Participating Junior Preferred
Stock, par value $.01 per share, of NNS ("NNS Junior Preferred Stock") and
reserving shares of NNS Junior Preferred Stock for issuance in connection with
the Rights to be issued in connection with the Shipbuilding Distribution. No
NNS Preferred Stock will be issued in the Shipbuilding Distribution. Based on
the number of shares of Tenneco outstanding on September 30, 1996 up to
approximately 34,151,115 shares of the NNS Common Stock will be issued in the
Shipbuilding Distribution.
NNS COMMON STOCK
The holders of NNS Common Stock will be entitled to one vote for each share
on all matters on which stockholders generally are entitled to vote, and
except as otherwise required by law or provided in any resolution adopted by
the NNS Board with respect to any series of Preferred Stock, the holders of
the NNS Common Stock will possess 100% of the voting power. The Certificate
does not provide for cumulative voting.
Subject to the preferential rights of any outstanding NNS Preferred Stock
which may be created by the NNS Board under the Certificate, the holders of
NNS Common Stock will be entitled to such dividends as may be declared from
time to time by the NNS Board and paid from funds legally available therefor,
and the holders of NNS Common Stock will be entitled to receive pro rata all
assets of NNS available for distribution upon liquidation. All shares of NNS
Common Stock received in the Shipbuilding Distribution will be fully paid and
nonassessable, and the holders thereof will not have any preemptive rights.
There is no established public trading market for NNS Common Stock, although
a "when issued" market is expected to develop prior to the Distribution Date.
NNS has applied to the NYSE for the listing of NNS Common Stock upon notice of
issuance and expects to receive approval of such listing prior to the
Distributions.
The declaration of dividends on NNS Common Stock will be at the discretion
of the NNS Board. The NNS Board has not adopted a dividend policy as such.
Subject to legal and contractual restrictions, its decisions regarding
dividends will be based on all considerations that in its business judgment
are relevant at the time, including past and projected earnings, cash flows,
economic, business and securities market conditions and anticipated
developments concerning the Company's business and operations. For additional
information concerning the payment of dividends by NNS, see "Risk Factors --
Dividends" and "Financing."
NNS' cash flow and the consequent ability of NNS to pay any dividends on NNS
Common Stock will be substantially dependent upon the earnings and cash flow
of NNS' subsidiaries available after its debt service and the availability of
such earnings to NNS by way of dividends, distributions, loans and other
advances. The agreements relating to Senior Credit Facility and Notes contain
provisions that limit the amount of dividends that may be paid on NNS Common
Stock. See "Financing."
Under the DGCL, dividends may be paid by NNS out of "surplus" (as defined
under Section 154 of the DGCL) or, if there is no surplus, out of net profits
for the fiscal year in which the dividends are declared and/or the preceding
fiscal year. On a pro forma basis, at June 30, 1996, the Company had surplus
of
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approximately $194 million (on a book value basis) for the payment of
dividends, and NNS will also be able to pay dividends out of any net profits
for the current and/or prior fiscal year, if any.
NNS PREFERRED STOCK
Under the Certificate, the NNS Board is authorized to issue NNS Preferred
Stock, in one or more series, and to fix the number of shares constituting
such series and the designation of such series, the voting powers (if any) of
the shares of such series, and the preferences and relative, participating,
optional or other special rights, if any, and any qualifications, limitations
or restrictions thereof, of the shares of such series. See "Antitakeover
Effects of Certain Provisions."
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS
The Certificate, the By-laws, the Rights and Delaware statutory law contain
certain provisions that could make the acquisition of the Company by means of
a tender offer, a proxy contest or otherwise more difficult. The description
set forth below is intended as a summary only and is qualified in its entirety
by reference to the Certificate, the By-laws and the Rights Agreement which
are attached as exhibits to NNS's Registration Statement on Form 10 under the
Exchange Act relating to NNS Common Stock.
CLASSIFIED BOARD OF DIRECTORS
The Certificate provides that the NNS Board will be divided into three
classes of directors, with the classes to be as nearly equal in number as
possible. The NNS Board consists of the persons referred to in "Management--
Board of Directors" above. The Certificate provides that, of the initial
directors of NNS, approximately one-third will continue to serve until the
first succeeding annual meeting of NNS' stockholders, approximately one-third
will continue to serve until the second succeeding annual meeting of NNS's
stockholders and approximately one-third will continue to serve until the
third succeeding annual meeting of NNS' stockholders. Of the initial
directors, Mr. Fricks will serve until the first succeeding annual meeting of
NNS' stockholders, Mr. Sisco will serve until the second succeeding annual
meeting of NNS' stockholders and Mr. Mead will serve until the third
succeeding annual meeting of NNS' stockholders. At each annual meeting of NNS'
stockholders, one class of directors will be elected for a term expiring at
the third succeeding annual meeting of stockholders.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the NNS Board. At
least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the members of the NNS Board.
Such a delay may help ensure that NNS' directors, if confronted by a
stockholder attempting to force a proxy contest, a tender or exchange offer,
or an extraordinary corporate transaction, would have sufficient time to
review the proposal as well as any available alternatives to the proposal and
to act in what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the NNS Board would be
beneficial to NNS and its stockholders and whether or not a majority of NNS'
stockholders believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or
otherwise attempting to obtain control of NNS, even though such an attempt
might be beneficial to NNS and its stockholders. The classification of the NNS
Board could thus increase the likelihood that incumbent directors will retain
their positions. In addition, because the classification provisions may
discourage accumulations of large blocks of NNS' stock by purchasers whose
objective is to take control of the Company and remove a majority of the
members of the NNS Board, the classification of the NNS Board could tend to
reduce the likelihood of fluctuations in the market price of NNS Common Stock
that might result from accumulations of large blocks for such a purpose.
Accordingly, stockholders could be deprived of certain
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opportunities to sell their shares of NNS Common Stock at a higher market
price than might otherwise be the case.
Notwithstanding the foregoing, the Certificate provides that whenever the
holders of any one or more series of NNS Preferred Stock have the right,
voting separately as a class or series, to elect directors, such directors
will not be classified, unless expressly provided by the terms of such series
of NNS Preferred Stock.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Certificate provides that the business and affairs of the Company will
be managed by or under the direction of a Board of Directors, consisting of
not less than three nor more than sixteen directors, the exact number thereof
to be determined from time to time by affirmative vote of a majority of the
entire Board of Directors. In addition, the Certificate provides that any
vacancy on the NNS Board that results from an increase in the number of
directors may be filled by a majority of the NNS Board then in office,
provided that a quorum is present, and any other vacancy occurring in the NNS
Board may be filled by a majority of the directors then in office, even if
less than a quorum, or by a sole remaining director.
Under the DGCL, unless otherwise provided in the Certificate, directors
serving on a classified board may only be removed by the stockholders for
cause. The Certificate does not provide that directors may be removed without
cause.
Notwithstanding the foregoing, the Certificate provides that whenever the
holders of any one or more series of NNS Preferred Stock have the right,
voting separately as a class or series, to elect directors, the election,
removal, term of office, filling of vacancies and other features of such
directorships will be governed by the terms of the Certificate applicable
thereto.
SPECIAL MEETINGS
The By-laws provide that special meetings of stockholders will be called by
the NNS Board. Moreover, the business permitted to be conducted at any special
meeting of stockholders is limited to the purposes specified in the notice of
meeting given by NNS.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS
The By-laws establish an advance notice procedure for stockholders to make
nominations of candidates for election of directors, or to bring other
business before an annual meeting of stockholders of NNS (the "Stockholder
Notice Procedure").
The Stockholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the NNS Board, or by a stockholder who
has given timely written notice to the Secretary of NNS prior to the meeting
at which directors are to be elected, will be eligible for election as
directors of NNS. The Stockholder Notice Procedure provides that at an annual
meeting only such business may be conducted as has been brought before the
meeting by, or at the direction of, the NNS Board or by a stockholder who has
given timely written notice to the Secretary of NNS of such stockholder's
intention to bring such business before such meeting. Under the Stockholder
Notice Procedure, for stockholder notice in respect of the annual meeting of
NNS' stockholders to be timely, such notice must be delivered to the Secretary
of the NNS not less than 50 days nor more than 75 days prior to the annual
meeting; provided, however, that in the event that less than 65 days' notice
or prior public announcement of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 15th day following the day on which
such notice of the date of the annual meeting was mailed or such public
announcement was made, whichever first occurs.
Under the Stockholder Notice Procedure, a stockholder's notice to NNS
proposing to nominate a person for election as a director must contain certain
information, including, without limitation, the identity and
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address of the nominating stockholder, the class and number of shares of stock
of NNS which are beneficially owned by such stockholder, and as to each person
whom the stockholder proposes to nominate for election or reelection as a
director, (i) the name, age, business address and residence of the person,
(ii) the principal occupation or employment of the person, (iii) the class and
number of shares of capital stock of
NNS which are beneficially owned by the person and (iv) any other information
relating to the person that is required to be disclosed in solicitations for
proxies for election of directors pursuant to Rule 14A under the Exchange Act.
Under the Stockholder Notice Procedure, a stockholder's notice relating to the
conduct of business other than the nomination of directors must contain
certain information about such business and about the proposing stockholder,
including, without limitation, a brief description of the business the
stockholder proposes to bring before the meeting, the reasons for conducting
such business at such meeting, the name and address of such stockholder, the
class and number of shares of stock of NNS beneficially owned by such
stockholder, and any material interest of such stockholder in the business so
proposed. If the Chairman of the meeting determines that a person was not
nominated, or other business was not brought before the meeting, in accordance
with the Stockholder Notice Procedure, such person will not be eligible for
election as a director, or such business will not be conducted at any such
meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the Stockholder
Notice Procedure will afford the NNS Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the NNS Board, to inform stockholders about such qualifications.
By requiring advance notice of other proposed business, the Stockholder Notice
Procedure will also provide a more orderly procedure for conducting annual
meetings of stockholders and, to the extent deemed necessary or desirable by
the NNS Board, will provide the NNS Board with an opportunity to inform
stockholders, prior to such meetings, of any business proposed to be conducted
at such meetings, together with any recommendations as to the NNS Board's
position regarding action to be taken with respect to such business, so that
stockholders can better decide whether to attend such a meeting or to grant a
proxy regarding the disposition of any such business.
Although the By-laws do not give the NNS Board any power to approve or
disapprove stockholder nominations for the election of directors or proper
stockholder proposals for action, they may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals if the proper procedures are not followed, and of discouraging or
deterring a third party from conducting a solicitation of proxies to elect its
own slate of directors or to approve its own proposal, without regard to
whether consideration of such nominees or proposals might be harmful or
beneficial to NNS and its stockholders.
RECORD DATE PROCEDURE FOR STOCKHOLDER ACTION BY WRITTEN CONSENT
The By-laws establish a procedure for the fixing of a record date in respect
of action proposed to be taken by NNS' stockholders by written consent in lieu
of a meeting. The By-laws provide that any person seeking to have the
stockholders authorize or take corporate action by written consent without a
meeting shall by written notice addressed to the Secretary and delivered to
NNS, request that a record date be fixed for such purpose. The By-laws state
that the NNS Board may fix a record date for such purpose which shall be no
more than 10 days after the date upon which the resolution fixing the record
date is adopted by the NNS Board and shall not precede the date such
resolution is adopted. If the NNS Board fails within 10 days after NNS
receives such notice to fix a record date for such purpose, the By-laws
provide that the record date shall be the day on which the first written
consent is delivered to NNS unless prior action by the NNS Board is required
under the DGCL, in which event the record date shall be at the close of
business on the day on which the NNS Board adopts the resolution taking such
prior action. The By-laws also provide that the Secretary of NNS or, under
certain circumstances, two inspectors designated by the Secretary shall
promptly conduct such ministerial review of the sufficiency of any written
consents of stockholders duly delivered to NNS and of the validity of the
action to be taken by stockholder consent as he deems necessary or
appropriate, including, without limitation, whether the holders of a number of
shares having the requisite voting power to authorize or take the action
specified in the written consents have given consent.
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STOCKHOLDER MEETINGS
The By-laws provide that the NNS Board and the chairman of a meeting may
adopt rules for the conduct of stockholder meetings and specify the types of
rules that may be adopted (including the establishment of an agenda, rules
relating to presence at the meeting of persons other than stockholders,
restrictions on entry at the meeting after commencement thereof and the
imposition of time limitations for questions by participants at the meeting).
NNS PREFERRED STOCK
The Certificate authorizes the NNS Board to provide for series of NNS
Preferred Stock and, with respect to each such series, to fix the number of
shares constituting such series and the designation of such series, the voting
powers (if any) of the shares of such series, and the preferences and
relative, participating, optional or other special rights, if any, and any
qualifications, limitations or restrictions thereof, of the shares of such
series.
Tenneco and the Company believe that the ability of the NNS Board to issue
one or more series of NNS Preferred Stock will provide the Company with
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs which might arise. The authorized shares of NNS
Preferred Stock, as well as shares of NNS Common Stock, will be available for
issuance without further action by NNS' stockholders, unless such action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which the Company's securities may be listed or traded.
The NYSE currently requires stockholder approval as a prerequisite to listing
shares in several instances, including where the present or potential issuance
of shares could result in a 20% increase in the number of shares of common
stock outstanding or in the amount of voting securities outstanding. If the
approval of NNS' stockholders is not required for the issuance of shares of
NNS Preferred Stock or NNS Common Stock, the NNS Board may determine not to
seek stockholder approval.
Although the NNS Board has no intention at the present time of doing so, it
could issue a series of NNS Preferred Stock that could, depending on the terms
of such series, impede the completion of a merger, tender offer or other
takeover attempt. The NNS Board will make any determination to issue such
shares based on its judgment as to the best interests of NNS and its
stockholders. The NNS Board, in so acting, could issue NNS Preferred Stock
having terms that could discourage an acquisition attempt through which an
acquiror may be able to change the composition of the NNS Board, including a
tender offer or other transaction that some, or a majority, of NNS'
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
RIGHTS
The NNS Board will adopt a stockholder rights plan and cause to be issued,
with each share of NNS Common Stock to be distributed in the Shipbuilding
Distribution, one preferred share purchase right (a "Right"). Each Right will
entitle the registered holder to purchase from NNS a unit consisting of one
one-hundredth of a share (a "Unit") of NNS Junior Preferred Stock, at a price
of $50 per Unit (the "Purchase Price"), subject to adjustment. The description
and terms of the Rights are set forth in a Rights Agreement (the "Rights
Agreement"), between NNS and First Chicago Trust Company of New York, as
Rights Agent (the "Rights Agent").
Initially, the Rights will be represented by NNS Common Stock certificates,
and no separate certificates representing the Rights ("Rights Certificates")
will be distributed. The Rights will separate from the NNS Common Stock and a
distribution date (a "Rights Distribution Date") will occur upon the earlier
of (i) 10 business days following the first date of public announcement (the
"Stock Acquisition Date") that a person or group of affiliated or associated
persons (an "Acquiring Person") has acquired, or obtained the right to
acquire, beneficial ownership of 20% or more of the outstanding shares of NNS
Common Stock, (ii) 10 business days (or such later date as may be determined
by the NNS Board) following the commencement of a tender offer or
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exchange offer that would result in a person or group beneficially owning 20%
or more of such outstanding shares of NNS Common Stock or (iii) 10 business
days after the NNS Board determines that any person, alone or together with
its affiliates and associates, has become the Beneficial Owner of an amount of
NNS Common Stock which the NNS Board determines to be substantial (which
amount shall in no event be less than 10% of the shares of NNS Common Stock
outstanding) and at least a majority of the NNS Board who are not officers of
the Company, after reasonable inquiry and investigation, including
consultation with such persons as such directors shall deem appropriate, shall
determine that (a) such beneficial ownership by such person is intended to
cause NNS to repurchase the NNS Common Stock beneficially owned by such person
or to cause pressure on NNS to take action or enter into a transaction or
series of transactions intended to provide such person with short-term
financial gain under circumstances where the NNS Board determines that the
best long-term interests of NNS and its stockholders would not be served by
taking such action or entering into such transactions or series of
transactions at that time or (b) such beneficial ownership is causing or is
reasonably likely to cause a material adverse impact (including, but not
limited to, impairment of relationships with customers or impairment of the
Company's ability to maintain its competitive position) on the business or
prospects of the Company (any such person being referred to herein and in the
Rights Agreement as an "Adverse Person").
Until the Rights Distribution Date, (i) the Rights will be evidenced by NNS
Common Stock certificates and will be transferred with and only with such NNS
Common Stock certificates, (ii) NNS Common Stock certificates will contain a
notation incorporating the Rights Agreement by reference and (iii) the
surrender for transfer of any certificates for NNS Common Stock outstanding
will also constitute the transfer of the Rights associated with NNS Common
Stock represented by such certificate.
The Rights will not be exercisable until the Rights Distribution Date and
will expire at the close of business on June 10, 1998 (the "Final Expiration
Date"), unless (i) earlier redeemed by NNS as described below or (ii) the
Rights Agreement is extended (with stockholder approval) as discussed below.
The Final Expiration Date is the same date on which the stockholder rights
issued under the current Tenneco's stockholder's rights plan would have
terminated, but for the Merger.
As soon as practicable after the Rights Distribution Date, Rights
Certificates will be mailed to holders of record of the NNS Common Stock as of
the close of business on the Rights Distribution Date and, thereafter, the
separate Rights Certificates alone will represent the Rights. Except as
otherwise determined by the NNS Board, only shares of NNS Common Stock issued
prior to the Rights Distribution Date will be issued with Rights.
In the event that (i) any person becomes an Acquiring Person (except
pursuant to an offer for all outstanding shares of NNS Common Stock that the
independent directors determine to be fair to and otherwise in the best
interests of NNS and its stockholders) or (ii) the NNS Board determines that a
person is an Adverse Person, each holder of a Right will thereafter have the
right to receive, upon exercise, NNS Common Stock (or, in certain
circumstances, cash, property or other securities of NNS) having a value equal
to two times the exercise price of the Right. Upon the occurrence of either of
the events set forth in the preceding sentence, all Rights that are, or (under
certain circumstances specified in the Rights Agreement) were, beneficially
owned by the Acquiring Person or Adverse Person (or certain related parties)
will be null and void. Rights will not be exercisable following the occurrence
of either of such events until such time as the Rights are no longer
redeemable by NNS as set forth below.
For example, at an exercise price of $50 per Right, each Right not owned by
an Acquiring Person or by an Adverse Person (or by certain related parties)
following an event set forth in the preceding paragraph would entitle its
holder to purchase $100 worth of NNS Common Stock (or other consideration, as
noted above) for $50. Assuming that NNS Common Stock had a per share value of
$20 at such time, the holder of each valid Right would be entitled to purchase
5.0 shares of NNS Common Stock for $50.
In the event that, at any time following the Stock Acquisition Date, (i) NNS
is acquired in a merger or other business combination transaction (other than
a merger meeting prescribed terms and conditions that
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follows an offer described in the second preceding paragraph) or (ii) more
than 50% of NNS' assets or earning power is sold or transferred, each holder
of a Right (except Rights that previously have been voided as set forth above)
shall thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
The Purchase Price payable, and the number of Units of NNS Junior Preferred
Stock or other securities or property issuable, upon exercise of the Rights
are subject to adjustment from time to time to prevent dilution (i) in the
event of a stock dividend on, or a subdivision, combination or
reclassification of, NNS Junior Preferred Stock, (ii) if holders of NNS Junior
Preferred Stock are granted certain rights or warrants to subscribe for NNS
Junior Preferred Stock or convertible securities at less than the current
market price of NNS Junior Preferred Stock or (iii) upon the distribution to
holders of the NNS Junior Preferred Stock of evidences of indebtedness or
assets (excluding regular quarterly cash dividends) or of subscription rights
or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional Units will be issued and, in lieu thereof, an adjustment
in cash will be made based on the market price of NNS Junior Preferred Stock
on the last trading date prior to the date of exercise.
In general, at any time until 10 business days following the Stock
Acquisition Date, NNS may redeem the Rights in whole, but not in part, at a
price of $.02 per Right. NNS may not redeem the Rights if the NNS Board has
previously declared a person to be an Adverse Person. Immediately upon the
action of the NNS Board ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
$.02 redemption price.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of NNS, including, without limitation, the right to vote or
to receive dividends. While the distribution of the Rights will not be taxable
to stockholders or to NNS, stockholders may, depending upon the circumstances,
recognize taxable income in the event that the Rights became exercisable for
NNS Common Stock (or other consideration) of NNS or for common stock of the
acquiring company as set forth above.
Other than those provisions relating to the duration of the Rights Agreement
and the principal economic terms of the Rights, any of the provisions of the
Rights Agreement may be amended by the NNS Board prior to the Rights
Distribution Date. After the Rights Distribution Date, the provisions of the
Rights Agreement may be amended by the NNS Board in order to cure any
ambiguity, to make changes that do not adversely affect the interests of
holders of Rights, or to shorten or lengthen any time period under the Rights
Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not
redeemable. Notwithstanding the foregoing, unless approved by a vote of the
stockholders of NNS, the Rights Agreement may not be supplemented or amended
to alter the redemption price, the Final Expiration Date, the Purchase Price
or the number of Units for which a Right is exercisable.
The Rights Agreement is designed to protect the stockholders of NNS in the
event of unsolicited offers to acquire NNS and other coercive takeover tactics
which, in the opinion of the NNS Board, could impair its ability to represent
stockholder interests. The provisions of the Rights Agreement may render an
unsolicited takeover of NNS more difficult or less likely to occur, even
though such takeover may offer NNS' stockholders the opportunity to sell their
stock at a price above the prevailing market rate and may be favored by a
majority of NNS' stockholders.
THE FOREGOING SUMMARY OF THE TERMS OF THE RIGHTS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE RIGHTS AGREEMENT, A COPY OF WHICH HAS BEEN FILED
AS AN EXHIBIT TO NNS' REGISTRATION STATEMENT ON FORM 10 UNDER THE EXCHANGE ACT
RELATING TO NNS COMMON STOCK. THE RIGHTS ARE BEING REGISTERED UNDER THE
EXCHANGE ACT, TOGETHER WITH NNS COMMON STOCK, PURSUANT TO SUCH REGISTRATION
STATEMENT. IN THE EVENT
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THAT THE RIGHTS BECOME EXERCISABLE, NNS WILL REGISTER THE SHARES OF NNS JUNIOR
PREFERRED STOCK FOR WHICH THE RIGHTS MAY BE EXERCISED, IN ACCORDANCE WITH
APPLICABLE LAW.
ANTITAKEOVER LEGISLATION
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any "business
combination" with any "interested stockholder" for a three-year period
following the time that such stockholder becomes an interested stockholder
unless (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced
(excluding certain shares) or (iii) on or subsequent to such time, the
business combination is approved by the board of directors of the corporation
and by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder. Section 203 of the
DGCL generally defines an "interested stockholder" to include (x) any person
that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to the relevant date and (y) the
affiliates and associates of any such person. Section 203 of the DGCL
generally defines a "business combination" to include (1) mergers and sales or
other dispositions of 10% or more of the assets of the corporation with or to
an interested stockholder, (2) certain transactions resulting in the issuance
or transfer to the interested stockholder of any stock of the corporation or
its subsidiaries, (3) certain transactions which would result in increasing
the proportionate share of the stock of the corporation or its subsidiaries
owned by the interested stockholder and (4) receipt by the interested
stockholder of the benefit (except proportionately as a stockholder) of any
loans, advances, guarantees, pledges, or other financial benefits.
Under certain circumstances, Section 203 of the DGCL makes it more difficult
for a person who would be an "interested stockholder" to effect various
business combinations with a corporation for a three-year period, although the
certificate of incorporation or stockholder-adopted by-laws may exclude a
corporation from the restrictions imposed thereunder. Neither the Certificate
nor the By-laws exclude NNS from the restrictions imposed under Section 203 of
the DGCL. It is anticipated that the provisions of Section 203 of the DGCL may
encourage companies interested in acquiring NNS to negotiate in advance with
the NNS Board since the stockholder approval requirement would be avoided if
the NNS Board approves, prior to the time the stockholder becomes an
interested stockholder, either the business combination or the transaction
which results in the stockholder becoming an interested stockholder.
COMPARISON WITH RIGHTS OF HOLDERS OF TENNECO COMMON STOCK
Except as otherwise described herein, the provisions of the Certificate and
the By-laws (including the provisions thereof relating to the classification
of directors, the calling of special meetings of stockholders, the advance
notice requirements for stockholder nominations and proposals and the setting
of a record date for actions by written consent of stockholders in lieu of a
meeting) are substantially identical to the provisions of the Tenneco
Certificate of Incorporation (the "Tenneco Certificate") and the Tenneco By-
laws (the "Tenneco By-laws").
Capitalization
Tenneco's authorized capital stock consists of 350,000,000 shares of Tenneco
Common Stock, 15,000,000 shares of Preferred Stock, without par value
("Tenneco Preferred Stock"), and 50,000,000 shares of Junior Preferred Stock,
without par value ("Tenneco Junior Preferred Stock"). NNS's authorized capital
stock consists of 70,000,000 shares of NNS Common Stock and 10,000,000 shares
of NNS Preferred Stock.
The Tenneco Board is generally authorized to issue Tenneco Preferred Stock
and Tenneco Junior Preferred Stock in series and to fix the terms of such
series, but such authority is subject to numerous requirements and/or
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limitations relating to, among other things, the voting rights of such series
and the ability of Tenneco to pay dividends and acquire its capital stock. The
NNS Board is authorized to issue NNS Preferred Stock in series and to fix the
terms of such series, without limitation (other than as provided in the DGCL).
All series of Tenneco Preferred Stock (but not Tenneco Junior Preferred
Stock) must rank on a parity with respect to the payment of dividends. Any of
the terms of a series of NNS Preferred Stock may differ from those of any
other series.
Business Combinations
The Tenneco Certificate prohibits certain "Business Combinations" with
"Interested Stockholders" without supermajority stockholder approval unless
(i) approved by a majority of the "Continuing Directors," or (ii) certain
detailed requirements as to, among other things, the value and type of
consideration to be paid to the Tenneco stockholders, the maintenance of
Tenneco's dividend policy, the public disclosure of the Business Combination
and the absence of any major change in Tenneco's business or equity capital
structure without the approval of a majority of Continuing Directors, have
been satisfied. The Certificate contains no such restrictions on Business
Combinations.
Charter Amendments
Under the Tenneco Certificate, a majority in voting power of the outstanding
shares of voting stock is generally required to effect a charter amendment,
other than an amendment of the provisions relating to Business Combinations.
Under the Certificate, a majority in voting power of the outstanding shares of
voting stock is generally required to effect a charter amendment.
Class Voting
Under the Tenneco Certificate, approval of 66 2/3% of the outstanding shares
of Tenneco Preferred Stock or Tenneco Junior Preferred Stock, or of a series
thereof, is required for any charter amendment which adversely
affects the rights, powers or preferences of the Tenneco Preferred Stock or
Tenneco Junior Preferred Stock, or of a series thereof, as the case may be.
Under the Certificate, there is no such two-thirds approval requirement;
however, the DGCL generally requires any charter amendment that so adversely
affects a particular class or series of stock be approved by a majority of the
outstanding shares of such class or series, as the case may be.
The Tenneco Certificate requires separate class votes of Tenneco Preferred
Stock and of Tenneco Junior Preferred Stock (i) to create a class of stock
ranking senior thereto, (ii) to sell, lease, transfer or convey all or
substantially all of Tenneco's assets or (iii) to merge with another
corporation (unless Tenneco survives). No such class votes are required under
the Certificate.
Stockholder Meetings
The By-laws provide that the NNS Board and the chairman of a meeting may
adopt rules for the conduct of stockholder meetings and specify the types of
rules that may be adopted (including the establishment of an agenda, rules
relating to presence at the meeting of persons other than stockholders,
restrictions on entry at the meeting after commencement thereof and the
imposition of time limitations for questions by participants at the meeting).
Such issues are not expressly addressed by the Tenneco By-laws.
Number of Directors
Under the Tenneco By-laws, the number of directors constituting the whole
Tenneco Board is required to be not less than 8, nor more than 16, and
determined from time to time, within such limits, by the Tenneco Board. The
Certificate provides for the number of directors to be not less than 3, nor
more than 16, and
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determined from time to time, within such limits, by the NNS Board. The NNS
Board currently consists of 3 directors.
Stockholder Rights Plans
Tenneco adopted a stockholder rights plan on May 24, 1988, which was amended
and restated on October 1, 1989 (the "Tenneco Rights Plan"). Pursuant to and
in accordance with such plan, one preferred share purchase right (a "Tenneco
Right") is attached to each share of Tenneco Common Stock. Each Tenneco Right
entitles the registered holder thereof to, among other things, purchase, under
certain circumstances, from Tenneco a unit consisting of one one-hundredth of
a share of Tenneco Series A Junior Preferred Stock. Tenneco has amended the
Tenneco Rights Plan to exempt El Paso and El Paso Merger Company from becoming
an "acquiring person" thereunder, or otherwise triggering the Tenneco Rights,
solely by reason of the execution of the Merger Agreement and consummation of
the transactions contemplated thereby, and to cause the Tenneco Rights to
expire at the Merger Effective Time.
The Company will adopt the Rights Agreement. The Rights Agreement is, in all
material respects, the same as the Tenneco Rights Plan except that the
Redemption Price (as defined therein), the Final Expiration Date, the Purchase
Price and the number of one one-hundredths of a share of NNS Junior Preferred
Stock for which a Right is exercisable (which under the Tenneco Rights Plan
may not be supplemented or amended) may be supplemented or amended with
stockholder approval.
Indemnification
The Tenneco By-laws provide for mandatory indemnification for directors and
officers of Tenneco and for directors and officers of Tenneco serving as
directors and officers of other entities at the request of Tenneco to the
fullest extent permitted by the DGCL. The By-laws provide similar mandatory
indemnification except (i) such indemnification includes directors and
officers of NNS serving as directors, officers, employees or agents of another
entity at the request of NNS and (ii) suits (or parts thereof) instituted by
any such indemnitee without NNS Board approval are excluded from such
mandatory indemnification.
The By-laws also provide for mandatory advancement of expenses in defending
any proceeding for which mandatory indemnification may be available. The
Tenneco By-laws do not provide for such mandatory advancement of expenses.
Under the By-laws, persons claiming indemnification or advancement may file
suit in respect thereof if NNS does not pay such a claim within 30 days after
receipt of a written claim therefor and, if successful in whole or in part,
are entitled to be paid the expense of prosecuting such claim. The By-laws
provide that in any such action, NNS has the burden of proving that the
indemnitee is not entitled to the requested indemnification or advancement.
Such issues are not expressly addressed by the Tenneco By-laws.
Director Exculpation
Pursuant to Section 102(b)(7) of the DGCL, the Tenneco Certificate provides
that a director thereof shall not be liable to Tenneco or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to Tenneco or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of the law, (iii) under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit.
The Certificate provides that a director of NNS shall not be liable to NNS
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the DGCL as the same exists or may thereafter
be amended. The Certificate, therefore, affords directors of NNS the benefit
of any subsequent broadening of director exculpation permitted by the DGCL
without the need for a further charter amendment.
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Ratification
The Tenneco Certificate provides that a director of Tenneco shall not be
disqualified by his or her office from dealing or contracting with Tenneco
either as a vendor, purchaser or otherwise, nor shall any transaction or
contract of Tenneco be void or voidable by reason of the fact that any
director or any firm of which any director is a member, or any corporation of
which any director is a shareholder, officer or director, is in any way
interested in such transaction or contract, provided that such transaction or
contract is or shall be authorized, ratified or approved either (i) by a vote
of a majority of a quorum of the Tenneco Board or of the Executive Committee
of Tenneco, without counting in such majority or quorum any director so
interested or a member of a firm so interested, or a stockholder, officer or
director of a corporation so interested, or (ii) by the written consent, or by
the vote at any stockholders' meeting, of the holders of record of a majority
of all the outstanding shares of stock of Tenneco entitled to vote, nor shall
any director be liable to account to Tenneco for any profits realized by or
from or through any such transaction or contract of Tenneco authorized,
ratified or approved as aforesaid by reason of the fact that he, or any firm
of which he is a member or any corporation of which he or she is a
stockholder, officer or director was interested in such transaction or
contract.
The Tenneco By-laws provide that any transaction questioned in any
stockholders derivative suit on the ground of lack of authority, defective or
irregular execution, adverse interest of director, officer or stockholder,
nondisclosure, miscomputation, or the application of improper principles or
practices of accounting may be ratified before or after judgment, by the
Tenneco Board or by Tenneco's stockholders. The Tenneco By-laws also provide
that, if so ratified, the transaction shall have the same force and effect as
if it had been originally duly authorized, and said ratification shall be
binding upon Tenneco and shall continue as a bar to any claim or execution of
any judgment in respect of such questioned transaction.
Such issues are not expressly addressed by either the Certificate or the By-
laws. However, Section 144 of the DGCL provides, in relevant part, that no
contract or transaction between a corporation and one or more of its directors
or officers, or between a corporation and any other corporation, partnership,
association, or other organization in which one or more of its directors or
officers are directors or officers or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer
is present at or participates in the meeting of the board or committee which
authorized the contract or transaction, or solely because his, her or their
votes are counted for such purpose, if: (i) the material facts as to his or
her relationship or interest and as to the contract or transaction are
disclosed or are known to the board of directors or the committee, and the
board or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum; or (ii) the material facts
as to his or her relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good
faith by vote of the stockholders; or (iii) the contract or transaction is
fair as to the corporation as of the time it is authorized, approved or
ratified, by the board of directors, a committee or the stockholders.
Contracts
The By-laws provide that, except as otherwise required by law, the
Certificate or the By-laws, any contracts or other instruments may be executed
and delivered in the name and on the behalf of the Company by such officer or
officers of the Company as the NNS Board may from time to time direct. The By-
laws state that such authority may be general or confined to specific
instances as the NNS Board may determine. The By-laws also provide that (i)
the Chairman of the NNS Board, the President or any Vice President may execute
bonds, contracts, deeds, leases and other instruments to be made or executed
for or on behalf of the Company, and (ii) subject to any restrictions imposed
by the Board, the Chairman of the NNS Board, the President or any Vice
President of NNS may delegate contractual powers to others under his or her
jurisdiction, it being understood, however, that any such delegation of power
shall not relieve such officer of responsibility with respect to the exercise
of such delegated power. Such issues are not expressly addressed by the
Tenneco By-laws.
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Proxies
The By-laws provide that unless otherwise provided by resolution adopted by
the NNS Board, the Chairman of the NNS Board, the President or any Vice
President may from time to time appoint an attorney or attorneys or agent or
agents of NNS, in the name and on behalf of NNS, to cast the votes which NNS
may be entitled to cast as the holders of stock or other securities in any
other corporation or other entity, any of whose stock or other securities may
be held by NNS, at meetings of the holders of the stock or other securities of
such other corporation or other entity, or to consent in writing, in the name
of NNS as such holder, to any action by such other corporation or other
entity, and may instruct the person or persons so appointed as to the manner
of casting such votes or giving such consent, and may execute or cause to be
executed in the name and on behalf of NNS and under its corporate seal or
otherwise, all such written proxies or other instruments as he may deem
necessary or proper in the premises. Such issues are not expressly addressed
by the Tenneco By-laws.
92
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LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
ELIMINATION OF LIABILITY OF DIRECTORS
The Certificate provides that a director of NNS will not be liable to NNS or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the DGCL as the same exists or may thereafter
be amended. Based on the DGCL as presently in effect, a director of NNS will
not be personally liable to NNS or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to NNS or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL, which
concerns unlawful payments of dividends, stock purchases or redemptions, or
(iv) for any transactions from which the director derived an improper personal
benefit.
While the Certificate provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate
such duty. Accordingly, the Certificate will have no effect on the
availability of equitable remedies such as an injunction or rescission based
on a director's breach of his or her duty of care. The provisions of the
Certificate described above apply to an officer of NNS only if he or she is a
director of NNS and is acting in his or her capacity as director, and do not
apply to officers of NNS who are not directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The By-laws provide that NNS will indemnify and hold harmless, to the
fullest extent permitted by applicable law as it presently exists or may
thereafter be amended, any person (an "Indemnitee") who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, she, or a person for whom he or
she is the legal representative, is or was a director or officer of NNS or,
while a director or officer of NNS, is or was serving at the request of NNS as
a director, officer, employee or agent of another company or of a partnership,
joint venture, trust, enterprise or nonprofit entity, including service with
respect to employee benefit plans, against all liability and loss suffered and
expenses (including attorneys' fees) reasonably incurred by such Indemnitee.
The By-laws also provide that, notwithstanding the foregoing, but except as
described in the second following paragraph, NNS will be required to indemnify
an Indemnitee in connection with a proceeding (or part thereof) commenced by
such Indemnitee only if the commencement of such proceeding (or past thereof)
by the Indemnitee was authorized by the NNS Board.
The By-laws further provide that NNS will pay the expenses (including
attorneys' fees) incurred by an Indemnitee in defending any proceeding in
advance of its final disposition, provided however, that, to the extent
required by law, such payment of expenses in advance of the final disposition
of the proceeding will be made only upon receipt of an undertaking by the
Indemnitee to repay all amounts advanced if it should be ultimately determined
that the Indemnitee is not entitled to be indemnified under the relevant
section of the By-laws or otherwise.
Pursuant to the By-laws, if a claim for indemnification or payment of
expenses thereunder is not paid in full within 30 days after a written claim
therefor by the Indemnitee has been received by NNS, the Indemnitee may file
suit to recover the unpaid amount of such claim and, if successful in whole or
in part, will be entitled to be paid the expense of prosecuting such claim.
The By-laws provide that, in any such action, NNS will have the burden of
proving that the Indemnitee is not entitled to the requested indemnification
or payment of expenses under applicable law.
The By-laws also provide (i) that the rights conferred on any Indemnitee
thereby are not exclusive of any other rights which such Indemnitee may have
or thereafter acquire under any statute, provision of the Certificate, the By-
laws, agreement, vote of stockholders or disinterested directors or otherwise,
(ii) that NNS' obligation,
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if any, to indemnify or to advance expenses to any Indemnitee who was or is
serving at its request as a director, officer, employee or agent of another
company, partnership, joint venture, trust, enterprise or nonprofit entity
will be reduced by any amount such Indemnitee may collect as indemnification
or advancement of expenses from such other company, partnership, joint
venture, trust, enterprise or nonprofit enterprise, and (iii) that any repeal
or modification of the relevant provisions of the By-laws will not adversely
affect any right or protection thereunder of any Indemnitee in respect of any
act or omission occurring prior to the time of such repeal or modification.
The By-laws also expressly state that the provisions thereof will not limit
the right of NNS, to the extent and in the manner permitted by law, to
indemnify and to advance expenses to persons other than Indemnitees when and
as authorized by appropriate corporate action.
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<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE BUSINESSES OF NEWPORT NEWS
Report of Independent Public Accountants................................ F-2
Combined Statements of Earnings for each of the three years in the
period ended December 31, 1995 and the six months ended June 30, 1996
and 1995............................................................... F-3
Combined Balance Sheets--December 31, 1995 and 1994 and June 30, 1996... F-4
Combined Statements of Cash Flows for each of the three years in the
period ended December 31, 1995 and the six months ended June 30, 1996
and 1995............................................................... F-5
Statements of Changes in Combined Equity for each of the three years in
the period ended December 31, 1995 and the six months ended June 30,
1996 and 1995.......................................................... F-6
Notes to Combined Financial Statements.................................. F-7
FINANCIAL STATEMENT SCHEDULE
Valuation and Qualifying Accounts....................................... S-1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Tenneco Inc.:
We have audited the accompanying combined balance sheets of the businesses of
Newport News (see Note 1) as of December 31, 1995 and 1994, and the related
combined statements of earnings, cash flows and changes in combined equity for
each of the three years in the period ended December 31, 1995. These combined
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
businesses of Newport News as of December 31, 1995 and 1994, and the results
of its combined operations and cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the combined financial statements, effective January
1, 1994, the businesses of Newport News changed its method of accounting for
postemployment benefits.
Our audits were made for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The supplemental schedule
listed in the index to the combined financial statements and schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic combined financial statements.
The supplemental schedule has been subjected to the auditing procedures
applied in the audits of the basic combined financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic combined financial statements of
the businesses of Newport News taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.,
October 1, 1996
F-2
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER ENDED
31, JUNE 30,
---------------------- ------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ------ ------ ------ ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES................................ $1,756 $1,753 $1,861 $ 915 $ 845
OPERATING COSTS AND EXPENSES............. 1,599 1,552 1,651 834 755
------ ------ ------ ----- -----
OPERATING EARNINGS....................... 157 201 210 81 90
Interest Expense, net of interest
capitalized............................. (29) (30) (36) (17) (20)
Gain on Sale of Business................. -- -- 15 -- --
Other Income (Expense), net.............. 3 (1) -- -- --
------ ------ ------ ----- -----
EARNINGS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.................... 131 170 189 64 70
Provision for Income Taxes............... 58 75 78 27 29
------ ------ ------ ----- -----
EARNINGS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.......... 73 95 111 37 41
Cumulative Effect of Change in Accounting
Principle, net of tax.................... -- (4) -- -- --
------ ------ ------ ----- -----
NET EARNINGS............................. $ 73 $ 91 $ 111 $ 37 $ 41
====== ====== ====== ===== =====
</TABLE>
The accompanying notes are an integral part of these combined statements of
earnings.
F-3
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
JUNE 30,
(MILLIONS) 1995 1994 1996
- ---------- ------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents............................. $ 2 $ 1 $ 1
Accounts Receivable, net.............................. 67 89 125
Contracts in Process.................................. 263 184 282
Inventory............................................. 54 45 49
Notes Receivable...................................... 18 -- --
Other Current Assets.................................. 15 11 16
------ ------ ------
Total Current Assets.................................. 419 330 473
------ ------ ------
NONCURRENT ASSETS
Property, Plant and Equipment, net.................... 820 796 824
Other Assets.......................................... 141 137 155
------ ------ ------
Total Noncurrent Assets............................... 961 933 979
------ ------ ------
$1,380 $1,263 $1,452
====== ====== ======
LIABILITIES AND COMBINED EQUITY
CURRENT LIABILITIES
Trade Accounts Payable................................ $ 99 $ 63 $ 104
Accounts Payable to Tenneco........................... 67 117 73
Short-Term Debt....................................... 68 30 95
Deferred Income Taxes................................. 39 38 5
Other Accrued Liabilities............................. 165 157 155
------ ------ ------
Total Current Liabilities............................. 438 405 432
------ ------ ------
NONCURRENT LIABILITIES
Long-Term Debt........................................ 292 287 282
Postretirement Benefits............................... 101 104 103
Deferred Income Taxes................................. 138 141 140
Other Long-Term Liabilities........................... 139 127 146
Commitments and Contingencies (See Note 13)
------ ------ ------
Total Noncurrent Liabilities.......................... 670 659 671
------ ------ ------
COMBINED EQUITY (SEE NOTE 4).......................... 272 199 349
------ ------ ------
$1,380 $1,263 $1,452
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-4
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
---------------- -------------
(MILLIONS) 1995 1994 1993 1996 1995
- ---------- ---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings................................. $ 73 $ 91 $111 $ 37 $ 41
Cumulative Effect of Change in Accounting
Principle................................... -- (4) -- -- --
Adjustments to Reconcile Net Earnings Before
Accounting Changes to Net Cash (Used)
Provided by Operating Activities--
Depreciation............................... 67 70 72 32 33
Deferred Income Taxes...................... (2) (46) 30 (32) --
Gain on Sale of Business................... -- -- (15) -- --
Allocated Corporate Interest, net of tax... 18 17 22 12 12
Changes in Components of Working Capital--
Decrease(Increase) in--
Accounts Receivable, net................. 22 (15) (22) (58) 18
Contracts in Process..................... (95) (20) 76 (19) (94)
Inventory................................ (9) (1) -- 5 (12)
Other Current Assets..................... (4) (6) -- (1) (2)
Increase(Decrease) in--
Trade Accounts Payable................... 36 (1) (17) 5 4
Accounts Payable to Tenneco.............. (50) 58 (69) 6 (70)
Other Accrued Liabilities................ 8 29 15 (10) 36
Other, net................................. (1) 10 12 22 16
---- ---- ---- ----- -----
Net Cash (Used) Provided by Operating
Activities.................................. 63 182 215 (1) (18)
---- ---- ---- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Business............... -- -- 56 -- --
Capital Expenditures......................... (77) (29) (35) (36) (29)
Other........................................ (10) -- -- (9) --
---- ---- ---- ----- -----
Net Cash (Used) Provided by Investing
Activities.................................. (87) (29) 21 (45) (29)
---- ---- ---- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Transfers (to) from Tenneco............. 25 (154) (241) 45 47
---- ---- ---- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 1 (1) (5) (1) --
Effect of Exchange Rate Changes on Cash and
Cash Equivalents............................ -- -- -- -- --
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD...................................... 1 2 7 2 1
---- ---- ---- ----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD... $ 2 $ 1 $ 2 $ 1 $ 1
==== ==== ==== ===== =====
CASH PAID DURING THE PERIOD FOR INCOME TAXES
(SEE NOTE 3)................................ $122 $ 53 $120 $ 9 $ 16
==== ==== ==== ===== =====
CASH PAID DURING THE PERIOD FOR INTEREST (SEE
NOTE 4)...................................... $ -- $ -- $ -- $ -- $ --
==== ==== ==== ===== =====
</TABLE>
The accompanying notes are an integral part of these combined statements of
cash flows.
F-5
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
STATEMENTS OF CHANGES IN COMBINED EQUITY
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- ------------
1995 1994 1993 1996 1995
---- ----- ------ ----- -----
(MILLIONS)
- ---------- (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Combined Equity, beginning of period......... $199 $ 105 $ (173) $ 272 $ 199
Net Earnings................................. 73 91 111 37 41
Net Cash Transfers (To) From Tenneco......... 25 (154) (241) 45 47
Non-Cash Transactions With Tenneco
Net Change in Allocated Corporate Debt..... (43) 140 386 (17) (63)
Allocated Corporate Interest, net of tax... 18 17 22 12 12
---- ----- ------ ----- -----
Combined Equity, end of period............... $272 $ 199 $ 105 $ 349 $ 236
==== ===== ====== ===== =====
</TABLE>
The accompanying notes are an integral part of these combined statements of
changes in combined equity.
F-6
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of Presentation
The accompanying combined financial statements represent the financial
position, results of operations and cash flows for all shipbuilding operations
owned directly or indirectly by Tenneco Inc. ("Tenneco") and its subsidiaries
(see "Control" below).
Unless the context otherwise requires, as used herein, the term "Company"
refers: (i) for periods prior to the Shipbuilding Distribution (as defined
below), to Newport News Shipbuilding and Dry Dock Company ("Newport News") and
certain other consolidated subsidiaries through which Tenneco conducted its
shipbuilding business (the "Shipbuilding Business") during such period, and
(ii) for periods after the Shipbuilding Distribution, to Newport News
Shipbuilding Inc. ("NNS," formerly Tenneco InterAmerica Inc.) and its
consolidated subsidiaries, including Newport News.
Investments in 20% to 50% owned companies where the Company has the ability
to exert significant influence over operating and financial policies are
carried at cost plus equity in undistributed earnings since the date of
acquisition. Earnings recognized and distributions received from equity method
investees was not significant during any of the periods presented in the
accompanying combined financial statements. All significant transactions and
balances among combined businesses have been eliminated.
Description of Business
The Company is in the business of designing, constructing, repairing,
overhauling and refueling ships, primarily for the United States Government.
Prior to November 1993, the Company was also involved in the manufacture of
advanced electronics for maritime and other applications (see Note 5).
Except with respect to its interest in Abu Dhabi Ship Building Company, the
Company does not have significant operations or assets outside the U.S. The
largest single customer of the Company is the U.S. Government. Contract
revenues from the U.S. Government were $1,697 million (97%), $1,700 million
(97%) and $1,771 million (95%) in 1995, 1994, and 1993, respectively.
2. THE SHIPBUILDING DISTRIBUTION
On June 19, 1996, Tenneco and El Paso Natural Gas Company ("El Paso")
entered into a merger agreement pursuant to which a subsidiary of El Paso will
be merged into Tenneco (the "Merger"). The Merger is part of a larger Tenneco
reorganization (the "Transaction") which includes the distribution of the
common stock of the Company (the "Shipbuilding Distribution") and New Tenneco
Inc. ("New Tenneco"), a newly formed subsidiary of Tenneco which will hold
substantially all of the assets, liabilities and operations of Tenneco's
current automotive and packaging businesses and its administrative services
business (the "Industrial Distribution") (collectively the "Distributions"),
to the holders of Tenneco common stock. Upon completion of the Transaction,
holders of Tenneco common stock will receive equity securities of the Company,
New Tenneco and El Paso.
Prior to the Transaction, Tenneco intends to initiate a realignment of its
existing indebtedness. As part of the debt realignment, certain New Tenneco
debt will be offered in exchange for certain issues of Tenneco debt. Tenneco
will initiate tender offers for other Tenneco debt, and certain debt issues
may be defeased. These tender offers and defeasances will be financed by a
combination of new lines of credit of Tenneco, New Tenneco (which may declare
and pay a dividend to Tenneco) and the Company (which will declare and pay a
dividend of approximately $600 million to Tenneco). Upon completion of the
debt realignment, Tenneco will have responsibility for $2.65 billion of debt,
subject to certain adjustments, the Company will have responsibility for the
borrowings under its credit lines, and New Tenneco will have responsibility
for the remaining debt.
F-7
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Transaction is subject to certain conditions, including receipt of a
favorable ruling from the Internal Revenue Service to the effect that the
Distributions and certain internal spin-off transactions will be tax-free for
federal income tax purposes and approval by Tenneco stockholders.
In order to assist in the orderly transition of the Company into a separate,
publicly held company, Tenneco intends to modify, amend or enter into certain
contractual agreements with the Company. Such agreements include a tax sharing
agreement between Tenneco and its subsidiaries (see "Income taxes" in Note 3),
an employee benefits agreement, an insurance agreement, an administrative
services agreement and other ancillary agreements. These agreements will
provide, among other things, that (i) New Tenneco will become the sole sponsor
of the Tenneco Inc. Retirement Plan, the Tenneco Inc. Thrift Plan, and various
Tenneco welfare plans, while the Company will establish new plans for its
employees subsequent to the Shipbuilding Distribution, (ii) the Company will
retain specific insurance policies which relate to its businesses and will
retain continuing rights and obligations for certain parent-company insurance
policies of Tenneco, and (iii) the Company will receive certain corporate
services, such as mainframe data processing and product purchasing services,
from New Tenneco for a specified period of time.
3. SUMMARY OF ACCOUNTING POLICIES
Control
All of the outstanding common stock of the Company is owned directly or
indirectly by Tenneco. Thus, the Company is under the control of Tenneco.
Unaudited Interim Information
The unaudited interim combined financial statements as of June 30, 1996 and
for each of the six month periods ended June 30, 1996 and 1995, included
herein, have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim combined financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The interim financial results are not necessarily
indicative of operating results for an entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of the Company's assets,
liabilities, revenues and expenses. Reference is made to the "Revenue
Recognition" section of this footnote and Notes 11, 12 and 13 for additional
information on certain estimates included in the Company's combined financial
statements.
Revenue Recognition
The Company reports profits on its long-term contracts using the percentage-
of-completion method of accounting, determined on the basis of total costs
incurred to date to estimated final total costs. Losses on contracts,
including allocable general and administrative expenses, are reported when
first estimated. The performance of contracts usually extends over several
years, requiring periodic reviews and revisions of estimated final contract
prices and costs during the term of the contracts. The effect of these
revisions to estimates is included in earnings in the period the revisions are
made. Revenue arising from the claims process is not recognized either as
income or as an offset against a potential loss until it can be reliably
estimated and its realization is probable.
General and Administrative Expenses
General and administrative expenses of $254 million, $271 million and $249
million in 1995, 1994, and 1993, respectively, are included in the "Operating
Costs and Expenses" caption in the Combined Statements of
F-8
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Earnings. Of the total general and administrative expenses for 1995, 1994, and
1993, $12 million, $13 million and $13 million, respectively, represent the
Company's share of Tenneco's corporate general and administrative costs for
legal, financial, communication and other administrative services. The
allocation of Tenneco's corporate general and administrative expenses to the
Company has been based on estimated levels of effort devoted to the Company's
operations and the relative size of the Company based on revenues, gross
property and payroll. The Company's management believes the method for
allocating corporate general and administrative expenses is reasonable and
that the general and administrative expenses reflected in the accompanying
combined financial statements are generally representative of the total
general and administrative costs the Company would have incurred as a separate
public entity.
Income Taxes
The Company utilizes the liability method of accounting for income taxes
whereby it recognizes deferred tax assets and liabilities for the future tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts in the combined financial statements.
Deferred tax assets are reduced by a valuation allowance when, based upon
management's estimates, it is more likely than not that a portion of the
deferred tax assets will not be realized in a future period. No deferred tax
valuation allowances were recorded by the Company as of December 31, 1995 and
1994.
The Company and Tenneco, together with certain of their respective
subsidiaries which are owned 80% or more, have entered into an agreement to
file a consolidated U.S. federal income tax return. Such agreement provides,
among other things, that (i) each company in a taxable income position will be
currently charged with an amount equivalent to its federal income tax computed
on a separate return basis and (ii) each company in a tax loss position will
be reimbursed currently to the extent its deductions, including general
business credits, are utilized in the consolidated return. The income tax
amounts reflected in the combined financial statements of the Company under
the provisions of the tax sharing arrangement are not materially different
from the income taxes which would have been provided had the Company filed a
separate tax return. Under the tax sharing agreement, Tenneco pays all federal
taxes directly and bills or refunds, as applicable, its subsidiaries,
including the Company, for the applicable portion of the total tax payments.
Thus, the majority of payments made by the Company for taxes included in the
Combined Statements of Cash Flows represent payments to Tenneco.
In connection with the Distributions the current tax sharing agreement will
be cancelled and the Company will enter into a new tax sharing agreement with
Tenneco, New Tenneco and El Paso. The new tax sharing agreement will provide,
among other things, for the allocation of tax liabilities arising prior to, as
a result of, and subsequent to the Distributions. Generally, the Company will
be liable for taxes imposed on the Company and its affiliates engaged in the
shipbuilding business. In the case of federal income taxes imposed on the
combined activities of the Tenneco consolidated group, the Company and New
Tenneco will be liable to Tenneco for federal income taxes attributable to
their activities, and each will be allocated an agreed-upon share of estimated
tax payments made by the Tenneco consolidated group.
Cash and Cash Equivalents
The Company considers highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
Accounts Receivable, net and Contracts In Process
Only amounts billed and currently due from customers are included in the
"Accounts Receivable, net" caption in the accompanying Combined Balance
Sheets. Recoverable costs and accrued earnings related to long-term contracts
on which revenue has been recognized, but billings have not been made to the
customer, are included in the "Contracts in Process" caption (See Note 6).
Accounts receivable are presented net of an allowance for doubtful accounts.
As of December 31, 1995 and 1994, the allowance for doubtful accounts
receivable was none and $8 million, respectively.
F-9
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Inventory
Inventory principally consists of raw materials and supplies which have not
been allocated to specific contracts. Inventory is stated at the lower of cost
or market. Substantially all inventory is costed using the "last-in, first-
out" method. If the first-in, first-out or average cost method of inventory
accounting had been used by the Company for all inventory, inventory would
have been approximately $8 million higher at both December 31, 1995 and 1994.
Property, Plant and Equipment, net
Property, plant and equipment is carried at cost, net of accumulated
depreciation. The Company provides for depreciation on a straight-line basis
in amounts which, in the opinion of management, are adequate to allocate the
cost of depreciable assets over their estimated useful lives. Estimated useful
lives for significant classes of assets are as follows.
<TABLE>
<S> <C>
Buildings................................................ 30 to 60 years
Machinery and equipment.................................. 8 to 45 years
</TABLE>
Total depreciation expense was $67 million, $70 million and $72 million, for
1995, 1994 and 1993, respectively. Depreciation expense is included as a
component of "Operating Costs and Expenses" in the Combined Statements of
Earnings.
Interest capitalized on constructed assets during the years ended December
31, 1995, 1994 and 1993 was $2 million, $1 million and $1 million,
respectively.
Changes in Accounting Principles
The Company adopted Statement of Financial Accounting Standards ("FAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," in the first quarter of 1996. FAS No. 121
establishes new accounting standards for measuring the impairment of long-
lived assets. The adoption of this new standard did not have any impact on the
Company's combined financial position or results of operations.
Effective January 1, 1994, the Company adopted FAS No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees, after employment but before retirement, on the accrual versus cash
basis of accounting. The Company recorded an after-tax charge of $4 million,
which was reported as a cumulative effect of change in accounting principle.
Research and Development Costs
Research and development costs are charged to "Operating Costs and Expenses"
as incurred. The amounts charged to operations during the years ended December
31, 1995, 1994 and 1993 were $20 million, $14 million and $15 million,
respectively.
Risk Management Activities
The Company periodically utilizes foreign currency contracts to hedge its
exposure to changes in foreign currency exchange rates for firm purchase
commitments. Net gains and losses on these contracts are deferred and
recognized when the offsetting gains or losses are recognized on the hedged
items. In the Combined Statements of Cash Flows, cash receipts or payments
related to these financial instruments are classified consistent with the cash
flows from the transactions being hedged.
F-10
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Foreign Currency Translation
Financial statements of equity investments in international entities are
translated into U.S. dollars using the exchange rate at each balance sheet
date for assets and liabilities and the weighted-average exchange rate for
each applicable period for amounts included in the Combined Statements of
Earnings. The amount of cumulative translation adjustments is not significant
and is included in the balance sheet caption "Combined Equity."
Classification
The Company's contracts range in duration up to a period of 8 years from the
signing of the contract until delivery. Because of the varying nature of the
Company's operating cycle, and consistent with industry practice, assets and
liabilities relating to long-term contracts are classified as current,
although a portion of these amounts is not expected to be realized or paid
within one year (see Note 6).
4. TRANSACTIONS WITH TENNECO
Combined Equity
The "Combined Equity" caption in the accompanying combined financial
statements represents Tenneco's cumulative net investment in the combined
businesses of the Company. Changes in the "Combined Equity" caption represent
the net earnings of the Company, net cash transfers (to) from Tenneco,
cumulative translation adjustments, changes in allocated corporate debt, and
allocated corporate interest, net of tax. Reference is made to the Statements
of Changes in Combined Equity for an analysis of the activity in the "Combined
Equity" caption for the three years ended December 31, 1995 and six months
ended June 30, 1996 and 1995.
Corporate Debt and Interest Allocation
Tenneco's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, corporate debt of Tenneco and its
related interest expense have been allocated to the Company based on the
portion of Tenneco's investment in the Company which is deemed to be debt,
generally based upon the ratio of the Company's net assets to Tenneco
consolidated net assets plus debt. Interest expense was allocated at a rate
equivalent to the weighted-average cost of all corporate debt, which was 7.7%,
8.3% and 7.4% for 1995, 1994, and 1993, respectively. Total pre-tax interest
expense allocated to the Company in 1995, 1994 and 1993 was $28 million, $26
million and $34 million, respectively. The Company has also been allocated tax
benefits approximating 35% of the allocated pre-tax interest expense. Although
interest expense, and the related tax effects, have been allocated to the
Company for financial reporting on a historical basis, the Company has not
been billed for these amounts. The changes in allocated corporate debt and the
after-tax allocated interest have been included as a component of the
Company's Combined Equity. Although management believes that the historical
allocation of corporate debt and interest is reasonable, it is not necessarily
indicative of the Company's debt upon completion of the Debt Realignment nor
debt and interest that will be incurred by the Company as a separate public
entity.
Notes and Advances Receivable from Tenneco
"Cash transfers (to) from Tenneco" in the Statements of Changes in Combined
Equity consist of net cash changes in notes and advances receivable with
Tenneco which have been included in Combined Equity. Historically, Tenneco has
utilized notes and advances to centrally manage cash funding requirements for
its consolidated group.
F-11
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, the Company had a non-interest bearing note
receivable from Tenneco totaling $965 million and $991 million, respectively,
which is payable on demand and is included as a component of the Company's
Combined Equity.
Accounts Payable to Tenneco
Certain costs are incurred by Tenneco and allocated to the Company. The
Accounts Payable to Tenneco balance consists of unpaid billings for these
allocated costs and other services. Reference is made to Note 3 for a
discussion of the types of such costs allocated to the Company.
Employee Benefits
Certain employees of the Company participate in the Tenneco employee stock
option and employee stock purchase plans. The Tenneco employee stock option
plan provides for the grant of Tenneco common stock options and other stock
awards at a price not greater than market value at the date of grant. The
Tenneco employee stock purchase plan allows employees to purchase Tenneco
common stock at a 15% discount subject to certain thresholds. The Company
expects to establish similar plans for its employees after the Shipbuilding
Distribution. In connection with the Shipbuilding Distribution, outstanding
options on Tenneco common stock held by Company employees will be converted
into options of the Company so as to preserve the aggregate value of the
options held prior to the Shipbuilding Distribution.
Employees of the Company also participate in certain Tenneco postretirement
and pension plans. Reference is made in Notes 11 and 12 for a further
discussion of these plans.
5. DISPOSITION OF SPERRY MARINE BUSINESS
During November 1993, the Company disposed of its Sperry Marine business
("Sperry"), which was part of its shipbuilding segment. Sperry was involved in
the domestic and international design and manufacture of advanced electronics
for maritime and other applications. The financial amounts related to Sperry
are included in the accompanying Combined Financial Statements through the
date of disposition. The accompanying Combined Financial Statements for the
year ended December 31, 1993, also include $56 million of the total cash
proceeds of $61 million from the sale of Sperry. The remaining portion of the
cash proceeds was realized by other Tenneco entities. In addition to the cash
proceeds from the sale of Sperry, the Company received $17 million in
preferred stock of the purchaser and recognized a pre-tax gain on the total
sale of $15 million. The preferred stock of the purchaser received in the
Sperry sale was subsequently sold in late 1995 for proceeds of $18 million,
which was reflected as a short-term note receivable at December 31, 1995. The
short-term note receivable was collected in 1996.
6. CONTRACTS IN PROCESS
Contracts in process include production costs and related overhead,
including allocable general and administrative expenses, net of progress
payments of $3,023 million and $5,053 million as of December 31, 1995 and
1994, respectively. Approximately $24 million and $79 million of retainages
included in contracts in process, as of December 31, 1995 and 1994,
respectively, are not expected to be billed and collected within one year.
Under the contractual arrangements by which progress payments are received,
the U.S. Government asserts that it has a security interest in the contracts
in process identified with the related contracts.
F-12
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. PROPERTY, PLANT AND EQUIPMENT, NET
The major classes of property, plant and equipment (at cost) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 (MILLIONS) 1995 1994
---------------------- ------ ------
<S> <C> <C>
Land and improvements..................................... $ 26 $ 26
Buildings and improvements................................ 1,150 1,081
Machinery and equipment................................... 376 387
------ ------
1,552 1,494
Less accumulated depreciation............................. (732) (698)
------ ------
$ 820 $ 796
====== ======
</TABLE>
8. DETAIL OF OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
DECEMBER 31 (MILLIONS)
----------------------
<S> <C> <C>
Accrued vacation............................................... $ 43 $ 48
Employee payroll and benefits.................................. 40 34
Current postretirement benefits................................ 16 13
Current postemployment benefits................................ 7 7
Accrued taxes.................................................. 18 26
Other.......................................................... 41 29
---- ----
$165 $157
==== ====
</TABLE>
9. FINANCIAL INSTRUMENTS
The carrying amount and estimated fair values of the Company's financial
instruments by class are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
DECEMBER 31 (MILLIONS) ASSETS (LIABILITIES)
----------------------
<S> <C> <C> <C> <C>
Asset and liability instruments
Accounts receivable, net................. $ 67 $ 67 $ 89 $ 89
Notes receivable......................... 18 18 -- --
Preferred stock investment............... -- -- 17 18
Accounts payable (trade and to Tenneco).. (166) (166) (180) (180)
Instruments with off-balance sheet risk....
Foreign currency contracts............... -- -- -- --
</TABLE>
The fair value of accounts receivable, notes receivable, and accounts
payable in the above table was considered to be the same as or was not
determined to be materially different from the carrying amount. The short-term
and long-term debt reflected in the Combined Balance Sheets represents
corporate debt allocated to the Company for financial reporting purposes by
Tenneco. As such, an estimate of fair value has not been provided.
Preferred stock investment--The fair value of the preferred stock received
as part of the Sperry sale (see Note 5) was determined based on the proceeds
from the sale of such stock that were received in 1996.
F-13
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Foreign currency contracts--The Company periodically utilizes foreign
currency contracts to hedge certain specific foreign currency transactions,
principally the purchase of raw materials and machinery denominated in a
foreign currency. Such contracts generally mature in one year or less and the
cost of replacing these contracts in the event of nonperformance by
counterparties is not significant. At December 31, 1995 and 1994, the Company
had no significant foreign currency contracts outstanding.
10. INCOME TAXES
The Company's income before income taxes was principally domestic for all
years presented in the accompanying Combined Financial Statements. Following
is a comparative analysis of the components of the provision for income taxes:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Current--
Federal................................................ $51 $101 $40
State.................................................. 9 20 8
--- ---- ---
60 121 48
--- ---- ---
Deferred--
Federal................................................ (2) (46) 30
--- ---- ---
$58 $ 75 $78
=== ==== ===
</TABLE>
Current Federal tax expense for the years ended December 31, 1995, 1994 and
1993, include tax benefits of $10 million, $9 million and $12 million,
respectively, related to the allocation of corporate interest expense to the
Company from Tenneco. See Note 4.
The following is a reconciliation of income taxes computed using the
statutory U.S. federal income tax rate (35% for all years presented) to the
provision for income taxes reflected in the Combined Statements of Earnings:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Tax expense computed at the statutory U.S. Federal income
tax rate................................................. $46 $60 $66
State and local taxes on income, net of Federal benefit... 6 14 5
U.S. Federal income tax rate change....................... -- -- 5
Other..................................................... 6 1 2
--- --- ---
$58 $75 $78
=== === ===
</TABLE>
F-14
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The components of the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 (MILLIONS) 1995 1994
---------------------- ---- ----
<S> <C> <C>
Deferred tax assets--
Postretirement benefits...................................... $ 36 $ 36
Postemployment benefits...................................... 14 15
Accrued vacation............................................. 13 14
Other........................................................ 13 7
---- ----
Total deferred tax assets.................................. 76 72
---- ----
Deferred tax liabilities--
Tax over book depreciation................................... 179 183
Long-term shipbuilding contracts............................. 62 55
Other........................................................ 12 13
---- ----
Total deferred tax liabilities............................. 253 251
---- ----
$177 $179
==== ====
</TABLE>
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Postretirement Benefits
The Company has postretirement health care and life insurance plans which
cover its employees who meet certain eligibility requirements. For salaried
employees, the plans cover employees retiring from the Company on or after
attaining age 55 who have had at least 10 years service with the Company after
attaining age 45. For hourly employees, the postretirement benefit plans
generally cover employees who retire pursuant to one of the Company's hourly
employee retirement plans. All of these benefits may be subject to
deductibles, copayment provisions and other limitations, and the Company has
reserved the right to modify these benefits. The Company's postretirement
benefit plans are funded on a pay-as-you-go basis.
Generally, the Company, will retain liabilities with respect to the welfare
benefits of its current and former employees and their dependents.
The funded status of the postretirement benefit plans reconciles with
amounts recognized in the accompanying Combined Balance Sheets as follows:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994
- ---------- ----- -----
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit
obligation at September 30:
Retirees....................................................... $ 109 $ 112
Fully eligible active plan participants........................ 24 22
Other active plan participants................................. 28 30
----- -----
Total accumulated postretirement benefit obligation.............. 161 164
Plan assets at fair value at September 30........................ -- --
----- -----
Accumulated postretirement benefit obligation in excess of plan
assets at September 30.......................................... (161) (164)
Claims paid during the fourth quarter............................ 4 3
Unrecognized reduction of prior service obligations resulting
from plan amendments............................................ (20) (11)
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions........................................ 60 55
----- -----
Accrued postretirement benefit cost at December 31............... $(117) $(117)
===== =====
</TABLE>
F-15
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The accrued postretirement benefit cost has been recorded based upon certain
actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
The net periodic postretirement benefit cost consists of the following
components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 (MILLIONS) 1995 1994 1993
---------------------------------- ---- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the year.......... $ 3 $ 3 $ 3
Interest cost on accumulated postretirement benefit
obligation............................................... 13 11 12
Net amortization of unrecognized amounts.................. 1 -- --
--- --- ---
Net periodic postretirement benefit cost.................. $17 $14 $15
=== === ===
</TABLE>
The initial weighted average assumed health care cost trend rate used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligation was 7%, 8% and 9%, respectively, declining to 5% in 1997 and
remaining at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage-point
in each year would increase the 1995, 1994 and 1993 accumulated postretirement
benefit obligations by approximately $10 million each year and would increase
the aggregate of the service cost and interest cost components of the net
postretirement benefit cost for 1995, 1994 and 1993 by approximately $1
million, $1 million, and $2 million, respectively.
The discount rates (which are based on long-term market rates) used in
determining the 1995, 1994 and 1993 accumulated postretirement benefit
obligations were 7.75%, 8.25% and 7.50%, respectively.
Postemployment Benefits
The Company adopted FAS No. 112 "Employers' Accounting for Postemployment
Benefits," in the first quarter of 1994. This new accounting rule requires
employers to account for postemployment benefits for former or inactive
employees after employment but before retirement on the accrual versus cash
basis of accounting. The postemployment benefit liability, which is based on
actuarial estimates, is recorded at its discounted present value, using
discount rates similar to those used for postretirement liabilities.
Implementation of this new rule
reduced 1994 net income by $4 million, net of tax benefits of $2 million,
which was reported as the cumulative effect of a change in accounting
principle.
12. PENSION PLANS
The Company has various defined benefit plans which cover substantially all
of its employees. Benefits are based on years of service and, for most
salaried employees, on final average compensation. The Company's funding
policies are to contribute to the plans amounts necessary to satisfy the
funding requirements of federal laws and regulations. Plan assets consist
principally of listed equity and fixed income securities. Certain employees of
the Company participate in the Tenneco Inc. Retirement Plan ("TRP").
New Tenneco will become the sole sponsor of the TRP after the Distributions,
and the Company will establish benefit plans for its employees. The benefits
accrued by Company employees in the TRP will be frozen as of the last day of
the calendar month including the Distributions, and New Tenneco will amend the
TRP to provide that all benefits accrued through that day by Company employees
are fully vested and non-forfeitable.
F-16
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plans reconcile with amounts recognized on the
Combined Balance Sheet at December 31, 1995 and 1994, as follows:
<TABLE>
<CAPTION>
ALL PLANS
----------
(MILLIONS) 1995 1994
- ---------- ---- ----
<S> <C> <C>
Actuarial present value of benefits based on service to date and
present pay levels at September 30:
Vested benefit obligation....................................... $570 $514
Non-vested benefit obligation................................... 43 44
---- ----
Accumulated benefit obligation.................................. 613 558
Additional amounts related to projected salary increases.......... 104 92
---- ----
Total projected benefit obligation at September 30................ 717 650
Plan assets at fair value at September 30......................... 767 666
---- ----
Plan assets in excess of total projected benefit obligation at
September 30..................................................... 50 16
Contributions during the fourth quarter........................... -- --
Unrecognized net loss resulting from plan experience and changes
in actuarial assumptions......................................... 4 45
Unrecognized prior service obligations resulting from plan
amendments....................................................... 7 7
Remaining unrecognized net asset at initial application........... (49) (55)
---- ----
Prepaid pension cost at December 31............................... $ 12 $ 13
==== ====
</TABLE>
Assets of one plan may not be utilized to pay benefits of other plans.
Additionally, the prepaid pension cost has been recorded based upon certain
actuarial estimates as described below. Those estimates are subject to
revision in future periods given new facts or circumstances.
The Company measures pension cost according to independent actuarial
valuations. The projected unit credit actuarial cost method is used to
determine pension cost for financial accounting purposes consistent with the
provisions of FAS No. 87, "Employers' Accounting for Pensions." Net periodic
pension costs for the years ended December 31, 1995, 1994 and 1993 consist of
the following components:
<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the year... $23 $27 $27
Interest on prior year's projected benefit
obligation..................................... 52 50 48
Expected return on plan assets--
Actual (return) loss.......................... (132) 9 (95)
Unrecognized excess (deficiency) of actual
return over expected return.................. 65 (76) 32
---- --- ---
(67) (67) (63)
Net amortization of unrecognized amounts........ (6) (5) (6)
--- --- ---
Net pension costs............................... $ 2 $ 5 $ 6
=== === ===
</TABLE>
The weighted average discount rates (which are based on long-term market
rates) used in determining the 1995, 1994 and 1993 actuarial present value of
the benefit obligations were 7.75%, 8.25% and 7.50%. The rate of increase in
future compensation was 4.9% in 1995, 1994, and 1993. The weighted average
expected long-term
F-17
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
rate of return on plan assets was 10.0% in 1995, 1994 and 1993. Unrecognized
prior service obligations are being amortized on a straight-line basis over
the average remaining estimated service period of employees expected to
receive benefits under the plans.
13. COMMITMENTS AND CONTINGENCIES
Government Contracting
More than 90% of the Company's business involves contracting with the U.S.
Government. These contracts are subject to possible termination for the
convenience of the U.S. Government, to audit and to possible adjustments
affecting both cost-type and fixed price type contracts. Like many government
contractors, the Company has received audit reports which recommend that
certain contract prices be reduced, or costs allocated to government contracts
be disallowed, to comply with various government regulations. Some of these
audit reports involve substantial amounts. The Company has made adjustments to
its contract prices and the costs allocated to government contracts in those
cases it believes such adjustments are appropriate.
Tenneco and the Company have received letters from the Defense Contract
Audit Agency (the "DCAA"), inquiring about certain aspects of the
Distributions, including the disposition of the Tenneco Inc. Retirement Plan
(the "TRP"), which covers salaried employees of the Company and other Tenneco
divisions. The DCAA has been advised that (i) the TRP will retain the
liability for all benefits accrued by the Company's employees through the date
of the Distributions (the "Distribution Date"), (ii) the Company's employees
will not accrue additional benefits under the TRP after the Distribution Date
and (iii) no liabilities or assets of the TRP will be transferred from the TRP
to any plan maintained by the Company. A determination of the ratio of assets
to liabilities of the TRP attributable to the Company will be based on facts,
assumptions and legal issues which are complicated and uncertain; however, it
is likely that the Government will assert a claim against the Company with
respect to the amount, if any, by which the assets of the TRP attributable to
the Company's employees are alleged to exceed the liabilities. New Tenneco,
with the full cooperation of the Company, will defend against any claim by the
Government, and in the event there is a determination that an amount is due to
the Government, New Tenneco and the Company will share its obligation for such
amount plus the amount of related defense expenses, in the ratio of 80% and
20%, respectively. Pending a final determination of any such claim, the
Government may, absent an agreement with the Company to defer the payment of
the amounts claimed, withhold all or a portion of all future progress payments
due the Company under its government contracts until it has recovered its
alleged share of the claimed amount plus interest. In the event of a claim by
the Government, the Company will diligently seek a deferral agreement with the
Government; however, there can be no assurance that the Company will be able
to arrange such an agreement and thus avoid an offset against future progress
payments pending a final determination. At this preliminary stage it is
impossible to predict with certainty any eventual outcome regarding this
matter, however, the Company does not believe that this matter will have a
material adverse effect on its financial condition or results of operations.
In March 1995, the DCAA informed the Company that it would conduct a post-
award audit of the contract to build the aircraft carrier Reagan (CVN-76). The
audit concerns the Company's submission to the U.S. Navy of current, accurate
and complete data relating to labor and overhead costs submitted in connection
with the proposals and negotiations relating to the CVN-76 contract. The audit
is ongoing and the DCAA has not issued its audit report. In discussions with
the DCAA auditors, however, the DCAA auditors have indicated to Company
management that the $2.5 billion CVN-76 contract should be reduced by
approximately $122 million based on an alleged submission of defective cost
and pricing data. In addition, in May 1996, the Company received a subpoena
from the Inspector General of the Department of Defense requesting documents
in connection with a joint inquiry being conducted by the Department of
Defense, the Department of Justice, the U.S. Attorney's Office for the Eastern
District of Virginia, and the Naval Criminal Investigative Service. Like the
DCAA audit,
F-18
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the investigation appears to focus on whether data relating to labor and
overhead costs that the Company supplied in connection with the proposals and
negotiations relating to the CVN-76 contract were current, accurate and
complete. The Government has not asserted any formal claims against the
Company related to these CVN-76 contract matters. Based on the Company's
present understanding of the focus of the inquiries, it is the Company's
opinion that it has substantial defenses to claims that the government might
potentially assert that the Company submitted cost or pricing data that was
not current, accurate and complete for the CVN-76 contract. It is the
Company's intention to vigorously assert these defenses in the event that the
Government should assert such claims. Although the ultimate outcome cannot be
predicted, based on the Company's present understanding of the claims the
Government might assert, together with defenses the Company believes are
available to it, management is of the opinion that the ultimate resolution of
this matter will not have a material adverse effect on the financial condition
or results of operations of the Company.
In addition, various government agencies may at any time be conducting other
various investigations or making specific inquiries concerning the Company.
The Company believes that the outcome of such other investigations and
inquiries will not have a material adverse effect on the Company's financial
condition or results of operations.
Significant Estimates
In 1994 and 1995, the Company entered into fixed price contracts (which
shift the risks of construction costs that exceed the contract price to the
Company) to construct four Double Eagle product tankers for affiliates of
Eletson Corporation at a price of $36 million per ship. Construction of the
first tanker is substantially complete; construction has begun on the second
tanker; and a substantial portion of the materials needed for the construction
of the three uncompleted tankers has been ordered. The Company presently
estimates that these ships will be constructed over the period ending in
February, 1998. In connection with the construction of these four tankers, the
Company has incurred or estimates it will incur costs of approximately $90
million in excess of the fixed contract prices. As of September 30, 1996, the
full amount of these excess costs has been reserved for by a charge against
income; $56.6 million in 1996 ($26.2 million through June 30), $29.7 million
in 1995 and $5.0 million in 1994. Disagreements have arisen with the
purchasers during the course of construction as to whether the first and
second ships were and are being constructed in compliance with the
specifications set forth in the contracts, and the purchasers sent letters to
the Company purporting to invoke the procedures set forth in the contracts for
resolution of this situation and requested that the Company in the interim
stop construction on the ships. The Company saw no reason to stop construction
on the ships because of its confidence that the ships will be in compliance
with all contract and classification society requirements. The purchasers have
withdrawn both their invocation of the dispute resolution procedures under the
contracts and their request that the Company cease further construction of the
ships. Discussions between the Company and the purchasers to date have
resulted in the resolution of a significant number of these disagreements,
although some remain unresolved and are the subject of further discussions. No
assurances can be given as to the effect the resolution of these remaining
disagreements will have on the Company (although the Company does not believe
such resolution will materially and adversely affect it) or the extent to
which the remaining work on these contracts can be completed without further
disagreements with the purchasers or the incurrence of additional losses in
excess of current estimates, although the Company currently believes it can
complete the four ships within the current estimate of cost.
In 1995, the Company entered into fixed price contracts with limited
liability companies comprised principally of Hvide Partners, L.P. and an
affiliate of Van Ommeren International BV to construct an additional five
Double Eagle product tankers having a somewhat different design for the
domestic Jones Act market at a current average price of $43.4 million per
ship. The Company is in the process of completing its design work on these
ships and expects to begin construction in the first half of 1997. These ships
are scheduled for delivery in 1998. The Company presently estimates that it
will break even on these ships on a aggregate basis, but there can be no
assurance that the costs incurred in constructing these ships will not exceed
the contract prices for them.
F-19
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Contracting with the U.S. Government can also result in the Company filing a
Request for Equitable Adjustment ("REA") in connection with a contract. REAs
represent claims against the U.S. Government for changes in the original
contract specifications and resulting delays and disruption in contract
performance. All major REAs filed by the Company in connection with its
contracts, have been settled as of June 1996 for approximately the same amount
recorded previously by the Company. Through 1995, costs of $18 million had
been recognized on the Sealift REA in excess of the adjudicated REA price.
Cost growth of $36 million that was not recoverable through that REA has been
recognized in the first half of 1996. Due to uncertainties inherent in the
estimation process these contract completion costs could be increased in the
future by $0 to $10 million. The first of two Sealift ships was delivered in
August 1996. Management expects this contract to be substantially complete by
the end of the first quarter of 1997.
Litigation
The Company is also a defendant in other matters of varying nature. In the
opinion of management, the outcome of these proceedings should not have a
material adverse effect on the financial position or results of operations of
the Company.
Capital Commitments
The Company estimates that expenditures aggregating approximately $90
million will be required after December 31, 1995, to complete facilities and
projects authorized at such date, and substantial commitments have been made
in connection therewith.
Lease Commitments
The Company holds certain equipment under long-term operating leases. Future
minimum lease payments under existing operating leases as of December 31,
1995, are $1 million for 1996.
Rent expense recognized for the years ended December 31, 1995, 1994 and
1993, was $14 million, $14 million and $16 million, respectively.
F-20
<PAGE>
THE BUSINESSES OF NEWPORT NEWS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
EARNINGS
BEFORE
INCOME EARNINGS
TAXES & BEFORE
CUMULATIVE CUMULATIVE
EFFECT OF EFFECT OF
CHANGE IN CHANGE IN
NET OPERATING ACCOUNTING ACCOUNTING NET
(MILLIONS) SALES EARNINGS PRINCIPLE PRINCIPLE EARNINGS
- ---------- ------ --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
1996
1st Quarter..................... $ 476 $ 41 $ 32 $19 $19
2nd Quarter..................... 439 40 32 18 18
------ ---- ---- --- ---
$ 915 $ 81 $ 64 $37 $37
====== ==== ==== === ===
1995
1st Quarter..................... $ 421 $ 44 $ 37 $20 $20
2nd Quarter..................... 424 46 33 21 21
3rd Quarter..................... 445 35 29 17 17
4th Quarter..................... 466 32 32 15 15
------ ---- ---- --- ---
$1,756 $157 $131 $73 $73
====== ==== ==== === ===
1994
1st Quarter..................... $ 403 $ 48 $ 41 $23 $19
2nd Quarter..................... 464 53 46 28 28
3rd Quarter..................... 424 52 44 25 25
4th Quarter..................... 462 48 39 19 19
------ ---- ---- --- ---
$1,753 $201 $170 $95 $91
====== ==== ==== === ===
</TABLE>
Reference is made to the Notes 1, 2 and 3 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this Information Statement for items affecting quarterly results.
F-21
<PAGE>
SCHEDULE II
THE BUSINESSES OF NEWPORT NEWS
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS (NOTE) OF YEAR
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts Deducted from
Assets to Which it
Applies:
Year Ended December 31,
1995.................. $8 $-- $-- $ 8 $--
=== === === === ===
Year Ended December 31,
1994.................. $2 $ 6 $-- $-- $ 8
=== === === === ===
Year Ended December 31,
1993.................. $3 $ 2 $-- $ 3 $ 2
=== === === === ===
</TABLE>
Note: Includes uncollectible accounts, net of recoveries, on accounts
previously written-off.
S-1
<PAGE>
APPENDIX E
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S) 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S)(S) 251 (other than a merger effected pursuant to
subsection (g) of (S) 251), 252, 254, 257, 258, 263, or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
(S)(S) 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all
E-1
<PAGE>
or substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to (S) 228 or
(S) 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within twenty days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only to be sent to each stockholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in accordance
with this subsection. An affidavit of the secretary or assistant secretary
or of the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given; provided that,
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the
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<PAGE>
value of the stock of all such stockholders. Notwithstanding the foregoing,
at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of
holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement
is received by the surviving or resulting corporation or within 10 days
after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in
Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with such direction, the Court may
dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of
the proceeding. Upon application by the surviving or resulting corporation
or by any stockholder entitled to participate in the appraisal proceeding,
the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder
whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation
to the stockholders entitled thereto. Interest may be simple or compound,
as the Court may direct. Payment shall be so made to each such stockholder,
in the case of holders of uncertificated stock forthwith, and the case of
holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree
may be enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of this
State or of any state.
E-3
<PAGE>
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective date of
the merger or consolidation as provided in subsection (e) of this section
or thereafter with the written approval of the corporation, then the right
of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be
dismissed as to any stockholder without the approval of the Court, and such
approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation.
E-4
<PAGE>
APPENDIX F
Lazard Freres & Co. llc
30 Rockefeller Plaza
New York, N.Y. 10020
----
Telephone (212) 632-6000 New York
Facsimile (212) 632-6060
June 19, 1996
The Board of Directors
Tenneco Inc.
1275 King Street
Greenwich, CT 06831
Dear Members of the Board:
We understand that Tenneco Inc. (the "Company") proposes to reorganize (the
"Reorganization") itself by distributing to its shareholders all the shares of
common stock of a new corporation ("Automotive/ Packaging") to be composed of
the Company's automotive and packaging business and all the shares of common
stock of a new corporation ("Newport News") to be composed of the Company's
Newport News shipbuilding business, and immediately thereafter, pursuant to an
Agreement and Plan of Merger dated as of June 19, 1996 (including the exhibits
thereto, collectively the "Merger Agreement") between El Paso Natural Gas
Company ("El Paso"), the Company and a newly formed wholly-owned subsidiary of
El Paso ("El Paso Subsidiary"), merging (the "Merger") the Company (which at
that point will be composed of the Company's energy business ("Energy") and
certain discontinued operations and related contingent liabilities) with El
Paso Subsidiary. In the Merger, the shares of the Common Stock, the $4.50
Cumulative Preferred Stock and the $7.40 Cumulative Preferred Stock of the
Company will be converted into shares of common stock of El Paso as provided
in the Merger Agreement. We understand that under certain circumstances set
forth in the Merger Agreement, the consideration to be paid in connection with
the Merger would consist of common stock and preferred stock of El Paso. The
shares of common stock of Auotmotive/Packaging, Newport News and El Paso (or
common and preferred stock of El Paso, as the case may be) to be received by
shareholders of the Company in connection with the Reorganization are referred
to herein collectively as the "Consideration".
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of the Company of the Consideration. In connection
with this opinion, we have:
(i) Reviewed the financial terms and conditions of the form of the
Distribution Agreement included as an exhibit to the Merger Agreement among
the Company, Tenneco Interamerica Inc. and Automotive/ Packaging (including
the exhibits thereto, collectively the "Distribution Agreement") pursuant
to which shares of Automotive/Packaging and Newport News are to be
distributed, the Debt Realignment Plan relating to the Reorganization
attached as Exhibit B to the Merger Agreement (the "Debt Realignment Plan")
and the Merger Agreement;
(ii) Analyzed certain historical business and financial information
relating to the Company and El Paso;
(iii) Reviewed various financial forecasts and other data provided to us
by the Company and El Paso relating to each of their respective businesses;
(iv) Held discussions with members of the senior managements of the
Company and El Paso with respect to the businesses and prospects of the
Company and El Paso, respectively, the strategic objectives of each, and
possible benefits which might be realized following the Reorganization;
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<PAGE>
(v) Reviewed public information with respect to certain other companies
in lines of businesses we believe to be generally comparable to the
businesses of the Company and El Paso;
(vi) Reviewed the financial terms of certain business combinations
involving companies in lines of businesses we believe to be generally
comparable to those of the businesses of the Company and in other
industries generally;
(vii) Reviewed the historical stock prices and trading volumes of the
common stock of the Company and El Paso; and
(viii) Conducted such other financial studies, analyses and
investigations as we deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing
information, and have not assumed any responsibility for any independent
verification of such information or any independent valuation or appraisal of
any of the assets or liabilities of the Company or El Paso. With respect to
financial forecasts, we have assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of
management of the Company and El Paso as to the future financial performance
of the Company and El Paso. We assume no responsibility for and express no
view as to such forecasts or the assumptions on which they are based.
Further, our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof.
In rendering our opinion, we have assumed that the Reorganization will be
consummated on the terms described in the Distribution Agreement, the Debt
Realignment Plan and the Merger Agreement, without any waiver of any material
terms or conditions by the Company and that obtaining the necessary
regulatory, corporate and other approvals and consents for the Reorganization
will not have an adverse effect on Energy, Automotive/ Packaging, Newport News
or El Paso. Specifically, we have assumed that the terms of any El Paso
preferred stock that may be issued in connection with the Merger will be as
contemplated in the Merger Agreement, including that it will trade at par upon
its issuance and that the El Paso common stock and El Paso preferred stock
will have the same value in the aggregate as the El Paso common stock would
have had if the consideration in connection with the Merger consisted solely
of El Paso common stock. We are not expressing any opinion as to the prices at
which the shares of Automotive/Packaging, Newport News or El Paso will trade
when issued to the Company's shareholders.
We have also assumed that the distribution of shares of Automotive/Packaging
and Newport News pursuant to the Distribution Agreement will be tax-free
distributions under Section 355 of the Internal Revenue Code of 1986, as
amended (the "Code"), the Merger will qualify as a reorganization under
Section 368(a)(1)(B) of the Code and the other transfers described in the
Corporate Restructuring Transaction (as defined in the Distribution Agreement)
will qualify as tax-free transfers under Sections 332, 351, 355 and 368 of the
Code.
Lazard Freres & Co. llc is acting as financial advisor to the Company in
connection with the Reorganization and will receive a fee for our services
upon the occurrence of the Reorganization. We have in the past provided, and
are currently providing, investment banking services to the Company and its
affiliates, for which we have been or will be paid customary fees. Mr. W.
Michael Blumenthal, a senior advisor to our firm, is a member of the Company's
Board of Directors.
Our engagement and the opinion expressed herein are for the benefit of the
Company's Board of Directors and our opinion is rendered in connection with
its consideration of the transactions contemplated hereby. This opinion is not
intended to and does not constitute a recommendation to shareholders of the
Company as to whether such shareholders should vote to approve the
transactions contemplated hereby. It is understood that this letter may not be
disclosed or otherwise referred to without our prior written consent, except
as may otherwise be required by law or by a court of competent jurisdiction.
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Based on and subject to the foregoing, we are of the opinion that the
Consideration is fair to the shareholders of the Company from a financial point
of view.
Very truly yours,
Lazard Freres & Co. llc
/s/ Gerald Rosenfeld
By _________________________________
Gerald Rosenfeld
Managing Director
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APPENDIX G
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
277 PARK AVENUE, NEW YORK, NEW YORK 10172 . (212) 892-3000
June 27, 1996
Board of Directors
El Paso Energy Corporation
One Paul Kayser Center
100 North Stanton Street
El Paso, TX 79901
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to El Paso Energy Corporation (the "Company") and its common shareholders
of the consideration to be paid by the Company pursuant to the terms of the
Agreement and Plan of Merger dated as of June 19, 1996, (the "Agreement")
between the Company and Tenneco Inc. ("Tenneco"). Certain terms used herein
have the meaning set forth in the Agreement.
Pursuant to the Agreement, a wholly owned subsidiary of the Company will be
merged (the "Merger") with and into Tenneco, subject to certain conditions. If
(i) the Merger is approved (the "Tenneco Stockholders' Approvals") by the
holders of a majority of the outstanding shares of (a) common stock (the
"Tenneco Common Stock"), par value $5.00 per share of Tenneco and (b) the
$4.50 Cumulative Preferred Stock of Tenneco (the "$4.50 Preferred Stock") and
the $7.40 Cumulative Preferred Stock of Tenneco (the "$7.40 Preferred Stock")
(collectively, the "Tenneco Preferred Stock") voting together as a class, and
(ii) the issuance, pursuant to the Agreement, of additional shares of common
stock (the "Company Common Stock"), par value $3.00 per share, is approved
(the "Company Stockholders' Approval") by the holders of a majority of
outstanding Company Common Stock, all issued and outstanding shares (other
than shares being canceled pursuant to the Agreement) of Tenneco Common Stock
and Tenneco Preferred Stock will be converted, on the terms and conditions set
forth in the Agreement, into the right to receive shares of Company Common
Stock having an aggregate value of $750 million, subject to adjustment, as
provided in the Agreement. If, however, the Tenneco Stockholders' Approvals
are obtained but Company Shareholders' Approval is not obtained, all issued
and outstanding shares (other than shares being canceled pursuant to the
Agreement) of Tenneco Common Stock and Tenneco Preferred Stock will be
converted, on the terms and conditions set forth in the Agreement, into the
right to receive an aggregate of 7 million shares of Company Common Stock and
such number of shares of Adjustable Rate Cumulative Preferred Stock of the
Company, which, together with such 7 million shares of Company Common Stock,
will have an aggregate value of $750 million, subject to adjustment, as
provided in the Agreement.
As contemplated by the Agreement, prior to the Merger, Tenneco will
distribute to the holders of Tenneco Common Stock all of its common equity
interest in the Industrial Business and the Shipbuilding Business pursuant to
the Distribution Agreement to be attached as Exhibit A to the Agreement (the
"Spin-offs"). Additionally, the Agreement contemplates that Tenneco will issue
$250 million of New Preferred Stock and at the effectiveness of the Merger
have outstanding indebtedness of up to $2.4 billion which, along with certain
liabilities associated with Tenneco's previously discontinued operations, will
remain obligations of Tenneco following consummation of the Merger. The terms
and conditions of the Merger, the Spin-offs and the transactions contemplated
thereby are more fully described in the Agreement and the exhibits thereof.
In arriving at our opinion, we have reviewed the Agreement dated as of June
19, 1996, and the exhibits thereto and financial and other information that
was publicly available or furnished to us by the Company and Tenneco,
including information provided during discussions with their respective
managements and certain financial forecasts of Tenneco and the Company
prepared by the management of Tenneco or the Company, as the case may be. In
addition, we have (i) compared certain financial and securities data of the
Company with
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various other companies whose securities are traded in public markets, (ii)
reviewed prices paid in certain other business combinations (iii) reviewed the
historical stock prices and trading volumes of the common stock of the Company
and (iv) conducted such other financial studies, analyses and investigations
as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy,
completeness and fairness of all of the financial and other information that
was available to us from the public sources, that was provided to us by the
Company and Tenneco or their respective representatives, or that was otherwise
reviewed by us. In particular, we have relied upon the views and judgments of
the management of the Company as to (i) the impact of regulatory matters and
customer relationships on the business of Tenneco, (ii) the amount of
liabilities associated with Tenneco's previously discontinued operations and
(iii) the amount and timing of synergies achievable as a result of the Merger.
In addition, we have assumed that (i) the Spin-offs, (ii) the Debt Realignment
Plan and (iii) the offering and sale or distribution of the New Preferred
Stock each are consummated prior to the Merger. With respect to the financial
forecasts supplied to us, we have assumed that they have been reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of the Company and Tenneco as to the future
operating and financial performance of the Company and Tenneco. We have not
assumed any responsibility for making any independent evaluation of Tenneco's
assets or liabilities or for making any independent verification of any of the
information reviewed by us. We have relied as to all legal matters on advice
of counsel to the Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as
of, the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
recoverability of gas supply realignment costs of Tenneco or the amount of
liabilities to be assumed by the Company related to the discontinued
operations of Tenneco. We have not been requested to and do not express any
opinion regarding the financial impact of the amounts recovered or assumed, as
the case may be, on Tenneco or the Company and the effect, if any, of such
actual amounts on the fairness to the Company from a financial point of view
of the consideration to be paid in the proposed merger. In addition, we are
expressing no opinion herein as to the prices at which the Company Common
Stock or, if issued, the Adjustable Rate Preferred Stock, will actually trade
at any time. Our opinion does not constitute a recommendation to any
shareholder as to how such shareholder should vote in connection with the
proposed Merger.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the consideration to be paid by the Company pursuant to
the Agreement is fair to the Company and its common shareholders from a
financial point of view.
Very truly yours,
Donaldson, Lufkin & Jenrette
Securities Corporation
/s/ Ralph Eads
By: _________________________________
Ralph Eads
Managing Director
cc: Mr. Gary P. Cooperstein/FRIED, FRANK, ET AL
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APPENDIX H
FORM OF
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TENNECO INC.
TENNECO INC., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware (the "Company"), DOES
HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the Company
resolutions were adopted setting forth proposed amendments to the Certificate
of Incorporation of said Company, as amended as of such date (the "Certificate
of Incorporation"), declaring said amendments to be advisable and directing
that the amendments be considered at a special meeting of the stockholders of
the Company. The resolution setting forth the proposed amendments is as
follows:
RESOLVED, that the Board of Directors of the Company hereby approves and
declares it advisable that the Certificate of Incorporation of the Company be
amended (the "Amendment") by (i) deleting Subsection 1 of Part II of Article
FOURTH thereof in its entirety and inserting the paragraph set forth below in
lieu thereof, (ii) deleting Subsections 2, 3 and 4 of Part II of Article
FOURTH thereof in their entirety, and (iii) renumbering Subsection 5 of Part
II of Article FOURTH thereof as Subsection 2:
"1. The Board of Directors of the Company is hereby expressly authorized,
by resolution or resolutions thereof, to provide, out of the unissued
shares of Junior Preferred Stock, for series of Junior Preferred Stock and,
with respect to each such series, to fix the number of shares constituting
such series and the designation of such series, the voting powers (if any)
of the shares of such series, and the preferences and relative,
participating, optional or other special rights, if any, and any
qualifications, limitations or restrictions thereof, of the shares of such
series. The powers, preferences and relative, participating, optional and
other special rights of each series of Junior Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ
from those of any and all other series at any time outstanding."
SECOND: That thereafter, pursuant to the resolution of its Board of
Directors, (i) a special meeting of the stockholders of the Company was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware (the "DGCL"), at which meeting
holders of a majority of the outstanding stock entitled to vote thereon
(except for the holders of the Company's outstanding Junior Preferred Stock),
as required by the DGCL and the Certificate of Incorporation, voted in favor
of the amendment and (ii) the holders of the shares of the Company's
outstanding Junior Preferred Stock unanimously consented, in accordance with
Section 228 of the DGCL, to the adoption of the amendments.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the DGCL.
IN WITNESS WHEREOF, said Tenneco Inc. has caused this Certificate to be
signed by , as , this th day of , 1996.
TENNECO INC.
By:__________________________________
H-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
in connection with specified actions, suits, or proceedings whether civil,
criminal, administrative, or investigative (other than action by or in the
right of the corporation--a "derivative action"), if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) incurred
in connection with the defense or settlement of such action, and the statute
requires court approval before there can be any indemnification where the
person seeking indemnification has been found liable to the corporation. The
statute provides that it is not exclusive of other indemnification that may be
granted by a corporation's charter, by-laws, disinterested director vote,
stockholder vote, agreement, or otherwise.
Article X of the By-laws of El Paso requires indemnification to the full
extent permitted under Delaware law as from time to time in effect. Subject to
any restrictions imposed by Delaware law, the By-laws of El Paso provide an
unconditional right to indemnification for all expense, liability, and loss
(including attorney's fees, judgments, fines, ERISA excise taxes, or penalties
and amounts paid in settlement) actually and reasonably incurred or suffered
by any person in connection with any actual or threatened proceeding
(including, to the extent permitted by law, any derivative action) by reason
of the fact that such person is or was serving as a director, officer, or
employee of El Paso, or that, being or having been such a director or officer
or an employee of El Paso, such person is or was serving at the request of El
Paso as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise, including an employee
benefit plan. The By-laws of El Paso also provide that El Paso may, by action
of its Board of Directors, provide indemnification to its agents with the same
scope and effect as the foregoing indemnification of directors and officers.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for (i) any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) payment of
unlawful dividends or unlawful stock purchases or redemptions, or (iv) any
transaction from which the director derived an improper personal benefit.
Article 10 of El Paso's Restated Certificate of Incorporation, as amended,
provides that to the full extent that the DGCL, as it now exists or may
hereafter be amended, permits the limitation or elimination of the liability
of directors, a director of El Paso shall not be liable to El Paso or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Any amendment to or repeal of such Article 10 shall not adversely affect any
right or protection of a director of El Paso for or with respect to any acts
or omissions of such director occurring prior to such amendment or repeal.
El Paso maintains directors' and officers' liability insurance which
provides for payment, on behalf of the directors and officers of El Paso and
its subsidiaries, of certain losses of such persons (other than matters
uninsurable under law) arising from claims, including claims arising under the
Act, for acts or omissions by such persons while acting as directors or
officers of El Paso and/or its subsidiaries, as the case may be.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
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2.A --Amended and Restated Agreement and Plan of Merger, dated as of June
19, 1996, as amended and restated, among El Paso Natural Gas Company,
El Paso Merger Company and Tenneco Inc. (attached as Appendix B to
the Joint Proxy Statement-Prospectus).
2.B --Distribution Agreement, dated as of November 1, 1996, by and among
Tenneco Inc., New Tenneco Inc. and Newport News Shipbuilding Inc.
(attached as Appendix A to the Joint Proxy Statement-Prospectus).
2.C --Agreement between Tenneco Inc. and El Paso, dated June 19, 1996, re-
lating to consulting services.
3(i) --Restated Certificate of Incorporation of El Paso, dated January 22,
1992 (incorporated by reference from the Form 10-K, No. 1-2700, filed
January 29, 1992); Certificate of Designation, Preferences and Rights
of Series A Junior Participating Preferred Stock of El Paso, dated
July 7, 1992 (incorporated by reference from the Form 10-K, No. 1-
2700, filed February 3, 1993).
3(ii) --By-laws of El Paso, as amended April 1, 1996 (incorporated by refer-
ence from the Form 10-Q, No. 1-2700, filed May 15, 1996).
3(iii) --Form of Certificate of Designation of Powers, Preference and Rights
of the Adjustable Rate Cumulative Preferred Stock.
3(iv) --Form of Deposit Agreement for the Adjustable Rate Cumulative Pre-
ferred Stock.
4.A.1 --Specimen Certificate for shares of Common Stock $3.00 par value, of
El Paso (incorporated by reference from the Form 8-A, No. 1-2700,
filed February 13, 1992).
4.A.2 --Specimen Certificate for the Adjustable Rate Cumulative Preferred
Stock.
4.B.1 --Indenture, dated as of March 1, 1987, between El Paso and Citibank,
N.A., Trustee, with respect to El Paso's 8 5/8% Debentures due 2012
(incorporated by reference from the Form S-3, No. 33-34284, filed
April 20, 1990); Supplemental Indenture, dated December 24, 1991 (in-
corporated by reference from the Form 10-K, No. 1-2700, filed January
29, 1992).
4.B.2. --Indenture, dated as of August 1, 1987, between El Paso and Citibank,
N.A., Trustee, with respect to El Paso's 9.45% Notes due 1999 (incor-
porated by reference from the Form S-3, No. 33-34284, filed April 20,
1990); Supplemental Indenture, dated December 24, 1991 (incorporated
by reference from the Form 10-K, No. 1-2700, filed January 29, 1992).
4.B.3 --Indenture, dated as of January 1, 1992, between El Paso and
Citibank, N.A., Trustee, with respect to El Paso's 6.90% Notes due
1997, 7 3/4% Notes due 2002 and 8 5/8% Debentures due 2022 (incorpo-
rated by reference from the Form 10-K, No. 1-2700, filed January 29,
1992).
4.C --Shareholder Rights Plan (incorporated by reference from the Form 10-
Q, No. 1-2700, filed November 12, 1992).
5 --Opinion of Fried, Frank, Harris, Shriver & Jacobson regarding the
validity of the securities.
8 --Opinion of Jenner & Block regarding tax matters.
10.A --Mojave Pipeline General Partnership Agreement by and among El Paso
Mojave Pipeline Co., HNG Mojave, Inc., and Pacific Interstate Mojave
Company, dated as of March 26, 1985 (incorporated by reference from
the Form 10-Q, No. 1-2700, filed May 15, 1985); Amendment No. 1 to
General Partnership Agreement, dated as of September 29, 1986 (incor-
porated by reference from the Form 10-Q, No. 1-2700, filed November
14, 1991).
10.B --Lease, dated May 27, 1982, between El Paso and First Capital Kayser
Center (incorporated by reference from the Form 10-Q, No. 1-2700
filed November 14, 1991).
10.C --Transportation Service Agreement as Amended and Restated, effective
November 1, 1993, between El Paso and Pacific Gas and Electric Com-
pany (incorporated by reference from the Form 10-K, No. 1-2700, filed
January 26, 1995).
</TABLE>
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<TABLE>
<C> <S>
10.D --Transportation Service Agreement as Amended and Restated, effective
July 16, 1993, between El Paso and Southern California Gas Company (in-
corporated by reference from the Form 10-K, No. 1-2700, filed January
26, 1995). Letter Agreement and revised Exhibits A and B to the Trans-
portation Service Agreement, effective January 1, 1996 (incorporated by
reference from the Form 10-Q, No. 1-23700, filed May 15, 1996).
10.E --Transportation Service Agreement, dated August 9, 1991, and effective
September 1, 1991, between El Paso and Southwest Gas Corporation for
service to Arizona; Transportation Service Agreement, dated August 9,
1991, and effective September 1, 1991, between El Paso and Southwest
Gas Corporation for service to Nevada (incorporated by reference from
the Form 10-Q, No. 1-2700, filed November 14, 1991); Amendatory Agree-
ment and replacement of Exhibit B to Transportation Service Agreement,
dated August 9, 1991, and effective May 8, 1992, between El Paso and
Southwest Gas Corporation for service to Nevada (incorporated by refer-
ence from the Form 10-K, No. 1-2700, filed February 3, 1993); Exhibit B
to the Transportation Service Agreement, dated August 9, 1991, and ef-
fective March 1, 1994, between El Paso and Southwest Gas Corporation
for service to Arizona (incorporated by reference from the Form 10-K,
No. 1-2700, filed January 26, 1995).
10.F --Credit Agreement among Mojave Pipeline Company and Deutsche Bank AG,
New York Branch, and Swiss Bank Corporation, New York Branch, individu-
ally and as Agents, and the Banks named therein, dated as of September
30, 1991, and the following documents related thereto: Sponsor Perfor-
mance Agreement among El Paso and Deutsche Bank AG, New York Branch, as
Collateral Agent and Deutsche Bank AG, New York Branch and Swiss Bank
Corporation, New York Branch, as Agents, dated as of September 30,
1991; Partner Performance Agreement among El Paso Mojave Pipeline Co.
and Deutsche Bank AG, New York Branch, as Collateral Agent and Deutsche
Bank AG, New York Branch and Swiss Bank Corporation, New York Branch,
as Agents, dated September 30, 1991; Pledge Agreement made by El Paso
Mojave Pipeline Co. with and to Deutsche Bank AG, New York Branch (as
Collateral Agent) for the Secured Creditors, dated as of September 30,
1991; $90,000,000 Note dated September 30, 1991, executed by Mojave
Pipeline Company and payable to Deutsche Bank AG, New York Branch;
$90,000,000 Note dated September 30, 1991, executed by Mojave Pipeline
Company and payable to Swiss Bank Corporation, New York Branch (incor-
porated by reference from the Form 10-Q, No. 1-2700, filed November 14,
1991); Syndication and replacement of Notes with a $52,750,000 Note
dated September 30, 1991, executed by Mojave Pipeline Company and pay-
able to Swiss Bank Corporation, New York Branch; a $40,000,000 Note
dated September 30, 1991, executed by Mojave Pipeline Company and pay-
able to Deutsche Bank AG, New York Branch; a $30,000,000 Note dated
September 30, 1991, executed by Mojave Pipeline Company and payable to
Banque Indosuez; a $20,000,000 Note dated September 30, 1991, executed
by Mojave Pipeline Company and payable to the Sumitomo Bank, Limited,
Houston Agency; a $20,000,000 Note dated September 30, 1991, executed
by Mojave Pipeline Company and payable to the Bank of Nova Scotia; a
$17,250,000 Note dated September 30, 1991, executed by Mojave Pipeline
Company and payable to Credit Lyonnais Cayman Islands Branch (incorpo-
rated by reference from the Form 10-K, No. 1-2700 , filed January 29,
1992). First Amendment to Credit Agreement, dated as effective December
23, 1992, among Mojave Pipeline Company and Deutsche Bank AG, New York
Branch and Swiss Bank Corporation, New York Branch; Amendment to Spon-
sor and Partner Performance Agreements entered into effective as of De-
cember 23, 1992; Syndication and replacement of Note for $52,750,000
payable to Swiss Bank Corporation, New York Branch and Note for
$17,250,000 payable to Credit Lyonnais Cayman Islands Branch with a
$40,000,000 Note dated September 30, 1991, executed by Mojave Pipeline
Company and payable to Swiss Bank Corporation, New York Branch; and a
$30,000,000 Note dated September 30, 1991, executed by Mojave Pipeline
Company and payable to Credit Lyonnais Cayman Islands Branch. Second
Amendment to Credit Agreement, dated as effective June 1, 1993, among
Mojave Pipeline Company and Deutsche Bank AG, New York Branch and Swiss
Bank Corporation, New York Branch; Amendment and Ratification of Part-
ner Documents dated as effective June 1, 1993, among EPNG Mojave, Inc.
and El Paso Mojave Pipeline Co. and Deutsche Bank AG, New York Branch
and Swiss Bank Corporation, New York Branch (incorporated by reference
from
</TABLE>
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<TABLE>
<C> <S>
the Form 10-Q, No. 1-2700, filed August 16, 1993). Replacement of
$30,000,000 Note dated September 30, 1991, executed by Mojave Pipeline
Company and payable to Banque Indosuez with a $30,000,000 Note dated
September 30, 1991, executed by Mojave Pipeline Company and payable to
Bank of Scotland (incorporated by reference from the Form 10-Q,
No. 1-2700, filed May 13, 1994).
10.G --Master Separation Agreement and documents related thereto, dated Janu-
ary 15, 1992, by and among Burlington Resources Inc., El Paso and Merid-
ian Oil Holding, Inc., including Exhibits (incorporated by reference
from the Form 10-K, No. 1-2700, filed January 29, 1992).
10.H --Omnibus Compensation Plan, dated as of January 1, 1992 (incorporated by
reference from the Amendment No. 1 to Form S-2, No. 33-45369, filed Feb-
ruary 27, 1992).
10.I --1995 Incentive Compensation Plan, effective as of January 13, 1995 (in-
corporated by reference from the Form S-8, No. 33-57553, filed February
2, 1995); Amendment No. 1 to El Paso's 1995 Incentive Compensation Plan,
effective as of July 21, 1995 (incorporated by reference from the Form
10-Q, No. 1-2700, filed July 21, 1995). Amendment No. 2 to the 1995 In-
centive Plan, effective January 1, 1996 (incorporated by reference from
the Form 10-K, No. 1-2700, filed March 15, 1996).
10.J --1995 Compensation Plan for Non-Employee Directors, effective as of Jan-
uary 13, 1995 (incorporated by reference from the Form S-8, No. 33-
57553, filed February 2, 1995).
10.K --Stock Option Plan for Non-Employee Directors, dated as of January 1,
1992 (incorporated by reference from the Amendment No. 1 to Form S-2,
No. 33-45369, filed February 27, 1992).
10.L --1995 Omnibus Compensation Plan, effective as of January 13, 1995 (in-
corporated by reference from the Form S-8, No. 33-57553, filed February
2, 1995); Amendment No. 1 to El Paso's 1995 Omnibus Compensation Plan,
effective as of July 21, 1995 (incorporated by reference from the Form
10-Q, No. 1-2700, filed July 21, 1995).
10.M --Omnibus Compensation Plan for Management Employees, Amended and Restat-
ed, effective as of April 12, 1996 (incorporated by reference from the
Form 10-Q, No. 1-2700, filed May 15, 1996).
10.N --Supplemental Benefits Plan, Amended and Restated Effective as of Janu-
ary 13, 1995 (incorporated by reference from the Form 10-K, No. 1-2700,
filed January 26, 1995).
10.O --Senior Executive Survivor Benefit Plan, effective January 1, 1992 (in-
corporated by reference from the Amendment No. 1 to Form S-2, No. 33-
45369, filed February 27, 1992).
10.P --Deferred Compensation Plan, Amended and Restated Effective as of Janu-
ary 13, 1995 (incorporated by reference from the Form 10-K, No. 1-2700,
filed January 26, 1995).
10.Q --Retirement Income Plan for Non-Employee Directors, Amended and Restated
Effective as of January 13, 1995 (incorporated by reference from the
Form 10-K, No. 1-2700, filed January 26, 1995).
10.R --Key Executive Severance Protection Plan, Amended and Restated Effective
as of January 13, 1995 (incorporated by reference from the Form 10-K,
No. 1-2700, filed January 26, 1995).
10.S --Director Charitable Award Plan, Amended and Restated Effective as of
January 13, 1995 (incorporated by reference from the Form 10-K, No. 1-
2700, filed January 26, 1995). Amendment No. 1 to the Director Charita-
ble Award Plan effective as of January 22, 1996. (incorporated by refer-
ence from the Form 10-K, No. 1-2700, filed March 15, 1996).
10.T --Employment Agreement, dated July 31, 1992, between El Paso and William
A. Wise (incorporated by reference from the Form 10-K, No. 1-2700, filed
February 3, 1993). Amendment to Employment Agreement dated January 29,
1996 between El Paso and William A. Wise (incorporated by reference from
the Form 10-K, No. 1-2700, filed March 15, 1996.)
10.U --Letter Agreement, dated February 22, 1991, between El Paso and Britton
White, Jr. (incorporated by reference from the Form 10-K, No. 1-2700,
filed February 3, 1993).
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.V --Letter Agreement, dated January 13, 1995, between El Paso and William
A. Wise (incorporated by reference from the Form 10-K, No. 1-2700,
filed January 26, 1995).
10.W --Amended and Restated Limited Liability Company Agreement of Aguaytia
Energy, LLC entered into November 30, 1995, by and among The Maple Gas
Corporation del Peru Ltd., The Maple Gas Corporation, P.I.D.C.
Aguaytia, L.L.C., EPED Aguaytia Company, IGC Aguaytia Partners, L.L.C.,
Scudder Latin American Power I-P L.D.C., and PMDC Aguaytia, Ltd. (in-
corporated by reference from the Form 10-K, No. 1-2700, filed March 15,
1996). First Amendment to Amended and Restated Limited Liability Com-
pany Agreement of Aguaytia Energy, LLC, dated January 19, 1996, and
Second Amendment to Amended and Restated Limited Liability Company
Agreement of Aguaytia Energy, LLC, dated March 12, 1996 (incorporated
by reference from the Form 10-Q, No. 1-2700, filed May 15, 1996). Third
Amendment to Amended and Restated Limited Liability Company Agreement
of Aguaytia Energy, LLC, dated May 10, 1996 (incorporated by reference
from the Form 10-Q, No. 1-2700, filed August 14, 1996).
10.X --Participation and Credit Agreement, dated as of February 9, 1995,
among El Paso, El Paso New Chaco Company, State Street Bank and Trust
Company, as Trustee, Chemical Bank, as Agent, the Note Holders Signato-
ries and the Certificate Holder Signatories (without exhibits and
schedules, except for the schedule of defined terms), and the following
documents related thereto: Lease Agreement, dated as of February 9,
1995, between State Street Bank and Trust Company and El Paso New Chaco
Company; Support Agreement, dated as of February 9, 1995, between State
Street Bank and Trust Company and El Paso New Chaco Company; Support
Agreement, dated as of February 9, 1995, between El Paso New Chaco Com-
pany and State Street Bank and Trust Company; Guaranty Agreement by El
Paso in favor of Chemical Bank, as Agent, and each of the Participants
as of February 9, 1995; Sponsor Agreement by El Paso in favor of State
Street Bank and Trust Company as of February 9, 1995; Mortgage, Assign-
ment, Security Agreement and Financing Statement, executed February 7,
1995, between State Street Bank and Trust Company (Mortgagor) and Chem-
ical Bank Company and Chemical Bank, as Agent, dated February 9, 1995
(incorporated by reference from the Form 10-Q, No. 1-2700, filed April
28, 1995).
10.Y --Letter dated February 4, 1992 between El Paso and Michael C. Holland
(incorporated by reference from the Form 10-K, No. 1-2700, filed March
15, 1996).
10.Z --$400,000,000 and $100,000,000 Revolving Credit and Competitive Advance
Facility agreements, each dated as of May 31, 1996, between El Paso,
Chemical Bank and certain other banks (incorporated by reference from
the Form 10-Q, No. 1-2700, filed August 14, 1996).
10.AA --Reimbursement and Loan Agreement dated as of April 30, 1996, between
Sam II Equity Funding, LLC and NationsBank of Texas, N.A. Relating to
the Samalayuca Project; El Paso Guaranty dated as of April 30, 1996
(incorporated by reference from the Form 10-Q, No. 1-2700, filed August
14, 1996).
10.AB --El Paso Energy Corporation Strategic Stock Plan, effective as of June
19, 1996 (incorporated by reference from the Form 10-Q, No. 1-2700,
filed August 14, 1996).
12 --Ratio of earnings to combined fixed charges and preferred stock divi-
dends.
21 --Subsidiaries of El Paso (incorporated by reference from the Form 10-K,
No. 1-2700, filed March 15, 1996).
23.A --Consent of Lazard Freres & Co. LLC.
+23.B --Consent of Donaldson, Lufkin & Jenrette Securities Corporation.
23.C --Consent of Fried, Frank, Harris, Shriver & Jacobson (contained in Ex-
hibit 5).
23.D --Consent of Jenner & Block (contained in Exhibit 8).
23.E1 --Consent of Arthur Andersen LLP.
23.E2 --Consent of Arthur Andersen LLP.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
23.F --Consent of Coopers & Lybrand L.L.P.
23.G --Consent of Ernst & Young LLP.
+24.1 --Power of Attorney.
+24.2 --Power of Attorney.
99 --Form of Proxy.
</TABLE>
- --------
+Previously filed.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(3) That every prospectus (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of El Paso, State of Texas, on November 1, 1996.
EL PASO NATURAL GAS COMPANY
/s/ H. Brent Austin
By: _________________________________
H. BRENT AUSTIN ATTORNEY-IN-FACT
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates as indicated.
SIGNATURE TITLE DATE
* Chairman of the
- ------------------------------------- Board, Chief November 1,
WILLIAM A. WISE Executive Officer 1996
and Director
Executive Vice
President and Chief November 1,
- ------------------------------------- Financial Officer 1996
H. BRENT AUSTIN
* Vice President,
- ------------------------------------- Chief Accounting November 1,
JEFFREY I. BEASON Officer, Controller 1996
and Treasurer
* Director
- ------------------------------------- November 1,
BYRON ALLUMBAUGH 1996
Director
- ------------------------------------- November 1,
EUGENIO GARZA LAGUERA 1996
* Director
- ------------------------------------- November 1,
JAMES F. GIBBONS 1996
II-7
<PAGE>
SIGNATURE TITLE DATE
* Director
- ------------------------------------- November 1,
BEN F. LOVE 1996
* Director
- ------------------------------------- November 1,
KENNETH L. SMALLEY 1996
Director
- ------------------------------------- November 1,
MALCOLM WALLOP 1996
/s/ H. Brent Austin
*By: ________________________________
H. Brent Austin
Attorney-in-Fact
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
2.A --Amended and Restated Agreement and Plan of Merger,
dated as of June 19, 1996, as amended and restated,
among El Paso Natural Gas Company, El Paso Merger
Company and Tenneco Inc. (attached as Appendix B to
the Joint Proxy Statement-Prospectus).
2.B --Distribution Agreement, dated as of November 1,
1996, by and among Tenneco Inc., New Tenneco Inc. and
Newport News Shipbuilding Inc. (attached as Appendix
A to the Joint Proxy Statement-Prospectus).
2.C --Agreement between Tenneco Inc. and El Paso, dated
June 19, 1996, relating to consulting services.
3(i) --Restated Certificate of Incorporation of El Paso,
dated January 22, 1992 (incorporated by reference
from the Form 10-K, No. 1-2700, filed January 29,
1992); Certificate of Designation, Preferences and
Rights of Series A Junior Participating Preferred
Stock of El Paso, dated July 7, 1992 (incorporated by
reference from the Form 10-K, No. 1-2700, filed
February 3, 1993).
3(ii) --By-laws of El Paso, as amended April 1, 1996
(incorporated by reference from the Form 10-Q, No. 1-
2700, filed May 15, 1996).
3(iii) --Form of Certificate of Designation of Powers,
Preference and Rights of the Adjustable Rate
Cumulative Preferred Stock.
3(iv) --Form of Deposit Agreement for the Adjustable Rate
Cumulative Preferred Stock.
4.A.1 --Specimen Certificate for shares of Common Stock
$3.00 par value, of El Paso (incorporated by
reference from the Form 8-A, No. 1-2700, filed
February 13, 1992).
4.A.2 --Specimen Certificate for the Adjustable Rate
Cumulative Preferred Stock.
4.B.1 --Indenture, dated as of March 1, 1987, between El
Paso and Citibank, N.A., Trustee, with respect to El
Paso's 8 5/8% Debentures due 2012 (incorporated by
reference from the Form S-3, No. 33-34284, filed
April 20, 1990); Supplemental Indenture, dated
December 24, 1991 (incorporated by reference from the
Form 10-K, No. 1-2700, filed January 29, 1992).
4.B.2. --Indenture, dated as of August 1, 1987, between El
Paso and Citibank, N.A., Trustee, with respect to El
Paso's 9.45% Notes due 1999 (incorporated by
reference from the Form S-3, No. 33-34284, filed
April 20, 1990); Supplemental Indenture, dated
December 24, 1991 (incorporated by reference from the
Form 10-K, No. 1-2700, filed January 29, 1992).
4.B.3 --Indenture, dated as of January 1, 1992, between El
Paso and Citibank, N.A., Trustee, with respect to El
Paso's 6.90% Notes due 1997, 7 3/4% Notes due 2002
and 8 5/8% Debentures due 2022 (incorporated by
reference from the Form 10-K, No. 1-2700, filed
January 29, 1992).
4.C --Shareholder Rights Plan (incorporated by reference
from the Form 10-Q, No. 1-2700, filed November 12,
1992).
5 --Opinion of Fried, Frank, Harris, Shriver & Jacobson
regarding the validity of the securities.
8 --Opinion of Jenner & Block regarding tax matters.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
10.A --Mojave Pipeline General Partnership Agreement by and
among El Paso Mojave Pipeline Co., HNG Mojave, Inc.,
and Pacific Interstate Mojave Company, dated as of
March 26, 1985 (incorporated by reference from the
Form 10-Q, No. 1-2700, filed May 15, 1985); Amendment
No. 1 to General Partnership Agreement, dated as of
September 29, 1986 (incorporated by reference from
the Form 10-Q, No. 1-2700, filed November 14, 1991).
10.B --Lease, dated May 27, 1982, between El Paso and First
Capital Kayser Center (incorporated by reference from
the Form 10-Q, No. 1-2700 filed November 14, 1991).
10.C --Transportation Service Agreement as Amended and
Restated, effective November 1, 1993, between El Paso
and Pacific Gas and Electric Company (incorporated by
reference from the Form 10-K, No. 1-2700, filed
January 26, 1995).
10.D --Transportation Service Agreement as Amended and
Restated, effective July 16, 1993, between El Paso
and Southern California Gas Company (incorporated by
reference from the Form 10-K, No. 1-2700, filed
January 26, 1995). Letter Agreement and revised
Exhibits A and B to the Transportation Service
Agreement, effective January 1, 1996 (incorporated by
reference from the Form 10-Q, No. 1-23700, filed May
15, 1996).
10.E --Transportation Service Agreement, dated August 9,
1991, and effective September 1, 1991, between El
Paso and Southwest Gas Corporation for service to
Arizona; Transportation Service Agreement, dated
August 9, 1991, and effective September 1, 1991,
between El Paso and Southwest Gas Corporation for
service to Nevada (incorporated by reference from the
Form 10-Q, No. 1-2700, filed November 14, 1991);
Amendatory Agreement and replacement of Exhibit B to
Transportation Service Agreement, dated August 9,
1991, and effective May 8, 1992, between El Paso and
Southwest Gas Corporation for service to Nevada
(incorporated by reference from the Form 10-K, No. 1-
2700, filed February 3, 1993); Exhibit B to the
Transportation Service Agreement, dated August 9,
1991, and effective March 1, 1994, between El Paso
and Southwest Gas Corporation for service to Arizona
(incorporated by reference from the Form 10-K, No. 1-
2700, filed January 26, 1995).
10.F --Credit Agreement among Mojave Pipeline Company and
Deutsche Bank AG, New York Branch, and Swiss Bank
Corporation, New York Branch, individually and as
Agents, and the Banks named therein, dated as of
September 30, 1991, and the following documents
related thereto: Sponsor Performance Agreement among
El Paso and Deutsche Bank AG, New York Branch, as
Collateral Agent and Deutsche Bank AG, New York
Branch and Swiss Bank Corporation, New York Branch,
as Agents, dated as of September 30, 1991; Partner
Performance Agreement among El Paso Mojave Pipeline
Co. and Deutsche Bank AG, New York Branch, as
Collateral Agent and Deutsche Bank AG, New York
Branch and Swiss Bank Corporation, New York Branch,
as Agents, dated September 30, 1991; Pledge Agreement
made by El Paso Mojave Pipeline Co. with and to
Deutsche Bank AG, New York Branch (as Collateral
Agent) for the Secured Creditors, dated as of
September 30, 1991; $90,000,000 Note dated September
30, 1991, executed by Mojave Pipeline Company and
payable to Deutsche Bank AG, New York Branch;
$90,000,000 Note dated September 30, 1991, executed
by Mojave Pipeline Company and payable to Swiss Bank
Corporation, New York Branch (incorporated by
reference from the Form 10-Q, No. 1-2700, filed
November 14, 1991); Syndication and replacement of
Notes with a $52,750,000 Note dated September 30,
1991, executed by Mojave Pipeline Company and payable
to Swiss Bank Corporation, New York Branch; a
$40,000,000 Note dated September 30, 1991, executed
by Mojave Pipeline Company and payable to Deutsche
Bank AG, New York Branch; a $30,000,000 Note dated
September 30, 1991, executed by Mojave Pipeline
Company and payable to Banque
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
Indosuez; a $20,000,000 Note dated September 30,
1991, executed by Mojave Pipeline Company and payable
to the Sumitomo Bank, Limited, Houston Agency; a
$20,000,000 Note dated September 30, 1991, executed
by Mojave Pipeline Company and payable to the Bank of
Nova Scotia; a $17,250,000 Note dated September 30,
1991, executed by Mojave Pipeline Company and payable
to Credit Lyonnais Cayman Islands Branch
(incorporated by reference from the Form 10-K, No. 1-
2700 , filed January 29, 1992). First Amendment to
Credit Agreement, dated as effective December 23,
1992, among Mojave Pipeline Company and Deutsche Bank
AG, New York Branch and Swiss Bank Corporation, New
York Branch; Amendment to Sponsor and Partner
Performance Agreements entered into effective as of
December 23, 1992; Syndication and replacement of
Note for $52,750,000 payable to Swiss Bank
Corporation, New York Branch and Note for $17,250,000
payable to Credit Lyonnais Cayman Islands Branch with
a $40,000,000 Note dated September 30, 1991, executed
by Mojave Pipeline Company and payable to Swiss Bank
Corporation, New York Branch; and a $30,000,000 Note
dated September 30, 1991, executed by Mojave Pipeline
Company and payable to Credit Lyonnais Cayman Islands
Branch. Second Amendment to Credit Agreement, dated
as effective June 1, 1993, among Mojave Pipeline
Company and Deutsche Bank AG, New York Branch and
Swiss Bank Corporation, New York Branch; Amendment
and Ratification of Partner Documents dated as
effective June 1, 1993, among EPNG Mojave, Inc. and
El Paso Mojave Pipeline Co. and Deutsche Bank AG, New
York Branch and Swiss Bank Corporation, New York
Branch (incorporated by reference from the Form 10-Q,
No. 1-2700, filed August 16, 1993). Replacement of
$30,000,000 Note dated September 30, 1991, executed
by Mojave Pipeline Company and payable to Banque
Indosuez with a $30,000,000 Note dated September 30,
1991, executed by Mojave Pipeline Company and payable
to Bank of Scotland (incorporated by reference from
the Form 10-Q, No. 1-2700, filed May 13, 1994).
10.G --Master Separation Agreement and documents related
thereto, dated January 15, 1992, by and among
Burlington Resources Inc., El Paso and Meridian Oil
Holding, Inc., including Exhibits (incorporated by
reference from the Form 10-K, No. 1-2700, filed
January 29, 1992).
10.H --Omnibus Compensation Plan, dated as of January 1,
1992 (incorporated by reference from the Amendment
No. 1 to Form S-2, No. 33-45369, filed February 27,
1992).
10.I --1995 Incentive Compensation Plan, effective as of
January 13, 1995 (incorporated by reference from the
Form S-8, No. 33-57553, filed February 2, 1995);
Amendment No. 1 to El Paso's 1995 Incentive
Compensation Plan, effective as of July 21, 1995
(incorporated by reference from the Form 10-Q, No. 1-
2700, filed July 21, 1995). Amendment No. 2 to the
1995 Incentive Plan, effective January 1, 1996
(incorporated by reference from the Form 10-K, No. 1-
2700, filed March 15, 1996).
10.J --1995 Compensation Plan for Non-Employee Directors,
effective as of January 13, 1995 (incorporated by
reference from the Form S-8, No. 33-57553, filed
February 2, 1995).
10.K --Stock Option Plan for Non-Employee Directors, dated
as of January 1, 1992 (incorporated by reference from
the Amendment No. 1 to Form S-2, No. 33-45369, filed
February 27, 1992).
10.L --1995 Omnibus Compensation Plan, effective as of
January 13, 1995 (incorporated by reference from the
Form S-8, No. 33-57553, filed February 2, 1995);
Amendment No. 1 to El Paso's 1995 Omnibus
Compensation Plan, effective as of July 21, 1995
(incorporated by reference from the Form 10-Q, No. 1-
2700, filed July 21, 1995).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
10.M --Omnibus Compensation Plan for Management Employees,
Amended and Restated, effective as of April 12, 1996
(incorporated by reference from the Form 10-Q, No.
1-2700, filed May 15, 1996).
10.N --Supplemental Benefits Plan, Amended and Restated
Effective as of January 13, 1995 (incorporated by
reference from the Form 10-K, No. 1-2700, filed
January 26, 1995).
10.O --Senior Executive Survivor Benefit Plan, effective
January 1, 1992 (incorporated by reference from the
Amendment No. 1 to Form S-2, No. 33-45369, filed
February 27, 1992).
10.P --Deferred Compensation Plan, Amended and Restated
Effective as of January 13, 1995 (incorporated by
reference from the Form 10-K, No. 1-2700, filed
January 26, 1995).
10.Q --Retirement Income Plan for Non-Employee Directors,
Amended and Restated Effective as of January 13, 1995
(incorporated by reference from the Form 10-K, No. 1-
2700, filed January 26, 1995).
10.R --Key Executive Severance Protection Plan, Amended and
Restated Effective as of January 13, 1995
(incorporated by reference from the Form 10-K, No. 1-
2700, filed January 26, 1995).
10.S --Director Charitable Award Plan, Amended and Restated
Effective as of January 13, 1995 (incorporated by
reference from the Form 10-K, No. 1-2700, filed
January 26, 1995). Amendment No. 1 to the Director
Charitable Award Plan effective as of January 22,
1996. (incorporated by reference from the Form 10-K,
No. 1-2700, filed March 15, 1996).
10.T --Employment Agreement, dated July 31, 1992, between
El Paso and William A. Wise (incorporated by
reference from the Form 10-K, No. 1-2700, filed
February 3, 1993). Amendment to Employment Agreement
dated January 29, 1996 between El Paso and William A.
Wise (incorporated by reference from the Form 10-K,
No. 1-2700, filed March 15, 1996.)
10.U --Letter Agreement, dated February 22, 1991, between
El Paso and Britton White, Jr. (incorporated by
reference from the Form 10-K, No. 1-2700, filed
February 3, 1993).
10.V --Letter Agreement, dated January 13, 1995, between El
Paso and William A. Wise (incorporated by reference
from the Form 10-K, No. 1-2700, filed January 26,
1995).
10.W --Amended and Restated Limited Liability Company
Agreement of Aguaytia Energy, LLC entered into
November 30, 1995, by and among The Maple Gas
Corporation del Peru Ltd., The Maple Gas Corporation,
P.I.D.C. Aguaytia, L.L.C., EPED Aguaytia Company, IGC
Aguaytia Partners, L.L.C., Scudder Latin American
Power I-P L.D.C., and PMDC Aguaytia, Ltd.
(incorporated by reference from the Form 10-K, No. 1-
2700, filed March 15, 1996). First Amendment to
Amended and Restated Limited Liability Company
Agreement of Aguaytia Energy, LLC, dated January 19,
1996, and Second Amendment to Amended and Restated
Limited Liability Company Agreement of Aguaytia
Energy, LLC, dated March 12, 1996 (incorporated by
reference from the Form 10-Q, No. 1-2700, filed May
15, 1996). Third Amendment to Amended and Restated
Limited Liability Company Agreement of Aguaytia
Energy, LLC, dated May 10, 1996 (incorporated by
reference from the Form 10-Q, No. 1-2700, filed
August 14, 1996).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
10.X --Participation and Credit Agreement, dated as of
February 9, 1995, among El Paso, El Paso New Chaco
Company, State Street Bank and Trust Company, as
Trustee, Chemical Bank, as Agent, the Note Holders
Signatories and the Certificate Holder Signatories
(without exhibits and schedules, except for the
schedule of defined terms), and the following
documents related thereto: Lease Agreement, dated as
of February 9, 1995, between State Street Bank and
Trust Company and El Paso New Chaco Company; Support
Agreement, dated as of February 9, 1995, between
State Street Bank and Trust Company and El Paso New
Chaco Company; Support Agreement, dated as of
February 9, 1995, between El Paso New Chaco Company
and State Street Bank and Trust Company; Guaranty
Agreement by El Paso in favor of Chemical Bank, as
Agent, and each of the Participants as of February
9, 1995; Sponsor Agreement by El Paso in favor of
State Street Bank and Trust Company as of February
9, 1995; Mortgage, Assignment, Security Agreement
and Financing Statement, executed February 7, 1995,
between State Street Bank and Trust Company
(Mortgagor) and Chemical Bank Company and Chemical
Bank, as Agent, dated February 9, 1995 (incorporated
by reference from the Form 10-Q, No. 1-2700, filed
April 28, 1995).
10.Y --Letter dated February 4, 1992 between El Paso and
Michael C. Holland (incorporated by reference from
the Form 10-K, No. 1-2700, filed March 15, 1996).
10.Z --$400,000,000 and $100,000,000 Revolving Credit and
Competitive Advance Facility agreements, each dated
as of May 31, 1996, between El Paso, Chemical Bank
and certain other banks (incorporated by reference
from the Form 10-Q, No. 1-2700, filed August 14,
1996).
10.AA --Reimbursement and Loan Agreement dated as of April
30, 1996, between Sam II Equity Funding, LLC and
NationsBank of Texas, N.A. Relating to the
Samalayuca Project; El Paso Guaranty dated as of
April 30, 1996 (incorporated by reference from the
Form 10-Q, No. 1-2700, filed August 14, 1996).
10.AB --El Paso Energy Corporation Strategic Stock Plan,
effective as of June 19, 1996 (incorporated by
reference from the Form 10-Q, No. 1-2700, filed
August 14, 1996).
12 --Ratio of earnings to combined fixed charges and
preferred stock dividends.
21 --Subsidiaries of El Paso (incorporated by reference
from the Form 10-K, No. 1-2700, filed March 15,
1996).
23.A --Consent of Lazard Freres & Co. LLC.
+23.B --Consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
23.C --Consent of Fried, Frank, Harris, Shriver & Jacobson
(contained in Exhibit 5).
23.D --Consent of Jenner & Block (contained in Exhibit 8).
23.E1 --Consent of Arthur Andersen LLP.
23.E2 --Consent of Arthur Andersen LLP.
23.F --Consent of Coopers & Lybrand L.L.P.
23.G --Consent of Ernst & Young LLP.
+24.1 --Power of Attorney.
+24.2 --Power of Attorney.
99 --Form of Proxy.
</TABLE>
- --------
+Previously filed.
<PAGE>
APPENDIX B
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF
JUNE 19, 1996
AMONG
EL PASO NATURAL GAS COMPANY,
EL PASO MERGER COMPANY
AND
TENNECO INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I DEFINITIONS................................................. 2
ARTICLE II THE MERGER.................................................. 7
2.1 Merger...................................................... 7
2.2 Effects of the Merger....................................... 7
2.3 Certificate of Incorporation and Bylaws..................... 8
2.4 Directors................................................... 8
2.5 Conversion of Shares........................................ 8
2.6 Exchange of Certificates.................................... 9
2.7 New Preferred Stock......................................... 11
ARTICLE III CLOSING AND FILING.......................................... 11
3.1 Closing..................................................... 11
3.2 Effective Time.............................................. 11
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF TENNECO................... 12
4.1 Organization and Existence.................................. 12
4.2 Capitalization.............................................. 12
4.3 Authority and Approval...................................... 12
4.4 Financial Statements........................................ 13
4.5 Consents and Approvals; No Violations....................... 13
4.6 Litigation.................................................. 14
4.7 Tenneco SEC Documents; Accuracy of Information.............. 14
4.8 No Material Adverse Effect.................................. 14
4.9 Advisors.................................................... 14
4.10 Opinion of Financial Advisor................................ 14
4.11 Amendments to Rights Agreement.............................. 15
ARTICLE V REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUBSIDIARY... 15
5.1 Organization and Existence.................................. 15
5.2 Capitalization.............................................. 15
5.3 Authority and Approval...................................... 16
5.4 Financial Statements........................................ 16
5.5 Consent and Approvals; No Violation......................... 16
5.6 Litigation.................................................. 17
5.7 Acquiror SEC Documents; Accuracy of Information............. 17
5.8 No Material Adverse Effect.................................. 17
5.9 Advisors.................................................... 17
5.10 Opinion of Financial Advisor................................ 17
5.11 Due Authorization........................................... 17
5.12 No Active Business.......................................... 17
5.13 Ownership of Tenneco Stock.................................. 17
ARTICLE VI COVENANTS OF THE PARTIES.................................... 17
6.1 Conduct of Tenneco and its Subsidiaries..................... 17
6.2 Conduct of the Business of Acquiror and its Subsidiaries.... 21
6.3 Access to Information; Confidentiality...................... 22
6.4 Directors' and Officers' Indemnification and Insurance...... 22
6.5 Notification of Certain Matters............................. 24
6.6 Tax Treatment............................................... 25
Registration Statement; Joint Proxy Statement; NPS
6.7 Materials................................................... 25
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
6.8 Stockholders' Meetings..................................... 28
6.9 Further Action; Reasonable Best Efforts.................... 28
6.10 Public Announcements....................................... 29
6.11 Listing of Acquiror Stock.................................. 30
6.12 Rights Agreement........................................... 30
6.13 The Spinoffs............................................... 30
6.14 Antitrust Matters.......................................... 30
6.15 Employee Matters........................................... 31
6.16 Debt Realignment........................................... 31
6.17 No Solicitations........................................... 31
6.18 Performance of Agreement and Distribution Agreement........ 31
6.19 Affiliates of Tenneco...................................... 32
6.20 Antitakeover Statutes...................................... 32
6.21 Equity Issuance by Acquiror................................ 32
6.22 Ruhrgas AG................................................. 32
6.23 Additional Covenants of Acquiror........................... 32
ARTICLE VII CONDITIONS PRECEDENT....................................... 33
Conditions to Obligations of Each Party to Effect the
7.1 Merger..................................................... 33
Additional Conditions to Obligations of Acquiror and
7.2 Subsidiary................................................. 35
7.3 Additional Conditions to Obligations of Tenneco............ 35
ARTICLE VIII TERMINATION................................................ 36
8.1 Grounds for Termination.................................... 36
8.2 Effect of Termination...................................... 38
8.3 Waiver..................................................... 38
ARTICLE IX EXTENT AND SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS.................................. 38
9.1 Scope of Representations................................... 38
9.2 Survival................................................... 38
ARTICLE X MISCELLANEOUS.............................................. 38
10.1 Expenses................................................... 38
10.2 Notices.................................................... 39
10.3 Remedies................................................... 40
10.4 Consent to Amendments...................................... 40
10.5 Successors and Assignors................................... 40
10.6 Severability............................................... 40
10.7 Counterparts............................................... 40
10.8 Descriptive Headings....................................... 40
10.9 No Third-Party Beneficiaries............................... 40
10.10 Entire Agreement........................................... 40
10.11 Construction............................................... 41
10.12 Incorporation of Exhibits.................................. 41
10.13 Governing Law.............................................. 41
</TABLE>
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<PAGE>
EXHIBITS
EXHIBIT ADistribution Agreement
EXHIBIT BCertificate of Designation Respecting Acquiror Preferred Stock
EXHIBIT CDebt Realignment Plan
EXHIBIT D[Intentionally Omitted]
EXHIBIT EForm of Certificate of Designation Respecting New Preferred Stock
EXHIBIT F Pro Forma Financial Information Concerning the Energy Business
EXHIBIT G Certain Permitted Actions, Transactions and Other Matters
EXHIBIT H Text of Section 14 of Article IV of the By-Laws of the
Surviving Corporation
EXHIBIT I Certain Deferred Intercompany Gains
EXHIBIT J Representations in Connection with IRS Ruling Letter
EXHIBIT KBenefits for Employees of the Energy Business
EXHIBIT LGuarantees
EXHIBIT MForm of Rule 145 Letter
EXHIBIT NForm of Jenner & Block Tax Opinion
EXHIBIT OForm of Depositary Agreement
ANNEX 1 Form of Amendment to Tenneco Certificate of Incorporation
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<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER is entered into as of
June 19, 1996 (the "AGREEMENT EFFECTIVE DATE"), by and among Tenneco Inc., a
Delaware corporation ("TENNECO"), El Paso Natural Gas Company, a Delaware
corporation ("ACQUIROR"), and El Paso Merger Company, a Delaware corporation
and an indirect wholly-owned subsidiary of Acquiror ("SUBSIDIARY").
W I T N E S S E T H:
WHEREAS, the board of directors of Tenneco has approved a plan of
distribution set forth in the form of agreement attached hereto as EXHIBIT A
(which, together with any exhibits, schedules or attachments thereto, is
hereinafter referred to as the "DISTRIBUTION AGREEMENT") which will be entered
into prior to the Effective Time (as defined below) and pursuant to which,
prior to the Effective Time,
(i) Tenneco and its subsidiaries will, through various intercompany
transfers and distributions, restructure, divide and separate their
existing automotive, packaging and shipbuilding businesses so that all of
the assets, liabilities and operations of
(a) the automotive and packaging businesses will be owned, directly
and indirectly, by a wholly-owned subsidiary of Tenneco (the
"INDUSTRIAL SUBSIDIARY"), and
(b) the shipbuilding business will be owned, directly and indirectly,
by a wholly-owned subsidiary of Tenneco (the "SHIPBUILDING
SUBSIDIARY"), and
(ii) all of the shares of capital stock of each of the Industrial
Subsidiary and the Shipbuilding Subsidiary will be distributed on a pro
rata basis as a dividend to the holders of Tenneco's issued and outstanding
common stock (the "SPINOFFS");
WHEREAS, Acquiror (which is the ultimate parent company of its consolidated
group) desires to acquire Tenneco and its direct and indirect subsidiaries
remaining immediately following the Spinoffs pursuant to the merger of
Subsidiary with and into Tenneco (the "MERGER"), with Tenneco surviving as an
indirect subsidiary of Acquiror (the "SURVIVING CORPORATION");
WHEREAS, the respective boards of directors of Acquiror, Subsidiary and
Tenneco, deeming the Merger to be advisable and in the best interests of their
respective stockholders, have authorized and approved the execution and
delivery of this Agreement and the performance of their respective obligations
hereunder;
WHEREAS, for federal income tax purposes, the parties hereto intend that
(i) the Spinoffs will qualify as tax-free distributions within the
meaning of Section 355 of the Internal Revenue Code of 1986, as amended
(the "CODE"), and
(ii) the Merger will be treated as a reorganization pursuant to the
provisions of Section 368(a)(1)(B) of the Code;
WHEREAS, this Agreement is intended to be, and is adopted as, a plan of
reorganization.
WHEREAS, the parties entered into an Agreement and Plan of Merger (the
"PRIOR AGREEMENT") as of June 19, 1996, and now desire to amend and restate
the Prior Agreement in its entirety effective as of the Agreement Effective
Date.
NOW, THEREFORE, in consideration of the premises and of the mutual and
dependent promises, representations, warranties and covenants herein
contained, the parties agree as follows:
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ARTICLE I
DEFINITIONS
Unless otherwise defined herein or unless the context otherwise requires,
the following terms shall have the meanings set forth below:
"ACQUIROR COMMON STOCK" means the Common Stock, par value $3.00 per
share, of Acquiror.
"ACQUIROR PREFERRED STOCK" means the series of voting preferred stock of
Acquiror to be designated as Adjustable Rate Cumulative Preferred Stock and
described in the form of Certificate of Designation therefor attached
hereto as EXHIBIT B; provided, however, that if either Tenneco or Acquiror
determines, in good faith after consultation with the other party and its
advisors, that there exists a reasonable likelihood that the issuance of
Acquiror Preferred Stock (or Depositary Shares (as defined below) in
respect thereof) in connection with the Merger would cause the Merger to be
taxable to the stockholders of Tenneco, Acquiror shall have the absolute
obligation (at Acquiror's sole cost) to amend, if legally possible, the
terms of the Acquiror Preferred Stock in a manner reasonably acceptable to
Tenneco so that the issuance would not cause the Merger to be so taxable.
In the event that the terms of the Acquiror Preferred Stock are amended
pursuant to the proviso in the immediately preceding sentence, the parties
hereto hereby agree, if required by applicable Law, they shall (i) prepare
and execute an appropriate amendment to this Agreement reflecting said
amendment to the terms of the Acquiror Preferred Stock, (ii) subject to
SECTIONS 6.7(A) and 6.8 hereof, prepare, file and mail an appropriate
supplement to the Joint Proxy Statement reflecting the terms of this
Agreement and of the Merger as so amended, and (iii) if such amendment is
made after the approval of the Merger by the stockholders of Tenneco,
resubmit for the approval of the stockholders of Tenneco this Agreement and
the Merger as so amended.
"ACQUIROR COMMON STOCKHOLDERS' MEETING" has the meaning set forth in
SECTION 6.8 hereof.
"ACQUIROR SEC DOCUMENTS" means all filings made by Acquiror or its
subsidiaries, including Subsidiary, with the SEC from January 1, 1995
through the Agreement Effective Date, including notes, schedules,
amendments and exhibits thereto.
"ACQUIROR STOCK" means the Acquiror Common Stock and the Acquiror
Preferred Stock.
"ACQUIROR STOCK FUND" has the meaning set forth in SECTION 2.6(A) hereof.
"ACQUISITION TRANSACTION" has the meaning set forth in SECTION 6.17
hereof.
"ADJUSTED COMMON EQUITY CONSIDERATION" means the product of (i) the
Average Acquiror Price, and (ii) the quotient determined by dividing the
Common Equity Consideration by the Average Acquiror Common Equity Price.
"AFFILIATE" means, when used with respect to a specified Person, another
Person that directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the Person
specified.
"AGREEMENT" means this Amended and Restated Agreement and Plan of Merger,
as the same may be amended from time to time in accordance with the terms
hereof.
"AGREEMENT EFFECTIVE DATE" means June 19, 1996, the date on which the
Prior Agreement was entered into.
"ALLOCATION AGREEMENT" means the Debt and Cash Allocation Agreement
included in the Distribution Agreement as an exhibit.
"APPRAISAL CONSIDERATION" has the meaning set forth in SECTION 2.6(H)
hereof.
"ACQUIROR PRICE" means the closing price of the Acquiror Common Stock on
the NYSE Composite Transactions Reporting System, as reported in The Wall
Street Journal, for the trading day immediately
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<PAGE>
preceding the day on which the holders of Tenneco Stock entitled to vote at
the Tenneco Stockholders' Meeting vote with respect to Merger; provided,
however, if there is no closing price for Acquiror Common Stock on such
trading day, the Acquiror Price shall be the closing price for Acquiror
Common Stock on the next preceding trading day on which a trade of Acquiror
Common Stock occurred.
"AVERAGE ACQUIROR PRICE" means the average of the closing prices of the
Acquiror Common Stock on the NYSE Composite Transactions Reporting System,
as reported in The Wall Street Journal, for the Average Period (but subject
to correction for typographical or other manifest errors in such
reporting), rounded to four decimal places.
"AVERAGE ACQUIROR COMMON EQUITY PRICE" means the Average Acquiror Price;
provided that if the Average Acquiror Price is greater than $38.3625, the
Average Acquiror Common Equity Price shall be $38.3625 and if the Average
Acquiror Price is less than $31.3875, the Average Acquiror Common Equity
Price shall be $31.3875; provided further, however, that the aforesaid
dollar amounts shall be subject to appropriate adjustments, reasonably
satisfactory to Tenneco and Acquiror in all respects, to reflect any
recapitalization, reclassification, stock split, combination of shares,
issuance of equity (other than issuances of shares pursuant to the exercise
of employee stock options) or options for less than full market value or
the like of or involving Acquiror.
"AVERAGE PERIOD" means the 20 trading days on the NYSE immediately
preceding the second trading day prior to the Effective Time.
"BENEFITS AGREEMENT" means the Benefits Agreement attached to the
Distribution Agreement as Exhibit A.
"BLACK-OUT PERIOD" means the Average Period and the 20 trading days
preceding the Average Period.
"CERTIFICATES" has the meaning set forth in SECTION 2.6(B) hereof.
"CLAIM" has the meaning set forth in SECTION 6.4(B) hereof.
"CLAIMS ADMINISTRATION" means the handling of claims made under the D&O
Policies, including the management, defense and settlement of claims.
"CLOSING" has the meaning set forth in SECTION 3.1 hereof.
"CLOSING DATE" has the meaning set forth in SECTION 3.1 hereof.
"COMMISSION" means the United States Securities and Exchange Commission.
"COMMON CONVERSION NUMBER CASE A" means the number of shares (rounded to
the nearest one-thousandth of a share) of Acquiror Common Stock to be
issued upon conversion of a single share of Tenneco Common Stock at the
Effective Time pursuant to SECTION 2.5 hereof and the other terms and
conditions of this Agreement, determined by dividing the Common Equity
Consideration by the Average Acquiror Common Equity Price and dividing the
result by the number of shares of Tenneco Common Stock outstanding
immediately prior to the Effective Time as certified to Acquiror by
Tenneco's principal registrar and transfer agent, which are to be converted
into the right to receive Acquiror Stock pursuant to the provisions of
SECTION 2.5 hereof.
"COMMON CONVERSION NUMBER CASE B" means the number of shares (rounded to
the nearest one-thousandth of a share) of Acquiror Common Stock to be
issued upon conversion of a single share of Tenneco Common Stock at the
Effective Time pursuant to SECTION 2.5 hereof and the other terms and
conditions of this Agreement, determined by dividing (x) the excess of (i)
7,000,000 over (ii) the number of shares of Acquiror Common Stock issued in
exchange for shares of $4.50 Preferred Stock and $7.40 Preferred Stock in
the Merger by (y) the number of shares of Tenneco Common Stock outstanding
immediately prior to the Effective Time as certified to Acquiror by
Tenneco's principal registrar and transfer agent, which are to be converted
into the right to receive Acquiror Stock pursuant to the provisions of
SECTION 2.5 hereof.
"COMMON EQUITY CONSIDERATION" means the Equity Consideration less the
Preferred Stock Amount.
"CORPORATE RESTRUCTURING TRANSACTIONS" has the meaning ascribed to that
term in the Distribution Agreement.
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<PAGE>
"DEBT" means any indebtedness representing an obligation for the
repayment of money borrowed by a subject Person (including short-term debt
and current maturities of long-term obligations), and any accrued but
unpaid or accreted interest related to such indebtedness.
"DEBT REALIGNMENT" means the plan for repayment, exchange and/or
modification of the indebtedness of Tenneco, as described in EXHIBIT C
attached hereto.
"DEPOSITARY" means The First National Bank of Boston, N.A.
"DEPOSITARY AGREEMENT" means the Depositary Agreement attached hereto as
EXHIBIT O.
"DEPOSITARY RECEIPT" means a depositary receipt issued by the Depositary
to evidence a Depositary Share.
"DEPOSITARY SHARE" means a unit representing a one twenty-fifth
fractional interest in a whole share of Acquiror Preferred Stock which
shall be evidenced by a Depositary Receipt issued to the Person entitled to
such fractional interest and which shall entitle the holder thereof,
pursuant to the Depositary Agreement, to rights equivalent to those of a
holder of a whole share of Acquiror Preferred Stock (to the extent of such
one twenty-fifth fractional interest therein).
"DISSENTING SHARES" has the meaning set forth in SECTION 2.6(H) hereof.
"DGCL" means the Delaware General Corporation Law, as amended.
"D&O POLICIES" has the meaning set forth in SECTION 6.4(D) hereof.
"EFFECTIVE TIME" has the meaning set forth in SECTION 3.2 hereof.
"ENERGY ASSETS" has the meaning ascribed to that term in the Distribution
Agreement.
"ENERGY BUSINESS" has the meaning ascribed to that term in the
Distribution Agreement.
"ENERGY GROUP" has the meaning ascribed to that term in the Distribution
Agreement.
"ENERGY SUBSIDIARIES" means the direct and indirect consolidated
subsidiaries of Tenneco immediately following the Spinoffs, including the
Major Subsidiaries.
"EQUITY CONSIDERATION" means $750,000,000.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"EXCHANGE AGENT" means First Chicago Trust Company of New York, or such
other trust company or bank designated by Acquiror and acceptable to
Tenneco, who shall act as agent for the holders of Tenneco Stock in
connection with the Merger to receive the Exchange Fund (as defined in
SECTION 2.6(A) hereof).
"$4.50 PREFERRED STOCK" means the $4.50 Cumulative Preferred Stock of
Tenneco.
"$4.50 PREFERRED CONVERSION NUMBER" means the number of shares (rounded
to the nearest one-thousandth of a share) of Acquiror Common Stock to be
issued upon conversion of a single share of $4.50 Preferred Stock at the
Effective Time pursuant to SECTION 2.5 and the other terms and conditions
of this Agreement, determined by dividing (i) $115, by (ii) the Acquiror
Price.
"GAAP" means United States generally accepted accounting principles and
practices, as in effect on the date of this Agreement, as promulgated by
the Financial Accounting Standards Board and its predecessors.
"GAINS TAX" has the meaning set forth in SECTION 10.1(C) hereof.
"GOVERNMENTAL AUTHORITY" means any government or any agency, bureau,
board, commission, court, department, official, political subdivision,
tribunal or other instrumentality of any government, whether federal, state
or local, domestic or foreign.
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"HIGHER PROPOSAL" has the meaning set forth in SECTION 6.17 hereof.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"INDEMNIFIED PARTIES" has the meaning set forth in SECTION 6.4(B) hereof.
"INDUSTRIAL BUSINESS" has the meaning ascribed to that term in the
Distribution Agreement.
"INDUSTRIAL GROUP" has the meaning ascribed to that term in the
Distribution Agreement.
"INSURANCE ADMINISTRATION" means, with respect to a D&O Policy, the
accounting for premiums, defense costs, indemnity payments, deductibles and
retentions, as appropriate, under the terms and conditions of such D&O
Policy, and the distribution of Insurance Proceeds.
"INSURANCE PROCEEDS" means, with respect to an insured party, those
monies, net of any applicable premium adjustment, deductible, retention or
similar cost paid or held by or for the benefit of such insured party,
which are either
(i) received by an insured from an insurance carrier, or
(ii) paid by an insurance carrier on behalf of an insured.
"IRS RULING LETTER" has the meaning set forth in SECTION 7.1(G) hereof.
"JOINT PROXY STATEMENT" has the meaning set forth in SECTION 6.7 hereof.
"LAW" means any constitutional provision, statute, law, ordinance, rule,
regulation, permit, decree, injunction, judgment, order, decree, ruling,
determination, finding or writ of any Governmental Authority.
"LAZARD" means Lazard Freres & Co. LLC.
"MAJOR SUBSIDIARIES" means the following subsidiaries of Tenneco after
giving effect to the Spinoffs:
<TABLE>
<CAPTION>
JURISDICTION
NAME OF ORGANIZATION
---- ---------------
<S> <C>
Tennessee Gas Pipeline Company Delaware
Tenneco Energy Resources Corporation Delaware
Tenneco Gas Australia, Inc. Delaware
Tenneco Corporation Delaware
Tenneco Ventures Corporation Delaware
Midwestern Gas Transmission Company Delaware
East Tennessee Natural Gas Company Tennessee
</TABLE>
"MATERIAL ADVERSE EFFECT ON ACQUIROR" means an event, change or effect
that:
(i) is or is reasonably likely to be materially adverse to the
business, operations, properties or financial condition of Acquiror and
its consolidated subsidiaries, taken as a whole; or
(ii) prevents Acquiror or Subsidiary from consummating the
transactions contemplated hereby, including the Merger, prior to the
date specified in SECTION 8.1(II) hereof.
"MATERIAL ADVERSE EFFECT ON TENNECO" means an event, change or effect
that:
(i) is or is reasonably likely to be materially adverse to the
business, operations, properties or financial condition of the Energy
Business, taken as a whole; or
(ii) prevents Tenneco from consummating the transactions contemplated
hereby, including the Spinoffs and the Merger, prior to the date
specified in SECTION 8.1(II) hereof.
"NEW CERTIFICATES" has the meaning set forth in SECTION 2.6(A) hereof.
"NEW PREFERRED STOCK" means the series of junior preferred stock of
Tenneco to be issued prior to the Closing Date as set forth in SECTION
6.1(D) hereof and described in the form of Certificate of Designation
therefor attached hereto as EXHIBIT E.
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"NPS MATERIALS" means any registration statement, private placement
memorandum and/or other documents or filings prepared by or on behalf of
Tenneco or Acquiror (or their Affiliates or representatives) and
(i) distributed to prospective purchasers or other receivers of New
Preferred Stock, or
(ii) filed with the Commission or other Governmental Authority, or
the NYSE or other stock exchange, relating to the issuance of New
Preferred Stock.
"NPS VALUE" means the market value of the New Preferred Stock issued and
outstanding at and as of the Effective Time, as jointly determined by the
financial advisors identified in SECTIONS 4.10 and 5.10 below on the
Closing Date (or, if they are unable to so agree, by Morgan Stanley & Co.
Incorporated later on the Closing Date). If the New Preferred Stock is
issued pursuant to a public issuance or private placement (as opposed to a
stock dividend), the gross proceeds of the issuance or placement shall be
presumptive evidence of the NPS Value (subject only to adjustment for
changes in value, if any, occurring between the date of the issuance or
placement and the Closing Date).
"NYSE" means the New York Stock Exchange.
"1981 STOCK PLAN" means the 1981 Tenneco Inc. Key Employee Stock Option
Plan.
"1994 STOCK PLAN" means the 1994 Tenneco Inc. Stock Ownership Plan.
"OPTION PLANS" means the 1981 Stock Plan and the 1994 Stock Plan.
"PERSON" means any natural person, corporation, business trust, joint
venture, association, company, partnership, limited liability company or
other entity, or any government, or any agency or political subdivision
thereof.
"PREFERRED STOCK AMOUNT" means an amount equal to the Acquiror Price
times the number of shares of Acquiror Common Stock issued to the holders
of the $4.50 Preferred Stock and the $7.40 Preferred Stock pursuant to the
terms of SECTION 2.5 hereof.
"PREFERRED STOCK CONVERSION NUMBER" means the result obtained by (x)
subtracting from the Adjusted Common Equity Consideration the product of
(i) the excess of (A) 7,000,000 over (B) the number of shares of Acquiror
Common Stock issued in exchange for shares of $4.50 Preferred Stock and
$7.40 Preferred Stock in the Merger and (ii) the Average Acquiror Price,
(y) dividing the result obtained pursuant to clause (x) by the "Assigned
Value" (as set forth in EXHIBIT B attached hereto) (being the liquidation
value) of the Acquiror Preferred Stock and (z) dividing the result obtained
pursuant to clause (y) by the number of shares of Tenneco Common Stock
outstanding immediately prior to the Effective Time as certified to
Acquiror by Tenneco's principal registrar and transfer agent.
"RIGHTS" shall mean the preferred stock purchase rights issued pursuant
to the Rights Agreement.
"RIGHTS AGREEMENT" shall mean the Rights Agreement dated as of May 24,
1988, as amended and restated as of October 1, 1989, between Tenneco and
First Chicago Trust Company of New York.
"REGISTRATION STATEMENT" has the meaning set forth in SECTION 6.7 hereof.
"REPLACEMENT D&O POLICY" has the meaning set forth in SECTION 6.4(D)
hereof.
"SECT" means the Stock Employee Compensation Trust currently maintained
by Tenneco.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"$7.40 PREFERRED STOCK" means the $7.40 Cumulative Preferred Stock of
Tenneco.
"$7.40 PREFERRED CONVERSION NUMBER" means the number of shares (rounded
to the nearest one-thousandth of a share) of Acquiror Common Stock to be
issued upon conversion of a single share of $7.40
6
<PAGE>
Preferred Stock at the Effective Time pursuant to SECTION 2.5 and the other
terms and conditions of this Agreement, determined by dividing (i) $115, by
(ii) the Acquiror Price.
"S/I TRANSACTION" has the meaning set forth in SECTION 6.13 hereof.
"SHIPBUILDING BUSINESS" has the meaning ascribed to that term in the
Distribution Agreement.
"SHIPBUILDING GROUP" has the meaning ascribed to that term in the
Distribution Agreement.
"STOCKHOLDERS' MEETINGS" has the meaning set forth in SECTION 6.8 hereof.
"TAKEOVER STATUTE" means any "fair price," "moratorium," "control share
acquisition" or other similar antitakeover statute or regulation enacted
under state or federal laws in the United States or any foreign
jurisdiction.
"TENDER AND EXCHANGE MATERIALS" means any registration statement, private
placement memorandum, offer to purchase and/or other documents or filings
prepared by or on behalf of Tenneco or Acquiror (or their Affiliates or
representatives), either separately or jointly, and
(i) distributed to the record and/or beneficial holders of Tenneco
consolidated Debt in connection with the Debt Realignment, and/or
(ii) filed with the Commission or other Governmental Authority, or
the NYSE or other stock exchange, relating to Debt Realignment.
"TENNECO COMMON STOCK" means the Common Stock, par value $5.00 per share,
of Tenneco.
"TENNECO SEC DOCUMENTS" means all filings made by Tenneco or its
subsidiaries with the SEC since January 1, 1995 through the Agreement
Effective Date, including notes, schedules, amendments and exhibits
thereto.
"TENNECO STOCK" means the Tenneco Common Stock, the $7.40 Preferred Stock
and the $4.50 Preferred Stock (but not the New Preferred Stock).
"TENNECO STOCKHOLDERS' MEETING" has the meaning set forth in SECTION 6.8
hereof.
"TRANSFER TAXES" has the meaning set forth in SECTION 10.1(C) hereof.
"$" is a reference to United States dollars. All monetary amounts set
forth in this Agreement are intended to be United States currency amounts.
ARTICLE II
THE MERGER
2.1 MERGER. Upon the terms and subject to the conditions herein set forth,
Subsidiary shall be merged with and into Tenneco at the Effective Time.
2.2 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
the DGCL. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time the separate existence and corporate
organization of Subsidiary shall cease and Tenneco shall continue as the
Surviving Corporation, and all the identity, purposes, properties, rights,
privileges, powers, assets, franchises, debts and duties of Tenneco and
Subsidiary shall, except as expressly provided herein or in the DGCL, vest in
the Surviving Corporation and become the identity, purposes, properties,
rights, privileges, powers, assets, franchises, debts and duties of the
Surviving Corporation.
7
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2.3 CERTIFICATE OF INCORPORATION AND BYLAWS.
(a) At the Effective Time, the certificate of incorporation of Tenneco in
effect immediately prior to the Effective Time shall be amended as set forth
in ANNEX 1 hereto, and as so amended shall be the certificate of incorporation
of the Surviving Corporation.
(b) From and after the Effective Time, the by-laws of Subsidiary, as in
effect immediately prior to the Effective Time (but, in any event, to be in
form and substance reasonably acceptable to Tenneco), shall, until further
amended as provided by law, constitute the by-laws of the Surviving
Corporation, except that the by-laws of the Surviving Corporation shall
include the provisions specified in SECTION 6.4(A)(I) of this Agreement.
2.4 DIRECTORS. The directors of Subsidiary at the Effective Time shall be
the initial directors of the Surviving Corporation, each to hold office from
the Effective Time in accordance with the certificate of incorporation and
bylaws of the Surviving Corporation and until his or her successor is duly
elected and qualified.
2.5 CONVERSION OF SHARES. At the Effective Time, by virtue of the Merger and
without any action on the part of any stockholder of either Tenneco or
Subsidiary, as applicable, but subject to SECTION 2.6 hereof, each outstanding
share of Subsidiary's capital stock and Tenneco Stock (but not New Preferred
Stock) shall be cancelled or converted in accordance with the following
provisions of this SECTION 2.5:
(a) CAPITAL STOCK OF SUBSIDIARY. Each share of Subsidiary's capital stock
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one fully paid and nonassessable share of Common
Stock, par value $5.00 per share, of the Surviving Corporation.
(b) CANCELLATION OF TREASURY AND ACQUIROR-OWNED STOCK. Each share of
Tenneco Stock owned immediately prior to the Effective Time (after giving
effect to the Spinoffs) by Tenneco, directly as treasury stock or
indirectly through one or more of its wholly-owned subsidiaries, or by
Acquiror or any direct or indirect wholly-owned subsidiary of Acquiror,
shall be cancelled and retired and shall cease to exist and no Acquiror
Stock or other consideration shall be delivered in exchange therefor or
with respect thereto.
(c) CONVERSION OF $7.40 PREFERRED STOCK. Each share of $7.40 Preferred
Stock issued and outstanding immediately prior to the Effective Time (other
than shares to be cancelled in accordance with SECTION 2.5(B) above) shall
be converted into the right to receive that number of fully paid and
nonassessable shares of Acquiror Common Stock that is equal to the $7.40
Preferred Conversion Number.
(d) CONVERSION OF $4.50 PREFERRED STOCK. Each share of $4.50 Preferred
Stock issued and outstanding immediately prior to the Effective Time (other
than shares to be cancelled in accordance with SECTION 2.5(B) above) shall
be converted into the right to receive that number of fully paid and
nonassessable shares of Acquiror Common Stock that is equal to the $4.50
Preferred Conversion Number.
(e) CONVERSION OF TENNECO COMMON STOCK. Each share of Tenneco Common
Stock issued and outstanding immediately prior to the Effective Time (other
than shares to be cancelled in accordance with SECTION 2.5(B) above) shall
be converted into the right to receive (i) that number of fully paid and
nonassessable shares of (i) Acquiror Common Stock that is equal to the
Common Conversion Number Case A if the issuance of Acquiror Common Stock as
contemplated by this SECTION 2.5(E)(I) is approved by the requisite vote of
the holders of the Acquiror Common Stock, or if such vote is not required
by law or the rules of any national securities exchange on which the
Acquiror Common Stock is listed, or (ii) if the issuance of shares of
Acquiror Common Stock as contemplated by SECTION 2.5(E)(I) is not approved
by the requisite vote of the holders of the Acquiror Common Stock and is
not permissible as aforesaid without such vote, (A) that number of fully
paid and nonassessable shares of Acquiror Common Stock that is equal to the
Common Conversion Number Case B and (B) that number of Depositary Shares
representing interests in that fraction of a fully paid and nonassessable
share of Acquiror Preferred Stock that is equal to the Preferred Stock
Conversion Number.
(f) REDEMPTION OF PREFERRED STOCK. Subject to the consent of Acquiror
(which shall not be unreasonably withheld or delayed), Tenneco may at any
time hereafter, prior to the Effective Time, redeem the $4.50 Preferred
Stock and/or the $7.40 Preferred Stock in accordance with their respective
terms.
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2.6 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Promptly after the Effective Time, Acquiror shall
deposit with the Exchange Agent, for the benefit of the holders of shares of
Tenneco Stock, for exchange in accordance with this SECTION 2.6, certificates
and Depositary Receipts, if any (together, the "NEW CERTIFICATES")
representing shares of Acquiror Stock and any Depositary Shares, respectively,
in amounts sufficient to allow the Exchange Agent to make all deliveries of
New Certificates that may be required in exchange for Certificates (as defined
below) pursuant to this SECTION 2.6 (the "ACQUIROR STOCK FUND") (such Acquiror
Stock Fund, together with any dividends or distributions with respect thereto
contemplated by SECTION 2.6(D) hereof and cash in lieu of fractional shares or
any fractional Depositary Shares contemplated by SECTION 2.6(C) hereof, being
hereinafter referred to as the "EXCHANGE FUND").
(b) EXCHANGE PROCEDURES. As soon as practicable after the Effective Time,
the Surviving Corporation shall cause the Exchange Agent to mail to each
holder of record of a certificate or certificates which immediately prior to
the Effective Time represented outstanding shares of Tenneco Stock which were
converted pursuant to SECTION 2.5 hereof into the right to receive shares of
Acquiror Stock and Depositary Shares, if any (the "CERTIFICATES")
(i) a letter of transmittal (which shall be in such form and have such
provisions as Acquiror and Tenneco may reasonably specify), and
(ii) instructions for use in effecting the surrender of the Certificates
in exchange for New Certificates.
Upon surrender of a Certificate for cancellation to the Exchange Agent
together with such letter of transmittal, duly completed in accordance with
the instructions thereto and executed, the holder of such Certificate shall be
entitled to receive in exchange therefor a New Certificate or New Certificates
representing that number of whole shares of Acquiror Stock (and any whole
Depositary Shares) which such holder has the right to receive pursuant to the
provisions of SECTION 2.5 hereof (after giving effect to SECTIONS 2.6(C) and
2.6(H) hereof) and any cash paid in lieu of fractional shares (or any
fractional Depositary Shares) and any dividends or distributions with respect
thereto as contemplated by SECTIONS 2.6(C) and 2.6(D) hereof, after giving
effect to any required tax withholdings, and the Certificate so surrendered
shall forthwith be cancelled. In the event of a transfer of ownership of
Tenneco Stock that is not registered in the transfer records of Tenneco, a New
Certificate representing the proper number of shares of Acquiror Stock (and
any Depositary Shares) may be issued to a transferee if the Certificate
formerly representing such Tenneco Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this SECTION 2.6(B), each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender a New Certificate or New Certificates representing
such whole shares of Acquiror Stock (and any whole Depositary Shares), any
dividends or distributions in respect of such shares of Acquiror Stock (and
any Depositary Shares) and cash in lieu of any fractional shares of Acquiror
Stock (or any fractional Depositary Shares), as is contemplated by SECTIONS
2.5 and 2.6 of this Agreement.
(c) FRACTIONAL SHARES. Notwithstanding anything to the contrary contained
herein (but except for the issuance of Depositary Receipts), no scrip or
certificates for fractional shares of Acquiror Stock or for any fractional
Depositary Shares shall be issued, and no Person otherwise entitled to any
such fractional share or fractional Depositary Share shall be entitled to
vote, to receive dividends, or to any other rights of a holder of a share or
Depositary Share with respect to such fractional interest. Instead, the
Exchange Agent shall act as agent for the holders of Tenneco Stock and shall
sell on the NYSE, as promptly as possible, but in any event not later than 30
days after the Closing Date, for the account of the Persons otherwise entitled
to such fractional shares or fractional Depositary Shares, shares of Acquiror
Stock or Depositary Shares equivalent to the aggregate of such fractional
interests. The Exchange Agent shall, until December 31, 1998, pay to such
Persons upon surrender of their Certificate(s) their respective pro rata
shares of the net proceeds of such sale, without interest. On December 31,
1998, any remaining proceeds of the sale shall be paid over to Acquiror, after
which the Persons otherwise entitled to such fractional interests represented
by such proceeds shall look only to Acquiror for payment, subject to the
requirements of escheat laws of the various states that may be applicable.
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(d) DIVIDENDS AND OTHER DISTRIBUTIONS. Any dividend or other distribution
declared or made after the Effective Time with a record date after the
Effective Time in respect of Acquiror Stock issuable hereunder to the holder
of a Certificate not then surrendered pursuant to SECTION 2.6(B) hereof shall
be paid to the Exchange Agent (or, if payable after December 31, 1998, shall
be set aside and retained by Acquiror), and no such dividend or other
distribution payable in respect of such Acquiror Stock shall be paid to the
holder of such outstanding Certificate until such Certificate shall have been
so surrendered to the Exchange Agent (or, if after December 31, 1998, to
Acquiror). Upon surrender of such outstanding Certificate, there shall be paid
by the Exchange Agent (or, if after December 31, 1998, by Acquiror) to or at
the direction of the holder of the New Certificate(s) issued in exchange
therefor the amount (without interest thereon) of all dividends or
distributions which have theretofore been paid to the Exchange Agent (or, if
after December 31, 1998, set aside and retained by Acquiror) with respect to
the number of shares of Acquiror Stock and any Depositary Shares represented
by the New Certificate(s) issued upon such surrender and exchange.
(e) NO FURTHER OWNERSHIP RIGHTS IN TENNECO STOCK. All shares of Acquiror
Stock and any Depositary Shares issued upon the surrender for exchange of
shares of Tenneco Stock in accordance with the terms hereof (including any
cash paid pursuant to SECTION 2.6(C) hereof) shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Tenneco
Stock, and there shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of Tenneco Stock
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be cancelled and exchanged as provided in this SECTION
2.6.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund held by
the Exchange Agent that remains undistributed to the stockholders of Tenneco
after December 31, 1998, shall be delivered to Acquiror, and any stockholders
of Tenneco who have not theretofore complied with this SECTION 2.6 shall
thereafter look only to Acquiror for payment of their claims for Acquiror
Stock, any Depositary Shares, any cash in lieu of fractional shares of
Acquiror Stock or in lieu of any fractional Depositary Shares and any
dividends or distributions with respect to Acquiror Stock.
(g) NO LIABILITY. None of Acquiror, Subsidiary, Tenneco, the Industrial
Subsidiary or the Shipbuilding Subsidiary (or any of their respective direct
or indirect subsidiaries or Affiliates) shall be liable to any holder of
shares of Tenneco Stock, Acquiror Stock or any Depositary Shares, as the case
may be, for such shares (or dividends or distributions with respect thereto)
or cash for payment in lieu of fractional shares or in lieu of any fractional
Depositary Shares delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. The Industrial Subsidiary, the
Shipbuilding Subsidiary and their respective direct and indirect subsidiaries
and Affiliates shall be deemed third party beneficiaries of this SECTION
2.6(G) and all other provisions of this Agreement necessary or appropriate for
purposes of enforcing this SECTION 2.6(G).
(h) DISSENTING HOLDERS OF $4.50 PREFERRED STOCK AND DISSENTING HOLDERS OF
NEW PREFERRED STOCK. Notwithstanding anything in this Agreement to the
contrary, shares of $4.50 Preferred Stock and New Preferred Stock that are
issued and outstanding immediately prior to the Effective Time and are held by
stockholders who are entitled to appraisal rights in respect thereof under
Section 262 of the DGCL and who have
(i) not voted such shares in favor of the adoption of this Agreement or
otherwise waived or lost their right to demand appraisal of such shares and
(ii) properly demanded appraisal of such shares in accordance with
Section 262 of the DGCL (the "DISSENTING SHARES")
shall not be converted as described in SECTION 2.5(D) above or remain
outstanding as described in SECTION 2.7 hereof, as the case may be, but shall
become the right to receive such consideration as may be determined to be due
to such stockholders pursuant to Section 262 of the DGCL ("APPRAISAL
CONSIDERATION"). If, after the Effective Time, any such stockholder withdraws
his demand for appraisal or fails to perfect or otherwise loses his right of
appraisal, in any case pursuant to the DGCL, his Dissenting Shares shall be
deemed to be converted as of the Effective Time into the right to receive
shares of Acquiror Common Stock (without any interest thereon)
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as provided in SECTION 2.5(D) hereof or shall be deemed to have remained
outstanding as provided in SECTION 2.7 hereof, as the case may be. Promptly
upon receiving any demands for appraisal, withdrawals of demand for appraisal
or any other instrument served pursuant to Section 262 of the DGCL, Tenneco
shall so notify Acquiror and shall give Acquiror the opportunity to
participate in and direct all negotiations and proceedings with respect to any
such appraisal demands. Tenneco shall not, without the prior written consent
of Acquiror, make any payment with respect to, or settle, offer to settle or
otherwise negotiate, any such appraisal demands. From and after the Effective
Time, the Surviving Corporation shall be solely responsible for the payment of
any and all Appraisal Consideration, and shall indemnify, defend, protect and
hold harmless the Industrial Subsidiary, the Shipbuilding Subsidiary and their
respective direct and indirect subsidiaries from and against any and all
claims, losses, expenses, payments, liabilities and damages (including
attorneys' fees) relating to any Dissenting Shares or claims of stockholders
holding Dissenting Shares. In order to effect the payment of any Appraisal
Consideration, the Surviving Corporation shall establish an escrow with the
Exchange Agent (or other escrow agent reasonably acceptable to the Industrial
Subsidiary) consisting of an adequate amount of cash from the $25,000,000 of
cash required to be on hand at Tenneco as of the Effective Time pursuant to
the Allocation Agreement. The Industrial Subsidiary, the Shipbuilding
Subsidiary and their respective direct and indirect subsidiaries shall be
deemed third party beneficiaries of this SECTION 2.6(H) and all other
provisions of this Agreement necessary or appropriate for purposes of
enforcing this SECTION 2.6(H).
2.7 NEW PREFERRED STOCK. Subject to SECTION 2.6(H) hereof, the shares of New
Preferred Stock outstanding immediately prior to the Effective Time shall not
be converted or otherwise exchanged pursuant to the Merger and shall remain
outstanding immediately after the Effective Time, held by the Persons who were
holders of the New Preferred Stock immediately prior to the Effective Time.
ARTICLE III
CLOSING AND FILING
3.1 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to SECTION
8.1 hereof, and subject to the satisfaction or, if permissible, waiver of the
conditions set forth in ARTICLE VII hereof, the closing of the Merger (the
"CLOSING") shall take place as promptly as practicable (and in any event
within two business days) after satisfaction or waiver of the conditions set
forth in ARTICLE VII hereof, at the offices of Tenneco Inc., 1010 Milam
Street, Houston, Texas, unless another date, time or place is agreed to in
writing by the parties hereto; provided, however, that if, (i) during the
Black-out Period there occurs an event or series of events that, in the
opinion of either Tenneco or Acquiror, could reasonably be expected to have a
temporary effect on the price of Acquiror Stock, and (ii) but for the
provisions of this proviso the Average Acquiror Price would be greater than
$38.3625 or less than $31.3875 (said dollar amounts to be adjusted on the same
basis as is described in the definition of Average Acquiror Common Equity
Price), then either Tenneco (in the case the Average Acquiror Price would be
greater than $38.3625 as aforesaid) or Acquiror (in the case the Average
Acquiror Price would be less than $31.3875 as aforesaid) may, by written
notice to the other, elect to delay or to restart the commencement of the
Average Period (and thereby the Closing) until such day as such temporary
effect has ended (but in no event shall the Closing be delayed by more than 15
days and in no event beyond the dated specified in SECTION 8.1(II) hereof), as
determined and specified by the notifying party. The date on which the Closing
occurs is referred to in this Agreement as the "CLOSING DATE".
3.2 EFFECTIVE TIME. As promptly as practicable after the satisfaction or, if
permissible, waiver of the conditions set forth in ARTICLE VII hereof, but
subject to the terms of SECTION 3.1 hereof, the parties hereto shall cause the
Merger to be consummated by filing a certificate of merger with the Secretary
of State of the State of Delaware in such form as required by, and executed in
accordance with the relevant provisions of, the DGCL (the date and time of the
acceptance of such filing, or such later date or time as set forth therein,
being the "EFFECTIVE TIME").
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TENNECO
Tenneco hereby represents and warrants to Acquiror and Subsidiary as
follows:
4.1 ORGANIZATION AND EXISTENCE. Each of Tenneco and the Major Subsidiaries
is a corporation validly existing and in good standing under the laws of the
jurisdiction of its organization with the corporate power and authority to own
its properties and assets and to carry on its business as now being conducted,
except where the failure to be so existing and in good standing or to have
such power and authority would not have a Material Adverse Effect on Tenneco.
4.2 CAPITALIZATION.
(a) As of the dates indicated below, the authorized and outstanding capital
stock of Tenneco was as follows:
<TABLE>
<CAPTION>
AUTHORIZED
AS OF THE
CLASS DATE HEREOF OUTSTANDING AS OF MARCH 31, 1996
----- ----------- --------------------------------
<S> <C> <C>
Common Stock 350,000,000 191,354,932 shares (including 17,358,445
shares held in treasury or by subsidiaries
of Tenneco)
Preferred Stock 15,000,000 803,723 shares of $4.50 Preferred Stock;
391,519 shares of $7.40 Preferred Stock
Junior Preferred 50,000,000 none
Stock
</TABLE>
(b) Between March 31, 1996 and the Agreement Effective Date, Tenneco has
issued no shares of its capital stock except for shares of Tenneco Common
Stock issued upon the exercise of options granted pursuant to the Option Plans
or to executives of Tenneco outside the Option Plans.
(c) As of March 31, 1996, except for
(i) Rights issued pursuant to the Rights Agreement and
(ii) options to acquire an aggregate of 5,207,655 shares of Tenneco
Common Stock,
there were no outstanding options, warrants, rights, puts, calls, commitments
or other contracts, arrangements, or understandings issued by or binding upon
Tenneco requiring or providing for, and there were no outstanding securities
of Tenneco or its subsidiaries which upon the conversion, exchange or exercise
thereof would require or provide for, the issuance by Tenneco of any new or
additional equity interests in Tenneco or any other securities of Tenneco
which, with notice, lapse of time and/or payment of monies, are or would be
convertible into or exercisable or exchangeable for equity interests in
Tenneco (each, a "TENNECO EQUITY RIGHT"). Between March 31, 1996 and the
Agreement Effective Date, Tenneco has not issued or granted any Tenneco Equity
Right except for
(i) Rights issued in connection with the issuance of Tenneco Common Stock
as described in SECTION 4.2(B) hereof and
(ii) options to purchase 11,000 shares of Tenneco Common Stock granted
pursuant to the 1994 Stock Plan.
(d) As of the Agreement Effective Date all outstanding shares of Tenneco
Stock are, and immediately prior to the Effective Time all outstanding shares
of Tenneco Stock and New Preferred Stock will be, validly issued, fully paid
and nonassessable and free of any preemptive (or similar) right.
4.3 AUTHORITY AND APPROVAL. Tenneco has the corporate power and authority,
and no other corporate proceedings on the part of Tenneco are necessary, to
execute and deliver this Agreement and the Distribution Agreement and to
consummate the transactions contemplated hereby and thereby (subject to
securing the
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<PAGE>
approval of the stockholders of Tenneco as contemplated by SECTION 6.8 hereof,
and formal declaration of the dividends necessary to effectuate the Spinoffs
and the issuance of the New Preferred Stock). This Agreement has been duly
executed and delivered by Tenneco and, assuming this Agreement constitutes a
valid and binding obligation of each of Acquiror and Subsidiary, this
Agreement constitutes a valid and binding obligation of Tenneco, enforceable
against Tenneco in accordance with its terms.
4.4 FINANCIAL STATEMENTS. The audited financial statements of Tenneco and
consolidated subsidiaries as of December 31, 1995 and 1994 and for the three
years ended December 31, 1995, included in Tenneco's 1995 Annual Report on
Form 10-K, as filed with the Commission, (i) were prepared in accordance with
GAAP applied on a consistent basis (except as indicated therein or in the
notes thereto) and (ii) fairly present the financial position of Tenneco and
consolidated subsidiaries as of the dates thereof and the results of their
operations and cash flows for the periods then ended. The unaudited financial
statements of Tenneco and consolidated subsidiaries as of March 31, 1996 and
1995 and for the three-month periods ended on each of such dates, included in
Tenneco's March 31, 1996 Quarterly Report on Form 10-Q as filed with the
Commission, (A) comply in all material respects with the published rules and
regulations of the Commission with respect thereto, (B) were prepared in
accordance with GAAP, except as otherwise permitted under the Exchange Act and
the rules and regulations thereunder, on a consistent basis (except as
indicated therein or in the notes thereto) and (C) fairly present the
financial position of Tenneco and consolidated subsidiaries as of the dates
thereof and the results of their operations and cash flows for the periods
then ended, subject to normal year-end adjustments and any other adjustments
described herein or in the notes or schedules thereto.
The unaudited pro forma financial information of the Energy Business
(including related notes thereto) as of December 31, 1995 included in EXHIBIT
F-1 attached to this Agreement (which were prepared without cash flow
statements and treating the Energy Business as if it were a separate entity
for the purpose of estimates and judgments of materiality) appropriately
reflects all significant pro forma adjustments necessary to and does fairly
present the financial position of the Energy Business as of December 31, 1995
and for the year then ended, except that such financial information was
prepared on the assumption that the Energy Business had no long-term debt as
of December 31, 1995. The historical financial balances included in the
unaudited pro forma financial balances included in EXHIBIT F-1 have been
derived from amounts included in the consolidated balances presented in the
audited financial statements of Tenneco and consolidated subsidiaries included
in Tenneco's December 31, 1995 Annual Report on Form 10-K as filed with the
Commission.
The unaudited pro forma financial information of the Energy Business
(including related notes thereto) as of March 31, 1996 included in EXHIBIT F-2
attached to this Agreement (which were prepared without cash flow statements
and treating the Energy Business as if it were a separate entity for the
purpose of estimates and judgments of materiality) appropriately reflects all
significant pro forma adjustments necessary to and does fairly present the
financial position of the Energy Business as of March 31, 1996, except that
such financial information was prepared on the assumption that the Energy
Business had no long-term debt as of March 31, 1996. The historical financial
balances included in the unaudited pro forma financial balances included in
EXHIBIT F-2 have been derived from amounts included in the consolidated
balances presented in the audited financial statements of Tenneco and
consolidated subsidiaries included in Tenneco's March 31, 1996 Quarterly
Report on Form 10-Q as filed with the Commission.
The financial statements of Tennessee Gas Pipeline Company, Midwestern Gas
Transmission Company and East Tennessee Natural Gas Company as of and for the
years ended December 31, 1995 and 1994 included on pages 110 through 123 of
each company's respective Federal Energy Regulatory Commission Form 2 were
prepared in all material respects in accordance with the accounting
requirements of the Federal Energy Regulatory Commission as set forth in its
applicable Uniform System of Accounts and published accounting releases.
4.5 CONSENTS AND APPROVALS; NO VIOLATIONS. The execution, delivery and,
subject to securing the approval of the stockholders of Tenneco as
contemplated by SECTION 6.8 hereof, formal declaration of the dividends
necessary to effectuate the Spinoffs and the issuance of the New Preferred
Stock, performance by Tenneco of
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this Agreement and the Distribution Agreement and the consummation by Tenneco
of the transactions contemplated hereby or thereby do not or will not:
(i) conflict with or result in any breach of any provisions of the
certificate of incorporation or bylaws of Tenneco;
(ii) except as contemplated by this Agreement or the Distribution
Agreement, require any filing by Tenneco or any Energy Subsidiary with any
Governmental Authority, or require Tenneco or any Energy Subsidiary to
obtain any permit, authorization, consent or approval from any Governmental
Authority;
(iii) after giving effect to the Debt Realignment, result in a violation
or breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, license,
contract, agreement, franchise, permit, concession or other instrument,
obligation, understanding, commitment or other arrangement to which Tenneco
or any Energy Subsidiary is a party or by which any of them or any of their
respective material properties or assets may be bound or affected; or
(iv) violate any Law applicable to Tenneco or any Energy Subsidiary;
except, in the case of each of clauses (ii) through (iv) above, for failures
to make filings or obtain permits, authorizations, consents or approvals,
violations, breaches or defaults that could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on
Tenneco.
4.6 LITIGATION. Except as previously disclosed in writing to Acquiror, as of
the Agreement Effective Date there are no actions, suits, proceedings or, to
the knowledge of Tenneco, governmental investigations or inquiries pending
against Tenneco or any of its subsidiaries or their respective properties,
assets, operations or businesses which could reasonably be expected to delay,
prevent or hinder the consummation of the transactions contemplated hereby or
by the Distribution Agreement, and to the knowledge of Tenneco as of the
Agreement Effective Date, no such actions, suits, proceedings or governmental
investigations or inquiries are threatened.
4.7 TENNECO SEC DOCUMENTS; ACCURACY OF INFORMATION. The information relating
to the Energy Business contained in the Tenneco SEC Documents (A) complied, as
of the date of filing thereof (or, in the case of any registration statement,
on the date it was declared effective), in all material respects with the
applicable requirements of the Exchange Act or Securities Act and (B) did not
contain, as of the date of filing thereof (or, in the case of any registration
statement, on the date it was declared effective), any untrue statement of a
material fact or omit to state any material fact necessary in order to have
the statements made therein, in light of the circumstances under which they
were made, not misleading.
4.8 NO MATERIAL ADVERSE EFFECT. Except as previously disclosed to Acquiror
in writing prior to the date of this Agreement, between December 31, 1995 and
the Agreement Effective Date, there has occurred no Material Adverse Effect on
Tenneco.
4.9 ADVISORS. Except for Lazard, Morgan Stanley & Co. Incorporated, and J.P.
Morgan Securities Incorporated, which have been retained by Tenneco to assist
and advise Tenneco in connection with the transactions contemplated by this
Agreement and the Distribution Agreement, Tenneco has not employed any broker,
finder or intermediary in connection with such transactions who might be
entitled to a fee or commission upon the consummation of this Agreement, the
Distribution Agreement or the transactions contemplated hereby or thereby. A
copy of the engagement letter between Tenneco and each such advisor has been
provided to Acquiror.
4.10 OPINION OF FINANCIAL ADVISOR. Tenneco has received the opinion of
Lazard, dated as of the Agreement Efffective Date, to the effect that, as of
such date, the consideration to be received in the Merger by Tenneco's
stockholders is fair to Tenneco's stockholders from a financial point of view
(and Tenneco has the right to refer
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<PAGE>
to that opinion, so long as such reference is in form and substance
satisfactory to Lazard, in the Joint Proxy Statement and other appropriate
filings with the Commission and mailings to its stockholders).
4.11 AMENDMENTS TO RIGHTS AGREEMENT. Tenneco has caused the Rights Agreement
to be amended such that
(i) neither a "Triggering Event" nor a "Distribution Date" (in each case
as defined in the Rights Agreement) will occur solely by reason of the
execution of this Agreement and the consummation of the transactions
contemplated hereby, and
(ii) the Rights will expire at the Effective Time.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUBSIDIARY
Acquiror and Subsidiary hereby represent and warrant, jointly and severally,
to Tenneco as follows:
5.1 ORGANIZATION AND EXISTENCE. Each of Acquiror and Subsidiary is a
corporation validly existing and in good standing under the laws of the
jurisdiction of its organization with the corporate power and authority to own
its properties and assets and to carry on its business as now being conducted,
except where the failure to be so existing and in good standing or to have
such power and authority would not have a Material Adverse Effect on Acquiror.
5.2 CAPITALIZATION.
(a) ACQUIROR.
(i) As of the Agreement Effective Date, the authorized capital stock of
Acquiror consists of:
(A) 100,000,000 shares of Acquiror Common Stock of which, at June 18,
1996, 35,582,074 shares were issued and outstanding and 1,769,151 shares
were held in treasury (including shares held in Acquiror's Benefits
Protection Trust); and
(B) 25,000,000 shares of Preferred Stock , $.01 par value, none of which
are issued and outstanding.
(ii) As of the Agreement Effective Date, except for rights issued pursuant
to the Shareholders Rights Agreement, dated as of July 7, 1992, between
Acquiror and The First National Bank of Boston and options to acquire an
aggregate of 4,066,487 shares of Acquiror Common Stock, there were no
outstanding options, warrants, rights, puts, calls, commitments or other
contracts, arrangements, or understandings issued by or binding upon Acquiror
requiring or providing for, and there were no outstanding securities of
Acquiror or its subsidiaries which upon the conversion, exchange or exercise
thereof would require or provide for, the issuance by Acquiror of any new or
additional equity interests in Acquiror or any other securities of Acquiror
which, with notice, lapse of time and/or payment of monies, are or would be
convertible into or exercisable or exchangeable for equity interests in
Acquiror (each, an "ACQUIROR EQUITY RIGHT").
(iii) As of the Agreement Effective Date all outstanding shares of the
capital stock of Acquiror are, and immediately prior to the Effective Time all
outstanding shares of the capital stock of Acquiror will be, validly issued,
fully paid and nonassessable and free of any preemptive (or similar) right.
(b) SUBSIDIARY.
(i) The authorized capital stock of Subsidiary consists of 1,000 shares of
common stock, $1.00 par value, all of which are issued and outstanding.
(ii) There are no outstanding options, warrants, rights, puts, calls,
commitments or other contracts, arrangements, or understandings issued by or
binding upon Subsidiary requiring or providing for, and there were
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no outstanding securities of Subsidiary which upon the conversion, exchange or
exercise thereof would require or provide for, the issuance by Subsidiary of
any new or additional equity interests in Subsidiary or any other securities
of Subsidiary which, with notice, lapse of time and/or payment of monies, are
or would be convertible into or exercisable or exchangeable for equity
interests in Subsidiary.
(iii) All outstanding shares of the capital stock of Subsidiary are, and
immediately prior to the Effective Time all outstanding shares of the capital
stock of Subsidiary will be, validly issued, fully paid and nonassessable and
free of any preemptive (or similar) right.
5.3 AUTHORITY AND APPROVAL. Each of Acquiror and Subsidiary has the
corporate power and authority, and no other corporate proceedings on the part
of Acquiror or Subsidiary are necessary, to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. This Agreement has
been duly executed and delivered by each of Acquiror and Subsidiary and,
assuming this Agreement constitutes a valid and binding obligation of Tenneco,
this Agreement constitutes the valid and binding obligation of Acquiror and
Subsidiary, enforceable against each of them in accordance with its terms.
5.4 FINANCIAL STATEMENTS. Acquiror has heretofore delivered to Tenneco
complete and correct copies of all filings made by Acquiror pursuant to the
Exchange Act since January 1, 1995. The audited consolidated financial
statements of Acquiror included in such filings (i) were prepared in
accordance with GAAP applied on a consistent basis (except as indicated
therein or in the notes thereto) during the periods presented and (ii) fairly
present the financial position of Acquiror and its consolidated subsidiaries
as of the dates thereof and the results of their operations and cash flows for
the periods then ended. The unaudited financial statements included in such
filings
(i) comply in all material respects with the published rules and
regulations of the Commission with respect thereto,
(ii) were prepared in accordance with GAAP, except as otherwise permitted
under the Exchange Act and the rules and regulations thereunder, on a
consistent basis (except as may be indicated therein or in the notes or
schedules thereto) during the periods presented and
(iii) fairly present the financial position of Acquiror and its
consolidated subsidiaries as at the dates thereof and the results of their
operations and cash flows for the periods then ended, subject to normal
year-end adjustments and any other adjustments described therein or in the
notes or schedules thereto.
5.5 CONSENT AND APPROVALS; NO VIOLATION. The execution, delivery and
performance by Acquiror and Subsidiary of this Agreement and the consummation
by Acquiror and Subsidiary of the transactions contemplated hereby do not and
will not:
(i) conflict with or result in any breach of any provisions of the
certificate of incorporation, bylaws or other governing documents of
Acquiror or Subsidiary,
(ii) except as contemplated by this Agreement, require any filing by
Acquiror or any of its subsidiaries (including Subsidiary) with any
Governmental Authority or require Acquiror or any of its subsidiaries
(including Subsidiary) to obtain any permit, authorization, consent or
approval of any Governmental Authority;
(iii) result in a violation or breach of, or constitute (with or without
due notice or lapse of time or both) a default (or give rise to any right
of termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, license, contract, agreement, franchise, permit, concession or other
instrument, obligation, understanding, commitment or other arrangement to
which Acquiror or any of its subsidiaries (including Subsidiary) is a party
or by which any of them or any of their respective material properties or
assets may be bound or affected; or
(iv) violate any Law applicable to Acquiror or any of its subsidiaries
(including Subsidiary);
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except, in the case of each of clauses (ii) through (iv) above, for failures
to make filings or obtain permits, authorizations, consents or approvals,
violations, breaches or defaults which could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect on
Acquiror.
5.6 LITIGATION. Except as previously disclosed in writing to Tenneco, as of
the Agreement Effective Date, there are no actions, suits, proceedings or, to
Acquiror's knowledge, governmental investigations or inquiries pending against
Acquiror or any of its subsidiaries (including Subsidiary) or their respective
properties, assets, operations or businesses which could reasonably be
expected to delay, prevent or hinder the consummation of the transactions
contemplated hereby and, to the knowledge of Acquiror, no such actions, suits,
proceedings or governmental investigations or inquiries are threatened.
5.7 ACQUIROR SEC DOCUMENTS; ACCURACY OF INFORMATION. The information
regarding Acquiror and its consolidated subsidiaries contained in the Acquiror
SEC Documents (A) complied, as of the date of filing thereof (or, in the case
of any registration statement, on the date it was declared effective), in all
material respects with the applicable requirements of the Exchange Act or
Securities Act and (B) did not contain, as of the date of filing thereof (or,
in the case of any registration statement, on the date it was declared
effective), any untrue statement of a material fact or omit to state any
material fact necessary in order to have the statements made therein, in light
of the circumstances under which they were made, not misleading.
5.8 NO MATERIAL ADVERSE EFFECT. Except as previously disclosed to Tenneco in
writing prior to the date of this Agreement, between December 31, 1995 and the
Agreement Effective Date, there has occurred no Material Adverse Effect on
Acquiror.
5.9 ADVISORS. Except for Donaldson, Lufkin & Jenrette ("DLJ"), which has
been retained by Acquiror to assist and advise Acquiror in connection with the
transactions contemplated by this Agreement, Acquiror has not employed any
broker, finder or intermediary in connection with such transactions who might
be entitled to a fee or commission upon the consummation of this Agreement or
the transactions contemplated hereby.
5.10 OPINION OF FINANCIAL ADVISOR. Acquiror has received the opinion of DLJ,
dated as of the Agreement Effective Date, to the effect that, as of such date,
the consideration to be paid in the Merger by Acquiror is fair to Acquiror's
stockholders from a financial point of view (and Acquiror has the right to
refer to that opinion, so long as such reference is in form and substance
satisfactory to DLJ, in the Joint Proxy Statement and other appropriate
filings with the Commission and mailings to its stockholders).
5.11 DUE AUTHORIZATION. The shares of Acquiror Stock and any Depositary
Shares issued in connection with the Merger as contemplated by this Agreement
will be duly authorized and will be validly issued, fully paid and
nonassessable.
5.12 NO ACTIVE BUSINESS. Subsidiary has not engaged in any business and does
not have any contractual liabilities, commitments, or obligations (other than
pursuant to this Agreement) or any assets (other than cash representing its
initial capitalization). Subsidiary has been formed solely for purposes of
effectuating the transactions contemplated by this Agreement and having such
transactions treated for federal income tax purposes as an acquisition of the
outstanding Tenneco Stock by Acquiror in exchange for Acquiror Stock through
the Merger of Subsidiary with and into Tenneco pursuant to this Agreement.
5.13 OWNERSHIP OF TENNECO STOCK. Neither Acquiror nor Subsidiary is
(i) an "Interested Stockholder" of Tenneco as defined in Article NINTH of
the Certificate of Incorporation of Tenneco or
(ii) an "interested stockholder" of Tenneco as defined in Section 203 of
the DGCL.
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As of the Agreement Effective Date, Acquiror and its Affiliates own
(directly or indirectly, beneficially or of record) no shares of Tenneco Stock
and neither Acquiror nor any of its Affiliates own any rights to acquire any
shares of Tenneco Stock, except pursuant to this Agreement.
ARTICLE VI
COVENANTS OF THE PARTIES
6.1 CONDUCT OF TENNECO AND ITS SUBSIDIARIES.
(a) Between the Agreement Effective Date and the Effective Time, unless
Acquiror shall have consented in writing (such consent not to be unreasonably
withheld), and except for
(i) actions taken that either affect solely the Industrial Business or
the Shipbuilding Business or only adversely affect the Energy Business to a
de minimis extent and do not materially delay or prevent consummation of
the transactions contemplated hereby,
(ii) actions taken by Tenneco and its Affiliates and subsidiaries
(including the Energy Subsidiaries) in order to consummate any of the
Merger, the Spinoffs and the other transactions contemplated by this
Agreement or the Distribution Agreement, which actions are taken in good
faith and either are contemplated by this Agreement or the Distribution
Agreement (including the Corporate Restructuring Transactions described
therein) or do not have more than a de minimis effect on Tenneco or do not
materially delay or prevent consummation of the transactions contemplated
hereby, or
(iii) actions or matters set forth in EXHIBIT G attached hereto,
Tenneco shall, and shall cause each of the Energy Subsidiaries to:
(A) use its reasonable best efforts to
(I) operate the Energy Business in good faith and in the ordinary
course, consistent with past practices, including, without limitation,
with respect to the payment and administration of accounts payable and
the collection and administration of accounts receivable, inventory
management and control policies and implementation of capital programs
for the Energy Business in a timely manner,
(II) preserve substantially intact the present business organization
of the Energy Business,
(III) keep available, consistent with the past practices of the
Energy Business, the services of the present officers, employees and
consultants of Tenneco and each of the Energy Subsidiaries (to the
extent they customarily provide services to the Energy Business), and
(IV) preserve the relationships with customers, suppliers and others
having business dealings with the Energy Business,
it being understood that
(x) certain employees of Tenneco and the Energy Subsidiaries will
also be engaged in activities for the Industrial Business and the
Shipbuilding Business, and
(y) the failure of any officer, employee or consultant of the Energy
Business to remain an officer, employee or consultant of the Energy
Business or to become an officer, employee or consultant of Acquiror or
any subsidiary of Acquiror shall not constitute a breach of this
covenant;
(B) not amend or otherwise change the certificate of incorporation or
bylaws of Tenneco (except as may be necessary or appropriate to effect the
transactions contemplated hereby or by the Distribution Agreement);
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(C) not issue or authorize the issuance of (except, as to Tenneco, in the
ordinary course of business consistent with past practices or as
contemplated in this Agreement) or the Distribution Agreement, any shares
of any class of the capital stock of Tenneco or any Energy Subsidiary
(other than New Preferred Stock) or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of such
capital stock, or any other ownership interest (including, without
limitation, any phantom interest), of Tenneco or any of the Energy
Subsidiaries (other than the issuance of Rights and shares of Tenneco
Common Stock either
(I) in connection with any dividend reinvestment plan,
(II) upon the exercise of options granted prior to the Agreement
Effective Date,
(III) pursuant to the terms of any other Tenneco employee benefit
plan with an employee stock fund or employee stock ownership plan
feature,
(IV) in accordance with the Rights Agreement, or
(V) as is otherwise permitted pursuant to this Agreement or the
Distribution Agreement);
(D) not reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any class of the capital stock
of Tenneco or of any of the Energy Subsidiaries other than acquisitions by
a dividend reinvestment plan or by any Tenneco employee benefit plan with
an employee stock fund or employee stock ownership plan feature, consistent
with the terms thereof and applicable securities laws;
(E) not declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect
to any class of the capital stock of Tenneco or any of the Energy
Subsidiaries, except:
(I) in the case of Tenneco, regular dividends (including the regular
dividend for the dividend period in which the Effective Time occurs)
with respect to the $4.50 Preferred Stock, the $7.40 Preferred Stock
and the New Preferred Stock and regular quarterly dividends on the
Tenneco Common Stock at such times and in such amounts as the Board of
Directors of Tenneco in its sole discretion determines;
(II) the Spinoffs;
(III) the issuance of New Preferred Stock; and
(IV) cash dividends declared and paid by any of the Energy
Subsidiaries;
(F) with respect to the individuals who will be executive officers or
employees of the Energy Business after the Effective Time, not:
(I) increase the compensation payable or to become payable to any of
such executive officers or employees except for increases in the
ordinary course of business in accordance with past practices;
(II) grant any severance or termination pay to, or enter into any
employment or severance agreement with, any executive officer of the
Energy Subsidiaries; or
(III) except as contemplated in this Agreement or in the Distribution
Agreement, establish, adopt, enter into or amend or take action to
accelerate any rights or benefits under, any collective bargaining,
bonus, profit sharing, thrift, compensation, stock option, restricted
stock, pension, retirement, deferred compensation, employment,
termination, severance or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any such director, executive officer or
employee;
provided, however, that Tenneco may continue to provide benefits under
employee benefit plans and incentive compensation plans that are in effect
on the Agreement Effective Date;
(G) not take, or permit any of its subsidiaries in respect of which it
has the direct or indirect voting power to control to take, any action that
would reasonably likely result in any of the conditions to the
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Merger set forth in ARTICLE VII of this Agreement not being satisfied or
that would materially impair the ability of Tenneco to consummate the
Spinoffs in accordance with the terms of the Distribution Agreement or the
Merger in accordance with the terms hereof or would materially delay such
consummation or that would disqualify either of the Spinoffs as a tax free
distribution within the meaning of Section 355 of the Code;
(H) not implement any change in its accounting principles, practices or
methods, other than as (X) may be required by GAAP, the Financial
Accounting Standards Board, the Commission or any other Governmental
Authority or oversight agency and (Y) relating solely to the Shipbuilding
Group and/or the Industrial Group;
(I) except in the ordinary course of business, consistent with past
practices, with respect to inventory or services or except where the effect
on the Energy Business would be de minimis, not, with respect to the Energy
Business, transfer, lease, license, sell, mortgage, pledge or dispose of
any property or assets included in the Energy Assets or otherwise encumber
any property or assets included in the Energy Assets;
(J) not release any third party from, or amend, modify or waive any
provisions of, any confidentiality or standstill agreement to which Tenneco
is a party (except any that relate solely to the Industrial Business or the
Shipbuilding Business);
(K) file on or before the due date therefor all tax returns required to
be filed by Tenneco or any Energy Subsidiary, which tax returns shall, to
the extent such tax returns relate to the Energy Business, be (i) complete
and correct in all material respects and (ii) prepared in accordance and on
a basis consistent with the elections, accounting methods, conventions and
principles of tax returns used for the most recent taxable periods for
which tax returns involving similar tax items have been filed; and
(L) not make, change or revoke any tax election relating to the Energy
Business to the extent such election may have more than a de minimis effect
on the Energy Business or Acquiror, or enter into any material agreement or
settlement regarding taxes relating to the Energy Business with any tax
authority to the extent such settlement or agreement may have a more than
de minimis effect on the Energy Business or Acquiror.
(b) Prior to the Effective Time, Tenneco shall cause all stock options
issued under the Option Plans (or to executives outside the Option Plans) to
be
(i) converted to options to acquire the stock of the Industrial Company
or the Shipbuilding Company;
(ii) exercised; and/or
(iii) cancelled.
Tenneco shall also cause all such options not held by employees of the Energy
Business to be so converted if not exercised or cancelled prior to the
Effective Time in accordance with their terms. All such options held by
employees of the Energy Business shall become exercisable prior to the
Effective Time and, if not exercised by the Effective Time, shall be
cancelled.
(c) Between the Agreement Effective Date and the Effective Time, Tenneco
shall cause the Industrial Subsidiary to succeed to sponsorship of the SECT.
To the extent the SECT continues to own Tenneco Stock, the SECT will
participate in the Merger, the Spinoffs and the conversion of shares pursuant
to SECTION 2.5 hereof (and the other transactions contemplated by this
Agreement and/or the Distribution Agreement) as any other stockholder of
Tenneco.
(d) Tenneco shall have the right, and shall use its reasonable best efforts
to, issue shares of New Preferred Stock prior to the Effective Time on the
following basis:
(i) the issuance may be effected through public sale or private placement
(either United States or foreign, but with a placement agent mutually and
reasonably acceptable to both Tenneco and Acquiror), or
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if such sale or placement is not reasonably practicable under the
circumstances, through a dividend-in-kind to the holders of Tenneco Common
Stock, but shall in any event be in accordance with all applicable
securities and other Laws (and, if publicly issued or issued as a dividend-
in-kind, shall be listed on the NYSE);
(ii) the NPS Value shall be approximately 25% (but in no event 20% or
less) of the sum of:
(x) the NPS Value, plus
(y) the market value of all outstanding Tenneco Common Stock (as
determined as of the Effective Time pursuant to the same procedure as
applies to determining the NPS Value).
(e) Prior to the Effective Time, Tenneco shall cause the elimination of all
intercompany accounts (including accounts and notes receivable and payable)
between members of the Energy Group, the Shipbuilding Group and the Industrial
Group, as the case may be (except trade accounts incurred in the ordinary
course of business), as set forth in the Distribution Agreement.
(f) From and after the Agreement Effective Date, Tenneco shall afford
Acquiror and its officers, employees, representatives and agents the
opportunity to participate with Tenneco in the process of obtaining the
rulings set forth in the IRS Ruling Request, including the right to
participate in the submission of written materials by Tenneco to the Internal
Revenue Service, and in-person and telephonic conferences between Tenneco and
the Internal Revenue Service, to the extent such communications relate to the
IRS Ruling Request. Notwithstanding the foregoing, Tenneco shall have the
right, subject to prior consultation with Acquiror, to determine, in its
reasonable discretion, that Acquiror's participation in certain communications
with the Internal Revenue Service (or any other aspects of the rulings
process) may hinder or delay Tenneco's ability to obtain the rulings requested
in the IRS Ruling Request, in which case Acquiror will be precluded from such
participation; provided, that Tenneco shall promptly inform Acquiror of the
substance of any matter in which Acquiror does not participate.
(g) In the event that, between the Agreement Effective Date and the Closing
Date, the General Counsel or an Executive Vice President of Tenneco becomes
aware that the Energy Business has the realistic opportunity to exercise its
right of first refusal with respect to the acquisition of additional interests
in the Oasis pipeline or otherwise to acquire additional interests in the
Oasis pipeline, Tenneco shall notify Acquiror thereof and shall consult and
cooperate with Acquiror prior to exercising its right of first refusal or
making any acquisition proposal. Any exercise of such right of first refusal
or other acquisition of interests in the Oasis pipeline by the Energy Business
shall be subject to the consent of Acquiror, which consent shall not be
unreasonably withheld or delayed.
6.2 CONDUCT OF THE BUSINESS OF ACQUIROR AND ITS SUBSIDIARIES.
(a) Between the Agreement Effective Date and the Effective Time, neither
Acquiror nor Subsidiary nor any of their Affiliates shall:
(i) take any action that would be reasonably likely to result in any of
the conditions to the Merger set forth in ARTICLE VII of this Agreement not
being satisfied or that would impair the ability of Acquiror or Subsidiary
to consummate the Merger in accordance with the terms hereof or delay such
consummation;
(ii) acquire (directly or indirectly, beneficially or of record), any
shares of Tenneco Stock (or any rights to acquire any such shares, except
pursuant to this Agreement); or
(iii) amend or otherwise change its certificate of incorporation (except
as is contemplated by this Agreement in respect of the designation of the
Acquiror Preferred Stock), bylaws or other organizational documents;
provided, however, that the provisions of this clause (iii) shall not apply
to any Affiliate of Acquiror or Subsidiary if the amendment or other change
would not adversely effect any of the rights or benefits hereunder or under
any of the Ancillary Agreements of Tenneco or the holders of Tenneco Stock
(other than to a de minimis extent) or otherwise materially delay or
prevent the consummation of the transactions contemplated hereby.
(b) Acquiror shall not, and shall not permit any of its subsidiaries
(including Subsidiary) to, take or cause or permit to be taken any action that
would disqualify either of the Spinoffs as a tax-free distribution within the
meaning of Section 355 of the Code.
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(c) Between the Agreement Effective Date and the Effective Time, Subsidiary
shall not engage in any activities of any nature except as provided in, or in
connection with the transactions contemplated by, this Agreement.
6.3 ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) Between the date of this Agreement and the Effective Time, and except as
may otherwise be required by applicable law, each of Tenneco and Acquiror
shall (and shall cause its subsidiaries and officers, directors, employees,
auditors and agents to) afford the officers, employees and agents of the other
party (the "RESPECTIVE REPRESENTATIVES") reasonable access at all reasonable
times to its officers, employees, agents, properties, offices, plants and
other facilities, books and records, and shall furnish such Respective
Representatives with all financial, operating and other data and information
as may be reasonably requested, in each case to the extent that such access
and disclosure would not:
(i) violate the terms of any agreement to which the disclosing party or
any of its Affiliates is bound or any applicable law or regulation; or
(ii) impair any attorney-client privilege of the disclosing party.
Notwithstanding the foregoing, Tenneco shall not be required (and shall not
be required to cause its subsidiaries and officers, directors, employees,
auditors and agents) to provide the access, data and information described in
the preceding sentence with respect to the Industrial Business or the
Shipbuilding Business unless Acquiror has a reasonable interest in obtaining
such access, data or information in connection with the Merger.
(b) All information obtained by Tenneco, Acquiror or their Respective
Representatives pursuant to SECTION 6.3(A) hereof shall be kept confidential
in accordance with the confidentiality agreement, dated March 28, 1996,
executed by Acquiror and the confidentiality agreement, dated June 12, 1996,
executed by Tenneco.
(c) The Industrial Subsidiary and the Shipbuilding Subsidiary (and their
respective direct and indirect subsidiaries and Affiliates) shall be deemed
third party beneficiaries of this SECTION 6.3 and all other provisions of this
Agreement necessary or appropriate for purposes of enforcing this SECTION 6.3.
6.4 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE.
(a) For a period of six years after the Effective Time, Acquiror shall not
cause or permit any amendment, repeal or other modification of the provisions
of
(i) Article IV, Section 14 of the by-laws of the Surviving Corporation,
as set forth in EXHIBIT H attached hereto, or
(ii) Article Eighth of the certificate of incorporation of the Surviving
Corporation,
in either case in any manner that would adversely affect the rights thereunder
of individuals who at any time prior to the Effective Time were directors,
officers or employees of Tenneco or any of its subsidiaries or Affiliates or
who are otherwise entitled to indemnification pursuant to such provisions in
respect of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by this
Agreement and the Distribution Agreement), unless such modification is
required by the DGCL or applicable federal law, and then only to the extent of
such applicable requirements of the DGCL or federal law. To the extent the
Surviving Corporation is unable for any reason to fulfill its obligations
under the bylaw provisions set forth in EXHIBIT H attached hereto, Acquiror
agrees to pay, perform and discharge all such obligations.
(b) Prior to the Effective Time, Tenneco shall, and from and after the
Effective Time the Acquiror and the Surviving Corporation jointly and
severally shall, indemnify, defend and hold harmless each Person who is now,
has been at any time prior to the date of this Agreement or who becomes prior
to Effective Time an officer, director or employee of Tenneco or any of its
subsidiaries (collectively, the "INDEMNIFIED PARTIES") against all losses,
expenses, claims, damages, liabilities or amounts that are paid in settlement
of, with the approval of the
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indemnifying party (which approval shall not unreasonably be withheld), or
otherwise in connection with any claim, action, suit, proceeding or
investigation (a "CLAIM"), based in whole or in part on the fact that such
Person is or was a director, officer or employee of Tenneco or any of its
subsidiaries and arising out of actions or omissions occurring at or prior to
the Effective Time (including, without limitation, the transactions
contemplated by this Agreement and the Distribution Agreement), whether or not
such Claim was asserted prior to, at or after the Effective Time, in each case
to the fullest extent permitted under the DGCL or other applicable law (and
shall pay expenses in advance of the final disposition of any such Claim to
each Indemnified Party to the fullest extent permitted under the DGCL or other
applicable law, upon receipt from the Indemnified Party to whom expenses are
advanced of any undertaking to repay such advances required by Section 145(e)
of the DGCL or other applicable law). Notwithstanding anything contained
herein, Tenneco's obligation to indemnify any such person pursuant to this
SECTION 6.4 shall not affect the allocation of liability among the Energy
Group, the Industrial Group and Shipbuilding Group pursuant to the
Distribution Agreement and any corresponding indemnification rights
thereunder.
(c) Without limiting the generality of the foregoing, in the event any Claim
is brought against any Indemnified Party (whether arising before or after the
Effective Time):
(i) the Indemnified Party may retain counsel satisfactory to him with the
consent of Tenneco (or the consent of Acquiror and the Surviving
Corporation after the Effective Time) which consent of Tenneco (or, after
the Effective Time, Acquiror and the Surviving Corporation) with respect to
such counsel retained by the Indemnified Party may not be unreasonably
withheld or delayed;
(ii) Tenneco (or, after the Effective Time, Acquiror and the Surviving
Corporation) shall pay all reasonable fees and expenses of such counsel for
the Indemnified Party promptly as statements therefor are received; and
(iii) Tenneco (or, after the Effective Time, Acquiror and the Surviving
Corporation) will use all reasonable efforts to assist in the vigorous
defense of any such matter, provided that none of Tenneco, Acquiror or the
Surviving Corporation shall be liable for any settlement of any Claim
effected without its written consent, which consent, however, shall not be
unreasonably withheld.
Any Indemnified Party wishing to claim indemnification under this SECTION 6.4,
upon learning of any such Claim, shall notify Tenneco (or, after the Effective
Time, Acquiror and the Surviving Corporation) (but any failure so to notify
shall not relieve Tenneco, Acquiror or the Surviving Corporation from any
liability which it may have under this SECTION 6.4, except to the extent such
failure materially prejudices such party), and shall deliver to Tenneco (or,
after the Effective Time, Acquiror and the Surviving Corporation) any
undertaking required by Section 145(e) of the DGCL or other applicable law.
The Indemnified Parties as a group may retain only one law firm to represent
them with respect to each such Claim unless there is, under applicable
standards of professional conduct, a conflict on any significant issue between
the positions of any two or more Indemnified Parties.
(d) (i) MAINTENANCE OF D&O POLICIES. On or prior to the Closing Date,
Tenneco shall provide Acquiror with copies and a schedule of those Directors'
and Officers' Liability Insurance Policies which Tenneco shall enter into
effective as of the Closing Date (the "D&O POLICIES"). For a period of seven
years after the Effective Time, Acquiror and the Surviving Corporation shall
cause to be maintained in full force and effect the D&O Policies. Acquiror and
the Surviving Corporation shall be jointly and severally responsible for
payment of all premiums due as respects the D&O Policies and shall take all
other actions necessary or appropriate to maintain the D&O Policies in full
force and effect (other than to the extent the available limit of liability of
any such D&O Policy may be reduced or exhausted solely as the result of the
payment of claims thereunder) for the agreed term of seven years after the
Effective Time. If at any time an insurance carrier under any of the D&O
Policies becomes unable or unwilling, or it becomes probable that such
insurance carrier will be unable or unwilling (which determination shall be
made in the reasonable discretion of the Industrial Subsidiary), to fulfill
any of its obligations under any D&O Policy, whether due to such insurance
carrier's dissolution, bankruptcy, insolvency or otherwise, then Acquiror and
the Surviving Corporation shall obtain a directors' and officers' liability
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insurance policy in substitution (with an insurance carrier acceptable to the
Industrial Subsidiary) of each D&O Policy under which such insurance carrier
was to provide coverage (a "REPLACEMENT D&O POLICY"), which shall provide at
least the same coverage and amounts, and contain terms and provisions which
are no less favorable to the insured parties, as existed under the D&O Policy
so replaced. Acquiror and the Surviving Corporation shall pay any costs
associated with the obtaining and maintenance of any Replacement D&O Policy as
contemplated hereby.
(ii) OWNERSHIP AND ADMINISTRATION OF POLICIES. The parties hereto agree that
the D&O Policies and any Replacement D&O Policy shall be owned by the
Industrial Subsidiary. From and after the Effective Time, the Industrial
Subsidiary shall be solely responsible for all aspects of service and
administration of such policies (other than the payment of any premiums due),
including the notification to insurers, and the management, negotiation and
settlement, of any claims made under the D&O Policies and any Replacement D&O
Policy. From and after the Effective Time, Acquiror and the Surviving
Corporation shall have the right to participate in the negotiation and
participate in and consent to settlement (such consent not to be unreasonably
withheld or delayed) of any claim under the D&O Policies and any Replacement
D&O Policy for which, and then only to the extent, that either is obligated to
indemnify any of the present or former directors or officers of Tenneco or any
of its present or past subsidiaries ("DIRECTORS OR OFFICERS") for liabilities
associated with such claim. The Industrial Subsidiary's responsibilities for
administering and servicing the D&O Policies and any Replacement D&O Policy
shall in no manner restrict, reduce, limit or impair any of the Directors' or
Officers' rights to indemnification from Acquiror, the Surviving Corporation
or their respective successors or assigns in accordance with any applicable
Law, statute, charter or bylaw provision.
(iii) COOPERATION. Acquiror and the Surviving Corporation shall cooperate
with the Directors and Officers in the defense and settlement of any claim
made against them based upon or arising out of any actual or alleged wrongful
act (as such term may be defined in the applicable D&O Policies or Replacement
D&O Policy) occurring at or prior to the Effective Time. Acquiror and the
Surviving Corporation shall provide any reasonable assistance or information
that may be required by a Director or Officer in connection with any such
claim. Neither Acquiror, the Surviving Corporation nor any of their respective
representatives shall cause any action or inaction that could reasonably be
expected to jeopardize or otherwise impair the rights or ability of the
Directors or Officers to recover loss amounts due under the D&O Policies or
any Replacement D&O Policy.
(e) Neither Acquiror nor the Surviving Corporation shall take any action
that could reasonably be expected to jeopardize or otherwise interfere with
the ability of any of the Indemnified Parties to collect any proceeds payable
under any of the D&O Policies.
(f) Each of Tenneco, Acquiror and Subsidiary acknowledges and agrees that
the Industrial Subsidiary's responsibilities hereunder for Claims
Administration and Insurance Administration shall not relieve any Person
submitting an insured claim under any of the D&O Policies of
(i) the primary responsibility for giving notice of such insured claim
accurately, completely and in a timely manner, or
(ii) any other right or responsibility which such Person may have
pursuant to the terms of any of the D&O Policies.
(g) This SECTION 6.4 (and all other provisions of this Agreement necessary
or appropriate for purposes of enforcing this SECTION 6.4) is intended to be
for the benefit of, and shall be enforceable by, the Industrial Subsidiary and
the Indemnified Parties, their heirs and personal representatives and shall be
binding on Tenneco, the Surviving Corporation and Acquiror and each of their
respective successors and assigns.
6.5 NOTIFICATION OF CERTAIN MATTERS. Between the Agreement Effective Date
and the Effective Time, Tenneco and Acquiror shall give prompt notice to the
other of :
(i) the occurrence or nonoccurrence of any event, the occurrence or
nonoccurrence of which would likely cause
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(A) any of its representations or warranties contained in this
Agreement to be untrue or inaccurate, or
(B) any of its covenants, conditions or agreements contained in this
Agreement not to be complied with or satisfied; and
(ii) its (or in the case of Acquiror, Acquiror's or Subsidiary's) failure
to comply with or satisfy any of its covenants, conditions or agreements to
be complied with or satisfied by it (or, in the case of Acquiror, Acquiror
or Subsidiary) at or prior to the Effective Time;
provided, however, that the delivery of any notice pursuant to this SECTION
6.5 shall not limit or otherwise affect the remedies available hereunder to
the party receiving such notice.
6.6 TAX TREATMENT.
(a) Each of Tenneco, on the one hand, and Acquiror and Subsidiary, on the
other hand, intend the Merger to qualify as a reorganization under Code
Section 368(a)(1)(B) and the Spinoffs to be treated as tax-free distributions
under Code Section 355, and each such party shall use its reasonable best
efforts to cause the Merger and Spinoffs to so qualify. Neither Tenneco, on
the one hand, nor Acquiror or Subsidiary, on the other hand, shall take any
action which might cause
(i) the Merger to fail to qualify as a reorganization under Code Section
368(a)(1)(B),
(ii) the Spinoffs to fail to qualify as tax free distributions under Code
Section 355,
(iii) any other transfer described in the Corporate Restructuring
Transactions that is intended (as described in Tenneco's request for
rulings from the Internal Revenue Service) to qualify as a tax free
transfer under Code Sections 332, 351, 355 or 368 to fail to so qualify, or
(iv) Tenneco or any Energy Subsidiary to recognize any gains relating to
deferred intercompany transactions or excess loss accounts between or among
any members of the affiliated group of corporations of which Tenneco is the
common parent (other than those deferred intercompany gains listed on
EXHIBIT I attached hereto).
(b) In furtherance of SECTION 6.6(A) above, Tenneco shall make the
representations set forth in EXHIBIT J attached hereto, and such other
representations as are reasonably necessary to ensure the tax-free treatment
of the Merger, Spinoffs and related transactions described in SECTION 6.6(A)
above, and shall assure the continuing accuracy of such representations.
(c) In furtherance of SECTION 6.6(A) above, Acquiror and Subsidiary shall
each make the representations set forth in EXHIBIT J attached hereto, and such
other representations as are reasonably necessary to ensure the tax-free
treatment of the Merger, Spinoffs and related transactions described in
SECTION 6.6(A) above, and shall assure the continuing accuracy of such
representations.
(d) The Industrial Subsidiary and the Shipbuilding Subsidiary (and their
respective direct and indirect subsidiaries and Affiliates) shall be deemed
third party beneficiaries of this SECTION 6.6 and all other provisions of this
Agreement necessary or appropriate for purposes of enforcing this SECTION 6.6.
6.7 REGISTRATION STATEMENT; JOINT PROXY STATEMENT; NPS MATERIALS; TENDER AND
EXCHANGE MATERIALS.
(a) As promptly as practicable after the Agreement Effective Date, Tenneco
and Acquiror shall prepare and file, or cause to be prepared and filed, with
the Commission a joint proxy statement (the "JOINT PROXY STATEMENT") and other
proxy solicitation materials relating to the Stockholders' Meeting (as defined
in SECTION 6.8 hereof), and Acquiror shall prepare and file, or cause to be
prepared and filed, with the Commission a registration statement on Form S-4
in which the Joint Proxy Statement shall be included as a prospectus (the
"REGISTRATION STATEMENT"), in connection with the registration under the
Securities Act of the shares of Acquiror Stock (and any Depositary Shares) to
be issued to the stockholders of Tenneco pursuant to the Merger.
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Each of Acquiror and Tenneco shall furnish or cause to be furnished to the
other party all information concerning itself and its subsidiaries as the
other party may reasonably request in connection with such actions and the
preparation of the Registration Statement and the Joint Proxy Statement (and
in connection with the preparation of the NPS Materials and the Tender and
Exchange Materials). Each of Acquiror and Tenneco hereby agree to take, and to
cause their respective subsidiaries to take,
(i) such actions as may be required to have the Registration Statement
and, to the extent applicable, the NPS Materials and the Tender and
Exchange Materials declared effective under the Securities Act and to have
the Joint Proxy Statement cleared by the Commission, in each case as
promptly as practicable, including by consulting with each other as to, and
responding promptly to, any Commission comments with respect thereto, and
(ii) such actions as may be required to be taken under applicable state
securities or "blue sky" laws in connection with the issuance of shares of
Acquiror Stock (and any Depositary Shares) pursuant to the Merger.
As promptly as practicable after the Registration Statement shall have become
effective, each of Tenneco and Acquiror shall mail the Joint Proxy Statement
to its respective stockholders (and Tenneco and Acquiror shall attempt to
effect their respective mailings on the same date), and the Joint Proxy
Statement shall include the recommendation of the board of directors of
Tenneco in favor of adoption and approval of this Agreement and the Merger and
the Spinoffs, and of the board of directors of Acquiror in favor of approval
of the Stock Issuance (as defined in SECTION 6.8 hereof); provided, however,
that no obligation of Tenneco pursuant to this SECTION 6.7(A) shall be
required to be performed if there is a substantial risk that the performance
thereof would constitute a breach of the fiduciary duties of the board of
directors of Tenneco as determined by the board of directors of Tenneco in
good faith after consultation with and based upon the advice of its
independent legal counsel (who may be its regularly engaged independent legal
counsel).
(b) Acquiror covenants that the information supplied by or on behalf of
Acquiror for inclusion in the Registration Statement and the Joint Proxy
Statement shall not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading, at any of:
(i) the time the Registration Statement (or any amendment or supplement
thereto) is declared effective;
(ii) the time the Joint Proxy Statement (or any amendment or supplement
thereto) is first mailed to the stockholders of Tenneco and Acquiror;
(iii) the time of each of the Stockholders' Meetings; and
(iv) the Effective Time.
Likewise, Acquiror covenants that the information and data supplied by or on
behalf of Acquiror for inclusion in the NPS Materials and Tender and Exchange
Materials (including, without limitation, all information and financial data
(pro forma or otherwise) relating to the business and operations of Tenneco
following consummation of the Merger supplied by or on behalf of Acquiror)
shall not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, at all times through the completion of (A)
in the case of the NPS Materials, the offering and sale of the New Preferred
Stock, and (B) in the case of the Tender and Exchange Materials, the tender
and exchange offers pursuant to the Debt Realignment.
(c) Tenneco covenants that the financial information (including pro forma
financial data and information) supplied or to be supplied by Tenneco or its
representatives for inclusion or incorporation by reference in the
Registration Statement or the Joint Proxy Statement (or the NPS Materials
and/or Tender and Exchange Materials) shall comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the Commission with respect thereto, shall be prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto
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or, in the case of unaudited financial information, as permitted by the rules
of the Commission) and shall fairly present (subject, in the case of unaudited
financial information, to normal, recurring audit adjustments) the financial
information reflected therein as of the dates thereof or for the periods then
ended. The Joint Proxy Statement shall, as it relates to the Tenneco
Stockholders' Meeting, comply as to form in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder,
except that no representation is herein made by Tenneco with respect to
statements made in the Joint Proxy Statement based on information supplied by
Acquiror or any of its representatives for inclusion in the Joint Proxy
Statement or with respect to information concerning Acquiror or any of its
subsidiaries (including Subsidiary) incorporated by reference in the Joint
Proxy Statement. If at any time prior to the Effective Time any event or
circumstance relating to Acquiror or any of its subsidiaries (including
Subsidiary), their respective officers or directors, or Acquiror's plans and
intentions regarding its operation of the Surviving Corporation after the
Merger should be discovered by Acquiror or any of its subsidiaries (including
Subsidiary) that should be set forth in an amendment or a supplement to the
Registration Statement or Joint Proxy Statement (or in any of the NPS
Materials or Tender and Exchange Materials), Acquiror shall promptly inform
Tenneco in writing.
(d) Tenneco covenants that the information supplied by or on behalf of
Tenneco for inclusion in the Registration Statement and the Joint Proxy
Statement shall not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading, at
(i) the time the Registration Statement (or any amendment or supplement
thereto) is declared effective,
(ii) the time the Joint Proxy Statement (or any amendment or supplement
thereto) is first mailed to the stockholders of Tenneco and Acquiror,
(iii) the time of each of the Stockholders' Meetings, and
(iv) the Effective Time.
Likewise, Tenneco covenants that the NPS Materials and Tender and Exchange
Materials shall not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading, at all times through the
completion of (A) in the case of the NPS Materials, the offering and sale of
the New Preferred Stock, and (B) in the case of the Tender and Exchange
Materials, the tender and exchange offers pursuant to the Debt Realignment;
provided, that the foregoing provisions of this sentence shall not apply to
any information or financial data (including pro forma financial information
and data) supplied by or on behalf of Acquiror, including information and data
relating to the business and operations of Tenneco following consummation of
the Merger.
(e) Acquiror covenants that the financial information (including pro forma
financial data and information regarding Acquiror or Tenneco) supplied or to
be supplied by Acquiror or its representatives for inclusion or incorporation
by reference in the Registration Statement or the Joint Proxy Statement (or
the NPS Materials or Tender and Exchange Materials) shall comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the Commission with respect thereto, shall
be prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of unaudited financial information, as permitted by the rules of the
Commission) and shall fairly present (subject, in the case of unaudited
financial information, to normal, recurring audit adjustments) the financial
information reflected therein as of the dates thereof or for the periods then
ended. Each of the Joint Proxy Statement, as it relates to the Acquiror Common
Stockholders' Meeting, and the Registration Statement will comply as to form
in all material respects with the provisions of the Exchange Act and the rules
and regulations thereunder or the Securities Act and the rules and regulations
thereunder, as applicable, except that no representation is herein made by
Acquiror with respect to statements made in the Joint Proxy Statement or
Registration Statement based on information supplied by Tenneco or any of its
representatives for inclusion in the Joint Proxy Statement or Registration
Statement or with respect to information concerning Tenneco or any of its
subsidiaries incorporated by reference in the Joint Proxy Statement or
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Registration Statement. If at any time prior to the Effective Time any event
or circumstance relating to Tenneco or any of its subsidiaries, or their
respective officers or directors, should be discovered by Tenneco or any of
its subsidiaries which should be set forth in an amendment or a supplement to
the Registration Statement or Joint Proxy Statement (or in any of the NPS
Materials or Tender and Exchange Materials), Tenneco shall promptly inform
Acquiror in writing.
(f) None of the Joint Proxy Statement, the Registration Statement, the NPS
Materials or the Tender and Exchange Materials shall be filed or distributed,
and, prior to the termination of this Agreement, no amendment or supplement to
the Joint Proxy Statement or the Registration Statement shall be filed or
distributed, by or on behalf of Tenneco or Acquiror, without consultation with
the other party and its counsel.
6.8 STOCKHOLDERS' MEETINGS. Tenneco shall call and hold a meeting of its
stockholders (the "Tenneco Stockholders' Meeting") for the purpose of voting
upon the adoption and approval of this Agreement, the Merger and the Spinoffs.
Acquiror shall call and hold a meeting of its stockholders (the "Acquiror
Common Stockholders' Meeting") for the purpose of voting upon the approval of
the issuance of Acquiror Common Stock in connection with the Merger as
contemplated by this Agreement (the "Stock Issuance") (the Acquiror Common
Stockholders' Meeting and the Tenneco Stockholders' Meeting being collectively
referred to herein as the "Stockholders' Meetings"). Each of Tenneco and
Acquiror shall use its reasonable best efforts to schedule and hold their
respective Stockholders' Meetings so that the Acquiror Common Stockholders'
Meeting occurs at least one business day prior to the Tenneco Stockholders'
Meeting, and otherwise so as not to delay the transactions contemplated hereby
(it being intended that the Joint Proxy Statement shall be mailed and the
Stockholders' Meetings shall be scheduled to occur as soon as practicable
after the receipt of the IRS Ruling Letter). Each of Tenneco and Acquiror
shall use its reasonable best efforts to solicit from its stockholders proxies
in favor of the approval and adoption of this Agreement, the Merger and the
Spinoffs or the Stock Issuance, as applicable, and shall take all other action
necessary or advisable to secure the vote or consent of stockholders required
therefor by applicable Law and/or its certificate of incorporation or other
governing instrument or document. The stockholders of Tenneco will vote on the
Spinoffs and the Merger as a single transaction. Notwithstanding the
foregoing, Tenneco shall not be required to take any action if there is a
substantial risk that the subject action would constitute a breach of the
fiduciary duties of the board of directors of Tenneco as determined by the
board of directors of Tenneco in good faith after consultation with and based
upon the advice of independent legal counsel (who may be its regularly engaged
independent legal counsel).
6.9 FURTHER ACTION; REASONABLE BEST EFFORTS.
(a) Upon the terms and subject to the provisions of this Agreement, each of
the parties hereto shall use its reasonable best efforts to take, or cause to
be taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations promptly
to consummate and make effective the transactions contemplated hereby and by
the Distribution Agreement (subject, however, to the vote of the stockholders
of Tenneco and, to the extent required, Acquiror as provided herein),
including, without limitation, using its reasonable best efforts to obtain all
licenses, permits, consents, approvals, authorizations, qualifications and
orders of Governmental Authorities and parties to contracts with Tenneco and,
to the extent required, Acquiror and their respective subsidiaries as are
necessary for the consummation of the transactions contemplated by this
Agreement. Each party hereto shall promptly consult with each other party with
respect to, and provide to each other party all such information or
documentation which shall be reasonably requested with respect to, all filings
made by such party with any Governmental Authority in connection with this
Agreement and the transactions contemplated hereby. In case at any time after
the Effective Time any further action is necessary or desirable to carry out
the purposes of this Agreement, the proper officers and directors of each
party to this Agreement shall use their reasonable best efforts to take all
such action.
(b) Between the Agreement Effective Date and the Closing Date,
(i) Tenneco and Acquiror shall, and shall cause their respective
Affiliates and representatives to, consult, cooperate and work together in
good faith and with reasonable best efforts and all deliberate speed to
attempt jointly to obtain a favorable resolution prior to the Effective
Time with respect to pending
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regulatory proceedings affecting the Energy Business, including sharing
ideas and information concerning alternative approaches to resolving such
regulatory proceedings and coordinating the timing and content of
communications with customers of the Energy Business, affecting the Energy
Business, and regulatory authorities having jurisdiction over the
operations of the Energy Business; provided, that any settlement (or
proposed settlement) of any such regulatory proceedings shall require the
consent of both Tenneco and Acquiror, such consent not to be arbitrarily
withheld; and
(ii) Tenneco shall, and shall cause its Affiliates and representatives
to, consult and work with Acquiror and its Affiliates and representatives
to attempt to obtain favorable resolutions of material litigation affecting
the Energy Business; provided that, except as otherwise set forth on
EXHIBIT G attached hereto, any settlement (or proposed settlement) of any
such litigation shall require the consent of Acquiror, such consent not to
be arbitrarily withheld.
(c) Except as set forth on EXHIBIT G attached hereto, between the Agreement
Effective Date and the Closing Date, the Energy Business shall not incur any
additional off balance sheet indebtedness for the purpose of monetization of
any Energy Assets. Subject to the terms of the previous sentence, Acquiror and
Tenneco shall consult and cooperate with each other with respect to off-
balance sheet financing opportunities for the Australian assets of the Energy
Business, the Orange Cogeneration Project and the South Sulawesi Project and
any such off-balance sheet financing may be incurred by mutual agreement
between Acquiror and Tenneco.
Between the Agreement Effective Date and the Closing Date, Tenneco shall
attempt to cooperate with Acquiror to the extent reasonably requested by
Acquiror in connection with sales by the Energy Business after the Closing
Date of material Energy Assets; provided that any such transactions shall be
subject to the covenants, restrictions and limitations set forth in SECTION
6.6 hereof.
(d) Between the Agreement Effective Date and the Closing Date, Tenneco
shall, to the extent permitted by law, consult and work in good faith with
Acquiror with respect to the payment and administration of accounts payable,
inventory levels and policies and the collection and administration of
accounts receivable of the Energy Business and the making of capital
expenditures by the Energy Business to preserve the value of the Energy
Business and not to artificially delay payment of accounts payable, accelerate
collections of accounts receivable, alter inventory levels or unreasonably
delay capital expenditures; provided, however, that Tenneco shall have the
right to effect the actions and transactions identified on EXHIBIT G attached
hereto. To the extent permitted by Law, Tenneco shall consult with Acquiror
with respect to other matters pertaining to the operation of the Energy
Business. Each of Tenneco and Acquiror shall designate one or more members of
management to act as coordinators with respect to the matters covered by this
SECTION 6.9.
(e) Each party shall use its reasonable best efforts to not take any action,
or enter into any transaction, that would cause any of its representations or
warranties contained in this Agreement to be untrue or result in a breach of
any covenant made by it in this Agreement.
(f) The Industrial Subsidiary shall be a deemed third party beneficiary of
this SECTION 6.9 and all other provisions of this Agreement necessary or
appropriate for purposes of enforcing this SECTION 6.9.
6.10 PUBLIC ANNOUNCEMENTS. Each party hereto shall consult with each other
before issuing any press release or otherwise issuing any other similar
written public statement with respect to this Agreement or the Merger and
shall not issue any such press release or make any such public statement
without the prior consent of each other party, which shall not be unreasonably
withheld; provided, however, that a party may, without the prior consent of
any other party, issue such press release or other similar written public
statement as may be required by law or any listing agreement with a national
securities exchange to which Tenneco or Acquiror is a party if it has used all
reasonable efforts to consult with such other party and to obtain such party's
consent but has been unable to do so in a timely manner. Further, the parties
shall use their respective reasonable best efforts to coordinate and jointly
schedule and interface with the various Governmental Authorities and ratings
agencies and other applicable bodies and groups involved or otherwise
interested in the transactions contemplated by this Agreement.
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6.11 LISTING OF ACQUIROR COMMON STOCK AND DEPOSITARY SHARES. Acquiror shall
use its reasonable best efforts to cause the shares of Acquiror Common Stock
and any Depositary Shares to be issued in or in connection with the Merger to
be approved for listing on the NYSE and any other national securities exchange
on which shares of Acquiror Common Stock may at such time be listed, subject
to official notice of issuance prior to the Effective Time.
6.12 RIGHTS AGREEMENT. Except as contemplated by this Agreement, prior to
the Effective Time the Board of Directors of Tenneco shall not, without the
prior written approval of Acquiror,
(i) amend or supplement the Rights Agreement in any manner that would
cause either a "Triggering Event" or a "Distribution Date" (in each case as
defined in the Rights Agreement) to occur or to be deemed to have occurred
solely by reason of the execution of this Agreement and the consummation of
the transactions contemplated hereby, or
(ii) redeem the Rights.
6.13 THE SPINOFFS. Prior to the Closing, Tenneco shall enter into the
Distribution Agreement (with only such amendments or modifications as are not
prejudicial, other than to a de minimis extent, to the Energy Business or do
not materially delay or prevent consummation of the Merger) and shall cause
the Industrial Subsidiary and the Shipbuilding Subsidiary to enter into the
Distribution Agreement (with only such amendments), and Tenneco shall take, or
cause to be taken, all actions and do, or cause to be done, all things
necessary to effect the Spinoffs pursuant to the terms of the Distribution
Agreement (with only such amendments). Notwithstanding the foregoing, after
prior notice to Acquiror, Tenneco may furnish information or enter into
negotiations regarding, or enter into an agreement for, any sale, merger or
other disposition transaction(s) involving either or both of the Shipbuilding
Business and/or the Industrial Business, or any portion of either (an "S/I
TRANSACTION"), which may render either or both of the Spinoffs (or any portion
thereof) impossible or impracticable; provided, that Tenneco shall not solicit
any S/I Transaction involving the Industrial Subsidiary, the Shipbuilding
Subsidiary, the Industrial Business as a whole, the Shipbuilding Business as a
whole or any other S/I Transaction which could be reasonably predicted to
render the Merger impossible or impracticable or materially delay or prevent
consummation thereof. Tenneco may enter into any such S/I Transaction in its
sole discretion if the subject S/I Transaction would not be adverse, other
than to a de minimis extent, to Acquiror or the Energy Business (including
with respect to any covenants or obligations of a party under this Agreement
or the Distribution Agreement) and would not render the Merger impossible or
impracticable or materially delay or prevent consummation thereof. If the S/I
Transaction would be so adverse to Acquiror or the Energy Business, or would
render the Merger impossible or impracticable or materially delay or prevent
consummation thereof, then S/I Transaction may be pursued and/or entered into
only (a) prior to the approval of this Agreement, the Merger and the Spinoffs
by the Tenneco stockholders and (b) if Tenneco's board of directors determines
in good faith, after consultation with and based upon the advice of
independent legal counsel (which may be Tenneco's regularly engaged
independent legal counsel), that there is a substantial risk that the failure
to do so would constitute a breach of its fiduciary duties under applicable
Law.
6.14 ANTITRUST MATTERS.
(a) Tenneco and Acquiror shall file with the Federal Trade Commission and
the Department of Justice, as promptly as practicable but in any event within
20 business days of the Agreement Effective Date, the notification and report
form required for the transactions contemplated hereby and shall promptly
provide any supplemental information which may be reasonably requested in
connection therewith pursuant to the HSR Act, which notification, report and
supplemental information shall comply in all material respects with the
requirements of the HSR Act.
(b) Although the parties do not believe that the Merger has any antitrust
implications, Acquiror shall use all reasonable efforts to resolve antitrust
objections, if any, that may be asserted with respect to the transactions
contemplated hereby by the Federal Trade Commission, the Antitrust Division of
the Department of Justice or any other federal or state agency. Acquiror shall
make such divestitures, or enter into such hold-separate
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agreements, as may be necessary to prevent the entry of, or effect the
dissolution of, any injunction, temporary restraining order or other order
that has the effect of preventing for any period of time the consummation of
the Merger in any respect. Acquiror shall reimburse Tenneco for reasonable
attorneys' fees and costs incurred by Tenneco in connection with defending any
antitrust investigation or other proceeding brought by any of the above
identified entities.
6.15 EMPLOYEE MATTERS.
(a) Prior to the Effective Time, Tenneco shall enter into the Benefits
Agreement and shall take the actions with respect to compensation and benefits
described elsewhere in this Agreement or in the Distribution Agreement.
(b) Acquiror shall provide, or shall cause the Surviving Corporation (or any
of its subsidiaries, as appropriate) to provide, to the employees and former
employees of the Energy Business and the dependents of either, as applicable,
the benefits described in EXHIBIT K attached hereto.
6.16 DEBT REALIGNMENT. Each of Tenneco and Acquiror shall use its reasonable
best efforts so that, immediately prior to the Spinoffs, the Debt Realignment
has been effected (with only such modifications as are not adverse, except to
a de minimis extent, to Acquiror, the Energy Business, the Industrial
Subsidiary or the Shipbuilding Subsidiary).
6.17 NO SOLICITATIONS. Tenneco shall immediately cease any existing
discussions or negotiations with any third parties conducted prior to the date
hereof with respect to any merger, consolidation, business combination, sale
of the Energy Business, sale of a Major Subsidiary, tender or exchange offer
or similar transaction involving the Energy Business as a whole or any Major
Subsidiary as a whole, other than the transactions contemplated by this
Agreement or the Distribution Agreement (an "ACQUISITION TRANSACTION").
Neither Tenneco nor any of its subsidiaries nor any of their respective
directors and officers shall, and Tenneco shall use its best efforts to ensure
that none of its or its subsidiaries' Affiliates, representatives or agents
shall, directly or indirectly, solicit any person, entity or group concerning
any Acquisition Transaction; provided, however, that, after prior notice to
Acquiror and prior to the approval of this Agreement, the Merger and the
Spinoffs by the Tenneco stockholders, Tenneco may furnish information or enter
into negotiations regarding, or enter into an agreement for, an Acquisition
Transaction if Tenneco's board of directors determines in good faith, after
consultation with and based upon the advice of independent legal counsel
(which may be Tenneco's regularly engaged independent legal counsel), that
there is a substantial risk that the failure to do so would be found to
constitute a breach of its fiduciary duties under applicable Law, but only in
response to a proposal (which may be subject to due diligence) for an
Acquisition Transaction received by Tenneco which the board of directors of
Tenneco determines in good faith after consultation with its financial
advisors is reasonably likely to result in consummation of an Acquisition
Transaction more favorable, from a financial point of view, to the
stockholders of Tenneco than the transactions contemplated hereby, taking into
account the financial responsibility of the party making such proposal, as
then reasonably determinable by Tenneco, and such party's ability, as then
reasonably determinable by Tenneco, to obtain regulatory approvals for such
Acquisition Transaction (a "HIGHER PROPOSAL"). Tenneco shall advise Acquiror
immediately if any proposal of or other indication of interest in a Higher
Proposal is received by Tenneco and the terms and conditions thereof and keep
Acquiror promptly informed of the status thereof.
6.18 PERFORMANCE OF AGREEMENT AND DISTRIBUTION AGREEMENT. After the
Effective Time, Acquiror shall, and shall cause the Surviving Corporation and
the Energy Subsidiaries to, perform their respective obligations under this
Agreement and the Distribution Agreement and their respective obligations
under each and every other agreement to be entered into pursuant to the
Distribution Agreement and/or the Spinoffs, and Acquiror hereby guarantees the
full and timely payment and performance of all of the respective obligations
and covenants of Tenneco, the Surviving Corporation and the Energy
Subsidiaries under this Agreement and the Distribution Agreement and their
respective obligations under each and every other agreement to be entered into
pursuant to the Distribution Agreement and/or the Spinoffs, which are to be
performed from and after the Effective Time. Without limiting the generality
of the foregoing sentence, the foregoing covenant and guarantee of Acquiror
shall
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specifically be deemed to apply to the obligations of the Surviving
Corporation to make any payments due to the Industrial Subsidiary pursuant to
Section 6 of the Tax Sharing Agreement attached to the Distribution Agreement
in respect of any Tax Benefit attributable to any Debt Discharge Item (as
those terms are defined in the Tax Sharing Agreement). The Industrial
Subsidiary and the Shipbuilding Subsidiary are hereby designated as, and
deemed to be, third party beneficiaries of this SECTION 6.18 (and all other
provisions of this Agreement necessary or appropriate for purposes of
enforcing the terms of this SECTION 6.18). The covenants and guarantees of
Acquiror set forth in this SECTION 6.18 are not in limitation of or
substitution for, but are in addition to, the Guarantees attached hereto as
EXHIBIT L, which shall be executed by Acquiror and delivered to the Industrial
Subsidiary and the Shipbuilding Subsidiary on the Closing Date.
6.19 AFFILIATES OF TENNECO. Tenneco shall promptly deliver to Acquiror a
letter
(i) identifying all Persons who may be deemed affiliates of Tenneco under
Rule 145 of the Securities Act, including, without limitation, all
directors and executive officers of Tenneco, and
(ii) representing to Acquiror that Tenneco has advised the Persons
identified in such letter of the resale restrictions with respect to shares
of Acquiror Common Stock and any Depositary Shares received in connection
with the Merger imposed by applicable securities laws. Tenneco shall use
its reasonable best efforts to obtain from each Person identified in such
letter a written agreement, substantially in the form of EXHIBIT M.
Tenneco shall use its reasonable best efforts to obtain as soon as practicable
from any Person who may be deemed to have become an Affiliate of Tenneco after
Tenneco's delivery of the letter referred to above and prior to the Effective
Time, a written agreement substantially in the form of EXHIBIT M.
6.20 ANTITAKEOVER STATUTES. If any Takeover Statute is or may become
applicable to the transactions contemplated hereby, each of the parties hereto
and the members of its board of directors shall grant such approvals and take
such actions as are necessary so that the transactions contemplated by this
Agreement may be consummated as promptly as practicable on the terms
contemplated hereby and otherwise act to eliminate or minimize the effects of
any Takeover Statute on any of the transactions contemplated by this
Agreement; provided however, that no party hereto shall be required to take
any action if there is a substantial risk that the subject action would be
held to constitute a breach of the fiduciary duties of the board of directors
of the subject party, as determined by the subject board of directors in good
faith after consultation with and based upon the advice of independent legal
counsel (who may be the subject party's regularly engaged independent
counsel).
6.21 EQUITY ISSUANCE BY ACQUIROR. Acquiror intends, subject to market
conditions, to issue, after the Closing Date, $150,000,000 to $250,000,000 of
equity securities. The initial press release with respect to the transactions
contemplated hereby will include disclosure of Acquiror's intention to effect
such issuances of additional equity securities.
6.22 RUHRGAS AG. Between the Agreement Effective Date and the Closing Date,
Tenneco shall use its reasonable best efforts to repurchase for cash the
equity interest of Ruhrgas AG in Tenneco Energy Resources Corporation,
provided that the terms of any such repurchase shall be acceptable to
Acquiror. Acquiror shall have the right to participate in any discussions or
negotiations with Ruhrgas AG with respect to the foregoing.
6.23 ADDITIONAL COVENANTS OF ACQUIROR.
(a) From the Agreement Effective Date through the Effective Time, Acquiror
shall not take, enter into or propose, or allow any of its subsidiaries to
take, enter into or propose, any action or transaction (other than actions or
transactions expressly permitted under this Agreement) which is primarily for
the purpose of reducing the value of the transactions contemplated by this
Agreement and the Distribution Agreement to the stockholders of Tenneco.
(b) From the Agreement Effective Date through the Effective Time, Acquiror
shall not enter into any internal corporate restructuring involving Acquiror
and one or more of its direct or indirect subsidiaries.
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(c) During the Black-out Period, except as expressly contemplated by this
Agreement or the Distribution Agreement in order to effect the transactions
described herein or therein:
(i) Acquiror and its subsidiaries shall carry on their respective
businesses in the usual, regular and ordinary course in substantially the
same manner as heretofore conducted and use all reasonable efforts to
preserve intact their present business organizations, and preserve their
relationships with customers, suppliers and others having business dealings
with them to the end that their goodwill and ongoing businesses shall not
be impaired in any material respect at the Effective Time.
(ii) Acquiror shall not, nor shall Acquiror permit any of its
subsidiaries to, nor shall Acquiror or any of its subsidiaries propose to,
(A) declare or pay any dividends on or make other distributions in respect
of any of its capital stock (other than intercompany dividends and regular
quarterly dividends on Acquiror Common Stock), (B) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in
substitution for shares of its capital stock or (C) repurchase or otherwise
acquire any shares of capital stock.
(iii) Except for the issuance of shares of Acquiror Common Stock upon the
exercise of outstanding stock options disclosed in Section 5.2 hereof,
Acquiror shall not issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock of any
class, any debt or securities convertible into, or any rights, warrants or
options to acquire, any such shares or convertible securities or debt.
(iv) Acquiror shall not amend or propose to amend its Certificate of
Incorporation or By-laws or other organizational documents.
(v) Acquiror shall not, nor shall it permit any of its subsidiaries to,
acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof
or otherwise acquire or agree to acquire any assets, in each case which are
material, individually or in the aggregate, to Acquiror and its
subsidiaries taken as a whole.
(vi) Except for sales of inventory and services in the ordinary course of
business, Acquiror shall not, nor shall it permit any of its subsidiaries
to, sell, lease, encumber or otherwise dispose of, or agree to sell, lease,
encumber or otherwise dispose of, any of its assets, which are material,
individually or in the aggregate, to Acquiror and its subsidiaries taken as
a whole.
(d) If the Stock Issuance is not approved by the requisite vote of the
holders of Acquiror Common Stock at the Acquiror Common Stockholders' Meeting,
Acquiror, prior to or as of the Effective Time, shall: (i) enter into the
Depositary Agreement with the Depositary so that the holders of Tenneco Common
Stock are issued Depositary Shares in connection with the Merger and such
holders of Depositary Shares will have rights equivalent to those of holders
of whole shares of Acquiror Preferred Stock (to the extent of their fractional
interest therein); and (ii) issue to the Depositary, and deliver to the
Depositary certificates for, the number of shares of Acquiror Preferred Stock
provided for in the SECTION 2.5 (E) (II) (B) hereof.
(e) From and after the Agreement Effective Date, Acquiror shall use its
reasonable best efforts, and shall cause its subsidiaries and Affiliates to
use their respective reasonable best efforts, to cause each of the "EPNGC
Facilities" (as defined in that certain $3 Billion Revolving Credit and
Competitive Advance Facility Agreement (the "$3 Billion Credit Agreement")
among Tenneco Inc., the several banks and other financial institutions (the
"Bank Group") from time to time parties to the $3 Billion Credit Agreement and
The Chase Manhattan Bank, as agent ("Chase"), to become in full force and
effect no later than the "Effective Date" under Section 3.1 of the $3 Billion
Credit Agreement, and to remain in full force and effect from said Effective
Date through the "Closing Date" under Section 3.2 of the $3 Billion Credit
Agreement. From and after the Agreement Effective Date, Tenneco shall use its
reasonable best efforts, and shall cause its subsidiaries and Affiliates to
use their respective reasonable best efforts, to cause the $3 Billion Credit
Agreement to become in full force and effect in order to effect the
transactions contemplated by the Debt Realignment.
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ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party hereto to effect the Merger and the other
transactions contemplated herein shall be subject to the satisfaction, at or
prior to the Closing, of the following conditions, any or all of which may be
waived, in whole or in part, to the extent permitted by applicable law:
(a) EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Registration
Statement shall have been declared effective by the Commission under the
Securities Act, no stop order suspending the effectiveness of the
Registration Statement shall have been issued by the Commission and no
proceedings for that purpose shall have been initiated or, to the knowledge
of Tenneco or Acquiror, threatened by the Commission.
(b) STOCKHOLDER APPROVAL. This Agreement, the Merger and the Spinoffs
(and/or any S/I Transaction, if requiring such approval) shall have been
approved and adopted by the requisite vote of the stockholders of Tenneco
in accordance with the certificate of incorporation of Tenneco and the
DGCL.
(c) HSR ACT. The waiting period under the HSR Act applicable to the
transactions contemplated hereby shall have expired or been terminated.
(d) OTHER APPROVALS. All authorizations, consents, orders and approvals
of, and declarations or filings with, and expirations of waiting periods
imposed by, any Governmental Authority or other Person which if not
obtained or filed would have a Material Adverse Effect on Acquiror or a
Material Adverse Effect on Tenneco shall have been obtained or filed, as
applicable, and shall be in full force and effect.
(e) NO ORDER. No Governmental Authority of competent jurisdiction shall
have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and which
materially restricts, prevents or prohibits consummation of the Merger or
any transaction contemplated by this Agreement; it being understood that
the parties hereto hereby agree to use their reasonable best efforts to
cause any such decree, judgment, injunction or other order to be vacated or
lifted as promptly as possible.
(f) NYSE LISTING. The Acquiror Common Stock and any Depositary Shares
issuable to stockholders of Tenneco in accordance with SECTION 2.5 hereof
shall have been authorized for listing on the NYSE upon official notice of
issuance.
(g) TAX RULING. Tenneco shall have received rulings from the Internal
Revenue Service (the "IRS RULING LETTER"), reasonably acceptable to Tenneco
and Acquiror, to the effect that:
(i) the distribution of the capital stock of the Industrial
Subsidiary on a pro rata basis to the stockholders of Tenneco as
contemplated under the Distribution Agreement will be tax-free for
federal income tax purposes to Tenneco under Section 355(c)(1) of the
Code and to the stockholders of Tenneco under Section 355(a) of the
Code;
(ii) the distribution of the capital stock of the Shipbuilding
Subsidiary on a pro rata basis to the stockholders of Tenneco as
contemplated under the Distribution Agreement will be tax-free for
federal income tax purposes to Tenneco under Section 355(c)(1) of the
Code and to the stockholders of Tenneco under Section 355(a) of the
Code;
(iii) The following distributions will be tax free to the respective
transferor corporations under Section 355(c)(1) or 361a) of the Code
and to the respective stockholders of the transferor corporation under
Section 355(a) of the Code: (A) the distribution by the Shipbuilding
Subsidiary of the capital stock of Tenneco Packaging Inc. to Tenneco
Corporation as contemplated under the Distribution Agreement, (B) the
distribution by Tenneco Corporation of the capital stock of the
Shipbuilding Subsidiary and the Industrial Subsidiary to Tennessee Gas
Pipeline Company as contemplated under
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the Distribution Agreement and (C) the distribution by Tennessee Gas
Pipeline Company of the capital stock of the Shipbuilding Subsidiary
and the Industrial Subsidiary to Tenneco Inc. as contemplated under the
Distribution Agreement.
(h) SPINOFFS CONSUMMATED. The Distribution Agreement, in substantially the
form attached hereto with such changes as do not adversely affect, other than
to a de minimis extent, the Energy Business, shall have been duly executed and
delivered by each of Tenneco, the Industrial Subsidiary and the Shipbuilding
Subsidiary, and the transactions contemplated thereby, including the Spinoffs
(and/or any S/I Transaction) and the Debt Realignment, shall have been
consummated (with only such changes).
(i) TAX OPINION. Tenneco shall have received an opinion of Jenner & Block,
in form and substance substantially as set forth in EXHIBIT N attached hereto,
dated the Closing Date, which opinion may be based on appropriate
representations of Tenneco and Acquiror that are in form and substance
reasonably satisfactory to Jenner & Block. The condition set forth in this
SECTION 7.1(I) shall be deemed satisfied to the extent the matters referred to
as to be covered by the tax opinion are instead covered by the IRS Ruling
Letter.
(j) NEW PREFERRED STOCK. The New Preferred Stock shall have been issued by
Tenneco and shall be outstanding as set forth in SECTION 6.1(D) hereof and, if
publicly issued or issued as a dividend-in-kind to the stockholders of
Tenneco, shall have been authorized for listing on the NYSE upon official
notice of issuance.
(k) DEBT REALIGNMENT. The Debt Realignment shall have been effected in
accordance with EXHIBIT C attached hereto.
(l) CHARTER AMENDMENT. The Charter Amendment shall have become effective.
7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF ACQUIROR AND SUBSIDIARY. The
obligations of Acquiror and Subsidiary to consummate the Merger and the other
transactions contemplated herein are also subject to the satisfaction, at the
Closing, of all of the following conditions, any one or more of which may be
waived, in whole or in part, by Acquiror and Subsidiary:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Tenneco contained in this Agreement, without giving effect to
any notification to Acquiror delivered pursuant to SECTION 6.5 hereof,
shall be true and correct as of the Closing Date as though made on and as
of the Closing Date, except
(i) for changes specifically permitted by this Agreement, and
(ii) that those representations and warranties which address matters
only as of a particular date shall remain true and correct as of such
date,
except in any case for such failures to be true and correct which would
not, individually or in the aggregate, have a Material Adverse Effect on
Tenneco.
(b) AGREEMENTS AND COVENANTS. Tenneco shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the
Closing.
(c) OFFICERS' CERTIFICATES. Acquiror shall have received certificates,
dated the Closing Date, of
(i) the President or any Vice President of Tenneco certifying as to
the matters specified in SECTIONS 7.2(A) and (B) hereof and
(ii) the Secretary of Tenneco certifying as to (A) the content and
continuing effectiveness as of the Closing Date of the resolutions of
the board of directors of Tenneco approving this Agreement and the
transactions contemplated hereby, and (B) the fact that this Agreement
and the transactions contemplated hereby have been duly approved by the
requisite vote of the stockholders of Tenneco in accordance with the
certificate of incorporation of Tenneco and the DGCL and that such
approval is in full force and effect.
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(d) CERTAIN LEGISLATION. There shall not have occurred any announcement
or introduction of legislation by an Appropriate Person as a result of
which Acquiror reasonably determines, in good faith after consultation with
Tenneco and its advisors, that there exists a reasonable likelihood that
the Spinoffs or the Merger would not be tax free for federal income tax
purposes to Tenneco and Acquiror. For purposes of this SECTION 7.2(D), an
"Appropriate Person" is a member of the House Ways and Means Committee or
the Senate Finance Committee, the President or a President-elect, a
cabinet-level member of the Executive Branch, an Assistant Secretary of the
Treasury, the Reporting Assistant Secretary of the Treasury for Tax Policy,
the Tax Legislation Counsel, the Chief of Staff of the Joint Committee of
Taxation or a current or presumptive Majority or Minority Leader of the
House or Senate.
7.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF TENNECO. The obligations of
Tenneco to consummate the transactions contemplated hereby are also subject to
the satisfaction, at the Closing, of all of the following conditions, any one
or more of which may be waived, in whole or in part, by Tenneco:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Acquiror and Subsidiary contained in this Agreement, without
giving effect to any notification made by Acquiror to Tenneco pursuant to
SECTION 6.5 hereof, shall be true and correct as of the Closing Date, as
though made on and as of the Closing Date, except
(i) for changes specifically permitted by this Agreement, and
(ii) that those representations and warranties which address matters
only as of a particular date shall remain true and correct as of such
date,
except in any case for such failures to be true and correct which would not,
individually or in the aggregate, have a Material Adverse Effect on Acquiror.
(b) AGREEMENTS AND COVENANTS. Each of Acquiror and Subsidiary shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it
at or prior to the Closing.
(c) OFFICERS' CERTIFICATES. Tenneco shall have received certificates,
dated the Closing Date, of
(i) the President or any Vice President of each of Acquiror and
Subsidiary certifying as to the matters specified in SECTIONS 7.3(A)
and (B) hereof and
(ii) the Secretaries or Assistant Secretaries of Acquiror and
Subsidiary certifying as to (A) the content and continuing
effectiveness as of the Closing Date of the resolutions of the sole
stockholder of Subsidiary and of the boards of directors of Acquiror
and Subsidiary approving this Agreement and the transactions
contemplated hereby, and (B) the fact that the Stock Issuance has been
duly approved, if required, by the requisite vote of the stockholders
of Acquiror in accordance with the rules and regulations of the NYSE,
any other applicable Law and the certificate of incorporation and/or
other governing document or instrument of Acquiror, and that such
approval is in full force and effect, or, alternatively, that no such
vote of the stockholders is so required.
ARTICLE VIII
TERMINATION
8.1 GROUNDS FOR TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after adoption and approval of
this Agreement, the Merger and the Spinoffs by the stockholders of Tenneco and
approval of the Stock Issuance by the stockholders of Acquiror:
(i) by the mutual written agreement of Tenneco and Acquiror authorized by
their respective boards of directors;
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(ii) by Tenneco or by Acquiror if the Merger shall not have been
consummated prior to June 30, 1997 unless such eventuality shall be due to
the failure of the party seeking to terminate this Agreement to perform or
observe any of the covenants, agreements and conditions hereof to be
performed or observed by such party on or prior to the Closing Date;
(iii) by Tenneco or by Acquiror if Tenneco enters into an S/I Transaction
pursuant to the last sentence of SECTION 6.13 above;
(iv) by Acquiror if
(A) there has been a material breach on the part of Tenneco in the
representations, warranties or covenants of Tenneco set forth herein,
or any failure on the part of Tenneco to comply with its obligations
hereunder or any other events or circumstances shall have occurred such
that, in any such case, any of the conditions to the consummation of
the Merger set forth in SECTIONS 7.1 or 7.2 hereof could not be
satisfied on or prior to the termination date contemplated by paragraph
(ii) of this SECTION 8.1,
(B) Tenneco's stockholders entitled to vote thereat do not adopt and
approve this Agreement, and the Merger and the Spinoffs as contemplated
by Section 7.1(B) hereof at the Tenneco Stockholders' Meeting,
(C) the board of directors of Tenneco withdraws, amends, or modifies
in a manner materially adverse to Acquiror its favorable recommendation
of this Agreement or the Merger, or approves an agreement for or
recommends to the stockholders of Tenneco an Acquisition Transaction,
provided that any action taken by Tenneco pursuant to PARAGRAPH (V)(A)
of this SECTION 8.1 or any public announcement by Tenneco relating
thereto shall not give rise to any right of termination by Acquiror, or
(D) there has occurred since the Agreement Effective Date of any
event, change or effect which, in the aggregate with all other events,
changes or effects (giving effect to both positive and negative events,
changes and events), reduces the value of the Energy Business as of the
Agreement Effective Date by more than $75,000,000, but excluding any
negative events, changes or effects which result from (A) any action by
Acquiror or any of its subsidiaries, Affiliates, officers, employees,
agents or representatives, (B) changes in general economic, financial
(including, without limitation, equity and debt) markets or industrial
conditions, and (C) any ruling by the Federal Energy Regulatory
Commission Administrative Law Judge in the proceedings regarding the
Energy Business pending as of the Agreement Effective Date before the
Federal Energy Regulatory Commission Administrative Law Judge, or
(v) by Tenneco if
(A) there has been a material breach on the part of Acquiror or
Subsidiary in the representations, warranties or covenants of Acquiror
or Subsidiary set forth herein, or any failure on the part of Acquiror
or Subsidiary to comply in any material respect with its obligations
hereunder or any other events or circumstances shall have occurred such
that, in any such case, any of the conditions to the consummation of
the Merger set forth in SECTIONS 7.1 or 7.3 hereof could not be
satisfied on or prior to the termination date contemplated by paragraph
(ii) of this SECTION 8.1,
(B) Tenneco's stockholders entitled to vote thereat do not adopt and
approve this Agreement,the Merger and the Spinoffs as contemplated by
SECTION 7.1(B) hereof at the Tenneco Stockholders' Meeting,
(C) the board of directors of Acquiror withdraws, amends, or modifies
in a manner materially adverse to Tenneco its favorable recommendation
of this Agreement, the Merger or the Stock Issuance, or approves an
agreement for or recommends to the stockholders of Acquiror an
Acquisition Transaction, provided that any action taken by Acquiror
pursuant to PARAGRAPH (IV)(A) of this SECTION 8.1 or any public
announcement by Acquiror relating thereto shall not give rise to any
right of termination by Tenneco, or
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(D) there has occurred since the Agreement Effective Date any event,
change or effect which, in the aggregate with all other events, changes
or effects (giving effect to both positive and negative events, changes
and events), reduces the value of Acquiror as of the Agreement
Effective Date by more than $75,000,000, but excluding any negative
events, changes or effects which result from (i) any action by Tenneco
or any of its subsidiaries, Affiliates, officers, employees, agents or
representatives, and (ii) changes in general economic, financial
(including, without limitation, equity and debt) market or industrial
conditions; or
(vi) by Tenneco or by Acquiror (but only prior to the approval of this
Agreement by Tenneco's stockholders) if
(1) Tenneco receives a Higher Proposal that it advises Acquiror in
writing Tenneco wishes to accept and
(2) Acquiror does not make, within five business days of receipt of
written notice of Tenneco's desire to accept such Higher Proposal, an
offer that the board of directors of Tenneco believes, in good faith
after consultation with its financial advisors, is at least as
favorable, from a financial point of view, to the stockholders of
Tenneco as the Higher Proposal.
8.2 EFFECT OF TERMINATION. If this Agreement is terminated by Tenneco or by
Acquiror as permitted under SECTION 8.1 hereof, except as provided in SECTION
10.1(B) such termination shall be without liability to the terminating party,
or any stockholder, director, officer, employee, agent, consultant or
representative of such party, but such termination shall not relieve any other
party of any damages or other amounts for which it would otherwise be liable.
8.3 WAIVER. Any time prior to the Effective Time any party hereto, by action
taken or authorized by its board of directors, may, to the extent legally
allowed:
(i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties of the
other parties contained herein or in any document delivered pursuant
hereto, and
(iii) waive compliance by any of the other parties hereto with any of the
agreements or conditions contained herein. Any waiver of rights by any
party hereto shall be valid only if set forth in a written instrument
signed on behalf of such party.
ARTICLE IX
EXTENT AND SURVIVAL OF REPRESENTATIONS,
WARRANTIES, COVENANTS AND AGREEMENTS
9.1 SCOPE OF REPRESENTATIONS. Except as set forth in ARTICLES IV and V
hereof, the parties make no representations or warranties whatsoever, and each
party disclaims all liability and responsibility for any other representation,
warranty, statement or information made or communicated (orally or in writing)
to another party (including, but not limited to, any opinion, information or
advice which may have been provided to Acquiror or Subsidiary by any officer,
stockholder, director, employee, agent or consultant of Tenneco, Lazard or any
other agent or representative of Tenneco). Acquiror acknowledges and affirms
that it has made its own independent investigation, analysis and evaluation of
Tenneco and its subsidiaries, their properties and assets, operations,
business and prospects, and that it is relying exclusively upon such
investigation, analysis and evaluation in entering into this Agreement.
9.2 SURVIVAL. The representations, warranties, covenants and agreements set
forth in this Agreement and in any certificate delivered in connection
herewith shall survive until the Effective Time and, except for SECTIONS 2.3,
2.6, 6.2(B), 6.3(B), 6.4, 6.6, 6.9(A) AND (F), 6.10, 6.14(B), 6.15, 6.18, 9.1
AND 9.2 and ARTICLE X hereof and
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EXHIBIT J attached hereto, shall terminate and expire at the Effective Time
and shall be of no force or effect thereafter. If the Merger is consummated,
no party to this Agreement (or any of its present or former Affiliates) shall
have any liability to any other party (or any of its present or former
Affiliates) for any breaches of this Agreement that occurred prior to the
Effective Time, whether or not known at the Effective Time.
ARTICLE X
MISCELLANEOUS
10.1 EXPENSES.
(a) All legal and other costs and expenses shall be paid by Acquiror,
Subsidiary or Tenneco, as the case may be, depending upon which party incurred
such expenses. Subsequent to the Merger, Acquiror shall cause the Surviving
Corporation promptly to pay any and all such costs and expenses (including,
without limitation, the fees and expenses of the Exchange Agent and Tenneco's
financial advisors, and all legal, accounting and actuarial fees and expenses
incurred by Tenneco in connection with this Agreement and the transactions
contemplated hereby) incurred by Tenneco prior to the Effective Time which
have not been paid as of such time.
(b) In the event that this Agreement shall be terminated pursuant to SECTION
8.1(III), 8.1(IV)(B), 8.1(V)(B) or 8.1(VI), Tenneco shall pay to Acquiror, as
liquidated damages, in exchange for a complete release of any liabilities of
Tenneco hereunder, the amount of $25,000,000 plus actual out of pocket
expenses (up to $10,000,000) incurred by Acquiror to third parties in
connection with the transactions contemplated hereby, payable to an account
specified by Acquiror in writing by wire transfer of immediately available
funds within 5 business days after the effective date of the subject
termination (except that (i) no such amounts shall be payable unless
concurrently therewith, Tenneco receives the aforesaid complete release (other
than with respect to the items referred to in clause (ii), as to which
Acquiror shall deliver a complete release concurrently with the receipt of
payment therefor) and (ii) the aforesaid payment for Acquiror's out of pocket
expenses shall not be payable unless and until 5 business days after receipt
of reasonably satisfactory documentation of the subject expenses).
Notwithstanding the foregoing, Tenneco shall have no obligations under this
SECTION 10.1(B) due to any termination of this Agreement pursuant to either
SECTION 8.1(IV)(B) or 8.1(V)(B) unless Tenneco's Board of Directors has
withdrawn, amended or modified in a manner materially adverse to Acquiror
(other than by reason of a matter referred to in SECTION 8.1(V)(A) hereof) its
recommendation concerning the Merger or the Spinoffs prior to the vote of
Tenneco's stockholders which is the subject of SECTION 8.1(IV)(B) or
8.1(V)(B), as the case may be.
(c) Acquiror shall cause the Surviving Corporation to pay any New York State
Tax on Gains Derived from Certain Real Property Transfers (the "Gains Tax"),
New York State Real Estate Transfer Tax and New York City Real Property
Transfer Tax (the "Transfer Taxes") and any similar taxes in any other
jurisdiction (and any penalties and interest with respect to such taxes) that
become payable in connection with the Merger, on behalf of the stockholders of
Tenneco. Tenneco and Acquiror shall cooperate in the preparation, execution
and filing of any required returns with respect to such taxes (including
returns on behalf of the stockholders of Tenneco) and in the determination of
the portion of the consideration allocable to the real property of Tenneco and
the Tenneco subsidiaries in New York State and City (or in any other
jurisdiction, if applicable). In order to effect the payment of any transfer
taxes subject to this SECTION 10.1(C), Tenneco shall establish a separately
maintained escrow account consisting of an adequate amount of cash from the
$25,000,000 of cash required to be on hand at Tenneco as of the Effective Time
pursuant to the Allocation Agreement. The terms of the Joint Proxy Statement
shall provide that the stockholders of Tenneco shall be deemed to have agreed
to be bound by the allocation established pursuant to this SECTION 10.1(C) in
the preparation of any return with respect to the Gains Tax and the Transfer
Taxes and any similar taxes, if applicable.
(d) This SECTION 10.1 (and all other provisions of this Agreement necessary
or appropriate for purposes of enforcing this SECTION 10.1) shall be
enforceable by the Industrial Subsidiary, which is hereby deemed a third party
beneficiary hereof.
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10.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or mailed by
registered or certified mail, return receipt requested, to the parties at the
following addresses:
(A) If to Tenneco, to:
Tenneco Inc.
1275 King Street
Greenwich, Connecticut 06831
Attention: Corporate Secretary
(B) If to the Acquiror or Subsidiary, to:
El Paso Natural Gas Company
One Paul Kayser Center
100 North Stanton Street
El Paso, Texas 79901
Attention: William A. Wise
Chairman and Chief Executive Officer
10.3 REMEDIES. Any party having any rights under any provision of this
Agreement will have all rights and remedies set forth in this Agreement and
all rights and remedies which such party may have been granted at any time
under any other agreement or contract and all of the rights which such party
may have under any law. Any party having any rights or remedies under this
Agreement will be entitled to enforce such rights specifically, without
posting a bond or other security, to recover damages by reason of any breach
of any provision of this Agreement and to exercise all other rights granted by
law.
10.4 CONSENT TO AMENDMENTS. Prior to the Effective Time, whether before or
after approval and adoption of this Agreement by the stockholders of Tenneco,
the provisions of this Agreement may be amended by a written agreement
executed and delivered by the parties hereto, subject to applicable law (and
shall be so amended if expressly required by the terms of this Agreement).
After the Effective Time, the provisions of this Agreement may be amended only
by a written agreement executed and delivered by Acquiror, the Surviving
Corporation and the Industrial Subsidiary. Any purported amendment to this
Agreement that does not strictly comply with the foregoing provisions of this
SECTION 10.4 shall be null and void ab initio. This SECTION 10.4 (and all
other provisions of this Agreement necessary or appropriate for purposes of
enforcing this SECTION 10.4) shall be enforceable by the Industrial
Subsidiary, which is hereby deemed a third party beneficiary hereof.
10.5 SUCCESSORS AND ASSIGNORS. No party hereto may assign or delegate any of
such party's rights or obligations under or in connection with this Agreement
without the written consent of the other parties hereto, and any attempted
assignment without such consent shall be null and void ab initio. All
covenants and agreements contained in this Agreement by or on behalf of any of
the parties hereto will be binding upon and enforceable against the respective
successors and assigns of such party and will be enforceable by and will inure
to the benefit of the respective successors and permitted assigns of such
party.
10.6 SEVERABILITY. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
10.7 COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together will constitute one
and the same Agreement.
10.8 DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
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10.9 NO THIRD-PARTY BENEFICIARIES. Except as expressly provided in SECTIONS
2.6(G), 2.6(H), 6.3, 6.4, 6.6, 6.9, 6.18, 10.1 and 10.4 hereof, this Agreement
will not confer any rights or remedies upon any person other than the parties
hereto and their respective successors and permitted assigns.
10.10 ENTIRE AGREEMENT. Except for the Confidentiality Agreements identified
in SECTION 6.3(B) hereof, this Agreement constitutes the entire agreement
among the parties and supersedes any prior understandings, agreements or
representations by or among the parties, written or oral, that may have
related in any way to the subject matter hereof.
10.11 CONSTRUCTION. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent and no rule
of strict construction will be applied against any party. The use of the word
"including" in this Agreement means "including without limitation" and is
intended by the parties to be by way of example rather than limitation.
10.12 INCORPORATION OF EXHIBITS. The Exhibits identified in this Agreement
are incorporated herein by reference and made a part hereof.
10.13 GOVERNING LAW. ALL QUESTIONS AND/OR DISPUTES CONCERNING THE
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS
HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND NOT THE LAW OF CONFLICTS,
OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY
IRREVOCABLY AND UNCONDITIONALLY AGREES TO BE SUBJECT TO, AND HEREBY CONSENTS
AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE STATE OF DELAWARE AND OF
THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement, as of the
date first written above.
TENNECO INC.
/s/ ROBERT G. SIMPSON
By __________________________________
Title: Vice President
EL PASO NATURAL GAS COMPANY
/s/ BRITTON WHITE, JR.
By___________________________________
Title: Senior Vice President and
General Counsel
EL PASO MERGER COMPANY
/s/ BRITTON WHITE, JR.
By___________________________________
Title: Vice President
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EXHIBIT A TO
AGREEMENT AND PLAN OF MERGER
DISTRIBUTION AGREEMENT
THE DISTRIBUTION AGREEMENT TOGETHER WITH EXHIBITS
IS ATTACHED TO THE JOINT PROXY STATEMENT-
PROSPECTUS AS APPENDIX A.
<PAGE>
EXHIBIT 3(III)
FORM OF CERTIFICATE OF DESIGNATION OF POWERS, PREFERENCES AND RIGHTS OF THE
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK OF EL PASO NATURAL GAS COMPANY
El Paso Natural Gas Company, a Delaware corporation (the "Company"),
pursuant to Section 151 of the General Corporation Law of the State of
Delaware does hereby make this Certificate of Designation of Powers,
Preferences and Rights (this "Certificate of Designation") and does hereby
state and certify that pursuant to the authority conferred upon the Board of
Directors of the Company (the "Board") by the Restated Certificate of
Incorporation of the Company (the "Restated Certificate of Incorporation"),
the Board on , 199 duly adopted the following resolution:
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Company in accordance with the provisions of the Restated
Certificate of Incorporation, which authorizes 25,000,000 shares of preferred
stock, $.01 par value per share (the "Preferred Stock"), the Board hereby
creates a series of preferred stock of the Company and hereby states the
designation and number of shares, and fixes the relative rights, preferences
and limitations thereof (in addition to the provisions set forth in the
Restated Certificate of Incorporation which are applicable to the preferred
stock of all classes and series) as follows:
SECTION 1. Designation, Rank. This series of preferred stock shall be
designated the "Adjustable Rate Cumulative Preferred Stock", with a par value
of $.01 per share (the "AR Preferred Stock"). The AR Preferred Stock will
rank, with respect to dividend rights and rights on liquidation, winding-up
and dissolution, (i) senior to all classes of common stock of the Company, as
they exist on the date hereof or as such stock may be constituted from time to
time (the "Common Stock"), and each other class of capital stock or series of
preferred stock established by the Board to the extent the terms of such stock
do not expressly provide that it ranks senior to or on a parity with the AR
Preferred Stock as to dividend rights and rights on liquidation, winding-up
and dissolution, including the Company's Series A Junior Preferred Stock, par
value $.01 per share (collectively, together with the Common Stock, the
"Junior Securities"); (ii) on a parity with each other class of capital stock
or series of preferred stock issued by the Company established by the Board to
the extent the terms of such stock expressly provide that it will rank on a
parity with the AR Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution (collectively, the "Parity
Securities"); and (iii) junior to each other class of capital stock or series
of preferred stock established by the Board to the extent the terms of such
stock expressly provide that it will rank senior to the AR Preferred Stock as
to dividend rights and rights on liquidation, winding-up and dissolution
(collectively, the "Senior Securities"). Shares of additional series of AR
Preferred Stock may be issued from time to time by the Board of Directors,
subject to limitations set forth in the Restated Certificate of Incorporation
and the resolutions of the Board of Directors providing for any such series,
which shall be mutually fixed by Tenneco Inc. and the Company.
SECTION 2. Authorized Number. The authorized number of shares constituting
the AR Preferred Stock shall be [505,875] shares. Such number of shares may be
increased or decreased by resolution of the Board of Directors, provided that
no decrease shall reduce the number of shares of the AR Preferred Stock to a
number less than that of the shares then outstanding.
SECTION 3. Dividends.
(a) Dividend Periods and Rates. Dividends on each share of AR Preferred
Stock shall be payable with respect to each quarter beginning on the last day
of March, June, September and December of each year and ending on the day
immediately prior to the first day of the next succeeding period (each, a
"Quarterly Dividend Period"). Dividends shall be payable in cash when, as and
if declared by the Board out of funds of the Company legally available
therefor, quarterly in arrears on the last day of March, June, September and
December of each year (each a "Quarterly Dividend Payment Date"), commencing
on the next Quarterly Dividend Payment
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Date following the issuance of the AR Preferred Stock. Dividends will be
payable at a per annum rate equal to the Applicable Rate in effect for the
Quarterly Dividend Period to which such dividend relates, multiplied by the
Liquidation Preference (as defined in Section 4) of each such share. Dividends
for each full Quarterly Dividend Period will be computed by dividing the
Applicable Rate by four. Dividends payable for any period less than a full
Quarterly Dividend Period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Each dividend will be payable to holders
of record as they appear on the books of the Company at the close of business
on a record date, not more than 60 nor less than 15 days before the related
Quarterly Dividend Payment Date fixed by the Board. Dividends will be
cumulative from the date of original issuance of the AR Preferred Stock. The
AR Preferred Stock will not entitle the holder thereof to any dividends,
whether payable in cash, property or stock, in excess of full cumulative
dividends. No interest, or sum of money in lieu of interest, will be payable
in respect of any accrued and unpaid dividends. Dividends in arrears for any
past Quarterly Dividend Periods may be declared and paid at any time without
reference to any regular Quarterly Dividend Payment Date, to holders of record
on such date, not exceeding 45 days preceding the payment date thereof, as may
be fixed by the Board of Directors of the Company.
(b) Priority. So long as shares of AR Preferred Stock are outstanding, no
dividends may be declared or paid and no funds may be set apart for the
payment of dividends or other distributions on any Parity Securities (except
dividends on Parity Securities paid in shares of Junior Securities) for any
period unless the full cumulative dividends on all outstanding shares of AR
Preferred Stock shall have been declared and paid in full for all past
Quarterly Dividend Periods. No dividends or other distributions may be paid or
declared and set apart for such payment on Junior Securities or Parity
Securities (except dividends paid in additional shares of Junior Securities)
and no Parity Securities or Junior Securities may be repurchased, redeemed or
otherwise retired nor may funds be declared and set apart for payment with
respect thereto, nor shall the Company permit any corporation or entity
directly or indirectly controlled by the Company to purchase any Parity
Securities or Junior Securities, unless, in each case, the full cumulative
dividends on all outstanding shares of AR Preferred Stock shall have been
declared and paid in full for all past Quarterly Dividend Periods.
Notwithstanding the foregoing, the Company may (i) make redemptions, purchases
or other acquisitions of Parity Securities or Junior Securities payable in
Junior Securities and (ii) make, pursuant to the Company's Shareholder Rights
Plan (the "Plan"), redemptions of Rights (as defined in the Plan) distributed
pursuant to the Plan.
(c) Applicable Rate. Except as provided below in this subsection (c), the
"Applicable Rate" for each Quarterly Dividend Period shall be a per annum
rate, rounded to the nearest one-hundredth of a percentage point, equal to the
arithmetic average of the [ ] Rates quoted by the Reference Banks. In
the event that the [ ] Rates quoted by the Reference Banks with respect to
the Quarterly Dividend Period preceding the first Quarterly Dividend Payment
Date are not identical to within one-one hundredth of a percentage point, then
the Applicable Rate with respect to such period will be determined by Morgan
Stanley & Co. Incorporated. ["Reference Banks" shall mean two major banks in
the New York interbank market, one of which shall be selected by the Company
and the other by Tenneco Inc. with respect to the calculation of the
Applicable Rate for any Quarterly Dividend Period.] Notwithstanding the
foregoing, in no event shall the Applicable Rate for any dividend period be
less than 6% per annum or greater than 10% per annum.
SECTION 4. Liquidation Rights. The liquidation preference of each share of
AR Preferred Stock shall be $1,000.00 (the "Liquidation Preference"). In the
event of any voluntary or involuntary liquidation, dissolution or winding-up
of the Company, after satisfaction of the claims of creditors and before any
payment or distribution of assets is made on any Junior Securities, including,
without limitation, the Common Stock, the holders of AR Preferred Stock shall
receive an amount equal to the Liquidation Preference of their shares,
and shall be entitled to receive an amount equal to all accrued and unpaid
dividends through the date of distribution (whether or not declared). If, upon
such a voluntary or involuntary liquidation, dissolution or winding-up of the
Company, the assets of the Company are insufficient to pay in full the amounts
described above as payable with respect to the AR Preferred Stock, the holders
of the AR Preferred Stock and any Parity Securities will share ratably in any
distribution of assets of the Company, first in proportion to their respective
liquidation preferences until such preferences are paid in full, and then in
proportion to their respective amounts
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of accrued but unpaid dividends. After payment in full of any such liquidation
preference and accrued but unpaid dividends, the AR Preferred Stock will not
be entitled to any further participation in any distribution of assets by the
Company. Neither the sale or transfer of all or any part of the assets of the
Company, nor the merger or consolidation of the Company into or with any other
corporation or a merger of any other corporation with or into the Company,
will be deemed to be a liquidation, dissolution or winding-up of the Company.
SECTION 5. Voting Rights.
(a) Except as provided below and as may be required by Delaware law, the
holders of AR Preferred Stock will be entitled to vote together as one class
with the holders of Common Stock on all matters submitted for a vote of the
Company's stockholders. Each share of AR Preferred Stock shall entitle the
holder thereof to 15 votes.
(b) (i) If at any time dividends on the AR Preferred Stock shall be in
arrears in an amount equal to six (6) or more quarterly dividends thereon, the
occurrence of such contingency shall mark the beginning of a period (herein
called a "Default Period") which shall extend until such time when all accrued
and unpaid dividends for all previous Quarterly Dividend Periods and for the
current Quarterly Dividend Period on all shares of AR Preferred Stock then
outstanding shall have been paid or set apart for payment. During each Default
Period, all holders of AR Preferred Stock, voting as a class, shall have the
right to elect two (2) directors.
(ii) So long as any shares of AR Preferred Stock shall be outstanding,
during any Default Period, the voting right described in subsection (i) above
may be exercised initially at a special meeting called pursuant to subsection
(iii) below or at any annual meeting of stockholders and thereafter at annual
meetings of stockholders. The absence of a quorum of holders of Common Stock
(or any class thereof) shall not affect the exercise of such voting rights by
the holders of AR Preferred Stock. At any meeting at which the holders of AR
Preferred Stock shall exercise such voting right initially during an existing
Default Period, they shall have the right, voting as a class, to elect
directors to fill such vacancies, if any, in the Board of Directors as may
then exist up to two (2) directors or, if such right is exercised at an annual
meeting, to elect two (2) directors. If the number of directors which may be
so elected at any special meeting does not amount to the required number of
directors, the holders of the AR Preferred Stock shall have the right to make
such increase in the number of directors as shall be necessary to permit the
election by them of the required number of directors. After the holders of the
AR Preferred Stock shall have exercised their right to elect directors in any
Default Period and during the continuance of such period, the number of
directors on the Board of Directors shall not be increased or decreased except
by vote of the holders of AR Preferred Stock as herein provided or pursuant to
the rights of any Senior Securities or Parity Securities.
(iii) Unless the holders of AR Preferred Stock, if any such shares are then
outstanding, have, during an existing Default Period, previously exercised
their right to elect directors, the Board may, and upon the request of the
holders of record of not less than 10% of the aggregate liquidation preference
of AR Preferred Stock then outstanding, the Board shall, order the calling of
a special meeting of holders of AR Preferred Stock, which meeting shall
thereupon be called by the Chairman of the Board or the President and Chief
Executive Officer of the Company. Notice of such meeting and of any annual
meeting at which holders of AR Preferred Stock are entitled to vote pursuant
to this subsection (iii) shall be given to each holder of record of AR
Preferred Stock by mailing a copy of such notice to such holder at such
holder's last address as it appears on the books of the Company. Such meeting
shall be called for a date not earlier than 10 days and not later than 60 days
after such order or request, or, in default of the calling of such meeting
within 60 days after such order or request, such meeting may be called on
similar notice by any stockholder or stockholders owning in the aggregate not
less than 10% of the aggregate liquidation preference of the AR Preferred
Stock then outstanding. Any holder of the AR Preferred Stock shall have access
to the stock books of the Company for the purpose of causing a meeting of
stockholders to be called pursuant to these provisions. [Notwithstanding the
provisions of this subsection (iii), no such special meeting shall be called
during the period within 60 days immediately preceding the date fixed for the
next annual meeting of stockholders of the Company.]
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(iv) During any Default Period, the holders of Common Stock, and other
classes of stock of the Company, if applicable, shall continue to be entitled
to elect all of the directors unless and until the holders of AR Preferred
Stock shall have exercised their right pursuant to this Section 5(b) to elect
two directors voting as a class. After the exercise of such right (x) the
directors so elected by the holders of AR Preferred Stock shall continue in
office until the earlier of (A) such time as their successors shall have been
elected by such holders and (B) the expiration of the Default Period, and (y)
any vacancy in the Board with respect to a directorship to be elected pursuant
to this Section 5(b) by the holders of AR Preferred Stock may be filled by
vote of the remaining director previously elected by such holders. References
in this subsection (b)(iv) to directors elected by the holders of a particular
class of stock shall include directors elected by such directors to fill
vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a Default Period (and subject to
revesting of the rights provided for in this Section 5(b) upon the subsequent
occurrence of a Default Period), (x) the right of the holders of AR Preferred
Stock to elect directors pursuant to this Section 5(b) shall cease, (y) the
term of any directors elected by the holders of AR Preferred Stock pursuant to
this Section 5(b) shall terminate, and (z) the number of directors shall be
such number as may be provided for in the Restated Certificate of
Incorporation or bylaws of the Company irrespective of any increase made
pursuant to subsection (ii) of this subsection (b) (such number being subject,
however, to subsequent change in any manner provided by law or in the Restated
Certificate of Incorporation or bylaws of the Company). Any vacancies in the
Board of Directors effected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining Directors.
(c) Except as set forth herein, holders of AR Preferred Stock shall have no
special voting rights and their consent shall not be required (except to the
extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
SECTION 6. Redemption.
(a) On or after [ ], 200 [the fifth anniversary of the Merger],
the Company may, at its option, redeem all or any part of the shares of AR
Preferred Stock, in cash out of funds legally available therefor, at any time
upon giving a notice of redemption as set forth in section (c) below, at the
Liquidation Preference thereof plus an amount equal to accrued and unpaid
dividends, if any (whether or not declared), up to but excluding the date
fixed for redemption. If fewer than all of the outstanding shares of the AR
Preferred Stock are to be redeemed, the number of shares to be redeemed shall
be determined by the Board in good faith and the shares to be redeemed will be
determined pro rata as nearly as practicable, or by such other method as the
Board in its discretion may determine is fair and appropriate. AR Preferred
Stock may not be redeemed unless full cumulative dividends have been paid on
the AR Preferred Stock for all past dividend periods.
(b) On [ ], 201 [the twentieth anniversary of the Merger], the
Company shall redeem, in cash out of funds legally available therefor, all
outstanding shares of AR Preferred Stock, at the Liquidation Preference
thereof plus an amount equal to accrued and unpaid dividends, if any (whether
or not declared), up to but excluding such date.
(c) Notice of redemption of AR Preferred Stock will be given by (i) first-
class mail, not less than 30 nor more than 60 days prior to the date fixed for
redemption thereof, to each record holder of shares of AR Preferred Stock to
be redeemed at the address of such holder in the books of the Company and (ii)
publication in the Wall Street Journal. On the date such notices are mailed,
the Company shall issue a press release announcing the redemption. The mailed
and published notice shall state, as appropriate: (1) the redemption date and
record date for purposes of such redemption; (2) the number of shares of AR
Preferred Stock to be redeemed and, if fewer than all shares of AR Preferred
Stock held by any holder are to be redeemed, the number of shares to be
redeemed from such holder; (3) the place or places at which certificates for
such shares are to be surrendered; (4) the redemption price; and (5) that
dividends on the AR Preferred Stock to be redeemed shall cease to accrue on
such redemption date, except as otherwise provided herein. If a notice of
redemption has been given, from
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and after the specified redemption date (unless the Company defaults in making
payment of the redemption price), dividends on the AR Preferred Stock so
called for redemption will cease to accrue, such shares will no longer be
deemed to be outstanding, and all rights of the holders thereof as
stockholders of the Company (except the right to receive the redemption price
and any dividend due on a Quarterly Dividend Payment Date after the redemption
date relating to a dividend record date prior to such redemption date) will
cease.
SECTION 7. Exchange.
(a) At any time, the Company shall have the right to exchange the
outstanding shares of the AR Preferred Stock for shares of Common Stock,
subject to the notice provisions set forth below. On the date fixed for such
exchange by the Board (the "Exchange Date"), the Company shall deliver to the
holders of the AR Preferred Stock, in exchange for each share of AR Preferred
Stock (i) the number of shares of Common Stock equal to the Common Equivalent
Rate in effect on the Exchange Date, plus (ii) an amount in cash equal to all
accrued and unpaid dividends on such shares of AR Preferred Stock up to but
excluding the Exchange Date. The Common Equivalent Rate shall be subject to
adjustment from time to time as provided herein, but all adjustments to the
Common Equivalent Rate shall be calculated to the nearest one one-hundredth of
a share of Common Stock.
(b) The "Common Equivalent Rate" shall be determined by dividing 1,000 by
the Current Market Price. "Current Market Price" means the average of the
daily Closing Prices for the five consecutive Trading Dates ending on and
including the date immediately preceding the Exchange Date. The term "Closing
Price" on any day shall mean the closing sale price regular way (with any
relevant due bills attached) of a share of Common Stock on such day, or in
case no such sale takes place on such day, the average of the reported closing
bid and asked prices regular way (with any relevant due bills attached) of a
share of Common Stock on such day, in each case on the New York Stock Exchange
Consolidated Tape (or any successor composite tape reporting transactions on
national securities exchanges), or, if the Common Stock is not listed or
admitted to trading on such Exchange, on the principal national securities
exchange on which the Common Stock is listed or admitted to trading (which
shall be the national securities exchange on which the greatest number of
shares of Common Stock has been traded during the five consecutive Trading
Dates ending on and including the date immediately preceding the Exchange
Date) or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the average of the closing bid and asked prices
regular way (with any relevant due bills attached) of a share of the Common
Stock on the over-the-counter market on the day in question as reported by the
National Association of Securities Dealers Automated Quotations System, or a
similarly generally accepted reporting service, or if not so available, the
market price of a share of Common Stock as determined in good faith by the
Board of Directors on the basis of such relevant factors as the Board of
Directors in good faith considers appropriate. The term "Trading Date" shall
mean a date on which the New York Stock Exchange (or any successor to such
Exchange) is open for the transaction of business.
(c) Before taking any action which would cause an adjustment to the Common
Equivalent Rate that would cause the Company to issue shares of Common Stock
for consideration below the then par value (if any) of the Common Stock upon
redemption of the AR Preferred Stock, the Company will take any corporate
action that may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable shares of
such Common Stock at the Common Equivalent Rate, including registration of
such Common Stock under applicable federal and state securities laws.
(d) Notice of exchange of AR Preferred Stock will be given by (i) first-
class mail, not less than 30 nor more than 60 days prior to the date fixed for
exchange thereof, to each record holder of shares of AR Preferred Stock at the
address of such holder in the books of the Company and (ii) publication in the
Wall Street Journal. On the date such notices are mailed, the Company shall
issue a press release announcing the exchange. The mailed and published notice
shall state, as appropriate: (1) the Exchange Date and record date for
purposes of such exchange;
5
<PAGE>
(2) the place or places at which certificates for shares of AR Preferred Stock
are to be surrendered, and (3) that dividends on the AR Preferred Stock shall
cease to accrue on the Exchange Date, except as otherwise provided herein. If
a notice of exchange has been given, from and after the Exchange Date (unless
the Company defaults in delivery of the shares of Common Stock to be exchanged
for AR Preferred Stock, or any cash with respect to accrued and unpaid
dividends up to the Exchange Date, in which event the exchange shall be null
and void as to all shares of AR Preferred Stock), dividends on the AR
Preferred Stock will cease to accrue, such shares will no longer be deemed to
be outstanding, and all rights of the holders thereof with respect to such
shares (except the right to receive shares of Common Stock in exchange
therefor and any dividends due on a Quarterly Dividend Payment Date after the
Exchange Date relating to a dividend record date prior to the Exchange Date)
will cease.
(e) Each holder of shares of the AR Preferred Stock shall surrender the
certificates evidencing such shares (properly endorsed or assigned for
transfer, if the Board of Directors of the Company shall so require and the
notice shall so state) to the Company at the place designated in the notice of
such exchange and shall thereupon be entitled to receive certificates
evidencing shares of Common Stock and to receive any other funds payable
pursuant to this Section 7 upon such surrender and following the Exchange
Date.
(f) No fractional shares or script representing fractional shares of Common
Stock shall be issued upon the exchange of any shares of AR Preferred Stock.
In lieu of any fractional interest in a share of Common Stock which would
otherwise be deliverable upon the exchange of a share of AR Preferred Stock,
the Company shall, at its election, either (i) sell such fractional share, as
agent for the person entitled thereto, and distribute the proceeds of such
sale, net of any discounts, commissions, fees or expenses associated with such
sale, to such person, all in accordance with applicable rules under the
Securities Act of 1933, as amended, or (ii) pay to the holder entitled thereto
an amount in cash (computed to the nearest cent) equal to the current value
such fraction represents of the Current Market Price, or (iii) round such
fractional share otherwise issuable to any holder up to the nearest whole
number of shares of Common Stock. If more than one share shall be surrendered
for exchange by the same holder, the number of full shares of Common Stock
issuable upon exchange thereof shall be computed on the basis of the aggregate
number of shares of AR Preferred Stock so surrendered.
SECTION 8. Status of Reacquired Shares. If shares of AR Preferred Stock are
redeemed pursuant to Section 6 or exchanged pursuant to Section 7, the shares
so reacquired shall, upon compliance with any statutory requirements, assume
the status of authorized but unissued shares of preferred stock of the
Company, but may not be reissued as AR Preferred Stock.
SECTION 9. Preemptive Rights. The AR Preferred Stock is not entitled to any
preemptive or subscription rights in respect of any securities of the Company.
SECTION 10. Notices. Except as otherwise provided herein, all notices,
requests, demands, and other communications hereunder shall be in writing and
shall be deemed to have been duly given if delivered by and when sent by telex
or telecopier (with receipt confirmed), provided a copy is also sent by
express (overnight, if possible) courier, addressed (i) in the case of a
holder of AR Preferred Stock, to such holder's address as it appears on the
books of the Company, and (ii) in the case of the Company, to the Company's
principal executive offices to the attention of the Company's Chief Executive
Officer or President.
SECTION 11. Severability of Provisions. Whenever possible, each provision
hereof shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof would be valid or
enforceable if a period of time were extended or shortened or a particular
percentage were increased or decreased, then such court may make such change
as shall be necessary to render the provision in question effective and valid
under applicable law.
IN WITNESS WHEREOF, El Paso Natural Gas Company has caused this Certificate
of Designation to be duly executed by its duly authorized officer and attested
by its Secretary this day of , 199 .
6
<PAGE>
EXHIBIT C TO
AGREEMENT AND PLAN OF MERGER
DEBT REALIGNMENT PLAN
(Capitalized terms used but not otherwise defined herein have the meanings
ascribed to them in the Agreement and Plan of Merger to which this is
attached.)
1. On or prior to the effectiveness of the Spinoffs (which will occur prior to
the Merger), Tenneco shall, or shall cause Tennessee Gas Pipeline Company
("TGP") and/or Tenneco Credit Corporation ("TCC") to, tender for, redeem,
prepay, defease or let mature, or cause Industrial Subsidiary to offer to
exchange its debt for, one or more of the issues of Consolidated Debt (as
defined below) (collectively, the "Debt Realignment"). Concurrently with
the Debt Realignment, Tenneco, TGP and TCC will solicit the consent of the
holders of such Consolidated Debt to provide that the relevant debt
instruments are amended and that the tendered-for debt is accepted in each
case immediately before the Spinoffs. Tenneco reserves the right to
determine whether or not it, TGP and/or TCC tenders for, redeems, prepays,
defeases, lets mature or leaves outstanding, or causes Industrial
Subsidiary to offer to exchange its debt for, any particular issue of
Consolidated Debt. The term "Consolidated Debt" means indebtedness for
money borrowed of Tenneco and its consolidated Energy Subsidiaries
(including accrued and accreted interest and fees and expenses).
2. There will not be any restriction on the right of Tenneco and/or its
consolidated subsidiaries to incur after the date of the Agreement and Plan
of Merger and on or prior to the closing of the Merger additional
Consolidated Debt.
3. Tenneco shall, at its expense, have the sole right and authority to, and
will use its commercially reasonable efforts to, have in place a credit
facility for itself (with such guarantees of its obligations thereunder by
the Energy Subsidiaries as it deems necessary) in an aggregate principal
amount sufficient (together with other funds available to Tenneco) to fund
such tenders, redemptions, prepayments, defeasances and maturities; to pay
all the fees, costs and expenses incurred by Tenneco and its subsidiaries
in preparing for, negotiating and effecting the Spinoffs, the Merger and
the Debt Realignment and any financings in connection therewith; and for
other general corporate purposes (including, without limitation, working
capital, the repayment or refinancing of Consolidated Debt and the payments
of dividends). This facility shall be in effect at, and have a maturity
date at least 180 days following, the Effective Time. The aggregate amount
of debt including accrued and accreted interest and fees and expenses
outstanding as of the Effective Time under this facility is hereinafter
called the "Tenneco Revolving Debt". Acquiror shall cooperate with Tenneco
in arranging such facility and will provide, effective as of the Effective
Time, such credit support and undertakings as shall be reasonably requested
of it by the providers thereof.
4. All aspects of (x) the Debt Realignment and any financing thereof, and (y)
the terms of any consents solicited in respect of or amendments with
respect to Consolidated Debt, shall be controlled solely and exclusively by
Tenneco. As appropriate, Tenneco shall consult with and update Acquiror
from time to time in respect thereof, and Acquiror shall cooperate with
Tenneco in connection therewith. Tenneco shall select in its sole
discretion the dealer manager for any and all consent solicitations, debt
tenders and debt exchanges in respect of Consolidated Debt.
Tenneco and Industrial Subsidiary shall have the right, in their sole
discretion, to fix the timing, tender and/or exchange prices, conditions
and other terms of and the strategy and amounts of the fees, costs and
expenses payable with respect to any and all such consent solicitations,
tenders and exchanges.
5. Tenneco, Industrial Subsidiary and Acquiror shall comply with all
applicable securities, blue sky and other laws in connection with the Debt
Realignment Plan and the other transactions contemplated hereunder.
6. Industrial Subsidiary shall transfer to Tenneco on or prior to the
Effective Time all Consolidated Debt acquired by it in any exchange offer
undertaken by it.
1
<PAGE>
7. Adjustments shall be made in respect of Consolidated Debt outstanding as of
the Effective Time as set forth in the Debt and Cash Allocation Agreement
attached as Exhibit C to the Distribution Agreement.
8. Notwithstanding anything contained herein, (a) contemporaneously with the
Spinoffs, Tenneco and the Energy Subsidiaries shall be removed as obligor
under (and released from liability with respect to) any indebtedness for
borrowed money for which Tenneco or its subsidiaries are liable and which
are assumed by the Industrial Subsidiary or the Shipbuilding Subsidiary,
(b) any Tenneco Revolving Debt shall be prepayable without penalty, subject
to customary notice provisions, (c) in respect of publicly-traded
Consolidated Debt, between the date of the Merger Agreement and the
Effective Time there shall be no (i) extension of maturity or average life,
(ii) increase in interest rates or (iii) adverse change in defeasance or
redemption provisions with respect to any indebtedness for borrowed money
for which Tenneco or the Energy Subsidiaries will be liable on or after the
Effective Time and (d) except for the Tenneco Revolving Debt, no
indebtedness for borrowed money of Tenneco or the Energy Subsidiaries at
the Effective Time shall contain any affirmative or negative financial or
operational covenants other than ones that are (x) mutually acceptable to
Tenneco and Acquiror or (y) no more restrictive in the aggregate and
substantially equivalent to those set forth in the Indenture dated as of
January 1, 1992 of El Paso Natural Gas Company as in effect as of the date
of the Merger Agreement (other than Section 10.05 of the Indenture).
2
<PAGE>
TENNECO INC.
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF JUNIOR PREFERRED STOCK
BY RESOLUTIONS OF THE BOARD OF DIRECTORS
PROVIDING FOR AN ISSUE OF 2,000,000
SHARES OF JUNIOR PREFERRED STOCK DESIGNATED
" % CUMULATIVE JUNIOR PREFERRED STOCK, SERIES A"
----------------
I, , , of Tenneco Inc. (hereinafter referred to as the
"Corporation"), a corporation organized and existing under the General
Corporation Law of the State of Delaware, in accordance with the provisions of
Section 151 thereof, DO HEREBY CERTIFY:
That pursuant to authority conferred upon the Board of Directors by the
Certificate of Incorporation of said Corporation, as amended (the "Certificate
of Incorporation"), the Board of Directors is authorized to issue Junior
Preferred Stock, without par value, of the Corporation ("Junior Preferred
Stock") in one or more series, and the Board of Directors (i) has authorized
the issuance of the series of Junior Preferred Stock hereinafter provided for,
and (ii) has authorized a special committee of the Board of Directors (the
"Junior Preferred Stock Issuance Committee") to adopt the resolutions set
forth below creating a series of 2,000,000 shares of Junior Preferred Stock,
without par value, designated as % Cumulative Junior Preferred Stock,
Series A.
That the Junior Preferred Stock Issuance Committee has adopted the following
resolution:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation by the Certificate of Incorporation and the authority
vested by such Board in a Junior Preferred Stock Issuance Committee, all of
the members of which are members of such Board, a series of Junior
Preferred Stock, without par value, of the Corporation (the "Junior
Preferred Stock") be, and hereby is created, to be designated " %
Cumulative Junior Preferred Stock, Series A" (hereinafter referred to as
the "Series A Preferred Stock"), consisting of 2,000,000 shares, and the
designations, powers, preferences and relative and other special rights and
the qualifications, limitations and restrictions of the Series A Preferred
Stock, are hereby fixed and stated to be as follows (all terms used herein
which are defined in the Certificate of Incorporation shall be deemed to
have the meanings provided therein):
Section 1. Dividends. (a) The dividend rate on the Series A Preferred
Stock shall be $ per annum ($ per quarter-year). Dividends
(including Additional Dividends (as defined in Section 2)) on shares of the
Series A Preferred Stock shall accrue, whether or not declared, on a daily
basis from the date of issuance of such shares. Accrued but unpaid
dividends shall not bear interest.
(b) Dividends on the Series A Preferred Stock shall be payable, when, as
and if declared by the Board of Directors of the Corporation out of assets
legally available therefor, quarter-yearly on the last days of March, June,
September and December in each year (each, a "Dividend Payment Date"), with
the first dividend payment date being the next Dividend Payment Date
following the date of issuance. Dividends will be payable to holders of
record of the Series A Preferred Stock as they appear on the stock books of
the Corporation on such record dates, not more than 60 days preceding the
Dividend Payment Dates. Dividends payable on the Series A Preferred Stock
for any period shorter than a quarter-yearly dividend period shall be
computed on the basis of a 360-day year of twelve 30-day months. The Series
A Preferred Stock shall rank on a parity with each other series of Junior
Preferred Stock as to the payment of dividends, except to the extent
otherwise provided in Section 7 hereof or in the resolution or resolutions
providing for the issuance of such other series.
(c) If (x) the Stock Issuance (as defined in the Amended and Restated
Agreement and Plan of Merger, dated as of , 1996, as such may be
amended or supplemented from time to time (the "Merger Agreement") among
the Corporation, El Paso Natural Gas Company, a Delaware corporation ("El
Paso") and El Paso Merger Company, a Delaware corporation) is not approved
by the stockholders of El Paso (as hereinafter defined) at a special
meeting of El Paso stockholders (including any adjournments or
postponements thereof, the "El Paso Special Meeting") called to approve
such issuance, (y) the Merger (as
<PAGE>
defined in the Merger Agreement) is effected, and (z) on or before the 30th
day after the date of the El Paso Special Meeting, either Standard & Poor's
Corp. or Moody's Investors Service, Inc., downgrades the rating previously
given by it to the Series A Preferred Stock (the "Revised Ratings"), the
annual dividend rate set forth in (a) above will be automatically subjected
to a one-time upward adjustment by the amount set forth in the table below
opposite the applicable Revised Rating, effective as of the date of
original issuance of the Series A Preferred Stock.
<TABLE>
<CAPTION>
ANNUAL
DIVIDEND
RATE
REVISED RATINGS (MOODY'S/S&P) INCREASE
----------------------------- --------
<S> <C>
Ba1/BBB- or Baa3/BB+............................................. %
Ba1/BB+.......................................................... %
Ba2/BB+ or Ba1/BB................................................ %
Ba2/BB........................................................... %
Ba3/BB or BA2/BB-................................................ %
Ba3/BB-.......................................................... %
</TABLE>
If any such adjustment to the annual dividend rate occurs after a
Dividend Payment Date as to which the Corporation previously paid dividends
on the Series A Preferred Stock, additional dividends will be payable on
each share of Series A Preferred Stock on the next succeeding Dividend
Payment Date (or if such adjustment occurs after the dividend payable on
the next succeeding Dividend Payment Date has been declared, on the second
succeeding Dividend Payment Date following the date of such adjustment) to
the holder of record of such share of Series A Preferred Stock as of the
record date established for such succeeding Dividend Payment Date (or
second succeeding Dividend Payment Date, as the case may be) in an amount
equal to the excess of (x) the aggregate amount of dividends that would
have been payable on such share on all Dividend Payment Dates as to which
the Corporation previously paid dividends on the Series A Preferred Stock
if dividends accrued from the date of issuance of the Series A Preferred
Stock at the adjusted annual dividend rate over (y) the aggregate amount of
dividends actually paid with respect to such share of Series A Preferred
Stock. If the annual dividend rate is adjusted as provided above, the
Corporation will cause notice of such adjustment to be sent to the holders
of record of the Series A Preferred Stock as they appear in the stock
register of the Corporation.
Section 2. Changes in the Dividends Received Percentage. (a)
Notwithstanding Section 1 hereof, if one or more amendments to the Internal
Revenue Code of 1986, as amended (the "Code"), are enacted that reduce the
percentage of the dividends received deduction as specified in Section
243(a)(1) of the Code or any successor provision (the "Dividends Received
Percentage") to below 70%, the amount of each dividend payable per share of
the Series A Preferred Stock for dividend payments made on or after the
effective date of such change (or the second succeeding dividend payment
after such effective date, as hereinafter described) will be adjusted by
multiplying the amount of the dividend payable pursuant to Section 1
(before adjustment) by a factor, which will be the number determined in
accordance with the following formula (the "DRD Formula"), and rounding the
result to the nearest cent:
1 - (.35 (1 - .70))
-------------------------
1 - (.35 (1 - DRP))
For the purposes of the DRD Formula, "DRP" means the Dividends Received
Percentage applicable to the dividend in question. No amendment to the
Code, other than a change in the percentage of the dividends received
deduction set forth in Section 243(a)(1) of the Code or any successor
provision, will give rise to an adjustment. Notwithstanding the foregoing
provisions of this Section 2, in the event that, with respect to any such
amendment, the Corporation receives either an unqualified opinion of
nationally recognized independent tax counsel selected by the Corporation
or a private letter ruling or similar form of authorization from the
Internal Revenue Service to the effect that such an amendment would not
apply to dividends payable on the Series A Preferred Stock, then any such
amendment will not result in the adjustment provided for pursuant to the
DRD Formula. The opinion referenced in the previous sentence must be based
upon a specific exception in the legislation amending the DRP or upon a
published
2
<PAGE>
pronouncement of the Internal Revenue Service addressing such legislation.
The Corporation's calculation of the dividends payable, as so adjusted and
as certified accurate as to calculation and reasonable as to method by the
independent public accountants then regularly engaged by the Corporation,
will be final and not subject to review absent manifest error.
(b) If any amendment to the Code which reduces the Dividends Received
Percentage to below 70% is enacted after a dividend payable on a Dividend
Payment Date has been declared but prior to the applicable dividend payment
date, the amount of dividend payable on such Dividend Payment Date will not
be increased. Instead, an amount, equal to the excess of (x) the product of
the dividends paid by the Corporation on such Dividend Payment Date and the
factor derived from the DRD Formula (where the DRP used in the DRD Formula
would be equal to the reduced Dividends Received Percentage for such
dividends) over (y) the dividends paid by the Corporation on such Dividend
Payment Date, will be payable to holders of record as of the record date
established for the next succeeding Dividend Payment Date in addition to
any other amounts payable on such date. Notwithstanding the foregoing, no
such additional dividend will be payable pursuant to this Section 2 if such
amendment to the Code would not result in an adjustment to the DRD Formula
due to the Corporation having received either an opinion of counsel or tax
ruling referred to in paragraph (a) of this Section 2.
(c) If, prior to January 2, 1997, an amendment to the Code is enacted
that reduces the Dividends Received Percentage to below 70% and such
reduction retroactively applies to a Dividend Payment Date as to which the
Corporation previously paid dividends on the Series A Junior Preferred
Stock (each an "Affected Dividend Payment Date"), additional dividends (the
"Additional DRD Dividends") will be payable out of funds legally available
therefor on the next succeeding Dividend Payment Date (or if such amendment
is enacted after the dividend payable on such Dividend Payment Date has
been declared, on the second succeeding Dividend Payment Date following the
date of enactment) to holders of record as of the record date established
for such succeeding Dividend Payment Date in an amount equal to the excess
of (x) the product of the dividends paid by the Corporation on each
Affected Dividend Payment Date and the factor derived from the DRD Formula
(where the DRP used in the DRD Formula would be equal to the reduced
Dividends Received Percentage applied to each Affected Dividend Payment
Date), over (y) the dividends paid by the Corporation on all Affected
Dividend Payment Dates.
(d) Additional DRD Dividends will not be payable in respect of the
enactment of any amendment to the Code on or after January 2, 1997 which
retroactively reduces the Dividends Received Percentage to below 70%, or if
enacted prior to January 2, 1997, which would not result in an adjustment
due to the Corporation having received either an opinion of counsel or tax
ruling referred to in clause (a) of this Section 2. The Corporation shall
only be required to make one payment of Additional DRD Dividends.
(e) In the event that the amount of dividends payable per share of the
Series A Preferred Stock are adjusted pursuant to the DRD Formula and/or
Additional DRD Dividends are to be paid, the Corporation shall cause notice
of each such adjustment and, if applicable, any Additional DRD Dividends,
to be sent to the holders of record of the Series A Preferred Stock as they
appear in the stock register of the Corporation.
Section 3. Optional Redemption. (a) At any time or from time to time, on
or after , 2001, the Series A Preferred Stock may be redeemed at the
option of the Corporation, in whole or in part, at a redemption price equal
to $50.00 per share, plus accrued and unpaid dividends (whether or not
declared) to but excluding the date fixed for redemption including any
changes in dividends payable due to changes in the annual dividend rate or
Dividends Received Percentage, and Additional DRD Dividends if any. If full
cumulative dividends on the Series A Preferred Stock for all past dividend
periods have not been paid or declared and set apart for payment, the
Series A Preferred Stock shall not be redeemed in part by the Corporation
pursuant to this clause (a) and the Corporation shall not purchase or
acquire any shares of Series A Preferred Stock other than pursuant to
Section 4 hereof or pursuant to a purchase or exchange offer made on the
same terms to all holders of the Series A Preferred Stock. If fewer than
all the outstanding shares of
3
<PAGE>
Series A Preferred Stock are to be redeemed, the Corporation will select
those to be redeemed pro rata, by lot or by a substantially equivalent
method.
(b) If the Dividends Received Percentage is equal to or less than %
and, as a result, the amount of dividends on the Series A Preferred Stock
payable on any Dividend Payment Date will be or is adjusted upwards as
provided in Section 2, the Corporation, at its option, may redeem all, but
not less than all, of the outstanding shares of the Series A Preferred
Stock, provided that within 60 days of the date on which an amendment to
the Code is enacted which reduces the Dividends Received Percentage to %
or less, the Corporation gives notice of redemption as provided in
paragraph (d) of this Section 3 to all holders of record of the Series A
Preferred Stock. A redemption of the Series A Preferred Stock in accordance
with this paragraph (b) shall be at the applicable redemption price set
forth in the following table, in each case plus an amount equal to accrued
and unpaid dividends (whether or not declared) thereon to but excluding the
date fixed for redemption, including any changes in dividends payable due
to changes in the annual dividend rate or Dividends Received Percentage,
and Additional Dividends, if any:
<TABLE>
<CAPTION>
REDEMPTION
PRICE PER
REDEMPTION PERIOD SHARE
----------------- ----------
<S> <C>
, 1996 to , 1997....................................... $
, 1997 to , 1998.......................................
, 1998 to , 1999.......................................
, 1999 to , 2000.......................................
, 2000 to , 2001.......................................
, 2001 and thereafter......................................
</TABLE>
(c) If at any time fewer than 200,000 shares of Series A Preferred Stock
remain outstanding, the Corporation, at its option, may redeem all, but not
less than all, of the outstanding Series A Preferred Stock. A redemption of
the Series A Preferred Stock in accordance with this clause (c) shall be at
the applicable redemption price set forth in the following table, in each
case plus an amount equal to accrued but unpaid dividends (whether or not
declared thereon) to but excluding the date fixed for redemption, including
any changes in dividends payable due to changes in the annual dividend rate
or the Dividends Received Percentage, and Additional DRD Dividends, if any:
<TABLE>
<CAPTION>
REDEMPTION
PRICE PER
REDEMPTION PERIOD SHARE
----------------- ----------
<S> <C>
Date of Issuance to , 1997........................... $
, 1997 to , 1998........................... $
, 1998 to , 1999........................... $
, 1999 to , 2000........................... $
, 2000 to , 2001........................... $
, 2001 and thereafter................................ $
</TABLE>
(d) Notice of redemption pursuant to paragraph (a), (b) or (c) of this
Section 3 will be given by mail, (i) not less than 30 days prior to the
date fixed for redemption thereof in the case of paragraph (a) and (ii) not
less than 30 nor more than 60 days prior to the date fixed for redemption
thereof, in the case of paragraphs (b) and (c), in each case to each record
holder of the shares of Series A Preferred Stock to be redeemed at the
address of such holder in the stock register of the Corporation. If a
notice of redemption has been given, from and after the specified
redemption date (unless the Corporation defaults in making payment of the
redemption price), dividends on the Series A Preferred Stock so called for
redemption will cease to accrue, such shares will no longer be deemed to be
outstanding, and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive the redemption price) will cease.
Subject to applicable escheat and similar abandoned property laws, any
moneys set aside by the Corporation for such redemption and unclaimed at
the end of six months from the redemption date shall revert to the general
funds of the Corporation, after which reversion the holders of such shares
so called for redemption shall look only to the general funds of the
Corporation for the payment of the amounts payable upon such redemption.
Any interest accrued on funds so deposited shall be paid to the Corporation
from time to time.
4
<PAGE>
Section 4. Mandatory Redemption. Upon the occurrence of a Mandatory
Redemption Event, the Corporation shall redeem out of funds legally
available therefor all of the outstanding shares of Series A Preferred
Stock on a date (the "Mandatory Redemption Date") not more than 60 days
after the date of such Mandatory Redemption Event at $ per share plus an
amount equal to accrued and unpaid dividends (whether or not declared)
thereon to but excluding the Mandatory Redemption Date including any
changes in dividends payable due to changes in the annual dividend rate or
Dividends Received Percentage, and Additional Dividends, if any.
A "Mandatory Redemption Event" shall mean the earliest to occur of the
following events:
(i) the Transaction (as defined below) shall have been subjected to a
vote by the stockholders of the Corporation at the Tenneco Special
Meeting and shall not have been approved; (ii) the Transaction shall
not have been approved by the requisite vote of the stockholders of the
Corporation entitled to vote thereon on or prior to March 31, 1997; and
(iii) the Corporation shall not have accepted on or prior to March 31,
1997 any indebtedness of the Corporation and its subsidiaries tendered
to it pursuant to the cash tender offers made by it pursuant to the
Transaction.
"Transaction" means the reorganization of the Corporation pursuant to
which (i) the Corporation and its subsidiaries will, pursuant to a
Distribution Agreement dated as of , 1996 (as such may be
amended, supplemented or modified from time to time among the Corporation,
New Tenneco Inc., a newly formed wholly-owned subsidiary of the Corporation
("New Tenneco"), and Newport News Shipbuilding Inc., a wholly-owned
subsidiary of the Corporation ("Newport News"), undertake various
intercompany transfers and distributions designed to restructure, divide
and separate their various businesses and assets so that all of the assets,
liabilities and operations of (A) their automotive parts, packaging and
administrative services businesses ("Industrial Business") are owned and
operated by New Tenneco, and (B) their shipbuilding business ("Shipbuilding
Business") are owned and operated by Newport News; (ii) the Corporation
will then distribute pro rata to holders of Common Stock all of the
outstanding common stock of New Tenneco and Newport News; and (iii)
thereafter a subsidiary of El Paso will merge with and into the
Corporation, which will then consist of the remaining existing and
discontinued operations of the Corporation and its subsidiaries other than
those relating to the Industrial Business or the Shipbuilding Business,
including the transmission and marketing of natural gas, pursuant to the
Merger Agreement.
Notice of redemption pursuant to this Section 4 will be given by mail,
not less than 30 nor more than 60 days prior to the Mandatory Redemption
Date to each record holder of shares of Series A Preferred Stock at the
address of such holder in the stock register of the Corporation. If a
notice of redemption has been given, from and after the Mandatory
Redemption Date (unless the Corporation defaults in making payment of the
redemption price), dividends on the Series A Preferred Stock will cease to
accrue, such shares will no longer be deemed to be outstanding, and all
rights of the holders thereof as stockholders of the Corporation (except
the right to receive the redemption price) will cease. Subject to
applicable escheat and similar abandoned property laws, any moneys set
aside by the Corporation for such redemption and unclaimed at the end of
six months from the Mandatory Redemption Date shall revert to the general
funds of the Corporation, after which reversion the holders of such shares
so called for redemption shall look only to the general funds of the
Corporation for the payment of the amounts payable upon such redemption.
Any interest accrued on funds so deposited shall be paid to the Corporation
from time to time.
Section 5. Voting. The Series A Preferred Stock shall have the following
voting rights:
(a) Each share of Series A Preferred Stock shall entitle the holder
thereof to one vote on all matters submitted to a vote of the holders
of Series A Preferred Stock.
(b) The holders of Series A Preferred Stock, voting as a separate
series from all other series of Junior Preferred Stock and classes of
capital stock, but together as a single class with the holders of %
Cumulative Junior Preferred Stock, Series B, of the Corporation
("Series B Preferred Stock") and each other class or series ranking on
parity with respect to dividends with the Series A Preferred
5
<PAGE>
Stock and Series B Preferred Stock and having substantially the same
voting rights (together with the Series A Preferred Stock and Series B
Preferred Stock, the "Voting Preferred Stock"), shall be entitled, at
each annual meeting of stockholders of the Corporation, to elect a
number of directors of the Corporation equivalent to the smallest
number, representing at least one-sixth of the number of members of the
Board of Directors as if there were no vacancies or unfilled newly
created directorships on such Board, which number shall not give effect
to any directors elected pursuant to paragraph (c) below. Any director
so elected shall hold office until the next annual meeting and until
his or her successor shall be elected and qualify, subject, however, to
prior death, resignation, retirement, disqualification or removal from
office.
A director elected pursuant to the terms of this paragraph (b) may be
removed without cause only by the holders of a majority in voting power
of the outstanding Voting Preferred Stock, entitled to vote in an
election of such director.
At such time as all shares of the Voting Preferred Stock shall cease
to be outstanding, the term of office of any director elected pursuant
to this paragraph (b), or his or her successor, shall automatically
terminate.
(c) Whenever, at any time or times, dividends payable on the Series A
Preferred Stock shall be in arrears for dividend periods, whether or
not consecutive, containing in the aggregate a number of days
equivalent to six calendar quarters, the holders of outstanding Series
A Preferred Stock shall have the exclusive right, in addition to their
rights under (b) above, voting together with the Voting Junior
Preferred Stock but as a separate series from all other series of
Junior Preferred Stock and classes of capital stock of the Corporation,
at each meeting of the stockholders held for the purpose of electing
directors, to elect two directors of the Corporation, until such time
as all dividends accumulated on the Series A Preferred Stock and in
arrears shall have been paid in full or declared and set apart for
payment, at which time the right of the holders of the Series A
Preferred Stock to vote pursuant to the provisions of this clause (c)
shall terminate, subject to revesting in the event of each and every
subsequent default of the character and for the time above mentioned.
At any time when voting rights shall, pursuant to the provisions of
this clause (c), be vested in the Series A Preferred Stock, the number
of directors of the Corporation shall be automatically increased, to
the extent necessary, so that two directors may be elected by the
holders of the Series A Preferred Stock, voting together with all other
Voting Preferred Stock, and a proper officer of the Corporation shall,
upon the written request of the holders of record of at least ten
percent in aggregate liquidation value of the Series A Preferred Stock
then outstanding and other outstanding Voting Preferred Stock then
entitled to vote in such election, addressed to the Secretary of the
Corporation, call a special meeting of holders of the Series A
Preferred Stock and of any other class or series of Voting Preferred
Stock then entitled to vote in such election. Such meeting shall be
held at the earliest practicable date but in no event shall a special
meeting be held if the annual meeting of stockholders of the
Corporation is to be held within 90 days of the receipt by the
Secretary of the Corporation of such request. If such meeting shall not
be called by the proper officer of the Corporation as required within
20 days after personal service of the said written request upon the
Secretary of the Corporation, or within 20 days after mailing the same
within the United States of America by certified or registered mail,
return receipt requested, addressed to the Secretary of the Corporation
at its principal office (such mailing to be evidenced by the registry
receipt issued by the postal authorities), then the holders of record
of at least ten percent of the aggregate liquidation value of the
Series A Preferred Stock then outstanding and other outstanding Voting
Preferred Stock then entitled to vote in such election may designate in
writing one of their number to call such meeting, and such meeting may
be called by such person designated upon the notice required for annual
meetings of stockholders but in no event shall a special meeting be
held if the annual meeting of stockholders of the Corporation is to be
held within 90 days of the receipt by the Secretary of the Corporation
of such request. Any holder of the Voting Junior Preferred Stock so
designated shall have access to the stock books of the Corporation for
the purpose of causing a meeting of stockholders to be called pursuant
to these provisions.
6
<PAGE>
Upon any termination of the right of the holders of the Series A
Junior Preferred Stock to vote for directors as a class as provided in
this clause (c), the term of office of the directors so elected in
accordance with this paragraph (c) shall automatically terminate and
the number of directors shall be reduced accordingly.
(d) At any meeting so called pursuant to paragraph (c) above, and at
any other meeting of stockholders held for the purpose of electing
directors at which the holders of the Voting Junior Preferred Stock
shall have the right to elect directors as provided in paragraph (b) or
paragraph (c) above, the presence in person or by proxy of a majority
in voting power of the outstanding shares of the Voting Junior
Preferred Stock shall be required to constitute a quorum thereof for
the election of any director by the holders of the Voting Junior
Preferred Stock.
At any such meeting or adjournment thereof, (x) the absence of a
quorum of the Voting Junior Preferred Stock, shall not prevent the
election of directors other than those to be elected by the Voting
Junior Preferred Stock and the absence of a quorum for the election of
such other directors shall not prevent the election of the directors to
be elected by the Voting Junior Preferred Stock, and (y) in the absence
of either or both such quorums, a majority in voting power of the
holders present in person or by proxy of the stock or stocks which lack
a quorum shall have power to adjourn the meeting, subject to applicable
law, for the election of directors which they are entitled to elect
from time to time without notice other than announcement at the meeting
until a quorum shall be present.
(e) If by reason of any resignation, retirement, disqualification,
death or removal there are not in office all such directors that the
holders of the Voting Junior Preferred Stock are entitled to elect
pursuant to paragraph (c), then any such vacancy shall be filled only
by the remaining director elected by such holders or, only in the event
there is no such remaining director, by the holders of the Voting
Preferred Stock entitled to vote thereon. If by reason of any
resignation, retirement, disqualification, death or removal there are
not in office all such directors that the holders of the Voting
Preferred Stock are entitled to elect pursuant to paragraph (b), then
any such vacancy shall be filled by a majority of the remaining
directors elected by such holders or, in the event there are no such
remaining directors, by the majority vote of the remaining directors
then constituting the Board of Directors.
Promptly after the right of the holders of the Voting Preferred Stock
to fill any vacancy as set forth in the immediately preceding paragraph
arises, the Board of Directors may cause a special meeting of the
holders of Voting Preferred Stock entitled to vote thereon, to be held
for the purpose of filling such vacancy and such vacancy shall be
filled at any such special meeting. Such meeting shall be held at the
earliest practicable date but in no event shall a special meeting be
held if the annual meeting of stockholders of the Corporation is to be
held within 90 days of the occurrence of such vacancy.
Notwithstanding the immediately preceding paragraph, at any time
after the right of the holders of the Voting Preferred Stock to fill
any vacancy as set forth above in the first paragraph of this paragraph
(e) arises, a proper officer of the Corporation shall, upon the written
request of the holders of record of at least ten percent in aggregate
liquidation value of the Voting Preferred Stocks then outstanding,
addressed to the Secretary of the Corporation, call a special meeting
of holders of the Voting Preferred Stock entitled to vote thereon. Such
meeting shall be held at the earliest practicable date but in no event
shall a special meeting be held if the annual meeting of stockholders
of the Corporation is to be held within 90 days of the occurrence of
such vacancy. If such meeting shall not be called by the proper officer
of the Corporation as required within 20 days after personal service of
the said written request upon the Secretary of the Corporation, or
within 20 days after mailing the same within the United States of
America by registered mail addressed to the Secretary of the
Corporation at its principal office (such mailing to be evidenced by
the registry receipt issued by the postal authorities), then the
holders of record of at least ten percent of the aggregate liquidation
value of the Voting Junior Preferred Stocks then outstanding and
entitled to vote thereon may designate in writing one of their number
to call such meeting, and such meeting may be called by such person
designated upon the notice required for annual meetings of stockholders
and shall be held at the place at which
7
<PAGE>
the last preceding annual meeting of the stockholders of the
Corporation was held. Any holder of the Voting Junior Preferred Stock
so designated shall have access to the stock books of the Corporation
for the purpose of causing a meeting of stockholders to be called
pursuant to these provisions.
(f) So long as any shares of Series A Junior Preferred Stock or
Series B Junior Preferred Stock are outstanding, the Corporation shall
not, without the consent of the holders of at least a majority in
voting power of the outstanding shares of Series A Junior Preferred
Stock and Series B Junior Preferred Stock, voting together as a single
class, given in person or by proxy, either in writing or by vote at an
annual meeting or a special meeting called for that purpose:
(A) issue any additional class of stock or any additional
series of Junior Preferred Stock ranking, in each case, prior to
or on parity with the Series A Preferred Stock and Series B
Junior Preferred Stock as to the payment of dividends or as to
the distribution of assets on liquidation, dissolution or
winding up;
(B) issue any obligation or security convertible into shares
of stock ranking prior to or on parity with the Series A
Preferred Stock and Series B Preferred Stock as to the payment
of dividends or as to the distribution of assets on liquidation,
dissolution or winding up.
Section 6. Restrictions on Dividends and Stock Repurchases. So long as
any shares of Series A Preferred Stock or Series B Preferred Stock shall
remain outstanding, (a) in no event shall any dividends whatsoever, whether
in cash, stock or otherwise, be paid or declared, or any distribution be
made on any stock ranking junior to the Series A Preferred Stock and Series
B Preferred Stock, unless all dividends of the Series A Preferred Stock and
Series B Preferred Stock for all past dividend periods shall have been
paid, or declared and a sum sufficient for the payment of such dividends
set apart, and (b) during the continuance of any default in the payment of
dividends on, or any mandatory redemption obligations of the Corporation in
respect of, the Series A Preferred Stock or Series B Preferred Stock, the
Corporation shall not purchase, redeem or otherwise acquire for value any
shares of Series A Preferred Stock or Series B Preferred Stock or any
shares of any other stock ranking on a parity with the Series A Preferred
Stock and Series B Preferred Stock as to the payment of dividends or as to
the distribution of assets on liquidation, dissolution or wind up without
the consent, given in person or by proxy, either in writing or by vote at
an annual meeting or at a special meeting called for that purpose, of the
holders of at least a majority in voting power of the outstanding shares of
Series A Preferred Stock and Series B Preferred Stock, voting together as a
single class, present in person or by proxy at such meeting, provided that
a quorum, consisting of at least a majority in voting power of the then
outstanding shares of Series A Preferred Stock and Series B Preferred
Stock, voting together as a single class, is present.
Section 7. Ranking. (a) Any class or series of stock of the Corporation
shall be deemed to rank:
(i) prior to the Series A Preferred Stock and Series B Preferred
Stock, as to the payment of dividends or as to distributions of assets
upon liquidation, dissolution or winding up, as the case may be, if the
holders of such class or series shall be entitled to the receipt of
dividends or of amounts distributable upon liquidation, dissolution or
winding up, as the case may be, in preference or priority to the
holders of Series A Preferred Stock and Series B Preferred Stock;
(ii) on a parity with the Series A Preferred Stock and Series B
Preferred Stock as to the payment of dividends, whether or not the
dividend rates or dividend payment dates thereof be different from
those of the Series A Preferred Stock or Series B Preferred Stock, if
the holders of such class or series of stock and the holders of the
Series A Preferred Stock and Series B Preferred Stock shall be entitled
to the receipt of dividends in proportion to their respective amounts
of accrued and unpaid dividends per share, without preference or
priority one over the other, and on a parity with the Series A
Preferred Stock and Series B Preferred Stock as to the distribution of
assets upon liquidation, dissolution or winding up, whether or not the
liquidation prices per share thereof be different from those of the
Series A Preferred Stock or Series B Preferred Stock, if the holders of
such class or series of stock and the holders of the Series A Preferred
Stock and Series B Preferred Stock shall be entitled to the receipt of
amounts distributable upon liquidation, dissolution or winding up in
proportion to their respective liquidation preferences, without
preference or priority one over the other; and
8
<PAGE>
(iii) junior to the Series A Preferred Stock and Series B Preferred
Stock, as to the payment of dividends or as to the distribution of
assets upon liquidation, dissolution or winding up, as the case may be,
if the holders of Series A Preferred Stock and Series B Preferred Stock
shall be entitled to receipt of dividends or of amounts distributable
upon liquidation, dissolution or winding up, as the case may be, in
preference or priority to the holders of shares of such class or
series.
(b) Except for the Common Stock, par value $5.00 per share, of the
Corporation (the "Common Stock") and the Series A Participating Junior
Preferred Stock, without par value, of the Corporation (the "Participating
Junior Preferred Stock"), each other class of stock of the Corporation
existing on the date of the adoption of this Certificate shall be deemed to
rank prior to the Series A Preferred Stock and Series B Junior Preferred
Stock both as to the payment of dividends and as to the distribution of
assets upon liquidation, dissolution or winding up. The Series A Preferred
Stock and Series B Preferred Stock shall be deemed to rank on a parity with
each other both as to the payment of dividends and as to the distribution
of assets upon liquidation, dissolution or winding up. The Common Stock and
the Participating Preferred Stock shall be deemed to rank junior to the
Series A Preferred Stock and Series B Preferred Stock both as to the
payment of dividends and as to the distribution of assets upon liquidation,
dissolution or winding up.
Section 8. Status of Redeemed or Acquired Shares. Any shares of Series A
Preferred Stock which shall have been redeemed or otherwise acquired by the
Corporation shall be restored to the status of authorized but unissued
shares of Junior Preferred Stock undesignated as to series.
Section 9. Liquidation Rights. (a) The amount that the holders of Series
A Preferred Stock shall be entitled to receive in the event of any
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary (collectively, a "Liquidation"), shall be
$50.00 per share, plus an amount equal to all accrued and unpaid dividends
to the date of Liquidation including any changes in dividends payable due
to changes in the annual dividend rate or Dividends Received Percentage,
and Additional Dividends, if any, and no more. After such amount is paid in
full, no further distributions or payments shall be made in respect of
shares of Series A Preferred Stock, such shares of Series A Preferred Stock
shall no longer be deemed to be outstanding or be entitled to any powers,
preferences, rights or privileges, including voting rights, and such shares
of Series A Preferred Stock shall be surrendered for cancellation to the
Corporation.
(b) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, then, before any distribution or payment shall
be made to the holders of any class or series of stock of the Corporation
ranking junior to the Series A Preferred Stock and Series B Preferred
Stock, the holders of the Series A Preferred Stock and Series B Preferred
Stock (subject to the rights of the Preferred Stock) shall be entitled to
be paid in full the amounts set forth in paragraph (a) of this Section 9.
After such payment shall have been made in full to the holders of the
Series A Preferred Stock and Series B Preferred Stock, the remaining assets
and funds of the Corporation shall be distributed among the holders of the
stock of the Corporation ranking junior in respect thereof to the Series A
Preferred Stock and Series B Preferred Stock according to their respective
rights. In the event that the assets of the Corporation available for
distribution to holders of Series A Preferred Stock and Series B Preferred
Stock shall not be sufficient to make the payment herein required to be
made in full and to pay in full the liquidation preference on all other
shares of stock of the Corporation ranking on a parity with the Series A
Preferred Stock and Series B Preferred Stock as to amounts distributable
upon dissolution, liquidation or winding up of the Corporation, such assets
shall be distributed to the holders of the respective shares of Series A
Preferred Stock, Series B Preferred Stock and any such other parity stock
pro rata in proportion to the full amounts payable upon the shares of
Series A Preferred Stock, Series B Preferred Stock and any such other
parity stock if all amounts payable thereon were paid in full.
Section 10. Increase in Shares. The number of shares of Series A
Preferred Stock may, to the extent of the Corporation's authorized and
unissued Junior Preferred Stock, be increased and may be decreased (but not
below the number of shares thereof then outstanding) by further resolution
duly adopted by the Board of Directors and the filing and recording of a
certificate pursuant to the provisions of the General Corporation Law of
the State of Delaware stating that such increase or decrease has been so
authorized.
9
<PAGE>
Section 11. Maturity. Unless otherwise redeemed as provided herein, the
term of the Series A Preferred Stock shall be perpetual.
IN WITNESS WHEREOF, said Tenneco Inc. has caused this Certificate to be
signed by , as , this th day of , 1996.
TENNECO INC.
By: _________________________________
Name:
Title:
10
<PAGE>
EXHIBIT F-1 TO
AGREEMENT AND PLAN OF MERGER
ENERGY BUSINESS
PRO FORMA BALANCE SHEET
(UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
1995 PRO FORMA PRO FORMA
ASSETS DEC 31 ADJUSTMENTS BALANCE
------ ------ ----------- ---------
<S> <C> <C> <C>
CURRENT ASSETS:
CASH AND TEMPORARY CASH INVESTMENTS.......... $ 248 $ (212)(6)
(20)(11)
9 (14) $ 25
RECEIVABLES--
CUSTOMER NOTES AND ACCOUNTS (NET).......... 508 (202)(6)
(2)(8)
(1)(11) 303
AFFILIATED COMPANIES....................... 199 (144)(5)
(2)(6) 53
GAS TRANSPORTATION AND EXCHANGE............ 64 64
INCOME TAXES............................... 133 26 (9) 159
OTHER...................................... 436 436
INVENTORIES.................................. 24 24
PREPAYMENTS AND OTHER........................ 83 (22)(8)
4 (10) 65
------ ------- ------
1,695 (566) 1,129
------ ------- ------
INVESTMENTS AND OTHER ASSETS:
INVESTMENT IN AFFILIATED COMPANIES........... 603 (323) (1)
(1)(12) 279
LONG-TERM RECEIVABLES--
NOTES AND OTHER (NET)...................... 352 (22)(2)
(283)(6)
(5)(8) 42
INVESTMENT IN SUBSIDIARIES IN EXCESS OF FAIR
VALUE OF NET ASSETS AT DATE OF ACQUISITION,
LESS AMORTIZATION........................... 22 22
OTHER........................................ 954 31 (7)
(2)(6)
(353)(8)
(16)(14) 614
------ ------- ------
1,931 (974) 957
------ ------- ------
PLANT, PROPERTY AND EQUIPMENT, AT COST......... 6,272 (43)(12) 6,229
LESS--RESERVES FOR DEPRECIATION, DEPLETION
AND AMORTIZATION............................ 3,431 (4)(12) 3,427
------ ------- ------
2,841 (39) 2,802
------ ------- ------
$6,467 $(1,579) $4,888
====== ======= ======
</TABLE>
1
<PAGE>
ENERGY BUSINESS
PRO FORMA BALANCE SHEET
(UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
1995 PRO FORMA PRO FORMA
LIABILITIES AND COMBINED EQUITY DEC 31 ADJUSTMENTS BALANCE
------------------------------- -------- ----------- ---------
<S> <C> <C> <C>
CURRENT LIABILITIES:
SHORT-TERM DEBT (INCLUDING CURRENT
MATURITIES)............................... $ 869 $ (155)(6)
24(11)
(738)(14) --
PAYABLES--
TRADE.................................... 365 13 (2) 378
AFFILIATED COMPANIES..................... 88 (86)(5) 2
GAS TRANSPORTATION AND EXCHANGE.......... 28 28
TAXES ACCRUED.............................. 525 (12)(2)
(500)(3) 13
DEFERRED INCOME TAXES...................... 65 50 (3)
(8)(8) 107
INTEREST ACCRUED........................... 102 (16)(6) 86
NATURAL GAS PIPELINE REVENUE RESERVATION... 27 27
OTHER...................................... 426 (1)(8) 425
-------- ------- ------
2,495 (1,429) 1,066
-------- ------- ------
LONG-TERM DEBT............................... 3,690 (524)(6)
(3,166)(14) --
-------- ------- ------
DEFERRED INCOME TAXES........................ 541 (23)(2)
(5)(3)
11 (4)
(14)(6)
12 (7)
(130)(8)
(103)(13) 289
-------- ------- ------
POSTRETIREMENT BENEFITS...................... 260 (1)(8) 259
-------- ------- ------
DEFERRED CREDITS AND OTHER LIABILITIES....... 481 16 (1)
(32)(4)
(2)(8)
(23)(11)
(4)(13) 436
-------- ------- ------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST............................ 19 19
-------- ------- ------
PREFERRED STOCK WITH MANDATORY REDEMPTION
PROVISIONS.................................. 130 130
-------- ------- ------
COMBINED EQUITY
(1,149) (339)(1)
455 (3)
21 (4)
(58)(5)
8 (6)
19 (7)
(240)(8)
26 (9)
4 (10)
(22)(11)
(40)(12)
107 (13)
3,897 (14) 2,689
-------- ------- ------
(1,149) 3,838 2,689
-------- ------- ------
$6,467 $(1,579) $4,888
======== ======= ======
</TABLE>
2
<PAGE>
ENERGY BUSINESS
NOTES TO PRO FORMA BALANCE SHEET
Pro forma adjustments to reflect certain first quarter 1996 transactions:
(1) Disposition of Tenneco's remaining investment in Case Corp. common
stock.
(2) Tentative settlement of a note receivable and tax issues with ICH, a
company in bankruptcy.
(3) Payment made for settlement of tax issues with the Internal Revenue
Service.
(4) Reflect removal of the Cummins deferred gain which was recognized in
the first quarter of 1996.
Pro forma adjustments to reflect certain events that will occur prior to a
sale transaction:
(5) Capitalize or settle affiliated accounts receivable and accounts
payable.
(6) Reflect the reacquisition by the Automotive/Packaging businesses of
trade accounts receivable from Tenneco Credit Corp., the sale of farm and
construction equipment notes receivable and the retirement of Tenneco
Credit Corp. debt.
(7) Transfer the Energy Business' computer hardware and share of software
development costs held by Tenneco Business Services.
(8) Reflect the assumption by the Automotive/Packaging businesses of
responsibility for the Tenneco Retirement Plan.
(9) Move the Energy Business' portion of state income tax receivable to
the Energy Business.
(10) Move the Energy Business' portion of prepaid insurance to the Energy
Business.
(11) Record dividend by Eastern Insurance of $20 million and transfer of
Eastern's assets and liabilities related to the Automotive/Packaging
businesses.
(12) Transfer Corporate Aviation assets and certain furniture, fixtures
and equipment to the Automotive/Packaging businesses.
(13) Transfer of "other reserves" and recorded pre-distribution income
tax assets and liabilities in accordance with the Tax Sharing Agreement.
(14) Reflect tender for all Tenneco debt and contribution of cash to
reach $25 million.
3
<PAGE>
EXTERNAL BASIS
TENNECO ENERGY
PRO FORMA STATEMENT OF OPERATING INCOME
YEAR ENDED DECEMBER 31, 1995
(MILLIONS)
<TABLE>
<CAPTION>
BEFORE PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTED
----------- ----------- ---------
<S> <C> <C> <C>
Revenues
Net Sales and Operating Revenues Energy.... $1,916 $1,916
Automotive............................... -- --
Packaging................................ -- --
Shipbuilding............................. -- --
Farm and Construction Equipment.......... -- -- --
Other (Land Use)......................... 5 5
------ ---- ------
1,921 -- 1,921
Other Income
Interest Income............................ 85 $(53)(1) 32
Equity in Net Income of Affiliated
Companies................................. 65 -- 65
Gain on Sale of Businesses and Assets...... 12 11 (1) 23
Gain on the Sale by a Subsidiary of its
Stock..................................... -- --
Other Income, Net.......................... 28 28
------ ---- ------
2,111 (42) 2,069
------ ---- ------
Costs and Expenses
Cost of Sales.............................. 1 1
Cost of Gas Sold........................... 954 954
Operating Expenses......................... 413 (12)(1) 401
Selling, General and Administrative........ 163 (2) (1)
38 (2)
10 (3) 209
Finance Charges,--Tenneco Finance.......... 79 (79)(1) --
Depreciation, Depletion and Amortization... 196 6 (4) 202
------ ---- ------
1,806 (39) 1,767
------ ---- ------
Operating Income............................. $ 305 $ (3) $ 302
====== ==== ======
</TABLE>
4
<PAGE>
TENNECO ENERGY
NOTES TO PRO FORMA STATEMENT OF OPERATING INCOME
YEAR ENDED DECEMBER 31, 1995
Pro forma adjustments to reflect income statement effects of certain events:
(1) To remove income realized from Tenneco Credit Corporation assets
which will be sold prior to any transaction.
(2) To remove impact of Tenneco Inc. Retirement Plan.
(3) To record employee benefit expense related to planned Tenneco Energy
defined contribution plan.
(4) To reflect amortization of capitalized hardware and system
development costs related to Tenneco Energy.
5
<PAGE>
EXHIBIT F-2 TO
AGREEMENT AND PLAN OF MERGER
ENERGY BUSINESS
PRO FORMA BALANCE SHEET
(UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
1996 PRO FORMA PRO FORMA
ASSETS MAR 31 ADJUSTMENTS BALANCE
------ ------ ----------- ---------
<S> <C> <C> <C>
CURRENT ASSETS:
CASH AND TEMPORARY CASH INVESTMENTS.......... $ 150 $ (53)(9)
(72)(12) $ 25
RECEIVABLES--
CUSTOMER NOTES AND ACCOUNTS (NET).......... 927 (647)(4)
(2)(6) 278
AFFILIATED COMPANIES....................... 83 (30)(3) 53
GAS TRANSPORTATION AND EXCHANGE............ 115 115
INCOME TAXES............................... -- 40 (7) 40
OTHER...................................... 260 (3)(4) 257
INVENTORIES................................ 25 25
PREPAYMENTS AND OTHER...................... 95 (22)(6)
4 (8)
(8)(9) 69
------ ------- ------
1,655 (793) 862
------ ------- ------
INVESTMENTS AND OTHER ASSETS:
INVESTMENT IN AFFILIATED COMPANIES........... 258 (1)(10) 257
LONG-TERM RECEIVABLES-
NOTES AND OTHER (NET)...................... 294 (23)(1)
(212)(4)
(5)(6) 54
INVESTMENT IN SUBSIDIARIES IN EXCESS OF FAIR
VALUE OF NET ASSETS AT DATE OF ACQUISITION,
LESS AMORTIZATION........................... 22 22
OTHER........................................ 955 (2)(4)
36 (5)
(362)(6)
(17)(12) 610
------ ------- ------
1,529 (586) 943
------ ------- ------
PLANT, PROPERTY AND EQUIPMENT, AT COST LESS--
RESERVES FOR DEPRECIATION, DEPLETION AND
AMORTIZATION................................ 3,469 (4)(10) 3,465
------ ------- ------
2,852 (39) 2,813
------ ------- ------
$6,036 $(1,418) $4,618
====== ======= ======
</TABLE>
6
<PAGE>
ENERGY BUSINESS
PRO FORMA BALANCE SHEET
(UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
1996 PRO FORMA PRO FORMA
LIABILITIES AND COMBINED EQUITY MAR 31 ADJUSTMENTS BALANCE
------------------------------- ------- ----------- ---------
<S> <C> <C> <C>
CURRENT LIABILITIES:
SHORT-TERM DEBT (INCLUDING CURRENT
MATURITIES)................................ $ 1,179 $ (178)(4)
(1,001)(12) --
PAYABLES--
TRADE..................................... 315 13 (1) 328
AFFILIATED COMPANIES...................... 75 (73)(3) 2
GAS TRANSPORTATION AND EXCHANGE........... 77 77
TAXES ACCRUED............................... 96 (13)(1)
(77)(2) 6
DEFERRED INCOME TAXES....................... 42 42
INTEREST ACCRUED............................ 133 (14)(4)
-- (118)(12) 1
NATURAL GAS PIPELINE REVENUE RESERVATION.... 45 45
OTHER....................................... 281 (1)(6) 280
------- ------- ------
2,243 (1,462) 781
------- ------- ------
LONG-TERM DEBT................................ 3,420 (501)(4)
(2,919)(12) --
------- ------- ------
DEFERRED INCOME TAXES......................... 490 (23)(1)
72 (2)
(14)(4)
14 (5)
(131)(6)
(103)(11) 305
------- ------- ------
POSTRETIREMENT BENEFITS....................... 256 (1)(6) 255
------- ------- ------
DEFERRED CREDITS AND OTHER LIABILITIES........ 668 (8)(4)
(10)(6)
(41)(9)
(4)(11) 605
------- ------- ------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST............................. 19 19
------- ------- ------
PREFERRED STOCK WITH MANDATORY REDEMPTION
PROVISIONS................................... 111 111
------- ------- ------
COMBINED EQUITY (1,171) 5 (2)
43 (3)
(149)(4)
22 (5)
(248)(6)
40 (7)
4 (8)
(20)(9)
(40)(10)
107 (11)
3,949 (12) 2,542
------- ------- ------
(1,171) 3,713 2,542
------- ------- ------
$6,036 $(1,418) $4,618
======= ======= ======
</TABLE>
7
<PAGE>
ENERGY BUSINESS
NOTES TO PRO FORMA BALANCE SHEET
Pro forma adjustments to reflect certain events that will occur prior to the
Effective Time:
(1) Tentative settlement of a note receivable and tax issues with ICH, a
company in bankruptcy.
(2) Allocation of settlement of tax issues with the Internal Revenue
Service.
(3) Capitalize or settle affiliated accounts receivable and accounts
payable.
(4) Reflect the reacquisition by the Automotive/Packaging businesses of
trade accounts receivable from Tenneco Credit Corp. and the retirement of
Tenneco Credit Corp. debt.
(5) Transfer the Energy Business' computer hardware and share of software
development costs held by Tenneco Business Services.
(6) Reflect the assumption by the Automotive/Packaging businesses of
responsibility for the Tenneco Retirement Plan.
(7) Move the Energy Business' portion of state income tax receivable to
the Energy Business.
(8) Move the Energy Business' portion of prepaid insurance to the Energy
Business.
(9) Record dividend by Eastern Insurance of $20 million and transfer of
Eastern's assets and liabilities related to the Automotive/Packaging
businesses.
(10) Transfer Corporate Aviation assets and certain furniture, fixtures
and equipment to the Automotive/Packaging businesses.
(11) Transfer of "other reserves" and recorded pre-distribution income
tax assets and liabilities in accordance with the Tax Sharing Agreement.
(12) Reflect tender for all Tenneco debt and dividend of all cash in
excess of $25 million.
8
<PAGE>
EXHIBIT G TO
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
CERTAIN PERMITTED ACTIONS, TRANSACTIONS AND OTHER MATTERS
1. Tenneco may take the actions referred to in the letters, consents,
agreements and documents (collectively, the "Letter Agreements") referred to
in Schedule G-1 attached hereto to the extent provided therein, and all the
terms of all such Letter Agreements are hereby ratified and affirmed (it being
understood, however, that (i) the allocation of any cash proceeds therefrom or
other "economic" effects thereof shall be governed by the terms of the Debt
and Cash Allocation Agreement, and (ii) the failure to include any letter
agreement or the like fully executed and delivered between the parties, does
not mean that same is not effective).
2. On November 29, 1996 (the last business day of the month), the Energy
Group will factor to ASCC sufficient receivables to generate Factored Proceeds
in an amount not to exceed $100,000,000. It is understood that under the
factoring arrangement Tenneco pledges its accounts receivable to ASCC, and
upon payment in full of amounts owed to ASCC under the factoring arrangement,
ASCC has no further claim against any pledged accounts receivable. No other
pledge or sale of accounts receivable by Tenneco or any of its subsidiaries
prior to the Effective Time shall be permitted. This paragraph will be
appropriately revised should the date of Closing not occur in December 1996.
For additional information see the Debt and Cash Allocation Agreement. All
other receivables, and all accounts payable, may only be collected, or paid,
as the case may be, in the ordinary course of business, consistent with past
practices.
3. The Energy Group may provide to employees of the Energy Group merit pay
increases, promotional pay increases and salary adjustments in the ordinary
course of business consistent with past practices.
4. The Energy Group may make payments prior to the Merger to its non-
executive employees pursuant to its 1996 Tenneco Energy Success Sharing Plan
consistent with past practices.
5. The Energy Group may make payments prior to the Merger to executive
employees of the Energy Group pursuant to the Tenneco Inc. Executive Incentive
Compensation Plan consistent with past practices.
6. Tenneco may make payments prior to the Merger to its executive employees
pursuant to the Tenneco Inc. Executive Incentive Compensation Plan as
determined by the management of Tenneco consistent with past practices.
7. Tenneco and the Energy Group may pay 1996 year-end bonuses to executives
and other employees of the Energy Business as determined by Tenneco prior to
the Effective Time with the consent of Acquiror which shall not be
unreasonably withheld.
8. Tenneco may take the actions described in Section 6.15 of the Agreement
to which this Exhibit G is attached.
9. Except for Tenneco Power Generation Co. v. City of College Station, et
al., and any other action, claim, suit or proceeding between or involving
Tenneco or any of its subsidiaries and Texas A&M University or the City of
College Station, which are not to be settled prior to Closing, all cash
proceeds received prior to Closing (i) from the settlement of any or all of
the cases identified in Exhibit G-2 shall be for the account of the Industrial
Subsidiary to a maximum amount of $10,500,000, and (ii) from collection
actions which may be initiated and settled after the date hereof and prior to
the Effective Time, shall be for the account of the Industrial Subsidiary to a
maximum amount of $5,000,000. Any such case (including collection cases) not
settled by October 18, 1996 shall be settled only with the consent of
Acquiror, which consent is not to be arbitrarily withheld.
10. Tenneco has (or may) sell its interests in the Iroquois Pipeline (the
cash proceeds from which were (or will be) added to the general cash funds of
Tenneco and will be allocated between the parties in accordance with other
cash of Tenneco as of the Closing in accordance with the Debt and Cash
Allocation Agreement.
11. Any receivables of Case Corporation (and/or its affiliates) or the
Industrial Group held by Tenneco or any of its subsidiaries may be sold for
cash and the cash will be added to the general cash funds of Tenneco and
allocated between the parties in accordance with other cash of Tenneco as of
the Closing in accordance with the Debt and Cash Allocation Agreement.
12. Tenneco and its subsidiaries may, with the consent of Acquiror, take
actions and enter into agreements and transactions to monetize Tenneco
Ventures, Tenneco's investment in Australia and Tenneco's interest in the
Orange Cogeneration Facility.
1
<PAGE>
SCHEDULE G-1 TO EXHIBIT G
TO AGREEMENT AND PLAN OF MERGER
1. July 8, 1996 agreement to invest in 70 MW Dunaferr power project in
Hungary
2. September 19, 1996 agreement to reimburse amounts expended by Tenneco
relating to the 70 MW Dunaferr power project in Hungary and to indemnify
Tenneco against losses related to the project
3. July 17, 1996 consent to the disposition of certain private operational-
fixed microwave licenses used by Tenneco Communications Corporation on
frequencies 1,850 to 1,990 MHz
4. July 31, 1996 blanket consent to the disposition of certain private
microwave licenses
5. August 8, 1996 consent to sale of 960-acre parcel of land located along
Galveston Bay at Ingleside
6. August 28, 1996 consent to sale of Post Oak Ranch
7. August 28, 1996 consent to sale of Westchase Development property, Tract
6A
8. September 12, 1996 consent to sale of certain gas turbines
9. September 13, 1996 consent to Additional Retention Agreements
10. October 14, 1996 blanket consent to disposition of certain real estate.
11. September 24, 1996 consent to settlement of ICH tax indemnity issue
12. September 24, 1996 letter returning consents to settlement of three
lawsuits involving discontinued operations
13. August 19, 1996 letter consenting to customer rate refunds.
2
<PAGE>
EXHIBIT G-2
CASE NAME
TGP v. Conoco (Grand Chenier)(1)
TGP v. Tidewater(1)
TGP v. South Oak Production(2)
TGP v. SIFCO Forge Group(2)
Land Ventures, Inc. v. Port Camelot(2)
Altamont Gas Transmission Co. v. Express Pipeline, Inc. (Arbitration award)(1)
TGP v. Rowan Companies, Inc. & the D/B Rowan Odessa(3)
TGP v. KES Pepperell and HCE Pepperell, Inc.(3)
Western American Specialized Transportation Services, Inc. v. United States
Fire Insurance Company (Tenneco Energy, Inc. as Intervenor)(3)
Tenneco Power Generation Co. v. City of College Station, et al.(4)
- --------
(1) Settled but cash not yet received.
(2) Settled and cash received.
(3) Not yet settled.
(4) Not yet settled and not to be settled prior to closing.
3
<PAGE>
EXHIBIT H TO
AGREEMENT AND PLAN OF MERGER
Section 14.
(a) General. The Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any contemplated, pending or
completed action, suit, arbitration, alternate dispute resolution mechanism,
investigation, administrative hearing or any other proceeding, whether civil,
criminal, administrative or investigative ("Proceeding") (other than a
Proceeding by or in the right of the Corporation to procure a judgment in its
favor) in whole or in part attributable to (i) the fact that he is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, employee benefit plan, trust or other
enterprise ("Indemnitee"), or (ii) anything done or not done by such
Indemnitee in any such capacity, against expenses (including attorneys' fees)
and losses, claims, liabilities, judgments, fines and amounts paid in
settlement incurred by him or on his behalf in connection with such Proceeding
("Losses") if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal Proceeding, had no reasonable cause to believe his
conduct was unlawful; provided, however, that except as provided in Section
14(f) of this Article IV, the Corporation shall indemnify any such Indemnitee
in connection with a Proceeding initiated by such Indemnitee only if such
Proceeding was authorized by the Board of Directors.
(b) Actions by or in the Right of the Corporation. The Corporation shall
indemnify any person who was or is made a party or is threatened to be made a
party to any pending, completed or threatened Proceeding brought by or in the
right of the Corporation to procure a judgment in its favor in whole or in
part attributable to (i) the fact that he is or was a director or officer of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise (also an "Indemnitee") or (ii)
anything done or not done by such Indemnitee in any such capacity, against
expenses (including attorneys' fees) actually incurred by him or on his behalf
in connection with such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, provided that no such indemnification shall be made in
respect of any claim, issue or matter as to which Delaware law expressly
prohibits such indemnification by reason of an adjudication of liability of
such person to the Corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or the court in which such action or suit
was brought shall determine such indemnification to be equitable under the
circumstances.
(c) Indemnification in Certain Cases. Notwithstanding any other provision of
this Section 14, to the extent that an Indemnitee has been wholly successful
on the merits or otherwise in defense of any Proceeding referred to in
Sections 14(a) or 14(b) of this Article IV or in defense of any claim, issue
or matter therein, he shall be indemnified against expenses (including
attorneys' fees) incurred by him or on his behalf in connection therewith. If
Indemnitee is not wholly successful in such Proceeding but is successful, on
the merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Corporation shall indemnify Indemnitee, to the
maximum extent permitted by law, against expenses (including attorneys' fees)
actually incurred by Indemnitee in connection with each successfully resolved
claim, issue or matter. For purposes of this Section 14(c) and without
limitation, the termination of any such claim, issue or matter by dismissal
with or without prejudice shall be deemed to be a successful resolution as to
such claim, issue or matter.
(d) Procedure. (i) Any indemnification under Sections 14(a) and 14(b) of
this Article IV (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the Indemnitee is proper (except that the right of
Indemnitee to receive payments pursuant to Section 14(e) of this Article IV
shall not be subject to this Section 14(d)) in the circumstances because he
has met the applicable standard of conduct set forth in such Sections 14(a)
and 14(b), as applicable. When seeking indemnification, Indemnitee shall
submit a written request for indemnification to the Corporation. Such requests
shall include documentation or information which is necessary for the
Corporation to make a determination of Indemnitee's entitlement to
indemnification and what is reasonably available to Indemnitee. Such
determination
1
<PAGE>
shall be made promptly, but in no event later than 30 days after receipt by
the Corporation of Indemnitee's written request for indemnification. The
Secretary of the Corporation shall, promptly upon receipt of Indemnitee's
request for indemnification, advise the Board of Directors that Indemnitee has
made such request for indemnification.
(ii) The entitlement of Indemnitee to indemnification shall be determined in
the specific case by a majority vote of the directors who are Disinterested
Directors, even though less than a quorum, except that such determination
shall be made by Independent Legal Counsel, if either there are no
Disinterested Directors or a majority of such Disinterested Directors so
directs.
(iii) In the event the determination of entitlement is to be made by
Independent Legal Counsel, such Independent Legal Counsel shall be selected by
the Board of Directors and approved by Indemnitee. Upon failure of the Board
of Directors to so select such Independent Legal Counsel or upon failure of
Indemnitee to so approve, such Independent Legal Counsel shall be selected by
the Chancellor of the State of Delaware or such other person as such
Chancellor shall designate to make such selection.
(iv) If the Board of Directors or Independent Legal Counsel shall have
determined that Indemnitee is not entitled to indemnification to the full
extent of Indemnitee's request, Indemnitee shall have the right to seek
entitlement to indemnification in accordance with the procedures set forth in
Section 14(f) of this Article IV.
(v) If the person or persons empowered pursuant to Section 14(d)(ii) of this
Article IV to make a determination with respect to entitlement to
indemnification shall have failed to make the requested determination within
90 days after receipt by the Corporation of such request, the requisite
determination of entitlement to indemnification shall be deemed to have been
made and Indemnitee shall be absolutely entitled to such indemnification,
absent (A) misrepresentation by Indemnitee of a material fact in the request
for indemnification or (B) a final judicial determination that all or any part
of such indemnification is expressly prohibited by law.
(vi) The termination of any Proceeding by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, adversely affect the rights of Indemnitee to indemnification hereunder
except as may be specifically provided herein, or create a presumption that
Indemnitee did not act in good faith and in a manner which Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Corporation or create a presumption that (with respect to any criminal action
or proceeding) Indemnitee had reasonable cause to believe that Indemnitee's
conduct was unlawful.
(vii) For purposes of any determination of good faith hereunder, Indemnitee
shall be deemed to have acted in good faith if Indemnitee's action is based on
the records or books of account of the Corporation or an Affiliate, including
financial statements, or on information supplied to Indemnitee by the officers
of the Corporation or an Affiliate in the course of their duties, or on the
advice of legal counsel for the Corporation or an Affiliate or by an
independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Corporation or an Affiliate. The
provisions of this Section 14(d)(vii) of this Article IV shall not be deemed
to be exclusive or to limit in any way the other circumstances in which the
Indemnitee may be deemed to have met the applicable standard of conduct set
forth in these By-Laws.
(viii) The knowledge and/or actions, or failure to act, of any director,
officer, agent or employee of the Corporation or an Affiliate shall not be
imputed to Indemnitee for purposes of determining the right to indemnification
under these By-Laws.
(ix) Without limiting the generality of the foregoing, in the event any
Indemnitee is made a party or is threatened to be made a party to any
Proceeding:
(A) the Indemnitee may retain counsel satisfactory to him with the
consent of the Corporation, which may not be unreasonably withheld or
delayed;
2
<PAGE>
(B) the Corporation shall pay all fees and expenses of such counsel for
the Indemnitee promptly as statements therefor are received; and
(C) the Corporation will use all reasonable efforts to assist in the
vigorous defense of any such matter, provided that the Corporation shall
not be liable for any settlement effected without its written consent,
which consent, however, shall not be unreasonably withheld.
Any Indemnitee wishing to claim indemnification under this Section 14, upon
notice that such person has been made or is threatened to be made a party to
any such Proceeding, shall notify the Corporation (but any failure so to
notify shall not relieve the Corporation from any liability which it may have
under this Section 14, except to the extent such failure materially prejudices
the Corporation) and shall deliver to the Corporation any undertaking required
by Section 145(e) of the DGCL. The Indemnitees as a group may retain only one
law firm to represent them with respect to each such Proceeding unless there
is, under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnitees.
(e) Advances for Expenses and Costs. All expenses (including attorneys'
fees) incurred by or on behalf of Indemnitee (or reasonably expected by
Indemnitee to be incurred by Indemnitee within three months) in connection
with any Proceeding shall be paid by the Corporation in advance of the final
disposition of such Proceeding within 20 days after the receipt by the
Corporation of a statement or statements from Indemnitee requesting from time
to time such advance or advances whether or not a determination to indemnify
has been made under Section 14(d) of this Article IV (and even if the
Disinterested Directors or Independent Legal Counsel has determined, pursuant
to Section 14(d), that Indemnitee is not entitled to indemnification by reason
of their conclusions that Indemnitee (i) did not act in good faith or in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Corporation or (ii) had reasonable cause to believe his
conduct was unlawful, but not after the conclusion of judicial proceedings
under Section 14(f)). Indemnitee's entitlement to such advancement of expenses
shall include those incurred in connection with any Proceeding by Indemnitee
seeking an adjudication or award in arbitration pursuant to these By-Laws.
Such statement or statements shall evidence such expenses incurred (or
reasonably expected to be incurred) by Indemnitee in connection therewith and
shall include or be accompanied by a written undertaking by or on behalf of
Indemnitee to repay such amount if it shall ultimately be determined that
Indemnitee is not entitled to be indemnified therefor pursuant to the terms of
this Section 14(e) of Article IV. The financial ability of an Indemnitee to
repay an advance shall not be a prerequisite to the making of such an advance.
(f) Remedies in Cases of Determination not to Indemnify or to Advance
Expenses. (i) In the event that (A) a determination is made that Indemnitee is
not entitled to indemnification hereunder, (B) advances are not made pursuant
to Section 14(e) of this Article IV or (C) payment has not been timely made
following a determination of entitlement to indemnification pursuant to
Section 14(d) of this Article IV, Indemnitee shall be entitled to seek a final
adjudication in an appropriate court of the State of Delaware or any other
court of competent jurisdiction of Indemnitee's entitlement to such
indemnification or advance.
(ii) In the event a determination has been made in accordance with the
procedures set forth in Section 14(d) of this Article IV, in whole or in part,
that Indemnitee is not entitled to indemnification, any judicial proceeding
referred to in paragraph (i) of this Section 14(f) shall be de novo and
Indemnitee shall not be prejudiced by reason of any such prior determination
that Indemnitee is not entitled to indemnification.
(iii) If a determination is made or deemed to have been made pursuant to the
terms of Sections 14(d) or (f) of this Article IV that Indemnitee is entitled
to indemnification, the Corporation shall be bound by such determination in
any judicial proceeding in the absence of (A) a misrepresentation of a
material fact by Indemnitee or (B) a final judicial determination that all or
any part of such indemnification is expressly prohibited by law.
(iv) To the extent deemed appropriate by the court, interest shall be paid
by the Corporation to Indemnitee at a reasonable interest rate for amounts
which the Corporation indemnifies or is obliged to indemnify Indemnitee
3
<PAGE>
for the period commencing with the date on which Indemnitee requested
indemnification (or reimbursement or advance of expenses) and ending with the
date on which such payment is made to Indemnitee by the Corporation.
(g) Rights Non-Exclusive. The rights of indemnification and advancement of
expenses provided by, or granted pursuant to, this Section 14 of Article IV
shall not be deemed exclusive of any rights to which any person seeking
indemnification or advancement of expenses may be entitled under any law,
certificate of incorporation, by-law, agreement, vote of stockholders or
resolution of directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office. No
amendment, alteration, rescission or replacement of these By-Laws or any
provision hereof shall be effective as to Indemnitee with respect to any
action taken or omitted by such Indemnitee in Indemnitee's position with the
Corporation or an Affiliate or any other entity which Indemnitee is or was
serving at the request of the Corporation prior to such amendment, alteration,
rescission or replacement.
(h) Insurance. The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Section 14
of Article IV.
(i) Surviving of Rights. The indemnification and advancement of expenses
provided by, or granted pursuant to this Section 14 of Article IV shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(j) Indemnification of Employees and Agents of the Corporation. The
Corporation may, by action of the Board of Directors from time to time, grant
rights to indemnification and advancement of expenses to employees and agents
of the Corporation, with the same scope and effect as the provisions of this
Section 14 of Article IV with respect to the indemnification of directors and
officers of the Corporation.
(k) Definitions. For purposes of this Section 14:
(a) "Affiliate" includes any corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise directly or indirectly
owned by the Corporation.
(b) "Corporation" includes all constituent corporations absorbed in a
consolidation or merger as well as the resulting or surviving corporation
so that any person who is or was a director, officer, employee or agent of
such a constituent corporation or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
shall stand in the same position under the provisions of this Article IV
with respect to the resulting or surviving corporation as he would if he
had served the resulting or surviving corporation in the same capacity.
(c) "Disinterested Director" shall mean a director of the Corporation who
is not or was not a party to the Proceeding in respect of which
indemnification is being sought by Indemnitee.
(d) "Independent Legal Counsel" shall mean a law firm or lawyer that
neither is presently nor in the past five years has been retained to
represent: (i) the Corporation or Indemnitee in any matter material to
either such party or (ii) any other party to the Proceeding giving rise to
a claim for indemnification hereunder. Notwithstanding the foregoing, the
term "Independent Counsel" shall not include any firm or person who, under
the applicable standards of professional conduct then prevailing, would
have a conflict of interest in representing either the Corporation or
Indemnitee in an action to determine Indemnitee's right to indemnification
under these By-Laws. All fees and expenses of the Independent Counsel
incurred in connection with acting pursuant to these By-Laws shall be borne
by the Corporation.
4
<PAGE>
EXHIBIT I TO
AGREEMENT AND PLAN OF MERGER
CERTAIN DEFERRED INTERCOMPANY GAINS
. The deferred gain created as a result of the transfer of the assets and
business of Newport News Industrial Corporation and Newport News Industrial
Corporation of America to Tenneco InterAmerica Inc.
. Any deferred gain created as a result of the transfer of any assets to
Industrial Subsidiary as contemplated by the Corporate Transaction Steps as
defined in the Distribution Agreement.
1
<PAGE>
EXHIBIT J TO
AGREEMENT AND PLAN OF MERGER
REPRESENTATIONS IN CONNECTION WITH IRS RULING LETTER
A. TENNECO REPRESENTATIONS
Pursuant to Section 6.6(a) of the Agreement, Tenneco will use its reasonable
best efforts to deliver, in connection with the IRS Ruling Letter, letters of
representation reasonable under the circumstances as to its present intentions
and present knowledge including the following representations:
(a) Tenneco will pay its own expenses, if any, in connection with the
Merger.
(b) There is no plan or intention by the Tenneco Stockholders who own
five percent or more of the Tenneco Stock, and to the best of the knowledge
of the management of Tenneco, there is no plan or intention on the part of
the remaining Tenneco Stockholders to sell, exchange, or otherwise dispose
of a number of shares of Acquiror Stock received in the transaction that
would reduce the Tenneco Stockholders' ownership of Acquiror Stock to a
number of shares having a value, as of the Closing Date, of less than 50%
of the value of all of the formerly outstanding Tenneco Stock as of the
Closing Date. For purposes of this representation, shares of Tenneco Stock
surrendered by dissenters or exchanged for cash in lieu of fractional
shares of Acquiror Stock will be treated as outstanding Tenneco Stock on
the Closing Date. Moreover, shares of Tenneco Stock and shares of Acquiror
Stock held by Tenneco Stockholders and otherwise sold, redeemed or disposed
of prior or subsequent to the Closing Date will be considered in making
this representation.
(c) The fair market value of the Acquiror Stock received by each of the
Tenneco Stockholders will be approximately equal to the fair market value
of the Tenneco Stock surrendered in the Merger.
(d) Tenneco has no plan or intention to issue additional shares of
capital stock that would result in Acquiror losing control of Tenneco
within the meaning of Section 368(c)(1) of the Code.
(e) At the time of the Merger, Tenneco will not have outstanding any
warrants, options, convertible securities, or any other type of right
pursuant to which any Person could acquire stock in Tenneco that, if
exercised or converted, would affect Acquiror's acquisition or retention of
control of Tenneco, as defined in Section 368(c)(1) of the Code.
(f) Tenneco is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
(g) Tenneco will pay to its stockholders who are entitled to demand, and
who properly demand and perfect, appraisal rights under the DGCL the fair
value of their Tenneco Stock as determined by the Delaware courts out of
its own funds. No funds will be supplied for that purpose, directly or
indirectly, by Acquiror, nor will Acquiror directly or indirectly reimburse
Tenneco for any payments to dissenters.
(h) On the date of the Merger, the fair market value of the assets of
Tenneco will exceed the sum of its liabilities plus the liabilities, if
any, to which Tenneco's assets are subject.
(i) The payment of cash in lieu of fractional shares of Acquiror Stocks
is solely for the purpose of avoiding the expense and inconvenience to
Acquiror of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be paid
in the transaction to the Tenneco stockholders instead of issuing
fractional shares of Acquiror Stock will not exceed one percent of the
total consideration that will be issued in the transaction to the Tenneco
stockholders in exchange for their shares of Tenneco Stock. The total share
interests of each stockholder will be aggregated, and no stockholder will
receive cash in an amount greater to or greater than the value of one full
share of Acquiror Stock.
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B. ACQUIROR AND SUBSIDIARY REPRESENTATIONS
Pursuant to Section 6.6(b) of the Agreement, each of Acquiror and Subsidiary
will use its reasonable best efforts to deliver, in connection with the IRS
Ruling Letter, letters of representation reasonable under the circumstances as
to its present intentions and present knowledge including the following
representations:
(a) Acquiror has no present plan or intention to liquidate Tenneco, to
merge Tenneco into another corporation, to cause Tenneco to sell or
otherwise dispose of its assets (other than certain assets unrelated to
Tenneco's interstate gas pipeline and natural gas marketing businesses), or
to sell or otherwise dispose of any Tenneco Stock acquired in the Merger,
except for transfers described in Section 368(a)(2)(C) of the Code.
(b) Acquiror has no plan or intention to reacquire any shares of Acquiror
Stock issued to Tenneco stockholders in the Merger.
(c) Acquiror will pay its expenses, if any, incurred in connection with
the Merger.
(d) Acquiror will acquire the Tenneco Stock in exchange for voting
capital stock of Acquiror pursuant to Section 2.5 of the Merger Agreement.
For purposes of this representation, Tenneco Stock redeemed for cash or
other property furnished by Acquiror will be considered as acquired by
Acquiror. Further, no liabilities of Tenneco or the Tenneco stockholders
will be assumed by Acquiror, nor will any of the Tenneco Stock be subject
to any liabilities.
(e) Acquiror does not presently own, directly or indirectly, nor has it
owned during the past five years, directly or indirectly, any capital stock
of Tenneco.
(f) Immediately following the Merger, Acquiror will continue Tenneco's
Energy Business or use a significant portion of the assets of Tenneco's
Energy Business in a business.
(g) Acquiror is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
(h) Immediately after the Merger, Acquiror will be in control of Tenneco
within the meaning of Section 368(c) of the Code.
2
<PAGE>
EXHIBIT K TO
AGREEMENT AND PLAN OF MERGER
BENEFITS FOR EMPLOYEES OF THE ENERGY BUSINESS
After the Effective Time,
(i) Acquiror shall cause Tenneco to perform its obligations under the
Benefits Agreement.
(ii) Acquiror shall provide, or shall cause its subsidiaries (including
Tenneco) to provide, the severance benefits described on Annex I hereto to
employees of the Energy Business whose employment with Tenneco and its
Affiliates (including Acquiror and its Affiliates) is terminated within one
year after the Effective Time for any reason other than (A) death, (B)
disability, (C) voluntary termination by the employee, other than with
respect to EICP Employees upon a substantial reduction in compensation or
substantial diminishment of job responsibilities or (D) for cause. A
termination of employment for cause with respect to EICP Employees shall
not include a termination of employment due to a refusal to accept a
relocation of such employment to a location that is more than 50 miles from
the location of such employment immediately prior to the Effective Time;
(iii) Acquiror shall cause to be provided to (A) former employees of
Tenneco currently eligible for retiree medical and life benefits, (B)
current employees of Tenneco who (i) would be eligible to receive such
benefits if they retired as of the Effective Time and (ii) retire within
six months following the Effective Time (or such longer period designated
by Acquiror) and (C) the dependents of the current and former employees
described in clause (A) and (B) the retiree medical and life benefits as in
effect immediately prior to the Effective Time for a period of at least ten
years from the Effective Time; provided, however, that nothing herein shall
be construed to prohibit changes to the retiree medical plan (to the extent
otherwise permitted under the documents governing the benefits), to
implement appropriate cost containment features and other methods of
providing comparable benefits;
(iv) Acquiror shall cause to be provided the benefits under the Tenneco
Energy Retention Programs as described on Annex II hereto;
(v) Acquiror shall timely pay or cause to be timely paid to each employee
of the Energy Business whose employment is terminated within one year after
the Effective Time an amount equal to his or her earned but unused 1996 and
1997 vacation pay (in accordance with Tenneco Energy's current vacation
policy).
(vi) Acquiror shall provide to each employee of the Energy Business whose
employment is involuntarily terminated within one year after the Effective
Time outplacement services as follows:
(A) for officer and director-level employees of the Energy Business,
up to 12 months of counseling services by either Right and Associates
or King Chapman Broussard; and
(B) for other employees of the Energy Business, up to three months of
counseling services by Lee Hecht Harrison.
(vii) Employees of the Energy Business will receive credit for Past
Service (as hereinafter defined) in determining vacation entitlement under
the applicable vacation policy of Acquiror and its subsidiaries. "Past
Service" means (A) service as an employee of Tenneco or any of its
Affiliates and (ii) service as an employee of any other entity, but only to
the extent that such service is recognized under the applicable plan of
Acquiror and is continuous through the Closing Date.
(viii) For a period extending to December 31, 1997, employees of the
Energy Business shall receive benefits which in the aggregate are
substantially equivalent to the benefits received by similarly situated
employees of Acquiror (other than pursuant to the Acquiror's employee and
executive severance plans).
(ix) Acquiror shall give credit for Past Service for purposes of (i)
determining eligibility for initial participation in the plans or
arrangements maintained by Acquiror and its Affiliates, (ii) determining
the
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duration and amount, if any, of short-term disability benefits due and
(iii) vesting (including, without limitation, eligibility for early
retirement) under such plans.
(x) No preexisting condition, exclusion or limitation shall be applicable
with respect to the participation of an employee of the Energy Business in
any medical benefit plan of Acquiror or any of its Affiliates. Welfare
plans will credit amounts already expended in the year in which the Merger
occurs towards deductibles, out-of-pocket limits and similar provisions for
such year.
(xi) Acquiror shall satisfy, or shall cause the Surviving Corporation or
one of its subsidiaries to satisfy, the obligations owed by Tenneco or its
subsidiaries to (i) Wilton Scott, former Chairman of the Board of Directors
of Tenneco, in accordance with past practices, and (ii) J. L. Ketelsen,
former Chairman of the Board of Directors of Tenneco, set forth in the
Letter Agreement dated December 13, 1991 from Joseph J. Sisco to J. L.
Ketelsen.
(xii) Acquiror shall satisfy, or shall cause the Surviving Corporation or
one of its subsidiaries to satisfy, the obligations owed by Tenneco or its
subsidiaries to Edward Casey, Peter Menikoff and Donald Sinclair, set forth
in the following documents:
1. Letter dated November 1, 1995, from Barry R. Schuman to Edward J.
Casey, Jr.
2. Letter dated May 12, 1994, from Dana G. Mead to Peter Menikoff;
Memorandum dated December 13, 1994, from Barry Schuman to Peter
Menikoff.
3. Letter dated April 15, 1996, from Edward J. Casey, Jr. to Donald
R. Sinclair.
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<PAGE>
ANNEX I
TO EXHIBIT K TO
AGREEMENT AND PLAN OF MERGER
SEVERANCE BENEFITS
EICP Employees
In the event of a sale, approximately 50 high-level employees are covered by
Tenneco Energy's current Executive Incentive Compensation Program (EICP). The
non-ERISA severance program for EICP employees is based on position. Under
this current program, in the event of an acquisition of Tenneco Energy,
Tenneco shall pay to eligible employees severance benefits generally ranging
from 12 months of base pay to 24 months of base pay on the following formula:
<TABLE>
<CAPTION>
MONTHS
LEVEL OF PAY
----- ------
<S> <C>
1 12
2 18
3 and above 24
</TABLE>
Employees otherwise eligible for severance benefits pursuant to this program
and pursuant to any employment agreement shall receive the greater of the
above severance benefits or the benefits provided under the employment
agreement.
In addition, if an eligible employee is enrolled in medical or dental plans
when separated, Tenneco shall provide health care coverage on an optional
basis with the costs shared by the employee being the same as for similarly
situated active employees for a period equal to the months of pay received as
severance, up to 12 months. At the end of such period, the employee shall be
entitled to COBRA coverage and the applicable COBRA coverage period shall not
be reduced by the period of the optional continued coverage.
Acquiror shall maintain the current severance benefits for at least one year
from the Effective Time.
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<PAGE>
ANNEX I, PAGE 2
TO EXHIBIT K TO
AGREEMENT AND PLAN OF MERGER
SEVERANCE BENEFITS
Non-EICP Employees
In the event of a sale, approximately 3200 employees are covered by Tenneco
Energy's current non-ERISA severance program, based on three factors: 1) years
of service; 2) age; and 3) position. Under this program, in the event of an
acquisition of Tenneco Energy, Tenneco shall pay to eligible employees
severance benefits ranging from 6 weeks to 52 weeks of base pay based on the
following formula:
(A) 2 weeks base pay per year or partial year of service, plus
(B) a number of weeks of base pay according to employee age at
termination
40 to 44(4)
45 to 49(6)
50 to 54(8)
55 to 59(10)
60+(12), plus
(C) a number of weeks base pay according to position level
Grade 09(1)15(7)
10(2)16(8)
11(3)17(9)
12(4)18(10)
13(5)
14(6)
Employees otherwise eligible for severance benefits pursuant to this program
and pursuant to any employment agreement shall receive the greater of the
above severance benefits or the benefits provided under the employment
agreement.
In addition, if an eligible employee is enrolled in medical or dental plans
when separated, Tenneco shall provide health care coverage on an optional
basis with the costs shared by the employee being the same as for similarly
situated active employees for a period equal to the months of pay received as
severance, up to 12 months. At the end of such period, the employee shall be
entitled to COBRA coverage and the applicable COBRA coverage period shall not
be reduced by the period of the optional continued coverage.
Acquiror shall maintain the current severance benefits for at least one year
from the Effective Time.
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<PAGE>
ANNEX II
TO EXHIBIT K TO
AGREEMENT AND PLAN OF MERGER
TENNECO ENERGY RETENTION PROGRAMS
To insure that certain Tenneco Energy employees continue to devote
appropriate time and effort toward managing the enterprise, Tenneco has
implemented an Executive Retention Program. Under the Program, cash awards are
provided to "Key Employees" who are instrumental in the operation and who
continue with Tenneco during this critical transition.
The retention payments are to be paid to designated Key Employees only if
all of the following conditions are met:
. The acquisition by a third party of Tenneco Energy by a merger or
otherwise (collectively a "Sale") occur no later than March 31, 1997.
. The Key Employee remains a full-time, active employee of Tenneco Energy
on the date of the Sale (unless earlier terminated at the request of
Acquiror).
. The Key Employee cooperates fully with Tenneco in the efforts to sell
Tenneco and complies with all terms and conditions of employment required
of all full-time employees.
The retention payments will be payable with 30 days following the completion
of the sale and upon execution of releases.
The cost of the Executive Retention Program is approximately $9 million and
will be the obligation of Tenneco (to be paid after it has been acquired by
Acquiror).
Additionally, a separate retention program will be implemented for
approximately 200 lower management and staff level employees. Conditions for
the program are similar to those set forth above, and the resulting costs are
approximately $4 million (or such higher amount if instructed by Acquiror).
Consistent with the Executive Retention Program, all costs would be the
obligation of Tenneco (to the paid after it has been acquired by Acquiror).
5
<PAGE>
EXHIBIT L TO
AGREEMENT AND PLAN OF MERGER
GUARANTY
This Guaranty (the "GUARANTY") dated as of , , by the
undersigned, El Paso Natural Gas Company, a Delaware corporation
("GUARANTOR"), in favor of , a Delaware corporation
("INDUSTRIAL COMPANY"), has reference to the following facts and
circumstances:
A. Guarantor owns 100% of the issued and outstanding capital stock of
, a Delaware corporation ("ACQUIROR SUBSIDIARY");
B. Guarantor, Acquiror Subsidiary and Tenneco Inc., a Delaware
corporation ("TENNECO") have entered into that certain Agreement and Plan
of Merger, dated as of , 1996 ("the MERGER AGREEMENT"),
pursuant to which, subject to the terms and conditions contained therein,
Acquiror Subsidiary will be merged with and into Tenneco, with Tenneco
continuing as the surviving corporation of the merger (the "SURVIVING
CORPORATION") and a wholly-owned subsidiary of Guarantor;
C. In connection with the transactions contemplated by the Merger
Agreement, Tenneco, Industrial Company and , a Delaware
corporation (SHIPBUILDING COMPANY"), have entered into that certain
Distribution Agreement, dated as of , 1996 (together with all
exhibits, schedules and attachments thereto, the "DISTRIBUTION AGREEMENT"),
pursuant to which, subject to the terms and conditions contained therein,
(i) Tenneco and its subsidiaries will restructure, divide and separate
their existing businesses and assets so that (a) the Industrial Assets and
Industrial Business (as such terms are defined in the Distribution
Agreement) shall be owned, directly and indirectly, by the Industrial
Company, and (b) the Shipbuilding Assets and Shipbuilding Business (as such
terms are defined in the Distribution Agreement) shall be owned, directly
and indirectly by the Shipbuilding Company, and (ii) Tenneco shall
distribute all of the outstanding capital stock of Industrial Company and
Shipbuilding Company as a dividend to the holders of shares of the common
stock, par value $5.00 per share, of Tenneco;
D. Guarantor deems it to be in its best interests to enter into this
Guaranty in order to guarantee the payment and performance of the
obligations of Tenneco, Surviving Corporation and the Energy Subsidiaries
arising under the Transaction Documents (as hereinafter defined); and
E. Tenneco, as a condition precedent to consummation of the transactions
contemplated by the Merger Agreement, requires that Guarantor execute and
deliver this Guaranty.
NOW, THEREFORE, in consideration of the foregoing, Guarantor agrees as
follows:
1. DEFINITIONS.
(a) "EFFECTIVE TIME" has the meaning set forth in the Merger Agreement.
(b) "ENERGY SUBSIDIARIES" has the meaning set forth in the Merger Agreement.
(c) "GUARANTOR'S LIABILITIES" means all of Guarantor's obligations and
liabilities to Industrial Company under this Guaranty
(d) "PERSON" has the meaning set forth in the Merger Agreement.
(e) "TENNECO LIABILITIES" has the meaning set forth in Section 2 hereof.
(f) "TRANSACTION DOCUMENTS" means the Merger Agreement and the Distribution
Agreement (including, without limitation, the Tax Sharing Agreement included
as an exhibit to the Distribution Agreement).
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<PAGE>
2. GUARANTY.
In consideration of the foregoing, from and after the Effective Time
Guarantor unconditionally, absolutely, continuingly and irrevocably
guarantees, as a primary obligor and not a surety, to Industrial Company the
timely payment and performance by Tenneco, Surviving Corporation and/or the
Energy Subsidiaries of all of their respective covenants, agreements,
obligations and liabilities arising under or pursuant to the Transaction
Documents (or any of them) (collectively, the "TENNECO LIABILITIES").
As a condition to payment or performance of Guarantor's Liabilities,
Industrial Company is not required to prosecute collection or seek to enforce
or resort to any remedies against Tenneco, Surviving Corporation or any of the
Energy Subsidiaries or any other Person liable to Industrial Company on
account of Tenneco Liabilities or any guaranty thereof. Guarantor's
Liabilities shall in no way be impaired, affected, reduced or released by
reason of (i) Industrial Company's failure or delay to do or take any of the
actions or things described in this Guaranty, or (ii) the voluntary or
involuntary liquidation, dissolution, sale or other disposition of all or
substantially all the assets of Tenneco, Surviving Corporation or any of the
Energy Subsidiaries or the marshaling of assets and liabilities, receivership,
insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition with creditors or readjustment of, or
other similar proceedings, or any other inability to pay or perform, affecting
Tenneco, Surviving Corporation or any of the Energy Subsidiaries, or any of
their respective assets, or any allegation concerning, or contest of the
legality or validity of, the indemnification obligations under any of the
Transaction Documents or this Guaranty in any such proceeding.
3. REPRESENTATIONS AND WARRANTIES.
Guarantor represents and warrants to Industrial Company that:
(a) Guarantor has the legal power, right and authority to execute, deliver
and perform this Guaranty, and to consummate the transactions contemplated
hereby. All requisite corporate action has been taken by the Guarantor in
connection with the execution and delivery of this Guaranty, and the
consummation of the transactions contemplated hereby.
(b) This Guaranty has been duly executed and delivered by or on behalf of
Guarantor and constitutes the legal, valid and binding obligation of
Guarantor, enforceable against Guarantor in accordance with its terms.
(c) None of the execution, delivery and performance by Guarantor of this
Guaranty shall, by the lapse of time, the giving of notice or otherwise,
constitute a violation of any provision of applicable law, or contained in any
agreement, instrument or document to which Guarantor is now or may hereafter
become a party or by which Guarantor is or may become bound.
(d) Guarantor is now solvent and generally able to pay its debts as such
debts become due.
4. WAIVERS.
(a) Guarantor waives any and all right to assert against Industrial Company
any claims or defenses with respect to the legality, validity and/or
enforceability of this Guaranty based upon any failure of Industrial Company
to furnish to Guarantor any information or facts relating to the ability of
any of Tenneco, Surviving Corporation or the Energy Subsidiaries to pay and
perform the applicable Tenneco Liabilities.
(b) Guarantor waives all defenses, counterclaims and offsets of any kind or
nature, in connection with the legality, validity and/or enforceability of
this Guaranty, including, without limitation, any such defenses, counterclaims
or offsets arising directly or indirectly from any agreement, instrument or
document executed and delivered, by Tenneco, Surviving Corporation or any of
the Energy Subsidiaries, or acquired by Industrial Company from Tenneco,
Surviving Corporation or any of the Energy Subsidiaries.
2
<PAGE>
(c) Guarantor waives any and all right to assert against Industrial Company
any claim or defense based upon any election of remedies by Industrial Company
which in any manner impairs, affects, reduces, releases or extinguishes
Guarantor's right to proceed against Tenneco, Surviving Corporation or any of
the Energy Subsidiaries for reimbursement, or any other rights of Guarantor
against Tenneco, Surviving Corporation or any of the Energy Subsidiaries, or
against any other Person.
(d) Guarantor hereby waives notice of the following events or occurrences
and agrees that Industrial Company may do any or all of the following in such
manner, upon such terms and at such times as Industrial Company in its sole
discretion deems advisable without in any way impairing, affecting, reducing
or releasing Guarantor from Guarantor's Liabilities: (i) Industrial Company's
acceptance of this Guaranty; (ii) Industrial Company's heretofore, now or at
any time or times hereafter obtaining, releasing, waiving or modifying of any
other Person's guaranty of Tenneco Liabilities given to Industrial Company;
(iii) the amendment or modification of any of the Transaction Documents, or
the waiver or release of any provisions of the Transaction Documents by
Industrial Company; (iv) presentment, demand, notices of default, nonpayment,
partial payment and protest, and all other notices or formalities to which
Guarantor may be entitled; (v) Industrial Company's heretofore, now or at any
time or times hereafter granting to Tenneco, Surviving Corporation or any of
the Energy Subsidiaries (or any other Person liable to Industrial Company on
account of Tenneco Liabilities) of any indulgences or extensions of time of
payment of Tenneco Liabilities; and (vi) Industrial Company's heretofore, now
or at any time or times hereafter accepting from Tenneco, Surviving
Corporation or any of the Energy Subsidiaries or any other Person any partial
payment or payments on account of Tenneco Liabilities or Industrial Company's
settling, subordinating, compromising, discharging or releasing the same.
5. REMEDIES.
If Guarantor's Liabilities are not paid or performed forthwith by Guarantor
to Industrial Company at Industrial Company's principal place of business,
Industrial Company may proceed to suit against Guarantor (at Industrial
Company's election, one or more successive or concurrent suits may be brought
hereunder by Industrial Company against Guarantor, whether suit has been
commenced against Tenneco, Surviving Corporation or any of the Energy
Subsidiaries and in any such suit Tenneco, Surviving Corporation or any of the
Energy Subsidiaries may be joined (but need not be joined) as a party with
Guarantor). In addition, Industrial Company may exercise any other right or
remedy provided by law.
6. JURISDICTION.
All questions and/or disputes concerning the legality, construction,
validity and interpretation of this Guaranty shall be governed by the internal
laws, and not the law of conflicts, of the State of Delaware. Guarantor hereby
irrevocably and unconditionally agrees to be subject to, and hereby consents
and submits to, the jurisdiction of the courts of the State of Delaware and of
the Federal courts sitting in the State of Delaware.
7. MISCELLANEOUS.
If any provision of this Guaranty or the application thereof to any party or
circumstance is held invalid or unenforceable, the remainder of this Guaranty
and the application of such provision to other Persons or circumstances will
not be affected thereby, the provisions of this Guaranty being severable in
any such instance.
This Guaranty shall continue in full force and effect until all of the
Tenneco Liabilities are fully and indefeasibly paid, performed and discharged.
This Guaranty shall continue to be effective or be reinstated, as the case may
be, if at any time payment of any of Guarantor's Liabilities is rescinded or
must otherwise be returned by Industrial Company upon the insolvency,
bankruptcy or reorganization of Guarantor, Tenneco, Surviving Corporation or
any of the Energy Subsidiaries or otherwise, all as though such payment had
not been made. This Guaranty shall be binding upon Guarantor and its
successors and assigns and shall inure to the benefit of Industrial Company,
its successors and assigns.
3
<PAGE>
All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally or mailed by registered or certified
mail, return receipt requested, to the parties at the following addresses
(until notice of a change thereof is delivered as provided in this paragraph):
Industrial Company:1275 King Street
Greenwich, CT 06831
Attn: Corporate Secretary
Guarantor:One Paul Kayser Center
100 North Stanton Street
El Paso, TX 79901
Attn: William A. Wise
Chairman and Chief Executive Officer
Industrial Company's failure at any time hereafter to require strict
performance by Guarantor of any provision of this Guaranty shall not waive,
effect or diminish any right of Industrial Company thereafter to demand strict
compliance and performance therewith.
This Guaranty is in addition to, and not limitation of or substitution for,
Guarantor's covenants and obligations under the Transaction Documents
(including, without limitation, Guarantor's covenants and obligations under
Section 6.18 of the Merger Agreement).
IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date
first above written.
EL PASO NATURAL GAS COMPANY
By:__________________________________
Title:
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<PAGE>
GUARANTY
This Guaranty (the "GUARANTY") dated as of , , by the
undersigned, El Paso Natural Gas Company, a Delaware corporation
("GUARANTOR"), in favor of , a Delaware corporation
("SHIPBUILDING COMPANY"), has reference to the following facts and
circumstances:
A. Guarantor owns 100% of the issued and outstanding capital stock of
, a Delaware corporation ("ACQUIROR SUBSIDIARY");
B. Guarantor, Acquiror Subsidiary and Tenneco Inc., a Delaware
corporation ("TENNECO") have entered into that certain Agreement and Plan
of Merger, dated as of , 1996 ("the MERGER AGREEMENT"),
pursuant to which, subject to the terms and conditions contained therein,
Acquiror Subsidiary will be merged with and into Tenneco, with Tenneco
continuing as the surviving corporation of the merger ("SURVIVING
CORPORATION") and a wholly-owned subsidiary of Guarantor;
C. In connection with the transactions contemplated by the Merger
Agreement, Tenneco, Shipbuilding Company and , a Delaware
corporation ("INDUSTRIAL COMPANY"), have entered into that certain
Distribution Agreement, dated as of , 1996 (together with all
exhibits, schedules and attachments thereto, the "DISTRIBUTION AGREEMENT"),
pursuant to which, subject to the terms and conditions contained therein,
(i) Tenneco and its subsidiaries will restructure, divide and separate
their existing businesses and assets so that (a) the Industrial Assets and
Industrial Business (as such terms are defined in the Distribution
Agreement) shall be owned, directly and indirectly, by the Industrial
Company, and (b) the Shipbuilding Assets and Shipbuilding Business (as such
terms are defined in the Distribution Agreement) shall be owned, directly
and indirectly by the Shipbuilding Company, and (ii) Tenneco shall
distribute all of the outstanding capital stock of Industrial Company and
Shipbuilding Company as a dividend to the holders of shares of the common
stock, par value $5.00 per share, of Tenneco;
D. Guarantor deems it to be in its best interests to enter into this
Guaranty in order to guarantee the payment and performance of the
obligations of Tenneco, Surviving Corporation and the Energy Subsidiaries
arising under the Transaction Documents (as hereinafter defined); and
E. Tenneco, as a condition precedent to consummation of the transactions
contemplated by the Merger Agreement, requires that Guarantor execute and
deliver this Guaranty.
NOW, THEREFORE, in consideration of the foregoing, Guarantor agrees as
follows:
1. DEFINITIONS.
(a) "EFFECTIVE TIME" has the meaning set forth in the Merger Agreement.
(b) "ENERGY SUBSIDIARIES" has the meaning set forth in the Merger Agreement.
(c) "GUARANTOR'S LIABILITIES" means all of Guarantor's obligations and
liabilities to Shipbuilding Company under this Guaranty
(d) "PERSON" has the meaning set forth in the Merger Agreement.
(e) "TENNECO LIABILITIES" has the meaning set forth in Section 2 hereof.
(f) "TRANSACTION DOCUMENTS" means the Merger Agreement and the Distribution
Agreement (including, without limitation, the Tax Sharing Agreement included
as an exhibit to the Distribution Agreement).
2. GUARANTY.
In consideration of the foregoing, from and after the Effective Time
Guarantor unconditionally, absolutely, continuingly and irrevocably
guarantees, as a primary obligor and not a surety, to Shipbuilding Company the
timely payment and performance by Tenneco, Surviving Corporation and/or the
Energy Subsidiaries of all of
1
<PAGE>
their respective covenants, agreements, obligations and liabilities arising
under or pursuant to the Transaction Documents (or any of them) (collectively,
the "TENNECO LIABILITIES").
As a condition to payment or performance of Guarantor's Liabilities,
Shipbuilding Company is not required to prosecute collection or seek to
enforce or resort to any remedies against Tenneco, Surviving Corporation or
any of the Energy Subsidiaries or any other Person liable to Shipbuilding
Company on account of Tenneco Liabilities or any guaranty thereof. Guarantor's
Liabilities shall in no way be impaired, affected, reduced or released by
reason of (i) Shipbuilding Company's failure or delay to do or take any of the
actions or things described in this Guaranty, or (ii) the voluntary or
involuntary liquidation, dissolution, sale or other disposition of all or
substantially all the assets of Tenneco, Surviving Corporation or any of the
Energy Subsidiaries or the marshaling of assets and liabilities, receivership,
insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition with creditors or readjustment of, or
other similar proceedings, or any other inability to pay or perform, affecting
Tenneco, Surviving Corporation or any of the Energy Subsidiaries, or any of
their respective assets, or any allegation concerning, or contest of the
legality or validity of, the indemnification obligations under any of the
Transaction Documents or this Guaranty in any such proceeding.
3. REPRESENTATIONS AND WARRANTIES.
Guarantor represents and warrants to Shipbuilding Company that:
(a) Guarantor has the legal power, right and authority to execute, deliver
and perform this Guaranty, and to consummate the transactions contemplated
hereby. All requisite corporate action has been taken by the Guarantor in
connection with the execution and delivery of this Guaranty, and the
consummation of the transactions contemplated hereby.
(b) This Guaranty has been duly executed and delivered by or on behalf of
Guarantor and constitutes the legal, valid and binding obligation of
Guarantor, enforceable against Guarantor in accordance with its terms.
(c) None of the execution, delivery and performance by Guarantor of this
Guaranty shall, by the lapse of time, the giving of notice or otherwise,
constitute a violation of any provision of applicable law, or contained in any
agreement, instrument or document to which Guarantor is now or may hereafter
become a party or by which Guarantor is or may become bound.
(d) Guarantor is now solvent and generally able to pay its debts as such
debts become due.
4. WAIVERS.
(a) Guarantor waives any and all right to assert against Shipbuilding
Company any claims or defenses with respect to the legality, validity and/or
enforceability of this Guaranty based upon any failure of Shipbuilding Company
to furnish to Guarantor any information or facts relating to the ability of
any of Tenneco, Surviving Corporation or the Energy Subsidiaries to pay and
perform the applicable Tenneco Liabilities.
(b) Guarantor waives all defenses, counterclaims and offsets of any kind or
nature, in connection with the legality, validity and/or enforceability of
this Guaranty, including, without limitation, any such defenses, counterclaims
or offsets arising directly or indirectly from any agreement, instrument or
document executed and delivered, by Tenneco, Surviving Corporation or any of
the Energy Subsidiaries, or acquired by Shipbuilding Company from Tenneco,
Surviving Corporation or any of the Energy Subsidiaries.
(c) Guarantor waives any and all right to assert against Shipbuilding
Company any claim or defense based upon any election of remedies by
Shipbuilding Company which in any manner impairs, affects, reduces, releases
or extinguishes Guarantor's right to proceed against Tenneco, Surviving
Corporation or any of the Energy Subsidiaries for reimbursement, or any other
rights of Guarantor against Tenneco, Surviving Corporation or any of the
Energy Subsidiaries, or against any other Person.
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(d) Guarantor hereby waives notice of the following events or occurrences
and agrees that Shipbuilding Company may do any or all of the following in
such manner, upon such terms and at such times as Shipbuilding Company in its
sole discretion deems advisable without in any way impairing, affecting,
reducing or releasing Guarantor from Guarantor's Liabilities: (i) Shipbuilding
Company's acceptance of this Guaranty; (ii) Shipbuilding Company's heretofore,
now or at any time or times hereafter obtaining, releasing, waiving or
modifying of any other Person's guaranty of Tenneco Liabilities given to
Shipbuilding Company; (iii) the amendment or modification of any of the
Transaction Documents, or the waiver or release of any provisions of the
Transaction Documents by Shipbuilding Company; (iv) presentment, demand,
notices of default, nonpayment, partial payment and protest, and all other
notices or formalities to which Guarantor may be entitled; (v) Shipbuilding
Company's heretofore, now or at any time or times hereafter granting to
Tenneco, Surviving Corporation or any of the Energy Subsidiaries (or any other
Person liable to Shipbuilding Company on account of Tenneco Liabilities) of
any indulgences or extensions of time of payment of Tenneco Liabilities; and
(vi) Shipbuilding Company's heretofore, now or at any time or times hereafter
accepting from Tenneco, Surviving Corporation or any of the Energy
Subsidiaries or any other Person any partial payment or payments on account of
Tenneco Liabilities or Shipbuilding Company's settling, subordinating,
compromising, discharging or releasing the same.
5. REMEDIES.
If Guarantor's Liabilities are not paid or performed forthwith by Guarantor
to Shipbuilding Company at Shipbuilding Company's principal place of business,
Shipbuilding Company may proceed to suit against Guarantor (at Shipbuilding
Company's election, one or more successive or concurrent suits may be brought
hereunder by Shipbuilding Company against Guarantor, whether suit has been
commenced against Tenneco, Surviving Corporation or any of the Energy
Subsidiaries and in any such suit Tenneco, Surviving Corporation or any of the
Energy Subsidiaries may be joined (but need not be joined) as a party with
Guarantor). In addition, Shipbuilding Company may exercise any other right or
remedy provided by law.
6. JURISDICTION.
All questions and/or disputes concerning the legality, construction,
validity and interpretation of this Guaranty shall be governed by the internal
laws, and not the law of conflicts, of the State of Delaware. Guarantor hereby
irrevocably and unconditionally agrees to be subject to, and hereby consents
and submits to, the jurisdiction of the courts of the State of Delaware and of
the Federal courts sitting in the State of Delaware.
7. MISCELLANEOUS.
If any provision of this Guaranty or the application thereof to any party or
circumstance is held invalid or unenforceable, the remainder of this Guaranty
and the application of such provision to other Persons or circumstances will
not be affected thereby, the provisions of this Guaranty being severable in
any such instance.
This Guaranty shall continue in full force and effect until all of the
Tenneco Liabilities are fully and indefeasibly paid, performed and discharged.
This Guaranty shall continue to be effective or be reinstated, as the case may
be, if at any time payment of any of Guarantor's Liabilities is rescinded or
must otherwise be returned by Shipbuilding Company upon the insolvency,
bankruptcy or reorganization of Guarantor, Tenneco, Surviving Corporation or
any of the Energy Subsidiaries or otherwise, all as though such payment had
not been made. This Guaranty shall be binding upon Guarantor and its
successors and assigns and shall inure to the benefit of Shipbuilding Company,
its successors and assigns.
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All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally or mailed by registered or certified
mail, return receipt requested, to the parties at the following addresses
(until notice of a change thereof is delivered as provided in this paragraph):
Shipbuilding Company:4101 Washington Avenue
Newport News, VA 23607
Attn: Corporate Secretary
Guarantor:One Paul Kayser Center
100 North Stanton Street
El Paso, TX 79901
Attn: William A. Wise
Chairman and Chief Executive Officer
Shipbuilding Company's failure at any time hereafter to require strict
performance by Guarantor of any provision of this Guaranty shall not waive,
effect or diminish any right of Shipbuilding Company thereafter to demand
strict compliance and performance therewith.
This Guaranty is in addition to, and not limitation of or substitution for,
Guarantor's covenants and obligations under the Transaction Documents
(including, without limitation, Guarantor's covenants and obligations under
Section 6.18 of the Merger Agreement).
IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date
first above written.
EL PASO NATURAL GAS COMPANY
By:__________________________________
Title:
4
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EXHIBIT M TO
AGREEMENT AND PLAN OF MERGER
FORM OF AFFILIATE LETTER
Acquiror
Gentlemen:
I have been advised that as of the date of this letter I may be deemed to be
an "affiliate" of Tenneco Inc., a Delaware corporation (the "Company"), as the
term "affiliate" is defined for purposes of paragraphs (c) and (d) of Rule 145
of the rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933,
as amended (the "Act"). Pursuant to the terms of the Agreement and Plan of
Merger dated , 1996 (the "Agreement"), among Acquiror, a Delaware
corporation ("Acquiror"), , a Delaware corporation (the
"Subsidiary"), and the Company, Subsidiary will be merged with and into the
Company (the "Merger").
As a result of the Merger, shares of Tenneco capital stock owned by me will
be converted into shares of capital stock of Acquiror ("Acquiror Stock").
I represent, warrant and covenant to Acquiror that in the event I receive
any Acquiror Stock as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of the
Acquiror Stock in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Agreement and discussed the
requirements of such documents and other applicable limitations upon my
ability to sell, transfer or otherwise dispose of Acquiror Stock to the
extent I felt necessary, with my counsel or counsel for the Company.
C. I have been advised that the issuance of Acquiror Stock to me pursuant
to the Merger has been or will be registered with the Commission under the
Act on a Form S-4 Registration Statement. However, I have also been advised
that, because at the time the Merger is submitted for a vote of the
stockholders of the Company, (a) I may be deemed to be an affiliate of the
Company and (b) the distribution by me of the Acquiror Stock has not been
registered under the Act, I may not sell, transfer or otherwise dispose of
Acquiror Stock issued to me in the Merger unless (i) such sale, transfer or
other disposition is made in conformity with the volume and other
limitations of Rule 145 promulgated by the Commission under the Act, (ii)
such sale, transfer or other disposition has been registered under the Act
or (iii) in the opinion of counsel reasonably acceptable to Acquiror, such
sale, transfer or other disposition is otherwise exempt from registration
under the Act.
D. I understand that Acquiror is not under an obligation to register the
sale, transfer or other disposition of the Acquiror Stock by me or on my
behalf under the Act or to take any other action necessary in order to make
compliance with an exemption from such registration available solely as a
result of the Merger.
E. I also understand that there will be placed on the certificates for
the Acquiror Stock issued to me, or any substitutions therefor, a legend
stating in substance
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE
TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED
, 1996, BETWEEN THE REGISTERED HOLDER HEREOF AND ACQUIROR, A
COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF
ACQUIROR."
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F. I also understand that unless a sale or transfer is made in conformity
with the provisions of Rule 145 or pursuant to a registration statement,
Acquiror reserves the right to put the following legend on the certificates
issued to my transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED
BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY
DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933
AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN
ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if the undersigned shall have delivered to Acquiror a copy of a letter
from the staff of the Commission, or an opinion of counsel reasonably
satisfactory to Acquiror in form and substance reasonably satisfactory to
Acquiror, to the effect that such legend is not required for purposes of the
Act.
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of the Company as described in the first paragraph of
this letter, or as a waiver of any rights I may have to object to any claim
that I am such an affiliate on or after the date of this letter.
Very truly yours,
-------------------------------------
Name:
Accepted this day of
, 1996, by
ACQUIROR
By_____________________________
Name:
Title:
2
<PAGE>
EXHIBIT N TO
AGREEMENT AND PLAN OF MERGER
[Jenner & Block Letterhead]
FORM OF OPINION
, 1996
Tenneco Inc.
1275 King Street
Greenwich, Connecticut 06831
Attn: Robert G. Simpson
Re:Opinion With Respect to the Acquisition of Tenneco Inc. by
El Paso Natural Gas Company
Gentlemen:
We have acted as counsel to Tenneco Inc., a Delaware corporation
("TENNECO"), in connection with the proposed merger of El Paso Merger Company
("SUBSIDIARY"), a newly created, wholly-owned subsidiary of El Paso Natural
Gas Company ("ACQUIROR"), with and into Tenneco (the "MERGER"), pursuant to
the Agreement and Plan of Merger dated as of , 1996, by and among
Acquiror, Subsidiary and Tenneco (the "MERGER AGREEMENT"). Subsidiary,
Acquiror and Tenneco are sometimes referred to herein collectively as the
"PARTIES." Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Merger Agreement.
You have requested our opinion as to certain of the federal income tax
consequences of the Merger.
I. STATEMENT OF FACTS
For purposes of the opinions set forth herein we have relied on the
following facts set forth in the Merger Agreement or otherwise represented to
us by one or more of the Parties, the truth and accuracy of which have not
been independently verified by us:
1. Tenneco is the common parent corporation of an affiliated group of
corporations filing a consolidated federal income tax return on a calendar-
year basis. Its address is 1275 King Street, Greenwich, Connecticut 06831, and
its employer identification number is 76-0233548.
2. As of March 31, 1996, Tenneco had approximately 191,354,932 shares of
Common Stock, par value $5.00 per share, outstanding (the "Tenneco Common
Stock"). The shares are listed on the New York, Midwest, Pacific, Toronto,
London, Paris, Frankfurt, Dusseldorf, Basel, Geneva, and Zurich stock
exchanges. In addition, Tenneco had 391,519 shares of $7.40 Cumulative
Preferred Stock (the "$7.40 PREFERRED STOCK") and 803,723 shares of $4.50
Cumulative Preferred Stock (the "$4.50 PREFERRED STOCK") outstanding. The
Tenneco Common Stock, $7.40 Preferred Stock and $4.50 Preferred Stock are
sometimes referred to collectively herein as the "TENNECO STOCK." As of March
31, 1996, there were Tenneco options outstanding to acquire an aggregate of
5,207,655 shares of Tenneco Common Stock. [Update as of the Closing.]
3. Tenneco is a diversified industrial company conducting all of its
operations through its subsidiaries. Tenneco's major business interests are in
natural gas transportation and marketing ("ENERGY BUSINESS"); manufacture and
sale of automotive exhaust system parts, ride control products and brake
products ("AUTOMOTIVE BUSINESS"); design, construction and repair of ships and
submarines ("SHIPBUILDING BUSINESS"); and manufacture and sale of packaging
materials, cartons, containers and speciality packaging products ("PACKAGING
BUSINESS").
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4. Acquiror is a Delaware corporation and the common parent of an affiliated
group of corporations filing a federal consolidated income tax return. As of
the date of the Closing, the authorized capital stock of Acquiror consisted of
[100,000,000] shares of voting common stock ("ACQUIROR COMMON STOCK") and
[ ] shares of par value Adjustable Rate Cumulative
Preferred Stock ("ACQUIROR PREFERRED STOCK"). [Update as of Closing.] The
adjustable Rate Cumulative Preferred Stock is a series of voting preferred
stock of the Acquiror with the terms set forth in Exhibit B to the Merger
Agreement. Acquiror Common Stock and Acquiror Preferred Stock are sometimes
collectively referred to herein as "ACQUIROR STOCK."
5. Subsidiary, a corporation, was formed on ,
1996, solely as an acquisition vehicle for purposes of accomplishing the
Merger. Subsidiary is a newly created, wholly-owned first tier subsidiary of
Acquiror and it has not material assets or liabilities.
6. The Parties have entered into the Merger Agreement, which provides for
the merger of Subsidiary with and into Tenneco, with Tenneco surviving as a
subsidiary of Acquiror. The Merger is related to other transactions preceding
the Merger that will be carried out according to the Distribution Agreement
dated as of , 1996 ("DISTRIBUTION AGREEMENT") among Tenneco,
[Newco], a Delaware corporation ("NEWCO"), and Tenneco InterAmerica Inc., a
Delaware corporation ("TIA"). The Distribution Agreement and the transactions
contemplated therein are integral parts of a plan for reorganizing Tenneco and
its subsidiaries.
7. Pursuant to the Distribution Agreement, Tenneco and its subsidiaries
will, through various intercompany transfers and distributions, divide and
separate their existing businesses such that Newco will own, directly or
indirectly, all of the assets, liabilities and operations of the Automotive
and Packaging Businesses of Tenneco, and TIA will own, directly or indirectly,
all of the assets, liabilities and operations of the Shipbuilding Business of
Tenneco (the "RESTRUCTURING"). Thereafter, Tenneco will distribute all of the
capital stock of Newco and TIA on a pro rata basis as a dividend to the
holders of Tenneco Common Stock (the "SPIN-OFFS"). The Parties intend (i) for
the Spin-offs to qualify for tax-free treatment pursuant to Section 355 of the
Internal Revenue Code of 1986, as amended (the "CODE"), and (ii) for the
Merger to qualify as a tax-free reorganization pursuant to Code Section
368(a)(1)(B). The Restructuring and the Spin-offs collectively are described
in greater detail in section C of the ruling request filed by Tenneco, dated
as of , 1996 (the "RULING REQUEST"), and the foregoing summary is
qualified in its entirety by the description contained in the Ruling Request,
as amended prior to the date hereof, and the terms of the Distribution
Agreement.
8. Following the Spin-offs, but prior to the Merger, Tenneco shall either
issue shares of $ Cumulative Preferred Stock of Tenneco ("NEW
PREFERRED STOCK") in a public or private offering for cash proceeds or
distribute the New Preferred Stock on a pro rata basis to holders of Tenneco
Common Stock. The New Preferred Stock will have an aggregate value
approximately equal to 25% of the Aggregate value of all of the classes of
capital stock of Tenneco immediately following the Merger. The holders of the
New Preferred Stock will have the right to vote as a separate class to elect a
number of directors of the Board of Directors of Tenneco, rounded up to the
nearest whole number, representing one-sixth of the members of the Board of
Directors of Tenneco. The directors elected by the holders of the New
Preferred Stock will have the same rights to vote on matters as all other
directors of Tenneco. The terms of the New Preferred Stock are set forth in
Exhibit D to the Merger Agreement.
9. As promptly as practicable after the Spin-offs and the satisfaction of
the conditions contained in the Merger Agreement, the Parties shall consummate
the Merger. Pursuant to the Merger Agreement, each share of Tenneco Common
Stock owned, directly or indirectly, by Tenneco shall be canceled and retired.
In addition, each share of Tenneco Common Stock issued and outstanding shall
be converted into the right to receive shares of Acquiror Common
Stock (or, in the event a shareholder vote is required for the issuance of
such Acquiror Common Stock, and a majority of the Acquiror Common Stock does
not approve the issuance of such Acquiror Common Stock (a "NO VOTE"), a number
of shares of Acquiror Preferred Stock or Acquiror Common Stock as determined
pursuant to Section 2.5 of the Merger Agreement). Each share of $7.40
Preferred Stock issued and outstanding shall be converted into the right to
receive shares of Acquiror Common Stock in accordance with the terms of
the Merger Agreement (or, in the event of a No Vote, a number of shares of
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Acquiror Preferred Stock or Acquiror Common Stock as determined pursuant to
Section 2.5 of the Merger Agreement), and each share of $4.50 Preferred Stock
issued and outstanding shall be converted into the right to receive
shares of Acquiror Common Stock in accordance with the terms of the Merger
Agreement (or, in the event of a No Vote, number of shares of Acquiror
Preferred Stock or Acquiror Common Stock as determined pursuant to Section 2.5
of the Merger Agreement). Each share of Subsidiary stock owned and outstanding
shall be converted into and become one fully paid and nonassessable share of
Tenneco Common Stock. As a result of these exchanges, Acquiror will acquire
all of Tenneco's issued and outstanding stock, except for the New Preferred
Stock which will not be affected by the Merger and shall remain outstanding
immediately after the Merger.
10. Section 1.6(c) of the Merger Agreement provides that, notwithstanding
anything to the contrary in paragraph I.9 above, no scrip or fractional shares
of Acquiror Stock shall be issued in the Merger. Instead, the Exchange Agent
shall sell on the NYSE, for the account of the persons otherwise entitled to
such fractional share interests, shares of Acquiror Common Stock, as the case
may be, equivalent to the aggregate of such fractional share interests. The
Exchange Agent will pay the net proceeds of such sale, without interest, to
the persons otherwise entitled to fractional share interests who surrender
their shares of Tenneco Common Stock, $7.40 Preferred Stock and $4.50
Preferred Stock.
11. Section 2.6(h) of the Merger Agreement provides that, notwithstanding
anything to the contrary in paragraph I.0 above, holders of Tenneco's $4.50
Preferred Stock who have properly demanded appraisal of such shares (the
"DISSENTERS") in accordance with Section 262 of the Delaware General
Corporation Law ("DGCL") shall not receive shares of Acquiror Preferred Stock
in exchange for such stock. Instead, the Dissenters will receive such
consideration as may be determined to be due the Dissenters pursuant to
Section 262 of the DGCL. All such consideration paid to the Dissenters shall
be paid by Tenneco from the $25,000,000 of cash required to be on hand prior
to the Effective Time pursuant to the Allocation Agreement, which cash shall
have been deposited by Tenneco into a separate escrow account. Acquiror shall
not have directly contributed any cash to such escrow account nor shall
Acquiror have guaranteed or otherwise supported any new borrowing the proceeds
of which are contributed to such escrow account.
12. Under the Merger Agreement, Tenneco will use its commercially reasonable
efforts to have in place a credit facility for itself to fund such tenders,
redemptions, prepayments, deficiencies and maturities as will be effected
pursuant to the Debt Realignment, as described in Exhibit C to the Merger
Agreement. Acquiror is required to cooperate with Tenneco in arranging such
credit facility and is required to provide such credit support and
undertakings as shall be reasonably requested of it by the providers of the
credit facility. As a result, the Acquiror may acquire directly, or become
indirectly liable for the payment of, debts of Tenneco and its consolidated
Energy Subsidiaries ("CONSOLIDATED DEBT") other than any new debt incurred to
fund payments into the escrow account to pay Dissenters as described in I.11
above. A substantial portion of the Consolidated Debt is held by persons other
than Tenneco's shareholders.
13. Section 10.1 of the Merger Agreement provides that subsequent to the
Merger, Acquiror will cause the Surviving Corporation promptly to pay any and
all legal and other costs and expenses, including, without limitation, the
fees and expenses of the Exchange Agent and Tenneco's financial advisors, and
all legal, accounting and actuarial fees and expenses that are incurred by
Tenneco in connection with the Merger Agreement and the transactions
contemplated by the Merger Agreement; provided such expenses are incurred
prior to the Effective Time, and have not been paid as of such time. In
addition, Section 10.1(c) of the Merger Agreement provides that Tenneco will
establish a separate escrow account, consisting of an adequate amount of cash
from the $25,000,000 of cash required to be on hand pursuant to the Allocation
Agreement, to fund any New York State Tax on Gains Derived from Certain Real
Property Transfers, the New York State Real Estate Transfer Tax and New York
City Real Property Transfer Tax (these taxes are referred to herein
collectively as the "TRANSFER TAXES") and any similar taxes in any other
jurisdiction that become payable in connection with the Merger.
14. Tenneco and Acquiror believe that the Merger will enhance prospects for
the future growth of the Energy Business due to the affiliation with another
corporation possessing similar and complementary lines of business.
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II. ADDITIONAL ASSUMPTIONS AND REPRESENTATIONS
The following representations have been made by each of the Parties (to the
extent such representation relates to such Party) in connection with the
Merger, and have been relied on by us in rendering the opinions set forth
herein:
1. Except as otherwise provided in the Merger Agreement, Tenneco, Acquiror,
Subsidiary and the Tenneco stockholders will each pay their own expenses, if
any, in connection with the Merger.
2. To the best of the knowledge of the management of Tenneco, there is no
plan or intention on the part of the Tenneco stockholders to sell, exchange,
or otherwise dispose of a number of shares of Acquiror Stock received in the
Merger that would reduce the Tenneco stockholders' ownership of Acquiror Stock
to a number of shares having a value, as of the Closing Date, of less than 50%
of the value of all of the formerly outstanding Tenneco Stock as of the
Closing Date. For purposes of this representation, shares of Tenneco Stock
surrendered by Dissenters or exchanged for cash in lieu of fractional shares
of Acquiror Stock will be treated as outstanding Tenneco Stock on the Closing
Date. Moreover, shares of Tenneco Stock and shares of Acquiror Stock held by
Tenneco stockholders and otherwise sold, redeemed or disposed of prior or
subsequent to the Closing Date will be considered in making this
representation. There are no Tenneco stockholders who own beneficially five
percent or more of the Tenneco Stock.
3. The fair market value of the Acquiror Stock received by each of the
Tenneco stockholders will be approximately equal to the fair market value of
the Tenneco Stock surrendered in the Merger.
4. Immediately after the Merger, the outstanding capital stock of Tenneco
shall consist solely of the Tenneco Common Stock and the New Preferred Stock,
and Acquiror shall own 100% of the Tenneco Common Stock. Acquiror has no plan
or intention to cause Tenneco to issue additional shares that would result in
Acquiror losing control of Tenneco within the meaning of Section 368(c)(1) of
the Code.
5. On the Closing Date, Tenneco will not have outstanding any warrants,
options, convertible securities, or any other type of right pursuant to which
any Person could acquire stock in Tenneco that, if exercised or converted,
would affect Acquiror's acquisition or retention of control of Tenneco, as
defined in Section 368(c )(1) of the Code.
6. None of the Parties is an investment company as defined in Section
368(a)(2) (F)(iii) and (iv) of the Code.
7. On the Closing Date, the fair market value of the assets of Tenneco will
exceed the sum of its liabilities plus the liabilities, if any, to which
Tenneco's assets are subject.
8. A substantial portion of the Consolidated Debt is owned by persons who
are not owners of Tenneco stock.
9. The payment of cash in lieu of fractional shares of Acquiror Stock is
solely for the purpose of avoiding the expense and inconvenience to Acquiror
of issuing fractional shares and does not represent separately bargained-for
consideration. The total cash consideration that will be paid in the
transaction to the Tenneco stockholders instead of issuing fractional shares
of Acquiror Stock will not exceed one percent of the total consideration that
will be issued in the transaction to the Tenneco stockholders in exchange for
their shares of Tenneco Stock. The fractional share interests of each
stockholder with respect to each class of Acquiror Stock will be aggregated,
and no stockholder will receive cash in an amount greater to or greater than
the value of one full share of Acquiror Stock of any such class.
10. Acquiror has no present plan or intention to liquidate Tenneco, to merge
Tenneco into another corporation, to cause Tenneco to sell or otherwise
dispose of its assets (other than the sale of certain assets unrelated (or
immaterial in relation) to Tenneco's interstate pipeline or natural gas
marketing businesses), or to sell or otherwise dispose of any Tenneco Stock
acquired in the Merger, except for transfers described in Section 368(a)(2)(C)
of the Code.
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11. Acquiror has no plan or intention to reacquire any Acquiror Stock issued
to Tenneco stockholders in the Merger.
12. Acquiror will acquire the Tenneco Stock in exchange for Acquiror Stock
as provided in Section 2.5 of the Merger Agreement. For purposes of this
representation, Tenneco Stock redeemed for cash or other property furnished by
Acquiror will be considered as acquired by Acquiror. Further, no liabilities
of Tenneco or the Tenneco shareholders will be assumed by Acquiror, nor will
any of the Tenneco Stock be subject to any liabilities.
13. Acquiror does not presently own, directly or indirectly, nor has it
owned during the past five years, directly or indirectly, any capital stock of
Tenneco.
14. Immediately following the Merger, Acquiror will continue the Energy
Business or use a significant portion of the assets of the Energy Business in
a business.
In addition to the facts, assumptions and representations set forth above,
we have examined and relied on such statutes, regulations, records,
certificates and other documents as we have considered necessary or
appropriate as a basis for the opinions rendered below, including, but not
limited to, the following:
(a) The Merger Agreement and its exhibits;
(b) The Distribution Agreement and its exhibits;
(c) The Tax Sharing Agreement dated as of , 1996, by and between
Tenneco, Newco and TIA;
(d) The representation letter of Tenneco dated , 1996,
delivered to us pursuant to section 6.6 of the Merger Agreement and in the
form set forth in Exhibit I to the Merger Agreement;
(e) The representation letter of Acquiror and Subsidiary dated ,
1996, delivered to us pursuant to section 6.6 of the Merger Agreement and
in the form set forth in Exhibit I to the Merger Agreement; and
(f) [list of other appropriate documents including:
a. Any registration statement on form S-1, including the S-1's for
Newco, TIA and the New Preferred;
b. Any underwriting agreement, including the underwriting agreement
for Newco, TIA and the New Preferred; and
c. Any appropriate debt or loan documents.]
The documents referred to in items (a) through (f) above are referred to
herein as the "Transaction Documents."
In our examination of the Transaction Documents, we have assumed, without
independent investigation, that each of the Transaction Documents has been
duly executed and delivered by the respective parties thereto in the form
reviewed by us and are enforceable against such parties in accordance with
their terms and that all obligations imposed by any such documents on the
parties thereto have been or will be performed or satisfied in accordance with
the terms of such documents. We have further assumed that the Merger of
Tenneco and Subsidiary and related transactions will be carried out strictly
in accordance with the terms of the Merger Agreement and the other Transaction
Documents.
In rendering the opinions set forth herein, we have also assumed (i) the
genuineness of all signatures on documents we have examined, (ii) the
authenticity of all documents submitted to us as originals, (iii) the
conformity to the original documents of all documents submitted to us as
copies, (iv) the authority and capacity of the individual or individuals who
executed any such document on behalf of any person, (v) the accuracy and
completeness of all records made available to us, and (vi) the factual
accuracy of all representations, warranties and other statements made by all
parties.
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We have further assumed, without investigation, that all documents,
representations, warranties and covenants on which we have relied as set forth
herein in rendering the opinions set forth below and that were given or dated
earlier than the date of this letter continue to remain accurate, in so far as
relevant to the opinions set forth below, from such earlier date through and
including the date of this letter.
III. OPINIONS
Based on our review of relevant provisions and limitations of the Code,
Treasury Regulations promulgated thereunder (including Proposed, Temporary and
Final Regulations), legislative history of the Code, as of the date hereof,
and interpretations of the code by the Service and the courts having
jurisdiction over such matters, we are of the following opinion:
1. The Merger will qualify as a tax-free reorganization within the meaning
of Section 368(a)(1)(B) of the Code. The Parties will each be a "party to a
reorganization" within the meaning of Code Section 368(b).
2. Acquiror will not recognize any gain or loss upon the receipt of Tenneco
Stock, solely in exchange for Acquiror Stock, as set forth in the Merger
Agreement.
3. Acquiror's basis in Tenneco Common Stock, $7.40 Preferred Stock and $4.50
Preferred Stock will, in each case, be equal to the basis of such stock in the
hands of the Tenneco shareholders immediately prior to the Merger.
4. Acquiror's holding period for Tenneco Common Stock, $7.40 Preferred Stock
and $4.50 Preferred Stock will, in each case, include the period during which
such stock was held by the shareholders of Tenneco.
5. The holders of Tenneco Common Stock, $7.40 Preferred Stock and $4.50
Preferred Stock will not recognize any gain or loss upon the exchange of such
stock for Acquiror Stock.
6. The basis of the Acquiror Stock to be received by the holders of Tenneco
Common Stock, $7.40 Preferred Stock and $4.50 Preferred Stock will be the same
as the basis of the Tenneco Stock surrendered in exchange therefor.
7. The holding period for the Acquiror Stock to be received by the holders
of Tenneco Common Stock, $7.40 Preferred Stock and $4.50 Preferred Stock will
include the holding period for the Tenneco Stock surrendered in exchange
therefor, provided that the Tenneco Stock surrendered is held as a capital
asset on the Closing Date.
8. The payment of cash to holders of Tenneco Common Stock, $7.40 Preferred
Stock and $4.50 Preferred Stock in lieu of the issuance of fractional shares
by Acquiror will be treated for federal income tax purposes as if the
fractional shares were issued in the transaction and then redeemed by
Acquiror. These cash payments will be treated as having been received as
distributions in full payment in exchange for the stock redeemed as provided
in Section 302(a) of the Code. A holder of Tenneco Common Stock, $7.40
Preferred Stock and $4.50 Preferred Stock receiving cash for fractional shares
will recognize capital gain or loss thereon, provided the shares of Tenneco
Stock surrendered for such fractional interests are held as capital assets by
the Tenneco stockholders on the Closing Date, in an amount equal to the
difference between the amount of cash received and the portion of such
shareholder's basis in the shares of Tenneco Stock allocable to such
fractional share interests. Such capital gain or loss will be long term
capital gain or loss if the holding period for such shares is more than one
year.
9. Holders of Tenneco's $4.50 Preferred Stock who properly demand appraisal
of such shares in accordance with Section 262 of the DGCL, and as a result
receive only cash in the merger, will be treated as having received that cash
as a distribution in redemption of such stock subject to the provisions and
limitations of Section 302 of the Code. These Dissenters who hold no Acquiror
Stock, directly or through the application of Code Section
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318, shall be treated as having a complete termination of interest within the
meaning of Code Section 302(b)(3), and the cash received will be treated as a
distribution in full payment in exchange for such Tenneco $4.50 Preferred
Stock as provided in Code Section 302(a). Holders of such $4.50 Preferred
Stock receiving solely cash will recognize capital gain or loss thereon,
provided such shares are held as capital assets on the Closing Date, in an
amount equal to the difference between the amount of cash received and the
shareholder's basis in the shares surrendered. Such capital gain or loss will
be long term capital gain or loss if the holding period for such shares is
more than one year.
As noted above, our opinions set forth above are based on relevant
provisions and limitations of the Code, Treasury Regulations promulgated
thereunder (including Proposed, Temporary and Final Regulations), legislative
history of the Code, as of the date hereof, and interpretations of the Code by
the Service and the courts having jurisdiction over such matters. These
provisions and interpretations are subject to change, either prospectively or
retroactively, which might result in modification of our opinion. Also, any
variation or difference in the facts from those set forth above or otherwise
provided to us may affect the conclusions stated herein.
No opinion is expressed regarding the tax treatment of the Merger under any
other provision of the Code, the Treasury Regulations, or under any state,
local or foreign tax laws. In addition, no opinion is expressed regarding the
tax treatment of any conditions existing at the time of, or effects resulting
from, the Merger that are not specifically covered by the above opinions.
This opinion is based on the facts, circumstances and law in existence as of
the date of this letter, and we disclaim any responsibility to advise the
Parties of any matters arising after the date hereof that may affect the
conclusions set forth herein.
Our opinion is provided as a legal opinion only, and while it represents our
best legal judgment, it does not constitute, and shall not be deemed to
constitute a guaranty, warranty, or surety of the matters discussed herein.
Accordingly, we can provide no assurances that the Service (and other
applicable state, local and foreign tax authorities) may not take positions
which conflict with the opinions expressed herein, which positions might
ultimately be sustained by the courts. Our opinions have no binding, legal
effect on the Service, the courts or any other applicable state, local or
foreign tax authority.
The opinions set forth above are solely for the benefit of Tenneco Inc. and
the shareholders of Tenneco, and it may not be relied upon or used by any
other person or for any other purpose without our express written consent.
JENNER & BLOCK
By:__________________________________
a partner
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EXHIBIT 3(IV)
FORM OF
DEPOSIT AGREEMENT
DEPOSIT AGREEMENT, dated as of [ , 1996,] between El Paso Natural Gas
Company, a Delaware corporation, and [ ], as Depositary.
WITNESSETH:
WHEREAS, it is desired to provide, as hereinafter set forth in this Deposit
Agreement, for the deposit of shares of Stock with the Depositary, as agent
for the beneficial owners of the Stock, for the purposes set forth in this
Deposit Agreement and for the issuance hereunder of the Receipts evidencing
Adjustable Rate Depositary Shares representing an interest in the Stock so
deposited; and
WHEREAS, the Receipts are to be substantially in the form of the Depositary
Receipt annexed as Exhibit A to this Deposit Agreement, with appropriate
insertions, modifications and omissions, as hereinafter provided in this
Deposit Agreement;
NOW, THEREFORE, in consideration of the premises contained herein, it is
agreed by and among the parties hereto as follows:
ARTICLE I
DEFINITIONS
The following definitions shall apply to the respective terms (in the
singular and plural forms of such terms) used in this Deposit Agreement and
the Depositary Receipts:
"Adjustable Rate Depositary Share" shall mean an interest in one twenty-
fifth of a share of Stock deposited with the Depositary hereunder, as
evidenced by the Receipts issued hereunder. Subject to the terms of this
Deposit Agreement, each owner of an Adjustable Rate Depositary Share is
entitled, proportionately, to all the rights and preferences of the Stock
represented by such Adjustable Rate Depositary Share, including the dividend,
voting, redemption and liquidation rights contained in the Certificate of
Designation.
"Certificate of Designation" shall mean the Certificate of Designation
annexed as Exhibit B to this Deposit Agreement, as amended from time to time,
establishing and setting forth the rights, preferences, privileges and
limitations of the Stock.
"Certificate of Incorporation" shall mean the Restated Certificate
Incorporation, as amended from time to time, of the Company.
"Common Stock" shall mean the Company's Common Stock, par value $3 per
share.
"Company" shall mean El Paso Natural Gas Company, a Delaware corporation,
and its successors.
"Corporate Office" shall mean the office of the Depositary at which at any
particular time its depositary receipt business shall be administered, which
at the date of this Deposit Agreement is located at [ ].
"Deposit Agreement" shall mean this agreement, as the same may be amended,
modified or supplemented from time to time.
"Depositary" shall mean [ ], and any successor as depositary hereunder.
"Depositary's Agent" shall mean an agent appointed by the Depositary as
provided, and for the purposes specified, in Section 7.05.
<PAGE>
"Depositary Successor" means a successor to the Depositary taking title to
the Stock in accordance with Section 5.04.
"Operating Guidelines" means the operating and administrative procedures
relating to the functions of the Depositary pursuant to this Deposit
Agreement, as agreed between the Company and the Depositary from time to time.
"Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, a government or any agency or political subdivision
thereof, or any other entity of whatever nature.
"Receipt" shall mean a Depositary Receipt issued hereunder to evidence one
or more Adjustable Rate Depositary Shares, whether in temporary or definitive
form.
"Record holder" as applied to a Receipt shall mean the person in whose name
a Receipt is registered on the books maintained by the Depositary for such
purpose.
"Redemption Date" shall have the meaning assigned to it in Section 2.03.
"Registrar" shall mean any qualified Person appointed by the Company to
register ownership of Receipts as herein provided.
"Securities" shall have the meaning assigned to it in Section 3.02.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Stock" shall mean shares of the Company's Adjustable Rate Cumulative
Preferred Stock, par value $.01 per share, heretofore validly issued, fully
paid and nonassessable.
ARTICLE II
FORM OF RECEIPTS, DEPOSIT OF STOCK,
EXECUTION AND DELIVERY, TRANSFER,
SURRENDER AND REDEMPTION OF RECEIPTS
SECTION 2.01. Form and Transferability of Receipts. Receipts shall be
engraved or printed or lithographed with steel-engraved borders and underlying
tint and shall be substantially in the form set forth in Exhibit A annexed to
this Deposit Agreement, with appropriate insertions, modifications and
omissions, as hereinafter provided. Pending the preparation of definitive
Receipts, the Depositary, upon the written order of the Company or any holder
of Stock, as the case may be, delivered for deposit in compliance with Section
2.02, shall execute and deliver temporary Receipts that are printed,
lithographed, typewritten, mimeographed or otherwise substantially of the
tenor of the definitive Receipts in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the persons executing such Receipts may determine, as evidenced by their
execution of such Receipts. If temporary Receipts are issued, the Company and
the Depositary will cause definitive Receipts to be prepared without
unreasonable delay. After the preparation of definitive Receipts, the
temporary Receipts shall be exchangeable for definitive Receipts upon
surrender of the temporary Receipts at an office described in the second to
last paragraph of Section 2.02, without charge to the holder. Upon surrender
for cancellation of any one or more temporary Receipts, the Depositary shall
execute and deliver in exchange therefor definitive Receipts representing the
same number of Adjustable Rate Depositary Shares as represented by the
surrendered temporary Receipt or Receipts. Such exchange shall be made at the
Company's expense and without any charge to the holder thereof. Until so
exchanged, the temporary Receipts shall in all respects be entitled to the
same benefits under this Agreement, and with respect to the Stock deposited
hereunder, as definitive Receipts.
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<PAGE>
Receipts shall be executed by the Depositary by the manual signature of a
duly authorized signatory of the Depositary, provided, however, that such
signature may be a facsimile if a Registrar (other than the Depositary) shall
have countersigned the Receipts by manual signature of a duly authorized
signatory of the Registrar. No Receipt shall be entitled to any benefits under
this Deposit Agreement or be valid or obligatory for any purpose unless it
shall have been executed as provided in the preceding sentence. The Depositary
shall record on its books each Receipt executed as provided above and
delivered as hereinafter provided.
Except as the Depositary may otherwise determine, Receipts shall be in
denominations of any number of whole Adjustable Rate Depositary Shares. All
Receipts shall be dated the date of their execution.
Receipts may be endorsed with or have incorporated in the text thereof such
legends or recitals or changes not inconsistent with the provisions of this
Deposit Agreement as may be required by the Depositary or required to comply
with any applicable law or regulation or with the rules and regulations of any
securities exchange upon which the Stock, the Adjustable Rate Depositary
Shares or the Receipts may be listed or to conform with any usage with respect
thereto, or to indicate any special limitations or restrictions to which any
particular Receipts are subject by reason of the date of issuance of the Stock
or otherwise.
Title to any Receipt (and to the Adjustable Rate Depositary Shares evidenced
by such Receipt) that is properly endorsed or accompanied by a properly
executed instrument of transfer or endorsement shall be transferable by
delivery with the same effect as in the case of a negotiable instrument;
provided, however, that until a Receipt shall be transferred on the books of
the Depositary as provided in Section 2.04, the Depositary may,
notwithstanding any notice to the contrary, treat the record holder thereof at
such time as the absolute owner thereof for the purpose of determining the
person entitled to distribution of dividends or other distributions or to any
notice provided for in this Deposit Agreement and for all other purposes.
SECTION 2.02. Deposit of Stock; Execution and Delivery of Receipts in
Respect Thereof. On the date any Stock is initially issued by the Company, the
Depositary, upon receipt of a written order from the Company and a certificate
or certificates for the Stock to be deposited under this Deposit Agreement in
accordance with the provisions of this Section, shall execute and deliver a
Receipt or Receipts for the number of Adjustable Rate Depositary Shares
representing such deposited Stock to the person or persons stated in such
order.
Subject to the terms and conditions of this Deposit Agreement, any holder of
Stock may deposit such Stock under this Deposit Agreement by delivery to the
Depositary of a certificate or certificates for the Stock to be deposited,
properly endorsed or accompanied, if required by the Depositary, by a properly
executed instrument of transfer or endorsement in form satisfactory to the
Depositary, together with (i) all such certifications as may be required by
the Depositary in accordance with the provisions of this Deposit Agreement and
(ii) a written order directing the Depositary to execute and deliver to or
upon the written order of the person or persons stated in such order a Receipt
or Receipts for the number of Adjustable Rate Depositary Shares representing
such deposited Stock.
If required by the Depositary, Stock presented for deposit at any time,
whether or not the register of stockholders of the Company is closed, shall
also be accompanied by an agreement or assignment, or other instrument
satisfactory to the Depositary, that will provide for the prompt transfer to
the Depositary or its nominee of any dividend or right to subscribe for
additional Stock or to receive other property that any person in whose name
the Stock is or has been registered may thereafter receive upon or in respect
of such deposited Stock, or in lieu thereof such agreement of indemnity or
other agreement as shall be satisfactory to the Depositary.
Upon receipt by the Depositary of a certificate or certificates for Stock to
be deposited hereunder, together with the other documents specified above, the
Depositary shall, as soon as transfer and registration can be accomplished,
present such certificate or certificates to the registrar and transfer agent
of the Stock for transfer and registration in the name of the Depositary or
its nominee of the Stock being deposited. Deposited Stock shall be held by the
Depositary in an account to be established by the Depositary at the Corporate
Office.
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<PAGE>
Upon receipt by the Depositary of a certificate or certificates for Stock to
be deposited hereunder, together with the other documents specified above, the
Depositary, subject to the terms and conditions of this Deposit Agreement,
shall execute and deliver to or upon the order of the person or persons named
in the written order delivered to the Depositary referred to in the first or
second paragraph of this Section 2.02 a Receipt or Receipts for the number of
whole Adjustable Rate Depositary Shares representing the Stock so deposited
and registered in such name or names as may be requested by such person or
persons. The Depositary shall execute and deliver such Receipt or Receipts at
the Corporate office, except that, at the request, risk and expense of any
person requesting such delivery, such delivery may be made at such other place
as may be designated by such person. In each case, delivery will be made only
upon payment by such person to the Depositary of all taxes and other
governmental charges and any fees payable in connection with such deposit and
the transfer of the Deposited Stock.
The Company shall deliver to the Depositary from time to time such
quantities of Receipts as the Depositary may reasonably request to enable the
Depositary to perform its obligations under this Deposit Agreement.
SECTION 2.03. Redemptions of Stock. Whenever the Company shall elect to
redeem shares of Stock in accordance with the Certificate of Designation, it
shall (unless otherwise agreed in writing with the Depositary) give the
Depositary in its capacity as Depositary not less than two business days prior
notice of the proposed date of the mailing of the notice of redemption of
Stock required pursuant to paragraphs 6(b) or 7(d) of the Certificate of
Designation to be effected in connection with a redemption of Stock and of the
number of such shares of Stock hold by the Depositary to be redeemed as
hereinafter provided.
On the date of any redemption of Stock in accordance with the Certificate of
Designation, provided that the Company shall then have deposited with the
Depositary the shares of Common Stock and any funds required pursuant to the
Certificate of Designation for the Stock deposited with the Depositary to be
redeemed, the Depositary shall redeem (using the shares of Common Stock and
funds, if any, deposited with it) the number of Adjustable Rate Depositary
Shares representing such redeemed Stock. The distribution of the shares of
Common Stock and funds, if any, used to effect such redemption shall be
governed by Sections 4.01 and 4.02 hereof. The Depositary shall, as directed
by the Company, mail, first class postage prepaid, the notice of the
redemption of Stock and the proposed simultaneous redemption of the Adjustable
Rate Depositary Shares representing the Stock to be redeemed, not less than 30
and not more than 60 days prior to the date fixed for redemption (the
"Redemption Date") of such Stock and Adjustable Rate Depositary Shares. Such
notice shall be mailed to each holder of record on the record date fixed for
such redemption pursuant to Section 4.04 hereof of the Receipts evidencing the
Adjustable Rate Depositary Shares, at the address of such holder as the same
appears on the records of the Depositary; but neither failure to mail any such
notice to one or more such holders nor any defect in any notice shall affect
the sufficiency of the proceedings for redemption.
With respect to the notices provided in accordance with the first paragraph
of this Section 2.03, the Company shall provide the Depositary with such
notice, and each such notice shall, as appropriate and to the extent
determinable at the time of such notice, state: the record date for such
redemption; the redemption date; that all outstanding Adjustable Rate
Depositary Shares are to be redeemed or, in the case of a redemption of fewer
than all outstanding Adjustable Rate Depositary Shares in connection with a
partial redemption of Stock pursuant to paragraph 6(a) or 7(a) of the
Certificate of Designation, the number of such Adjustable Rate Depositary
Shares held by such holder to be so redeemed; in connection with a redemption
of Stock pursuant to paragraph 6(a) of the Certificate of Designation, the
redemption price for the Adjustable Rate Depositary Shares, in connection with
a redemption pursuant paragraph 7(a) of the Certificate of Designation, the
number of shares of Common Stock deliverable upon redemption of each
Adjustable Rate Depositary Share to be redeemed and the then effective Common
Equivalent Rate (as defined in the Certificate of Designation) used to
calculate the number of shares of Common Stock; the place or places where
Receipts evidencing Adjustable Rate Depositary Shares to be redeemed are to be
surrendered for redemption and that dividends in respect of the Stock
represented by the Adjustable Rate Depositary Shares to be redeemed will cease
to accrue on such redemption date, unless the Company shall default in
delivering the shares of Common Stock or cash, if any, payable by the Company
at the time and place specified in such notice. In case fewer than all the
outstanding Adjustable Rate Depositary
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Shares are to be redeemed, the Adjustable Rate Depositary Shares to be
redeemed shall be selected by lot or such other method as the Company in its
discretion may determine is fair and appropriate.
Notice having been mailed by the Depositary as aforesaid, from and after the
redemption date (unless the Company shall have failed to redeem the shares of
Stock to be redeemed by it as set forth in the Company's notice provided for
in the preceding paragraphs), the Adjustable Rate Depositary Shares called for
redemption shall be deemed no longer to be outstanding and all rights of the
holders of Receipts evidencing such Adjustable Rate Depositary Shares (except
the right to receive the shares of Common Stock and any cash upon redemption)
shall, to the extent of such Adjustable Rate Depositary Shares, cease and
terminate. Upon surrender in accordance with said notices of the Receipts
evidencing such Adjustable Rate Depositary Shares (properly endorsed or
assigned for transfer, if the Depositary shall so require), such Adjustable
Rate Depositary Shares shall be redeemed (as nearly as may be practicable
without creating fractional shares) in exchange for cash or, if applicable,
shares of Common Stock at a rate equal to one twenty-fifth the number of
shares of Common Stock delivered in respect of the shares of Stock represented
by such Adjustable Rate Depositary Shares as is provided for in the
Certificate of Designation. The foregoing shall be subject further to the
terms and conditions of the Certificate of Designation.
If fewer than all of the Adjustable Rate Depositary Shares evidenced by a
Receipt are called for redemption, the Depositary will deliver to the holder
of such Receipt upon its surrender to the Depositary, a new Receipt evidencing
the Adjustable Rate Depositary Shares evidenced by such prior Receipt and not
called for redemption, together with the shares of Common Stock for the
Adjustable Rate Depositary Shares called for redemption.
SECTION 2.04. Transfer of Receipts. Subject to the terms and conditions of
this Deposit Agreement, the Depositary shall make transfers on its books from
time to time of Receipts upon any surrender thereof by the holder in person or
by a duly authorized attorney, properly endorsed or accompanied by a properly
executed instrument of transfer or endorsement, together with evidence of the
payment of any transfer taxes as may be required by law. Upon such surrender,
the Depositary shall execute a new Receipt or Receipts and deliver the same to
or upon the order of the person entitled thereto evidencing the same aggregate
number of Adjustable Rate Depositary Shares evidenced by the Receipt or
Receipts surrendered.
SECTION 2.05. Combination and Split-ups of Receipts. Upon surrender of a
Receipt or Receipts at the Corporate Office or such other office as the
Depositary may designate for the purpose of effecting a split-up or
combination of Receipts, subject to the terms and conditions of this Deposit
Agreement, the Depositary shall execute and deliver a new Receipt or Receipts
in the authorized denominations requested evidencing the same aggregate number
of Adjustable Rate Depositary Shares evidenced by the Receipt or Receipts
surrendered; provided, however, that the Depositary shall not issue any
Receipt evidencing a fractional Adjustable Rate Depositary Share.
SECTION 2.06. Surrender of Receipts and Withdrawal of Stock. Any holder of a
Receipt or Receipts may withdraw any or all of the Stock (but only in whole
shares of Stock) represented by the Adjustable Rate Depositary Shares
evidenced by such Receipts by surrendering such Receipt or Receipts at the
Corporate Office or at such other office as the Depositary may designate for
such withdrawals. After such surrender, without unreasonable delay, the
Depositary shall deliver to such holder, or to the person or persons
designated by such holder as hereinafter provided, the whole number of shares
of Stock represented by the Adjustable Rate Depositary Shares evidenced by the
Receipt or Receipts so surrendered for withdrawal, but holders of such shares
of Stock will not thereafter be entitled to deposit such shares of Stock
hereunder or to receive Adjustable Rate Depositary Shares therefor. If the
Receipt or Receipts delivered by the holder to the Depositary in connection
with such withdrawal shall evidence a number of Adjustable Rate Depositary
Shares in excess of the number of Adjustable Rate Depositary Shares
representing the whole number of shares of Stock to be withdrawn, the
Depositary shall at the same time, in addition to such whole number of shares
of Stock, deliver to such holder a new Receipt or Receipts evidencing such
excess number of Adjustable Rate Depositary Shares. Delivery of the Stock
being withdrawn may be made by the delivery of such certificates, documents of
title and other instruments
5
<PAGE>
as the Depositary may deem appropriate, which, if required by the Depositary,
shall be properly endorsed or accompanied by proper instruments of transfer.
If the Stock being withdrawn is to be delivered to a person or persons other
than the record holder of the Receipt or Receipts being surrendered for
withdrawal of Stock, such holder shall execute and deliver to the Depositary a
written order so directing the Depositary and the Depositary may require that
the Receipt or Receipts surrendered by such holder for withdrawal of such
shares of Stock be properly endorsed in blank or accompanied by a properly
executed instrument of transfer or endorsement in blank.
The Depositary shall deliver the Stock represented by the Adjustable Rate
Depositary Shares evidenced by Receipts surrendered for withdrawal at the
Corporate office, except that, at the request, risk and expense of the holder
surrendering such Receipt or Receipts and for the account of the holder
thereof, such delivery may be made at such other place as may be designated by
such holder.
SECTION 2.07. Limitations on Execution and Delivery, Transfer, Split-up,
Combination, Surrender and Exchange of Receipts. As a condition precedent to
the execution and delivery, transfer, split-up, combination, surrender or
exchange of any Receipt, the Depositary, any of the Depositary's Agents or the
Company may require any or all of the following: (i) payment to it of a sum
sufficient for the payment (or, in the event that the Depositary or the
Company shall have made such payment, the reimbursement to it) of any tax or
other governmental charge with respect thereto (including any such tax or
charge with respect to the Stock being deposited or withdrawn or with respect
to the Common Stock of the Company being issued upon redemption); (ii) the
production of proof satisfactory to it as to the identity and genuineness of
any signature; and (iii) compliance with such regulations, if any, as the
Depositary or the Company may establish not inconsistent with the provisions
of this Deposit Agreement.
The deposit of Stock may be refused, the delivery of Receipts against Stock
may be suspended, the transfer of Receipts may be refused, and the transfer,
split-up, combination, surrender or exchange of outstanding Receipts may be
suspended (i) during a period when the register of stockholders of the Company
is closed, (ii) if any such action is deemed necessary or advisable by the
Depositary, any of the Depositary's Agents or the Company at any time or from
time to time because of any requirement of law or of any government or
governmental body or commission, or under any provision of this Deposit
Agreement, or (iii) with the approval of the Company, for any other reason.
Without limitation of the foregoing, the Depositary shall not knowingly accept
for deposit under this Deposit Agreement any shares of Stock that are required
to be registered under the Securities Act unless a registration statement
under the Securities Act is in effect as to such shares of Stock.
SECTION 2.08. Lost Receipts, etc. In case any Receipt shall be mutilated or
destroyed or lost or stolen, the Depositary in its discretion may execute and
deliver a Receipt of like form and tenor in exchange and substitution for such
mutilated Receipt or in lieu of and in substitution for such destroyed, lost
or stolen Receipt; provided, however, that the holder thereof provides the
Depositary with (i) evidence satisfactory to the Depositary of such
destruction, loss or theft of such Receipt, of the authenticity thereof and of
his ownership thereof, (ii) reasonable indemnification satisfactory to the
Depositary and (iii) payment of any expense (including fees, charges and
expenses of the Depositary) in connection with such indemnification, execution
and delivery.
SECTION 2.09. Cancellation and Destruction of Surrendered Receipts. All
Receipts surrendered to the Depositary or any Depositary's Agent shall be
cancelled by the Depositary. Except as prohibited by applicable law or
regulation, the Depositary is authorized to destroy such Receipts so
cancelled.
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<PAGE>
ARTICLE III
CERTAIN OBLIGATIONS OF HOLDERS
OF RECEIPTS AND THE COMPANY
SECTION 3.01. Filing Proofs, Certificates and Other Information. Any person
presenting stock for deposit or any holder of a Receipt may be required from
time to time to file such proof of residence or other information, to execute
such certificates and to make such representations and warranties as the
Depositary or the Company may reasonably deem necessary or proper. The
Depositary or the Company may withhold or delay the delivery of any Receipt,
the transfer, redemption or exchange of any Receipt, the withdrawal of the
Stock represented by the Adjustable Rate Depositary Shares evidenced by any
Receipt or the distribution of any dividend or other distribution until such
proof or other information is filed, such certificates are executed or such
representations and warranties are made.
SECTION 3.02. Payment of Taxes or Other Governmental Charges. If any tax or
other governmental charge shall become payable by or on behalf of the
Depositary with respect to any Receipt, the Adjustable Rate Depositary Shares
evidenced by such Receipt, the Stock (or fractional interest therein)
represented by such Adjustable Rate Depositary Shares or any transaction
referred to in Section 4.06, such tax (including transfer, issuance or
acquisition taxes, if any) or governmental charge shall be payable by the
holder of such Receipt. Until such payment is made, transfer of any Receipt or
any withdrawal of the Stock represented by the Adjustable Rate Depositary
Shares evidenced by such Receipt may be refused, any dividend or other
distribution may be withheld and any part or all of the Stock represented by
the Adjustable Rate Depositary Shares evidenced by such Receipt may be sold
for the account of the holder thereof (after attempting by reasonable means to
notify such holder prior to such sale). Any dividend or other distribution so
withheld and the proceeds of any such sale may be applied to any payment of
such tax or other governmental charge, the holder of such Receipt remaining
liable for any deficiency. Unless the Company determines otherwise, the
Depositary shall act as the withholding agent for any payments, distributions
and exchanges made with respect to the Adjustable Rate Depositary Shares and
Receipts, and the Stock represented thereby (collectively, the "Securities").
The Depositary shall be responsible with respect to the Securities for the
timely (i) collection and deposit of any required withholding or backup
withholding tax, and (ii) filing of any information returns or other documents
with federal (and other applicable) taxing authorities. In the event the
Depositary is required to pay any such amounts, the Company shall reimburse
the Depositary for payment thereof upon the request of the Depositary and the
Depositary shall, upon the Company's request and as instructed by the Company,
pursue its rights against such holder at the Company's expense.
SECTION 3.03. Representations and Warranties as to Stock. In the case of the
initial deposit of the Stock, the Company and, in the case of subsequent
deposits thereof, each person so depositing Stock under this Deposit Agreement
shall be deemed thereby to represent and warrant that such Stock and each
certificate therefor are valid, fully paid and nonassessable and that the
person making such deposit is duly authorized to do so. Such representations
and warranties shall survive the deposit of the Stock and the issuance of
Receipts.
ARTICLE IV
THE STOCK, NOTICES
SECTION 4.01. Cash Distributions. Whenever any cash dividend or other cash
distribution shall be paid on the Stock, the Company, on behalf of the
Depositary (or, if the Company determines otherwise, the Depositary), shall,
subject to Sections 3.01 and 3.02, distribute to record holders of Receipts on
the record date fixed pursuant to Section 4.04 such amounts of such sum as
are, as nearly as practicable, in proportion to the respective numbers of
Adjustable Rate Depositary Shares evidenced by the Receipts held by such
holders; provided, however, that in case the Company or the Depositary shall
be required to withhold and does withhold from any cash dividend or other cash
distribution in respect of the Stock an amount on account of taxes or as
otherwise required pursuant to law, regulation or court process, the amount
made available for distribution or
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distributed in respect of Adjustable Rate Depositary Shares shall be reduced
accordingly. The Company, on behalf of the Depositary (or, if the Company
determines otherwise, the Depositary), shall distribute or make available for
distribution, as the case may be, only such amount, however, as can be
distributed without attributing to any owner of Adjustable Rate Depositary
Shares a fraction of one cent. In the event that the calculation of any such
cash dividend or other cash distribution to be paid to any record holder on
the aggregate number of Adjustable Rate Depositary Shares held by such holder
results in an amount which is a fraction of a cent, the amount the Depositary
shall distribute to such record holder shall be rounded to the next highest
whole cent; and upon request of the Depositary, the Company shall pay the
additional amount to the Depositary for distribution.
SECTION 4.02. Distributions Other Than Cash. Whenever any distribution other
than cash shall be made on the Stock, the Company, on behalf of the Depositary
(or, if the Company determines otherwise, the Depositary), shall, subject to
Sections 3.01 and 3.02, distribute to record holders of Receipts on the record
date fixed pursuant to Section 4.04 such amounts of the securities or property
received by it as are, as nearly as practicable, in proportion to the
respective numbers of Adjustable Rate Depositary Shares evidenced by the
Receipts held by such holders, in any manner that the Company may deem
equitable and practicable for accomplishing such distribution. If, in the
opinion of the Company, such distribution cannot be made proportionately among
such record holders, or if for any other reason (including any requirement
that the Company or the Depositary withhold an amount on account of taxes or
as otherwise required pursuant to law, regulation or court process), the
Company deems such distribution not to be feasible, the Company on behalf of
the Depositary (or, if the Company determines otherwise, the Depositary) may
adopt such method as it deems equitable and practicable for the purpose of
effecting such distribution, including the sale (at public or private sale) of
the securities or property thus received, or any part thereof, at such place
or places and upon such terms as it may deem proper. The net proceeds of any
such sale shall, subject to Sections 3.01 and 3.02, be distributed or made
available for distribution, as the case may be, by the Company on behalf of
the Depositary (or, if the Company determines otherwise, the Depositary) to
record holders of Receipts as provided by Section 4.01 in the case of a
distribution received in cash.
SECTION 4.03. Subscription Rights, Preferences or Privileges. If the Company
shall at any time offer or cause to be offered to the persons in whose names
Stock is registered on the books of the Company any rights, preferences or
privileges to subscribe for or to purchase any securities or any rights,
preferences or privileges of any other nature, such rights, preferences or
privileges shall in each such instance be made available by the Depositary or
the Company to the record holders of Receipts if the Company so directs in
such manner as the Company shall instruct (including by the issue to such
record holders of warrants representing such rights, preferences or
privileges); provided, however, that (a) if at the time of issue or offer of
any such rights, preferences or privileges the Company determines that it is
not lawful or feasible to make such rights, preferences or privileges
available to some or all holders of Receipts (by the issue of warrants or
otherwise) or (b) if and to the extent instructed by holders of Receipts who
do not desire to exercise such rights, preferences or privileges, the
Depositary shall then, if so instructed by the Company, and if applicable laws
or the terms of such rights, preferences or privileges so permit, sell such
rights, preferences or privileges of such holders at public or private sale,
at such place or places and upon such terms as it may deem proper. The net
proceeds of any such sale shall, subject to Sections 3.01 and 3.02, be
distributed by the Depositary or the Company, as the case may be, to the
record holders of Receipts entitled thereto as provided by Section 4.01 in the
case of a distribution received in cash.
If registration under the Securities Act of the securities to which any
rights, preferences or privileges relate is required in order for holders of
Receipts to be offered or sold such securities, the Company shall promptly
file a registration statement pursuant to the Securities Act with respect to
such rights, preferences or privileges and securities and use its best efforts
and take all steps available to it to cause such registration statement to
become effective sufficiently in advance of the expiration of such rights,
preferences or privileges to enable such holders to exercise such rights,
preferences or privileges. In no event shall the Depositary make available to
the holders of Receipts any right, preference or privilege to subscribe for or
to purchase any securities unless and until the
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Depositary has been notified by the Company that such registration statement
has become effective or that the offering and sale of such securities to such
holders are exempt from registration under the provisions of the Securities
Act.
If any other action under the law of any jurisdiction or any governmental or
administrative authorization, consent or permit is required in order for such
rights, preferences or privileges to be made available to holders of Receipts,
the Company will use its best efforts to take such action or obtain such
authorization, consent or permit sufficiently in advance of the expiration of
such rights, preferences or privileges to enable such holders to exercise such
rights, preferences or privileges.
SECTION 4.04. Notice of Dividends, Fixing of Record Date for Holders of
Receipts. Whenever any cash dividend or other cash distribution shall become
payable, any distribution other than cash shall be made, or any rights,
preferences or privileges shall at any time be offered with respect to the
Stock, or whenever the Depositary shall receive notice of (i) any meeting at
which holders of Stock are entitled to vote or of which holders of Stock are
entitled to notice or any solicitation of consents in respect of the Stock,
(ii) any call for redemption of any shares of Stock or (iii) any event of
which holders of Stock are entitled to notice in accordance with the
Certificate of Designation, the Depositary shall in each such instance fix a
record date (which shall be the same date as the record date fixed by the
Company with respect to the Stock) for the determination of the holders of
Receipts who shall be entitled (i) to receive such dividend, distribution,
rights, preferences or privileges or the net proceeds of the sale thereof,
(ii) to receive notice of, and to give instructions for the exercise of voting
rights at, or the delivery of consents with respect to, any such meeting or
consent solicitation, as the case may be, or (iii) to receive notice of any
such redemption or other event.
SECTION 4.05. Voting Rights. Upon receipt of notice of any meeting at which
the holders of Stock are entitled to vote, the Depositary shall, as soon as
practicable thereafter (unless another arrangement for allowing holders of
Adjustable Rate Depositary Shares to exercise the voting rights associated
with the Adjustable Rate Depositary Shares is agreed by the Company and the
Depositary), mail to the record holders of Receipts a notice, which shall be
provided by the Company and which shall contain (i) such information as is
contained in such notice of meeting, (ii) a statement that the holders of
Receipts at the close of business on a specified record date fixed pursuant to
Section 4.04 will be entitled, subject to any applicable provision of law, the
Certificate of Incorporation or the Certificate of Designation, to instruct
the Depositary as to the exercise of the voting rights with respect to the
amount of Stock represented by their respective Adjustable Rate Depositary
Shares and (iii) a brief statement as to the manner in which such instructions
may be given. Upon the written request of a holder of a Receipt on such record
date, the Depositary shall endeavor insofar as practicable to vote or cause to
be voted with respect to the amount of Stock represented by the Adjustable
Rate Depositary Shares evidenced by such Receipt in accordance with the
instructions set forth in such request. In the absence of specific
instructions from the holder of a Receipt, the Depositary will abstain from
voting to the extent of the Stock represented by the Adjustable Rate
Depositary Shares evidenced by such Receipt.
SECTION 4.06. Changes Affecting Stock and Reclassifications,
Recapitalizations, etc. Upon any split-up, consolidation or any other
reclassification of Stock, or upon any recapitalization, reorganization,
merger, amalgamation or consolidation affecting the Company or to which it is
a party or sale of all or substantially all of the Company's assets, the
Depositary shall, upon the instructions of the Company, treat any shares of
stock or other securities (including depositary shares) or property (including
cash) that shall be received by the Depositary in exchange for or upon
conversion of or in respect of the Stock as now deposited property under this
Deposit Agreement, and Receipts then outstanding shall thenceforth represent
the proportionate interests of holders thereof in the new deposited property
so received in exchange for or upon conversion or in respect of such Stock. In
any such case the Depositary may, in its discretion, with the approval of the
Company, execute and deliver additional Receipts, or may call for the
surrender of all outstanding Receipts to be exchanged for new Receipts
specifically describing such new deposited property. If upon any split-up,
consolidation or any other reclassification of Stock, or upon any
recapitalization, reorganization, merger, amalgamation or consolidation
affecting the Company or to which it is a party or sale of all or
substantially all of the Company's assets the Company delivers to the
Depositary shares of stock or other securities (including depositary shares)
or property
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(including cash) a portion of which shall be distributed to record holders of
Receipts in accordance with Sections 4.01, 4.02 and 4.03 and a portion of
which shall be received by the Depositary in exchange for or upon conversion
of or in respect of the Stock as new deposited property under this Section
4.06, the Company shall clearly indicate such division in the instructions to
the Depositary provided pursuant to this Section 4.06.
ARTICLE V
THE DEPOSITARY AND THE COMPANY
SECTION 5.01. Maintenance of Offices, Agencies, Transfer Books by the
Depositary; the Registrar. Upon execution of this Deposit Agreement in
accordance with its terms, the Depositary shall maintain at the Corporate
Office facilities for the execution and delivery, transfer, surrender and
exchange, split-up and combination of Receipts and the deposit and withdrawal
of Stock and at the offices of the Depositary's Agents, if any, facilities for
the delivery, transfer, surrender and exchange, split-up, combination and
redemption of Receipts and the deposit and withdrawal of Stock, all in
accordance with the provisions of this Deposit Agreement.
The Depositary shall keep books at the Corporate Office for the registration
and transfer of Receipts, which books at all reasonable times shall be open
for inspection by the record holders of Receipts as and to the extent provided
by applicable law. The Depositary shall consult with the Company upon receipt
of any request for inspection. The Depositary may close such books, at any
time or from time to time, when deemed expedient by it in connection with the
performance of its duties hereunder.
The Depositary shall make available for inspection by holders of Receipts at
the Corporate Office and at such other places as it may from time to time deem
advisable during normal business hours any reports and communications received
from the Company that are both received by the Depositary as the holder of
Stock and made generally available to the holders of Stock.
Promptly upon request from time to time by the Company and at the Company's
sole expense, the Depositary shall furnish to it a list, as of a recent date,
of the names, addresses and holdings of Adjustable Rate Depositary Shares of
all persons in whose names Receipts are registered on the books of the
Depositary.
If the Receipts or the Adjustable Rate Depositary Shares evidenced thereby
or the Stock represented by such Adjustable Rate Depositary Shares shall be
listed on the New York Stock Exchange, Inc., the Depositary shall, if directed
by the Company, appoint a Registrar for registry of such Receipts or
Adjustable Rate Depositary Shares in accordance with the requirements of such
Exchange. Such Registrar (which may be the Depositary if so permitted by the
requirements of such Exchange) may be removed and a substitute registrar
appointed by the Depositary upon the request or with the approval of the
Company. If the Receipts, such Adjustable Rate Depositary Shares or such Stock
are listed on one or more other stock exchanges, the Depositary will, at the
request of the Company, arrange such facilities for the delivery, transfer,
surrender and exchange of such Receipts, such Adjustable Rate Depositary
Shares or such Stock as may be required by law or applicable stock exchange
regulations.
SECTION 5.02. Liability of the Depositary, the Depositary's Agents or the
Company. Neither the Depositary nor any Depositary's Agent nor the Company
shall incur any liability to any holder of any Receipt, if by reason of any
provision of any present or future law or regulation thereunder of the United
States of America or of any other governmental authority or, in the case of
the Depositary or the Depositary's Agent, by reason of any provision, present
or future, of the Certificate of Incorporation or the Certificate of
Designation or, in the case of the Company, the Depositary or the Depositary's
Agent, by reason of any act of God or war or other circumstances beyond the
control of the relevant party, the Depositary, any Depositary's Agent or the
Company shall be prevented or forbidden from doing or performing any act or
thing that the terms of this Deposit Agreement provide shall be done or
performed; nor shall the Depositary, any Depositary's Agent or the Company
incur any liability to any holder of a Receipt by reason of any nonperformance
or delay, caused as aforesaid, in the performance of any act or thing that the
terms of this Deposit Agreement provide shall or may be done or
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performed, or by reason of any exercise of, or failure to exercise, any
discretion provided for in this Deposit Agreement except, in case of any such
exercise or failure to exercise discretion not caused as aforesaid, if caused
by the negligence, bad faith or willful misconduct of the party charged with
such exercise or failure to exercise.
SECTION 5.03. Obligations of the Depositary, the Depositary's Agents and the
Company. Neither the Depositary nor any Depositary Agent nor the Company nor
the Registrar assumes any obligation or shall be subject to any liability
under this Deposit Agreement or any Receipt to holders of Receipts other than
that each of them agrees to use good faith in the performance of such duties
as are specifically set forth in this Deposit Agreement and other than for its
negligence, bad faith or willful misconduct.
Neither the Depositary nor any Depositary's Agent nor the Company nor the
Registrar shall be under any obligation to appear in, prosecute or defend any
action, suit or other proceeding with respect to Stock, Adjustable Rate
Depositary Shares or Receipts or Common Stock or other securities or property
that in its opinion may involve it in expense or liability, unless indemnity
satisfactory to it against all expense and liability be furnished as often as
may be required.
Neither the Depositary nor any Depositary's Agent nor the Company nor the
Registrar shall be liable for any action or any failure to act by it in
reliance upon the advice of or information from legal counsel, accountants,
any person presenting Stock for deposit, any holder of a Receipt or any other
person believed by it in good faith to be competent to give such advice or
information. The Depositary, any Depositary's Agent, the Registrar and the
Company may each rely and shall each be protected in acting upon any written
notice, request, direction or other document believed by it to be genuine and
to have been signed or presented by the proper party or parties.
Notwithstanding the first paragraph of this Section 5.03, the Depositary
shall not be responsible for any failure to carry out any instruction to vote
any of the deposited shares of Stock or for the manner or effect of any such
vote made, as long as any such action or non-action is in good faith or in
accordance with this Deposit Agreement. The Depositary undertakes, and any
Registrar shall be required to undertake, to perform such duties and only such
duties as are specifically set forth in this Deposit Agreement against the
Depositary or any Registrar. The Depositary will indemnify the Company against
any liability that may arise out of acts performed or omitted by the
Depositary or its agents due to its or their negligence, bad faith or willful
misconduct. The Depositary, its parent, affiliates or subsidiaries and any
Depositary's Agent may own, buy, sell or deal in any class of securities of
the Company and its affiliates and in Receipts or Adjustable Rate Depositary
Shares or become pecuniarily interested in any transaction in which the
Company or its affiliates may be interested or contract with or lend money to
or otherwise act as fully or as freely as if it were not the Depositary or the
Depositary's Agent hereunder. The Depositary may also act as transfer agent or
registrar of any of the securities of the Company and its affiliates or act in
any other capacity for the Company or its affiliates.
It is intended that neither the Depositary nor any Depositary's Agent shall
be deemed to be an "issuer" of the securities under the federal securities
laws or applicable state securities laws, it being expressly understood and
agreed that the Depositary and any Depositary's Agent are acting only in a
ministerial capacity as Depositary for the Stock.
The Depositary agrees to comply with all information reporting and
withholding requirements applicable to it under law or this Deposit Agreement
in its capacity as Depositary.
Each of the Company and the Depositary agrees to be bound by, and act in
accordance with, the Operating Guidelines current from time to time.
The Depositary shall not lend the Adjustable Rate Depositary Shares.
Neither the Depositary (or its officers, directors, employees or agents) nor
any Depositary's Agent nor the Registrar makes any representation or has any
responsibility as to the validity of the Prospectus pursuant to which
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the Adjustable Rate Depositary Shares are offered, the Stock, the Adjustable
Rate Depositary Shares or the Receipts (except its countersignature thereon),
or any instruments referred to therein or herein, or as to the correctness of
any statement made therein or herein; provided, however, that the Depositary
is responsible for its representations in this Deposit Agreement.
The Depositary assumes no responsibility for the correctness of the
description that appears in the Receipts, which can be taken as a statement of
the Company summarizing certain provisions of this Deposit Agreement.
Notwithstanding any other provision herein or in the Receipts, the Depositary
makes no warranties or representations as to the validity, genuineness or
sufficiency of any Stock at any time deposited with the Depositary hereunder
or of the Adjustable Rate Depositary Shares, as to the validity or sufficiency
of this Deposit Agreement, as to the value of the Adjustable Rate Depositary
Shares or as to any right, title or interest of the record holders of Receipts
in and to the Adjustable Rate Depositary Shares, except that the Depositary
hereby represents and warrants as follows: (i) the Depositary has been duly
organized and is validly existing and in good standing under the laws of
[ ], with full power, authority and legal right under such law to
execute, deliver and carry out the terms of this Deposit Agreement; (ii) this
Deposit Agreement has been duly authorized, executed and delivered by the
Depositary; and (iii) this Deposit Agreement constitutes a valid and binding
obligation of the Depositary, enforceable against the Depositary in accordance
with its terms, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting enforcement of
creditors' rights generally and except as enforcement thereof is subject to
general principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law). The Depositary shall not be accountable
for the use or application by the Company of the Adjustable Rate Depositary
Shares or the Receipts or the proceeds thereof.
SECTION 5.04. Resignation and Removal of the Depositary, Appointment of
Successor Depositary. The Depositary may at any time resign as Depositary
hereunder by notice of its election to do so delivered to the Company, such
resignation to take affect upon the appointment of a successor depositary and
its acceptance of such appointment as hereinafter provided.
The Company may, by notice in writing to the Depositary, terminate the
engagement of the Depositary with respect to any or all of the duties or
obligations of the Depositary set out in this Deposit Agreement (including
such duties as are customarily associated with the role of a transfer agent or
paying agent), such termination to take effect upon the appointment of a
successor to fulfill those duties or obligations and its acceptance of such
appointment as hereinafter provided. In the event that the Company terminates
the engagement of the Depositary with respect to some, but not all, of the
duties or obligations of the Depositary, the Depositary shall thereafter be
deemed only to have such rights and obligations under this Deposit Agreement
as are necessary for it to fulfill its remaining duties or obligations. The
Depositary agrees to cooperate with the Company or any person appointed by the
Company or that person with respect to the performance of any of the duties
previously performed by the Depositary.
In case at any time the Depositary acting hereunder shall resign or the
Company shall terminate the engagement of the Depositary with respect to any
or all of the duties or obligations of the Depositary set out in this Deposit
Agreement, the Company shall, within 45 days after the delivery of the notice
of resignation or termination, as the case may be, appoint a successor with
respect to such duties and obligations so terminated. If such successor is to
take title to the Stock (a "Depositary Successor"), the Depositary Successor
shall be a bank or trust company, or an affiliate of a bank or trust company,
having its principal office in the United States of America and having a
combined capital and surplus of at least [$ ]. If a successor shall not have
been appointed in 45 days, the resigning Depositary may petition a court of
competent jurisdiction to appoint a successor.
Every Depositary Successor shall execute and deliver to its predecessor and
to the Company an instrument in writing accepting its appointment hereunder,
and thereupon such Depositary Successor, without any further act or deed,
shall become fully vested with all the duties and obligations of its
predecessor so terminated and all rights and powers with respect thereto and
for all purposes shall be the Depositary under this Deposit Agreement
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with respect to the duties and obligations of the predecessor so terminated,
and such predecessor, upon payment of all sums due it and on the written
request of the Company, shall promptly execute and deliver an instrument
transferring to such Depositary Successor all such rights and powers of such
predecessor hereunder, shall, if applicable, duly assign, transfer and deliver
all rights, title and interest in the Stock and any moneys or property held
hereunder to such Depositary Successor and shall, if applicable, deliver to
such Depositary Successor a list of the record holders of all outstanding
Receipts. Any Depositary Successor shall promptly mail notice of its
appointment to the record holders of Receipts.
Any corporation into or with which the Depositary may be merged,
consolidated or converted shall be the successor of such Depositary without
the execution or filing of any document or any further act. Such successor
depositary may execute the Receipts either in the name of the predecessor
depositary or in the name of the successor depositary.
SECTION 5.05. Corporate Notices and Reports. The Company agrees that it will
deliver to the Depositary, and the Depositary will, promptly after receipt
thereof, transmit to the record holders of Receipts, in each case at the
address recorded in the Depositary's books, copies of all notices and reports
(including financial statements) required by law, by the rules of any national
securities exchange upon which the Stock, the Adjustable Rate Depositary
Shares or the Receipts are listed or by the Certificate of Incorporation and
the Certificate of Designation to be furnished by the Company to holders of
Stock. Such transmission will be at the Company's expense and the Company will
provide the Depositary with such number of copies of such documents as the
Depositary may reasonably request. In addition, the Depositary will transmit
to the record holders of Receipts at the Company's expense such other
documents as may be requested by the Company. The Depositary will make
available for inspection by holders of Receipts at the Corporate office and at
such other places as it may from time to time deem advisable during normal
business hours any such notices and reports received from the Company.
SECTION 5.06. Deposit of Stock by the Company. Neither the Company nor any
company controlled by the Company will at any time deposit any Stock if such
Stock is required to be registered under the provisions of the Securities Act
and no registration statement is at such time in effect as to such Stock.
SECTION 5.07. Indemnification by the Company. The Company agrees to
indemnify the Depositary, any Depositary's Agent and any Registrar against,
and hold each of them harmless from, any liability, costs and expenses
(including reasonable attorneys' fees) that may arise out of or in connection
with its acting as Depositary, Depositary's Agent or Registrar, respectively,
under this Deposit Agreement and the Receipts, except for any liability
arising out of negligence, bad faith or willful misconduct on the part of any
such person or persons.
SECTION 5.08. Fees, Charges and Expenses. No fees, charges and expenses of
the Depositary or any Depositary's Agent hereunder or of any Registrar shall
be payable by any person other than the Company, except for any taxes and
other governmental charges and except as provided in this Deposit Agreement.
If the Depositary incurs fees, charges or expenses for which it is not
otherwise liable hereunder at the election of a holder of a Receipt or other
person, such holder or other person will be liable for such fees, charges and
expenses. All other fees, charges and expenses of the Depositary and any
Depositary's Agent hereunder and of any Registrar (including, in each case,
fees and expenses of counsel) incident to the performance of their respective
obligations hereunder will be paid from time to time upon consultation and
agreement between the Depositary and the Company as to the amount and nature
of such fees, charges and expenses.
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ARTICLE VI
AMENDMENT AND TERMINATION
SECTION 6.01. Amendment. The form of the Receipts and any provision of this
Deposit Agreement may at any time and from time to time be amended by
agreement between the Company and the Depositary in any respect that they may
deem necessary or desirable. Any amendment that shall impose any fees, taxes
or charges (other than fees and charges provided for herein or in the
Receipts), or that shall otherwise prejudice any substantial existing right of
holders of Receipts, shall not become effective as to outstanding Receipts
until the expiration of 15 days after notice of such amendment shall have been
given to the record holders of outstanding Receipts. Every holder of an
outstanding Receipt at the time any such amendment becomes effective shall be
deemed, by continuing to hold such Receipt, to consent and agree to such
amendment and to be bound by this Deposit Agreement an amended thereby. In no
event shall any amendment impair the right, subject to the provisions of
Sections 2.03, 2.06, 2.07 and Article III, of any owner of any Adjustable Rate
Depositary Shares to surrender the Receipt evidencing such Adjustable Rate
Depositary Shares with instructions to the Depositary to deliver to the holder
the Stock represented thereby, except in order to comply with mandatory
provisions of applicable law.
SECTION 6.02. Termination. This Deposit Agreement may be terminated by the
Company or the Depositary only after (a) (i) all outstanding Adjustable Rate
Depositary Shares shall have been redeemed pursuant to Section 2.03 or (ii)
there shall have been made a final distribution in respect of the Stock in
connection with any liquidation, dissolution or winding up of the Company and
such distribution shall have been distributed to the holders of Adjustable
Rate Depositary Shares pursuant to Section 4.01 or 4.02, as applicable, and
(b) reasonable notice has been given to any remaining holders of Receipts.
If any Receipts shall remain outstanding after the date of termination of
this Deposit Agreement, the Depositary thereafter shall discontinue the
transfer of Receipts, the Company or the Depositary, as the case may be, shall
suspend the distribution of dividends to the holders thereof, and the
Depositary shall not give any further notices (other than notice of such
termination) or perform any further acts under this Deposit Agreement, except
that the Depositary shall, if applicable, continue to collect dividends and
other distributions pertaining to Stock, sell rights, preferences or
privileges as provided in this Deposit Agreement and shall continue to deliver
the Stock and any money and other property represented by Receipts upon
surrender thereof by the holders thereof. At any time after the expiration of
two years from the date of termination, the Depositary may sell Stock then
held hereunder at public or private sale, at such places and upon such terms
as it deems proper and may thereafter hold the net proceeds of any such sale,
together with any money and other property held by it hereunder, without
liability for interest, for the benefit, pro rata in accordance with their
holdings, of the holders of Receipts that have not theretofore been
surrendered. After making such sale, the Depositary shall be discharged from
all obligations under this Deposit Agreement except to account for such net
proceeds and money and other property.
Upon the termination of this Deposit Agreement, the Company shall be
discharged from all obligations under this Deposit Agreement except for its
obligations to the Depositary, any Depositary's Agent and any Registrar under
Sections 5.07 and 5.08. In the event this Deposit Agreement is terminated, the
Company hereby agrees to use its best efforts to list any outstanding
underlying Stock on the New York Stock Exchange, Inc. or any other national
securities exchange on which the Common Stock is listed.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Counterparts. This Deposit Agreement may be executed by the
Company and the Depositary in separate counterparts, each of which
counterparts, when so executed and delivered, shall be deemed an original, but
all such counterparts taken together shall constitute one and the same
instrument. Delivery of an executed counterpart of a signature page to this
Deposit Agreement by telecopier shall be effective
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as delivery of a manually executed counterpart of this Deposit Agreement.
Copies of this Deposit Agreement shall be filed with the Depositary and the
Depositary's Agents and shall be open to inspection at all reasonable times
during normal business hours at the Corporate Office and the respective
offices of the Depositary's Agents, if any, by any holder of a Receipt.
SECTION 7.02. Exclusive Benefits of Parties. This Deposit Agreement is for
the exclusive benefit of the parties hereto, and their respective successors
hereunder, and shall not be deemed to give any legal or equitable right,
remedy or claim to any other person whatsoever.
SECTION 7.03. Invalidity of Provisions. In case any one or more of the
provisions contained in this Deposit Agreement or in the Receipts should be or
become invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein or
therein shall in no way be affected, prejudiced or disturbed thereby.
SECTION 7.04. Notices. Any notices to be given to the Company hereunder or
under the Receipts shall be in writing and shall be deemed to have been duly
given if personally delivered or sent by mail, or by telegram or telex or
telecopier confirmed by letter, addressed to the Company at El Paso Natural
Gas Company, One Paul Kayser Center, 100 North Stanton Street, El Paso, Texas
79901, Attention: Corporate Secretary, or at any other place to which the
Company may have transferred its principal executive office.
Any notices given to the Depositary hereunder or under the Receipts shall be
in writing and shall be deemed to have been duly given if personally delivered
or sent by mail, return receipt requested, addressed to the Depositary at the
Corporate Office.
Any notices given to any record holder of a Receipt hereunder or under the
Receipts shall be in writing and shall be deemed to have been duly given if
personally delivered or sent by mail, or by telegram or telex or telecopier
confirmed by letter, addressed to such record holder at the address of such
record holder as it appears on the books of the Depositary or, if such holder
shall have timely filed with the Depositary a written request that notices
intended for such holder be mailed to some other address, at the address
designated in such request.
Delivery of a notice sent by mail, or by telegram or telex or telecopier
shall be deemed to be effected at the time when a duly addressed letter
containing the same (or a duly addressed letter confirming an earlier notice
in the case of a telegram or telex or telecopier message) is deposited,
postage prepaid, in a post office letter box. The Depositary or the Company
may, in its sole discretion, act upon any telegram or telex or telecopier
message received by it from the other or from any holder of a Receipt,
notwithstanding that such telegram or telex or telecopier message shall not
have complied with the notice provisions set forth herein.
SECTION 7.05. Depositary's Agents. The Depositary may from time to time
appoint Depositary's Agents (with the Company's prior written consent and on
terms and conditions acceptable to the Company) to act in any respect for the
Depositary for the purposes of this Deposit Agreement and may at any time
appoint additional Depositary's Agents and vary or terminate the appointment
of such Depositary's Agents. The Depositary will notify the Company prior to
any such action.
SECTION 7.06. Holders of Receipts Are Parties. Notwithstanding that holders
of Receipts have not executed and delivered this Deposit Agreement or any
counterpart thereof, the holders of Receipts from time to time shall be deemed
to be parties to this Deposit Agreement and shall be bound by all of the terms
and conditions hereof and of the Receipts by acceptance of delivery of
Receipts.
SECTION 7.07. Governing Law. This Deposit Agreement and the Receipts and all
rights hereunder and thereunder and provisions hereof and thereof shall be
governed by, and construed in accordance with, the law of the State of New
York without giving effect to principles of conflict of laws.
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SECTION 7.08. Headings. The headings of articles and sections in this
Deposit Agreement and in the form of the Receipt set forth in Exhibit A hereto
have been inserted for convenience only and are not to be regarded as a part
of this Deposit Agreement or to have any bearing upon the meaning or
interpretation of any provision contained herein or in the Receipts.
IN WITNESS WHEREOF, El Paso Natural Gas Company, and [ ] have duly
executed this agreement as of the day and year first above set forth and all
holders of Receipts shall become parties hereto by and upon acceptance by them
of delivery of Receipts issued in accordance with the terms hereof.
EL PASO NATURAL GAS COMPANY
By: _________________________________
Name:
Title:
[ ]
By: _________________________________
Name:
Title:
16
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EXHIBIT A
DEPOSITARY RECEIPT
FOR
ADJUSTABLE RATE DEPOSITARY SHARES,
EACH REPRESENTING ONE TWENTY-FIFTH SHARE OF
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK
(PAR VALUE $.01 PER SHARE)
OF
EL PASO NATURAL GAS COMPANY
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
No. Adjustable Rate Depositary Shares (each Adjustable Rate
Depositary Share represents [one-fifteenth] share of Adjustable
Rate Cumulative Preferred Stock (par value $.01 per share)
l. [ ] trust company, as Depositary (the "Depositary"), hereby
certifies that is the registered owner of Depositary Shares (the
"Adjustable Rate Depositary Shares"), each Adjustable Rate Depositary Share
representing one twenty-fifth share of Adjustable Rate Cumulative Preferred
Stock, par value $.01 per share (the "Stock"), of El Paso Natural Gas Company,
a corporation duly organized and existing under the laws of the State of
Delaware (the "Company"), deposited with the Depositary, and the same
proportionate interest in any and all other property received by the
Depositary in respect of such share of Stock and held by the Depositary under
the Deposit Agreement (as defined below). Subject to the terms of the Deposit
Agreement, each owner of an Adjustable Rate Depositary Share is entitled,
proportionately, to all the rights, preferences and privileges of the Stock
represented thereby, including the dividend, voting, liquidation and other
rights contained in the Certificate of Designation of Adjustable Rate
Cumulative Preferred Stock, as amended from time to time, establishing the
rights, preferences, privileges and limitations of the Stock (the "Certificate
of Designation"), copies of which are on file at the Depositary's office
located at the time of the execution of the Deposit Agreement at
[ ] (such office or the corporate trust office of the Depositary at
which its business in respect of matters governed by the Deposit Agreement is
administered at any later time, being at the relevant time, the "Corporate
Officer").
2. The Deposit Agreement. Depositary Receipts (the "Receipts"), of which
this Receipt is one, are made available upon the terms and conditions set
forth in the Deposit Agreement, dated as of [ ], 1996 (the "Deposit
Agreement"), between the Company and the Depositary. The Deposit Agreement
(copies of which are on file at the Corporate Office and at the office of any
Depositary's Agent) sets forth the rights of holders of Receipts and the
rights and duties of the Depositary. The statements made on the face and the
reverse of this Receipt are summaries of certain provisions of the Deposit
Agreement and are subject to the detailed provisions thereof, to which
reference is hereby made. In the event of any conflict between the provisions
of this Receipt and the provisions of the Deposit Agreement, the provisions of
the Deposit Agreement will govern. Unless otherwise expressly herein provided,
all defined terms used herein shall have the meanings ascribed thereto in the
Deposit Agreement.
3. Redemptions of Stock. Whenever the Company shall elect to redeem shares
of Stock in accordance with the Certificate of Designation, it shall (unless
otherwise agreed in writing with the Depositary) give the Depositary in its
capacity as Depositary not less than two business days prior notice of the
proposed date of the mailing of the notice of redemption of the Stock required
pursuant to paragraph 4(h) of the Certificate of Designation in connection
with a redemption of Stock and of the number of such shares of Stock held by
the Depositary to be redeemed as provided herein.
On the date of any redemption of Stock in accordance with the Certificate of
Designation, provided that the Company shall then have deposited with the
Depositary the shares of Common Stock, par value $3 per share ("Common
Stock"), and any funds required pursuant to the Certificate of Designation for
the Stock deposited
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with the Depositary to be redeemed, the Depositary shall redeem (using the
shares of Common Stock and funds, if any, deposited with it) the number of
Adjustable Rate Depositary Shares representing such redeemed Stock. The
distribution of the shares of Common Stock and funds, if any, used to effect
such redemption shall be governed by Sections 4.01 and 4.02 of the Deposit
Agreement. The Depositary shall, as directed by the Company, mail, first class
postage prepaid, notice of the redemption of Stock and the proposed
simultaneous redemption of Adjustable Rate Depositary Shares representing the
Stock to be redeemed, not less than 30 and not more than 60 days prior to the
date fixed for redemption (the "Redemption Date") of such Stock and Adjustable
Rate Depositary Shares. Such notice shall be mailed to each holder of record on
the record date fixed for such redemption as provided in paragraph 14 below of
the Receipts evidencing Adjustable Rate Depositary Shares. In case fewer than
all the outstanding Adjustable Rate Depositary Shares are to be redeemed, the
Adjustable Rate Depositary Shares to be redeemed shall be selected by lot or
such other methods the Company in its discretion may determine is fair and
appropriate.
Notice having been mailed as aforesaid, from and after the redemption date
(unless the Company shall have failed to redeem the shares of Stock to be
redeemed by it, as set forth in the Company's notice provided for above), the
Adjustable Rate Depositary Shares called for redemption shall be deemed no
longer to be outstanding and all rights of the holders of Receipts evidencing
such Adjustable Rate Depositary Shares (except the right to receive the shares
of Common Stock and any cash upon redemption) shall, to the extent of such
Adjustable Rate Depositary Shares, cease and terminate. Upon surrender in
accordance with said notices of the Receipts evidencing such Adjustable Rate
Depositary Shares (properly endorsed or assigned for transfer, if the
Depositary shall so require), such Adjustable Rate Depositary Shares shall be
redeemed (as nearly as may be practicable without creating fractional shares)
in exchange for cash or, if applicable, shares of Common Stock at a rate equal
to one twenty-fifth of the number of shares of Common Stock delivered in
respect of the shares of Stock represented by such Depositary Shares as is
provided for in the Certificate of Designation. The foregoing shall be subject
further to the terms and conditions of the Certificate of Designation. If fewer
than all of the Adjustable Rate Depositary Shares evidenced by this Receipt are
called for redemption, the Depositary will deliver to the holder of this
Receipt upon its surrender to the Depositary, a new Receipt evidencing the
Adjustable Rate Depositary Shares evidenced by such prior Receipt and not
called for redemption, together with the shares of Common Stock or other
property for the Adjustable Rate Depositary Shares called for redemption.
4. Surrender of Receipts and Withdrawal of Stock. Upon surrender of this
Receipt to the Depositary at the Corporate Office, or at such other offices as
the Depositary may designate, and subject to the provisions of the Deposit
Agreement, the holder hereof is entitled to withdraw, and to obtain delivery,
to or upon the order of such holder, of any or all of the Stock (but only in
whole shares of Stock) and all money and other property, if any, at the time
represented by the Adjustable Rate Depositary Shares evidenced by this Receipt,
but holders of such shares of Stock will not thereafter be entitled to deposit
such shares of Stock hereunder or to receive Adjustable Rate Depositary Shares
therefor. If the Receipt or Receipts delivered by the holder to the Depositary
in connection with such withdrawal shall evidence a number of Adjustable Rate
Depositary Shares in excess of the number of Adjustable Rate Depositary Shares
representing the whole number of shares of Stock to be withdrawn, the
Depositary shall, in addition to such whole number of shares of Stock and such
money and other property, if any, to be withdrawn, deliver, to or upon the
order of such holder, a new Receipt or Receipts evidencing such excess number
of Adjustable Rate Depositary Shares.
5. Transfers, Split-ups, Combinations. Subject to paragraphs 6, 7 and 8
below, this Receipt is transferable on the books of the Depositary upon
surrender of this Receipt to the Depositary, properly endorsed or accompanied
by a properly executed instrument of transfer or endorsement, and upon such
transfer the Depositary shall sign and deliver a Receipt to or upon the order
of the person entitled thereto, all as provided in and subject to the Deposit
Agreement. This Receipt may be split into other Receipts or combined with other
Receipts into one Receipt evidencing the same aggregate number of Adjustable
Rate Depositary Shares evidenced by the Receipt or Receipts surrendered;
provided, however, that the Depositary shall not issue any Receipt evidencing a
fractional Adjustable Rate Depositary Share.
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6. Conditions to Signing and Delivery, Transfer, etc., of Receipts. Prior to
the execution and delivery, transfer, split-up, combination, surrender or
exchange of this Receipt, the Depositary, any of the Depositary's Agents or
the Company may require any or all of the following: (i) payment to it of a
sum sufficient for the payment (or, in the event that the Depositary or the
Company shall have made such payment, the reimbursement to it) of any tax or
other governmental charge with respect thereto (including any such tax or
charge with respect to Stock being deposited or withdrawn or with respect to
Common Stock of the Company being issued upon redemption); (ii) the production
of proof satisfactory to it as to the identity and genuineness of any
signature; and (iii) compliance with such regulations, if any, as the
Depositary or the Company may establish not inconsistent with the Deposit
Agreement. Any person presenting Stock for deposit, or any holder of this
Receipt, may be required to file such proof of information, to execute such
certificates and to make such representations and warranties as the Depositary
or the Company may reasonably deem necessary or proper. The Depositary or the
Company may withhold or delay the delivery of this Receipt, the transfer,
redemption or exchange of this Receipt, the withdrawal of the Stock
represented by the Adjustable Rate Depositary Shares evidenced by this Receipt
or the distribution of any dividend or other distribution until such proof or
other information is filed, such certificates are executed or such
representations and warranties are made.
7. Suspension of Delivery, Transfer, etc. The deposit of Stock may be
refused, the delivery of this Receipt against Stock may be suspended, or the
transfer, split-up, combination, surrender or exchange of this Receipt may be
suspended (i) during any period when the register of stockholders of the
Company is closed, (ii) if any such action is deemed necessary or advisable by
the Depositary, any of the Depositary's Agents or the Company at any time or
from time to time because of any requirement of law or of any government or
governmental body or commission, or under any provision of the Deposit
Agreement, or (iii) with the approval of the Company, for any other reason.
8. Payment of Taxes or Other Governmental Charges. If any tax or other
governmental charge shall become payable by or on behalf of the Depositary
with respect to this Receipt, the Adjustable Rate Depositary Shares evidenced
by this Receipt, the Stock (or any fractional interest therein) represented by
such Adjustable Rate Depositary Shares or any transaction referred to in
Section 4.06 of the Deposit Agreement, such tax (including transfer, issuance
or acquisition taxes, if any) or governmental charge shall be payable by the
holder hereof. Until such payment is made, transfer of this Receipt or any
withdrawal of the Stock, represented by the Adjustable Rate Depositary Shares
evidenced by this Receipt may be refused, any dividend or other distribution
may be withheld and any part or all of the Stock represented by the Adjustable
Rate Depositary Shares evidenced by this Receipt may be sold for the account
of the holder hereof (after attempting by reasonable means to notify such
holder prior to such sale). Any dividend or other distribution so withheld and
the proceeds of any such sale may be applied to any payment of such tax or
other governmental charge, the holder of this Receipt remaining liable for any
deficiency.
9. Amendment. The form of the Receipts and any provision of the Deposit
Agreement may at any time and from time to time be amended by agreement
between the Company and the Depositary in any respect that they may deem
necessary or desirable. Any amendment that shall impose any fees, taxes or
charges (other than fees and charges provided for herein or in the Deposit
Agreement), or that shall otherwise prejudice any substantial existing right
of holders of Receipts, shall not become effective as to outstanding Receipts
until the expiration of 15 days after notice of such amendment shall have been
given to the record holders of outstanding Receipts. The holder of this
Receipt at the time any such amendment becomes effective shall be deemed, by
continuing to hold this Receipt, to consent and agree to such amendment and to
be bound by the Deposit Agreement an amended thereby. In no event shall any
amendment impair the right, subject to the provisions of paragraphs 3, 4, 7
and 8 hereof and of Sections 2.03, 2.06, 2.07 and Article III of the Deposit
Agreement, of the owner of the Adjustable Rate Depositary Shares evidenced by
this Receipt to surrender this Receipt with instructions to the Depositary to
deliver to the holder the Stock and all money and other property, if any,
represented thereby, except in order to comply with mandatory provisions of
applicable law.
10. Fees, Charges and Expenses. The Company will pay all fees, charges and
expenses of the Depositary, except for taxes (including transfer taxes, if
any) and other governmental charges and such charges as are
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<PAGE>
expressly provided in the Deposit Agreement to be at the expense of persons
depositing Stock, holders of Receipts or other persons.
11. Title to Receipts. It is a condition of this Receipt, and every
successive holder hereof by accepting or holding the same consents and agrees,
that title to this Receipt (and to the Adjustable Rate Depositary Shares
evidenced hereby), when properly endorsed or accompanied by a properly
executed instrument of transfer or endorsement, is transferable by delivery
with the same effect as in the case of a negotiable instrument; provided,
however, that until this Receipt shall be transferred on the books of the
Depositary as provided in Section 2.04 of the Deposit Agreement, the
Depositary and the Company may, notwithstanding any notice to the contrary,
treat the record holder hereof at such time as the absolute owner hereof for
the purpose of determining the person entitled to distribution of dividends or
other distributions or to any notice provided for in the Deposit Agreement and
for all other purposes.
12. Cash Dividends and Distributions. Whenever any cash dividend or other
cash distribution shall be paid on the Stock, the Company, on behalf of the
Depositary, (or, if the Company determines otherwise, the Depositary) will,
subject to the provisions of the Deposit Agreement, make such distribution to
record holders of Receipts as nearly as practicable in proportion to the
respective numbers of Adjustable Rate Depositary Shares evidenced by the
Receipts held by such holders; provided, however, that in the event the
Company or the Depositary shall be required to withhold and does withhold from
any cash dividend or other cash distribution in respect of the Stock an amount
on account of taxes or as otherwise required by law, regulation or court
process, the amount made available for distribution or distributed in respect
of Adjustable Rate Depositary Shares shall be reduced accordingly. The
Company, on behalf of the Depositary, (or, if the Company determines
otherwise, the Depositary) shall distribute or make available for
distribution, as the case may be, only such amount, however, as can be
distributed without attributing to any owner of Adjustable Rate Depositary
Shares a fraction of one cent. In the event that the calculation of any such
cash dividend or other cash distribution to be paid to any record holder on
the aggregate number of Adjustable Rate Depositary Shares held by such holder
results in an amount which is a fraction of a cent, the amount the Depositary
shall distribute to such record holder shall be rounded to the next highest
whole cent; and upon request of the Depositary, the Company shall pay the
additional amount to the Depositary for distribution.
13. Subscription Rights, Preferences or Privileges. If the Company shall at
any time offer or cause to be offered to the persons in whose name Stock is
registered on the books of the Company any rights, preferences or privileges
to subscribe for or to purchase any securities or any rights, preferences or
privileges of any other nature, such rights, preferences or privileges shall
in each such instance, subject to the provisions of the Deposit Agreement, be
made available by the Depositary or the Company to the record holders of
Receipts if the Company so directs in such manner as the Company shall
instruct.
14. Notice of Dividends, Fixing of Record Date. Whenever any cash dividend
or other cash distribution shall become payable, any distribution other than
cash shall be made, or any rights, preferences or privileges shall at any time
be offered with respect to the Stock, or whenever the Depositary shall receive
notice of (i) any meeting at which holders of Stock are entitled to vote or of
which holders of Stock are entitled to notice or any solicitation of consents
in respect of the Stock, (ii) any call for redemption or exchange of any
shares of Stock or (iii) any event of which holders of Stock are entitled to
notice in accordance with the Certificate of Designation, the Depositary shall
in each such instance fix a record date (which shall be the same date as the
record date fixed by the Company with respect to the Stock) for the
determination of the holders of Receipts who shall be entitled (i) to receive
such dividend, distribution, rights, preferences or privileges or the net
proceeds of the sale thereof, (ii) to receive notice of, and to give
instructions for the exercise of voting rights at, or the delivery of consents
with respect to, any such meeting or consent solicitation, as the case may be,
or (iii) to receive notice of any such redemption or other event.
15. Voting Rights. Upon receipt of notice of any meeting at which the
holders of Stock are entitled to vote, the Depositary shall, as soon as
practicable thereafter (unless another arrangement for allowing holders of
Adjustable Rate Depositary Shares to exercise the voting rights associated
with the Adjustable Rate Depositary
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Shares is agreed by the Company and the Depositary), mail to the record
holders of Receipts a notice, which shall contain (i) such information as is
contained in such notice of meeting, (ii) a statement that the holders of
Receipts at the close of business on a specified record date determined as
provided in paragraph 14 will be entitled, subject to any applicable provision
of law, the Certificate of Incorporation or the Certificate of Designation, to
instruct the Depositary as to the exercise of the voting rights with respect
to the amount of Stock represented by their respective Adjustable Rate
Depositary Shares, and (iii) a brief statement as to the manner in which such
instructions may be given. Upon the written request of a holder of a Receipt
on such record date, the Depositary shall endeavor insofar as practicable to
vote or cause to be voted with respect to the amount of Stock represented by
the Adjustable Rate Depositary Shares evidenced by such Receipt in accordance
with the instructions set forth in such request. In the absence of specific
instructions from the holder of a Receipt, the Depositary will abstain from
voting to the extent of the Stock represented by the Adjustable Rate
Depositary Shares evidenced by such Receipt.
16. Reports, Inspection of Transfer Books. The Depositary shall make
available for inspection by holders of Receipts at the Corporate office and at
such other places as it may from time to time deem advisable during normal
business hours any reports and communications received from the Company that
are both received by the Depositary as the holder of Stock and made generally
available to the holders of Stock by the Company. The Depositary shall keep
books at the Corporate Office for the registration and transfer of Receipts,
which books at all reasonable times during normal business hours will be open
for inspection by the record holders of Receipts as and to the extent provided
by applicable law.
17. Liability of the Depositary, the Depositary's Agent and the
Company. Neither the Depositary nor any Depositary's Agent nor the Company
shall incur any liability to any holder of any Receipt, if by reason of any
provision of any present or future law or regulation thereunder of any
governmental authority or, in the case of the Depositary or the Depositary's
Agent, by reason of any provision, present or future, of the Certificate of
Incorporation or the Certificate of Designation or, in the case of the
Company, the Depositary or the Depositary's Agent, by reason of any act of God
or war or other circumstances beyond the control of the relevant party, the
Depositary, any Depositary's Agent or the Company shall be prevented or
forbidden from doing or performing any act or thing that the terms of the
Deposit Agreement provide shall be done or performed; nor shall the
Depositary, any Depositary's Agent or the Company incur any liability to any
holder of a Receipt by reason of any nonperformance or delay, caused as
aforesaid, in the performance of any act or thing that the terms of the
Deposit Agreement provide shall or may be done or performed, or by reason of
any exercise of, or failure to exercise, any discretion provided for in the
Deposit Agreement.
18. Obligations of the Depositary, the Depositary's Agents and the
Company. Neither the Depositary nor any Depositary's Agent nor the Company
assumes any obligation or shall be subject to any liability hereunder or under
the Deposit Agreement to holders of Receipts other than that each of them
agrees to use good faith in the performance of such duties as are specifically
set forth in the Deposit Agreement and other than for its negligence, bad
faith or willful misconduct.
Neither the Depositary nor any Depositary's Agent nor the Company shall be
under any obligation to appear in, prosecute or defend any action, suit or
other proceeding with respect to Stock, Adjustable Rate Depositary Shares or
Receipts or Common Stock that in its opinion may involve it in expense or
liability, unless indemnity satisfactory to it against all expense and
liability be furnished as often as may be required.
Neither the Depositary nor any Depositary's Agent nor the Company shall be
liable for any action or any failure to act by it in reliance upon the advice
of or information from legal counsel, accountants, any person presenting Stock
for deposit, any holder of a Receipt or any other person believed by it in
good faith to be competent to give such advice or information.
19. Termination of Deposit Agreement. The Deposit Agreement may be
terminated by the Company or the Depositary only after (a) (i) all outstanding
Adjustable Rate Depositary Shares shall have been redeemed pursuant to Section
2.03 of the Deposit Agreement or there shall have been made a final
distribution in respect
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of the Stock in connection with any liquidation, dissolution or winding up of
the Company and such distribution shall have been distributed to the holders
of Adjustable Rate Depositary Shares pursuant to Section 4.01 or 4.02 of the
Deposit Agreement, as applicable and (b) reasonable notice has been given to
any remaining holders of Receipts. Upon the termination of the Deposit
Agreement, the Company shall be discharged from all obligations thereunder
except for its obligations to the Depositary, any Depositary's Agent and any
Registrar under Sections 5.07 and 5.08 of the Deposit Agreement.
If any Receipts remain outstanding after the date of termination, the
Depositary thereafter shall discontinue all functions and be discharged from
all obligations as provided in the Deposit Agreement, except as specifically
provided therein.
20. Governing Law. The Deposit Agreement and this Receipt and all rights
thereunder and hereunder and provisions thereof and hereof shall be governed
by, and construed in accordance with, the law of the State of New York without
giving effect to principles of conflict of laws.
This Receipt shall not be entitled to any benefits under the Deposit
Agreement or be valid or obligatory for any purpose unless this Receipt shall
have been executed manually or, if a Registrar for the Receipts (other than
the Depositary) shall have been appointed, by facsimile by the Depositary by
the signature of a duly authorized signatory and, if executed by facsimile
signature of the Depositary, shall have been countersigned manually by Such
Registrar by the signature of a duly authorized signatory.
THE DEPOSITARY IS NOT RESPONSIBLE FOR THE VALIDITY OF ANY DEPOSITED STOCK.
THE DEPOSITARY ASSUMES NO RESPONSIBILITY FOR THE CORRECTNESS OF THE FOREGOING
DESCRIPTION WHICH CAN BE TAKEN AS A STATEMENT OF THE COMPANY SUMMARIZING
CERTAIN PROVISIONS OF THE DEPOSIT AGREEMENT. UNLESS EXPRESSLY SET FORTH IN THE
DEPOSIT AGREEMENT, THE DEPOSITARY MAKES NO WARRANTIES OR REPRESENTATIONS AS TO
THE VALIDITY, GENUINENESS OR SUFFICIENCY OF ANY STOCK AT ANY TIME DEPOSITED
WITH THE DEPOSITARY UNDER THE DEPOSIT AGREEMENT OR OF THE ADJUSTABLE RATE
DEPOSITARY SHARES OR THE RECEIPTS (EXCEPT FOR ITS COUNTERSIGNATURE THEREON),
AS TO THE VALIDITY OR SUFFICIENCY OF THE DEPOSIT AGREEMENT, AS TO THE VALUE OF
THE ADJUSTABLE RATE DEPOSITARY SHARES OR AS TO ANY RIGHT, TITLE OR INTEREST OF
THE RECORD HOLDERS OF THE DEPOSITARY RECEIPTS IN AND TO THE ADJUSTABLE RATE
DEPOSITARY SHARES.
The Company will furnish to any holder of a Receipt without charge, upon
request addressed to its executive office or the office of its transfer agent,
a full statement of the designation, relative rights, preferences and
limitations of the shares of each authorized class, and of each series of
preferred stock authorized to be issued, so far as the same may have been
fixed, and a statement of the authority of the Board of Directors of the
Company to designate and fix the relative rights, preferences and limitations
of each series.
Dated:
[ ]
By __________________________________
Authorized Signatory
A-22
<PAGE>
[FORM OF ASSIGNMENT]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
the within Receipt and all rights and interests represented by the
Adjustable Rate Depositary Shares evidenced thereby, and hereby irrevocably
constitutes and appoints his attorney, to transfer the same on the
books of the within-named Depositary, with full power of substitution in the
premises.
Dated:
Signature: __________________________
NOTE: The signature to this
assignment must correspond
with the name as written
upon the face of the
Receipt in every
particular, without
alteration or enlargement,
or any change whatever.
Signature Guarantee:
_____________________________________
A-23
<PAGE>
ANNEX 1 TO
AGREEMENT AND PLAN OF MERGER
FORM OF
AMENDMENT TO
CERTIFICATE OF INCORPORATION
OF
TENNECO INC.
The first two paragraphs of Article FOURTH are hereby deleted in their
entirety and replaced with the following paragraph:
"The total number of shares of all classes of stock which the corporation
shall be authorized to issue is 20,000,000 shares of Preferred Stock, par
value $.01 per share (herein called "Preferred Stock"), and 100,000 shares
of Common Stock, of the par value of $.01 per share (herein called "Common
Stock")."
Part I of Article FOURTH is hereby deleted in its entirety.
Part II of Article FOURTH is hereby amended to read in its entirety as set
forth in the following paragraph:
"I.
1. The Board of Directors of the Company is hereby expressly authorized,
by resolution or resolutions thereof, to provide, out of the unissued
shares of Preferred Stock, for series of Preferred Stock and, with respect
to each such series, to fix the number of shares constituting such series
and the designation of such series, the voting powers (if any) of the
shares of such series, and the preferences and relative, participating,
optional or other special rights, if any, and any qualifications,
limitations or restrictions thereof, of the shares of such series. The
powers, preferences and relative, participating, optional and other special
rights of each series of Preferred Stock, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any
and all other series at any time outstanding.
2. Except as otherwise provided in any resolution of the Board of
Directors providing for the issuance of any particular series of Preferred
Stock, shares of Preferred Stock redeemed or otherwise acquired by the
corporation shall, upon the filing of any required certificates with the
Secretary of State of Delaware, assume the status of authorized but
unissued Preferred Stock and may thereafter, subject to the provisions of
this Part I of Article FOURTH and of any restrictions contained in any
resolution of the Board of Directors providing for the issue of any
particular series of Preferred Stock, be reissued in the same manner as
other authorized but unissued Preferred Stock."
Part III and IV of Article FOURTH are hereby deleted in their entirety.
Subsection (A) of Article FIFTH is hereby deleted in its entirety and
replaced with the following paragraph:
"The number of directors which shall constitute the whole Board of
Directors shall be as determined from time to time by resolution adopted by
the affirmative vote of a majority of the Board of Directors; provided that
until otherwise determined by the Board of Directors in accordance
herewith, the number of directors shall be six (6)."
Subsection (B)(g) of Article FIFTH is hereby amended by deleting the words
"each committee to consist of two or more directors of the corporation" and
the comma immediately following such text.
Articles SEVENTH and NINTH are hereby deleted in their entirety and the
remaining provisions renumbered accordingly.
The Certificates of Designation for the $7.40, $4.50 and Series A filed on
, and are hereby deleted in their entirety.
<PAGE>
APPENDIX A
DISTRIBUTION AGREEMENT
AMONG
TENNECO INC.,
NEW TENNECO INC.
AND
NEWPORT NEWS SHIPBUILDING INC.
(FORMERLY KNOWN AS TENNECO INTERAMERICA INC.)
DATED AS OF
NOVEMBER 1, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<C> <S> <C>
ARTICLE I DEFINITIONS.................................................. 1
SECTION 1.01. General........................................ 1
SECTION 1.02. References..................................... 12
ARTICLE II PRE-DISTRIBUTION TRANSACTIONS; CERTAIN COVENANTS............. 13
SECTION 2.01. Corporate Restructuring Transactions........... 13
SECTION 2.02. Pre-Distribution Stock Dividends to Tenneco.... 13
SECTION 2.03. Charters and Bylaws............................ 13
SECTION 2.04. Election of Directors of Industrial Company and
Shipbuilding Company............................. 13
SECTION 2.05. Transfer and Assignment of Certain Licenses and
Permits.......................................... 14
SECTION 2.06. Transfer and Assignment of Certain Agreements.. 14
SECTION 2.07. Consents....................................... 15
SECTION 2.08. Other Transactions............................. 15
SECTION 2.09. Election of Officers........................... 15
SECTION 2.10. Registration Statements........................ 16
SECTION 2.11. State Securities Laws.......................... 16
SECTION 2.12. Listing Application............................ 16
SECTION 2.13. Certain Financial and Other Arrangements....... 16
SECTION 2.14. Director, Officer and Employee Resignations.... 17
SECTION 2.15. Transfers Not Effected Prior to the
Distributions; Transfers Deemed Effective as of
the Distribution Date............................ 17
SECTION 2.16. Ancillary Agreements........................... 18
ARTICLE III THE DISTRIBUTIONS............................................ 18
SECTION 3.01. Tenneco Action Prior to the Distributions...... 18
SECTION 3.02. The Distributions.............................. 19
SECTION 3.03. Fractional Shares.............................. 19
ARTICLE IV CONDITIONS TO THE DISTRIBUTIONS.............................. 20
SECTION 4.01. Conditions Precedent to the Distributions...... 20
SECTION 4.02. No Constraint.................................. 21
SECTION 4.03. Deferral of Distribution Date.................. 21
SECTION 4.04. Public Notice of Deferred Distribution Date.... 21
ARTICLE V COVENANTS.................................................... 22
SECTION 5.01. Further Assurances............................. 22
SECTION 5.02. Tenneco Name................................... 22
SECTION 5.03. Supplies and Documents......................... 22
SECTION 5.04. Assumption and Satisfaction of Liabilities..... 23
SECTION 5.05. No Representations or Warranties; Consents..... 23
SECTION 5.06. Removal of Certain Guarantees.................. 24
SECTION 5.07. Public Announcements........................... 24
SECTION 5.08. Intercompany Agreements........................ 25
SECTION 5.09. Tax Matters.................................... 25
ARTICLE VI ACCESS TO INFORMATION........................................ 25
SECTION 6.01. Provision, Transfer and Delivery of Applicable
Corporate Records........................................... 25
SECTION 6.02. Access to Information.......................... 26
SECTION 6.03. Reimbursement; Other Matters................... 26
SECTION 6.04. Confidentiality................................ 26
SECTION 6.05. Witness Services............................... 27
SECTION 6.06. Retention of Records........................... 27
SECTION 6.07. Privileged Matters............................. 27
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE VII INDEMNIFICATION............................................ 28
SECTION 7.01. Indemnification by Tenneco................... 28
SECTION 7.02. Indemnification by Industrial Company........ 28
SECTION 7.03. Indemnification by Shipbuilding Company...... 28
SECTION 7.04. Limitations on Indemnification Obligations... 29
SECTION 7.05. Procedures for Indemnification............... 30
SECTION 7.06. Indemnification Payments..................... 31
SECTION 7.07. Other Adjustments............................ 31
SECTION 7.08. Obligations Absolute......................... 32
SECTION 7.09. Survival of Indemnities...................... 32
SECTION 7.10. Remedies Cumulative.......................... 32
SECTION 7.11. Cooperation of the Parties With Respect to
Actions and Third Party Claims................. 32
SECTION 7.12. Contribution................................. 33
ARTICLE VIII MISCELLANEOUS.............................................. 33
SECTION 8.01. Complete Agreement; Construction............. 33
SECTION 8.02. Ancillary Agreements......................... 33
SECTION 8.03. Counterparts................................. 33
SECTION 8.04. Survival of Agreements....................... 33
SECTION 8.05. Responsibility for Expenses.................. 34
SECTION 8.06. Notices...................................... 34
SECTION 8.07. Waivers...................................... 34
SECTION 8.08. Amendments................................... 34
SECTION 8.09. Assignment................................... 35
SECTION 8.10. Successors and Assigns....................... 35
SECTION 8.11. Termination.................................. 35
SECTION 8.12. Third Party Beneficiaries.................... 35
SECTION 8.13. Attorney Fees................................ 35
SECTION 8.14. Title and Headings........................... 35
SECTION 8.15. Exhibits and Schedules....................... 35
SECTION 8.16. Specific Performance......................... 35
SECTION 8.17. Governing Law................................ 35
SECTION 8.18. Severability................................. 36
SECTION 8.19. Subsidiaries................................. 36
SECTION 8.20. Shipbuilding Hedging Transactions............ 36
</TABLE>
ii
<PAGE>
EXHIBITS
EXHIBIT ABenefits Agreement
EXHIBIT BCorporate Restructuring Transactions
EXHIBIT CDebt and Cash Allocation Agreement
EXHIBIT DEnergy Business Pro Forma Balance Sheet
EXHIBIT EEnergy Subsidiaries
EXHIBIT FIndustrial Business Pro Forma Balance Sheet
EXHIBIT GIndustrial Subsidiaries
EXHIBIT HInsurance Agreement
EXHIBIT IShipbuilding Business Pro Forma Balance Sheet
EXHIBIT JShipbuilding Subsidiaries
EXHIBIT KTax Sharing Agreement
EXHIBIT LTBS Services Agreement
EXHIBIT MTransition Services Agreement
EXHIBIT NForm of Restated Certificate of Incorporation
EXHIBIT OForm of Bylaws
EXHIBIT PTenneco Transition Trademark License
EXHIBIT QShipbuilding Transition Trademark License
iii
<PAGE>
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT is made and entered into as of this first day of
November, 1996 by and among TENNECO INC., a Delaware corporation ("TENNECO"),
NEW TENNECO INC., a Delaware corporation ("INDUSTRIAL COMPANY"), and NEWPORT
NEWS SHIPBUILDING INC. (formerly known as Tenneco InterAmerica Inc.), a
Delaware corporation ("SHIPBUILDING COMPANY").
R E C I T A L S
WHEREAS, Tenneco, El Paso Natural Gas Company, a Delaware corporation
("ACQUIROR"), and El Paso Merger Company, a Delaware corporation and an
indirect wholly owned subsidiary of Acquiror ("ACQUIROR SUBSIDIARY"), have
entered into an Amended and Restated Agreement and Plan of Merger, dated as of
November 1, 1996, but effective as of June 19, 1996 (as amended from time to
time, the "MERGER AGREEMENT"), providing for the merger of Acquiror Subsidiary
with and into Tenneco (the "MERGER"), with Tenneco continuing as the surviving
corporation of the Merger (the "SURVIVING CORPORATION"), upon the terms and
subject to the conditions set forth in the Merger Agreement;
WHEREAS, the Board of Directors of Tenneco has deemed it appropriate and
advisable, prior to the Merger and as contemplated by the Merger Agreement,
to:
(a) separate and divide the existing businesses of Tenneco so that (i)
the automotive, packaging and business services businesses shall be owned
directly and indirectly by Industrial Company, and (ii) the shipbuilding
business shall be owned directly and indirectly by Shipbuilding Company;
and
(b) distribute, following such separation and division and immediately
prior to the Merger, as a dividend to the holders of shares of Common
Stock, par value $5.00 per share, of Tenneco (the "TENNECO COMMON STOCK")
all of the outstanding shares of common stock, $.01 par value, of
Industrial Company (the "INDUSTRIAL COMMON STOCK") and all of the
outstanding shares of common stock, $.01 par value, of Shipbuilding Company
(the "SHIPBUILDING COMMON STOCK");
WHEREAS, following such separation, division and distributions, the
remaining businesses, operations, assets and liabilities of Tenneco and its
remaining direct and indirect subsidiaries shall be acquired by Acquiror
pursuant to the Merger; and
WHEREAS, each of Tenneco, Industrial Company and Shipbuilding Company has
determined that it is necessary and desirable to set forth the principal
corporate transactions required to effect such separation, division and
distributions and to set forth other agreements that will govern certain other
matters prior to and following such separation, division and distributions.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. GENERAL. Unless otherwise defined herein or unless the context
otherwise requires, the following terms will have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined).
"ACTION" means any action, suit, arbitration, inquiry, proceeding or
investigation by or before any Governmental Authority or any arbitration
tribunal.
"ACQUIROR SUBSIDIARY" has the meaning ascribed to such term in the
recitals to this Agreement.
"AFFILIATE" means, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the Person
specified.
<PAGE>
"AGENT" means First Chicago Trust Company of New York, or such other
trust company or bank designated by Tenneco, who shall act as agent for the
holders of Tenneco Common Stock in connection with the Distributions.
"AGREEMENT" means this Distribution Agreement by and among Tenneco,
Industrial Company and Shipbuilding Company, including any amendments
hereto and each Schedule and Exhibit attached hereto.
"ANCILLARY AGREEMENTS" means all of the written agreements, instruments,
understandings, assignments or other arrangements (other than this
Agreement or the Merger Agreement) entered into by the parties hereto or
any other member of their respective Group in connection with the Corporate
Restructuring Transactions, the Distributions and the other transactions
contemplated hereby or thereby, including, without limitation, the
following:
(i) the Debt and Cash Allocation Agreement;
(ii) the Insurance Agreement;
(iii) the Conveyancing and Assumption Instruments;
(iv) the Benefits Agreement;
(v) the Tax Sharing Agreement;
(vi) the Transition Services Agreement;
(vii) the TBS Services Agreement; and
(viii) the Transition Trademark License.
"BENEFITS AGREEMENT" means the Benefits Agreement by and among Tenneco,
Industrial Company and Shipbuilding Company, which agreement shall be
entered into on or prior to the Distribution Date in the form attached
hereto as EXHIBIT A, except for such changes or modifications thereto that
do not, individually or in the aggregate, adversely affect the Energy
Business other than to a de minimis extent.
"BOOKS AND RECORDS" means all books, records, manuals, agreements and
other materials (in any form or medium), including without limitation, all
mortgages, licenses, indentures, contracts, financial data, customer lists,
marketing materials and studies, advertising materials, price lists,
correspondence, distribution lists, supplier lists, production data, sales
and promotional materials and records, purchasing materials and records,
personnel records, manufacturing and quality control records and
procedures, blue prints, research and development files, records, data and
laboratory books, accounts records, sales order files, litigation files,
computer files, microfiche, tape recordings and photographs.
"CODE" means the Internal Revenue Code of 1986, as amended, or any
successor law.
"COMMISSION" means the United States Securities and Exchange Commission.
"CONSENTS" has the meaning ascribed to such term in SECTION 2.07 hereof.
"CONVEYANCING AND ASSUMPTION INSTRUMENTS" means, collectively, the
various written agreements, instruments and other documents to be entered
into to effect the Corporate Restructuring Transactions or to otherwise
effect the transfer of assets and the assumption of Liabilities in the
manner contemplated by this Agreement, the Ancillary Agreements and the
Corporate Restructuring Transactions.
"CORPORATE RESTRUCTURING TRANSACTIONS" means, collectively, (a) each of
the distributions, transfers, conveyances, contributions, assignments and
other transactions described and set forth on EXHIBIT B attached hereto,
and (b) such other distributions, transfers, conveyances, contributions,
assignments and other transactions (so long as such other distributions,
transfers, conveyances, contributions, assignments and other transactions
do not, individually or in the aggregate, adversely affect the Energy
Business (other than to a de minimis extent) or materially delay or prevent
the consummation of the Merger) that may be required to be accomplished,
effected or consummated by any of Tenneco, Industrial Company,
2
<PAGE>
1Shipbuilding Company or any of their respective Subsidiaries and
Affiliates in order to separate and divide, in a series of transactions
that, to the extent intended to qualify for tax-free transactions under the
Code, shall qualify for tax-free treatment under the Code, the existing
businesses of Tenneco so that, except as otherwise expressly set forth on
EXHIBIT B hereto:
(i) the Industrial Assets, Industrial Liabilities and Industrial
Business shall be owned, directly and indirectly, by Industrial
Company;
(ii) the Shipbuilding Assets, Shipbuilding Liabilities and
Shipbuilding Business shall be owned, directly and indirectly, by
Shipbuilding Company; and
(iii) the businesses, assets and liabilities of Tenneco that remain
after the separations and divisions described in clauses (i) and (ii)
above, including, without limitation, the Energy Assets, Energy
Liabilities and Energy Business, are, after giving effect to the
Distributions, owned, directly and indirectly, by Tenneco.
"DEBT AND CASH ALLOCATION AGREEMENT" means the Debt and Cash Allocation
Agreement by and among Tenneco, Industrial Company and Shipbuilding
Company, which agreement shall be entered into on or prior to the
Distribution Date in the form attached hereto as EXHIBIT C, except for such
changes or modifications thereto that do not, individually or in the
aggregate, adversely affect the Energy Business (other than to a de minimis
extent) or materially delay or prevent the consummation of the Merger.
"DEBT REALIGNMENT" has the meaning ascribed to such term in the Merger
Agreement.
"DEBT REALIGNMENT DOCUMENTS" means all documents furnished by Tenneco or
Industrial Company to any holders of indebtedness or debt securities of
Tenneco or any of its Subsidiaries or filed by Tenneco or Industrial
Company in connection therewith with any Governmental Authority or
securities exchange in connection with the Debt Realignment.
"DISTRIBUTIONS" means the Industrial Distribution and the Shipbuilding
Distribution.
"DISTRIBUTION DATE" means such date as may hereafter be determined by
Tenneco's Board of Directors as the date on which the Distributions shall
be effected.
"DISTRIBUTION RECORD DATE" means the close of business on the date
determined by the Board of Directors of Tenneco for the purpose of
determining the holders of record of Tenneco Common Stock entitled to
participate in the Distributions.
"DGCL" means the Delaware General Corporation Law, as amended.
"ENERGY ASSETS" means, collectively, all the rights and assets owned by
Tenneco or any of its Subsidiaries as of the close of business on the
Distribution Date other than the Industrial Assets, the Shipbuilding Assets
and the capital stock of Industrial Company and Shipbuilding Company,
including without limitation:
(i) the capital stock of the Energy Subsidiaries;
(ii) all of the assets included on the Energy Business Pro Forma
Balance Sheet which are owned by Tenneco and its Subsidiaries as of the
close of business on the Distribution Date and any other asset acquired
by Tenneco or any of its Subsidiaries from the date of the Energy
Business Pro Forma Balance Sheet to the close of business on the
Distribution Date that is owned by Tenneco and its Subsidiaries as of
the close of business on the Distribution Date and that is of a type or
nature that would have resulted in such asset being included as an
asset on the Energy Business Pro Forma Balance Sheet had it been
acquired on or prior to the date of the Energy Business Pro Forma
Balance Sheet, determined on a basis consistent with the determination
of assets included on the Energy Business Pro Forma Balance Sheet; and
(iii) all of the assets and rights expressly allocated to Tenneco or
any of the Energy Subsidiaries under this Agreement, any of the
Ancillary Agreements or the Merger Agreement.
"ENERGY BUSINESS" means the businesses (other than the Industrial
Business and the Shipbuilding Business) that, after giving effect to the
Corporate Restructuring Transactions, are or were conducted by:
(i) Tenneco, the Energy Subsidiaries or any of the other members of
the Energy Group;
(ii) any other division, Subsidiary or investment of Tenneco, or any
Energy Subsidiary or any of the other members of the Energy Group
managed or operated or in existence as of the date of this Agreement or
any prior time, unless such other division, Subsidiary or investment is
expressly included
3
<PAGE>
in either the Industrial Group or the Shipbuilding Group immediately
after giving effect to the Corporate Restructuring Transactions; and
(iii) any business entity acquired or established by or for Tenneco
or any of the Energy Subsidiaries between the date of this Agreement
and the close of business on the Distribution Date that is engaged in,
or intends to engage in, any business that is of a type or nature that
would have resulted in such business being included either as a
Subsidiary or an asset of Tenneco on the Energy Business Pro Forma
Balance Sheet had it been acquired or established on or prior to the
date of the Energy Business Pro Forma Balance Sheet, determined on a
basis consistent with the determination of the Subsidiaries and assets
included on the Energy Business Pro Forma Balance Sheet.
"ENERGY BUSINESS PRO FORMA BALANCE SHEET" means the Pro Forma
Consolidated Balance Sheet for Tenneco and the Energy Subsidiaries as of
June 30, 1996 attached hereto as EXHIBIT D.
"ENERGY GROUP" means Tenneco, the Energy Subsidiaries and the
corporations, partnerships, joint ventures, investments and other entities
that represent equity investments of Tenneco or any of the Energy
Subsidiaries following consummation of the Corporate Restructuring
Transactions and the Distributions.
"ENERGY INDEMNITEES" means:
(i) Tenneco, the Energy Subsidiaries and each Affiliate thereof after
giving effect to the Corporate Restructuring Transactions and the
Distributions; and
(ii) each of the respective past, present and future directors,
officers, employees and agents of any of the entities described in the
immediately preceding clause (i) and each of the heirs, executors,
successors and assigns of such directors, officers, employees and
agents.
"ENERGY LIABILITIES" means, collectively, all of the Liabilities of
Tenneco and the Energy Subsidiaries and each of the other members of the
Energy Group remaining after giving effect to the Corporate Restructuring
Transactions, the Distributions and the transactions contemplated under the
Debt and Cash Allocation Agreement, including without limitation:
(i) all of the Liabilities included on the Energy Business Pro Forma
Balance Sheet which remain outstanding as of the close of business on
the Distribution Date;
(ii) all Liabilities which are incurred or which otherwise accrue or
are accrued at any time on, prior to or after the date of the Energy
Business Pro Forma Balance Sheet and which arise or arose out of, or in
connection with, the Energy Assets or the Energy Business, determined
on a basis consistent with the determination of Liabilities of Tenneco
included on the Energy Business Pro Forma Balance Sheet;
(iii) all of the Liabilities of Tenneco, the Energy Subsidiaries or
any of the other members of the Energy Group under, or to be retained
or assumed by Tenneco, any Energy Subsidiary or any of the other
members of the Energy Group pursuant to the Corporate Restructuring
Transactions, this Agreement, any of the Ancillary Agreements or the
Merger Agreement;
(iv) all of the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising whether prior to, on or following the
Distribution Date) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Distribution
Date of the Energy Business;
(v) all Securities Liabilities relating to or arising out of the
information and data (financial or otherwise and including pro forma
financial data) provided by or on behalf of Acquiror for inclusion in
the Registration Statement on Form S-4 of Industrial Company
registering certain debt securities of New Tenneco to be exchanged for
certain existing debt securities of Tenneco and certain of its
Subsidiaries in connection with the Debt Realignment, including,
without limitation, information, disclosures and data relating to or
concerning Acquiror, Acquiror Subsidiary, the business, operations and
management of the Energy Business and/or Energy Group following the
Merger and any refinancing or other transactions which Acquiror,
Acquiror Subsidiary and/or any member of the Energy Group anticipates
consummating following the Merger (collectively "ENERGY EXCHANGE
LIABILITIES"); and
4
<PAGE>
(vi) all other Liabilities of Tenneco, the Energy Subsidiaries or any
of the other members of the Energy Group (which do not constitute
Industrial Liabilities or Shipbuilding Liabilities), which other
Liabilities of Tenneco, the Energy Subsidiaries or any of the other
members of the Energy Group shall include, without limitation, any and
all Liabilities arising out of or relating to any Action or Third Party
Claim by any Governmental Authority or any other Person that is based
on (A) any violations or alleged violations by Tenneco, its
Subsidiaries (prior to giving effect to the Distributions) and/or any
of their respective directors, officers, employees, agents or
representatives of any of the provisions of the Exchange Act,
Securities Act, or the rules and regulations of the Commission
promulgated thereunder or any other securities or similar Law (other
than Liabilities (collectively "INFORMATION STATEMENT LIABILITIES") for
violations or alleged violations that arise out of, or in connection
with, the Industrial Information Statement, the Shipbuilding
Information Statement or information or data in the Joint Proxy
Statement or the Debt Realignment Documents concerning the Shipbuilding
Business or the Industrial Business), (B) any alleged breach of
fiduciary duty by the Board of Directors of Tenneco or any member
thereof, or (C) any stockholder derivative suit or other similar
Actions.
"ENERGY RECORDS" has the meaning ascribed to such term in SECTION 6.01(C)
hereof.
"ENERGY SUBSIDIARIES" means the Subsidiaries of Tenneco set forth on
EXHIBIT E hereto and all other Subsidiaries of Tenneco other than
Shipbuilding Company, Industrial Company, the Shipbuilding Subsidiaries and
the Industrial Subsidiaries.
"ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign
statutes, laws, regulations, ordinances, rules, judgments, orders, decrees,
permits, concessions, grants, franchises, licenses, agreements or other
governmental restrictions (including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et
seq.), whether now or hereafter in existence, relating to the environment,
natural resources or human health and safety or endangered or threatened
species of fish, wildlife and plants or to emissions, discharges or
releases of pollutants, contaminants, petroleum or petroleum products,
chemicals or industrial, toxic or hazardous substances or wastes into the
environment, including, without limitation, ambient air, surface water,
ground water or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the cleanup or other
remediation thereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE FILE MATERIAL" means the Registration Statements, as amended at
the times they were declared effective under the Exchange Act, the related
Information Statements or any amendment or supplement thereto, the related
letter of transmittal, any related stockholder communication, any other
exhibits to any of the foregoing and any amendment or supplement thereto,
in each case including all information incorporated by reference therein.
"GAAP" means United States generally accepted accounting principles and
practices, as in effect on the date of this Agreement, as promulgated by
the Financial Accounting Standards Board and its predecessors.
"GOVERNMENTAL AUTHORITY" means any government or any agency, bureau,
board, commission, court, department, official, political subdivision,
tribunal or other instrumentality of any government, whether federal, state
or local, domestic or foreign.
"GROUP" means (i) with respect to Tenneco, the Energy Group, (ii) with
respect to Industrial Company, the Industrial Group, and (iii) with respect
to Shipbuilding Company, the Shipbuilding Group.
"INDEMNIFIABLE LOSSES" means, with respect to any Person, any and all
losses, liabilities, penalties, claims, damages, demands, costs and
expenses (including, without limitation, reasonable attorneys' fees,
investigation expenses and any and all other out-of-pocket expenses, but
excluding any punitive or consequential damages) or other Liabilities
whatsoever that are assessed, imposed, awarded against, incurred or accrued
by such Person either (a) in investigating, preparing for, defending
against or otherwise arising out of or in connection with any Actions, any
potential or threatened Actions or any Third Party
5
<PAGE>
Claims for which such Person would be entitled to indemnification under
ARTICLE VII hereof, or (b) in respect of any other event, occurrence or
matter for which such Person would be entitled to indemnification under
ARTICLE VII hereof, in each case whether accrued or incurred on, before or
after the date of this Agreement.
"INDEMNIFYING PARTY" has the meaning ascribed to such term in SECTION
7.04(A) hereof.
"INDEMNITEE" has the meaning ascribed to such term in SECTION 7.04(A)
hereof.
"INDUSTRIAL ASSETS" means, collectively, all of the following rights and
assets that are owned by Tenneco or any of its Subsidiaries as of the close
of business on the Distribution Date:
(i) the capital stock of the Industrial Subsidiaries;
(ii) all of the assets included on the Industrial Business Pro Forma
Balance Sheet that are owned by Tenneco or any of its Subsidiaries as
of the close of business on the Distribution Date;
(iii) all of the assets and rights expressly allocated to Industrial
Company or any of the Industrial Subsidiaries under this Agreement or
any of the Ancillary Agreements; and
(iv) any other asset acquired by Tenneco or any of its Subsidiaries
from the date of the Industrial Business Pro Forma Balance Sheet to the
close of business on the Distribution Date that is owned by Tenneco or
any of its Subsidiaries as of the close of business on the Distribution
Date and that is of a type or nature that would have resulted in such
asset being included as an asset on the Industrial Business Pro Forma
Balance Sheet had it been acquired on or prior to the date of the
Industrial Business Pro Forma Balance Sheet, determined on a basis
consistent with the determination of the assets included on the
Industrial Business Pro Forma Balance Sheet.
"INDUSTRIAL BUSINESS" means the businesses that, after giving effect to
the Corporate Restructuring Transactions, are conducted by:
(i) the Industrial Company, the Industrial Subsidiaries or any of the
other members of the Industrial Group; and
(ii) any business entity acquired or established by or for Tenneco,
Industrial Company or any of the Industrial Subsidiaries between the
date of this Agreement and the close of business on the Distribution
Date that is engaged in, or intends to engage in, any business that is
of a type or nature that would have resulted in such business being
included either as a Subsidiary or an asset of Industrial Company on
the Industrial Business Pro Forma Balance Sheet had it been acquired or
established on or prior to the date of the Industrial Business Pro
Forma Balance Sheet, determined on a basis consistent with the
determination of the Subsidiaries and assets included on the Industrial
Business Pro Forma Balance Sheet.
"INDUSTRIAL BUSINESS PRO FORMA BALANCE SHEET" means the Pro Forma
Consolidated Balance Sheet for Industrial Company and the Industrial
Subsidiaries as of June 30, 1996 attached hereto as EXHIBIT F.
"INDUSTRIAL COMMON SHARES" means the shares of Industrial Common Stock
owned by Tenneco after giving effect to the stock dividend provided for in
SECTION 2.02(A) hereof.
"INDUSTRIAL COMMON STOCK" has the meaning ascribed to such term in the
recitals to this Agreement.
"INDUSTRIAL COMPANY" means New Tenneco Inc., a Delaware corporation.
"INDUSTRIAL DISTRIBUTION" means the distribution on the Distribution Date
as a dividend to holders of record of shares of Tenneco Common Stock as of
the Distribution Record Date of all of the outstanding Industrial Common
Shares owned by Tenneco on the basis provided in SECTION 3.02 hereof.
"INDUSTRIAL GROUP" means Industrial Company, the Industrial Subsidiaries
and the corporations, partnerships, joint ventures, investments and other
entities that represent equity investments of any of Industrial Company or
any of the Industrial Subsidiaries following the consummation of the
Corporate Restructuring Transactions and the Distributions.
"INDUSTRIAL INDEMNITEES" means:
(i) Industrial Company and each Affiliate thereof after giving effect
to the Corporate Restructuring Transactions and the Distributions; and
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(ii) each of the respective past, present and future directors,
officers, employees and agents of any of the entities described in the
immediately preceding clause (i) and each of the heirs, executors,
successors and assigns of any of such directors, officers, employees
and agents.
"INDUSTRIAL INFORMATION STATEMENT" means the information statement or
registration statement relating to Industrial Company and the transactions
contemplated hereby to be distributed to holders of Tenneco Common Stock
pursuant to the terms of this Agreement.
"INDUSTRIAL LIABILITIES" means, collectively, all of the Liabilities of
Industrial Company, the Industrial Subsidiaries and each of the other
members of the Industrial Group after giving effect to the Corporate
Restructuring Transactions, the Distributions and the transactions
contemplated under the Debt and Cash Allocation Agreement, including,
without limitation:
(i) all of the Liabilities included on the Industrial Business Pro
Forma Balance Sheet which remain outstanding as of the close of
business on the Distribution Date;
(ii) all Liabilities (other than Energy Exchange Liabilities) which
are incurred or which otherwise accrue or are accrued at any time on,
prior to or after the date of the Industrial Business Pro Forma Balance
Sheet and which arise or arose out of, or in connection with (A) the
Industrial Assets, the Industrial Business or the Prior Industrial
Businesses, determined on a basis consistent with the determination of
Liabilities of Industrial Company on the Industrial Business Pro Forma
Balance Sheet, including Information Statement Liabilities which arise
or arose out of or in connection with, the Industrial Information
Statement or which arise or arose out of or in connection with
information or data in the Joint Proxy Statement or the Debt
Realignment Documents concerning the Industrial Business (except to the
extent such Liabilities constitute Shipbuilding Securities Liabilities
or are otherwise based on any of (i) the actions or inactions of
Shipbuilding Company, any other member of the Shipbuilding Group, or
any director, officer or employee of the Shipbuilding Company or any
other member of the Shipbuilding Group or any underwriter or investment
banking firm of any member of the Shipbuilding Group (or any of their
directors, officers, employees, advisors or representatives)
(collectively, the "SHIPBUILDING PARTIES," or individually, a
"SHIPBUILDING PARTY"), or (ii) the information or data provided in
writing by any Shipbuilding Party expressly for inclusion in the
Industrial Information Statement), or (B) the Shipbuilding Information
Statement to the extent such Information Statement Liabilities are
based on information or data concerning directly and solely the
Industrial Company or the Industrial Business that is provided in
writing by Industrial Company (or any other member of its Group or any
Affiliate thereof after giving effect to the Distributions) expressly
for inclusion in the Shipbuilding Information Statement;
(iii) all of the Liabilities of Industrial Company, the Industrial
Subsidiaries or any of the other members of the Industrial Group under,
or to be retained or assumed by Industrial Company, any Industrial
Subsidiary or any of the other members of the Industrial Group pursuant
to this Agreement or any of the Ancillary Agreements; and
(iv) all of the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising whether prior to, at or following the
Distribution Date) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Distribution
Date of the Industrial Business.
"INDUSTRIAL RECORDS" has the meaning ascribed to such term in SECTION
6.01(A) hereof.
"INDUSTRIAL REGISTRATION STATEMENT" means the Registration Statement on
Form 10 to be filed with the Commission pursuant to the requirements of
Section 12 of the Exchange Act and the rules and regulations thereunder in
order to register the Industrial Common Stock under Section 12(b) of the
Exchange Act.
"INFORMATION STATEMENT LIABILITIES" has the meaning ascribed to such term
in CLAUSE (V) of the definitions herein of Energy Liabilities.
"INFORMATION STATEMENTS" means the Industrial Information Statement and
the Shipbuilding Information Statement.
"INDUSTRIAL SUBSIDIARIES" means the Subsidiaries listed on EXHIBIT G
hereto.
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"INSURANCE AGREEMENT" means the Insurance Agreement by and among Tenneco,
Industrial Company and Shipbuilding Company, which agreement shall be
entered into on or prior to the Distribution Date in the form attached
hereto as EXHIBIT H except for such changes or modifications thereto that
do not, individually or in the aggregate, adversely affect the Energy
Business other than to a de minimis extent.
"INSURANCE PROCEEDS" means, with respect to any insured party, those
monies, net of any applicable premium adjustment, retrospectively-rated
premium, deductible, retention, or cost of reserve paid or held by or for
the benefit of such insured, which are either:
(i) received by an insured from an insurance carrier; or
(ii) paid by an insurance carrier on behalf of an insured.
"JOINT PROXY STATEMENT" has the meaning ascribed to such term in the
Merger Agreement.
"LAW" means all laws, statutes and ordinances and all regulations, rules
and other pronouncements of Governmental Authorities having the effect of
law of the United States, any foreign country, or any domestic or foreign
state, province, commonwealth, city, country, municipality, territory,
protectorate, possession or similar instrumentality, or any Governmental
Authority thereof.
"LIABILITIES" means any and all debts, liabilities, obligations,
responsibilities, response actions, losses, damages (whether compensatory,
punitive or treble), fines, penalties and sanctions, absolute or
contingent, matured or unmatured, liquidated or unliquidated, foreseen or
unforeseen, joint, several or individual, asserted or unasserted, accrued
or unaccrued, known or unknown, whenever arising, including, without
limitation, those arising under or in connection with any Law (including
any Environmental Law), Action, threatened Action, order or consent decree
of any Governmental Authority or any award of any arbitration tribunal, and
those arising under any contract, guarantee, commitment or undertaking,
whether sought to be imposed by a Governmental Authority, private party, or
party to this Agreement, whether based in contract, tort, implied or
express warranty, strict liability, criminal or civil statute, or
otherwise, and including any costs, expenses, interest, attorneys' fees,
disbursements and expense of counsel, expert and consulting fees and costs
related thereto or to the investigation or defense thereof.
"MERGER" has the meaning ascribed to such term in the recitals to this
Agreement.
"MERGER AGREEMENT" has the meaning ascribed to such term in the recitals
to this Agreement.
"NYSE" means the New York Stock Exchange.
"PERSON" means any natural person, corporation, business trust, joint
venture, association, company, partnership, limited liability company or
other entity, or any government, or any agency or political subdivision
thereof.
"PRIOR INDUSTRIAL BUSINESSES" means, collectively, all divisions,
Subsidiaries, other business entities or investments of Tenneco (or one of
its Subsidiaries) that, at any time prior to the date of the Industrial
Business Pro Forma Balance Sheet, were included in the "automotive parts"
or "packaging" segments for purposes of segment reporting in any of
Tenneco's Annual Reports on Form 10-K, and were sold, transferred,
otherwise disposed of or discontinued prior to such date.
"PRIOR SHIPBUILDING BUSINESSES" means, collectively, all divisions,
Subsidiaries, other business entities or investments of Tenneco (or one of
its Subsidiaries) that, at any time prior to the date of the Shipbuilding
Business Pro Forma Balance Sheet, were included in the "shipbuilding"
segment for purposes of segment reporting in any of Tenneco's Annual
Reports on Form 10-K, and were sold, transferred, otherwise disposed of or
discontinued prior to such date.
"PRIVILEGE" has the meaning ascribed to such term in SECTION 6.07(A)
hereof.
"PRIVILEGED INFORMATION" has the meaning ascribed to such term in SECTION
6.07(A) hereof.
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"REGISTRATION STATEMENTS" means the Industrial Registration Statement and
the Shipbuilding Registration Statement.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES LIABILITIES" means any and all losses, liabilities,
penalties, claims, damages, demands, costs or expenses or other Liabilities
whatsoever that are assessed, imposed, awarded against, incurred or accrued
by a Person arising out of or relating in whole or in part to any Action,
any potential or threatened Action or any Third Party Claim (or potential
or threatened Third Party Claim) by any Governmental Authority or any other
Person that is based on any violations or alleged violations of the
Securities Act, Exchange Act, any of the rules or regulations of the
Commission promulgated under the Securities Act or Exchange Act, or any
other securities or other similar Law.
"SHIPBUILDING ASSETS" means, collectively, all of the following rights
and assets that are owned by Tenneco and or any of its Subsidiaries as of
the close of business on the Distribution Date:
(i) the capital stock of the Shipbuilding Subsidiaries;
(ii) all of the assets included on the Shipbuilding Business Pro
Forma Balance Sheet that are owned by Tenneco or any of its
Subsidiaries as of the close of business on the Distribution Date;
(iii) all of the assets and rights expressly allocated to
Shipbuilding Company or any of the Shipbuilding Subsidiaries under this
Agreement or any of the Ancillary Agreements; and
(iv) any other asset acquired by Tenneco or any of its Subsidiaries
from the date of the Shipbuilding Business Pro Forma Balance Sheet to
the close of business on the Distribution Date that is owned by Tenneco
or any of its Subsidiaries as of the close of business on the
Distribution Date and that is of a nature or type that would have
resulted in such asset being included as an asset on the Shipbuilding
Business Pro Forma Balance Sheet had it been acquired on or prior to
the date of the Shipbuilding Business Pro Forma Balance Sheet,
determined on a basis consistent with the determination of the assets
included on the Shipbuilding Business Pro Forma Balance Sheet.
"SHIPBUILDING BUSINESS" means the businesses that, after giving effect to
the Corporate Restructuring Transactions, are conducted by:
(i) the Shipbuilding Company, the Shipbuilding Subsidiaries or any of
the other members of the Shipbuilding Group; and
(ii) any business entity acquired or established by or for Tenneco,
Shipbuilding Company or any of the Shipbuilding Subsidiaries between
the date of this Agreement and the close of business on the
Distribution Date that is engaged in, or intends to engage in, any
business that is of a type or nature that would have resulted in such
business being included either as a Subsidiary or an asset of
Shipbuilding Company on the Shipbuilding Business Pro Forma Balance
Sheet had it been acquired or established on or prior to the date of
the Shipbuilding Business Pro Forma Balance Sheet, determined on a
basis consistent with the determination of the Subsidiaries and assets
included on the Shipbuilding Business Pro Forma Balance Sheet.
"SHIPBUILDING BUSINESS PRO FORMA BALANCE SHEET" means the Pro Forma
Consolidated Balance Sheet for Shipbuilding Company and the Shipbuilding
Subsidiaries (prepared in accordance with GAAP) as of June 30, 1996
attached hereto as EXHIBIT I.
"SHIPBUILDING COMMON SHARES" means the Shares of Shipbuilding Common
Stock owned by Tenneco after giving effect to the stock dividend provided
for in SECTION 2.02(B) hereof.
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"SHIPBUILDING COMMON STOCK" has the meaning ascribed to such term in the
recitals to this Agreement.
"SHIPBUILDING COMPANY" means Newport News Shipbuilding Inc. (formerly
known as Tenneco InterAmerica Inc.), a Delaware corporation.
"SHIPBUILDING DISTRIBUTION" means the distribution on the Distribution
Date as a dividend to holders of record of shares of Tenneco Common Stock
as of the Distribution Record Date, of all of the outstanding Shipbuilding
Common Shares owned by Tenneco on the basis provided in SECTION 3.02
hereof.
"SHIPBUILDING FINANCING MATERIALS" means any registration statement,
private placement memorandum, offering circular, prospectus, information
memorandum and/or any other document or filing (with the Commission or any
Governmental Authority or the NYSE or other stock exchange) prepared by or
on behalf of Shipbuilding Company (or its Affiliates) and distributed to
prospective lenders or prospective purchasers of any debt or equity
securities of the Shipbuilding Company (or any other member of the
Shipbuilding Group) in connection with any of the transactions contemplated
under this Agreement, the Merger Agreement or any of the Ancillary
Agreements, including, without limitation, the Confidential Information
Memorandum dated September 1996 relating to the Senior Credit Facility (as
defined in the Shipbuilding Information Statement), the 144A Offering
Memorandum relating to the Senior Subordinated Notes and Senior Notes (as
such terms are defined in the Shipbuilding Information Statement), and the
registration statement on Form S-1 to be filed by Shipbuilding Company
after the Distribution Date to register the Senior Subordinated Notes and
Senior Notes under the Securities Act and all related documents.
"SHIPBUILDING GROUP" means Shipbuilding Company, the Shipbuilding
Subsidiaries and the corporations, partnerships, joint ventures,
investments and other entities that represent equity investments of
Shipbuilding Company or any of the Shipbuilding Subsidiaries following the
consummation of the Corporate Restructuring Transactions and the
Distributions.
"SHIPBUILDING INDEMNITEES" means:
(i) Shipbuilding Company and each Affiliate thereof after giving
effect to the Corporate Restructuring Transactions and the
Distributions; and
(ii) each of the respective past, present and future directors,
officers, employees and agents of any of the entities described in the
immediately preceding clause (i) and each of the heirs, executors,
successors and assigns of any of such directors, officers, employees
and agents.
"SHIPBUILDING INFORMATION STATEMENT" means the information statement or
registration statement relating to Shipbuilding Company and the
transactions contemplated hereby to be distributed to holders of Tenneco
Common Stock pursuant to the terms of this Agreement.
"SHIPBUILDING LIABILITIES" means, collectively, all of the Liabilities of
Shipbuilding Company, the Shipbuilding Subsidiaries and each of the other
members of the Shipbuilding Group after giving effect to the Corporate
Restructuring Transactions, the Distributions and the transactions
contemplated by the Debt and Cash Allocation Agreement, including, without
limitation:
(i) all of the Liabilities included on the Shipbuilding Business Pro
Forma Balance Sheet that remain outstanding as of the close of business
on the Distribution Date;
(ii) all other Liabilities that are incurred or which accrue or are
accrued at any time on, prior to or after the date of the Shipbuilding
Business Pro Forma Balance Sheet and that arise or arose out of, or in
connection with, the Shipbuilding Assets, the Shipbuilding Business or
the Prior Shipbuilding Businesses, determined on a basis consistent
with the determination of Liabilities of Shipbuilding Company on the
Shipbuilding Business Pro Forma Balance Sheet, including, without
limitation,
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Shipbuilding Securities Liabilities and Information Statement
Liabilities to the extent such Information Statement Liabilities (A)
arise or arose out of or in connection with the Shipbuilding
Information Statement or information or data in the Joint Proxy
statement or the Debt Realignment Documents concerning the Shipbuilding
Business or (B) are based on information or data provided in writing by
Shipbuilding Company (or any member of its Group or any Affiliate
(after giving effect to the Distributions) thereof) expressly for
inclusion in the Industrial Information Statement;
(iii) all of the Liabilities of Shipbuilding Company, the
Shipbuilding Subsidiaries or any of the other members of the
Shipbuilding Group under, or to be retained or assumed by Shipbuilding
Company, any Shipbuilding Subsidiary or any of the other members of the
Shipbuilding Group pursuant to, this Agreement or any of the Ancillary
Agreements; and
(iv) all the Liabilities of the parties hereto or their respective
Subsidiaries (whenever arising whether prior to, on or following the
Distribution Date) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Distribution
Date of the Shipbuilding Business.
"SHIPBUILDING RECORDS" has the meaning ascribed to such term in SECTION
6.01(B) hereof.
"SHIPBUILDING REGISTRATION STATEMENT" means the Registration Statement on
Form 10 to be filed with the Commission pursuant to the requirements of
Section 12 of the Exchange Act and the rules and regulations promulgated
thereunder in order to register the Shipbuilding Common Stock under Section
12(b) of the Exchange Act.
"SHIPBUILDING SECURITIES LIABILITIES" means any and all Securities
Liabilities arising out of, or in connection with, or relating in whole or
in part to any of the following: (i) the Shipbuilding Registration
Statement; (ii) the Shipbuilding Information Statement (whether in the form
as an Appendix to the Joint Proxy Statement or as the Information Statement
included in the Shipbuilding Registration Statement); (iii) the
Shipbuilding Financing Materials; (iv) any of the information, data
(financial or otherwise) or disclosures in (or any alleged failure to set
forth certain information, data or disclosures in) the Shipbuilding
Registration Statement, Shipbuilding Information Statement (whether in the
form as an Appendix to the Joint Proxy Statement or as the Information
Statement included in the Shipbuilding Registration Statement) or
Shipbuilding Financing Materials, irrespective of (A) who authored,
prepared or provided such information, data or disclosures (or, as the case
may be, the section or discussion in which certain information, data or
disclosure is alleged to have been omitted), or (B) the form in which, or
medium through which (e.g., verbally, in writing, etc.), such information,
data, disclosures, discussion or section were provided; or (v) any of the
information, data (financial or otherwise) or disclosures in (or any
alleged failure to set forth certain information, data or disclosures in)
the Joint Proxy Statement or the Debt Realignment Documents concerning any
matter relating to the business, operations, management, financial results
or potential risks of (or pending or threatened claims or investigations
relating to) the Shipbuilding Business, Prior Shipbuilding Businesses,
Shipbuilding Assets or Shipbuilding Liabilities, irrespective of (A) who
authored, prepared or provided such information data or disclosures (or, as
the case may be, the section or discussion in which certain information,
data or disclosure is alleged to have been omitted), or (B) the form in
which, or medium through which (e.g., verbally, in writing, etc.), such
information, data, disclosure, section or discussion were provided.
"SHIPBUILDING SUBSIDIARIES" means the Subsidiaries listed on EXHIBIT J
hereto.
"SUBSIDIARY" means, with respect to any Person:
(i) any corporation of which at least a majority in interest of the
outstanding voting stock (having by the terms thereof voting power
under ordinary circumstances to elect a majority of the directors of
such corporation, irrespective of whether or not at the time stock of
any other class or classes of such corporation shall have or might have
voting power by reason of the happening of a contingency) is at
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the time, directly or indirectly, owned or controlled by such Person or
by such Person and one or more of its Subsidiaries; or
(ii) any non-corporate entity in which such Person or such Person and
one or more Subsidiaries of such Person either (a) directly or
indirectly, at the date of determination thereof, has at least majority
ownership interest, or (b) at the date of determination is a general
partner or an entity performing similar functions (e.g., manager of a
Limited Liability Company or a trustee of a trust).
"SURVIVING CORPORATION" has the meaning ascribed to such term in the
recitals to this Agreement.
"TAX" or "TAXES" means any income, gross income, gross receipts, profits,
capital stock, franchise, withholding, payroll, social security, workers
compensation, unemployment, disability, property, ad valorem, stamp,
excise, occupation, services, sales, use, license, lease, transfer, import,
export, value added, alternative minimum, estimated or other similar tax
(including any fee, assessment or other charge in the nature of or in lieu
of any tax) imposed by any governmental entity or political subdivision
thereof, and any interest, penalties, additions to tax, or additional
amounts in respect of the foregoing.
"TAX SHARING AGREEMENT" means the Tax Sharing Agreement by and among
Tenneco, Shipbuilding Company, Industrial Company and Acquiror, which
agreement shall be entered into on or prior to the Distribution Date in the
form attached hereto as EXHIBIT K, except for such changes or modifications
thereto that do not, individually or in the aggregate, adversely affect the
Energy Business other than to a de minimis extent.
"TENNECO" means Tenneco Inc., a Delaware corporation.
"TENNECO COMMON STOCK" has the meaning ascribed to such term in the
recitals to this Agreement.
"TENNECO CORPORATE RECORDS" has the meaning ascribed to such term in
SECTION 6.01(A) hereof.
"TENNECO HOLDERS" means the holders of record of Tenneco Common Stock as
of the Distribution Record Date.
"TENNECO TRADEMARKS AND TRADENAMES" means all trademarks, service marks,
and tradenames containing "TENNECO", "TEN", or "TENN" or variations
thereof, along with their respective applications and registrations
wherever used or registered; provided, however, that the term shall not
include the word "Tennessee" to the extent such word is used in the
business and operations of Tennessee Gas Pipeline Company or otherwise in
the Energy Business.
"TERMINATION DATE" means the date on which this Agreement is terminated
pursuant to and in accordance with the provisions of SECTION 8.11 of this
Agreement.
"THIRD PARTY CLAIM" has the meaning as defined in SECTION 7.05(A) hereof.
"TBS SERVICES AGREEMENT" means the Services Agreement by and among
Industrial Company, Shipbuilding Company and Tenneco Business Services
Inc., which agreement shall be entered into on or prior to the Distribution
Date in substantially the form attached hereto as EXHIBIT L and which
agreement Tenneco and the Energy Business will not become a party to and
not be bound by without the consent of Acquiror, which Acquiror may
withhold in its sole discretion.
"TRANSITION SERVICES AGREEMENT" means the Transition Services Agreement
by and between Tenneco and Tenneco Business Services Inc., which agreement
shall be entered into on or prior to the Distribution Date in the form
attached hereto as EXHIBIT M.
"TRANSITION TRADEMARK LICENSE" has the meaning ascribed to such term in
SECTION 5.02 hereof.
SECTION 1.02. REFERENCES. References to an "EXHIBIT" or to a "SCHEDULE" are,
unless otherwise specified, to one of the Exhibits or Schedules attached to
this Agreement, and references to a "SECTION" are, unless otherwise specified,
to one of the Sections of this Agreement.
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ARTICLE II
PRE-DISTRIBUTION TRANSACTIONS;
CERTAIN COVENANTS
SECTION 2.01. CORPORATE RESTRUCTURING TRANSACTIONS. On or prior to the
Distribution Date (but in all events prior to the Distributions) and otherwise
in accordance with the terms and provisions set forth in EXHIBIT B hereto,
each of Tenneco, Industrial Company and Shipbuilding Company shall, and shall
cause each of their respective Subsidiaries to, as applicable, take such
action or actions as is necessary to cause, effect and consummate the
Corporate Restructuring Transactions. Each of Tenneco, Shipbuilding Company
and Industrial Company hereby agrees that any one or more of the Corporate
Restructuring Transactions may be modified, supplemented or eliminated;
provided such modification, supplement or elimination (a) is determined to be
necessary or appropriate (i) to divide the existing businesses of Tenneco so
that the automotive, packaging and business services businesses shall be
owned, directly and indirectly, by Industrial Company and the shipbuilding
business shall be owned, directly and indirectly, by Shipbuilding Company, or
(ii) to obtain a ruling from the Internal Revenue Service as described in
Section 7.1(g) of the Merger Agreement, and (b) does not, individually or in
the aggregate, adversely affect the Energy Business (other than to a de
minimis extent) or materially delay or prevent the consummation of the Merger.
SECTION 2.02. PRE-DISTRIBUTION STOCK DIVIDENDS TO TENNECO. On or prior to
the Distribution Date (but in all events prior to the Distributions):
(a) INDUSTRIAL COMPANY STOCK DIVIDEND. Industrial Company shall issue to
Tenneco, as a stock dividend, the number of shares of Industrial Common
Stock as is required to effect the Industrial Distribution, as certified by
the Agent. In connection therewith, Tenneco shall deliver to Industrial
Company for cancellation the share certificate (or certificates) currently
held by it representing all Industrial Common Stock, and Industrial Company
shall issue a new certificate (or certificates) to Tenneco representing the
total number of Industrial Common Shares to be owned by Tenneco after
giving effect to such stock dividend.
(b) SHIPBUILDING COMPANY STOCK DIVIDEND. Shipbuilding Company shall issue
to Tenneco, as a stock dividend, the number of shares of Shipbuilding
Common Stock as is required to effect the Shipbuilding Distribution, as
certified by the Agent. In connection therewith, Tenneco shall deliver to
Shipbuilding Company for cancellation the share certificate (or
certificates) currently held by it representing all Shipbuilding Common
Stock, and Shipbuilding Company shall issue a new certificate (or
certificates) representing the total number of Shipbuilding Common Shares
to be owned by Tenneco after giving effect to such stock dividend.
SECTION 2.03. CHARTERS AND BYLAWS.
(a) CERTIFICATE OF INCORPORATION AND BYLAWS OF INDUSTRIAL COMPANY. On or
prior to the Distribution Date (but in all events prior to the
Distributions), Tenneco and Industrial Company shall each take all
necessary actions so that, as of the Distribution Date, the Restated
Certificate of Incorporation and Bylaws of Industrial Company will be
substantially in the forms set forth in EXHIBITS N and O, respectively.
(b) CERTIFICATE OF INCORPORATION AND BYLAWS OF SHIPBUILDING COMPANY. On
or prior to the Distribution Date (but in all events prior to the
Distributions), Tenneco and Shipbuilding Company shall each take all
necessary actions so that, as of the Distribution Date, the Restated
Certificate of Incorporation and Bylaws of Shipbuilding Company will be
substantially in the forms set forth in EXHIBITS N and O, respectively.
SECTION 2.04. ELECTION OF DIRECTORS OF INDUSTRIAL COMPANY AND SHIPBUILDING
COMPANY. On or prior to the Distribution Date, Tenneco, as the sole
stockholder of each of Industrial Company and Shipbuilding Company, shall take
all necessary action so that as of the Distribution Date the directors of
Industrial Company and of Shipbuilding Company will be as set forth in the
Industrial Information Statement and the Shipbuilding Information Statement,
respectively.
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SECTION 2.05. TRANSFER AND ASSIGNMENT OF CERTAIN LICENSES AND PERMITS.
(a) LICENSES AND PERMITS RELATING TO THE INDUSTRIAL BUSINESS. On or prior
to the Distribution Date, or as soon as reasonably practicable thereafter,
each of Tenneco and Shipbuilding Company shall (and, if applicable, shall
cause any other Person over which it has legal or effective direct or
indirect control to), severally but not jointly, duly and validly transfer
or cause to be duly and validly transferred to the appropriate member of
the Industrial Group (as directed by Industrial Company) all transferrable
licenses, permits and authorizations issued by any Governmental Authority
that relate to the Industrial Business but which are held in the name of
any member of the Energy Group or the Shipbuilding Group, or any of their
respective employees, officers, directors, stockholders or agents.
(b) LICENSES AND PERMITS RELATING TO THE SHIPBUILDING BUSINESS. On or
prior to the Distribution Date, or as soon as reasonably practicable
thereafter, each of Tenneco and Industrial Company shall (and, if
applicable, shall cause any other Person over which it has legal or
effective direct or indirect control to), severally but not jointly, duly
and validly transfer or cause to be duly and validly transferred to the
appropriate member of the Shipbuilding Group (as directed by Shipbuilding
Company) all transferrable licenses, permits and authorizations issued by
any Governmental Authority that relate to the Shipbuilding Business but
which are held in the name of any member of the Energy Group or the
Industrial Group, or any of their respective employees, officers,
directors, stockholders or agents.
(c) LICENSES AND PERMITS RELATING TO THE ENERGY BUSINESS. On or prior to
the Distribution Date, or as soon as reasonably practicable thereafter,
each of Industrial Company and Shipbuilding Company shall (and, if
applicable, shall cause any other Person over which it has legal or
effective direct or indirect control to), severally but not jointly, duly
and validly transfer or cause to be duly and validly transferred to the
appropriate member of the Energy Group (as directed by Tenneco) all
transferrable licenses, permits and authorizations issued by any
Governmental Authority that relate to the Energy Business but which are
held in the name of any member of the Industrial Group or the Shipbuilding
Group, or any of their respective employees, officers, directors,
stockholders or agents.
SECTION 2.06. TRANSFER AND ASSIGNMENT OF CERTAIN AGREEMENTS.
(a) TRANSFER AND ASSIGNMENT OF ENERGY BUSINESS AGREEMENTS. On or prior to
the Distribution Date, or as soon as reasonably practicable thereafter, and
subject to the limitations set forth in this SECTION 2.06, each of Industrial
Company and Shipbuilding Company shall (and, if applicable, shall cause any of
the other members of its Group over which it has legal or effective direct or
indirect control to), severally but not jointly, assign, transfer and convey
to Tenneco (or such other member of the Energy Group as Tenneco shall direct)
all of its (or such other member of its Group's) right, title and interest in
and to any and all agreements that relate exclusively to the Energy Business
or any member of the Energy Group.
(b) TRANSFER AND ASSIGNMENT OF INDUSTRIAL BUSINESS AGREEMENTS. On or prior
to the Distribution Date, or as soon as reasonably practicable thereafter, and
subject to the limitations set forth in this SECTION 2.06, each of Tenneco and
Shipbuilding Company shall (and, if applicable, shall cause any of the other
members of its Group over which it has legal or effective direct or indirect
control to), severally but not jointly, assign, transfer and convey to
Industrial Company (or such other member of the Industrial Group as Industrial
Company shall direct) all of its (or such other member of its Group's) right,
title and interest in and to any and all agreements that relate exclusively to
the Industrial Business or any member of the Industrial Group.
(c) TRANSFER AND ASSIGNMENT OF SHIPBUILDING BUSINESS AGREEMENTS. On or prior
to the Distribution Date, or as soon as reasonably practicable thereafter, and
subject to the limitations set forth in this SECTION 2.06, each of Tenneco and
Industrial Company shall (and, if applicable, shall cause any of the other
members of its Group over which it has legal or effective direct or indirect
control to), severally but not jointly, assign, transfer and convey to
Shipbuilding Company (or such other member of the Shipbuilding Group as
Shipbuilding Company shall direct) all of its (or such other member of its
Group's) right, title and interest in and to any and all agreements that
relate exclusively to the Shipbuilding Business or any member of the
Shipbuilding Group.
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(d) JOINT AGREEMENTS. Subject to the provisions of SECTION 2.06(F) below,
any agreement to which any party hereto (or any other member of such party's
Group) is a party that inures to the benefit of more than one of the Energy
Business, the Industrial Business and the Shipbuilding Business shall be
assigned in part, at the expense and risk of the assignee, on or prior to the
Distribution Date or as soon as reasonably practicable thereafter, so that
each party (or such other member of such party's Group) shall be entitled to
the rights and benefits inuring to its business under such agreement.
(e) OBLIGATIONS OF ASSIGNEES. The assignee of any agreement assigned, in
whole or in part, hereunder (an "ASSIGNEE") shall, as a condition to such
assignment, assume and agree to pay, perform, and fully discharge all
obligations of the assignor under such agreement (whether such obligations
arose or were incurred prior to, on or subsequent to the Distribution Date and
irrespective of whether such obligations have been asserted as of the
Distribution Date) or, in the case of a partial assignment under SECTION
2.06(D) above, such Assignee's related portion of such obligations as
determined in accordance with the terms of the relevant agreement, where
determinable on the face thereof, and otherwise as determined in accordance
with the practice of the parties prior to the Distributions. Furthermore, the
Assignee shall use its commercially reasonable efforts to cause the assignor
of such agreement to be released from its obligations under the assigned
agreements.
(f) NO ASSIGNMENT OF CERTAIN AGREEMENTS. Notwithstanding anything in this
Agreement to the contrary, this Agreement shall not constitute an agreement to
assign any agreement, in whole or in part, or any rights thereunder if the
agreement to assign or attempt to assign, without the consent of a third
party, would constitute a breach thereof or in any way adversely affect the
rights of the Assignee thereof until such consent is obtained. If an attempted
assignment thereof would be ineffective or would adversely affect the rights
of any party hereto so that the Assignee would not, in fact, receive all such
rights, the parties hereto will cooperate with each other to effect any
arrangement designed reasonably to provide for the Assignee the benefits of,
and to permit the Assignee to assume liabilities under, any such agreement,
subject to the remaining sentences of this SECTION 2.06(F). There are certain
software license agreements held in the name of a member of the Industrial
Group that presently inure to the benefit of the Energy Business, the
Industrial Business and the Shipbuilding Business. Notwithstanding any other
provision of this Agreement, each such license agreement shall continue to be
held by that member of the Industrial Group without any obligation of any
party to cause the assignment or inurement to the benefit of such license
agreement, or to effect any arrangement to provide such benefit, to the Energy
Business or the Shipbuilding Business, except where the license agreement
expressly permits the benefits and obligations to be divided among the
Businesses or as may be negotiated with the licensor by that member of the
Industrial Group and such other parties and the Industrial Business shall use
commercially reasonable efforts to do so.
SECTION 2.07. CONSENTS. The parties hereto shall use their best efforts to
obtain any third-party consents or approvals that are required to consummate
the Corporate Restructuring Transactions, the Distributions and the other
transactions contemplated herein (the "CONSENTS").
SECTION 2.08. OTHER TRANSACTIONS. On or prior to the Distribution Date (but
in all events prior to the Distributions), each of Tenneco, Industrial Company
and Shipbuilding Company shall have consummated those other transactions in
connection with the Corporate Restructuring Transactions and the Distributions
that are contemplated by the Information Statements and the ruling request
submission by Tenneco to the Internal Revenue Service dated June 27, 1996 (as
subsequently supplemented), and not specifically referred to in SECTIONS 2.01
through 2.07 above, subject, however, to the limitations set forth in
SUBPARAGRAPH (B) of SECTION 2.01 above.
SECTION 2.09. ELECTION OF OFFICERS. On or prior to the Distribution Date,
each of Tenneco, Industrial Company and Shipbuilding Company shall, as
applicable, take all actions necessary and desirable so that as of the
Distribution Date the officers of Industrial Company and of Shipbuilding
Company will be as set forth in the Industrial Information Statement and the
Shipbuilding Information Statement, respectively.
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SECTION 2.10. REGISTRATION STATEMENTS. Each of Tenneco, Industrial Company
and Shipbuilding Company shall prepare, and shall file with the Commission,
the Registration Statements in accordance with the terms of this SECTION 2.10.
(a) PREPARATION AND FILING OF INDUSTRIAL REGISTRATION STATEMENT. Tenneco,
Industrial Company and Shipbuilding Company shall prepare or cause to be
prepared, and Industrial Company shall file or cause to be filed with the
Commission, the Industrial Registration Statement. The Industrial
Registration Statement shall include or incorporate by reference the
Industrial Information Statement setting forth appropriate disclosure
concerning Tenneco, Industrial Company, Shipbuilding Company, the
Distributions and such other matters as may be required to be disclosed
therein by the provisions of the Exchange Act and the rules and regulations
promulgated thereunder. Tenneco and Industrial Company shall take all such
actions as may be reasonably necessary or appropriate in order to cause the
Industrial Registration Statement to become effective by order of the
Commission pursuant to the Exchange Act.
(b) PREPARATION AND FILING OF SHIPBUILDING REGISTRATION STATEMENT.
Tenneco, Industrial Company and Shipbuilding Company shall prepare or cause
to be prepared, and Shipbuilding Company shall file or cause to be filed
with the Commission, the Shipbuilding Registration Statement. The
Shipbuilding Registration Statement shall include or incorporate by
reference the Shipbuilding Information Statement setting forth appropriate
disclosure concerning Tenneco, Shipbuilding Company, Industrial Company,
the Distributions and such other matters as may be required to be disclosed
therein by the provisions of the Exchange Act and the rules and regulations
promulgated thereunder. Tenneco and Shipbuilding Company shall take all
such actions as may be reasonably necessary or appropriate in order to
cause the Shipbuilding Registration Statement to become effective by order
of the Commission pursuant to the Exchange Act.
SECTION 2.11. STATE SECURITIES LAWS. Prior to the Distribution Date,
Tenneco, Industrial Company and Shipbuilding Company shall take all such
action as may be necessary or appropriate under the securities or blue sky
laws of states or other political subdivisions of the United States in order
to effect the Distributions.
SECTION 2.12. LISTING APPLICATION. Prior to the Distribution Date, Tenneco,
Industrial Company and Shipbuilding Company shall prepare and file with the
NYSE listing applications and related documents and shall take all such other
actions with respect thereto as shall be necessary or desirable in order to
cause the NYSE to list on or prior to the Distribution Date, subject to
official notice of issuance, the Industrial Common Shares and the Shipbuilding
Common Shares.
SECTION 2.13. CERTAIN FINANCIAL AND OTHER ARRANGEMENTS.
(a) SETTLEMENT OF INTERCOMPANY ACCOUNTS BETWEEN INDUSTRIAL GROUP AND ENERGY
GROUP. All intercompany receivables, payables and loans (other than
receivables, payables and loans otherwise specifically provided for in any of
the Ancillary Agreements or hereunder), including, without limitation, in
respect of any cash balances, any cash balances representing deposited checks
or drafts for which only a provisional credit has been allowed or any cash
held in any centralized cash management system, between any member of the
Industrial Group, on the one hand, and any member of the Energy Group, on the
other hand, shall, as of the close of business on the Distribution Date, be
settled, capitalized or converted into ordinary trade accounts, in each case
as may be agreed in writing prior to the Distribution Date by duly authorized
representatives of Tenneco, Industrial Company and the Acquiror.
(b) SETTLEMENT OF INTERCOMPANY ACCOUNTS BETWEEN SHIPBUILDING GROUP AND
ENERGY GROUP. All intercompany receivables, payables and loans (other than
receivables, payables and loans otherwise specifically provided for in any of
the Ancillary Agreements or hereunder), including, without limitation, in
respect of any cash balances, any cash balances representing deposited checks
or drafts for which only a provisional credit has been allowed or any cash
held in any centralized cash management system, between any member of the
Shipbuilding Group, on the one hand, and any member of the Energy Group, on
the other hand, shall, as of the close of business on the Distribution Date,
be settled, capitalized or converted into ordinary trade accounts, in each
case as may be agreed in writing prior to the Distribution Date by duly
authorized representatives of Tenneco, Shipbuilding Company and the Acquiror.
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(c) SETTLEMENT OF INTERCOMPANY ACCOUNTS BETWEEN INDUSTRIAL GROUP AND
SHIPBUILDING GROUP. All intercompany receivables, payables and loans (other
than receivables, payables and loans otherwise specifically provided for in
any of the Ancillary Agreements or hereunder), including, without limitation,
in respect of any cash balances, any cash balances representing deposited
checks or drafts for which only a provisional credit has been allowed or any
cash held in any centralized cash management system, between any member of the
Industrial Group, on the one hand, and any member of the Shipbuilding Group,
on the other hand, shall, as of the close of business on the Distribution
Date, be settled, capitalized or converted into ordinary trade accounts, in
each case as may be agreed in writing prior to the Distribution Date by duly
authorized representatives of Industrial Company and Shipbuilding Company.
(d) OPERATIONS IN ORDINARY COURSE. Except as otherwise provided in this
Agreement, the Merger Agreement or any Ancillary Agreement, during the period
from the date of this Agreement through the Distribution Date, each of
Tenneco, Industrial Company and Shipbuilding Company shall, and shall cause
any entity that is a Subsidiary of such party at any time during such period
to, conduct its business in a manner substantially consistent with current and
past operating practices and in the ordinary course, including, without
limitation, with respect to the payment and administration of accounts payable
and the collection and administration of accounts receivable, the purchase of
capital assets and equipment and the management of inventories.
SECTION 2.14. DIRECTOR, OFFICER AND EMPLOYEE RESIGNATIONS. Subject to the
provisions of SECTION 2.04 and SECTION 2.09 above:
(a) RESIGNATIONS BY DIRECTORS AND EMPLOYEES OF THE ENERGY GROUP. Tenneco
shall cause all of its directors and all employees of the Energy Group to
resign, effective as of the close of business on the Distribution Date,
from all boards of directors or similar governing bodies of each member of
the Industrial Group or the Shipbuilding Group on which they serve, and
from all positions as officers or employees of any member of the Industrial
Group or the Shipbuilding Group, except as otherwise set forth in the
Information Statements or mutually agreed to in writing on or prior to the
Distribution Date by Tenneco, on the one hand, and, as applicable,
Industrial Company and/or Shipbuilding Company, on the other hand.
(b) RESIGNATIONS BY DIRECTORS AND EMPLOYEES OF THE INDUSTRIAL GROUP.
Industrial Company shall cause all of its directors and all employees of
the Industrial Group to resign, effective as of the close of business on
the Distribution Date, from all boards of directors or similar governing
bodies of each member of the Energy Group or the Shipbuilding Group on
which they serve, and from all positions as officers or employees of any
member of the Energy Group or the Shipbuilding Group, except as otherwise
set forth in the Information Statements or mutually agreed to in writing on
or prior to the Distribution Date by Industrial Company, on the one hand,
and, as applicable, Tenneco and/or Shipbuilding Company, on the other hand.
(c) RESIGNATIONS BY DIRECTORS AND EMPLOYEES OF THE SHIPBUILDING GROUP.
Shipbuilding Company shall cause all of its directors and all employees of
the Shipbuilding Group to resign, effective as of the close of business on
the Distribution Date, from all boards of directors or similar governing
bodies of each member of the Energy Group or the Industrial Group on which
they serve, and from all positions as officers or employees of any member
of the Energy Group or the Industrial Group, except as otherwise set forth
in the Information Statements or mutually agreed to in writing on or prior
to the Distribution Date by Shipbuilding Company, on the one hand, and, as
applicable, Industrial Company and/or Tenneco, on the other hand.
SECTION 2.15. TRANSFERS NOT EFFECTED PRIOR TO THE DISTRIBUTIONS; TRANSFERS
DEEMED EFFECTIVE AS OF THE DISTRIBUTION DATE. To the extent that any transfers
contemplated by this ARTICLE II shall not have been consummated on or prior to
the Distribution Date, the parties hereto shall cooperate (and shall cause
each of their respective Affiliates and each member of their respective Groups
over which they have legal or effective direct or indirect control to
cooperate) to effect such transfers as promptly following the Distribution
Date as shall be practicable. Nothing herein shall be deemed to require the
transfer of any assets or the assumption of any Liabilities which by their
terms or operation of Law cannot be transferred or assumed; provided, however,
that the parties hereto shall cooperate (and shall cause each of their
respective Affiliates and each member of their respective Groups over which
they have legal or effective direct or indirect control to cooperate) to seek
to
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obtain any necessary consents or approvals for the transfer of all assets and
Liabilities contemplated to be transferred pursuant to this ARTICLE II. In the
event that any such transfer of assets or Liabilities has not been
consummated, from and after the Distribution Date the party retaining such
asset or Liability (or, as applicable, such other member or members of such
party's Group) shall hold such asset in trust for the use and benefit of the
party entitled thereto (at the expense of the party entitled thereto) or
retain such Liability for the account of the party by whom such Liability is
to be assumed pursuant hereto, as the case may be, and take such other action
as may be reasonably requested by the party to whom such asset is to be
transferred, or by whom such Liability is to be assumed, as the case may be,
in order to place such party, insofar as is reasonably possible, in the same
position as would have existed had such asset or Liability been transferred or
assumed as contemplated hereby. As and when any such asset or Liability
becomes transferable or assumable, such transfer shall be effected forthwith.
As of the Distribution Date, each party hereto (or, if applicable, such other
members of such party's Group) shall be deemed to have acquired (or, as
applicable, retained) complete and sole beneficial ownership over all of the
assets, together with all rights, powers and privileges incident thereto, and
shall be deemed to have assumed in accordance with the terms of this Agreement
all of the Liabilities, and all duties, obligations and responsibilities
incident thereto, which such party (or any other member of such party's Group)
is entitled to acquire or required to assume pursuant to the terms of this
Agreement.
SECTION 2.16. ANCILLARY AGREEMENTS. Prior to the Distribution Date, each of
Tenneco, Industrial Company and Shipbuilding Company shall enter into, and/or
where applicable shall cause such other members of their respective Groups to
enter into, (a) the Ancillary Agreements and (b) any other agreements in
respect of the Corporate Restructuring Transactions and the Distributions as
are reasonably necessary or appropriate in connection with the transactions
contemplated hereby and thereby so long as such agreements do not materially
delay or prevent consummation of the Merger or adversely affect the Energy
Business other than to a de minimis extent.
ARTICLE III
THE DISTRIBUTIONS
SECTION 3.01. TENNECO ACTION PRIOR TO THE DISTRIBUTIONS. Subject to the
terms and conditions set forth herein, Tenneco shall take, or cause to be
taken, the following acts or actions in connection with, and to otherwise
effect in accordance with the terms of this Agreement, the Distributions.
(a) DECLARATION OF DISTRIBUTIONS AND ESTABLISHMENT OF DISTRIBUTION DATE.
The Board of Directors of Tenneco shall, in its sole discretion and subject
to and in accordance with the applicable rules of the NYSE and provisions
of the DGCL, declare the Distributions and establish the Distribution
Record Date, the Distribution Date, the date on which Industrial Common
Shares, Shipbuilding Common Shares and any cash in lieu of fractional
shares shall be mailed to the Tenneco Holders and all appropriate
procedures in connection with the Distributions to the extent not provided
for herein; provided, however, that no such action shall create any
obligation on the part of Tenneco to effect the Distributions or in any way
limit Tenneco's power of termination as set forth in SECTION 8.11 hereof or
alter the consequences of any such termination from those specified in such
Section.
(b) NOTICE TO NYSE. Tenneco shall, to the extent possible, give the NYSE
not less than ten days advance notice of the Distribution Record Date in
compliance with Rule 10b-17 under the Exchange Act.
(c) MAILING OF INDUSTRIAL INFORMATION STATEMENT. Tenneco shall, as soon
as practicable after the Industrial Registration Statement shall have been
declared effective under the Exchange Act, cause the Industrial Information
Statement to be mailed to the Tenneco Holders.
(d) MAILING OF SHIPBUILDING INFORMATION STATEMENT. Tenneco shall, as soon
as practicable after the Shipbuilding Registration Statement shall have
been declared effective under the Exchange Act, cause the Shipbuilding
Information Statement to be mailed to the Tenneco Holders.
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SECTION 3.02. THE DISTRIBUTIONS.
(a) DUTIES AND OBLIGATIONS OF TENNECO. Subject to the conditions contained
herein, on the Distribution Date but effective immediately following the close
of business on the Distribution Date Tenneco shall:
(i) deliver to the Agent the share certificates representing the
Industrial Common Shares and Shipbuilding Common Shares issued to
Tenneco by Industrial Company and Shipbuilding Company, respectively,
pursuant to SECTION 2.02 hereof, endorsed by Tenneco in blank, for the
benefit of the Tenneco Holders; and
(ii) instruct the Agent to distribute, as soon as practicable
following consummation of the Distributions, to the Tenneco Holders the
following:
(A) one share of Industrial Common Stock for every one share of
Tenneco Common Stock;
(B) one share of Shipbuilding Common Stock for every five shares
of Tenneco Common Stock; and
(C) cash, if applicable, in lieu of fractional shares obtained in
the manner provided in SECTION 3.03 hereof.
(b) DUTIES AND RESPONSIBILITIES OF INDUSTRIAL COMPANY AND SHIPBUILDING
COMPANY. Industrial Subsidiary and Shipbuilding Subsidiary shall provide, or
cause to be provided, to the Agent sufficient certificates representing
Industrial Common Stock and Shipbuilding Common Stock, respectively, in such
denominations as the Agent may request in order to effect the Distributions.
All shares of Industrial Common Stock issued pursuant to the Industrial
Distribution will be validly issued, fully paid and nonassessable and free of
any preemptive (or similar) rights. All shares of Shipbuilding Common Stock
issued pursuant to the Shipbuilding Distribution will be validly issued, fully
paid and nonassessable and free of any preemptive (or similar) rights.
SECTION 3.03. FRACTIONAL SHARES.
(a) NO FRACTIONAL SHARES. Notwithstanding anything herein to the contrary,
no certificate or scrip evidencing a fractional share of Industrial Common
Stock or Shipbuilding Common Stock shall be issued in connection with the
Distributions, and any such fractional share interests to which a Tenneco
Holder would otherwise be entitled will not entitle such Tenneco Holder to
vote or to any rights of a stockholder of Industrial Company or Shipbuilding
Company, as the case may be. In lieu of any such fractional shares, each
Tenneco Holder who, but for the provisions of this SECTION 3.03, would be
entitled to receive a fractional share interest of Industrial Common Stock or
Shipbuilding Common Stock pursuant to the Distributions shall be paid cash,
without any interest thereon, as hereinafter provided. Tenneco shall instruct
the Agent to determine the number of whole shares and fractional shares of
Industrial Common Stock and Shipbuilding Common Stock allocable to each
Tenneco Holder, to aggregate all such fractional shares into whole shares, to
sell the whole shares obtained thereby in the open market at the then
prevailing prices on behalf of Tenneco Holders who otherwise would be entitled
to receive fractional share interests and to distribute to each such Tenneco
Holder his, her or its ratable share of the total proceeds of such sale, after
making appropriate deductions of the amount required for federal income tax
withholding purposes and after deducting any applicable transfer taxes. All
brokers' fees and commissions incurred in connection with such sales shall be
paid by Tenneco.
(b) UNCLAIMED STOCK OR CASH. Any Industrial Common Stock, Shipbuilding
Common Stock or cash in lieu of fractional shares and dividends or
distributions with respect to Industrial Common Stock or Shipbuilding Common
Stock that remain unclaimed by any Tenneco Holder 180 days after the
Distribution Date shall be returned to Tenneco and any such Tenneco Holders
shall look only to Tenneco for the Industrial Common Stock, Shipbuilding
Common Stock, cash, if any, in lieu of fractional share interests and any such
dividends or distributions to which they are entitled, subject in each case to
applicable escheat or other abandoned property laws.
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(c) BENEFICIAL OWNERS. Solely for purposes of computing fractional share
interests pursuant to SECTION 3.03(A), the beneficial owner of shares of
Tenneco Common Stock held of record in the name of a nominee will be treated
as the holder of record of such shares.
ARTICLE IV
CONDITIONS TO THE DISTRIBUTIONS
SECTION 4.01. CONDITIONS PRECEDENT TO THE DISTRIBUTIONS. The obligation of
Tenneco to cause the Distributions to be consummated shall be subject, at the
option of Tenneco, to the fulfillment or waiver, on or prior to the
Termination Date, of each of the following conditions.
(a) TAX SHARING AGREEMENT. Tenneco, Industrial Company, Shipbuilding
Company and Acquiror shall have executed and delivered the Tax Sharing
Agreement and such agreement shall be in full force and effect.
(b) BENEFITS AGREEMENT. Tenneco, Industrial Company and Shipbuilding
Company shall have executed and delivered the Benefits Agreement and such
agreement shall be in full force and effect.
(c) TRANSITION SERVICES AGREEMENT. Tenneco and Tenneco Business Services
Inc. shall have executed and delivered the Transition Services Agreement
and such agreement shall be in full force and effect.
(d) INSURANCE AGREEMENT. Tenneco, Industrial Company and Shipbuilding
Company shall have executed and delivered the Insurance Agreement and such
agreement shall be in full force and effect.
(e) DEBT AND CASH ALLOCATION AGREEMENT. Tenneco, Industrial Company and
Shipbuilding Company shall have executed and delivered the Debt and Cash
Allocation Agreement and such agreement shall be in full force and effect.
(f) EFFECTIVE DATE OF REGISTRATION STATEMENT. Each of the Registration
Statements shall have been declared effective by order of the Commission
and no stop order shall have been entered, and no proceeding for that
purpose shall have been initiated or threatened by the Commission with
respect thereto.
(g) NYSE LISTING. The Industrial Common Shares and the Shipbuilding
Common Shares shall have been approved for listing on the NYSE, subject to
official notice of issuance.
(h) TAX RULING. Tenneco shall have received rulings from the Internal
Revenue Service reasonably acceptable to Tenneco and Acquiror, which
rulings shall be in full force and effect as of the Distribution Date, to
the effect that:
(i) The Industrial Distribution as contemplated hereunder will be
tax-free for federal income tax purposes to Tenneco under Section
355(c)(1) of the Code and to the stockholders of Tenneco under
Section 355(a) of the Code;
(ii) The Shipbuilding Distribution as contemplated hereunder will be
tax-free for federal income tax purposes to Tenneco under
Section 355(c)(1) of the Code and to the stockholders of Tenneco
under Section 355(a) of the Code; and
(iii) The following distributions will be tax free to the respective
transferor corporations under Section 355(c)(1) of the Code and
to the respective stockholders of the transferor corporations
under Section 355(a) of the Code: (A) the distribution by the
Shipbuilding Company of the capital stock of Tenneco Packaging
Inc. to Tenneco Corporation contemplated under the Corporate
Restructuring Transactions; (B) the distribution by Tenneco
Corporation of the capital stock of the Shipbuilding Company
and the Industrial Company to Tennessee Gas Pipeline Company as
contemplated under the Corporate Restructuring Transactions;
and (C) the distribution by Tennessee Gas Pipeline Company of
the capital stock of the Shipbuilding Company and the
Industrial Company to Tenneco Inc. as contemplated under the
Corporate Restructuring Transactions.
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(i) PRE-DISTRIBUTION TRANSACTIONS. Each of the transactions and other
matters contemplated by ARTICLE II and SECTION 3.01 hereof (including,
without limitation, each of the distributions, transfers, conveyances,
contributions, assignments or other transactions included in, or otherwise
necessary to consummate, the Corporate Restructuring Transactions) shall
have been fully effected, consummated and accomplished.
(j) COVENANTS. The covenants contained in ARTICLE V of this Agreement
that are required to be performed on or before the Distribution Date shall
have been fully performed.
(k) NO PROHIBITIONS. Consummation of the transactions contemplated hereby
shall not be prohibited by Law and no Governmental Authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered
any statute, rule, regulation, executive order, decree, injunction or other
order (whether temporary, preliminary or permanent) which is in effect and
which materially restricts, prevents or prohibits consummation of the
Distributions, the Merger or any transaction contemplated by this Agreement
or the Merger Agreement, it being understood that the parties hereto hereby
agree to use their reasonable best efforts to cause any such decree,
judgment, injunction or other order to be vacated or lifted as promptly as
possible.
(l) CONSENTS. Tenneco, Industrial Company, Shipbuilding Company and the
other members of their respective Groups shall have obtained all Consents
the failure of which to obtain would, in the determination of the Board of
Directors of Tenneco, have a material adverse effect on the Energy Group,
the Industrial Group or the Shipbuilding Group, each taken as a whole, and
such Consents shall be in full force and effect.
(m) STOCKHOLDER APPROVAL. The Distributions shall have been approved by
the requisite vote of the holders of the outstanding Tenneco Common Stock
and the holders of the outstanding $7.40 Cumulative Preferred Stock of
Tenneco, voting together as a class, by the requisite vote of the holders
of the outstanding $4.50 Cumulative Preferred Stock of Tenneco and the
holders of the outstanding $7.40 Cumulative Preferred Stock of Tenneco,
voting together as a class, and by any requisite vote of the holders of the
outstanding New Preferred Stock (as defined in the Merger Agreement),
voting separately as a class, in accordance with the DGCL and the
provisions of Tenneco's Certificate of Incorporation.
(n) HSR ACT. The waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, applicable to the transactions
contemplated under the Merger Agreement shall have expired or been
terminated.
(o) DEBT REALIGNMENT. Each of the transactions and other matters
contemplated under the Debt Realignment (as defined under the Merger
Agreement) shall have been fully effected, consummated and accomplished.
SECTION 4.02. NO CONSTRAINT. Notwithstanding the provisions of SECTION 4.01
above (but subject to Tenneco's obligations under the Merger Agreement), the
fulfillment or waiver of any or all of the conditions precedent to the
Distributions set forth therein shall not:
(i) create any obligation on the part of Tenneco or any other party
hereto to effect the Distributions;
(ii) in any way limit Tenneco's right and power under SECTION 8.11 hereof
to terminate this Agreement and the process leading to the Distributions
and to abandon the Distributions; or
(iii) alter the consequences of any such termination under SECTION 8.11
hereof from those specified in such Section.
SECTION 4.03. DEFERRAL OF DISTRIBUTION DATE. If the Distribution Date shall
have been established by the Board of Directors of Tenneco but all the
conditions precedent to the Distributions set forth in this Agreement have not
theretofore been fulfilled or waived, or Tenneco does not reasonably
anticipate that they will be fulfilled or waived, on or prior to the date
established as the Distribution Date, Tenneco may, by resolution of its Board
of Directors (or a committee thereof, so authorized), defer the Distribution
Date to a later date.
SECTION 4.04. PUBLIC NOTICE OF DEFERRED DISTRIBUTION DATE. If the Board of
Directors (or a committee thereof, so authorized) of Tenneco shall defer the
Distribution Date in accordance with SECTION 4.03 above and public
announcement of the prior Distribution Date has theretofore been made, Tenneco
shall promptly thereafter
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issue, in accordance with the advice of legal counsel, a public announcement
with respect to such deferment and shall, with the advice of legal counsel,
take such other actions as may be deemed necessary or desirable with respect
to the dissemination of such information.
ARTICLE V
COVENANTS
SECTION 5.01. FURTHER ASSURANCES. Each of Tenneco, Industrial Company and
Shipbuilding Company shall use all reasonable efforts to:
(a) take or cause to be taken all actions, and to do or cause to be done
all things reasonably necessary, proper or advisable under applicable Law
and agreements or otherwise to consummate and make effective the
transactions contemplated hereby, including without limitation using
commercially reasonable efforts to obtain any consents and approvals from,
enter into any amendatory agreements with and make any applications,
registrations or filings with, any third Person or any Governmental
Authority necessary or desirable in order to consummate the transactions
contemplated hereby or to carry out the purposes of this Agreement; and
(b) execute and deliver such further instruments and documents and take
such other actions as the other party may reasonably request in order to
consummate the transactions contemplated hereby and effectuate the purposes
of this Agreement.
SECTION 5.02. TENNECO NAME. Industrial Company shall grant to each of
Tenneco and Shipbuilding Company transition licenses, in the forms of EXHIBIT
P and Q, respectively (the "Transition Trademark License"), to use the Tenneco
Trademarks and Tradenames for the limited use as more fully described below in
this SECTION 5.02 and in SECTION 5.03. Each of Tenneco and Shipbuilding
Company shall, and shall cause each of the other members of its Group over
which it has legal or effective direct or indirect control to, at its own
expense:
(a) Within 30 days following the Distribution Date, change, if necessary,
its corporate name to delete therefrom the word "Tenneco" or any other word
that is confusingly similar to the word "Tenneco" (except the word
"Tennessee"); and
(b) With respect to Tenneco, within two years following the Distribution
Date, and, with respect to Shipbuilding Company, within one year following
the Distribution Date, remove any and all references to the Tenneco
Trademark and Tradenames from any and all signs, displays or other
identification or advertising material (excluding any such material that is
the subject of SECTION 5.03 below). After the conclusion of such period,
each of Tenneco, Shipbuilding Company, and each other member of its
respective Group or over which it has legal or effective direct or indirect
control shall not use or display any of the Tenneco Trademarks and
Tradenames without the prior written consent of Industrial Company, which
consent may be withheld for any reason or no reason whatsoever. After the
Distribution Date, no party hereto shall represent or permit to be
represented to any third Person that it or any member of its Group has a
business affiliation with any other party hereto or any member of such
other party's Group, except as expressly permitted by any of the Ancillary
Agreements.
SECTION 5.03. SUPPLIES AND DOCUMENTS. Notwithstanding the provisions of
SECTION 5.02 above, for a period of six (6) months following the Distribution
Date, the Transition Trademark License shall license (on a nonexclusive basis)
to each of the members of the Energy Group and the Shipbuilding Group the
right to use existing supplies and documents which have imprinted thereon any
of the Tenneco Trademarks and Tradenames to the extent that such supplies and
documents were existing in the inventory of such member of the Energy Group or
Shipbuilding Group, as applicable, as of the Distribution Date.
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SECTION 5.04. ASSUMPTION AND SATISFACTION OF LIABILITIES. Except as
otherwise specifically set forth in any Ancillary Agreement, from and after
the Distribution Date:
(a) Tenneco shall, and shall cause each of the other members of the
Energy Group over which it has legal or effective direct or indirect
control to, assume, pay, perform and discharge all Energy Liabilities in
accordance with their terms, when determinable, and otherwise as determined
in accordance with the practice of the parties prior to the Distributions;
(b) Industrial Company shall, and shall cause each of the other members
of the Industrial Group over which it has legal or effective direct or
indirect control to, assume, pay, perform and discharge all Industrial
Liabilities in accordance with their terms, when determinable, and
otherwise as determined in accordance with the practice of the parties
prior to the Distributions; and
(c) Shipbuilding Subsidiary shall, and shall cause each of the other
members of the Shipbuilding Group over which it has legal or effective
direct or indirect control to, assume, pay, perform and discharge all
Shipbuilding Liabilities in accordance with their terms, when determinable,
and otherwise as determined in accordance with the practice of the parties
prior to the Distributions.
SECTION 5.05. NO REPRESENTATIONS OR WARRANTIES; CONSENTS.
(a) General. Each of the parties hereto understands and agrees that no party
hereto is, in this Agreement or in any other agreement or document
contemplated by this Agreement (including the Ancillary Agreements) or
otherwise, making any representation or warranty whatsoever, including without
limitation, any representation or warranty:
(i) as to the value or freedom from encumbrance of, or any other matter
concerning, any assets of such party; or
(ii) as to the legal sufficiency to convey title to any asset as of the
execution, delivery and filing of this Agreement or any Ancillary
Agreement, including, without limitation, any Conveyancing and Assumption
Instrument.
(b) DISCLAIMER OF MERCHANTABILITY OR FITNESS OF ASSETS. Each party hereto
further understands and agrees that there are no warranties, express or
implied, as to the merchantability or fitness of any of the assets either
transferred to or retained by the Energy Group, the Industrial Group or the
Shipbuilding Group, as the case may be, pursuant to Corporate Restructuring
Transactions and the other terms and provisions of this Agreement, any
Conveyancing and Assumption Agreement or any Ancillary Agreement, and all such
assets which are so transferred will be transferred on an "AS IS, WHERE IS"
basis, and the party to which any such assets are transferred hereunder, or
which retains assets hereunder, shall bear the economic and legal risk that
any conveyances of such assets shall prove to be insufficient or that the
title of such party or any other member of its respective Group to any such
assets shall be other than good and marketable and free from encumbrances.
(c) ACKNOWLEDGEMENT OF DISCLOSURE AND WAIVER. Each of Industrial Company and
Shipbuilding Company acknowledges, for itself and on behalf of each other
member of its respective Group, that:
(i) Tenneco and the other members of the Energy Group have disclosed, and
Industrial Company and Shipbuilding Company have knowledge of, all matters
pertaining to the assets and properties to be conveyed to Industrial
Company, Shipbuilding Company or any member of their respective Group
pursuant to the Corporate Restructuring Transactions or otherwise pursuant
to the other terms of this Agreement to the same extent that Tenneco and
the other members of the Energy Group have knowledge of such matters; and
(ii) such knowledge constitutes notice and disclosure of such matters.
Each of Industrial Company and Shipbuilding Company waives, to the fullest
extent permitted by law, for itself and for each other member of its
respective Group, any and all claims or causes of action which any of them may
have arising out of such matters or the failure of any Conveyancing and
Assumption Instrument to describe or refer to, or provide notice of, any such
matters.
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(d) NO REPRESENTATIONS OR WARRANTIES REGARDING CONSENTS. Each of the parties
hereto understands and agrees that no party hereto is, in this Agreement or
any Ancillary Agreement or in any other agreement or document contemplated by
this Agreement or any Ancillary Agreement or otherwise, representing or
warranting in any way that the obtaining of any consents or approvals, the
execution and delivery of any amendatory agreements and the making of any
filings or applications contemplated by this Agreement will satisfy the
provisions of any or all applicable agreements or the requirements of any or
all applicable Law. Each of the parties hereto further agrees and understands
that the party to which any assets are transferred as contemplated by the
Corporate Restructuring Transactions or the other provisions of this Agreement
shall bear the economic and legal risk that any necessary consents or
approvals are not obtained, that any necessary amendatory agreements are not
executed and delivered or that any requirements of Laws are not complied with.
(e) COVENANT TO USE REASONABLE EFFORTS TO OBTAIN CONSENTS. Notwithstanding
the provisions of SECTION 5.05(D) above, each of the parties hereto shall (and
shall cause each other member of its respective Group over which it has direct
or indirect legal or effective control to) use commercially reasonable efforts
to obtain all consents and approvals, to enter into all amendatory agreements
and to make all filings and applications which may be reasonably required for
the consummation of the transactions contemplated by this Agreement and shall
take all such further reasonable actions as shall be reasonably necessary to
preserve for each of the Energy Group, the Industrial Group and the
Shipbuilding Group, to the greatest extent feasible, the economic and
operational benefits of the allocation of assets and Liabilities contemplated
by this Agreement. In case at any time after the Distribution Date any further
action is necessary or desirable to carry out the purposes of this Agreement,
the proper officers and directors of each party to this Agreement shall take
all such necessary or desirable action.
SECTION 5.06. REMOVAL OF CERTAIN GUARANTEES.
(a) REMOVAL OF ENERGY GROUP AS GUARANTOR OF INDUSTRIAL AND SHIPBUILDING
LIABILITIES. Except as otherwise contemplated in the Corporate Restructuring
Transactions or otherwise specified in any Ancillary Agreement, each of
Tenneco, Industrial Company and Shipbuilding Company shall use its
commercially reasonable efforts to have, on or prior to the Distribution Date,
or as soon as practicable thereafter, Tenneco and any other member of the
Energy Group removed as a guarantor of, or obligor under or for, any
Industrial Liability or Shipbuilding Liability.
(b) REMOVAL OF INDUSTRIAL GROUP AS GUARANTOR OF ENERGY AND SHIPBUILDING
LIABILITIES. Except as otherwise contemplated in the Corporate Restructuring
Transactions or otherwise specified in any Ancillary Agreement, each of
Tenneco, Industrial Company and Shipbuilding Company shall use its
commercially reasonable efforts to have, on or prior to the Distribution Date,
or as soon as practicable thereafter, Industrial Company and any other member
of the Industrial Group removed as a guarantor of, or obligor under or for,
any Energy Liability or Shipbuilding Liability.
(c) REMOVAL OF SHIPBUILDING GROUP AS GUARANTOR OF ENERGY AND INDUSTRIAL
LIABILITIES. Except as otherwise contemplated in the Corporate Restructuring
Transactions or otherwise specified in any Ancillary Agreement, each of
Tenneco, Industrial Company and Shipbuilding Company shall use their
commercially reasonable efforts to have, on or prior to the Distribution Date,
or as soon as practicable thereafter, Shipbuilding Company and any other
member of the Shipbuilding Group removed as a guarantor of, or obligor under
or for, any Energy Liability or Industrial Liability.
SECTION 5.07. PUBLIC ANNOUNCEMENTS. Each party hereto shall consult with
each other before issuing any press release or otherwise issuing any other
similar written public statement with respect to this Agreement or the
Distributions and shall not issue any such press release or make any such
public statement without the prior consent of each other party, which shall
not be unreasonably withheld; provided, however, that a party may, without the
prior consent of any other party, issue such press release or other similar
written public statement as may be required by law or any listing agreement
with a national securities exchange to which any party hereto (or any member
of such party's Group) is a party if it has used all reasonable efforts to
consult with such other party and to obtain such party's consent but has been
unable to do so in a timely manner.
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SECTION 5.08. INTERCOMPANY AGREEMENTS. Effective as of the consummation of
the Distributions, each of Industrial Company, Shipbuilding Company and
Tenneco shall (and shall cause each other member of its respective Group over
which it has legal or effective direct or indirect control) to terminate each
and every agreement between it and any member of any of the other Groups other
than this Agreement, any of the Ancillary Agreements and any of the license
agreements referred to in SECTION 2.06(F) above; provided, however, that such
termination shall not have any effect whatsoever on any of its rights and/or
obligations that accrued or were incurred prior to the Distribution Date
(subject to the terms of SECTION 2.13 above).
SECTION 5.09. TAX MATTERS. Each of Tenneco, the Industrial Company and the
Shipbuilding Company intend the Distributions to be treated as tax-free
distributions under Code Section 355 and each such party shall use its
reasonable best efforts to cause the Distributions to so qualify. Neither
Tenneco, on the one hand, nor the Industrial Company and Shipbuilding Company,
on the other hand, shall take any action (other than the Merger) which might
cause:
(i) the Distributions to fail to qualify as tax-free distributions under
Code Section 355;
(ii) any other transfer described in the Corporate Restructuring
Transactions that is intended (as described in Tenneco's request for
rulings from the Internal Revenue Service) to qualify as a tax free
transfer under Code Sections 332, 351, 355 or 368 to fail to so qualify; or
(iii) Tenneco or any Energy Subsidiary to recognize any gains relating to
deferred intercompany transactions or excess loss accounts between or among
any member of affiliated group of corporations of which Tenneco is the
common parent, other than those defined intercompany gains listed on
EXHIBIT H to the Merger Agreement.
ARTICLE VI
ACCESS TO INFORMATION
SECTION 6.01. PROVISION, TRANSFER AND DELIVERY OF APPLICABLE CORPORATE
RECORDS.
(a) PROVISION, TRANSFER AND DELIVERY OF INDUSTRIAL RECORDS. Each of Tenneco
and Shipbuilding Company shall (and shall cause each other member of its
respective Group over which it has legal or effective direct or indirect
control to) arrange as soon as practicable following the Distribution Date for
the transportation (at Industrial Company's cost) to Industrial Company of the
Books and Records in its possession (i) that relate primarily to the
Industrial Business or are necessary to operate the Industrial Business
(collectively, the "INDUSTRIAL RECORDS"), and (ii) that consist of the
corporate minutes of the Board of Directors (or committees thereof) of Tenneco
or otherwise relate to the business, administrative and management operations
of Tenneco as the parent holding company of the Energy Business, Industrial
Business and Shipbuilding Business (collectively, the "TENNECO CORPORATE
RECORDS") except to the extent such items are already in the possession of any
member of the Industrial Group. The Industrial Records and the Tenneco
Corporate Records shall be the property of Industrial Company, but shall be
available to each of Tenneco and Shipbuilding Company for review and
duplication, at their cost, pursuant to the terms of this Agreement.
(b) PROVISION, TRANSFER AND DELIVERY OF SHIPBUILDING RECORDS. Each of
Tenneco and Industrial Company shall (and shall cause each other member of its
respective Group over which it has legal or effective direct or indirect
control to) arrange as soon as practicable following the Distribution Date for
the transportation (at Shipbuilding Company's cost) to Shipbuilding Company of
the Books and Records in its possession that relate primarily to the
Shipbuilding Business or are necessary to operate the Shipbuilding Business
(collectively, the "SHIPBUILDING RECORDS"), except to the extent such items
are already in the possession of any member of the Shipbuilding Group. The
Shipbuilding Records shall be the property of Shipbuilding Company, but shall
be available to each of Tenneco and Industrial Company for review and
duplication , at their cost, pursuant to the terms of this Agreement.
(c) PROVISION, TRANSFER AND DELIVERY OF ENERGY RECORDS. Each of Industrial
Company and Shipbuilding Company shall (and shall cause each other member of
its respective Group over which it has legal or effective direct or indirect
control to) arrange as soon as practicable following the Distribution Date for
the transportation (at Tenneco's cost) to Tenneco of the Books and Records in
its possession that relate primarily to the Energy
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Business or are necessary to operate the Energy Business (collectively, the
"ENERGY RECORDS"), except to the extent such items are already in the
possession of any member of the Energy Group. The Energy Records shall be the
property of Tenneco, but shall be available to each of Industrial Company and
Shipbuilding Company for review and duplication, at their cost, pursuant to
the terms of this Agreement.
SECTION 6.02. ACCESS TO INFORMATION.
(a) ACCESS TO BOOKS AND RECORDS. Unless otherwise contemplated by SECTION
6.06 hereof, from and after the Distribution Date, each of Tenneco, Industrial
Company and Shipbuilding Company shall (and shall cause each of the other
members of its respective Group over which it has legal or effective direct or
indirect control to) afford to each other party and its authorized
accountants, counsel and other designated representatives reasonable access
and duplicating rights (all such duplicating costs to be borne by the
requesting party) during normal business hours, subject to appropriate
restrictions for classified, privileged or confidential information, to the
personnel, properties, Books and Records and other data and information of
such party and each other member of such party's Group relating to operations
prior to the Distributions insofar as such access is reasonably required by
the other requesting party for the conduct of the requesting party's business
(but not for competitive purposes).
(b) PROVISION OF POST-DISTRIBUTION COMMISSION FILINGS. For a period of five
years following the Distribution Date, each of Tenneco, Industrial Company and
Shipbuilding Company shall (and shall cause each of the other members of its
respective Group over which it has legal or effective direct or indirect
control to) provide to the other, promptly following such time at which such
documents are filed with the Commission, all documents (other than documents
or portions thereof for which confidential treatment has been granted or a
request for confidential treatment is pending) filed by it and by each other
member of such party's Group with the Commission pursuant to the Securities
Act or the periodic and interim reporting requirements of the Exchange Act and
the rules and regulations of the Commission promulgated thereunder.
SECTION 6.03. REIMBURSEMENT: OTHER MATTERS. Except to the extent otherwise
contemplated hereby or by any Ancillary Agreement, a party providing Books and
Records or access to information to any other party (or such party's
representatives) under this ARTICLE VI shall be entitled to receive from such
other party, upon the presentation of invoices therefor, payments for such
amounts, relating to supplies, disbursements and other out-of-pocket expenses,
as may be reasonably incurred in providing such Books and Records or access to
information.
SECTION 6.04. CONFIDENTIALITY.
(a) GENERAL RESTRICTION ON DISCLOSURE. Each of Tenneco, Industrial Company
and Shipbuilding Company shall not (and shall not permit any other member of
its respective Group over which it has legal or effective direct or indirect
control to) use or permit the use of (without the prior written consent of the
other) and shall hold, and shall cause its consultants, advisors and other
representatives and any other member of its respective Group (over which it
has legal or effective direct or indirect control) to hold, in strict
confidence, all information concerning each other party hereto and the other
members of such other party's Group in its possession, custody or control to
the extent such information either
(i)relates to the period up to the Distribution Date,
(ii)relates to any Ancillary Agreement, or
(iii)is obtained in the course of performing services for the other party
pursuant to any Ancillary Agreement, and each party hereto shall not (and
shall cause each other member of its respective Group over which it has
legal or effective direct or indirect control not to) otherwise release or
disclose such information to any other Person, except its auditors,
attorneys, financial advisors, bankers and other consultants and advisors,
without the prior written consent of the other affected party or parties,
unless compelled to disclose such information by judicial or administrative
process or unless such disclosure is required by Law and such party has
used commercially reasonable efforts to consult with the other affected
party or parties prior to such disclosure.
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(b) COMPELLED DISCLOSURE. To the extent that a party hereto is compelled by
judicial or administrative process to disclose such information under
circumstances in which any evidentiary privilege would be available, such
party agrees to assert such privilege in good faith prior to making such
disclosure. Each of the parties shall consult with each relevant other party
in connection with any such judicial or administrative process, including,
without limitation, in determining whether any privilege is available, and
shall not object to each such relevant party and its counsel participating in
any hearing or other proceeding (including, without limitation, any appeal of
an initial order to disclose) in respect of such disclosure and assertion of
privilege.
(c) EXCEPTIONS TO CONFIDENTIAL TREATMENT. Anything herein to the contrary
notwithstanding, no party hereto shall be prohibited from using or permitting
the use of, or required to hold in confidence, any information to the extent
that (i) such information has been or is in the public domain through no fault
of such party, (ii) such information is, after the Distribution Date, lawfully
acquired from other sources by such party, or (iii) this Agreement, any
Ancillary Agreement or any other agreement entered into pursuant hereto
permits the use or disclosure of such information by such party.
SECTION 6.05. WITNESS SERVICES. At all times from and after the Distribution
Date, each of Tenneco, Industrial Company and Shipbuilding Company shall use
its reasonable efforts to make available to each other party hereto, upon
reasonable written request, the officers, directors, employees and agents of
each member of its respective Group for fact finding, consultation or
interviews and as witnesses to the extent that:
(a) such persons may reasonably be required in connection with the
prosecution or defense of any Action in which the requesting party or any
member of its respective Group may from time to time be involved; and
(b) there is no conflict in the Action between the requesting party or
any member of its respective Group and the party to which a request is made
pursuant to this SECTION 6.05 or any member of such party's Group. Except
as otherwise agreed by the parties, a party providing witness services to
any other party under this Section shall be entitled to receive from the
recipient of such services, upon the presentation of invoices therefor,
payments for such amounts, relating to supplies, disbursements and other
out-of-pocket expenses (but not salary expenses) and direct and indirect
costs of employees who participate in fact finding, consultation or
interviews or are witnesses, as are actually and reasonably incurred in
providing such fact finding, consulting, interviews or witness services by
the party providing such services.
SECTION 6.06. RETENTION OF RECORDS. Except when a longer period is required
by Law or is specifically provided for herein or in any Ancillary Agreement,
each party hereto shall cause the members of its Group over which it has legal
or effective direct or indirect control, to retain, for a period of at least
seven years following the Distribution Date, all material information
(including without limitation all material Books and Records) relating to such
Group and its operations prior to the Distribution Date. Notwithstanding the
foregoing, any party hereto may offer in writing to deliver to the other
parties all or a portion of such information as it relates to members of the
offering party's Group and, if such offer is accepted in writing within 90
days after receipt thereof, the offering party shall promptly arrange for the
delivery of such information (or copies thereof) to each accepting party (at
the expense of such accepting party). If such offer is not so accepted, the
offered information may be destroyed or otherwise disposed of by the offering
party at any time thereafter.
SECTION 6.07. PRIVILEGED MATTERS.
(a) PRIVILEGED INFORMATION. Each of the parties hereto shall, and shall
cause the members of its Group over which it has legal or effective direct
or indirect control to, use its reasonable efforts to maintain, preserve,
protect and assert all privileges including, without limitation, all
privileges arising under or relating to the attorney-client relationship
(including without limitation the attorney-client and attorney work product
privileges) that relate directly or indirectly to any member of any other
Group for any period prior to the Distribution Date ("PRIVILEGE" or
"PRIVILEGES"). Each of the parties hereto shall use its reasonable efforts
not to waive, or permit any member of its Group over which it has legal or
effective direct or indirect control to waive, any such Privilege that
could be asserted under applicable Law without the prior written consent of
the other parties. With respect to each party, the rights and obligations
created by this SECTION 6.07 shall apply to all information as to which a
member of any Group did assert or, but for the
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Distributions, would have been entitled to assert the protection of a
Privilege ("PRIVILEGED INFORMATION") including, but not limited to, any and
all information that either:
(i) was generated or received prior to the Distribution Date but
which, after the Distributions, is in the possession of a member of
another Group; or
(ii) is generated or received after the Distribution Date but refers
to or relates to Privileged Information that was generated or received
prior to the Distribution Date.
(b) PRODUCTION OF PRIVILEGED INFORMATION. Upon receipt by a party or any
member of its Group of any subpoena, discovery or other request that
arguably calls for the production or disclosure of Privileged Information,
or if a party or any member of its Group obtains knowledge that any current
or former employee of such party or any member of its Group has received
any subpoena, discovery or other request which arguably calls for the
production or disclosure of Privileged Information, such party shall
promptly notify the other parties of the existence of the request and shall
provide the other parties a reasonable opportunity to review the
information and to assert any rights it may have under this SECTION 6.07 or
otherwise to prevent the production or disclosure of Privileged
Information. No party will, or will permit any member of its Group over
which it has direct or indirect legal or effective control to, produce or
disclose any information arguably covered by a Privilege under this SECTION
6.07 unless:
(i) each other party has provided its express written consent to such
production or disclosure; or
(ii) a court of competent jurisdiction has entered an order which is
not then appealable or a final, nonappealable order finding that the
information is not entitled to protection under any applicable
privilege.
(c) NO WAIVER. The parties hereto understand and agree that the transfer
of any Books and Records or other information between any members of the
Energy Group, the Industrial Group, or the Shipbuilding Group shall be made
in reliance on the agreements of Tenneco, Industrial Company and
Shipbuilding Company, as set forth in SECTION 6.04 and SECTION 6.07 hereof,
to maintain the confidentiality of Privileged Information and to assert and
maintain all applicable Privileges. The Books and Records being transferred
pursuant to SECTION 6.01 hereof, the access to information being granted
pursuant to SECTION 6.02 hereof, the agreement to provide witnesses and
individuals pursuant to SECTION 6.05 hereof and the transfer of Privileged
Information to either party pursuant to this Agreement shall not be deemed
a waiver of any Privilege that has been or may be asserted under this
Section or otherwise.
ARTICLE VII
INDEMNIFICATION
SECTION 7.01. INDEMNIFICATION BY TENNECO. Except as otherwise specifically
set forth in any provision of this Agreement or of any Ancillary Agreement,
Tenneco shall, to the fullest extent permitted by law, indemnify, defend and
hold harmless the Industrial Indemnitees and the Shipbuilding Indemnitees from
and against any and all Indemnifiable Losses of the Industrial Indemnitees and
the Shipbuilding Indemnitees, respectively, arising out of, by reason of or
otherwise in connection with either (i) the Energy Liabilities, or (ii) the
breach by Tenneco of any provision of this Agreement or any Ancillary
Agreement.
SECTION 7.02. INDEMNIFICATION BY INDUSTRIAL COMPANY. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, Industrial Company shall, to the fullest extent permitted by law,
indemnify, defend and hold harmless the Energy Indemnitees and the
Shipbuilding Indemnitees from and against any and all Indemnifiable Losses of
the Energy Indemnitees and the Shipbuilding Indemnitees, respectively, arising
out of, by reason of or otherwise in connection with either (i) the Industrial
Liabilities, or (ii) the breach by Industrial Company of any provision of this
Agreement or any Ancillary Agreement.
SECTION 7.03. INDEMNIFICATION BY SHIPBUILDING COMPANY. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, Shipbuilding Company shall, to the fullest
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entent permitted by law, indemnify, defend and hold harmless the Energy
Indemnitees and the Industrial Indemnitees from and against any and all
Indemnifiable Losses of the Energy Indemnitees and the Industrial Indemnitees,
respectively, arising out of, by reason of or otherwise in connection with
either (i) the Shipbuilding Liabilities, or (ii) the breach by Shipbuilding
Company of any provision of this Agreement or any Ancillary Agreement. In
addition, and without limiting the generality of the foregoing indemnification
provisions of this SECTION 7.03, Shipbuilding Company shall, to the fullest
extent permitted by law, indemnify, defend and hold harmless the Industrial
Indemnitees and the Energy Indemnitees from and against any and all
Indemnifiable Losses of the Industrial Indemnitees and the Energy Indemnitees,
respectively, arising out of, by reason of or otherwise in connection with any
matter, of whatever kind or nature, relating in any way to the commercial
ships commonly known as the "Double Eagle" product tankers, including without
limitation, (i) the design, engineering or construction of any of the Double
Eagle product tankers, (ii) the sale or other disposition of any of the Double
Eagle product tankers (or the sale or other disposition of any direct or
indirect equity interest in any of the Double Eagle product tankers), (iii)
the direct or indirect financing of the construction of any of the Double
Eagle product tankers or any other financing relating to any of the Double
Eagle product tankers, (iv) the direct or indirect equity investments in any
of the Double Eagle product tankers, (v) the purchase of raw materials and
other materials and services in connection with the design, construction or
engineering of any of the Double Eagle product tankers, (vi) the negotiation
of any contract for the construction of or financing for the construction of,
any of the Double Eagle product tankers, or (vii) the operation by any Person
whatsoever of any of the Double Eagle product tankers.
SECTION 7.04. LIMITATIONS ON INDEMNIFICATION OBLIGATIONS.
(a) REDUCTIONS FOR INSURANCE PROCEEDS AND OTHER RECOVERIES. The amount that
any party (an "INDEMNIFYING PARTY") is or may be required to pay to any other
Person (an "INDEMNITEE") pursuant to SECTION 7.01, SECTION 7.02 or SECTION
7.03 above, as applicable, shall be reduced (retroactively or prospectively)
by any Insurance Proceeds or other amounts actually recovered from third
parties by or on behalf of such Indemnitee in respect of the related
Indemnifiable Losses (except that nothing herein shall be construed as
requiring any Indemnitee in respect of any Shipbuilding Securities Liability
to file any claim for insurance). The existence of a claim by an Indemnitee
for insurance or against a third party in respect of any Indemnifiable Loss
shall not, however, delay any payment pursuant to the indemnification
provisions contained herein and otherwise determined to be due and owing by an
Indemnifying Party. Rather the Indemnifying Party shall make payment in full
of such amount so determined to be due and owing by it against an assignment
by the Indemnitee to the Indemnifying Party of the entire claim of the
Indemnitee for such insurance or against such third party. Notwithstanding any
other provisions of this Agreement, it is the intention of the parties hereto
that no insurer or any other third party shall be (i) entitled to a benefit it
would not be entitled to receive in the absence of the foregoing
indemnification provisions or (ii) relieved of the responsibility to pay any
claims for which it is obligated. If an Indemnitee shall have received the
payment required by this Agreement from an Indemnifying Party in respect of
any Indemnifiable Losses and shall subsequently actually receive Insurance
Proceeds or other amounts in respect of such Indemnifiable Losses, then such
Indemnitee shall hold such Insurance Proceeds in trust for the benefit of such
Indemnifying Party and shall pay to such Indemnifying Party a sum equal to the
amount of such Insurance Proceeds or other amounts actually received, up to
the aggregate amount of any payments received from such Indemnifying Party
pursuant to this Agreement in respect of such Indemnifiable Losses.
(b) FOREIGN CURRENCY ADJUSTMENTS. In the event that any indemnification
payment required to be made hereunder or under any Ancillary Agreement shall
be denominated in a currency other than U.S. Dollars, the amount of such
payment shall be translated into U.S. Dollars using the foreign exchange rate
for such currency determined in accordance with the following rules:
(i) with respect to any Indemnifiable Losses arising from the payment by
a financial institution under a guarantee, comfort letter, letter of
credit, foreign exchange contract or similar instrument, the foreign
exchange rate for such currency shall be determined as of the date on which
such financial institution shall have been reimbursed;
(ii) with respect to any Indemnifiable Losses covered by insurance, the
foreign exchange rate for such currency shall be the foreign exchange rate
employed by the insurance company providing such insurance in settling such
Indemnifiable Losses with the Indemnifying Party; and
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(iii) with respect to any Indemnifiable Losses not covered by either
clause (i) or (ii) above, the foreign exchange rate for such currency shall
be determined as of the date that notice of the claim with respect to such
Indemnifiable Losses shall be given to the Indemnitee.
SECTION 7.05. PROCEDURES FOR INDEMNIFICATION. Except as otherwise
specifically provided in any Ancillary Agreement, including, without
limitation, the Tax Sharing Agreement and the Benefits Agreement:
(a) NOTICE OF THIRD PARTY CLAIMS. If a claim or demand is made against an
Indemnitee by any Person who is not a member of the Energy Group, Industrial
Group or Shipbuilding Group (a "THIRD PARTY CLAIM") as to which such
Indemnitee is entitled to indemnification pursuant to this Agreement, such
Indemnitee shall notify the Indemnifying Party in writing, and in reasonable
detail, of the Third Party Claim promptly (and in any event within 15 business
days) after receipt by such Indemnitee of written notice of the Third Party
Claim; provided, however, that failure to give such notification shall not
affect the Indemnitee's right to indemnification hereunder except to the
extent the Indemnifying Party shall have been actually prejudiced as a result
of such failure (except that the Indemnifying Party shall not be liable for
any expenses incurred during the period in which the Indemnitee failed to give
such notice). Thereafter, the Indemnitee shall deliver to the Indemnifying
Party, promptly (and in any event within 15 business days) after the
Indemnitee's receipt thereof, copies of all notices and documents (including
court papers) received by the Indemnitee relating to the Third Party Claim.
(b) LEGAL DEFENSE OF THIRD PARTY CLAIMS. If a Third Party Claim is made
against an Indemnitee, the Indemnifying Party shall be entitled to participate
in the defense thereof and, if it so chooses, to assume the defense thereof
with counsel selected by the Indemnifying Party, which counsel shall be
reasonably satisfactory to the Indemnitee. Should the Indemnifying Party so
elect to assume the defense of a Third Party Claim, the Indemnifying Party
shall not be liable to the Indemnitee for legal or other expenses subsequently
incurred by the Indemnitee in connection with the defense thereof. If the
Indemnifying Party assumes such defense, the Indemnitee shall have the right
to participate in the defense thereof and to employ counsel, at its own
expense, separate from the counsel employed by the Indemnifying Party, it
being understood that the Indemnifying Party shall control such defense. The
Indemnifying Party shall be liable for the reasonable fees and expenses of
counsel employed by the Indemnitee for any period during which the
Indemnifying Party has failed to assume the defense of the Third Party Claim
(other than during the period prior to the time the Indemnitee shall have
given notice of the Third Party Claim as provided above). If the Indemnifying
Party so elects to assume the defense of any Third Party Claim, all of the
Indemnitees shall cooperate with the Indemnifying Party in the defense or
prosecution thereof. Notwithstanding the foregoing:
(i) the Indemnifying Party shall not be entitled to assume the defense of
any Third Party Claim (and shall be liable to the Indemnitee for the
reasonable fees and expenses of counsel incurred by the Indemnitee in
defending such Third Party Claim) if the Third Party Claim either (A) seeks
an order, injunction or other equitable relief or relief for other than
money damages against the Indemnitee which the Indemnitee reasonably
determines, after conferring with its counsel, cannot be separated from any
related claim for money damages; provided, however, that if such equitable
relief or other relief portion of the Third Party Claim can be so separated
from that for money damages, the Indemnifying Party shall be entitled to
assume the defense of the portion relating to money damages; or (B) relates
to or arises out of any Shipbuilding Securities Liability.
(ii) an Indemnifying Party shall not be entitled to assume the defense of
any Third Party Claim (and shall be liable for the reasonable fees and
expenses of counsel incurred by the Indemnitee in defending such Third
Party Claim) if, in the Indemnitee's reasonable judgment, a conflict of
interest between such Indemnitee and such Indemnifying Party exists in
respect of such Third Party Claim; and
(iii) if at any time after assuming the defense of a Third Party Claim an
Indemnifying Party shall fail to prosecute or withdraw from the defense of
such Third Party Claim, the Indemnitee shall be entitled to resume the
defense thereof and the Indemnifying Party shall be liable for the
reasonable fees and expenses of counsel incurred by the Indemnitee in such
defense.
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(c) SETTLEMENT OF THIRD PARTY CLAIMS. Except as otherwise provided below in
this SECTION 7.05(C), or as otherwise specifically provided in any Ancillary
Agreement, including without limitation, the Tax Sharing Agreement and the
Benefits Agreement, if the Indemnifying Party has assumed the defense of any
Third Party Claim, then
(i) in no event will the Indemnitee admit any liability with respect to,
or settle, compromise or discharge, any Third Party Claim without the
Indemnifying Party's prior written consent; provided, however, that the
Indemnitee shall have the right to settle, compromise or discharge such
Third Party Claim without the consent of the Indemnifying Party if the
Indemnitee releases the Indemnifying Party from its indemnification
obligation hereunder with respect to such Third Party Claim and such
settlement, compromise or discharge would not otherwise adversely affect
the Indemnifying Party, and
(ii) the Indemnitee will agree to any settlement, compromise or discharge
of a Third Party Claim that the Indemnifying Party may recommend and that
by its terms obligates the Indemnifying Party to pay the full amount of the
liability in connection with such Third Party Claim and releases the
Indemnitee completely in connection with such Third Party Claim and that
would not otherwise adversely affect the Indemnitee.
provided, however, that the Indemnitee may refuse to agree to any such
settlement, compromise or discharge if the Indemnitee agrees that the
Indemnifying Party's indemnification obligation with respect to such Third
Party Claim shall not exceed the amount that would be required to be paid by
or on behalf of the Indemnifying Party in connection with such settlement,
compromise or discharge. If the Indemnifying Party has not assumed the defense
of a Third Party Claim then in no event shall the Indemnitee settle,
compromise or discharge such Third Party Claim without providing prior written
notice to the Indemnifying Party, which shall have the option within 15
business days following receipt of such notice to
(i) approve and agree to pay the settlement,
(ii) approve the amount of the settlement, reserving the right to contest
the Indemnitee's right to indemnity pursuant to this Agreement,
(iii) disapprove the settlement and assume in writing all past and future
responsibility for such Third Party Claim (including all of Indemnitee's
prior expenditures in connection therewith), or
(iv) disapprove the settlement and continue to refrain from participation
in the defense of such Third Party Claim, in which event the Indemnifying
Party shall have no further right to contest the amount or reasonableness
of the settlement if the Indemnitee elects to proceed therewith.
In the event the Indemnifying Party does not respond to such written notice
from the Indemnitee within such 15 business-day period, the Indemnifying Party
shall be deemed to have elected option (i).
(d) OTHER CLAIMS. Any claim on account of an Indemnifiable Loss which does
not result from a Third Party Claim shall be asserted by written notice given
by the Indemnitee to the applicable Indemnifying Party. Such Indemnifying
Party shall have a period of 15 business days after the receipt of such notice
within which to respond thereto. If such Indemnifying Party does not respond
within such 15 business-day period, such Indemnifying Party shall be deemed to
have refused to accept responsibility to make payment. If such Indemnifying
Party does not respond within such 15 business-day period or rejects such
claim in whole or in part, such Indemnitee shall be free to pursue such
remedies as may be available to such party under applicable Law or under this
Agreement.
SECTION 7.06. INDEMNIFICATION PAYMENTS. Indemnification required by this
ARTICLE VII shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
loss, liability, claim, damage or expense is incurred.
SECTION 7.07. OTHER ADJUSTMENTS.
(a) ADJUSTMENTS FOR TAXES. The amount of any Indemnifiable Loss shall be:
(i) increased to take into account any net Tax cost actually incurred by
the Indemnitee arising from any payments received from the Indemnifying
Party (grossed up for such increase); and
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(ii) reduced to take account of any net Tax benefit actually realized by
the Indemnitee arising from the incurrence or payment of any such
Indemnifiable Loss.
In computing the amount of such Tax cost or Tax benefit, the Indemnitee shall
be deemed to recognize all other items of income, gain, loss, deduction or
credit before recognizing any item arising from the receipt of any payment
with respect to an Indemnifiable Loss or the incurrence or payment of any
Indemnifiable Loss.
(b) REDUCTIONS FOR SUBSEQUENT RECOVERIES OR OTHER EVENTS. In addition to any
adjustments required pursuant to SECTION 7.04 hereof or SECTION 7.07(A) above,
if the amount of any Indemnifiable Losses shall, at any time subsequent to any
indemnification payment made by the Indemnifying Party pursuant to this
ARTICLE VII, be reduced by recovery, settlement or otherwise, the amount of
such reduction, less any expenses incurred in connection therewith, shall
promptly be repaid by the Indemnitee to the Indemnifying Party, up to the
aggregate amount of any payments received from such Indemnifying Party
pursuant to this Agreement in respect of such Indemnifiable Losses.
SECTION 7.08. OBLIGATIONS ABSOLUTE. The foregoing contractual obligations of
indemnification set forth in this ARTICLE VII shall:
(i) also apply to any and all Third Party Claims that allege that any
Indemnitee is independently, directly, vicariously or jointly and severally
liable to such third party;
(ii) to the extent permitted by applicable law, apply even if the
Indemnitee is partially negligent or otherwise partially culpable or at
fault, whether or not such liability arises under any doctrine of strict
liability; and
(iii) be in addition to any liability or obligation that an Indemnifying
Party may have other than pursuant to this Agreement.
SECTION 7.09. SURVIVAL OF INDEMNITIES. The obligations of Tenneco,
Industrial Company and Shipbuilding Company under this ARTICLE VII shall
survive the sale or other transfer by any of them of any assets or businesses
or the assignment by any of them of any Liabilities, with respect to any
Indemnifiable Loss of any Indemnitee related to such assets, businesses or
Liabilities.
SECTION 7.10. REMEDIES CUMULATIVE. The remedies provided in this ARTICLE VII
shall be cumulative and shall not preclude assertion by any Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
SECTION 7.11. COOPERATION OF THE PARTIES WITH RESPECT TO ACTIONS AND THIRD
PARTY CLAIMS.
(a) IDENTIFICATION OF PARTY IN INTEREST. Any party to this Agreement that
has responsibility for an Action or Third Party Claim shall identify itself as
the true party in interest with respect to such Action or Third Party Claim
and shall use its commercially reasonable efforts to obtain the dismissal of
any other party to this Agreement from such Action or Third Party Claim.
(b) DISPUTES REGARDING RESPONSIBILITY FOR ACTIONS AND THIRD PARTY CLAIMS. If
there is uncertainty or disagreement concerning which party to this Agreement
has responsibility for any Action or Third Party Claim, the following
procedure shall be followed in an effort to reach agreement concerning
responsibility for such Action or Third Party Claim:
(i) The parties in disagreement over the responsibility for an Action or
Third Party Claim shall exchange brief written statements setting forth
their position concerning which party has responsibility for the Action or
Third Party Claim in accordance with the provisions of this ARTICLE VII.
These statements shall be exchanged within 5 days of a party putting
another party on written notice that the other party is or may be
responsible for the Action or Third Party Claim.
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(ii) If within 5 days of the exchange of the written statement of each
party's position agreement is not reached on responsibility for the Action
or Third Party Claim, the General Counsel for each of the parties in
disagreement over responsibility for the Action or Third Party Claim shall
speak either by telephone or in person to attempt to reach agreement on
responsibility for the Action or Third Party Claim.
(c) EFFECT OF FAILURE TO FOLLOW PROCEDURE. Failure to follow the procedure
set forth in clause (b) above shall not affect the rights and responsibilities
of the parties as established by the other provisions of this ARTICLE VII.
(d) EXCHANGE OF INFORMATION. In connection with the handling of current or
future Actions or Third Party Claims, the parties may determine that it is in
their mutual interest to exchange privileged or confidential information. If
so, the parties agree to discuss whether it is in their mutual interest to
enter into a joint defense agreement or information exchange agreement to
maintain the confidentiality of their communications and to permit them to
maintain the confidentiality of proprietary information or information that is
otherwise confidential or subject to an applicable privilege, including but
not limited to the attorney-client, work product, executive, deliberative
process, or self-evaluation privileges.
SECTION 7.12. CONTRIBUTION. To the extent that any indemnification provided
for under SECTION 7.01, SECTION 7.02 or SECTION 7.03 is unavailable to an
Indemnified Party or is insufficient in respect of any the Indemnifiable
Lossess of such Indemnified Party then the Indemnifying Party under such
Section, in lieu of indemnifying such Indemnified Party thereunder, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Indemnifiable Losses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Indemnifying Party on the one
hand and the Indemnified Party on the other hand from the transaction or other
matter which resulted in the Indemnifiable Losses or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other
hand in connection with the action, inaction, statements or omissions that
resulted in such Indemnifiable Losses as well as any other relevant equitable
considerations.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. COMPLETE AGREEMENT; CONSTRUCTION. This Agreement, including
the Exhibits and Schedules hereto, and the Ancillary Agreements shall
constitute the entire agreement between the parties with respect to the
subject matter hereof and shall supersede all previous negotiations,
commitments and writings with respect to such subject matter. In the event of
any inconsistency between this Agreement and any Schedule or Exhibit hereto,
the Schedule or Exhibit, as the case may be, shall prevail. Notwithstanding
any other provisions in this Agreement to the contrary, in the event and to
the extent that there shall be a conflict between the provisions of this
Agreement and the provisions of any Ancillary Agreement, such Ancillary
Agreement shall control.
SECTION 8.02. ANCILLARY AGREEMENTS. This Agreement is not intended to
address, and should not be interpreted to address, the matters specifically
and expressly covered by the Ancillary Agreements.
SECTION 8.03. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other parties.
SECTION 8.04. SURVIVAL OF AGREEMENTS. Except as otherwise expressly provided
herein, all covenants and agreements of the parties contained in this
Agreement shall survive the Distribution Date.
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SECTION 8.05. RESPONSIBILITY FOR EXPENSES.
(a) EXPENSES INCURRED ON OR PRIOR TO DISTRIBUTION DATE. Subject to the
provisions of SECTION 8.05(C) below and except as otherwise set forth in this
Agreement or any Ancillary Agreement, all costs and expenses incurred on or
prior to the Distribution Date (whether or not paid on or prior to the
Distribution Date) in connection with the preparation, execution, delivery and
implementation of this Agreement and any Ancillary Agreement, the Information
Statements and the Distribution, and the consummation of the transactions
contemplated hereby and thereby shall be charged to and paid by Tenneco;
provided, however, that (i) such amounts shall be included in the calculation
of the Actual Energy Debt Amount to the extent expressly provided in the Debt
and Cash Allocation Agreement, and (ii) each of Industrial Company and
Shipbuilding Company shall be solely responsible and liable for any expenses,
fees, or other costs that it separately and directly incurs in connection with
any of the transactions contemplated under this Agreement or any of the
Ancillary Agreements.
(b) EXPENSES INCURRED OR ACCRUED AFTER DISTRIBUTION DATE. Subject to the
provisions of SECTION 8.05(C) below and except as otherwise set forth in this
Agreement or any Ancillary Agreement, each party shall bear its own costs and
expenses first incurred or accrued after the Distribution Date.
(c) ENVIRONMENTAL EXPENSES. Notwithstanding the provisions of SECTION
8.05(A) and SECTION 8.05(B) above, expenses and other costs incurred in
connection with compliance with any Environmental Laws applicable to the
transactions contemplated hereby shall be paid by the party that after the
Distribution Date will, or that this Agreement contemplates will, own the
assets or operate the business subject to such Environmental Laws.
SECTION 8.06. NOTICES. All notices and other communications to a party
hereunder shall be in writing and hand delivered or mailed by registered or
certified mail (return receipt requested) or sent by any means of electronic
message transmission with delivery confirmed (by voice or otherwise) to such
party (and will be deemed given on the date on which the notice is received by
such party) at the address for such party set forth below (or at such other
address for the party as the party shall, from time to time, specify by like
notice to the other parties):
If to Tenneco, at:1010 Milam Street
Houston, Texas 77002
Telecopier:
Attention: Corporate Secretary
If to Industrial Company, at:1275 King Street
Greenwich, CT 06831
Telecopier:
Attention: Corporate Secretary
If to Shipbuilding Company, at:4101 Washington Avenue
Newport News, Virginia 23607
Telecopier:
Attention: Corporate Secretary
SECTION 8.07. WAIVERS. The failure of any party hereto to require strict
performance by any other party of any provision in this Agreement will not
waive or diminish that party's right to demand strict performance thereafter
of that or any other provision hereof.
SECTION 8.08. AMENDMENTS. Subject to the terms of SECTION 8.11 hereof, this
Agreement may not be modified or amended except by an agreement in writing
signed by the parties hereto; provided, however, any such amendments or
modifications prior to the termination of the Merger Agreement or consummation
of the Merger may only be made with the prior consent of Acquiror unless such
modifications or amendments do not, individually or in the aggregate,
adversely affect the Energy Business (other than to a de minimis extent) or
materially delay or prevent the consummation of the Merger.
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SECTION 8.09. ASSIGNMENT. This Agreement shall be assignable in whole in
connection with a merger or consolidation or the sale of all or substantially
all the assets of a party hereto so long as the resulting, surviving or
transferee entity assumes all the obligations of the relevant party hereto by
operation of law or pursuant to an agreement in form and substance reasonably
satisfactory to the other parties to this Agreement. Otherwise this Agreement
shall not be assignable, in whole or in part, directly or indirectly, by any
party hereto without the prior written consent of the others, and any attempt
to assign any rights or obligations arising under this Agreement without such
consent shall be void.
SECTION 8.10. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
be binding upon, inure to the benefit of and be enforceable by the parties and
their respective permitted successors and permitted assigns.
SECTION 8.11. TERMINATION. This Agreement may be terminated and the
Distributions may be amended, modified or abandoned at any time prior to the
Distributions by and in the sole discretion of Tenneco without the approval of
Industrial Company or Shipbuilding Company or the stockholders of Tenneco;
provided, however, any such termination, abandonment, amendments or
modifications prior to the termination of the Merger Agreement or consummation
of the Merger may only be made with the prior written consent of Acquiror
unless, in the case of a modification or amendment only, such modification or
amendment does not, individually or in the aggregate, adversely affect the
Energy Business (other than to a de minimis extent) or materially delay or
prevent the consummation of the Merger. In the event of such termination, no
party shall have any liability of any kind to any other party or any other
person. After the Distributions, this Agreement may not be terminated except
by an agreement in writing signed by all of the parties hereto; provided,
however, that ARTICLE VIII shall not be terminated or amended after the
Distributions in respect of the third party beneficiaries thereto without the
consent of such persons. Nothing in this SECTION 8.11 shall relieve Tenneco of
its obligations, under Section 6.13 of the Merger Agreement.
SECTION 8.12. THIRD PARTY BENEFICIARIES. Except as provided in ARTICLE VII
hereof (relating to Indemnitees), this Agreement is solely for the benefit of
the parties hereto, the members of their respective Groups and Affiliates and
the Acquiror, after giving effect to the Distributions, and should not be
deemed to confer upon third parties any remedy, claim, liability, right of
reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement.
SECTION 8.13. ATTORNEY FEES. A party in breach of this Agreement shall, on
demand, indemnify and hold harmless the other parties hereto for and against
all out-of-pocket expenses, including, without limitation, reasonable legal
fees, incurred by such other party by reason of the enforcement and protection
of its rights under this Agreement. The payment of such expenses is in
addition to any other relief to which such other party may be entitled
hereunder or otherwise.
SECTION 8.14. TITLE AND HEADINGS. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Agreement.
SECTION 8.15. EXHIBITS AND SCHEDULES. The Exhibits and Schedules attached
hereto shall be construed with and as an integral part of this Agreement to
the same extent as if the same had been set forth verbatim herein.
SECTION 8.16. SPECIFIC PERFORMANCE. Each of the parties hereto acknowledges
that there is no adequate remedy at law for the failure by such parties to
comply with the provisions of this Agreement and that such failure would cause
immediate harm that would not be adequately compensable in damages.
Accordingly, each of the parties hereto agrees that their agreements contained
herein may be specifically enforced without the requirement of posting a bond
or other security, in addition to all other remedies available to the parties
hereto under this Agreement.
SECTION 8.17. GOVERNING LAW. ALL QUESTIONS AND/OR DISPUTES CONCERNING THE
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE SCHEDULES
AND EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND NOT THE LAW
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OF CONFLICTS, OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO THIS AGREEMENT
HEREBY IRREVOCABLY AND UNCONDITIONALLY (i) AGREES TO BE SUBJECT TO, AND HEREBY
CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE STATE OF
DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE, (ii) TO
THE EXTENT SUCH PARTY IS NOT OTHERWISE SUBJECT TO SERVICE OF PROCESS IN THE
STATE OF DELAWARE, HEREBY APPOINTS THE CORPORATION TRUST COMPANY, AS SUCH
PARTY'S AGENT IN THE STATE OF DELAWARE FOR ACCEPTANCE OF LEGAL PROCESS AND
(iii) AGREES THAT SERVICE MADE ON ANY SUCH AGENT SET FORTH IN (ii) ABOVE SHALL
HAVE THE SAME LEGAL FORCE AND EFFECT AS IF SERVED UPON SUCH PARTY PERSONALLY
WITHIN THE STATE OF DELAWARE.
SECTION 8.18. SEVERABILITY. In the event any one or more of the provisions
contained in this Agreement should be held invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions contained herein and therein shall not in any way be affected or
impaired thereby. The parties shall endeavor in good-faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid
provisions, the economic effect of which comes as close as possible to that of
the invalid, illegal or unenforceable provisions.
SECTION 8.19. SUBSIDIARIES. Each of the parties hereto shall cause to be
performed, and hereby guarantee the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such
party which is contemplated to be a Subsidiary of such party on and after the
Distribution Date.
SECTION 8.20. SHIPBUILDING HEDGING TRANSACTIONS. Notwithstanding any other
provisions of this Agreement or any other document or instrument (including
any of the other Ancillary Agreements), any gains or losses relating to
hedging or similar transactions undertaken by Shipbuilding Company or any
other member of the Shipbuilding Group which are in effect on the date hereof
or at any time hereafter through the Distribution Date shall be for the
account of Shipbuilding Company, and, without limiting the generality of the
foregoing, (i) Shipbuilding Company and the other members of the Group shall
finance and fund any such losses through their own finance facilities, and
(ii) no cash or debt relating to any such gains or losses shall be taken into
account in making any of the determinations under the Debt and Cash Allocation
Agreement, including determinations regarding the amount of the Allocated
Shipbuilding Debt and/or the Guaranteed Shipbuilding Cash Amount.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
TENNECO INC.
By __________________________________
Name:
Title:
NEW TENNECO INC.
By __________________________________
Name:
Title:
NEWPORT NEWS SHIPBUILDING INC.
By __________________________________
Name:
Title:
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EXHIBIT A
TO
DISTRIBUTION AGREEMENT
BENEFITS AGREEMENT
THIS BENEFITS AGREEMENT is made and entered into as of this day of
, 1996, by and among TENNECO INC., a Delaware corporation
("TENNECO"), NEW TENNECO INC., a Delaware corporation ("INDUSTRIAL COMPANY"),
and NEWPORT NEWS SHIPBUILDING INC. (formerly known as Tenneco InterAmerica
Inc.), a Delaware corporation ("SHIPBUILDING COMPANY").
WHEREAS, pursuant to the terms of that certain Distribution Agreement by and
among the parties hereto and dated as of , 1996 (the "Distribution
Agreement") the parties have entered into this Agreement regarding certain
labor, employment, compensation and benefit matters occasioned by the
Distributions.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement and the Distribution Agreement, each of
the parties hereto, on behalf of itself and each other member of its Group
over which it has direct or indirect legal or effective control, hereby agrees
as follows:
SECTION 1. DEFINITIONS. The following terms, when capitalized herein, shall
have the meanings set forth below in this Section 1. All other capitalized
terms which are used but are not otherwise defined herein shall have the
meanings ascribed to them in the Distribution Agreement.
"ACTIVE EMPLOYEES" means, with respect to each Group, all employees
regularly engaged in the performance of services to, for or on behalf of
any member of such Group as of the close of business on the Distribution
Date.
"FORMER EMPLOYEES" means, with respect to each Group, all former
employees of Tenneco and/or its Subsidiaries (including, but not limited
to, such employees who, as of the close of business on the Distribution
Date, are on leave of absence, long-term disability or layoff with recall
rights and the dependents of those persons) who, if they were regularly
engaged in the performance of services to, for or on behalf of Tenneco or
any of its Subsidiaries at the close of business on the Distribution Date,
would be an Active Employee of such Group, determined on a basis consistent
with the determination of the Active Employees of such Group.
"PENSION MATTERS" means, collectively, (a) Tenneco's 1986 pension plan
asset valuation and its cost accounting treatment, as described in the DCAA
Audit Report dated November 28, 1995, and (b) any claim which the DCAA or
any other agency of the DOD may assert that (or based on any allegation
that) the aggregate amount of assets of the TRP attributable to the Active
Employees and Former Employees of the Shipbuilding Group exceeds the
aggregate amount of the liabilities under the TRP attributable to Active
and Former Employees of the Shipbuilding Group.
"TENNECO SALARIED WELFARE PLANS" means, collectively, the Tenneco Inc.
Health Care Plan, the Tenneco Inc. Group Life Insurance Plan, the Tenneco
Inc. Long Term Disability Plan, the Tenneco Inc. Travel Accident Insurance
Plan, the Tenneco Inc. Health Care Flexible Spending Account Program and
the Tenneco Inc. Dependent Day Care Flexible Spending Account Plan.
SECTION 2. GENERAL EMPLOYMENT MATTERS.
2.01. GENERAL OBLIGATIONS. From and after the Distribution Date, each of
Tenneco, Industrial Company and Shipbuilding Company shall (and shall, as
applicable, cause each of the other members of its respective Group over which
it has direct or indirect legal or effective control to) (a) continue the
employment of all of the Active Employees of its respective Group, subject,
however to the terms of SECTION 2.03 below and (b) except as otherwise
specifically provided herein, pay, perform and discharge any and all labor,
employment, compensation and benefit liabilities, whether arising prior to, on
or after the Distribution Date, with respect to all such Active
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Employees and all Former Employees of its respective Group. Except as
specifically provided herein, each of Tenneco, Industrial Company and
Shipbuilding Company shall be solely responsible for the Former Employees of
its respective Group.
2.02. INITIAL COMPENSATION OF ACTIVE EMPLOYEES. The initial compensation
(base salary or wage level) of each Active Employee of each Group shall be the
same as the compensation (base salary or wage level) of such Active Employee
immediately prior to the Distribution Date.
2.03. NO ADDITIONAL EMPLOYMENT RIGHTS CREATED. Nothing in this Agreement
shall give any Active Employee of any Group any right to continued employment
by any member of that Group or any other Group beyond the Distribution Date,
which is in addition to or supplemental to any such right he or she may have
arising under contract or otherwise.
SECTION 3. COLLECTIVE BARGAINING.
3.01. CONTINUATION OF EXISTING COLLECTIVE BARGAINING AGREEMENTS. Each of
Tenneco, Industrial Company and Shipbuilding Company shall (and shall cause,
as applicable, each other member of its Group over which it has direct or
indirect legal or effective control to) continue to honor all collective
bargaining agreements covering the Active Employees of its respective Group
which are in effect as of the close of business on the Distribution Date, in
accordance with and subject to the terms of each such collective bargaining
agreement. Each of the parties hereto hereby agrees and acknowledges, however,
that nothing herein, including its obligation to continue its applicable
collective bargaining agreements, shall be construed to restrict any right it,
or any other member of its respective Group, may have to terminate,
renegotiate, reopen or otherwise seek changes in any of its collective
bargaining agreements.
3.02. RECOGNITION OF INCUMBENT LABOR ORGANIZATIONS. Each of Tenneco,
Industrial Company and Shipbuilding Company shall (and shall cause, as
applicable, each other member of its Group over which it has direct or
indirect legal or effective control to) continue to recognize all incumbent
labor organizations which, as of the close of business on the Distribution
Date, have established collective bargaining relationships in respect of the
Active Employees of its respective Group.
3.03. CONTINUED SPONSORSHIP OF HOURLY EMPLOYEE BENEFIT PLANS. Each of
Tenneco, Industrial Company and Shipbuilding Company shall continue (and
shall, as applicable, cause each other member of its respective Group over
which it has direct or indirect legal or effective control to continue) to
sponsor all hourly employee benefit plans which, as of the close of business
on the Distribution Date, are in existence and relate to the Active Employees
of its respective Group, subject to its rights under such plans to amend or
terminate such plans.
3.04. PROVISION OF WAGES, RIGHTS AND OTHER EMPLOYMENT BENEFITS REQUIRED
UNDER EXISTING COLLECTIVE BARGAINING AGREEMENTS. Without limiting the
generality of the foregoing, each of Tenneco, Industrial Company and
Shipbuilding Company shall provide those of its Active Employees whose
employment is subject to collective bargaining agreements and/or established
collective bargaining relationships with the wages, benefits, and terms and
conditions of employment required by such agreements or relationships, except
that (i) participation in the Tenneco Inc. Employee Stock Purchase Plan will
cease as of September 30, 1996, and (ii) no additional amounts may be invested
in any shares of the common stock, par value $5.00 per share, of Tenneco
("TENNECO COMMON STOCK") in any defined contribution plan from and after the
Effective Time.
SECTION 4. UNITED STATES SALARIED PENSION AND THRIFT BENEFITS.
4.01 TENNECO INC. RETIREMENT PLAN. Effective as of the Distribution Date,
Tenneco and Shipbuilding Company shall cease to be sponsors of the Tenneco
Inc. Retirement Plan (the "TRP"), and Industrial Company shall become the
sponsor of the TRP. The TRP shall retain liability for all pension benefits
accrued by the Active and Former Employees of the Energy Group and
Shipbuilding Group who are or were formerly participants in the TRP through
the last day of the calendar month in which the Distribution Date occurs (the
"Impact Date").
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4.02 AMENDMENT OF TRP. After Industrial Company has become the sponsor of
the TRP, it shall amend the TRP to (a) "freeze" the benefit accruals of the
Active Employees of the Energy Group and Shipbuilding Group as of the Impact
Date, and (b) provide that all benefits accrued as of the Impact Date by the
Active Employees of either the Energy Group or the Shipbuilding Group will be
fully vested and non-forfeitable, and Industrial Company shall inform, in
writing, each such Active Employee of his or her accrued benefits under the
TRP as of the Distribution Date; provided, however, that if the Distribution
Date occurs on the Impact Date, Industrial Company shall in any event (i)
first become the sponsor of the TRP as provided under SECTION 4.01 above, and
(ii) immediately thereafter amend the TRP as provided in this SECTION 4.02.
4.03 NO CREDIT FOR POST-DISTRIBUTION DATE SERVICE. Except as may be required
by law, the TRP shall not be required to count service with any entity other
than Industrial Company after the Distribution Date for any purpose.
4.04 NO LIABILITY TO ENERGY GROUP. Following the Distribution Date, the
Energy Group will have no liability, contingent or otherwise, with respect to
the TRP or any other defined benefit pension plan that is subject to Title IV
of the Employee Retirement Income Security Act of 1974, as amended, including
any liability for benefits accrued prior to the Distribution Date (including
early retirement benefits and related subsidies) for employees of the Energy
Group, and Industrial Company shall assume or retain, as the case may be, all
such liabilities.
4.05 SHIPBUILDING COMPANY LIABILITIES.
(a) GENERAL INDEMNIFICATION OF INDUSTRIAL COMPANY. Except as specifically
provided in this SECTION 4.05, Shipbuilding Company shall retain, and shall
indemnify and hold the Industrial Company harmless from, any liability
incurred or accrued at any time (whether before on or after the date hereof),
which has been, or may in the future be, asserted by any of (i) the Defense
Contract Audit Agency ("DCAA"), (ii) the United States Navy, or (iii) any and
all other agencies of, within or affiliated with the United States Department
of Defense (the "DOD"), that arise or arose out of, or in connection with
either (A) the participation of Active Employees or Former Employees of the
Shipbuilding Group in the TRP, (B) payments made by any agency of the DOD with
respect to benefits accrued under the TRP, (C) any claim by any agency of the
DOD relating to the assets of the TRP, and (D) any other related matters.
(b) SHARING OF CERTAIN SHIPBUILDING COMPANY LIABILITIES. Notwithstanding the
foregoing, Industrial Company and Shipbuilding Company have agreed to share
the cost, if any, of certain specified liabilities described in SUBSECTION
4.05(A) above on the terms and conditions set forth in the remaining
Subsections of this SECTION 4.05. The liabilities which Industrial Company and
Shipbuilding Company have agreed to share are only those arising from a
Pension Matter.
(c) INDEMNIFICATION PERCENTAGES FOR PENSION MATTERS. Industrial Company
shall indemnify Shipbuilding Company from 80%, and Shipbuilding Company shall
retain and indemnify Industrial Company from 20%, of the following:
(i) all amounts paid in satisfaction of a Government claim for Pension
Matters; and
(ii) all costs incurred, including attorneys' and actuaries' fees, in
defending against the Government's claims in the Pension Matters, as
described in SUBSECTION 4.05(F) below.
(d) CONTROL OVER PENSION MATTERS. Industrial Company shall have total and
exclusive control of and over all aspects of the defense by Industrial Company
and Shipbuilding Company against the Government's claims in the Pension
Matters. Without limiting the generality of the foregoing, Industrial Company
shall have the exclusive right to:
(i) engage and dismiss any and all law firms, actuarial firms and other
service providers;
(ii) settle, compromise or otherwise dispose of either Pension Matter;
(iii) determine to not appeal any adverse determination with respect to
either Pension Matter; and
(iv) negotiate and determine the terms of a deferral agreement described
in item (iv) of SUBSECTION 4.05(E) below.
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(e) COOPERATION OF SHIPBUILDING COMPANY. Shipbuilding Company shall
cooperate fully with Industrial Company and its attorneys, actuaries and other
advisors and representatives in defending against the Government's claims in
the Pension Matters. Without limiting the generality of the foregoing,
Shipbuilding Company shall:
(i) advise Industrial Company in writing of any and all claims made by
the Government which may be included in the Pension Matters promptly after
Shipbuilding Company receives notice or otherwise becomes aware of such
claims;
(ii) provide Industrial Company copies of any and all correspondence,
pleadings or other papers it has or receives with respect to the Pension
Matters promptly upon receipt;
(iii) give Industrial Company at least 10 days written notice of and
afford Industrial Company an opportunity to be present at any and all
meetings, conferences or hearings relating to such issues; and
(iv) diligently seek an agreement to defer collection of any Government
claim for Pension Matters.
(f) BILLING FOR PAYMENT TO GOVERNMENT. Whenever the Shipbuilding Company or
Industrial Company makes a payment to the Government for a claim related to
Pension Matters or incurs a cost in defending against the Government's claims
in Pension Matters, it may bill the other party for that party's share of said
claim or cost. A payment to the Government for a claim related to Pension
Matters shall include (i) amounts paid directly to Government to satisfy the
claim; (ii) progress payments withheld to satisfy the Government claim; and
(iii) pension costs disallowed under Shipbuilding Company's new salaried
pension plan to satisfy the Government claim. Costs incurred in defending
against the Government's claims in the Pension Matters shall include outside
attorneys' fees, accounting fees and actuary fees and all other out-of-pocket
costs incurred in defending against the Government's claims. Neither
Industrial Company nor Shipbuilding Company shall charge the other any amounts
for the services of its employees. A bill for the other party's share of a
claim or cost shall be accompanied by adequate documentation and shall be paid
promptly upon receipt. However, any amounts so billed shall be subject to set-
off for amounts owed by the presenter to recipient whether relating to matters
covered by this SECTION 4.05 or otherwise.
(g) ADVANCES BY INDUSTRIAL COMPANY. Any amounts which Industrial Company may
advance to Shipbuilding Company to satisfy a Government Claim pending appeal
(regardless of whether the Government claim is satisfied by (i) direct payment
to the Government; (ii) progress payments withheld; or (iii) pension costs
disallowed under the Shipbuilding Company's new salaried pension plan) shall
be deducted from any amount due from Industrial Company to Shipbuilding
Company upon the ultimate resolution of the appeal of the Government's claim.
To the extent that the amounts advanced to Shipbuilding Company by Industrial
Company exceed the amount due upon the ultimate resolution of the appeal,
Shipbuilding Company shall, within 5 days after the date of such ultimate
resolution, reimburse such excess to Industrial Company with interest charged
from the date the amount was advanced at the interest rate established by the
Secretary of the Treasury under Public Law 92-41.
(h) PROHIBITION AGAINST CERTAIN ACTION OF SHIPBUILDING COMPANY. Shipbuilding
Company shall not take any action or permit or suffer any act or omission
within its control that is, or is likely to be, in any way detrimental to the
defense against the Government's claims under the Pension Matters. Without
limiting the generality of the preceding sentence, Shipbuilding Company will
not, without the express written consent of Industrial Company, which consent
may be withheld in Industrial Company's sole discretion, link either of the
Pension Matters to any other matter which it now has or may in the future have
pending with the Government in terms of settlement or otherwise.
(i) ASSERTION OF AFFIRMATIVE CLAIMS. If Industrial Company determines to
submit an affirmative claim against the Government in connection with the
Pension Matters, Industrial Company and Shipbuilding Company shall share the
cost of pursuing such claim and any recovery on such claim on a percentage
basis of 80% for Industrial Company and 20% for Shipbuilding Company.
(j) NO LIABILITY OF ENERGY BUSINESS. It is expressly acknowledged and agreed
that any liabilities described in this SECTION 4.05 are solely liabilities of
Shipbuilding Company and Industrial Company, in accordance with the terms of
the other provisions of this SECTION 4.05, and the Energy Business has no
obligation with respect to any of such liabilities.
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4.06. TENNECO INC. THRIFT PLAN. The active participation in the Tenneco Inc.
Thrift Plan (the "Tenneco DC Plan") by persons other than the Active Employees
of the Industrial Group shall cease effective as of the Distribution Date. In
addition, each of Tenneco and Shipbuilding Company shall cease to be sponsors
of the Tenneco DC Plan as of the Distribution Date and Industrial Company
shall become the sponsor of the Tenneco DC Plan from and after the
Distribution Date.
4.07. ESTABLISHMENT OF ENERGY AND SHIPBUILDING DC PLANS.
(a) ENERGY DC PLAN. Tenneco shall establish or make available on or with
effect from the Distribution Date a defined contribution plan for the
benefit of the Active Employees of the Energy Group (the "Energy DC Plan").
(b) SHIPBUILDING DC PLAN. Shipbuilding Company shall establish on or with
effect from the Distribution Date a defined contribution plan for the
benefit of the Active Employees of the Shipbuilding Group (the
"Shipbuilding DC Plan").
(c) TRANSFER OF ACCOUNT BALANCES TO ENERGY AND SHIPBUILDING DC PLANS.
Industrial Company shall cause the Tenneco DC Plan to transfer: (i) to the
Shipbuilding DC Plan, the account balances of each Active Employee of the
Shipbuilding Group and each Former Employee of the Shipbuilding Group with
respect to whom the Tenneco DC Plan maintains an account as of the close of
business on the Distribution Date, and (ii) to the Energy DC Plan, the
account balances of each Active Employee of the Energy Group and each
Former Employee of the Energy Group with respect to whom the Tenneco DC
Plan maintains an account as of the close of business on the Distribution
Date. Such transfers shall be in cash, except that the Energy DC Plan and
the Shipbuilding DC Plan will accept the following: (i) Tenneco Common
Stock (or stock of the Acquiror, as defined in the Merger Agreement) for
the Tenneco Common Stock fund portion of such account balances (together
with any and all of the shares of the common stock of Industrial Company
and/or Shipbuilding Company distributed in connection with the
Distributions); and (ii) amounts credited to the Tenneco DC Plan which are
held in mutual funds which are also investment media in the Energy DC Plan
or the Shipbuilding DC Plan, as the case may be.
4.08. NO TENNECO COMMON STOCK. No Tenneco Common Stock shall be offered as
an investment option with respect to contributions made after the Distribution
Date by any of the Tenneco DC Plan, Energy DC Plan or Shipbuilding DC Plan.
The sponsor of each of the foregoing plans shall cause the plan to afford each
participant therein an election to sell the stock of any entity held in the
Tenneco stock fund in the Tenneco DC Plan which does not employ him or her
immediately following the Distribution Date. Shipbuilding Company shall
administer each defined contribution plan which it maintains consistent with
any and all representations which Tenneco made to the Internal Revenue Service
at any time prior to the Distribution Date. No further contributions shall be
made under the Tenneco Inc. Employee Stock Purchase Plan after September 30,
1996.
SECTION 5. PENSION MATTERS OUTSIDE THE UNITED STATES. With respect to the
business and operations of each Group in jurisdictions outside the United
States, each of the parties hereto shall (and, as applicable, shall cause each
other member of its Group over which it has direct or indirect legal or
effective control to) retain any and all pension liabilities and attendant
plans and their assets related to its Active Employees and Former Employees.
SECTION 6. EXECUTIVE COMPENSATION.
6.01. TENNECO BENEFIT EQUALIZATION PLAN AND SUPPLEMENT EXECUTIVE RETIREMENT
PLAN. None of the Active Employees of either the Shipbuilding Group or the
Energy Group shall accrue any benefits under the Tenneco Benefit Equalization
Plan (the "BEP") or the Supplement Executive Retirement Plan (the "SERP") from
and after the Distribution Date. Industrial Company shall assume all
liabilities under the BEP and the SERP and shall cause the BEP and the SERP to
continue to cover the Active Employees and Former Employees of the Energy
Group and Shipbuilding Group after the Distribution Date who have accrued
benefits under either or both of such plans as of the close of business on the
Distribution Date, and the accrued benefits of such Active Employees under
such plans as of the close of business on the Distribution Date shall be fully
vested and non-forfeitable. Each of Tenneco and Shipbuilding Company shall
reimburse Industrial Company for any payments Industrial Company may make from
time to time under the BEP or the SERP to Mr. Edward J. Casey, Jr. in the
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case of the Energy Group and any Active Employee or Former Employee of the
Shipbuilding Group, in the case of the Shipbuilding Group. Such charges shall
be made by written notice thereof to, and shall be promptly paid by, the
Energy Group and/or Shipbuilding Group, as the case may be. Tenneco shall
retain and assume any and all supplemental pension obligations (and any
related assets) which are in addition to benefits under the TRP, BEP and SERP
under the contract with Mr. Edward J. Casey, Jr.
6.02. TENNECO INC. DEFERRED COMPENSATION PLAN. The participation of the
Active Employees and Former Employees of the Energy Group and the Shipbuilding
Group in the Tenneco Inc. Deferred Compensation Plan (the "DC Plan") and 1993
Deferred Compensation Plan (the "1993 Plan") shall cease as of the
Distribution Date. As of the Distribution Date, Shipbuilding Company shall
assume the liability for the accounts of its Active Employees and Former
Employees in the DC Plan and the 1993 Plan, Tenneco shall assume the liability
for the accounts of the Active Employees and Former Employees of the Energy
Group in the DC Plan and the 1993 Plan, and Industrial Company shall succeed
to sponsorship of the 1993 Plan and the DC Plan and shall assume the liability
for the accounts of the Active Employees and Former Employees of the
Industrial Group in the DC Plan and the 1993 Plan. The total of each such
Active Employee's or Former Employee's account in the DC Plan and the 1993
Plan as of the Distribution Date shall become the opening balance of such
Active Employee's or Former Employee's account in a Nonqualified Deferred
Compensation Plan created, as of the Distribution Date by either, (i) Tenneco,
in the case of Active Employees and Former Employees of the Energy Group, or
(ii) Shipbuilding Company, in the case of Active Employees or Former Employees
of the Shipbuilding Group. Such opening balances shall become fully vested as
of the close of business on the Distribution Date.
6.03. TENNECO BENEFITS PROTECTION PROGRAM. Effective upon the Distribution
Date, Shipbuilding Company and Tenneco shall each be released from any
obligations which it may have under the Tenneco Benefits Protection Program.
Neither Shipbuilding Company nor Tenneco shall be entitled to any portion of
the Tenneco Inc. Benefit Protection Trust (the "Trust"), other than to the
assets, if any, of the Trust allocable to the respective liabilities retained
or assumed by them pursuant to this Agreement. Industrial Company shall
continue to sponsor and maintain the Trust.
SECTION 6.04. TENNECO OPTIONS AND RESTRICTED STOCK. Prior to the
Distribution Date, Tenneco shall cause all outstanding restricted stock and
performance share equivalent unit awards to become fully vested. Except as
provided in the last sentence of this paragraph, the parties hereto shall
cause all outstanding Tenneco stock options to be converted to options to
acquire stock of Tenneco, Industrial Company or Shipbuilding Company in
amounts and with exercise prices adjusted so that as to each grant the excess
of the aggregate fair market value of the shares subject to the option
immediately after the Distributions over the aggregate option price of such
shares is not more than the excess of the aggregate fair market value of the
shares subject to the option immediately before the Distributions over the
aggregate option price of such shares. In all other respects, the options
shall remain subject to the terms and conditions of the grants under which
they were issued, conforming changes excepted. Except to the extent determined
by the Compensation and Benefits Committee of Tenneco's Board of Directors,
each grantee shall receive options with respect to the stock of the entity
which employs him (or with which he is otherwise affiliated) immediately after
the Distributions. If Tenneco has entered into a definitive agreement for a
third-party to acquire Tenneco, the Tenneco stock options held by employees of
the Energy Group shall not be treated as provided in the preceding portion of
this SECTION 6.04; rather such options shall be made fully exercisable no less
than 30 days prior to the closing date of such acquisition, and if such
options are not exercised prior to the closing date, they will be cancelled
effective as of the closing date.
SECTION 6.05. EMPLOYMENT CONTRACTS. Tenneco shall retain and assume any and
all contractual obligations to Messrs. Casey, Menikoff and Sinclair. Tenneco
shall retain and assume any and all obligations to provide office space and
secretarial help to Messrs. Ketelsen and Scott. Industrial Company shall
assume and discharge all supplemental pension obligations to Mr. Ketelsen.
SECTION 7. WELFARE BENEFITS.
7.01. TENNECO SALARIED WELFARE PLANS. Effective on the Distribution Date,
Tenneco and Shipbuilding Company shall each cease to be a sponsor of the
Tenneco Salaried Welfare Plans, and Industrial Company shall
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serve as the sponsor of the Tenneco Salaried Welfare Plans from and after the
Distribution Date. If the Energy Group or the Shipbuilding Group adopt one or
more welfare plans which is (are) identical to the comparable Tenneco Salaried
Welfare Plan, the Industrial Company shall use its best efforts to administer
such plan on behalf of the Energy Group or the Shipbuilding Group, as the case
may be, for a period ending not later thanDecember 31, 1997. Each of
Shipbuilding Company and Tenneco hereby agrees to reimburse Industrial Company
for all costs incurred by it with respect thereto.
7.02. ALLOCATION AND DISCHARGE OF WELFARE PLAN LIABILITIES. Shipbuilding
Company shall retain and discharge all welfare plan liabilities with respect
to Active Employees and Former Employees of the Shipbuilding Group and their
dependents. Industrial Company shall retain and discharge all welfare plan
liabilities with respect to Active Employees and Former Employees of the
Industrial Group and their dependents. Tenneco shall retain and discharge all
other welfare plan liabilities which remain after allocation of liabilities to
Shipbuilding Company and Industrial Company under the two immediately
preceding sentences, including, without limitation, all such liabilities
relating to the Active Employees and Former Employees of the Energy Group and
their dependents, and shall retain or have transferred to it all related
assets allocable to such liabilities, including without limitation, the
Tennessee Gas Pipeline Company Health Care Plan VEBA.
SECTION 8. GENERAL.
8.01. POST-DISTRIBUTION ADMINISTRATION OF PLANS. The parties hereto agree to
administer all plans consistently herewith, and to the extent necessary to
amend plans accordingly.
8.02. COST AND EXPENSES. Each party shall bear all costs and expenses,
including but not limited to legal and actuarial fees, incurred in the design,
drafting and implementation of any and all plans and compensation structures
which it enables or creates and the amendment of its existing plans or
compensation structures.
SECTION 9. MISCELLANEOUS.
9.01. COMPLETE AGREEMENT; CONSTRUCTION. This Agreement and the Distribution
Agreement, shall constitute the entire agreement between the parties with
respect to the subject matter hereof and shall supersede all previous
negotiations, commitments and writings with respect to such subject matter.
Notwithstanding any other provisions in this Agreement or the Distribution
Agreement to the contrary, in the event and to the extent that there shall be
a conflict between the provisions of this Agreement and the provisions of the
Distribution Agreement or any other Ancillary Agreement, this Agreement shall
control.
9.02. OTHER ANCILLARY AGREEMENTS. This Agreement is not intended to address,
and should not be interpreted to address, the matters specifically and
expressly covered by any of the other Ancillary Agreements.
9.03. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other parties.
9.04. SURVIVAL OF AGREEMENTS. Except as otherwise expressly provided herein,
all covenants and agreements of the parties contained in this Agreement shall
survive the Distribution Date.
9.05. NOTICES. All notices and other communications to a party hereunder
shall be in writing and hand delivered or mailed by registered or certified
mail (return receipt requested) or sent by any means of electronic message
transmission with delivery confirmed (by voice or otherwise) to such party
(and will be deemed given on the date on which the notice is received by such
party) at the address for such party set forth below (or at such other address
for the party as the party shall, from time to time, specify by like notice to
the other parties):
If to Tenneco, at:1010 Milam Street
Houston, Texas 77002
Attention: Corporate Secretary
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If to Industrial Company, at:1275 King Street
Greenwich, CT 06831
Attention: Corporate Secretary
If to Shipbuilding Company, at:4101 Washington Avenue
Newport News, Virginia 23607
Attention: Corporate Secretary
9.06. WAIVERS. The failure of any party hereto to require strict performance
by any other party of any provision in this Agreement will not waive or
diminish that party's right to demand strict performance thereafter of that or
any other provision hereof.
9.07. AMENDMENTS. This Agreement may not be modified or amended except by an
agreement in writing signed by the parties hereto.
9.08. ASSIGNMENT. This Agreement shall be assignable in whole in connection
with a merger or consolidation or the sale of all or substantially all the
assets of a party hereto so long as the resulting, surviving or transferee
entity assumes all the obligations of the relevant party hereto by operation
of law or pursuant to an agreement in form and substance reasonably
satisfactory to the other parties to this Agreement. Otherwise this Agreement
shall not be assignable, in whole or in part, directly or indirectly, by any
party hereto without the prior written consent of the others, and any attempt
to assign any rights or obligations arising under this Agreement without such
consent shall be void.
9.09. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective permitted successors and permitted assigns.
9.10. NO THIRD PARTY BENEFICIARIES. This Agreement is solely for the benefit
of the parties hereto and the members of their respective Groups and
Affiliates, after giving effect to the Distributions, and should not be deemed
to confer upon third parties any remedy, claim, liability, right of
reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement.
9.11. ATTORNEY FEES. A party in breach of this Agreement shall, on demand,
indemnify and hold harmless the other parties hereto for and against all out-
of-pocket expenses, including, without limitation, reasonable legal fees,
incurred by such other party by reason of the enforcement and protection of
its rights under this Agreement. The payment of such expenses is in addition
to any other relief to which such other party may be entitled hereunder or
otherwise.
9.12. TITLE AND HEADINGS. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Agreement.
9.13. GOVERNING LAW. ALL QUESTIONS AND/OR DISPUTES CONCERNING THE
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS
HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND NOT THE LAW OF CONFLICTS,
OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY
IRREVOCABLY AND UNCONDITIONALLY (i) AGREES TO BE SUBJECT TO, AND HEREBY
CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE STATE OF
DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE, (ii) TO
THE EXTENT SUCH PARTY IS NOT OTHERWISE SUBJECT TO SERVICE OF PROCESS IN THE
STATE OF DELAWARE, HEREBY APPOINTS THE CORPORATION TRUST COMPANY, AS SUCH
PARTY'S AGENT IN THE STATE OF DELAWARE FOR ACCEPTANCE OF LEGAL PROCESS AND
(iii) AGREES THAT SERVICE MADE ON ANY SUCH AGENT SET FORTH IN (ii) ABOVE SHALL
HAVE THE SAME LEGAL FORCE AND EFFECT AS IF SERVED UPON SUCH PARTY PERSONALLY
WITHIN THE STATE OF DELAWARE.
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9.14. SEVERABILITY. In the event any one or more of the provisions contained
in this Agreement should be held invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein and therein shall not in any way be affected or impaired
thereby. The parties shall endeavor in good-faith negotiations to replace the
invalid, illegal or unenforceable provisions with valid provisions, the
economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.
9.15. SUBSIDIARIES. Each of the parties hereto shall cause to be performed,
and hereby guarantee the performance of, all actions, agreements and
obligations set forth herein to be performed by any Subsidiary of such party
which is contemplated to be a Subsidiary of such party on and after the
Distribution Date.
9.16. RELEASE FROM POST EMPLOYMENT LIABILITY. Tenneco hereby agrees that in
the event it intends to request of any Energy Employee at any time on or
within 5 years subsequent to the Effective Time any release of liability and
further obligation on the part of Tenneco that it will promptly notify New
Tenneco in writing of such intent and, if so requested by New Tenneco, in
connection with such request also request from such Energy Employee a release
of liability and further obligation on the part of New Tenneco either, at New
Tenneco's election, (a) in the form provided to Tenneco by New Tenneco prior
to the Effective Time, with such changes thereto as may subsequently be
reasonably requested from time to time by New Tenneco, or (b) in substantially
the same form as the release obtained from such Energy Employee by Tenneco.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
TENNECO INC.
By: _________________________________
NEWPORT NEWS SHIPBUILDING INC.
(formerly known as Tenneco
InterAmerica Inc.)
By: _________________________________
NEW TENNECO INC.
By: _________________________________
9
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EXHIBIT B
TO
DISTRIBUTION AGREEMENT
CORPORATE RESTRUCTURING TRANSACTIONS
Set forth below are the transfers, distributions, contributions,
assignments, conveyances and other transactions that, as applicable, the
members of each of the Energy Group, Industrial Group and Shipbuilding Group
shall consummate prior to the Distributions (the "Corporate Restructuring
Transactions"). Each of Tenneco, Industrial Company and Shipbuilding Company
hereby agrees to take all reasonable and appropriate action to consummate or
to cause the consummation of each of the Corporate Restructuring Transactions
prior to the Distributions and, as necessary, to cause any other member of the
Energy Group, Industrial Group or Shipbuilding Group over which, at the time
each such Corporate Restructuring Transaction is to be consummated, it has
direct or indirect legal or effective control, to consummate such Corporate
Restructuring Transactions prior to the Distributions and in the order set
forth below. Capitalized terms used but not otherwise defined herein have the
meaning ascribed to them under the Distribution Agreement.
1. Tennessee Gas Pipeline Company ("TGP") shall transfer and assign all of
the assets and associated liabilities of and relating to the Walker muffler
distribution warehouse center operation located in Carson, California (the
"MSDC Business") to Tenneco Corporation as a contribution to capital.
2. Tenneco Corporation shall transfer and assign the MSDC Business to
Industrial Company as a contribution to capital.
3. Tenneco Corporation shall effect the following transactions to satisfy
the active trade or business requirement of Code Section 355(b).
a. TGP will transfer all of the stock of Midwestern Gas Transmission
Company (Delaware) ("Midwestern") to Tenneco Corporation as a contribution
to capital.
b. Tenneco Energy Resources Corporation (Delaware) ("TERC") will merge
into Channel Industries Gas Company (Delaware) ("CIGC"), a wholly owned
subsidiary of TERC, with CIGC as the surviving corporation.
c. Tenneco Corporation will transfer to New Midwestern Inc., a newly
formed corporation, all of Tenneco Corporation's Energy Business assets
other than stock of subsidiaries.
d. Tenneco Corporation will transfer to Midwestern as a contribution to
capital all of the stock of the following companies:
Entrade Engine Company (Kentucky)
HT Gathering Company (Texas) (50%)/1/
Petro-Tex Chemical Corporation (Delaware) (in dissolution)
SWL Security Corp. (Texas)
TGP Corporation (Delaware)
Tenneco Independent Power I Company (Delaware)
Tenneco Independent Power II Company (Delaware)
Tenneco Insurance Ventures Inc. (Delaware)
Tenneco Minerals Company--California (Delaware)
- --------
/1Tenneco/Corporation owns 50% of the issued and outstanding Class A Voting
Stock and 20% of the Class B Nonvoting Stock, 29% of the total Equity;
Houston Pipe Line Company, an unaffiliated company, owns 50% of the issued
and outstanding Class A Voting Stock and 80% of the Class B Nonvoting Stock,
71% of the total equity.
1
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Tenneco Minerals Company--Nevada (Delaware)
Tenneco OCS Company, Inc. (Delaware)
Tenneco Oil Company (Delaware)
Tenneco Polymers, Inc. (Delaware)
Tenneco Power Generation Company (Delaware)
Tennessee Overthrust Gas Company (Delaware)
New Midwestern Inc.
Alternatively, the stock of some of the above-listed companies may be
transferred to CIGC as a contribution to capital in lieu of transferring the
stock to Midwestern.
4. Tenneco will transfer all of its Energy Business assets (including the
stock of Tenneco Credit Corporation, Tenneco MLP Inc. and Kern County Land
Company) to TGP as a contribution to capital.
5. Newport News Industrial Corporation will transfer all of its assets and
trade payables to Shipbuilding Company in exchange for a promissory note
having a face amount and value equal to the net fair market value of the
assets and liabilities transferred.
6. Tenneco Credit Corporation ("TCC") shall transfer and assign all of TCC's
right, title and interest in and to a 95% interest as a limited partner in
Counce Limited Partnership, a Texas Limited Partnership ("Counce"), to Tenneco
Corporation in exchange and in consideration for Voting Preferred Stock of
Tenneco Corporation having a fair market value equal to the aggregate
appraised value of the partnership interest transferred by TCC.
7. Tenneco Equipment Corporation ("TEC") shall transfer and assign (a) all
of TEC's shares of the Common Stock, $0.01 par value, of Tenneco International
Holding Corp. ("TIHC"), representing approximately 20.34% of all of the
outstanding Common Stock of TIHC, and (b) all of TEC's shares of $8.00 Junior
Preferred Stock of TIHC, representing 50% of the total outstanding number
shares of such $8.00 Junior Preferred Stock to Tenneco Corporation in exchange
and in consideration for Voting Preferred Stock of Tenneco Corporation having
a fair market value equal to the aggregate appraised value of the stock
transferred by TEC.
8. Tenneco International Inc. ("TII") shall transfer and assign all of TII's
stock (100% unless otherwise indicated) in the following companies to Tenneco
Corporation in exchange and in consideration for (a) a $50,000 promissory note
issued by Tenneco Corporation and (b) Voting Preferred Stock of Tenneco
Corporation. The consideration issued by Tenneco Corporation shall have an
aggregate fair market value equal to the aggregate appraised value of the
stock of the following companies transferred by TII.
Autopartes Walker, S.A. de C.V. (Mexico) (0.02%)
Omni-Pac GmbH (Germany) (1%)
Omni-Pac S.A.R.L. (France) (97%)
Tenneco Automotive Trading Company
Tenneco International Holding Corp. (71.84% of Common Stock and 50%
of $8.00 Junior Preferred Stock)
Tenneco United Kingdom Holdings Limited
Walker Europe, Inc.
Walker Norge A/S (Norway)
9. Shipbuilding Company will transfer its interest as a general partner in
Counce Limited Partnership to PCA Leasing Company as a contribution to
capital.
10. As further described and provided for under the Debt and Cash Allocation
Agreement attached as EXHIBIT C to the Distribution Agreement, Shipbuilding
Company shall issue debt to one or more third parties
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and transfer the proceeds of the financing to Tenneco Corporation as a
dividend. Tenneco Corporation will loan the funds received from Shipbuilding
Company to Tenneco. Tenneco shall use all of the funds to retire existing debt
(as contemplated under the Debt Realignment Plan) and to defray expenses
related to the Transaction. Shipbuilding Company shall also transfer and
assign the net intercompany receivable owed to the Shipbuilding Group by the
Tenneco Group or the Industrial Group to Tenneco Corporation as a dividend.
11. Shipbuilding Company shall transfer and assign all of its shares of
capital stock in Tenneco Packaging Inc. and PCA Leasing Company to Tenneco
Corporation as a distribution with respect to stock.
12. Tenneco shall transfer and assign all of its ownership interest (100%
unless otherwise indicated) in the following companies to TGP as a
contribution to capital and in exchange and consideration for additional
shares of stock of TGP.
Autopartes Walker, S.A. de C.V. (0.02%)
DeLine Box & Display, Inc.
Tenneco Asia Inc.
Tenneco Brazil Ltda. (Brazil)
Tenneco Business Services Inc.
Tenneco Foam Products Company (f/k/a Amoco Foam Products Company)
Tenneco Texas Acquisition Inc.
Tenneco Management Company (f/k/a 1275, Inc.)
Tenneco Packaging Hungary Holdings Inc.
Tenneco Romania Holdings Inc.
13. TGP shall transfer and assign all of the assets and related liabilities
of the Walker Division (other than the MSDC Business) and all of the assets
and liabilities of the Automotive Headquarters Division to Monroe Auto
Equipment Company as a contribution to capital.
14. TGP shall assign and transfer all of its ownership interest (100% unless
otherwise indicated) in the following entities to Tenneco Corporation as a
contribution to capital and in exchange and consideration for additional
shares of common stock of Tenneco Corporation.
Autopartes Walker, S.A. de C.V. (Mexico) (99.94%)/2/
Monroe Auto Equipment Company
Monroe-Mexico S.A. de C.V. (Mexico) (0.01%)
Proveedora Walker S.A. de C.V. (Mexico) (99.99%)/3/
Tenneco Automotive Foreign Sales Corporation Ltd. (Jamaica) (1%)
Tenneco Brake, Inc.
Walker Electronic Silencing, Inc.
Walker Manufacturing Company
STOCK RECEIVED IN STEP (12) ABOVE
DeLine Box & Display, Inc.
Tenneco Asia Inc.
Tenneco Brazil Ltda. (Brazil)
Tenneco Business Services Inc.
Tenneco Foam Products Company (f/k/a Amoco Foam Products Company)
Tenneco Texas Acquisition Inc.
Tenneco Management Company (f/k/a 1275, Inc.)
Tenneco Packaging Hungary Holdings Inc.
Tenneco Romania Holdings Inc.
- --------
/2Includes/0.02% interest acquired from Tenneco in step 12 above.
/3TGP/owns 49,999 shares, and Monroe Auto Equipment Company owns 1 share.
3
<PAGE>
15. Tenneco Corporation shall transfer and assign all of its ownership
interest (100% unless otherwise indicated) in the following entities to
Industrial Company as a contribution to capital and in exchange and
consideration for additional shares of stock of Industrial Company.
STOCK OWNED AT DECEMBER 31, 1995
Tenneco Deutschland Holdinggesellschaft GmbH (Germany)
Walker Deutschland GmbH (Germany) (1%)
STOCK AND PARTNERSHIP INTEREST RECEIVED IN STEPS (6)-(8) ABOVE
Counce Limited Partnership (95% limited partner interest)
Tenneco International Holding Corp. (100% of Common Stock and
100% of $8.00 Junior Preferred Stock)
Omni-Pac GmbH (Germany) (1%)
Omni-Pac S.A.R.L. (France) (97%)
Tenneco Automotive Trading Company
Tenneco United Kingdom Holdings Limited
Walker Europe, Inc.
Walker Norge A/S (Norway)
STOCK RECEIVED IN STEP (11) ABOVE
Tenneco Packaging Inc.
PCA LEASING COMPANY
STOCK RECEIVED IN STEP (14) ABOVE
Autopartes Walker, S.A. de C.V. (Mexico) (99.98%)/4/
Monroe Auto Equipment Company
Monroe-Mexico S.A. de C.V. (Mexico) (0.01%)
Proveedora Walker S.A. de C.V. (Mexico) (99.99%)
Tenneco Automotive Foreign Sales Corporation Ltd. (Jamaica) (1%)
Tenneco Brake, Inc.
Walker Electronic Silencing, Inc.
Walker Manufacturing Company
DeLine Box & Display, Inc.
Tenneco Asia Inc.
Tenneco Brazil Ltda. (Brazil)
Tenneco Business Services Inc.
Tenneco Foam Products Company (f/k/a Amoco Foam Products Company)
Tenneco Texas Acquisition Inc.
Tenneco Management Company (f/k/a 1275, Inc.)
Tenneco Packaging Hungary Holdings Inc.
Tenneco Romania Holdings Inc.
16. Tenneco Corporation shall transfer and assign all of the stock of
Shipbuilding Company and Industrial Company to TGP as a distribution with
respect to stock.
- --------
/4Includes:/0.02% interest owned by Tenneco Corporation at 12/31/95; 0.02%
interest acquired from Tenneco International Inc.; and 99.94% interest
acquired from TGP. Monroe Auto Equipment Company continues to own 0.02% of
the stock.
4
<PAGE>
17. TGP shall transfer and assign all of the stock of Shipbuilding Company
and Industrial Company to Tenneco as a distribution with respect to stock.
18. Industrial Company shall transfer and assign the net intercompany
receivable owed to the Industrial Group by the Tenneco Group to Tenneco as a
dividend.
19. Eastern Insurance Company Limited (Bermuda) shall transfer and assign
any of its assets and liabilities not related to the Energy Business to the
appropriate Industrial Company or Shipbuilding Company.
20. TCC will sell most of the notes and accounts receivables purchased from
Case Corporation, net of unearned finance charges and the allowance for
doubtful accounts, to a third party. The remainder will be sold to Industrial
Company. TCC will sell back to any Industrial Company or any Shipbuilding
Company any third party notes or accounts receivables that were sold to TCC by
such Subsidiary, net of unearned finance charges. TCC will sell to Industrial
Company the loan to Tenneco International Holding Corp.
21. Industrial Company shall participate in the Debt Realignment pursuant to
the terms of the Debt Realignment Plan.
22. To the extent not otherwise transferred to Industrial Company (or any
other member of the Industrial Group) in any of the foregoing transactions,
each of Tenneco, Shipbuilding Company and the other members of their
respective Group shall transfer or cause to be transferred to Industrial
Company (or any other member of the Industrial Group designated by Industrial
Company), and Industrial Company (or such other member of the Industrial
Group) shall accept and/or assume, the following assets and liabilities (to
the extent of their interests therein or obligations thereunder):
a) Personal Property
1. Corporate aviation assets, including:
A. All fixed wing corporate aircraft (except the Gulfstream G-II,
serial number 248, and Rolls Royce Spey Model 511-8 engines,
manufacturer's Serial Numbers 9816 and 9844), and spare parts for the
aircraft which as of the Effective Time will not have a net book value
in excess of $1 million.
B. Limited partner interest in the Waukegan Corporate Aviation
Facilities, an Illinois limited partnership (which owns the Waukegan,
Illinois airport hangar facility and common facilities), the stock of
Corporate Hangar Services Inc., an Illinois corporation (which is the
corporate general partner of Waukegan Corporate Aviation Facilities),
and the sublease of the aviation facilities from Waukegan Corporate
Aviation Facilities.
C. Certain furniture, fixtures, and equipment located in the Houston,
Texas and Waukegan, Illinois hangar facilities which at the Effective
Time will not have a net book value in excess of $1 million.
2. Certain furniture, fixtures and equipment which as of the Effective
Time will not have a net book value in excess of $2 million located in:
A. Greenwich, Connecticut Management Center, including:
1. Furnishings
2. Computer equipment
B. Washington, D.C. office, including:
1. Furnishings
2. Computer equipment
C. Houston, Texas office, including:
1. Furnishings
2. Computer equipment
5
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b) Long term note receivable from Albright & Wilson, plc in the amount of $7
million.
c) Liability for all vested accrued benefits for participants in the Tenneco
Inc. Retirement Plan for Salaried Employees and the attendant assets.
d) All trademarks, trade names, service marks, company or operating unit
names containing the word "Tenneco" or any variation of the name "Tenneco",
such as those names with a "Tenn" or "Ten" syllable and respective
applications or registrations therefor wherever used or registered, except
that Tenneco and the other members of the Energy Group shall retain the right
to use the name "Tennessee" in their respective corporate names or otherwise
in respect of the Energy Business.
e) All other intellectual property that does not solely and directly relate
to the Energy Business and/or the Shipbuilding Business, including but not
limited to patents, copyrights, trademarks, service marks, tradenames, know-
how, trade secrets, licenses and rights therein.
f) the insurance reserves and other liabilities, and the attendant assets,
of Eastern Insurance that are related to the Industrial Business.
g) a $20 million dividend paid by Eastern Insurance out of Eastern
Insurance's capital surplus.
h) Transfer of "other reserves" in an amount not to exceed $30 million.
i) Transfer recorded pre-distribution income tax assets and liabilities in
accordance with the Tax Sharing Agreement.
23. To the extent not otherwise transferred to or retained by Tenneco (or
any other member of the Energy Group) in any of (or after giving effect to)
the foregoing transactions, each of Industrial Company, Shipbuilding Company
and the other members of their respective Group shall transfer or cause to be
transferred to Tenneco (or any other member of the Energy Group designated by
Tenneco), and Tenneco (or such other member of the Energy Group) shall accept
and/or assume, the following assets and liabilities (to the extent of their
interests therein or obligations thereunder):
a) Computer hardware previously transferred from Tenneco Energy and Tenneco
Energy's share of software development costs incurred by Tenneco Business
Services.
b) All prepaid or accrued insurance premiums related to Tenneco Energy.
24. Newport News Shipbuilding and Dry Dock Company ("NNSDD") shall assign
and transfer to Industrial Company all of the stock of Tenneco Tanker Holdings
Inc. in exchange and in consideration for an intercompany advance from
Industrial Company.
6
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EXHIBIT C
TO
DISTRIBUTION AGREEMENT
DEBT AND CASH ALLOCATION AGREEMENT
THIS DEBT AND CASH ALLOCATION AGREEMENT (this "Agreement") is made and
entered into as of this day of , 1996 by and among Tenneco
Inc., a Delaware corporation ("Tenneco"), Newport News Shipbuilding Inc.
(formerly known as Tenneco InterAmerica Inc.), a Delaware corporation
("Shipbuilding Company"), and New Tenneco Inc., a Delaware corporation
("Industrial Company").
WHEREAS, pursuant to the terms of that certain Distribution Agreement by and
among the parties hereto and dated as of , 1996 (the "Distribution
Agreement"), the parties have entered into this Agreement regarding the
allocation of the Cash and Cash Equivalents and Consolidated Debt of Tenneco
and its consolidated subsidiaries as of the Effective Time. For purposes of
this Agreement only, the "Effective Time" means 12:01 AM, Houston time, on the
date on which the Merger Effective Time occurs.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement and the Distribution Agreement, each of
the parties hereto, on behalf of itself and each of the other members of its
Group over which it has direct or indirect legal or effective control, hereby
agrees as follows:
1. Certain Definitions. Capitalized terms which are used herein but which
are not defined below in this SECTION 1 or in any of the other provisions or
Sections of this Agreement or in the Distribution Agreement, shall have the
meaning ascribed to such terms in the Debt Realignment Plan attached as
Exhibit C to the Merger Agreement.
(a) "Actual Energy Debt Amount" means the aggregate amount, as of the
Effective Time, of the following, without duplication:
(i) the then outstanding amount of the Tenneco Revolving Debt plus
accrued and accreted interest and fees and expenses in respect thereof
(as reflected on the Energy Adjusted Closing Balance Sheet) ; plus
(ii) the Consolidated Public Debt Value; plus
(iii) the then outstanding principal amount of Consolidated Debt of
Tenneco and the Energy Subsidiaries other than that which is described
in clauses (i) and (ii) above (for this purpose undrawn letters of
credit and guarantees shall not be treated as outstanding) plus accrued
and accreted interest and fees and expenses in respect thereof as
reflected on the Energy Adjusted Closing Balance Sheet; plus
(iv) except as otherwise expressly provided in the Merger Agreement
or the Distribution Agreement, the unpaid amount of all direct and out
of pocket fees, costs and expenses (as reflected on the Energy Adjusted
Closing Balance Sheet) incurred on or prior to the Effective Time by
Tenneco and its subsidiaries in respect of the transactions
contemplated under the Debt Realignment, with respect to the Merger
Agreement, the NPS Issuance and with respect to the Distribution
Agreement, including, without limitation, the Corporate Restructuring
Transactions, the Distributions, the Merger and the other related
transactions, including by way of example items specifically set forth
on Schedule 1 to the extent incurred in respect of the aforesaid
transactions (collectively, the "Tenneco Transaction Expenses");
(v) any sales and use, gross receipts or other transfer Taxes
(including Gains Taxes and Transfer Taxes, as defined in the Merger
Agreement) imposed as a result of the Corporate Restructuring
Transactions or otherwise occurring pursuant to the Distribution
Agreement or the Merger Agreement, excluding, however, any stamp duty
imposed by the Stamp Act 1894 (Queensland) as a result of the Merger;
plus
(vi) Restructuring Taxes (as defined in the Tax Sharing Agreement),
except (A) for Taxes resulting from the deferred intercompany items on
Schedule 2, and (B) to the extent the IRS ruling provides the
Transactions (as defined in the Tax Sharing Agreement) are tax-free;
plus
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(vii) the then outstanding amount of any off-balance sheet
indebtedness incurred after June 19, 1996 and before the Effective Time
to finance the acquisition of any additional interest in the Oasis
Pipeline;
(viii) dividends declared by Tenneco on its common stock, $4.50
Preferred Stock and $7.40 Preferred Stock which have not been paid
prior to the Effective Time but as to which the record date is before
the Effective Time; plus
(ix) the total amount of dividends accrued on the shares of New
Preferred Stock issued pursuant the NPS Issuance that remain unpaid as
of the Effective Time.
The parties hereto hereby acknowledge and agree that the Actual Energy Debt
Amount shall include any amounts (including interest, fees and other charges)
that may be due and owing ASCC under or as a result of the factoring
arrangement between ASCC and Tenneco (and/or any of its Subsidiaries) other
than the amount of Factored Proceeds (the "ASCC Amount").
(b) "Actual Energy Expenditures Amount" means the actual amount of
capital expenditures (determined on a basis consistent with the past
accounting practices of the Energy Business and the 1996 capital budget
provided to Acquiror) made and paid for by the Energy Business from and
after January 1, 1996 to and including the Effective Time, including,
without limitation any capital expenditures in respect of the 70 MW
Dunaferr power project in Hungary; provided, however, that any amount paid
for the acquisition of any additional interest in either Tenneco Energy
Resources Inc. or the Oasis Pipeline or to repair any gas pipeline shall
not be capital expenditures for any purpose under this Agreement and shall
not be included in the Actual Energy Expenditures Amount.
(c) "Allocated Energy Debt" means the total amount of indebtedness
(including accrued and accreted interest and fees and expenses) outstanding
as of the Effective Time under each of the Tenneco Revolving Debt, the
Consolidated Debt (other than the Tenneco Revolving Debt) of Tenneco and
the Energy Subsidiaries and the Tenneco Transaction Expenses, and any and
all such indebtedness outstanding or other obligations and liabilities
incurred or accrued under any of the foregoing from time to time and at any
time after the Effective Time.
(d) "Allocated Industrial Debt" means the total amount of indebtedness
(including accrued and accreted interest and fees and expenses) outstanding
under the Industrial Debt Securities as of the Effective Time, any and all
such indebtedness outstanding from time to time thereafter and all other
obligations and liabilities incurred or accrued at any time under the
Industrial Debt Securities.
(e) "Allocated Shipbuilding Debt" means the total amount of indebtedness
(including accrued and accreted interest and fees and expenses) outstanding
under the Shipbuilding Credit Facility as of the Effective Time, any and
all such indebtedness outstanding from time to time at any time thereafter
and all other obligations and liabilities incurred or accrued at any time
under the Shipbuilding Credit Facility.
(f) "Auditors" has the meaning ascribed to such term in SECTION 6 below.
(g) "Base Amount" means an amount equal to $2,650,000,000, (i) plus,
without duplication, the sum of (A) with respect to Tenneco gas purchase
contracts, the amount of all cash payments made by Tenneco and/or any of
its Subsidiaries during the period commencing on the date of Merger
Agreement and ending as of the Effective Time as a result or in respect of
any settlement, judgment or satisfaction of a bond in excess of the market
price for gas received by Tenneco and/or any of its Subsidiaries reduced by
the amount of any cash payments received from customers, insurers or other
third parties with respect thereto (other than ones refunded prior to the
Effective Time) or with respect to any gas supply realignment costs which
are so recovered (and not refunded) on or prior to the Effective Time, (B)
the purchase price paid by Tenneco and/or any of its subsidiaries to
acquire any additional interest in the Oasis Pipeline, (C) the amount of
all cash payments made by Tenneco and/or any of the Energy Subsidiaries
during the period commencing on the date of the Merger Agreement and ending
on the Closing Date in settlement of any significant claim, action, suit or
proceeding to the extent such matter would be an Energy Liability and with
2
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the consent of Acquiror, which shall not be arbitrarily withheld
(including, without limitation, cash payments in settlement of claims
against Tenneco and/or any of its affiliates arising from the Stock
Purchase Agreement dated as of July 31, 1986 by and between Tenneco Inc.
and I.C.H. Corporation) reduced by the amount of any cash payments received
by Tenneco or any of the Energy Subsidiaries during such period from
customers, insurers or other third parties with respect thereto, and (D)
the total amount of the specific additions or increases to the Base Amount
set forth on SCHEDULE 4 attached hereto, (ii) less, without duplication,
the sum of (A) the gross amount of cash proceeds from the NPS Issuance (as
defined in the Merger Agreement) less the amount of any expenses, fees or
other out-of-pocket costs related thereto which are included in the Actual
Energy Debt Amount), and (B) the total amount of the specific subtractions
and reductions to the Base Amount set forth on SCHEDULE 4 attached hereto.
(h) "Cash and Cash Equivalents" has the meaning ascribed to such term
under United States generally accepted accounting principles; provided,
that in all events checks issued by Tenneco and the Energy Subsidiaries
which remain unpaid as of the Effective Time shall be deducted from Cash
and Cash Equivalents, and checks received by Tenneco and the Energy
Subsidiaries which remain uncollected prior to the Effective Time (other
than checks that have been dishonored) shall be included in Cash and Cash
Equivalents.
(i) "Consolidated Public Debt Value" means the value (including any
accrued and unpaid interest thereon) of publicly-held Consolidated Debt of
Tenneco and the Energy Subsidiaries outstanding as of the Effective Time
(as reflected on the Energy Adjusted Closing Balance Sheet), calculated and
determined by Tenneco and Acquiror or if, they are unable to agree, by a
nationally recognized investment banking firm selected by mutual agreement
between Tenneco and Acquiror, as of the close of business on the fifth
(5th) business day preceding the Effective Time based on the applicable
spreads to treasuries and the applicable benchmark treasury securities
listed on Schedule 3.
(j) "Closing Calendar Month" means the calendar month in which the
Effective Time occurs.
(k) "Debt Realignment" has the meaning ascribed to such term in the
Merger Agreement.
(l) "Dispute" has the meaning ascribed to such term in SECTION 6 below.
(m) "Energy Adjusted Closing Balance Sheet" has the meaning ascribed to
such term in SECTION 6 below.
(n) "Energy Closing Balance Sheet" has the meaning ascribed to such term
in SECTION 6 below.
(o) "Energy Receivables" means any and all accounts receivable of the
Energy Business (after giving effect to the Corporate Restructuring
Transactions and the Distributions and, therefore, specifically excluding
receivables relating to the business of Case Corporation and the Industrial
Business).
(p) "Factored Proceeds" means the total amount of outstanding cash
proceeds received by Tenneco from ASCC, as of the last business day of the
month preceding the Closing Calendar Month, through the factoring of Energy
Receivables, which amount shall not exceed $100,000,000.
(q) "Guaranteed Energy Cash Amount" has the meaning ascribed to such term
in SECTION 5 below.
(r) "Guaranteed Shipbuilding Cash Amount" has the meaning ascribed to
such term in SECTION 5 below.
(s) "Independent Auditors" has the meaning ascribed to such term in
SECTION 6 below.
(t) "Industrial Debt Securities" means, collectively, the notes,
debentures and other debt securities issued by Industrial Company in
exchange for certain issues of the Consolidated Debt pursuant to and in
accordance with the debt exchange by Industrial Company contemplated under
the Debt Realignment.
(u) "Merger Closing Date" means the date on which the Merger is
consummated.
(v) "Required Energy Expenditures Amount" means an aggregate amount of
capital expenditures (determined on a basis consistent with the past
accounting practices of the Energy Business and the 1996
3
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capital budget provided to Acquiror) by the Energy Business for 1996 equal
to $333,200,000, plus an amount of capital expenditures by the Energy
Business for 1997 equal to $27,750,000 per month for each month (or pro
rata portion thereof) from January 1, 1997 to the Effective Time.
(w) "Shipbuilding Adjusted Closing Balance Sheet" has the meaning
ascribed to such term in SECTION 6 below.
(x) "Shipbuilding Closing Balance Sheet" has the meaning ascribed to such
term in SECTION 6 below.
(y) "Shipbuilding Credit Facility" has the meaning ascribed to such term
in SECTION 3 below.
(z) "Tenneco Allocation Percentage" means a fraction, the numerator of
which is the total number of business days remaining in the Closing
Calendar Month from and after the Effective Time (including the day on
which the Effective Time occurs), and the denominator of which is the total
number of business days in the Closing Calendar Month.
(aa) "Tenneco Revolving Debt" has the meaning ascribed to such term in
SECTION 2 below.
2. Tenneco Credit Facility and Tenneco Revolving Debt. Tenneco shall, at its
expense, have the sole right and authority to, and will use its commercially
reasonable efforts to, have in place prior to the Distribution Date a credit
facility for itself (with such guarantees of its obligations thereunder by the
Energy Subsidiaries as it deems necessary) in an aggregate principal amount
sufficient (together with other available funds to Tenneco) to fund the
tenders, redemptions, prepayments, defeasances and maturities contemplated
under the Debt Realignment; to pay all the fees, costs and expenses incurred
by Tenneco and its subsidiaries in preparing for, negotiating and effecting
the Distributions, the Merger and the Debt Realignment and any financings in
connection therewith; and for other general corporate purposes (including,
without limitation, working capital, the repayment or refinancing of
Consolidated Debt and the payments of dividends). This facility shall be in
effect at, and shall have a remaining stated maturity of at least 180 days
following, the closing of the Merger and the Distributions. The aggregate
amount of debt (including accrued and accreted interest and fees and expenses)
outstanding as of the Effective Time under this facility is hereinafter called
the "Tenneco Revolving Debt".
Notwithstanding anything contained herein, (a) contemporaneously with the
Distributions, Tenneco and the Energy Subsidiaries shall be removed as obligor
under (and released from liability with respect to) any indebtedness for
borrowed money for which Tenneco or its subsidiaries are liable and which are
assumed by the Industrial Company or the Shipbuilding Company pursuant to the
terms hereof and the Distribution Agreement, (b) any Tenneco Revolving Debt
shall be prepayable without penalty, subject to customary notice provisions,
(c) in respect of publicly-traded Consolidated Debt, between the date of the
Merger Agreement and the Effective Time there shall be no (i) extension of
maturity or average life, (ii) increase in interest rates or (iii) adverse
change in defeasance or redemption provisions with respect to any indebtedness
for borrowed money for which Tenneco or the Energy Subsidiaries will be liable
on or after the Effective Time and (d) except for the Tenneco Revolving Debt,
no indebtedness for borrowed money of Tenneco or the Energy Subsidiaries at
the Effective Time shall contain any affirmative or negative financial or
operational covenants other than ones that are (x) mutually acceptable to
Tenneco and Acquiror or (y) no more restrictive in the aggregate and
substantially equivalent to those set forth in the Indenture dated as of
January 1, 1992 of El Paso Natural Gas Company as in effect as of the date of
the Merger Agreement (other than Section 10.05 of the Indenture).
3. Shipbuilding Credit Facility and Shipbuilding Revolving Debt. Prior to
the Distributions (and at such time as Tenneco shall request), Shipbuilding
Company shall, at its expense, obtain and have in place a credit facility (the
"Shipbuilding Credit Facility") for itself (with such guarantees of its
obligations thereunder by the Shipbuilding Subsidiaries as is necessary to
obtain the Shipbuilding Credit Facility) in an aggregate principal amount of
at least $600 million (the "Minimum Debt Amount") and shall borrow the Minimum
Debt Amount thereunder and distribute the proceeds of such borrowing to
Tenneco (or such subsidiary of Tenneco as Tenneco shall designate) at such
time on or prior to the consummation of the Distributions as Tenneco shall
request.
4
<PAGE>
4. Allocation and Assumption of Debt.
(a) Allocated Energy Debt. On the Distribution Date, Tenneco shall assume,
and shall thereafter be solely liable and responsible for, the Allocated
Energy Debt. Tenneco hereby acknowledges and agrees that the Allocated Energy
Debt shall constitute an Energy Group Liability as defined in the Distribution
Agreement.
(b) Allocated Industrial Debt. On the Distribution Date, Industrial Company
shall assume, and shall thereafter be solely liable and responsible for, the
Allocated Industrial Debt. Industrial Company hereby acknowledges and agrees
that the Allocated Industrial Debt shall constitute an Industrial Group
Liability as defined in the Distribution Agreement.
(c) Allocated Shipbuilding Debt. On the Distribution Date, Shipbuilding
Company shall assume, and shall thereafter be solely liable and responsible
for, the Allocated Shipbuilding Debt. Shipbuilding Company hereby acknowledges
and agrees that the Allocated Shipbuilding Debt shall constitute a
Shipbuilding Group Liability as defined in the Distribution Agreement.
5. Allocation of Cash and Cash Equivalents. Prior to or contemporaneously
with the consummation of the Distributions, each of the parties hereto shall
make such transfers of the Cash and Cash Equivalents of Tenneco and its
consolidated subsidiaries (prior to giving effect to the Distributions) so
that to the extent possible, based on estimates of the aggregate amount of
Cash and Cash Equivalents of Tenneco and its consolidated subsidiaries then on
hand, (a) Tenneco and the Energy Subsidiaries, on a consolidated basis, shall,
as of the Effective Time, have an aggregate amount of Cash and Cash
Equivalents equal to the sum of the following:
(i) $25.0 million,
(ii) the product of (A) the Tenneco Allocation Percentage, and (B) the
lesser of (I) $100 million and (II) the total amount of the Factored
Proceeds (the lesser of such amounts being referred to as the "Section 5
Amount") and
(iii) should the Effective Time occur after the day of the month on which
Tenneco generally collects receivables from customers of its regulated
pipeline business (typically, the 25th day of a month), the lesser of the
amount of (A) the Section 5 Amount owing to ASCC as of the Effective Time,
and (B) the total amount of such receivables actually collected by Tenneco
or any of its Subsidiaries during the period beginning on the day such
receivables are first collected and ending at the Effective Time (the
"Actual Collection Amount"), so long as that amount is owing to ASCC as of
the Effective Time. It is expressly understood that as of the Effective
Time all payables and receivables are for the account of Acquiror.
(the sum of the amounts described in the immediately preceding clause (i),
(ii) and (iii) is hereinafter, referred to as the "Guaranteed Energy Cash
Amount"), and (b) Shipbuilding Company and the Shipbuilding Subsidiaries, on a
consolidated basis, shall, as of the close of business on the Merger Closing
Date, have an aggregate of $5 million of Cash and Cash Equivalents (the
"Guaranteed Shipbuilding Cash Amount"). All remaining Cash and Cash
Equivalents of Tenneco and its consolidated subsidiaries shall be allocated to
Industrial Company and the Industrial Subsidiaries.
6. Post Distribution Audit.
(a) Preparation of Closing Balance Sheets. As soon as practicable after the
Merger Closing Date, but in any event within 60 days following the Merger
Closing Date, Industrial Company shall cause Arthur Andersen LLP (the
"Auditors") to:
(i) conduct an audit of Tenneco and the Energy Subsidiaries to determine
the aggregate amount, as of the Effective Time, of each of the Factored
Proceeds, the Section 5 Amount, the Actual Collection Amount, the Tenneco
Revolving Debt, the Consolidated Debt (other than the Tenneco Revolving
Debt) of Tenneco and the Energy Subsidiaries, the Tenneco Transaction
Expenses, the Cash and Cash Equivalents of Tenneco
5
<PAGE>
and the Energy Subsidiaries and the Actual Energy Expenditures Amount, and
to prepare and deliver to each of Industrial Company and Tenneco a
consolidated balance sheet for Tenneco and the Energy Subsidiaries as of
the Effective Time reflecting (x) the amount of each of the foregoing
(other than the aggregate amount of the Factored Proceeds, the Section 5
Amount, the Actual Collection Amount (which shall be set forth in a
footnote to such consolidated balance sheet) and the Consolidated Debt
valued as part of the Consolidated Public Debt Value) and (y) the
Consolidated Public Debt Value (the "Energy Closing Balance Sheet"); and
(ii) conduct an audit of Shipbuilding Company and the Shipbuilding
Subsidiaries to determine the aggregate amount of the Cash and Cash
Equivalents of Shipbuilding Company and the Shipbuilding Subsidiaries as of
the Effective Time, and to prepare and deliver to each of Industrial
Company and Shipbuilding Company a consolidated balance sheet for
Shipbuilding Company and the Shipbuilding Subsidiaries as of the Effective
Time reflecting the aggregate amount of such Cash and Cash Equivalents (the
"Shipbuilding Closing Balance Sheet").
The Energy Closing Balance Sheet and the Shipbuilding Closing Balance Sheet
shall each be prepared on the basis of an audit conducted by the Auditors in
accordance with generally accepted auditing standards and prepared in
accordance with generally accepted accounting principles consistently applied
and without giving effect to any change in accounting principles required on
account of the consummation of the Merger or the Distributions, except that,
to the extent that any definition contained herein contemplates inclusion or
exclusion of an item that would not be included or excluded under generally
accepted accounting principles, the Auditors shall compute such item in
accordance with such definition. During the course of the preparation of the
Energy Closing Balance Sheet and the Shipbuilding Closing Balance Sheet by the
Auditors, and during any period in which there is a dispute regarding either
the Energy Closing Balance Sheet or the Shipbuilding Closing Balance Sheet,
each of Tenneco, Industrial Company and Shipbuilding Company, as the case may
be, shall cooperate with the Auditors and each other and shall have access to
all work papers of the Auditors and all pertinent accounting and other records
of Tenneco and the Energy Subsidiaries and Shipbuilding Company and the
Shipbuilding Subsidiaries, as applicable. Tenneco shall pay the fees and
expenses of the Auditors. Notwithstanding any provision of this Agreement or
the Distribution Agreement, the Claims Deposit (as defined in Insurance
Agreement) shall not be included as Cash and Cash Equivalents of Tenneco and
the Energy Subsidiaries.
(b) Disputes Regarding Closing Balance Sheet. Unless (i) in the case of the
Energy Closing Balance Sheet, Tenneco delivers written notice to Industrial
Company on or prior to the 30th day after its receipt of the Energy Closing
Balance Sheet that it disputes any of the amounts set forth on the Energy
Closing Balance Sheet (hereinafter, an "Energy Dispute"), or (ii) in the case
of the Shipbuilding Closing Balance Sheet, Shipbuilding Company delivers
written notice to Industrial Company on or prior to the 30th day after its
receipt of the Shipbuilding Closing Balance Sheet that it disputes the amount
of Cash and Cash Equivalents set forth on the Shipbuilding Closing Balance
Sheet (hereinafter, a "Shipbuilding Dispute") then, as applicable, Tenneco
and/or Shipbuilding Company shall be deemed to have accepted and agreed to the
Energy Closing Balance Sheet or the Shipbuilding Closing Balance Sheet, as
applicable, in the form in which it was delivered to it by the Auditors. If
such a notice of an Energy Dispute is given by Tenneco or a notice of a
Shipbuilding Dispute is given by Shipbuilding Company (in either case such
party being hereinafter referred to as the "Disputing Party") within such 30-
day period, then Industrial Company and the Disputing Party shall, within 15
days after the giving of any such notice, attempt to resolve such Energy
Dispute or Shipbuilding Dispute, as the case may be, and agree in writing upon
the final content of the Energy Closing Balance Sheet or Shipbuilding Closing
Balance Sheet, as the case may be. In the event that the Disputing Party and
Industrial Company are unable to resolve any Energy Dispute or Shipbuilding
Dispute, as the case may be, within such 15-day period, then the certified
public accounting firm of Ernst & Young or another mutually acceptable
independent accounting firm (the "Independent Auditors") shall be employed as
arbitrator hereunder to settle such Energy Dispute and/or Shipbuilding
Dispute, as the case may be, as soon as practicable. The Independent Auditors
shall have access to all documents and facilities necessary to perform its
function as arbitrator. The determination of the Independent Auditors with
respect to any Energy Dispute and/or Shipbuilding Dispute, as the case may be,
shall be final and binding on the applicable parties hereto. Industrial
Company and the Disputing Party shall each pay one-half ( 1/2) of the fees and
expenses of the Independent Auditors for such services. Industrial Company and
the
6
<PAGE>
Disputing Party each agree to execute, if requested by the Independent
Auditors, a reasonable engagement letter. The term "Energy Adjusted Closing
Balance Sheet," as used herein, shall mean the definitive Energy Closing
Balance Sheet agreed to by Tenneco and Industrial Company or, as the case may
be, the definitive Energy Closing Balance Sheet resulting from the
determinations made by the Independent Auditors in accordance with this
Section 6(b) (in addition to the matters theretofore agreed to by Tenneco and
Industrial Company). The term "Shipbuilding Closing Balance Sheet," as used
herein, shall mean the definitive Shipbuilding Closing Balance Sheet agreed to
by Shipbuilding Company and Industrial Company or, as the case may be, the
definitive Shipbuilding Closing Balance Sheet resulting from the
determinations made by the Independent Auditors in accordance with this
SECTION 6(B) (in addition to the matters theretofore agreed to by Shipbuilding
Company and Industrial Company). The date on which the Energy Adjusted Closing
Balance Sheet is determined and provided to each of Industrial Company and
Tenneco pursuant to this SECTION 6(B) is hereinafter referred to as the
"Energy Determination Date". The date on which the Shipbuilding Adjusted
Closing Balance Sheet is determined and provided to each of Industrial Company
and Shipbuilding Company pursuant to this SECTION 6(B) is hereinafter referred
to as the "Shipbuilding Determination Date".
7. Post Distribution Adjustments and Cash Payments.
(a) Adjustments and Payments Relating to Consolidated Debt. If the Actual
Energy Debt Amount exceeds the Base Amount, Industrial Company shall pay
Tenneco the amount of such excess in cash within 10 days after the Energy
Determination Date. If, on the other hand, the Actual Energy Debt Amount is
less than the Base Amount, Tenneco shall pay Industrial Company the amount of
such deficiency in cash within 10 days after the Energy Determination Date.
(b) Adjustments and Payments Relating to Cash and Cash Equivalents.
(i) Adjustments and Payments Relating to Shipbuilding Company. If the
amount of Cash and Cash Equivalents of Shipbuilding Company and the
Shipbuilding Subsidiaries as reflected on the Shipbuilding Adjusted
Closing Balance Sheet is less than the Guaranteed Shipbuilding Cash
Amount, Industrial Company shall pay Shipbuilding Company the amount of
such deficiency in cash within 10 days after the Shipbuilding
Determination Date. If, on the other hand, the amount of Cash and Cash
Equivalents of Shipbuilding Company and the Shipbuilding Subsidiaries
as reflected on the Shipbuilding Adjusted Closing Balance Sheet exceeds
the Guaranteed Shipbuilding Cash Amount, Shipbuilding shall pay
Industrial Company the amount of such excess in cash within 10 days
after the Shipbuilding Determination Date.
(ii) Adjustments and Payments Relating to Tenneco. (A) If the amount
of Cash and Cash Equivalents of Tenneco and the Energy Subsidiaries as
reflected on the Energy Adjusted Closing Balance Sheet is less than the
Guaranteed Energy Cash Amount, Industrial Company shall pay Tenneco the
amount of such deficiency in cash within 10 days after the Energy
Determination Date. If, on the other hand, the amount of Cash and Cash
Equivalents of Tenneco and the Energy Subsidiaries as reflected on the
Energy Adjusted Closing Balance Sheet exceeds the Guaranteed Energy
Cash Amount, Tenneco shall pay Industrial Company the amount of such
excess in cash within 10 days after the Energy Determination Date.
(B) If the Actual Energy Expenditures Amount as reflected on the
Energy Adjusted Closing Balance Sheet is less than the Required Energy
Expenditures Amount, Industrial Company shall pay Tenneco the amount of
such deficiency in cash within 10 days after the Energy Determination
Date. If, on the other hand, the Actual Energy Expenditures Amount as
reflected on the Energy Adjusted Closing Balance Sheet is greater than
the Required Energy Expenditures Amount, Tenneco shall pay to
Industrial Company the amount of such excess in cash within 10 days
after the Energy Determination Date.
(C) Each of Tenneco and Industrial Company hereby agrees that the
amount of any cash payment otherwise due it under any provision of this
SECTION 7 may be offset against and reduced, on a dollar for dollar
basis, in respect of any cash payment it may otherwise be required to
make to the other pursuant to and in accordance with any other
provision of this SECTION 7, and that the amount of such offset and
reduction shall be treated as payment of its obligations under any
provision of this SECTION 7 to the extent of such offset and reduction.
7
<PAGE>
8. Miscellaneous Provisions.
(a) Termination. This Agreement may not be terminated except upon the
written agreement of each of the parties hereto.
(b) Best Efforts. If at any time after the Merger Closing Date any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of Tenneco, Industrial Company and Shipbuilding Company shall, on the
written request of any of them, take (or cause the appropriate member of its
Group over which it has direct or indirect legal or effective control to take)
all such reasonably necessary or desirable action.
(c) Cooperation. The parties hereto agree to use their reasonable best
efforts to cooperate with respect to the various matters contemplated by this
Agreement.
(d) Successors and Assigns. Except as otherwise expressly provided herein,
no party hereto may assign or delegate, whether by operation of law or
otherwise, any of such party's rights or obligations under or in connection
with this Agreement without the written consent of each other party hereto. No
assignment will, however, release the assignor of any of its obligations under
this Agreement or waive or release any right or remedy the other parties may
have against such assignor hereunder. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto will be binding upon and enforceable
against the respective successors and assigns of such party and will be
enforceable by and will inure to the benefit of the respective successors and
permitted assigns of such party.
(e) Modification; Waiver; Severability. This Agreement may not be amended or
modified except in a writing executed by each of the parties hereto. The
failure by any party to exercise or a delay in exercising any right provided
for herein shall not be deemed a waiver of any right hereunder. Whenever
possible, each provision of this Agreement will be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of
this Agreement is held to be prohibited by or invalid under applicable law,
such provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement.
(f) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which
taken together shall constitute one and the same Agreement.
(g) Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
(h) Notices. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally or
five business days after mailing by certified or registered mail, return
receipt requested and postage prepaid, to the recipient at such recipient's
address as indicated in the Distribution Agreement or to such other address or
to the attention of such other person as the recipient party has specified by
prior written notice to the sending party.
(i) Survival. Each of the agreements of the parties herein shall survive the
Merger Closing Date.
(j) No Third Party Beneficiaries. This Agreement is made solely for the
benefit of the parties hereto and the other members of their respective
Groups, and shall not give rise to any rights of any kind to any other third
parties.
(k) Governing Law and Consent to Jurisdiction. ALL QUESTIONS AND/OR DISPUTES
CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND
THE SCHEDULES AND EXHIBITS HERETO SHALL BE GOVERNED BY THE INTERNAL LAWS, AND
NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO
THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES TO BE SUBJECT TO,
AND HEREBY CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE
STATE OF DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
TENNECO INC.
By __________________________________
Name:
Title:
NEW TENNECO INC.
By __________________________________
Name:
Title:
NEWPORT NEWS SHIPBUILDING INC.
(formerly known as Tenneco
InterAmerica Inc.)
By __________________________________
Name:
Title:
9
<PAGE>
Schedule 1
to Debt and Cash Allocation Agreement
Accounting fees and expenses
Actuarial fees and expenses
Appraisal fees and expenses
Audit fees and expenses
Broker/dealer fees and expenses
Consulting fees and expenses
Exchange/paying agent fees and expenses
Exit consent fees
Fees and expenses incurred in connection with arranging the Revolving Debt,
including commitment fees, drawdown fees, agent's fees, facility fees and
similar fees and expenses, and lender's costs and expenses payable by the
borrower
Filing fees, including SEC, NYSE, NASD, HSR and other similar fees
Information agent fees and expenses
Investment banking fees and expenses, dealer manager fees and expenses, and
similar fees and expenses
Fees and expenses with respect to legal matters pertaining to the transactions
Mailing expenses
Newspaper advertising costs
Printing fees and expenses
Proxy solicitation fees and expenses
Soliciting dealer fees and expenses
Rating Agency fees
Underwriting, placement, registration and similar fees, commissions and
discounts payable in connection with the NPS Preferred Stock
10
<PAGE>
Schedule 2
to Debt and Cash Allocation Agreement
The deferred intercompany items referred to in SECTION 1(A)(VI) of the Debt
and Cash Allocation agreement are the following intercompany transactions
<TABLE>
<CAPTION>
SELLER BUYER PROPERTY TRANSFERRED
- ------ ----- --------------------
<S> <C> <C>
Tenneco Corporation Tenneco Inc. Stock of Kern County Land Co.
Tenneco Corporation Tenneco Inc. Stock of Tenneco Credit Corp.
Tenneco Corporation Tennessee Gas Pipeline Co. Stock of Tenneco International Inc.
Channel Gas Marketing Channel Industries Gas DT Line
Tenngasco Gas Supply Channel Industries Gas Transmission facilities
Tennessee Gas Pipeline
Co. Energy TRACS Software assignment agreement
</TABLE>
11
<PAGE>
TENNECO INC.
Schedule 3
<TABLE>
<CAPTION>
PRE-DETERMINED
------------------------------------------------
SECURITY DESCRIPTION BENCHMARK TREASURY SPREAD TO TREASURY(1)
- ------------------------------------------------ ------------------------- ----------------------
INDENTURE FACE COUPON MATURITY COUPON MATURITY CASE A CASE B
--------- ------ ------ -------- ---------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Inc. ................... $300.0 6.500% 12/15/05 5.875% 11/05 84 bp 76 bp
Inc. ................... 300.0 7.250% 12/15/25 pricing 30yr UST 125 113
Inc. ................... 500.0 7.875% 10/01/02 6.375% 08/02 73 66
Inc. ................... 250.0 8.000% 11/15/99 7.750% 11/99 58 52
Inc. ................... 150.0 9.000% 11/15/12 pricing 30yr UST 95 86
Inc. ................... 200.0 9.875% 02/01/01 7.750% 02/01 66 59
Inc. ................... 250.0 10.000% 03/15/08 pricing 30yr UST 91 82
Inc. ................... 500.0 10.000% 08/01/98 5.875% 08/98 51 46
Inc. ................... 175.0 10.375% 11/15/00 5.625% 11/00 64 58
TGP..................... 400.0 6.000% 12/15/11 pricing 30yr UST 95 86
TGP..................... 75.0 8.000% 05/15/97 NA NA NA NA
TGP..................... 250.0 9.000% 01/15/97 NA NA NA NA
TCC..................... 7.5 8.500% 01/30/97 NA NA NA NA
TCC..................... 0.5 8.500% 03/17/97 NA NA NA NA
TCC..................... 3.0 8.500% 03/24/97 NA NA NA NA
TCC..................... 5.0 8.520% 03/28/97 NA NA NA NA
TCC..................... 6.6 8.570% 03/18/97 NA NA NA NA
TCC..................... 150.0 9.250% 11/01/96 NA NA NA NA
TCC..................... 12.0 9.470% 09/21/98 5.875% 08/98 48 43
TCC..................... 10.0 9.480% 01/28/02 7.500% 11/01 69 62
TCC..................... 250.0 9.625% 08/15/01 7.875% 08/01 68 61
TCC..................... 7.6 9.720% 09/15/01 7.875% 08/01 68 61
TCC..................... 10.0 9.720% 09/25/01 7.875% 08/01 69 62
TCC..................... 5.0 9.900% 12/02/96 7.500% 12/96 45 41
TCC..................... 3.0 9.900% 08/19/98 5.875% 08/98 48 43
TCC..................... 4.5 10.000% 08/19/98 5.875% 08/98 48 43
TCC..................... 5.0 10.000% 12/13/01 7.500% 11/01 70 63
TCC..................... 50.0 10.500% 08/17/98 5.875% 08/98 48 43
TCC..................... 150.0 10.125% 12/01/97 5.250% 12/97 48 43
Inc. ................... $2,625
TGP..................... 725
TCC..................... 680
------
$4,030
------
</TABLE>
NOTE: (1) Case A represents the spread to treasury for each security in the
event that the percentage of the aggregate principal amount of the bonds
participating in any tender or exchange, measured as a group for all
bonds tendered or exchanged for, equals or exceeds 80% of all such bonds
eligible to participate. In the event that the percentage of bonds
participating in any tender or exchange falls short of 80% (calculated as
aforesaid), the market value of all bonds remaining outstanding will be
determined by using the spread to treasury indicated in Case B.
12
<PAGE>
SCHEDULE 4
TO
DEBT AND CASH ALLOCATION AGREEMENT
ADDITIONAL ADJUSTMENTS TO BASE AMOUNT
1. Indonesia (the South Sulawesi Project)
(a) All expenditures made by Acquiror at any time from and after June 19,
1996 with respect to this project shall have no effect whatsoever on the Base
Amount or the calculation thereof.
(b) All expenditures actually incurred and paid by any of Tenneco or its
consolidated subsidiaries at any time between June 19, 1996 and the Effective
Time (the "PRE-CLOSING PERIOD") shall be added to the Base Amount (but shall
not be included as a capital expenditure for purposes of determining the
Actual Energy Expenditures Amount); provided, however, the Base Amount will be
reduced by the amount of any Net Cash Proceeds (as defined) received by
Tenneco or any of its consolidated subsidiaries during the Pre-Closing Period
from any monetization of this project during the Pre-Closing Period. As used
in the Schedule 4, the term "Net Cash Proceeds" means the total amount of cash
proceeds actually received by the party in question during the Pre-Closing
Period from the consummation during the Pre-Closing Period of the transaction
or transactions in question, less the sum of any and all costs, expenses and
taxes related to the transaction or transactions in question which either are
(i) actually incurred and paid by Tenneco or any of its consolidated
subsidiaries prior to or at the Effective Time (other than taxes based upon
income, which shall not be deducted from cash proceeds in determining Net Cash
Proceeds), or (ii) incurred but not paid prior to or at the Effective Time by
any member of either the Industrial Group and/or Shipbuilding Group and which
will remain an obligation or liability of such entity (or any member of its
Group) after giving effect to the Distributions without reimbursement therefor
by Tenneco or any other member of the Energy Group.
2. Orange Cogeneration Project
(a) All expenditures made by Acquiror at any time from and after June 19,
1996 with respect to this project shall have no effect whatsoever on the Base
Amount or the calculation thereof.
(b) All expenditures actually incurred and paid by any of Tenneco or its
consolidated subsidiaries at any time during the Pre-Closing Period shall be
added to the Base Amount (but shall not be included as a capital expenditure
for purposes of determining the Actual Energy Expenditures Amount); provided,
however, the Base Amount will be reduced by the amount of any Net Cash
Proceeds received by Tenneco or any of its consolidated subsidiaries during
the Pre-Closing Period from any monetization of this project during the Pre-
Closing Period.
3. Australian Infrastructure Bonds
(a) The Base Amount shall be reduced by any Net Cash Proceeds received by
Tenneco or any of its consolidated subsidiaries during the Pre-Closing Period
from any off-balance sheet financing in respect of this project.
4. Asset Sales
(a) Microwave Licenses. The Base Amount shall be reduced by the aggregate
amount of Microwave Net Cash Proceeds (as defined below) from any sale or
assignment during the Pre-Closing Period of private operational-fixed
microwave licenses issued by the Federal Communications Commission. As used
herein, "Microwave Net Cash Proceeds" means the gross cash proceeds actually
received by Tenneco or any of its consolidated subsidiaries less the sum of
(i) the total amount of relocation costs and cost and expenses of rebuilding
an acceptable replacement communication system that are actually incurred and
paid by Tenneco or any of its consolidated subsidiaries during the Pre-Closing
Period (or incurred by any member of the Industrial Group or Shipbuilding
Group and remain unpaid as of the Effective Time), and (ii) the amount of any
taxes incurred in connection with any such sale or assignment which are either
(A) actually incurred and paid by Tenneco or any of its consolidated
subsidiaries prior to the Effective Time (other than taxes based upon income,
which shall not be deducted from cash proceeds in determining Net Cash
Proceeds), or (B) incurred by any member of the Shipbuilding Group or
Industrial Group and remain unpaid as of the Effective Time and which will
remain an obligation or liability of such entity (or any member of its Group)
after giving effect to the Distributions without reimbursement therefor by
Tenneco or any other member of the Energy Group.
13
<PAGE>
5. Land Sales
(a) 960 Acre Parcel Located Along Galveston Bay at Ingleside, Texas. The
Base Amount shall be reduced by the total amount of Net Cash Proceeds actually
received by Tenneco or any of its consolidated subsidiaries at any time during
the Pre-Closing Period, in connection with the sale of the above referenced
property.
(b) Westchase Development in West Houston (also known as Tract 6A). The Base
Amount shall be reduced by the total amount of Net Cash Proceeds actually
received by Tenneco or any of its consolidated subsidiaries at any time during
the Pre-Closing Period in connection with the sale of the above referenced
property.
(c) 1625 West Loop (also known as Post Oak Ranch). The Base Amount shall be
reduced by the total amount of Net Cash Proceeds actually received by Tenneco
or any of its consolidated subsidiaries at any time during the Pre-Closing
Period in connection with the sale of the above referenced property.
6. Sales of Gas Turbines
The Base Amount shall be reduced by the total amount of Net Cash Proceeds
actually received by Tenneco or any of its consolidated subsidiaries (and
credited to the account of Industrial Company under the Debt and Cash
Allocation Agreement) from its sale of any gas turbines at any time during the
Pre-Closing Period.
7. ICH Tax Indemnity Matter
The Base Amount shall be increased (without duplication) by any cash payment
(up to a maximum amount, however, of $19.0 million) made by Tenneco or any of
its consolidated subsidiaries during the Pre-Closing Period in respect of the
settlement of the ICH tax indemnity matter.
8. Payments due on Settlement of Certain Lawsuits During the Pre-Closing
Period
All cash payments actually received by Tenneco or any of its consolidated
subsidiaries during the Pre-Closing Period in respect of any settlement of any
of the lawsuits or other proceedings identified and referred to in paragraph 9
of, and Schedule G-2 to, Exhibit G to the Merger Agreement shall, to the
extent provided for under the terms described under paragraph 9 of such
Exhibit G, be for the account of Industrial Company and shall not be included
in the Guaranteed Energy Cash Amount or have any effect on the Base Amount or
the calculation thereof.
9. Hedging Transactions
Any hedging transactions and all costs and expenses with respect thereto
that are entered into in connection with or in anticipation of the Debt
Realignment shall be for the benefit or detriment of Industrial Company and
shall have no effect whatsoever on the Base Amount or the calculation thereof.
10. Rate Refunds Payable to Customers
The Base Amount shall be reduced by the amount, calculated as of the
Effective Time, of any rate refunds, including interest, which would be
payable to customers pursuant to the rate settlement filed with the Federal
Energy Regulatory Commission at Docket No. RP95-112 and have not been paid as
of the Effective Time, whether such amounts are to be paid to customers or
credited against gas supply realignment costs pursuant to a settlement with
customers.
11. Sale of Tenneco Ventures
The Base Amount shall be reduced by the aggregate amount of Net Cash
Proceeds actually received by Tenneco or any of its subsidiaries from any sale
of Tenneco Ventures during the Pre-Closing Period.
12. Bonuses for Energy Employees
(a) The total amount of cash bonuses for Energy Employees for the calendar
year 1996 (the "1996 Bonus Amount") shall be pro rated based on the date on
which the Effective Time occurs and shall be shared between Tenneco and
Industrial Company based on such pro ration as follows:
14
<PAGE>
(i) Tenneco shall be responsible and liable for the payment of that
portion (the "Tenneco Bonus Portion") of the 1996 Bonus Amount that equals
the product of (A) the 1996 Bonus Amount, and (B) a fraction, the numerator
of which is the number of days remaining in the 1996 calendar year
following the day on which the Effective Time occurs (the "Effective Day"),
and the denominator of which is 365.
(ii) New Tenneco shall be responsible and liable for the payment of that
portion of the 1996 Bonus Amount that equals the amount by which the 1996
Bonus Amount exceeds the Tenneco Bonus Portion.
(b) Each of Tenneco's and New Tenneco's liability for its share of the 1996
Bonus Amount shall be accounted for in the Merger as follows:
(i) If 100% of the 1996 Bonus Amount is paid on or before the Effective
Time, the Base Amount shall be increased by the Tenneco Bonus Portion.
(ii) If as of the Effective Time, the amount of the 1996 Bonus Amount
that has not been paid exceeds the Tenneco Bonus Portion, the Base Amount
shall be reduced by the amount of such excess.
(iii) If as of the Effective Time, the amount of the 1996 Bonus Amount
that has not been paid equals the Tenneco Bonus Portion, the Base Amount
shall not be increased or decreased in respect of the 1996 Bonus Amount.
(c) The 1996 Bonus Amount shall be determined by Tenneco prior to the
Effective Time with the consent of Acquiror which shall not be unreasonably
withheld.
13. Non Cash Proceeds
Any proceeds received by Tenneco or any of its subsidiaries from the
transactions described in paragraphs 1, 2, 3, 4, 5, 6 and 11 other than cash
proceeds shall be for the account of Acquiror and shall be retained by or
distributed to the Energy Business.
15
<PAGE>
EXHIBIT D TO
DISTRIBUTION AGREEMENT
ENERGY BUSINESS
PRO FORMA BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
RESTRUCTURING,
TENNECO REALIGNMENT TENNECO
ENERGY AND NPS ENERGY
ASSETS HISTORICAL ISSUANCE AS ADJUSTED
------ ---------- -------------- -----------
<S> <C> <C> <C>
Current assets:
Cash and temporary investments.......... $ 100 $ (36)(d) $ 25
(39)(g)
Receivables............................. 1,190 (116)(a) 760
(357)(b)
48 (c)
(5)(d)
Other current assets.................... 138 (23)(c) 118
3 (d)
------ ----- ------
Total current assets.................. 1,428 (525) 903
------ ----- ------
Net property, plant and equipment......... 2,924 (39)(c) 2,885
Other assets and deferred charges......... 1,187 (172)(b) 1,014
(1)(c)
------ ----- ------
Total assets.......................... $5,539 $(737) $4,802
====== ===== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
1
<PAGE>
ENERGY BUSINESS
PRO FORMA BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
RESTRUCTURING,
TENNECO REALIGNMENT TENNECO
ENERGY AND NPS ENERGY
LIABILITIES AND STOCKHOLDERS' EQUITY HISTORICAL ISSUANCE AS ADJUSTED
------------------------------------ ---------- -------------- -----------
<S> <C> <C> <C>
Current liabilities:
Short-term debt........................ $ 521 $(521)(f) $
Payables............................... 532 (111)(a) 222
(2)(b)
(197)(f)
Other current liabilities.............. 718 (11)(c) 605
(20)(b)
(82)(f)
------ ----- ------
Total current liabilities............ 1,771 (944) 827
Long-term debt........................... 1,519 1,290 (f) 2,544
(265)(e)
Other liabilities and deferred credits... 652 (17)(b) 594
(41)(d)
Deferred income taxes.................... 413 (13)(b) 401
1 (c)
------ ----- ------
4,355 11 4,366
------ ----- ------
Minority interest........................ 18 18
------ ----- ------
Preferred stock with mandatory
redemption provisions................... 112 112
------ ----- ------
Stockholders' equity:
Preferred Stock........................ 265 (e) 265
Common Stock...........................
Additional Paid In Capital.............
Accumulated Earnings...................
Tenneco Combined Equity................ 1,054 (5)(a) 41
(477)(b)
(5)(c)
3 (d)
(490)(f)
(39)(g)
------ ----- ------
Total stockholders' equity........... 1,054 (748) 306
------ ----- ------
Total liabilities and
stockholders' equity................ $5,539 $(737) $4,802
====== ===== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet.
2
<PAGE>
ENERGY BUSINESS
NOTES TO PRO FORMA BALANCE SHEET
RESTRUCTURING, REALIGNMENT AND NPS ISSUANCE:
(a) To reflect the settlement of intercompany trade accounts receivable and
intercompany trade accounts payable with Tenneco Energy affiliates.
(b) To reflect the distribution to New Tenneco of receivables previously sold
to Tenneco Credit Corporation, a Tenneco Energy affiliate.
(c) To reflect the transfer from Tenneco Energy to New Tenneco and affiliates
of certain assets and liabilities held at the corporate level.
(d) To reflect the transfer to New Tenneco of insurance liabilities and the
related portfolio of short-term cash investments and other assets
previously held by Eastern Insurance Company Limited.
(e) To reflect the NPS Issuance of $275 million of Tenneco Junior Preferred
Stock, with an assumed 8 1/2% dividend yield, for net NPS Issuance
Proceeds of $265 million, and the use of the net NPS Issuance Proceeds for
the repayment of Tenneco Energy Consolidated Debt.
(f) To reflect the restructuring and realignment of the Tenneco debt pursuant
to the Debt Realignment, the Distributions and the applicable provisions
of the Merger Agreement, and the assumed payment of accrued interest on
the Tenneco Energy Consolidated Debt defeased, redeemed, tendered or
exchanged as part of the Debt Realignment. The Pro Forma Financial
Statements assume no such reduction in the Base Debt Amount. The amount of
"Tenneco Energy as Adjusted" debt immediately prior to the Merger will
consist primarily of borrowings under the Tenneco Credit Facility
(assuming 100% acceptance of the Debt Tender Offers and Debt Exchange
Offers) and is calculated from the provisions of the Merger Agreement as
follows (in millions):
<TABLE>
<S> <C>
Base Debt Amount per Merger agreement............................. $2,650
Less: NPS Issuance proceeds....................................... (275)
------
2,375
Plus: Cash settlement payments.................................... 439
Less: Estimated collections subject to refund..................... (270)
------
"Tenneco Energy as Adjusted" debt................................. $2,544
======
</TABLE>
At this time, Tenneco management cannot determine the ultimate amount of
securities which will be purchased in the Debt Tender Offers, or the
ultimate amount of securities which will be exchanged into New Tenneco
Public Debt pursuant to the Debt Exchange Offers, and such amount could
vary significantly. However, for purposes of these pro forma adjustments,
it is assumed that 100% of the securities subject to the Debt Tender Offers
are purchased pursuant to the Debt Tender Offers and 100% of the securities
subject to the Debt Exchange Offers are exchanged into New Tenneco Public
Debt pursuant to the Debt Exchange Offers.
(g) To reflect distribution from Tenneco Energy of cash in excess of $25
million pursuant to the Cash Realignment provisions of the Merger
Agreement. The distribution may be adjusted by the sale of Tenneco Energy
receivables by Tenneco prior to the Merger Effective Time.
3
<PAGE>
EXHIBIT E
TO
DISTRIBUTION AGREEMENT
ENERGY SUBSIDIARIES
Subsidiaries of Tenneco Inc.
<TABLE>
<S> <C>
Kern County Land Company (Delaware).................................... 100%
Tenneco Equipment Corporation (Delaware).............................. 100
Marlin Drilling Co., Inc. (Delaware)
Bluefin Supply Company (Delaware)................................... 100
Marlin do Brasil Perfuacoes Maritimas Ltda. (Brazil) (in
dissolution)...................................................... 0.16
(Bluefin Supply Company owns 0.16%; and Marlin Drilling Co., Inc.
owns 99.84%)
Marlin do Brasil Perfuacoes Maritimas Ltda. (Brazil) (in
dissolution)....................................................... 99.84
(Marlin Drilling Co., Inc. owns 99.84%; and Bluefin Supply Company
owns 0.16%)
Tenneco Equipment Holding I Company (Delaware)....................... 100
Tenneco Equipment Holding II Company (Delaware)...................... 100
Tenneco Equipment Holding III Company (Delaware)..................... 100
Tenneco Equipment Holding V Company (North Dakota).................. 100
Tenneco Equipment Holding IV Company (Wisconsin)..................... 100
Tenneco Equipment Holding VI Company (Illinois)...................... 100
Tenneco West, Inc. (Delaware)......................................... 100
Kern County Land Company, Inc. (California).......................... 100
Tenneco Credit Corporation (Delaware).................................. 100
TenFac Corporation (Delaware)......................................... 100
Tenneco MLP Inc. (Delaware)............................................ 100
Polk Power Partners, L.P. (Delaware Limited Partnership).............. 100
(Tenneco MLP Inc. owns % as a Limited Partner; CSW Mulberry, Inc.,
an unaffiliated company, owns % as a Limited Partner; GPSF-A Inc.,
an Unaffiliated company owns % as Preferred Limited Partner; and
Polk Power GP, Inc. owns % as the General Partner.)
Tenneco Transition Company (Delaware).................................. 100
Tennessee Gas Pipeline Company (Delaware).............................. 100
Altamont Service Corporation (Delaware)............................... 100
Altamont Gas Transmission Canada Limited (Canada).................... 100
(Altamont Service Corporation is the registered holder of all of the
issued and outstanding shares of Altamont Gas Transmission Canada
Limited, as Trustee for Altamont Gas Transmission Company, a Joint
Venture)
Border Gas Inc. (Delaware) (a close corp.)............................ 37.5
(Tennessee Gas Pipeline Company owns 100% of the Class A Common
Stock, 37.5% of the total equity, and 37.5% of the total voting
stock; unaffiliated companies (Texas Eastern Transmission
Corporation, El Paso Natural Gas Company, Transcontinental Gas Pipe
Line Corporation, Southern Natural Gas Company, and Florida Gas
Transmission Company) own the remaining stock and equity.)
Eastern Insurance Company Limited (Bermuda)........................... 100
</TABLE>
1
<PAGE>
Subsidiaries of Tenneco Inc.
Subsidiaries of Tennessee Gas Pipeline Company
<TABLE>
<S> <C>
East Tennessee Natural Gas Company (Tennessee)......................... 100
Tenneco East Natural Gas L.P. (Delaware Limited Partnership).......... 1
(East Tennessee Natural Gas Company, as General Partner, owns 1%; and
Tenneco East Corporation, as Limited Partner, owns 99%.)
Energy TRACS, Inc. (Delaware).......................................... 100
Kern River Corporation (Delaware)...................................... 0.01
Land Ventures, Inc. (Delaware)......................................... 100
Midwestern Gas Marketing Company (Delaware)............................ 100
Midwestern Gas Transmission Company (Delaware)......................... 100
Tenneco Midwest Natural Gas L.P. (Delaware Limited Partnership)....... 1
(Midwestern Gas Transmission Company, as General Partner, owns 1%;
and Tenneco Midwest Corporation, as Limited Partner owns 99%.)
Mont Belvieu Land Company (Delaware)................................... 100
New Tenn Company (Delaware)............................................ 100
(New Tenn Company and New Tennessee Gas Pipeline are in the process of
being merged into Tennessee Gas Pipeline Company.)
New Tennessee Gas Pipeline Company (Delaware).......................... 100
(New Tenn Company and New Tennessee Gas Pipeline are in the process of
being merged into Tennessee Gas Pipeline Company.)
S.K. Petroleum Company (Delaware)...................................... 100
Sandbar Petroleum Company (Delaware)................................... 100
Tennchase Inc. (Texas)................................................. 100
Tenneco Alaska, Inc. (Alaska).......................................... 100
Tenneco-Altamont Corporation (Delaware)................................ 100
Altamont Gas Transmission Company (Delaware Joint Venture)............ 53.34
(Tenneco-Altamont Corporation owns 53%; Amoco Altamont Company, an
unaffiliated company, owns 33%; and Entech Altamont, Inc., an
unaffiliated company, owns 13%.)
Tenneco Argentina Corporation (Delaware)............................... 100
Tenneco Baja California Corporation (Delaware)......................... 100
Tenneco Communications Corporation (Delaware).......................... 100
Tenneco Corporation (Delaware)......................................... 100
(Tennessee Gas Pipeline Company owns 100% of the Common Stock;
Tenneco Credit Corporation owns % of the Second Preferred Stock;
Tenneco Equipment Corporation owns % of the Second Preferred
Stock; and Tenneco International Inc. owns % of the Second
Preferred Stock.)
Entrade Engine Company (Kentucky)..................................... 100
H.T. Gathering Company (Texas)........................................ 50
(Tenneco Corporation owns 50% of the issued and outstanding Class A
Voting Stock and 20% of the Class B Nonvoting Stock, 29% of the total
equity; and Houston Pipe Line Company, an unaffiliated company, owns
50% of the issued and outstanding Class A Voting Stock and 80% of the
Class B Nonvoting Stock, 71% of the total equity.)
</TABLE>
2
<PAGE>
Subsidiaries of Tenneco Inc.
Subsidiaries of Tennessee Gas Pipeline Company
Subsidiaries of Tenneco Corporation
<TABLE>
<S> <C>
Petro-Tex Chemical Corporation (Delaware) (in dissolution)........... 100
(Certificate of Dissolution was filed in Delaware on January 18,
1995, Final dissolution date will be January 18, 1998, subject to
settlement of any other outstanding business.)
SWL Security Corp. (Texas)........................................... 100
TGP Corporation (Delaware)........................................... 100
Tenneco Energy Resources Corporation (Delaware)...................... 100
(Tenneco Corporation owns 100% of the Common Stock, 80% of total
equity; and Ruhrgas Aktiengesellschaft, an unaffiliated company,
owns 100% of the issued and outstanding Series A Common Stock, 20%
of total equity.)
Channel Gas Marketing Company (Delaware)............................ 100
Oasis Pipe Line Company (Delaware)................................. 30
(Channel Gas Marketing Company owns 100% of the issued and
outstanding Series B Preference Stock and 30% of the Common Stock,
30% of total equity; Dow Chemical Company, an unaffiliated company
owns 100% of the issued and outstanding Series A Preference Stock
and 70% of the Common Stock, 70% of total equity.)
Channel Industries Gas Company (Delaware)........................... 100
Tenneco Energy Marketing Company (Delaware)......................... 100
(Tenneco Gas Trading Company and Tenneco Energy Marketing Company
are in the process of being merged into Tenneco Gas Marketing
Company.)
Tenneco Offshore Gathering Company (Delaware)....................... 100
Tenneco Gas Marketing Company (Kentucky)............................ 100
(Tenneco Gas Marketing Company is in the process of changing its
name to Tenneco Energy Marketing Company.)
Creole Gas Pipeline Corporation (Louisiana)........................ 100
Entrade Pipeline Company (Kentucky)................................ 100
Tenneco Gas Processing Company (Delaware)........................... 100
Tenneco Gas Trading Company (Delaware).............................. 100
(Tenneco Gas Trading Company and Tenneco Energy Marketing Company
are in the process of being merged into Tenneco Gas Marketing
Company.)
Tennessee Gas Marketing Company (Delaware).......................... 100
Tenneco Independent Power I Company (Delaware)....................... 100
Tenneco Independent Power II Company (Delaware)...................... 100
Tenneco Insurance Ventures (Delaware)................................ 100
Tenneco Minerals Company--California (Delaware)...................... 100
Tenneco Minerals Company--Nevada (Delaware).......................... 100
Tenneco OCS Company, Inc. (Delaware)................................. 100
Tenneco Oil Company (Delaware)....................................... 100
Tenneco Polymers, Inc. (Delaware).................................... 100
Tenneco Eastern Realty, Inc. (New Jersey)........................... 100
</TABLE>
3
<PAGE>
Subsidiaries of Tenneco Inc.
Subsidiaries of Tennessee Gas Pipeline Company
Subsidiaries of Tenneco Corporation
<TABLE>
<S> <C>
Tenneco Power Generation Company (Delaware)........................... 100
Orange Acquisition, Inc. (Delaware).................................. 100
Orange Cogeneration Limited Partnership (Delaware Limited
Partnership)....................................................... 49.5
(Orange Acquisition, Inc. owns 49.5% as a Limited Partner; CSW
Orange, Inc., an unaffiliated company, owns % as a Limited
Partner; and Orange Cogeneration GP, Inc. owns % as General
Partner.)
Orange Cogeneration GP II, Inc. (Delaware)........................... 50
(Tenneco Power Generation Company owns 50%; and CSW Development-I,
Inc., an unaffiliated company, owns 50%.)
Orange Cogeneration G.P., Inc. (Delaware)........................... 100
Polk Power GP II, Inc. (Delaware).................................... 50
(Tenneco Power Generation Company owns 50% and CSW Development-I,
Inc., an unaffiliated company, owns 50%.)
Polk Power GP, Inc.................................................. 100
Tenneco Ethanol Company (Delaware)................................... 100
Tenneco Ethanol Services Company (Delaware).......................... 100
West Campus Cogeneration Company (Delaware).......................... 100
Tennessee Overthrust Gas Company (Delaware)........................... 100
Overthrust Pipeline Company (Delaware General Partner)............... 18
(Tennessee Overthrust Gas Company owns an 18% general partnership
interest; unaffiliated parties own 82% partnership interest)
Tenneco Deepwater Gathering Company (Delaware)......................... 100
Tenneco Delta XII Gas Co., Inc. (Delaware)............................. 100
Tenneco East Corporation (Delaware).................................... 100
Tenneco East Natural Gas L.P. (Delaware Limited Partnership).......... 99
(Tenneco East Corporation, as Limited Partner, owns 99%; and East
Tennessee Natural Gas Company, as General Partner, owns 1%.)
Tenneco Energy Europe Inc. (Delaware).................................. 100
Tenneco Energy Hungary Inc. (Delaware)................................ 99
Tenneco Energy Ltd. (Canada)........................................... 100
Tenneco Energy Services Company (Delaware)............................. 100
GreyStar Corporation (Texas).......................................... 50
(Tenneco Energy Services Company owns 50%, and unaffiliated parties
own 50%. Tenneco Energy Services Company owns 1,135,294 shares of
Series B Preferred Stock, $0.01 par value per share.)
Tenneco Energy AIRCO Inc. (Delaware).................................. 100
Tenneco Energy OGS Inc. (Delaware).................................... 100
Tenneco Energy TEPSCO Inc. (Delaware)................................. 100
Tenneco Energy Inc. (Delaware)......................................... 100
Tenneco EIS Company (Delaware)........................................ 100
Tenneco EIS Canada Ltd. (Alberta).................................... 100
</TABLE>
4
<PAGE>
Subsidiaries of Tenneco Inc.
Subsidiaries of Tennessee Gas Pipeline Company
Subsidiaries of Tenneco Energy Inc.
<TABLE>
<S> <C>
Tenneco Gas Transportation Company (Delaware)........................ 100
Tenneco Gas Canada, Ltd. (Ontario).................................... 100
Tenneco Gas International Inc. (Delaware)............................. 100
Tenneco Energy China Inc. (Delaware)................................. 100
Tenneco Gas Brazil Corporation (Delaware)............................ 100
Tenneco Gas International Servicos do Brasil Ltda (Brazil).......... 100
Tenneco Gas Chile Corporation (Delaware)............................. 100
Tenneco Energy International (East Asia/Pacific) Inc. (Delaware)..... 100
Tenneco Gas Services (Chile) Corporation (Delaware).................. 100
Tenneco Gas Transportes S.A. (Chile)................................ 100
Tenneco Gas Latin America Inc. (Delaware)............................ 100
Tenneco Gas Louisiana Inc. (Delaware)................................. 100
Martin Exploration Company (Delaware)................................ 100
Tenneco Gas Production Corporation (Delaware)......................... 100
Tenneco Gas Properties Inc. (Delaware)................................ 100
Tenneco Gas Services, Inc. (Delaware)................................. 100
Tenneco Gas Supply Corporation (Delaware)............................. 100
Tenneco Gas Australia Inc. (Delaware)................................. 100
Tenneco Holdings Pty. Ltd. (Australia)............................... 100
Sulawesi Energy Pty Ltd. (Australia)................................ 50
(Upon the acquisition of the Energy Equity subsidiaries
contemplated for the South Sulawesi Project, Tenneco Holdings Pty.
Ltd. will own 50%, and an unaffiliated company will own 50%.)
PT Energi Sengkang (Indonesia)..................................... 95
(Upon the acquisition of the Energy Equity subsidiaries
contemplated for the South Sulawesi Project, Sulawesi Energy Pty.
Ltd. will own 95% and an unaffiliated company will own 5%.)
Tenneco Energy Australia Pty. Limited (Australia)................... 100
Tenneco Energy Queensland Pty. Limited (Australia)................. 100
Tenneco Energy South Australia Pty. Limited (Australia)............ 100
Tenneco Energy Operations and Maintenance Pty. Ltd. (Australia)..... 100
Energy Management Technical Systems Pty. Ltd. (Australia).......... 50
(Upon the acquisition of the Energy Equity subsidiaries
contemplated for the South Sulawesi Project, Tenneco Energy
Operations and Maintenance Pty. Ltd. will own 50%, and an
Unaffiliated company will own 50%.)
Tenneco Sulawesi Gas Pty. Ltd. (Australia).......................... 100
Energy Equity (Sengkang) Pty. Ltd. (Australia)..................... 50
(Upon the acquisition of the Energy Equity subsidiaries
contemplated For the South Sulawesi Project, Tenneco Sulawesi Gas
Pty. Ltd. will own 50%, and an unaffiliated company will own 50%.)
</TABLE>
5
<PAGE>
Subsidiaries of Tenneco Inc.
Subsidiaries of Tennessee Gas Pipeline Company
<TABLE>
<S> <C>
Tenneco International Inc. (Delaware).................................. 100
Tenneco Nederland B.V. (Netherlands).................................. 100
Tenneco Offshore Netherlands Company (Delaware)....................... 100
Tenneco Liquids Corporation (Delaware)................................. 100
Tenneco Marketing Services Company (Delaware).......................... 100
Tenneco MTBE, Inc. (Delaware).......................................... 100
Tenneco Midwest Corporation (Delaware)................................. 100
Tenneco Midwest Natural Gas L.P. (Delaware Limited Partnership)....... 99
(Tenneco Midwest Corporation, as Limited Partner, owns 99%; and
Midwestern Gas Transmission Company, as General Partner, owns 1%.)
Tenneco Pittsfield Corporation (Delaware).............................. 100
Tenneco Portland Corporation (Delaware)................................ 100
Tenneco Realty, Inc. (Delaware)........................................ 100
Tenneco SNG Inc. (Delaware)............................................ 100
Tenneco Trinidad LNG, Inc. (Delaware).................................. 100
Tenneco Ventures Bolivia Corporation (Delaware)........................ 100
Tenneco Ventures Corporation (Delaware)................................ 100
Tenneco Ventures Poland Corporation (Delaware)......................... 100
Tenneco Western Market Center Corporation (Delaware)................... 100
The Western Market Center Joint Venture (Joint Venture)............... 50
(Tenneco Western Market Center Corporation owns 50%; Entech Gas
Ventures, Inc., an unaffiliated company, owns 15%; Questar WMC
Corporation, an unaffiliated company, owns 25%; and Fuels WMC
Corporation, an unaffiliated company, owns 10%.)
Tenneco Western Market Center Service Corporation (Delaware)........... 100
TennEcon Services, Inc. (Delaware)..................................... 100
Tenneco Energy Technology Consulting Services Inc. (Delaware)......... 100
Tennessee Gas Transmission Company (Delaware).......................... 100
Tennessee/New England Pipeline Company (Delaware) (sale pending)....... 100
Tennessee Storage Company (Delaware)................................... 100
Tennessee Trailblazer Gas Company (Delaware)........................... 100
Ten Ten Parking Garage Inc. (Delaware)................................. 100
The Fontanelle Corporation (Louisiana)................................. 100
The F and E Oyster Partnership (Louisiana Partnership)................ 64
(The Fontanelle Corporation owns 64% as General Partner; and Expedite
Oyster, Inc., an unaffiliated company, owns 36% as General Partner.)
The LaChute Corporation (Louisiana).................................... 100
</TABLE>
6
<PAGE>
EXHIBIT F TO
DISTRIBUTION AGREEMENT
AUTOMOTIVE/PACKAGING BUSINESSES
PRO FORMA BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
COMBINED ACQUISITIONS
-----------------------
POST-
ACQUISITIONS TRANSACTION
COMPANY PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL* ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED
---------- ----------- ----------- ------------ ----------- ---------
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and temporary
cash investments...... $ 129 $ 2 $ $ 131 $ 36 (e) $ 205
38 (f)
Receivables............ 829 74 903 (113)(a) 1,044
182 (b)
(48)(c)
120 (d)
Inventories............ 820 46 6 (i) 872 872
Deferred income taxes.. 28 28 28
Other current assets... 196 8 204 (5)(c) 204
5 (e)
------ ---- ---------- ------ ------- ------
Total Current Assets. 2,002 130 6 2,138 215 2,353
------ ---- ---------- ------ ------- ------
Goodwill and
intangibles............ 965 384 (i) 1,349 1,349
Other Assets............ 808 9 817 9 (c) 836
10 (g)
Plant, property and
equipment, net......... 2,748 148 144 (i) 3,040 39 (c) 3,079
------ ---- ---------- ------ ------- ------
Total Assets......... $6,523 $287 $ 534 $7,344 $ 273 $7,617
====== ==== ========== ====== ======= ======
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Short-term debt........ $ 530 $ $ 638 (i) $1,168 $(1,155)(g) $ 13
Payables............... 622 28 650 (23)(a) 629
2 (b)
Other current
liabilities.......... 558 76 634 17 (c) 651
------ ---- ---------- ------ ------- ------
Total Current
Liabilities......... 1,710 104 638 2,452 (1,159) 1,293
------ ---- ---------- ------ ------- ------
Long-term debt.......... 1,573 1 1,574 558 (g) 2,132
Deferred income taxes... 451 (5)(i) 446 13 (b) 459
Deferred credits and
other liabilities...... 320 53 30 (i) 403 41 (e) 444
Minority interest....... 301 301 301
------ ---- ---------- ------ ------- ------
Total Liabilities.... 4,355 158 663 5,176 (547) 4,629
------ ---- ---------- ------ ------- ------
Equity:
Combined equity........ 2,168 129 (129)(i) 2,168 (90)(a) --
167 (b)
(22)(c)
120 (d)
38 (f)
607 (g)
(2,988)(h)
Common Stock........... -- -- -- 2 (h) 2
Paid-in Capital........ -- -- -- 2,986 (h) 2,986
Retained Earnings...... -- -- -- -- (h) --
------ ---- ---------- ------ ------- ------
Total Liabilities and
Equity.............. $6,523 $287 $ 534 $7,344 $ 273 $7,617
====== ==== ========== ====== ======= ======
</TABLE>
- --------
* Certain amounts have been reclassified to conform to the Company's
classification.
See the accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
1
<PAGE>
AUTOMOTIVE/PACKAGING BUSINESSES
NOTES TO PRO FORMA BALANCE SHEET
(a) To reflect the settlement or capitalization of intercompany accounts
receivable and payable with Tenneco affiliates pursuant to the Corporate
Restructuring Transactions.
(b) To reflect the acquisition by the Company of certain receivables from
Tenneco Credit Corporation, a Tenneco affiliate, in connection with the
Merger.
(c) To reflect the allocation between the Company, Newport News and Tenneco of
certain corporate assets and liabilities in connection with the Corporate
Restructuring Transactions, the Distributions and the Merger.
(d) To reflect a $120 million receivable from El Paso pursuant to the Merger
Agreement and Distribution Agreement for certain tax benefits to be
realized as a result of the Debt Realignment.
(e) To reflect the transfer to the Company of insurance liabilities and the
related portfolio of short-term cash investments and other assets
previously held by Eastern Insurance Company Limited, a Tenneco affiliate,
in connection with the Corporate Restructuring Transactions and the
Merger.
(f) To reflect the cash contribution from Tenneco to the Company pursuant to
the Cash Realignment provisions of the Distribution Agreement and Merger
Agreement. The contribution of cash between Tenneco and the Company as
part of the Cash Realignment may be adjusted by the sale of Energy
Business receivables prior to the Merger Effective Time.
(g) To reflect adjustments to the Company's indebtedness for the pre-
Distribution restructuring and refinancing of debt pursuant to the Debt
Realignment. If the Debt Realignment had been consummated on June 30,
1996, on a pro forma basis, the Company would have had total long-term
debt of $2,132 million, and short-term debt of $13 million. The total pro
forma long-term debt includes $2,069 million of Company Public Debt
($1,950 million aggregate principal amount) assumed to be exchanged in the
Debt Exchange Offers, which will be recorded based on the fair values of
the Company Public Debt, and $63 million of long-term debt of Company
subsidiaries. At this time, the Company and Tenneco cannot determine the
ultimate amount of Tenneco Public Debt which will be exchanged by the
applicable Tenneco Public Debt holders into Company Public Debt pursuant
to the Debt Exchange Offers and such amount could vary significantly. For
purposes of these pro forma adjustments, it is assumed that 100% of the
Tenneco Public Debt subject to the Debt Exchange Offers will be exchanged
for Company Public Debt pursuant to the Debt Exchange Offers. Tenneco
expects to incur an extraordinary charge as a result of the Debt
Realignment. Tenneco estimates that this cost will be approximately $300
million after-tax based on current market rates of interest. Certain other
costs will also be incurred in connection with the Corporate Restructuring
Transactions and the Distributions which Tenneco estimates will be
approximately $100 million after tax. The effect on the Company's debt of
these costs has been reflected in this pro forma adjustment. However, such
charges have not been reflected in the pro forma income statement.
(h) To reflect the distribution of Company Common Stock to the holders of
Tenneco Common Stock at an exchange ratio of one share of Company Common
Stock for each share of Tenneco Common Stock.
(i) To reflect short-term debt issued to complete the Combined Acquisitions
and the preliminary allocation of purchase price to the assets acquired
and liabilities assumed related to the Combined Acquisitions. These
purchase accounting adjustments for Clevite and Amoco Foam Products are
based on preliminary estimates of fair values and will be adjusted when
more complete evaluations of fair values are received. The preliminary
allocations have been made solely for purposes of developing these
Unaudited Pro Forma Combined Financial Statements.
2
<PAGE>
EXHIBIT G
TO
DISTRIBUTION AGREEMENT
INDUSTRIAL SUBSIDIARIES
<TABLE>
<S> <C>
Subsidiaries of Industrial Company
Autopartes Walker, S.A. de C.V. (Mexico)............................. 99.98%
(Industrial Company owns 99.98% and Monroe Auto Equipment Company
owns .02%)
Counce Limited Partnership (Texas Limited Partnership)............... 95
(Industrial Company owns 95%, as Limited Partner; and Tenneco
Packaging, Inc. owns 5%, as General Partner)
Counce Finance Corporation (Delaware).............................. 100
Deline Box & Display, Inc. (Delaware)................................ 100
Monroe Auto Equipment Company (Delaware)............................. 100
Autopartes Walker, S.A. de C.V. (Mexico)........................... 0.02
(Industrial Company owns 99.98%; Monroe Auto Equipment Company
owns 0.02%)
Beijing Monroe Automobile Shock Absorber Company Ltd (China)....... 51
(Monroe Auto Equipment Company owns 51%; and Beijing Automotive
Industry Corporation, an unaffiliated company, owns 49%)
Consorcio Terranova S.A. de C.V. (Mexico)
(Monroe Auto Equipment Company owns 99.99%; and Josan
Latinamericana S.A. de C.V., an unaffiliated company, owns 0.01%)
McPherson Strut Company Inc. (Delaware)............................ 100
Monroe Auto Equipement France, S.A. (France)....................... 100
Monroe Europe Coordination Center N.V. (Belgium)................. 0.1
(S.A. Monroe Europe N.V. owns 99.9%; and Monroe Auto Equipement
France, S.A. owns 0.1%)
Monroe Packaging N.V. (Belgium).................................. 0.1
(S.A. Monroe Europe N.V. owns 99.9%; and Monroe Auto Equipement
France, S.A. owns 0.1%)
Tenneco Automotive Italia S.r.l. (Italy)......................... 15
(Monroe Auto Equipment Company owns 85%; and Monroe Auto
Equipement France, S.A. owns 15%)
Monroe Auto Pecas S.A. (Brazil).................................... 2.82
(Monroe Auto Equipment Company owns 2.82%; Monroe do Brasil
Industria e Comercio Ltda. Owns 82.71%; and Monteiro Aranha S/A,
an unaffiliated company, owns 14.47%)
Monroe-Mexico S.A. de C.V. (Mexico)................................ 99.99
(Monroe Auto Equipment Company owns 99.99%; and Industrial
Company owns 0.01%)
Precision Modular Assembly Corp. (Delaware)........................ 100
Rancho Industries Europe B.V. (Netherlands)........................ 100
Tenneco Automotive Foreign Sales Corporation Limited (Jamaica)..... 99
(Monroe Auto Equipment Company owns 99%; and Industrial Company
owns 1%)
Tenneco Automotive International Sales Corporation (Delaware) (In
Dissolution)...................................................... 100
Tenneco Automotive Italia S.r.l. (Italy)........................... 85
(Monroe Auto Equipment Company owns 85%; and Monroe Auto
Equipement France, S.A. owns 15%)
Tenneco Automotive Japan Ltd. (Japan).............................. 100
Monroe-Mexico S.A. de C.V. (Mexico).................................. 0.01
(Industrial Company owns 0.01%; and Monroe Auto Equipment Company
owns 99.99%)
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Subsidiaries of Industrial Company
Omni-Pac GmbH (Germany)............................................... 1
(Tenneco Deutschland Holdinggesellschaft mbH owns 99%; and
Industrial Company owns 1%)
Omni-Pac S.A.R.L. (France)............................................ 97
(Omni-Pac GmbH owns 3%; and Industrial Company owns 97%)
Tenneco Asia Inc. (Delaware).......................................... 100
Tenneco Automotive Foreign Sales Corporation Limited (Jamaica)...... 1
(Industrial Company owns 1%; and Monroe Auto Equipment Company owns
99%)
Tenneco Automotive Trading Company (Delaware)......................... 100
Tenneco Brake, Inc. (Delaware)........................................ 100
Tenneco Brazil Ltda. (Brazil)......................................... 100
Monroe do Brazil Industria e Comercio Ltda. (Brazil)................ 100
Monroe Auto Pecas S.A. (Brazil)..................................... 82.71
(Monroe do Brazil Industria e Comercio Ltda. Owns 82.71%; Monroe
Auto Equipment Company owns 2.82%; and Monteiro Aranha S/A, an
unaffiliated company owns 14.47%)
Tenneco Business Services Inc. (Delaware)............................. 100
Tenneco Technology Services Inc. (Delaware)......................... 100
Tenneco Deutschland Holdinggesellschaft mbH (Germany)................. 99.97
(Industrial Company owns 99.97%; and Atlas Bermoegensverwaltung, an
unaffiliated company, owns 0.03%)
GILLET Unternehmesverwaltungs (Germany)............................. 100
Heinrich Gillet GmbH & Co. KG (Germany)........................... 0.1
(GILLET Unternehmesverwaltungs GmbH owns 0.1%; and Tenneco
Deutschland Holdinggesellschaft mbH owns 99.9%)
Heinrich Gillet GmbH & Co. KG (Germany)............................. 99.9
(Tenneco Deutschland Holdinggesellschaft mbH owns 99.9%; and
GILLET Unternehmesverwaltungs GmbH owns 0.1%)
Gillet-Abgassysteme Zwickau Gmbh (Germany)........................ 100
Mastra-Gillet Industria e Comercio Ltda. (Brazil)................. 50
(Heinrich Gillet GmbH & Co. KG owns 50%; and Mastra Industria e
Comercio Ltda., an unaffiliated company, owns 50%)
Monroe Auto Equipment GmbH (Germany)................................ 100
Omni-Pac Ekco GmbH Verpackungsmittel (Germany)...................... 100
Omni-Pac Poland Sp. z o.o. (Poland)............................... 100
PCA Embalajes Espana, S.L. (Spain)................................ 1
(Omni-Pac Ekco GmbH Verpackungsmittel owns 1%; and PCA
Verpackungsmittel GmbH owns 99%)
Omni-Pac GmbH (Germany)............................................. 99
(Tenneco Deutschland Holdinggesellschaft mbH owns 99%; and
Industrial Company owns 1%)
Omni-Pac ApS (Denmark)............................................ 100
Omni-Pac A.B. (Sweden)............................................ 100
Omni-Pac S.A.R.L. (France)........................................ 3
(Omni-Pac GmbH owns 3%; and Industrial Company owns 97%)
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Subsidiaries of Industrial Company
Subsidiaries of Tenneco Deutschland Holdinggesellschaft mbH
Walker Deutschland GmbH (Germany).................................... 99
(Tenneco Deutschland Holdinggesellschaft mbH owns 99%; and Industrial
Company
owns 1%)
Walker Gillet (Europe) GmbH (Germany)................................ 100
Tenneco Hexacomb Acquisition Inv. (Delaware)........................... 100
Tenneco Inc. (Nevada).................................................. 100
Tenneco International Holding Corp. (Delaware)......................... 100
Monroe Australia Pty. Limited (Australia)............................ 100
Monroe Springs (Australia) Pty. Ltd. Australia).................... 100
Monroe Superannuation Pty. Ltd. (Australia)........................ 100
Walker Australia Pty. Limited (Australia).......................... 100
S.A. Monroe Europe N.V. (Belgium).................................... 100
Borusan Amortisor Imalat Ve Ticaret A.S. (Turkey).................. 16.67
(S.A. Monroe Europe N.V. owns 16.67%; Borusan Holding AS, an
unaffiliated company, owns 83.03%; and various unaffiliated
individual stockholders own 0.3%)
Monroe Europe Coordination Center N.V. (Belgium)................... 99.9
(S.A. Monroe Europe N.V. owns 99.9%; and Monroe Auto Equipement
France, S.A. owns 0.1%)
Monroe Europe (UK) Limited (United Kingdom)........................ 18
(S.A. Monroe Europe N.V. owns 18%; and Tenneco United Kingdom
Holdings Limited owns 82%)
Monroe Packaging N.V. (Belgium).................................... 99.9
(S.A. Monroe Europe N.V. owns 99.9%; and Monroe Auto Equipement
France, S.A. owns 0.1%)
Tenneco Canada Inc. (Ontario)........................................ 51.28
(Tenneco International Holding Corp. Owns 100% of the issued and
outstanding Common Stock, 51.28% of total equity; and Tenneco
United Kingdom Holdings Limited owns 100% of the Class A Stock,
48.72% of total equity)
98174 Ontario Limited (Ontario).................................... 100
Tenneco Canada Wholesale Finance Company (Alberta)................. 100
Tenneco Credit Canada Corporation (Alberta)........................ 100
Tenneco Espana Holdings, Inc. (Delaware)............................. 100
Monroe Springs (New Zealand) Pty. Ltd. (New Zealand)............... 100
Tenneco Espana S.A. (Spain)...................................... 100
Gillet Iberica, S.A. (Spain)..................................... 100
Manufacturas Fonos, S.L. (Spain)................................. 100
Omni-Pac Embalajes S.A. (Spain).................................. 100
Thibault Investments Limited (Mauritius)........................... 100
Hydraulics Limited (India)....................................... 51
(Thibault Investments Limited owns 51% and Bangalore Union
Services Limited, an unaffiliated company, owns 49%)
Tenneco Holdings Danmark A/S (Denmark)............................... 100
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Subsidiaries of Industrial Company
Subsidiaries of Tenneco International Holding Corp.
Subsidiaries of Tenneco Holdings Danmark A/S
Gillet Exhaust Technologie (Proprietary) Limited (South Africa)....... 100
Gillet Lazne Belohrad, s.r.o. (Republic of Czechoslovakia)............ 100
Heinrich Gillet Portuguesa--Sistemas de Escape, Lda. (Portugal)....... 100
Walker Danmark A/S (Denmark).......................................... 100
Walker Inapal Escapes, S.A. (Portugal)................................ 90
(Tenneco Holdings Danmark A/S owns 90%; Inapal, Industria Nacional
de Acessorios Para Automoveis, SA, an unaffiliated company, owns
9.99%; and Walker Danmark A/S owns 0.01%)
Walker France S.A. (France)............................................... 100
Constructions Metallurgiques de Wissembourg--Wimetal (France)......... 100
Societe Europeenne des Ensembles-Montes (France).................... 100
Gillet Tubes Technologies G.T.T. (France)............................. 100
Walker Sverige A.B. (Sweden)............................................ 100
Tenneco Management Company (Delaware)..................................... 100
Tenneco Packaging Inc. (Delaware)......................................... 100
A&E Plastics, Inc. (Delaware)........................................... 100
Alupak A.G. (Switzerland)............................................... 100
American Cellulose Corporation (Delaware)............................... 50
(Tenneco Packaging Inc. owns 50%; and Larry E. Homan, an unaffiliated
individual,
owns 50%)
The Corinth and Counce Railroad Company (Mississippi)................... 100
Marinette, Tomahawk & Western Railroad Company (Wisconsin)............ 100
Valdosta Southern Railroad Company (Florida).......................... 100
Counce Limited Partnership (Texas Limited Partnership).................. 5
(Industrial Company owns 95%, as Limited Partner; and Tenneco
Packaging Inc. owns 5%, as General Partner)
Dahlonega Packaging Corporation (Delaware).............................. 100
Dixie Container Corporation (Virginia).................................. 100
Dixie Convoy Corporation (North Carolina)............................... 100
Dongguan PCA Packaging Co., Ltd. (Peoples Republic of China)............ 50
(Tenneco Packaging Inc. owns 50%; and Dongguan Dong Ya Color Printing
& Packaging Factory, an unaffiliated company, owns 50%)
EKCO Products, Inc. (Illinois).......................................... 100
E-Z Por Corporation (Delaware).......................................... 100
Hexacomb Corporation (Illinois)......................................... 100
Hexacomb International Sales Corporation (U.S. Virgin Islands)........ 100
Packaging Corporation of America (Nevada)............................... 100
PCA Box Company (Delaware).............................................. 100
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Subsidiaries of Industrial Company
Subsidiaries of Tenneco Packaging Inc.
PCA-Budafok (Kartongyar) Kft. (Hungary).............................. 100
PCA Hydro, Inc. (Delaware)........................................... 100
PCA Leasing Company (Delaware)....................................... 100
PCA Romania Srl (Romania)............................................ 50
(Tenneco Packaging Inc. owns 50%; and Kraftcorr Inc., an
unaffiliated company owns 50%)
PCA Tomahawk Corporation (Delaware).................................. 100
PCA Valdosta Corporation (Delaware).................................. 100
PCA Verpackungsmittel GmbH (Germany)................................. 100
PCA Embalajes Espana S.L. (Spain).................................. 99
(PCA Verpackungsmittel GmbH owns 99%; and Omni-Pac Ekco GmbH
Verpackungsmittel owns 1%)
PCA West Inc. (Delaware)............................................. 100
Coast-Packaging Company (California General Partnership)........... 50
(PCA West Inc. owns 50%, as General Partner; and J. G. Haddy
Sales Company, an unaffiliated company, owns 50%, as General
Partner)
Pressware International, Inc. (Delaware)............................. 100
Revere Foil Containers, Inc. (Delaware).............................. 100
Tenneco Packaging-Romania S.R.L. (Romania)........................... 100
Tenneco Plastics Company (Delaware).................................. 100
798795 Ontario Limited (Ontario)..................................... 100
PCA Canada Inc. (Ontario).......................................... 100
Tenneco Romania Holdings Inc. (Delaware)............................... 100
Tenneco United Kingdom Holdings Limited (Delaware)..................... 100
Monroe Europe (UK) Limited (United Kingdom).......................... 82
(Tenneco United Holdings Limited owns 82%; and S.A. Monroe Europe
N.V.
owns 18%)
Omni-Pac U.K. Limited (United Kingdom)............................... 100
Packaging Corporation of America (UK) Limited (Scotland)............. 100
Alpha Products (Bristol Limited) (United Kingdom).................. 100
Calendered Plastics Limited (United Kingdom)....................... 100
Delyn Packaging Limited (United Kingdom)........................... 100
Penlea Plastics Limited (United Kingdom)........................... 100
Polbeth Packaging Limited (Scotland)............................... 100
Brucefield Plastics Limited (Scotland)........................... 100
Polbeth Packaging (Corby) Limited (Scotland)..................... 100
Tenneco Canada Inc. (Ontario)........................................ 48.72
(Tenneco United Kingdom Holdings Limited owns 100% of the Class A
Stock, 48.72% of total equity; and Tenneco International Holding
Corporation owns 100% of the issued and outstanding common stock,
51.28% of total equity)
Tenneco Europe Limited (Delaware).................................... 100
Tenneco Asia Limited (United Kingdom).............................. 100
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Subsidiaries of Industrial Company
Subsidiaries of Tenneco United Kingdom Holdings Limited
Tenneco International Finance Limited (United Kingdom)............... 100
Tenneco International Finance B.V. (Netherlands)................... 100
Tenneco Management (Europe) Limited (United Kingdom)................. 100
Tenneco Packaging (UK) Limited (United (Kingdom)..................... 100
Tenneco West Limited (United Kingdom)................................ 100
Thompson and Stammers Dunmow (Number 6) Limited (United Kingdom)..... 100
Thompson and Stammers Dunmow (Number 7) Limited (United Kingdom)..... 100
Thompson and Stammers Dunmow (Number 8) Limited (United Kingdom)..... 100
Walker Limited (United Kingdom)...................................... 100
Gillet Exhaust Manufacturing Limited (United Kingdom).............. 100
Gillet Pressings Cardiff Limited (United Kingdom).................. 100
Gillet Torsmaskiner UK Limited (United Kingdom).................... 50
(Walker Limited owns 100 A Ordinary Shares, 50% of total equity;
and AB Torsmaskiner, an unaffiliated company, owns 100 B Ordinary
Shares, 50% of total equity)
Exhaust Systems Technology Limited (United Kingdom).............. 99.99
(Gillet Torsmaskiner UK Limited owns 99.99%; and Heinrich Gillet
Gmbh & Co. KG & AB Torsmaskiner, an unaffiliated company owns
0.01%)
Walker UK Ltd. (United Kingdom).................................... 100
J.W. Hartley (Motor Trade) Limited (United Kingdom).............. 100
Tenneco--Walker (UK) Limited (United Kingdom).................... 100
Walker Deutschland GmbH (Germany)...................................... 1
(Industrial Company owns 1%; and Tenneco Deutschland
Holdinggesellsschaft mbH owns 99%) Walker Europe, Inc. (Delaware).... 100
Walker Electronic Mufflers, Inc. (Delaware)............................ 100
Walker Noise Cancellation Technologies (New York Partnership)........ 100
(Walker Electronic Mufflers, Inc. owns 50% as General Partner; and
Expedite Oyster, Inc., an unaffiliated company, owns 50% as General
Partner)
Walker Manufacturing Company (Delaware)................................ 100
Ced's Inc. (Illinois)................................................ 100
Walker Norge A/S (Norway).............................................. 100
</TABLE>
6
<PAGE>
EXHIBIT 10.3
EXHIBIT H
TO
DISTRIBUTION AGREEMENT
INSURANCE AGREEMENT
This Insurance Agreement (the "AGREEMENT") is made and entered into as of
this day of , 1996, by and among Tenneco Inc., a Delaware
corporation ("TENNECO"), New Tenneco Inc., a Delaware corporation ("INDUSTRIAL
COMPANY") and Newport News Shipbuilding Inc., a Delaware corporation
("SHIPBUILDING COMPANY").
WHEREAS, Tenneco, Industrial Company and Shipbuilding Company have entered
into that certain Distribution Agreement, dated as of , 1996
(the "DISTRIBUTION AGREEMENT"), pursuant to which (i) Tenneco and its
Subsidiaries shall cause to be consummated the Corporate Restructuring
Transactions in order to restructure, divide and separate their existing
businesses and assets so that (a) the Industrial Assets and Industrial
Business shall be owned, controlled and operated, directly or indirectly, by
the Industrial Company, and (b) the Shipbuilding Assets and Shipbuilding
Business shall be owned, controlled and operated, directly or indirectly, by
the Shipbuilding Company, and (ii) Tenneco shall distribute on the
Distribution Date all of the outstanding capital stock of Industrial Company
and Shipbuilding Company as a dividend to the holders of shares of the common
stock, par value $5.00 per share, of Tenneco upon the terms and subject to the
conditions set forth in the Distribution Agreement;
WHEREAS, Tenneco, its Subsidiaries and their respective predecessors have
historically maintained various Policies for the benefit or protection of one
or more of the Energy Covered Persons, Industrial Covered Persons and
Shipbuilding Covered Persons;
WHEREAS, in connection with the transactions contemplated by the
Distribution Agreement, Tenneco, Industrial Company and Shipbuilding Company
have determined that it is necessary and desirable to provide for the
respective continuing rights and obligations in respect of said Policies from
and after the Distribution Date; and
WHEREAS, pursuant to the Distribution Agreement the parties hereto have
agreed to enter into this Agreement.
NOW THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement and the Distribution Agreement, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 General. Unless otherwise defined herein or unless the context otherwise
requires, the following terms shall have the following meanings (such meanings
to be equally applicable to both the singular and plural forms of the terms
defined).
"AGREEMENT" shall mean this Insurance Agreement, dated as of , 1996,
by and among Tenneco, Industrial Company and Shipbuilding Company, including
any amendments hereto and each Schedule attached hereto.
"CLAIMS ADMINISTRATION" shall mean, with respect to any Policy, the
processing of claims made under such Policy, including, without limitation,
the reporting of losses or claims to insurance carriers and the management,
defense and settlement of claims.
1
<PAGE>
"CLAIMS DEPOSIT" shall mean the amount of funds, as of the Distribution
Date, maintained by Tenneco on deposit for the benefit of the insurance
carriers under the Retained Policies.
"CLAIMS-MADE" shall mean, with respect to any Policy, coverage provided by
such Policy for claims made during a period specified therein.
"CLAIMS-MADE POLICIES" shall mean those current and past Policies which are
Claims-Made in nature, including but not limited to those Policies identified
on SCHEDULE A hereto, which show Tenneco or any of its predecessors as the
named insured, but excluding (i) any directors' and officers' liability
insurance policies which are or were maintained by or on behalf of Tenneco,
(ii) the Exclusive Policies, and (iii) the Retained Policies.
"COMMON POLICIES" shall mean the Claims-Made Policies, Occurrence-Based
Policies, Eastern Policies and Retained Policies.
"CONSENT" shall have the meaning set forth in Section 2.3 hereof.
"CORPORATE RESTRUCTURING TRANSACTIONS" shall have the meaning set forth in
the Distribution Agreement.
"COVERED PERSONS" shall mean (i) with respect to Tenneco, the Energy Covered
Persons, (ii) with respect to Industrial Company, the Industrial Covered
Persons, and (iii) with respect to Shipbuilding Company, the Shipbuilding
Covered Persons.
"CURRENT CLAIMS-MADE POLICIES" shall mean the Claims-Made Policies in effect
as of the Distribution Date, which Policies are set forth on SCHEDULE A
hereto.
"CURRENT OCCURRENCE-BASED POLICIES" shall mean the Occurrence-Based Policies
in effect as of the Distribution Date, which Policies are set forth on
SCHEDULE B hereto.
"DISTRIBUTION AGREEMENT" shall mean that certain Distribution Agreement,
dated as of , 1996, by and among Tenneco, Industrial Company and
Shipbuilding Company, including any amendments, exhibits and schedules
thereto.
"DISTRIBUTION DATE" shall have the meaning set forth in the Distribution
Agreement.
"EASTERN POLICIES" shall mean the Policies identified on SCHEDULE C hereto,
which Policies show a member of the Energy Group as the named insured,
together with any predecessor policies thereto.
"ENERGY" shall mean, when unqualified, the Energy Assets, Energy Liabilities
and/or Energy Business.
"ENERGY BUSINESS" shall have the meaning set forth in the Distribution
Agreement.
"ENERGY COVERED PERSON" shall mean each member of the Energy Group and any
other Person, in each case to the extent any Policy addressed herein purports
to provide insurance coverage in respect of any claims, suits, actions,
proceedings, injuries, losses, liabilities, occurrences, damages or expenses
incurred by such Person arising out of, in connection with or otherwise
related to Energy.
"ENERGY GROUP" shall have the meaning set forth in the Distribution
Agreement.
"ENERGY LIABILITIES" shall have the meaning set forth in the Distribution
Agreement.
"EXCLUSIVE POLICIES" shall mean the Tenneco Exclusive Policies, Industrial
Exclusive Policies and Shipbuilding Exclusive Policies.
"GROUP" shall have the meaning set forth in the Distribution Agreement.
2
<PAGE>
"INDUSTRIAL" shall mean, when unqualified, the Industrial Assets, Industrial
Liabilities, Prior Industrial Businesses and/or Industrial Business.
"INDUSTRIAL ASSETS" shall have the meaning set forth in the Distribution
Agreement.
"INDUSTRIAL BUSINESS" shall have the meaning set forth in the Distribution
Agreement.
"INDUSTRIAL COVERED PERSON" shall mean each member of the Industrial Group
and any other Person, in each case to the extent any Policy addressed herein
purports to provide insurance coverage in respect of any claims, suits,
actions, proceedings, injuries, losses, liabilities, occurrences, damages or
expenses incurred by such Person arising out of, in connection with or
otherwise related to Industrial.
"INDUSTRIAL EXCLUSIVE POLICIES" shall mean all current and past Policies
which show Industrial Company, any other member of the Industrial Group or any
of their respective predecessors as the named insured and do not purport to
relate to Energy or Shipbuilding or to cover any Energy Covered Person or
Shipbuilding Covered Person, but excluding any Retained Policy.
"INDUSTRIAL GROUP" shall have the meaning set forth in the Distribution
Agreement.
"INDUSTRIAL LIABILITIES" shall have the meaning set forth in the
Distribution Agreement.
"INSURANCE ADMINISTRATION" shall mean, with respect to any Policy, the
accounting for premiums, defense costs, indemnity payments, deductibles and
retentions, as appropriate, under the terms and conditions of such Policy, and
the distribution of Insurance Proceeds.
"INSURANCE PROCEEDS" shall mean those monies, net of any applicable premium
adjustment, deductible, retention or similar cost paid or held by or for the
benefit of an insured party which are either (i) received by an insured from
an insurance carrier, or (ii) paid by an insurance carrier on behalf of an
insured.
"LETTERS OF CREDIT" shall have the meaning set forth in Section 7.1 hereof.
"MERGER AGREEMENT" shall have the meaning set forth in the Distribution
Agreement.
"OCCURRENCE-BASED" shall mean, with respect to any Policy, coverage provided
by such Policy for acts, omissions, damages or injuries which occur or are
alleged to have occurred during a period specified in such Policy.
"OCCURRENCE-BASED POLICIES" shall mean those current and past Policies which
are Occurrence-Based in nature, including but not limited to those policies
identified on SCHEDULE B hereto, which show Tenneco or any of its predecessors
as the named insured, but excluding (i) any directors' and officers' liability
policies which are or were maintained by or on behalf of Tenneco, (ii) the
Exclusive Policies, (iii) the Retained Policies, and (iv) the Eastern
Policies.
"OTHER CLAIMS-MADE POLICIES" shall mean the Claims-Made Policies other than
the Transferred Claims-Made Policies.
"OTHER OCCURRENCE-BASED POLICIES" shall mean the Occurrence-Based Policies
other than the Transferred Occurrence-Based Policies.
"PERSON" shall have the meaning set forth in the Distribution Agreement.
"POLICIES" means insurance policies and insurance contracts of any kind
(other than life and benefits policies or contracts), including, without
limitation, primary, excess and umbrella policies, commercial general
liability policies, fiduciary liability, automobile, aircraft, property and
casualty, workers' compensation and employee dishonesty insurance policies,
bond and self-insurance and captive insurance company arrangements, together
with the rights, benefits and privileges thereunder.
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"PRIOR INDUSTRIAL BUSINESSES" shall have the meaning set forth in the
Distribution Agreement.
"PRIOR SHIPBUILDING BUSINESSES" shall have the meaning set forth in the
Distribution Agreement.
"RETAINED POLICIES" shall mean the Policies identified on SCHEDULE D hereto,
together with all other current and past primary, workers' compensation,
automobile liability and general liability (including products liability)
Policies showing Tenneco, any other member of the Energy Group or any of their
respective predecessors as the insured party and which are cost plus,
fronting, high deductible or retrospective premium programs but excluding the
Eastern Policies.
"SHIPBUILDING" shall mean, when unqualified, the Shipbuilding Assets,
Shipbuilding Liabilities, Prior Shipbuilding Businesses and/or Shipbuilding
Business.
"SHIPBUILDING ASSETS" shall have the meaning set forth in the Distribution
Agreement.
"SHIPBUILDING BUSINESS" shall have the meaning set forth in the Distribution
Agreement.
"SHIPBUILDING COVERED PERSON" shall mean each member of the Shipbuilding
Group and any other Person, in each case to the extent any Policy addressed
herein purports to provide insurance coverage in respect of any claims, suits,
actions, proceedings, injuries, losses, liabilities, occurrences, damages or
expenses incurred by such Person arising out of, in connection with or
otherwise related to Shipbuilding.
"SHIPBUILDING EXCLUSIVE POLICIES" shall mean all current and past Policies
which show Shipbuilding Company, any other member of the Shipbuilding Group or
any of their respective predecessors as the named insured and do not purport
to relate to Energy or Industrial or to cover any Energy Covered Person or
Industrial Covered Person, but excluding any Retained Policy.
"SHIPBUILDING GROUP" shall have the meaning set forth in the Distribution
Agreement.
"SHIPBUILDING LIABILITIES" shall have the meaning set forth in the
Distribution Agreement.
"SUBSIDIARY" shall have the meaning set forth in the Distribution Agreement.
"TENNECO EXCLUSIVE POLICIES" shall mean all current and past Policies,
including but not limited to the current Policies set forth on SCHEDULE E
hereto, which show Tenneco, any other member of the Energy Group or any of
their respective predecessors as the named insured and do not purport to
relate to Shipbuilding or Industrial or to cover any Shipbuilding Covered
Person or Industrial Covered Person, excluding (i) any directors' and
officers' liability policies which are or were maintained by or on behalf of
Tenneco, and (ii) any Retained Policy.
"TERMINATION TIME" shall mean 11:59 p.m., Houston, Texas time, on the
Distribution Date.
"TRANSFERRED CLAIMS-MADE POLICIES" shall have the meaning set forth in
Section 2.2 hereof.
"TRANSFERRED OCCURRENCE-BASED POLICIES" shall have the meaning set forth in
Section 2.1 hereof.
"TRANSFERRED POLICIES" shall have the meaning set forth in Section 2.3
hereof.
1.2 References. References herein to a "Schedule" are, unless otherwise
specified, to one of the Schedules attached to this Agreement, and references
to an "Article" or a "Section" are, unless otherwise specified, to one of the
Articles or Sections, respectively, of this Agreement.
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ARTICLE II
SUBSTITUTION OF NAMED INSUREDS AND CANCELLATION OF POLICIES
2.1 Current Occurrence-Based Policies. On or prior to the Distribution Date,
Tenneco shall take or cause to be taken all necessary or appropriate action
(i) so that the Industrial Company is substituted as the named insured under
those Current Occurrence-Based Policies identified on SCHEDULE 2.1-A hereto
(the "TRANSFERRED OCCURRENCE-BASED POLICIES"), effective as of the Termination
Time, and (ii) to cause the Current Occurrence-Based Policies identified on
SCHEDULE 2.1-B hereto to be cancelled as of, and to afford no further coverage
to the insureds thereunder except as otherwise contemplated by this Agreement
from and after, the Termination Time. Industrial Company agrees to be
substituted as a named insured under the Transferred Occurrence-Based Policies
and to execute such further documents as Tenneco may reasonably request in
connection therewith.
2.2 Current Claims-Made Policies. On or prior to the Distribution Date,
Tenneco shall take or cause to be taken all necessary or appropriate action
(i) so that the Industrial Company is substituted as the named insured under
those Current Claims-Made Policies identified on SCHEDULE 2.2-A hereto (the
"TRANSFERRED CLAIMS-MADE POLICIES"), effective as of the Termination Time, and
(ii) to cause the Current Claims-Made Policies identified on SCHEDULE 2.2-B
hereto to be cancelled as of, and to afford no further coverage to the
insureds thereunder except as otherwise contemplated by this Agreement from
and after, the Termination Time. Industrial Company agrees to be substituted
as a named insured under the Transferred Claims-Made Policies and to execute
such further documents as Tenneco may reasonably request in connection
therewith.
2.3 Consent. Tenneco and Industrial Company shall each use its best efforts
to obtain prior to the Distribution Date the consent of each insurance carrier
under the Transferred Occurrence-Based Policies and the Transferred Claims-
Made Policies (collectively, the "TRANSFERRED POLICIES") that is required to
consummate the transactions contemplated by Sections 2.1 and 2.2 hereof (each,
a "CONSENT"), it being understood that if Consent to such transactions is not
received as contemplated by this Section 2.3 with respect to any Policy, such
Policy shall nonetheless be considered and treated as a Transferred Claims-
Made Policy or Transferred Occurrence-Based Policy, as the case may be, for
purposes of this Agreement.
2.4 No Transfer of Certain Policies. Notwithstanding anything in this
Agreement to the contrary, this Agreement shall not constitute an agreement to
substitute Industrial Company as the named insured under any Transferred
Policy without Consent thereto if such substitution or attempt to substitute
without such Consent would constitute a breach of such Transferred Policy. If
Consent to such substitution is not obtained prior to the Distribution Date,
Tenneco and Industrial Company agree to negotiate in good faith an arrangement
which shall place the Industrial Company, insofar as reasonably possible, in
the same position as would have existed had such Consent to substitution been
obtained prior to the Distribution Date.
ARTICLE III
COVERAGE
3.1 Maintenance of Coverage Through Distribution Date. From the date hereof
up to the Termination Time, the parties hereto agree to maintain (and to cause
each member of their respective Groups over which they have legal or effective
direct or indirect control to maintain) in full force and effect the
Occurrence-Based Policies, Claims-Made Policies, Eastern Policies and Retained
Policies for the benefit of any Energy Covered Person, Industrial Covered
Person and Shipbuilding Covered Person to which such Policies by their terms
relate.
3.2 Coverage Under Occurrence-Based Policies.
(a) Termination of Coverage Under Transferred Occurrence-Based Policies. The
parties hereto agree to take or cause to be taken all necessary or appropriate
action so that, notwithstanding anything to the contrary contained in any
Transferred Occurrence-Based Policy, effective as of the Termination Time
coverage under the Transferred Occurrence-Based Policies shall be terminated
(it being understood that such Transferred
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Occurrence-Based Policies shall nonetheless remain in full force and effect)
so that none of the Transferred Occurrence-Based Policies shall afford any
further coverage to any Energy Covered Person or Shipbuilding Covered Person
for occurrences which take place or are alleged to have taken place after the
Termination Time. From and after the Termination Time, coverage under any
Transferred Occurrence-Based Policy may, at the option of Industrial Company,
continue for any Industrial Covered Person upon the terms and conditions of
such Transferred Occurrence-Based Policy.
(b) Termination of Coverage Under Other Occurrence-Based Policies. The
parties hereto agree to take or cause to be taken all necessary or appropriate
action so that, notwithstanding anything to the contrary contained in any
Other Occurrence-Based Policy, effective as of the Termination Time coverage
under the Other Occurrence-Based Policies shall be terminated so that none of
the Other Occurrence-Based Policies shall afford any further coverage to any
Energy Covered Person, Industrial Covered Person or Shipbuilding Covered
Person for occurrences which take place or are alleged to have taken place
after the Termination Time.
(c) Access to Policies Following Termination Time. Notwithstanding the
provisions of Sections 3.2(a) and 3.2(b) hereof, from and after the
Termination Time each Energy Covered Person, Industrial Covered Person and
Shipbuilding Covered Person shall have the right to coverage and to make or
pursue a claim for coverage under any Occurrence-Based Policy with respect to
all claims, suits, actions, proceedings, injuries, losses, liabilities,
occurrences, damages and expenses incurred or claimed to have been incurred
prior to the Termination Time by such Covered Person in or in connection with
the operation of, or otherwise related to, (i) Energy, with respect to any
Energy Covered Person, (ii) Industrial, with respect to any Industrial Covered
Person, or (iii) Shipbuilding, with respect to any Shipbuilding Covered
Person, in each case subject to the terms, conditions and limitations of such
Occurrence-Based Policy, provided, however, that nothing in this Section
3.2(c) shall be deemed to constitute or reflect an assignment of any such
Occurrence-Based Policy.
(d) Policy Limits. Any Energy Covered Person, Industrial Covered Person or
Shipbuilding Covered Person entitled hereunder to make or pursue a claim for
insurance coverage under an Occurrence-Based Policy may claim for such
insurance as and to the extent that such insurance is available up to the full
extent of the applicable limits of liability under such Occurrence-Based
Policy. Notwithstanding the foregoing, each of Tenneco, Industrial Company and
Shipbuilding Company shall, to the extent any of its respective Covered
Persons shall have exhausted all or any portion of the limits of liability, if
any, under any Occurrence-Based Policy, use its best efforts to either (i)
obtain and comply in full with the conditions required to effect the
reinstatement of the full limits of liability under such Occurrence-Based
Policy for all claims which would be covered thereby absent such exhaustion
(including any pending or known claims) and be responsible for and pay all
costs and expenses, including the amount of any resultant increase in the
premium charged in respect of such Occurrence-Based Policy or any renewal
thereof, in connection therewith, or (ii) obtain and maintain in full force
and effect a Policy in replacement of the limits of liability exhausted under
such Occurrence-Based Policy for all claims which would be covered thereby
absent such exhaustion (including any pending or known claims), and be
responsible for and pay all costs and expenses in connection therewith, which
Policy shall provide at least the same coverage, and contain terms and
provisions which are no less favorable to the insured parties, as existed
under the Occurrence-Based Policy in respect of which such replacement is
obtained, provided, however, that no party hereto shall be required to expend
more than an amount equal to 350% of the original premium paid with respect to
the portion of the limits of liability under such Occurrence-Based Policy
(determined on a pro rata basis) exhausted by such party's respective Covered
Persons to obtain reinstatement or a replacement Policy as contemplated
hereby, it being understood that each party hereto shall nonetheless be
required to obtain the maximum amount of reinstatement or replacement coverage
available for such 350% premium amount in accordance with the terms and
provisions of clauses (i) or (ii) hereof, as applicable. If at any time a
party (an "Impairing Party") hereto becomes aware (such party being deemed to
be aware whenever any of the directors or executive officers of such party or
any other member of its respective Group become aware) of a claim or potential
claim against any of such Impairing Party's respective Covered Persons which
claim is reasonably likely to exhaust (but has not yet exhausted) all or any
portion of the aggregate limits of liability, if any, under any Occurrence-
Based Policy (a "Potential Impairment"), such Impairing Party shall promptly
provide notice of
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such Potential Impairment to the other parties hereto. Such Impairing Party
shall have five business days after providing such notice to elect to, at that
time, either secure reinstatement of the limits of liability under such
Occurrence-Based Policy (to the extent provided for therein) or purchase a
Policy in replacement of such limits of liability (in each case in accordance
with the terms and provisions of the second preceding sentence) in respect of
such Potential Impairment (but shall not be required to so elect at such
time). If such Impairing Party does not timely elect to secure reinstatement
or replacement coverage, then either or both of the other parties hereto may
elect to reinstate the limits of liability under such Occurrence-Based Policy
(to the extent provided for therein) and pay all expenses incurred in
connection therewith, provided, however, that if such Potential Impairment
actually occurs, the Impairing Party shall reimburse the other parties for any
fees and expenses incurred by such parties in connection with such
reinstatement.
3.3 Coverage Under Claims-Made Policies.
(a) Termination of Coverage Under Transferred Claims-Made Policies. The
parties hereto agree to take or cause to be taken all necessary or appropriate
action so that, notwithstanding anything to the contrary contained in any
Transferred Claims-Made Policy, effective as of the Termination Time coverage
under the Transferred Claims-Made Policies shall be terminated (it being
understood that such Transferred Claims-Made Policies shall nonetheless remain
in full force and effect) so that none of the Transferred Claims-Made Policies
shall afford any further coverage to any Energy Covered Person or Shipbuilding
Covered Person for claims which have not been reported or made as provided by
the terms of such Transferred Claims-Made Policy prior to the Termination
Time. From and after the Termination Time, coverage under any Transferred
Claims-Made Policy may, at the option of Industrial Company, continue for any
Industrial Covered Person upon the terms and conditions of such Transferred
Claims-Made Policy.
(b) Termination of Coverage Under Other Claims-Made Policies. The parties
hereto agree to take or cause to be taken all necessary or appropriate action
so that, notwithstanding anything to the contrary contained in any Other
Claims-Made Policy, effective as of the Termination Time coverage under the
Other Claims-Made Policies shall be terminated so that no Other Claims-Made
Policy shall afford any further coverage to any Energy Covered Person,
Industrial Covered Person or Shipbuilding Covered Person for claims which have
not been reported or made as provided by the terms of such Other Claims-Made
Policy prior to the Termination Time.
(c) Access to Policies Following Termination Time. Notwithstanding the
provisions of Sections 3.3(a) and 3.3(b) hereof, from and after the
Termination Time each Energy Covered Person, Industrial Covered Person and
Shipbuilding Covered Person shall have the right to coverage and to make or
pursue a claim for coverage under any Claims-Made Policy with respect to all
claims, suits, actions, proceedings, injuries, losses, liabilities,
occurrences, damages and expenses which are reported in accordance with the
terms of such Claims-Made Policy prior to the Termination Time and which are
incurred or claimed to be incurred by such Covered Person in or in connection
with the operation of, or otherwise related to, (i) Energy, with respect to
any Energy Covered Person, (ii) Industrial, with respect to any Industrial
Covered Person, or (iii) Shipbuilding, with respect to any Shipbuilding
Covered Person, in each case subject to the terms, conditions and limitations
of such Claims-Made Policy, provided, however, that nothing in this Section
3.3(c) shall be deemed to constitute or reflect an assignment of any such
Claims-Made Policy.
(d) Policy Limits. Any Energy Covered Person, Industrial Covered Person or
Shipbuilding Covered Person entitled hereunder to make or pursue a claim for
insurance coverage under a Claims-Made Policy may claim for such insurance as
and to the extent that such insurance is available up to the full extent of
the applicable limits of liability under such Claims-Made Policy.
Notwithstanding the foregoing, each of Tenneco, Industrial Company and
Shipbuilding Company shall, to the extent any of its respective Covered
Persons shall have exhausted all or any portion of the limits of liability, if
any, under any Claims-Made Policy, use its best efforts to either (i) obtain
and comply in full with the conditions required to effect the reinstatement of
the full limits of liability under such Claims-Made Policy for all claims
which would be covered thereby absent such exhaustion (including any pending
or known claims) and be responsible for and pay all costs and expenses,
including the amount of any resultant increase in the premium charged in
respect of such Claims-Made Policy or any renewal
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thereof, in connection therewith, or (ii) obtain and maintain in full force
and effect at its own cost a Policy in replacement of the limits of liability
exhausted under such Claims-Made Policy for all claims which would be covered
thereby absent such exhaustion (including any pending or known claims), and be
responsible for and pay all costs and expenses in connection therewith, which
Policy shall provide at least the same coverage, and contain terms and
provisions which are no less favorable to the insured parties, as existed
under the Claims-Made Policy in respect of which such replacement is obtained,
provided, however, that no party hereto shall be required to expend more than
an amount equal to 350% of the original premium paid with respect to the
portion of the limits of liability under such Claims-Made Policy (determined
on a pro rata basis) exhausted by such party's respective Covered Persons to
obtain reinstatement or a replacement Policy as contemplated hereby, it being
understood that each party hereto shall nonetheless be required to obtain the
maximum amount of reinstatement or replacement coverage available for such
350% premium amount in accordance with the terms and provisions of clauses (i)
or (ii) hereof, as applicable. If at any time an Impairing Party becomes aware
(such party being deemed to be aware whenever any of the directors or
executive officers of such party or any other member of its respective Group
become aware) of a claim or potential claim against any of such Impairing
Party's respective Covered Persons which claim is reasonably likely to exhaust
(but has not yet exhausted) all or any portion of the aggregate limits of
liability, if any, under any Claims-Made Policy (a "Potential Impairment"),
such Impairing Party shall promptly provide notice of such Potential
Impairment to the other parties hereto. Such Impairing Party shall have five
business days after providing such notice to elect to, at that time, either
secure reinstatement of the limits of liability under such Claims-Made Policy
(to the extent provided for therein) or purchase a Policy in replacement of
such limits of liability (in each case in accordance with the terms and
provisions of the second preceding sentence) in respect of such Potential
Impairment (but shall not be required to so elect at such time). If such
Impairing Party does not timely elect to secure reinstatement or replacement
coverage, then either or both of the other parties hereto may elect to
reinstate the limits of liability under such Claims-Made Policy (to the extent
provided for therein) and pay all expenses incurred in connection therewith,
provided, however, that if such Potential Impairment actually occurs, the
Impairing Party shall reimburse the other parties for any fees and expenses
incurred by such parties in connection with such reinstatement.
3.4 Coverage Under Retained Policies.
(a) Termination of Coverage at Termination Time. The parties hereto agree to
take or cause to be taken all necessary or appropriate action so that, except
as otherwise contemplated by the terms of this Agreement and notwithstanding
anything to the contrary contained in any Retained Policy, effective as of the
Termination Time any and all coverage of any Industrial Covered Person or
Shipbuilding Covered Person under the Retained Policies shall be terminated
(it being understood that such Retained Policies shall nonetheless remain in
full force and effect). From and after the Termination Time, coverage under
any of the Retained Policies may, at the option of Tenneco, continue for any
Energy Covered Person upon the terms and conditions of such Retained Policies.
(b) Access to Policies and Policy Limits. Notwithstanding the provisions of
Section 3.4(a) hereof, from and after the Termination Time each Industrial
Covered Person and Shipbuilding Covered Person shall have the right to
coverage and to make or pursue a claim for coverage under any Retained Policy
with respect to all claims, suits, actions, proceedings, injuries, losses,
liabilities, occurrences, damages and expenses incurred or claimed to have
been incurred prior to the Termination Time by such Covered Person in or in
connection with the operation of, or otherwise related to, (i) Industrial,
with respect to any Industrial Covered Person, or (ii) Shipbuilding, with
respect to any Shipbuilding Covered Person, in each case subject to the terms,
conditions and limitations of such Retained Policy, provided, however, that
nothing in this Section 3.4(b) shall be deemed to constitute or reflect an
assignment of any such Retained Policy. Any Industrial Covered Person or
Shipbuilding Covered Person may claim insurance coverage under a Retained
Policy as and to the extent that such insurance is available up to the full
extent of the applicable limits of liability under such Retained Policy.
3.5 Coverage Under Eastern Policies.
(a) Termination of Coverage Under Eastern Policies. The parties hereto agree
to take or cause to be taken all necessary or appropriate action so that,
notwithstanding anything to the contrary contained in any Eastern
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Policies, effective as of the Termination Time coverage under the Eastern
Policies shall be terminated (it being understood that such Eastern Policies
in full force and effect as of the Termination Time shall nonetheless remain
in full force and effect) so that the Eastern Policies do not afford any
further coverage to any Industrial Covered Person or Shipbuilding Covered
Person for occurrences which take place or are alleged to have taken place
after the Termination Time. From and after the Termination Time, coverage
under the Eastern Policies may, at the option of Tenneco, continue for any
Energy Covered Person upon the terms and conditions of the Eastern Policies.
(b) Access to Eastern Policies Following Termination Time. Notwithstanding
the provisions of Sections 3.5(a) hereof, from and after the Termination Time
each Energy Covered Person, Industrial Covered Person (to the extent (but only
to that extent and subject to the last sentence of this Section 3.5(b) and
Section 3.5(d)) payment under any Eastern Policy is a condition precedent to
the provision of coverage by any insurer providing coverage in the same layer
as, or a layer excess to that of, such Eastern Policy) and Shipbuilding
Covered Person (to the extent (but only to the extent and subject to the last
sentence of this Section 3.5(b)) necessary to access reinsurance policies)
shall have the right to coverage and to make or pursue a claim for coverage
under any Eastern Policy with respect to all claims, suits, actions,
proceedings, injuries, losses, liabilities, occurrences, damages and expenses
incurred or claimed to have been incurred prior to the Termination Time by
such Covered Person in or in connection with the operation of, or otherwise
related to, (i) Energy, with respect to any Energy Covered Person, (ii)
Industrial, with respect to any Industrial Covered Person, or (iii)
Shipbuilding, with respect to any Shipbuilding Covered Person, in each case,
subject to the terms, conditions and limitations of such Eastern Policy,
provided, however, that nothing in this Section 3.5(b) shall be deemed to
constitute or reflect an assignment of the Eastern Policies. The parties
hereto agree to take or cause to be taken all necessary or appropriate actions
so that, from and after the Termination Time, no Industrial Covered Person or
Shipbuilding Covered Person shall be entitled to coverage or to make or pursue
a claim for coverage under the Eastern Policies except to the extent expressly
provided for herein and in no event shall the Eastern Insurance Provider (as
defined below) or any of its subsidiaries have any obligation or liability to
any Shipbuilding Covered Person or Industrial Covered Person under any Eastern
Policy which is not either as a conduit with respect to third party
reinsurance or subject to reimbursement by Industrial Company pursuant to
Section 3.5(d).
(c) Policy Limits. Any Energy Covered Person, Industrial Covered Person or
Shipbuilding Covered Person entitled hereunder to make or pursue a claim for
insurance coverage under the Eastern Policies may claim for such insurance as
and to the extent that such insurance is available up to the full extent of
the applicable limits of liability under the Eastern Policies, subject to the
provisions of Section 3.5(b).
(d) Reimbursement Obligation of Industrial Company. Industrial Company
agrees to reimburse to the insurer under each Eastern Policy (the "EASTERN
INSURANCE PROVIDER") the full amount of any claim for insurance coverage for
an Industrial Covered Person under such Eastern Policy made pursuant to the
terms of Section 3.5(b) hereof which is actually paid by said Eastern
Insurance Provider after the Termination Time.
3.6 Coverage Under Exclusive Policies. From and after the Termination Time,
coverage under any Exclusive Policy may continue with respect to any claims,
suits, actions, proceedings, injuries, losses, liabilities, occurrences,
damages or expenses incurred or claimed to have been incurred prior to, on or
after the Distribution Date, subject to the terms, conditions and limitations
of such Exclusive Policy, provided, however, that (i) no member of the Energy
Group shall have any liability or obligation with respect to any of the
Industrial Exclusive Policies or Shipbuilding Exclusive Policies, (ii) no
member of the Industrial Group shall have any liability or obligation with
respect to any of the Tenneco Exclusive Policies or Shipbuilding Exclusive
Policies, and (iii) no member of the Shipbuilding Group shall have any
liability or obligation with respect to any of the Tenneco Exclusive Policies
or Industrial Exclusive Policies.
3.7 Assistance in Obtaining Additional Coverage. Each of the parties hereto
agrees to use its reasonable best efforts to assist the other parties in the
transition to separate insurance coverage for the Energy Group, Industrial
Group and Shipbuilding Group from and after the Distribution Date which
assistance shall include, but shall not be limited to, the identification of
potential insurance carriers.
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3.8 Discovery Periods. Except with respect to any Industrial Covered Person
and except as the parties hereto may otherwise agree, the parties hereto
acknowledge and agree that when this Agreement calls for the termination of
insurance coverage under a Claims-Made Policy such insurance coverage shall be
terminated as of the time specified and that no discovery period of coverage
in respect of such Policy shall be provided thereunder, notwithstanding
anything to the contrary contained herein or in any such Policy.
Notwithstanding the foregoing, if requested to do so by Tenneco, Industrial
Company shall use its reasonable efforts to procure that the relevant insurers
under the Claims-Made Policies offer to Tenneco a discovery period of coverage
under said Claims-Made Policies for Energy Covered Persons with an aggregate
limitation of liability separate from the limitation of liability under said
Claims-Made Policies for coverage afforded Industrial Covered Persons. All
premiums, costs and other charges with respect to any discovery period of
coverage provided under any Claims-Made Policy shall be the sole
responsibility of (i) Tenneco, with respect to coverage for Energy Covered
Persons, and (ii) Industrial Company, with respect to coverage for Industrial
Covered Persons. Each party hereto shall not (and shall not permit any of its
respective Covered Persons over which it has legal or effective direct or
indirect control to) take any action contrary to the provisions of this
Section 3.8.
3.9 Further Assurances. Each of Tenneco, Industrial Company and Shipbuilding
Company agree to take (and to cause each of its respective Covered Persons
over which it has direct or indirect legal or effective control to take) all
such actions as are necessary or appropriate, including the provision of
notice to all relevant insurance carriers and cooperation with respect to the
obtaining of any reinstatement of limitations on liability as contemplated
hereby, to effectuate the purposes of this Article III.
ARTICLE IV
PREMIUMS, DEDUCTIBLES AND RELATED MATTERS
4.1 Occurrence-Based and Claims-Made Policies.
(a) Premiums in Respect of Occurrence-Based and Claims-Made Policies. From
and after the Termination Time, all premiums, costs and other charges with
respect to any Occurrence-Based Policy or Claims-Made Policy shall be paid by
Industrial Company, provided, however, that (i) Tenneco shall promptly
reimburse Industrial Company in full for any such premiums, costs or other
charges in respect of the cover afforded under any such Occurrence-Based
Policy or Claims-Made Policy to any Energy Covered Person, and (ii)
Shipbuilding Company shall promptly reimburse Industrial Company in full for
any such premiums, costs or other charges in respect of the cover afforded
under any such Occurrence-Based Policy or Claims-Made Policy to any
Shipbuilding Covered Person, in each case determined in accordance with
Tenneco's historical practices with respect to the allocation of such
premiums, costs and charges prior to the date hereof. All amounts refunded
from and after the Termination Time by insurance carriers in respect of
premiums previously paid under any Occurrence-Based Policy or Claims-Made
Policy shall be the sole property of Industrial Company, provided, however,
that Industrial Company shall promptly pay to Tenneco or the Shipbuilding
Company, as applicable, upon receipt thereof from an insurance carrier, the
Energy Group's or the Shipbuilding Group's respective share of any such
amounts refunded (such respective share to be determined in accordance with
Tenneco's historical practices with respect to the allocation of insurance
premiums among its Subsidiaries and divisions prior to the date hereof). Each
of Tenneco and Shipbuilding Company shall (and shall cause each member of its
respective Group over which it has direct or indirect legal or effective
control to) promptly pay to Industrial Company any such refunded amounts
actually received by it to which Industrial Company is entitled pursuant
hereto.
(b) Deductibles, Retentions and Self-Insured Amounts. From and after the
Termination Time, all deductibles, retentions and self-insured amounts with
respect to coverage or a claim for coverage under any Occurrence-Based Policy
or Claims-Made Policy shall be the sole responsibility of (i) Tenneco, with
respect to any coverage or claim for coverage in respect of any Energy Covered
Person, (ii) Industrial Company, with respect to any coverage or claim for
coverage in respect of any Industrial Covered Person, and (iii) Shipbuilding
Company, with respect to any coverage or claim for coverage in respect of any
Shipbuilding Covered Person.
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4.2 Retained Policies.
(a) Premiums, Costs and Other Charges. From and after the Termination Time,
all premiums, costs and other charges with respect to any Retained Policy,
including claim payments and associated expenses under cost plus or fronting
policies, shall be the sole responsibility of and be paid by Tenneco,
provided, however, that (i) Industrial Company shall promptly reimburse
Tenneco for all such premiums, costs and other charges paid by Tenneco
(including amounts paid by Tenneco as reimbursement in respect of amounts
drawn under letters of credit maintained by Tenneco pursuant to Section 7.1
hereof) in respect of coverage provided for any Industrial Covered Person to
the extent such premiums, costs and other charges exceed the amount of the
Claims Deposit, and (ii) Shipbuilding Company shall promptly reimburse Tenneco
for all such premiums, costs and other charges paid by Tenneco (including
amounts paid by Tenneco as reimbursement in respect of amounts drawn under
letters of credit maintained by Tenneco pursuant to Section 7.1 hereof) in
respect of coverage provided for any Shipbuilding Covered Person. All amounts
refunded from and after the Termination Time by insurance carriers in respect
of premiums previously paid under any Retained Policy shall be the sole
property of Tenneco, provided, however, that Tenneco shall promptly pay to (i)
Industrial Company, all such refunded amounts in respect of coverage provided
for any Industrial Covered Person under such Retained Policy, and (ii)
Shipbuilding Company, all such refunded amounts in respect of coverage
provided for any Shipbuilding Covered Person under such Retained Policy.
(b) Deductibles, Retentions and Self-Insured Amounts. From and after the
Termination Time, all deductibles, retentions and self-insured amounts with
respect to coverage or a claim for coverage under any Retained Policy shall be
the sole responsibility of (i) Tenneco, with respect to any coverage or claim
for coverage in respect of any Energy Covered Person, (ii) Industrial Company,
with respect to any coverage or claim for coverage in respect of any
Industrial Covered Person, and (iii) Shipbuilding Company, with respect to any
coverage or claim for coverage in respect of any Shipbuilding Covered Person.
4.3 Eastern Policies.
(a) Premiums in Respect of Eastern Policies. All amounts refunded from and
after the Termination Time by insurance carriers in respect of premiums
previously paid under any Eastern Policy shall be the sole property of
Tenneco, provided, however, that Tenneco shall promptly pay to (i) Industrial
Company, upon receipt thereof from an insurance carrier, the Industrial
Group's respective share of any such amounts refunded, and (ii) Shipbuilding
Company, upon receipt thereof from an insurance carrier, the Shipbuilding
Group's respective share of any such amounts refunded, in each case determined
in accordance with Tenneco's historical practices with respect to the
allocation of insurance premiums among its Subsidiaries and divisions prior to
the date hereof. Each party shall (and shall cause each member of its
respective Group over which it has direct or indirect legal or effective
control to) promptly pay to any other party any such amounts actually received
by it to which such other party is entitled pursuant to this Section 4.3(a).
(b) Deductibles, Retentions and Self-Insured Amounts. From and after the
Termination Time, all deductibles, retentions and self-insured amounts with
respect to coverage or a claim for coverage under any Eastern Policy shall be
the sole responsibility of (i) Tenneco, with respect to any coverage or claim
for coverage in respect of any Energy Covered Person, (ii) Industrial Company,
with respect to any coverage or claim for coverage in respect of any
Industrial Covered Person, and (iii) Shipbuilding Company, with respect to any
coverage or claim for coverage in respect of any Shipbuilding Covered Person.
(c) Amounts to be Refunded. Tenneco shall direct and instruct the Eastern
Insurance Provider to pay to Industrial Company in cash promptly after the
Termination Time, to the extent permitted by law, and to record a
corresponding dollar-for-dollar reduction in all associated liabilities on its
books and records for, (i) all amounts which appear as reserves on the books
and records of the Eastern Insurance Provider as of the Termination Time in
respect of claims relating to any Industrial Covered Person which have been
reported prior to the Termination Time, (ii) the full amount of any "incurred
but not reported" reserve and any portfolio loss transfer reserve appearing on
the books and records of the Eastern Insurance Provider as of the Termination
Time under the contingent liability programs of the Eastern Policies, and
(iii) 50% of the amount of any "incurred but not reported" reserve appearing
on the books and records of the Eastern Insurance Provider as of the
Termination Time under the excess liability programs of the Eastern Policies
with respect to Industrial and Energy.
11
<PAGE>
4.4 Exclusive Policies. From and after the Termination Time, all
deductibles, retentions, self-insured amounts, premiums and other costs with
respect to any Exclusive Policy or claim for coverage thereunder shall be the
sole responsibility of, and all refunded premiums with respect to any
Exclusive Policy shall be the sole property of, (i) Tenneco, with respect to
any Tenneco Exclusive Policy, (ii) Industrial Company, with respect to any
Industrial Exclusive Policy, and (iii) Shipbuilding Company, with respect to
any Shipbuilding Exclusive Policy.
4.5 Excess Costs and Settlements. Each Covered Person shall be responsible
for any excess costs and expenses relating to its respective claims permitted
hereunder (or those of any member of its respective Group) under the Common
Policies, including defense costs to the extent such defense costs are not
covered under such Common Policies, and shall be responsible for obtaining or
reviewing the appropriateness of releases upon settlement of such claims.
4.6 Effect on Other Agreements. Notwithstanding anything to the contrary
contained herein, nothing in this Article IV shall be construed to alter or in
any way limit any rights to indemnity provided in the Distribution Agreement
or in any other Ancillary Agreement (as such term is defined in the
Distribution Agreement).
ARTICLE V
ADMINISTRATION
5.1 Occurrence-Based and Claims-Made Policies.
(a) Administration. From and after the Distribution Date, Claims
Administration and Insurance Administration with respect to the Occurrence-
Based Policies and Claims-Made Policies shall be the responsibility of (i)
Tenneco, with respect to any coverage or claim for coverage of any Energy
Covered Person, (ii) Industrial Company, with respect to any coverage or claim
for coverage of any Industrial Covered Person, and (iii) Shipbuilding Company,
with respect to any coverage or claim for coverage of any Shipbuilding Covered
Person. Each of Shipbuilding Company and Tenneco shall (and shall cause each
of its respective Covered Persons over which it has direct or indirect legal
or effective control to) provide prompt notice to Industrial Company of all
actions taken by it with respect to the Claims Administration and Insurance
Administration for the Occurrence-Based Policies and Claims-Made Policies as
contemplated by this Section 5.1. Each party hereto shall (and shall cause
each other member of its Group over which it has direct or indirect legal or
effective control to) take all necessary or appropriate action, if any, to
delegate Claims Administration and Insurance Administration with respect to
the Occurrence-Based Policies and Claims-Made Policies to any other party who
is to assume such responsibilities pursuant hereto and, to the extent such
delegation is not permitted by the terms of any such policy, shall engage in
Claims Administration or Insurance Administration for any such policy only
upon the express authorization and direction of such other party. Each party
hereto shall be responsible for its own disbursements and out-of-pocket
expenses and the direct and indirect costs of its employees or agents relating
to Claims Administration and Insurance Administration contemplated by this
Section 5.1. Notwithstanding anything to the contrary contained herein,
Industrial Company shall have the right, at its option, to undertake at its
own cost and expense Claims Administration and/or Insurance Administration
with respect to any coverage or claim for coverage of any Energy Covered
Person or Shipbuilding Covered Person.
(b) Effect of Administrative Responsibilities. Each of Tenneco, Industrial
Company and Shipbuilding Company acknowledges and agrees that each other
party's responsibilities under this Section 5.1 for Claims Administration and
Insurance Administration shall not relieve any party submitting an insured
claim under any Occurrence-Based Policy or Claims-Made Policy of (a) the
primary responsibility for reporting such insured claim accurately, completely
and in a timely manner, or (b) any other right or responsibility which such
party may have pursuant to the terms of any Occurrence-Based Policy or Claims-
Made Policy.
5.2 Eastern and Retained Policies. From and after the Termination Time,
Tenneco shall be solely responsible for Claims Administration and Insurance
Administration with respect to the Retained Policies and Eastern Policies
including, without limitation, the administration of all billings associated
with the Retained
12
<PAGE>
Policies by the insurance carriers thereunder. Notwithstanding the foregoing,
each of Industrial Company and Shipbuilding Company shall retain the right to,
at its option, direct the management, defense, reporting and settlement of
claims involving its respective Covered Persons under the Retained Policies
and Eastern Policies.
ARTICLE VI
PROCEEDS
6.1 Occurrence-Based and Claims-Made Policies. From and after the
Distribution Date, Insurance Proceeds received with respect to claims, costs
and expenses under the Occurrence-Based Policies and Claims-Made Policies
shall be paid to the Covered Person to which such Insurance Proceeds are due
pursuant to the terms of such Policies.
6.2 Eastern and Retained Policies. From and after the Distribution Date,
Insurance Proceeds received with respect to claims, costs and expenses under
the Retained Policies and Eastern Policies shall be paid, as appropriate, to
the Covered Person to which such Insurance Proceeds are due pursuant to the
terms of such Policies.
6.3 Return of Proceeds. Each of Tenneco, Industrial Company and Shipbuilding
Company shall (and shall cause each of its respective Covered Persons over
which it has direct or indirect legal or effective control to) to promptly pay
to each other party any Insurance Proceeds actually received by it to which
any of such other party's Covered Persons are entitled pursuant hereto, which
other party shall then distribute such Insurance Proceeds to the Covered
Person to which they are due pursuant hereto.
ARTICLE VII
LETTERS OF CREDIT AND SURETY BONDS
7.1 Maintenance. (a) Letters of Credit. From and after the Distribution
Date, to secure obligations under the Retained Policies relating to periods
preceding the Termination Time, Tenneco shall, for such time as may be
required by law or the terms of any Retained Policy, maintain in full force
and effect the letters of credit identified on SCHEDULE 7.1-A hereto or, as
necessary or appropriate, substitute therefor and maintain in full force and
effect letters of credit acceptable to the insurance carriers and/or surety
under the Retained Policies issued by comparably rated lenders containing
substantially identical terms and conditions (collectively, the "LETTERS OF
CREDIT"). The parties hereto shall use reasonable commercial efforts to obtain
the necessary consents and approvals, and shall thereafter negotiate in good
faith an agreement, to allocate the Letters of Credit among the parties hereto
such that each party becomes responsible for the maintenance of letters of
credit for such time as may be required by law or the terms of any Retained
Policy to secure obligations under the Retained Policies relating to periods
prior to the Termination Time in respect of coverage afforded thereunder to
such party's respective Covered Persons, provided, however, that neither
Industrial Company nor Shipbuilding Company shall be required to use such
reasonable commercial efforts or negotiate any such agreement if such party
determines that the allocation contemplated hereby cannot be accomplished
without commercially unreasonable expense.
(b) Surety Bonds. The parties hereto acknowledge that Tenneco is obligated
to indemnify the sureties under certain performance bonds and other surety
instruments that secure obligations of the Energy Business, Energy Group,
Industrial Business, Prior Industrial Businesses, Industrial Group,
Shipbuilding Business, Prior Shipbuilding Businesses and/or Shipbuilding Group
including, but not limited to, the surety instruments identified on SCHEDULE
7.1-B hereto (the "TENNECO-PROVIDED BONDS"). From and after the Termination
Time, Tenneco shall maintain such Tenneco-Provided Bonds in place for such
time as may be required by law. To the extent possible on commercially
reasonable terms, each of Industrial Company and Shipbuilding Company shall
use reasonable commercial efforts to obtain a replacement for each Tenneco-
Provided Bond that secures obligations of the Industrial Business, Prior
Industrial Businesses or Industrial Group (in the case of Industrial Company)
or the Shipbuilding Business, Prior Shipbuilding Businesses or Shipbuilding
Group (in the case of Shipbuilding Company) and to thereafter arrange for the
release of Tenneco from the Tenneco-Provided Bond
13
<PAGE>
which has been so replaced. If the surety under any Tenneco-Provided Bond is
required to and does in fact perform according to the terms of said Tenneco-
Provided Bond and Tenneco is required to and does in fact indemnify such
surety in respect thereof, (i) Industrial Company shall reimburse Tenneco for
all amounts actually paid by Tenneco to such surety to the extent such amounts
constitute Industrial Liabilities, and (ii) Shipbuilding Company shall
reimburse Tenneco for all amounts actually paid by Tenneco to such surety to
the extent such amounts constitute Shipbuilding Liabilities.
7.2 Reimbursement for Maintenance Fees. Each of Industrial Company and
Shipbuilding Company hereby agrees to reimburse Tenneco annually commencing on
, 1997 (to be a date as of the end of the thirteenth month
following execution hereof) (such date and each anniversary thereof being
referred to herein as a "DUE DATE") for the actual and reasonable
administrative fees and expenses paid by Tenneco (the "LC MAINTENANCE FEES")
in respect of the issuance and maintenance of the Letters of Credit during the
twelve-month period ended 30 days prior to such year's Due Date (each, a
"YEARLY PERIOD"), to the extent such Letters of Credit secure obligations
relating to any Industrial Covered Person or Shipbuilding Covered Person,
respectively, under the Retained Policies. The amount of the LC Maintenance
Fees for each Yearly Period which shall be the responsibility of Industrial
Company and Shipbuilding Company hereunder shall be based on the total
outstanding reserves showing on the books and records of CIGNA, as of February
28 during such Yearly Period, for claims by all Industrial Covered Persons,
Energy Covered Persons and Shipbuilding Covered Persons under the Retained
Policies relating to periods prior to the Termination Time (the "YEARLY TOTAL
RESERVES"). Industrial Company shall reimburse Tenneco hereunder for an amount
equal to the LC Maintenance Fees for each Yearly Period multiplied by a
fraction, (i) the numerator of which is equal to the outstanding reserves
showing on the books and records of CIGNA, as of February 28 during such
Yearly Period, for claims by all Industrial Covered Persons under the Retained
Policies relating to periods prior to the Termination Time, and (ii) the
denominator of which is equal to the Yearly Total Reserves for such Yearly
Period. Shipbuilding Company shall reimburse Tenneco hereunder for an amount
equal to the LC Maintenance Fees for each Yearly Period multiplied by a
fraction, (i) the numerator of which is equal to the outstanding reserves
showing on the books and records of CIGNA, as of February 28 during such
Yearly Period, for claims by all Shipbuilding Covered Persons under the
Retained Policies relating to periods prior to the Termination Time, and (ii)
the denominator of which is equal to the Yearly Total Reserves for such Yearly
Period.
ARTICLE VIII
MISCELLANEOUS
8.1 Termination. This Agreement may not be terminated except upon the
written agreement of each of the parties hereto.
8.2 Further Assurances. If at any time after the Distribution Date any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of Tenneco, Industrial Company and Shipbuilding Company shall,
on the written request of any of them, take (or cause the appropriate member
of its Group over which it has direct or indirect legal or effective control
to take) all such reasonably necessary or desirable action. If subsequent to
the Distribution Date any Policy showing any member of the Energy Group,
Industrial Group or Shipbuilding Group, or any of their respective
predecessors, as named insured is discovered which was in effect for periods
prior to the Termination Time and has not been addressed by the provisions of
this Agreement or the Merger Agreement, the parties hereto agree to negotiate
in good faith an arrangement with respect to such Policy which shall give, to
the fullest extent possible, effect to the purposes of this Agreement and the
transactions contemplated by the Distribution Agreement.
8.3 Cooperation. The parties hereto agree to use their reasonable best
efforts to cooperate with respect to the various insurance matters
contemplated by this Agreement. Each party hereto shall not (and shall not
permit any of its respective Covered Persons over which it has legal or
effective direct or indirect control to) take any action or permit any
inaction that could reasonably be expected to jeopardize or otherwise
interfere with the rights of any other party (or any of such other party's
respective Covered Persons) hereunder or the ability of
14
<PAGE>
any other party (or any of such other party's respective Covered Persons) to
collect any proceeds which might be available under any of the Policies
addressed herein in accordance with the terms of this Agreement.
8.4 No Representations and Warranties. The parties hereto understand and
agree that no representation or warranty as to the existence, applicability or
extent of insurance coverage for Energy, Industrial or Shipbuilding under any
Policy is herein being made.
8.5 Limitation on Liability. Except as may be otherwise expressly provided
for herein, no party hereto shall be liable hereunder to another party or any
of such other party's Covered Persons for claims not reimbursed by insurers
for any reason not within the control of such party including, without
limitation, coinsurance provisions, deductibles, quota share deductibles,
exhaustion of aggregates, self-insured retentions, bankruptcy or insolvency of
an insurance carrier, Policy limitations or restrictions, any coverage
disputes, any failure to timely claim or any defect in such claim or its
processing.
8.6 Successors and Assigns. Except as otherwise expressly provided herein,
no party hereto may assign or delegate, whether by operation of law or
otherwise, any of such party's rights or obligations under or in connection
with this Agreement without the written consent of each other party hereto. No
assignment will, however, release the assignor of any of its obligations under
this Agreement or waive or release any right or remedy the other parties may
have against such assignor hereunder. Except as otherwise expressly provided
herein, all covenants and agreements contained in this Agreement by or on
behalf of any of the parties hereto will be binding upon and enforceable
against the respective successors and assigns of such party and will be
enforceable by and will inure to the benefit of the respective successors and
permitted assigns of such party.
8.7 Modification; Waiver; Severability. This Agreement may not be amended or
modified except in a writing executed by each of the parties hereto. The
failure by any party to exercise or a delay in exercising any right provided
for herein shall not be deemed a waiver of any right hereunder. Whenever
possible, each provision of this Agreement will be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of
this Agreement is held to be prohibited by or invalid under applicable law,
such provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement.
8.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which
taken together shall constitute one and the same Agreement.
8.9 Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
8.10 Notices. All notices, demands or other communications to be given or
delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally or
five business days after mailing by certified or registered mail, return
receipt requested and postage prepaid, to the recipient at such recipient's
address as indicated below:
TENNECO INC.: 1010 Milam Street
Houston, TX 77002
Attention: Corporate Secretary
INDUSTRIAL COMPANY: 1275 King Street
Greenwich, CT 06831
Attention: Corporate Secretary
SHIPBUILDING COMPANY: 4101 Washington Avenue
Newport News, VA 23607
Attention: Corporate Secretary
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
15
<PAGE>
8.11 Survival. Each of the agreements of the parties herein shall survive
the Distribution Date.
8.12 No Third Party Beneficiaries. This Agreement is made solely for the
benefit of the parties hereto and their respective Covered Persons, and shall
not give rise to any rights of any kind to any other third parties.
8.13 Other. ALL QUESTIONS AND/OR DISPUTES CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY THE
INTERNAL LAWS, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE. EACH OF
THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES TO
BE SUBJECT TO, AND HEREBY CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE
COURTS OF THE STATE OF DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE
OF DELAWARE. This Agreement, together with the Distribution Agreement and
other Ancillary Agreements (as such term is defined in the Distribution
Agreement), constitutes the entire agreement and supersedes all other prior
and contemporaneous agreements and undertakings, both written and oral, among
the parties with respect to the subject matter hereof.
8.14 Sole Agent. In all matters relating to this Agreement, including the
resolution of any disputes relating to this Agreement between any members of
different Groups, (i) Tenneco shall be the sole agent for the members of the
Energy Group, (ii) Industrial Company shall be the sole agent for the members
of the Industrial Group, and (iii) Shipbuilding Company shall be the sole
agent for members of the Shipbuilding Group. No member of any Group shall have
any authority to represent itself in any such matter or to terminate such
agency without the prior written consent of each party hereto.
8.15 No Double Recovery. No provision of this Agreement shall be construed
to provide recovery to any Person for any costs, expenses or other amounts for
which such Person has been fully compensated under any other provision of this
Agreement, any other agreement or otherwise.
IN WITNESS WHEREOF, the parties have made and entered into this Insurance
Agreement as of the date first set forth above.
TENNECO INC.
By:__________________________________
Name:________________________________
Title:_______________________________
NEW TENNECO INC.
By:__________________________________
Name:________________________________
Title:_______________________________
NEWPORT NEWS SHIPBUILDING INC.
By:__________________________________
Name:________________________________
Title:_______________________________
16
<PAGE>
SCHEDULE A
TO INSURANCE AGREEMENT
CURRENT CLAIMS-MADE POLICIES
See attached (to be updated and made current as of the signing of the
Insurance Agreement).
17
<PAGE>
SCHEDULE B
TO INSURANCE AGREEMENT
CURRENT OCCURRENCE-BASED POLICIES
See attached (to be updated and made current as of the signing of the
Insurance Agreement). To the extent a policy listed herein has expired, this
schedule shall be deemed to refer to the successor policy thereto.
18
<PAGE>
SCHEDULE C
TO INSURANCE AGREEMENT
EASTERN POLICIES
(to be updated and made current as of the signing of the Insurance Agreement)
Eastern Insurance Company Limited Policy Number 95ED2501
Eastern Insurance Company Limited Contingent Liability Policies (policy
numbers not currently available)
19
<PAGE>
SCHEDULE D
TO INSURANCE AGREEMENT
CURRENT RETAINED POLICIES
See attached (to be updated and made current as of the signing of the
Insurance Agreement).
20
<PAGE>
SCHEDULE E
TO INSURANCE AGREEMENT
CURRENT TENNECO EXCLUSIVE POLICIES
See attached (to be updated and made current as of the signing of the
Insurance Agreement). To the extent a policy noted herein has expired, this
schedule shall be deemed to refer to the successor policy thereto.
21
<PAGE>
SCHEDULE 2.1-A
TO INSURANCE AGREEMENT
TRANSFERRED OCCURRENCE-BASED POLICIES
To be determined by Tenneco prior to execution of Insurance Agreement.
22
<PAGE>
SCHEDULE 2.1-B
TO INSURANCE AGREEMENT
CANCELLED OCCURRENCE-BASED POLICIES
To be determined by Tenneco prior to execution of Insurance Agreement.
23
<PAGE>
SCHEDULE 2.2-A
TO INSURANCE AGREEMENT
TRANSFERRED CLAIMS-MADE POLICIES
To be determined by Tenneco prior to execution of Insurance Agreement.
24
<PAGE>
SCHEDULE 2.2-B
TO INSURANCE AGREEMENT
CANCELLED CLAIMS-MADE POLICIES
To be determined by Tenneco prior to execution of Insurance Agreement.
25
<PAGE>
SCHEDULE 7.1-A
TO INSURANCE AGREEMENT
LETTERS OF CREDIT CURRENTLY IN PLACE
Tenneco Inc. is presently maintaining letters of credit totalling
approximately $45 million to secure its obligations under the Retained
Policies. The letters of credit in effect as of the Distribution Date will be
listed hereon.
26
<PAGE>
SCHEDULE 7.1-B
TO INSURANCE AGREEMENT
SURETY BONDS CURRENTLY IN PLACE
Tenneco Inc. is presently obligated to indemnify the surety under various
performance bonds and other surety instruments which secure obligations
relating to Energy, Industrial and/or Shipbuilding. Bidder has been provided a
current list thereof. Such surety bonds in effect as of the Distribution Date
will be listed hereon.
27
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
TYPE OF COVERAGE POLICY NUMBER POLICY DATES UNDERWRITER LIMITS DEDUCTIBLES
---------------- ----------------- ------------ -------------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Excess Liability XLUMB 00912 9/1/95-96 XL Insurance Company $100,000,000 xs
Bermuda $100,000,000
Excess Liability UO5138609 9/1/95-96 OCIL
Excess Liability TGT 5035/4 9/1/95-96 ACE Insurance $200,000,000 xs
Company--Bermuda $300,000,000
Fiduciary Liability NIA 0120995-96 3/1/96-97 Reliance $50,000,000 $500,000
71FF 101007525BCM Aetna
8141-48-49-A Federal
ERISA Bond (Crime) 445-71-61 9/1/95-96 National Union Fire $15,000,000 NIL
(AIG)
</TABLE>
28
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
POLICY
TYPE OF COVERAGE NUMBER POLICY DATES UNDERWRITERS LIMITS DEDUCTIBLES
---------------- ------------ ------------ ------------------------ ---------------------- -----------------
<S> <C> <C> <C> <C> <C>
Excess Liability DL039795 9/1/95-96 Gerling-Konzern $10,000,000 xs
$10,000,000
Excess Liability BE8180249RA 9/1/95-96 American International $25,000,000 xs
(AIG) $20,000,000
Excess Liability 95ER2501 9/1/95-96 Eastern Insurance Co. $10,000,000 p/o
(Front for AME Re) $55,000,000 xs
$45,000,000
Excess Liability 8784725 9/1/95-96 Lexington $5,000,000 p/o
$55,000,000 xs
$45,000,000
Excess Liability CSR2839501 9/1/95-96 Fireman's Fund $20,000,000 p/o
$55,000,000 xs
$45,000,000
Excess Liability EU 08355330 9/1/95-96 Steadfast Zurich $20,000,000 p/o
$55,000,000 xs
$45,000,000
Automobile--Mexico HLN 00261 1/1/96-97 Serguros Commercial BI:$30,000/$60,000
America PD:$30,000
Aviation Hull & 87BVH-153922 7/1/94-97 Associated Aviation $100,000,000
Liability Underwriters Per Occurrence
Ocean Cargo EIPH1006 7/1/94-96 ESIS International, Inc. $10,000,000 $10,000,000
One Conveyance Per Occurrence
All Risk Property 213601-95 6/1/95-96 Protection Mutual $10,318,608,000 $5,000,000
Damage/Business Blanket Per Occurrence Per Occurrence
Interruption
(USA/Canada)
All Risk Property TBD 6/1/95-96 Royal Insurance $1,771,781,531 $75,000 PD
Damage/Business Blanket Per $150,000 BI
Interruption Occurrence Per Occurrence
(International)
Comprehensive Boiler & BMI-SA- 11/1/95-96 Hartford Steam Boiler $100,000,000 $5,000,000
Machinery Property 9138264-20 Per Accident Any One Accident
Damage/ Business
Interruption
Foreign Public & 62/99102/D 9/1/95-96 Gerling-Konzern $2,000,000 $5,000 Per Claim
Products Liability Per Occurrence $50,000 Pollution
Insurance
(Primary Cover)
Umbrella Excess W51010 9/1/95-96 Winterthur $8,000,000
Liability (Front for Eastern Any One Occurrence
Insurance Company) xs
$2,000,000
</TABLE>
29
<PAGE>
SCHEDULE D
<TABLE>
<CAPTION>
POLICY
TYPE OF COVERAGE NUMBER POLICY DATES UNDERWRITER LIMITS DEDUCTIBLES
---------------- ------------ ------------ --------------- ------------------ -----------
<S> <C> <C> <C> <C> <C>
Workers' Compensation CCSC6162624 9/1/95-96 CIGNA $2,000,000 $2,000,000
Texas--Ded
Workers' Compensation WLRC36163008 9/1/95-96 CIGNA $2,000,000 $2,000,000
NE--Ded
Workers' Compensation WLRC36162600 9/1/95-96 CIGNA $2,000,000 $2,000,000
Other States--Ded
Workers' Compensation CCSC36162624 9/1/95-96 CIGNA $2,000,000 $2,000,000
Retro
Workers' Compensation 1810017884 9/1/95-96 Maine Employers $100,000/$500,000/ $5,000
Maine Mutual $100,000
General Liability HDOG13214001 9/1/95-96 CIGNA $2,000,000 $2,000,000
Automobile Liability ISA042952 9/1/95-96 CIGNA $2,000,000 $2,000,000
Environmental HDCG13214013 9/1/95-96 CIGNA $1,000,000 $1,000,000
Automobile--Canada CAC391021 9/1/95-96 CIGNA $2,000,000 $2,000,000
General Liability-- CGL23835 9/1/95-96 CIGNA $2,000,000 $2,000,000
Canada
</TABLE>
30
<PAGE>
SCHEDULE E
<TABLE>
<CAPTION>
POLICY
TYPE OF COVERAGE NUMBER POLICY DATES UNDERWRITER LIMITS DEDUCTIBLES
---------------- ----------- --------------- ----------------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Tenneco Gas Production JHB 503266 6/19/95-96 Sphere Drake $1,000,000 $5,000 Land
General Liability $10,000 Offshore
Tenneco Gas Production JHB 000297 6/19/95-96 Commercial Underwriters $5,000,000 xs
Excess Liability Ins. Co. $1,000,000
Tenneco Gas South 62/900194/D 7/24/95-1/24/97 Gerling Konzern $2,000,000 $10,000
Australia Construction
Risk Liability
Tenneco Gas Australia CXC 042840 7/24/95-1/24/97 CIGNA $8,000,000 xs
Construction Risk $2,000,000
Liability
Railroad Protective HDOG 8/1/95-96 CIGNA $2,000,000/ $2,000,000/
Bessemer & Lake Erie RR 13214025 $6,000,000 $6,000,000
Co.
Railroad Protective ORPG 8/1/95-96 CIGNA $2,000,000/ $2,000,000/
Boston & Marine Corp. 13214037 $6,000,000 $6,000,000
Railroad Protective ORP 4/8/96-97 CIGNA $2,000,000/ $2,000,000/
National RR Passenger G18967923 $6,000,000 $6,000,000
Corp. (AMTRAK)
Railroad Protective ORP 4/8/96-97 CIGNA $2,000,000/ $2,000,000/
Massachusetts Bay G18967881 $6,000,000 $6,000,000
Transp.
Michigan Production BE 9320742 4/26/96-97 National Union $10,000,000 $500,000
Company Fire Ins. Co. (AIG)
Owners & Contractors OCPG 10/10/95-96 CIGNA $500,000/ $500,000/
Protective Liability 14231298 $500,000 $500,000
Offshore Property/OEE MMA 95-126 7/27/95-96 SEC. IA SEC. IA SEC. IA
Package UNI 25.0% -- Per Schedule -- $5,000,000
SEC. 1A & B--OFFSHORE Gjensidige 15.0% Assured's Int. AOO
PROP. Vesta 15.0% SEC. IB
SEC. II--OEE Protector 10.5% -- Per Schedule SEC. IB
SEC. III--CHARTERER'S Commonwealth 3.0% -- $1,000,000
LIAB. Hull & Co. 5.0% SEC. II (100%)
C.T. Bowring 26.5% OEE $50,000,000 AOO
OCSLA $35,000,000
SEC. IB, II, & III CCC $5,000,000 SEC. II
Gjensidige 17.5% -- $200,000
Vesta 15.0% SEC. III (100%) AOO
Protector 16.0% -- $1,000,000
Commonwealth 20.0% OCSLA $200,000
Hull & Co. 5.0% (100%) Per Occ.
C.T. Bowring 26.5%
CCC $200,000
(100%) Per Occ.
SEC. III
-- $50,000
(100%) AOO
Construction All Risk HG 015595 10/5/95-10/1/96 National Vulcan Aus. $209,032,000 Aus. $30,000
Cornhill Ins. All Perils
SR International except:
Royal Insurance Global Aus. $250,000
Generali Windstorm, Flood,
SCOR and Earth Movement
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
POLICY
TYPE OF COVERAGE NUMBER POLICY DATES UNDERWRITER LIMITS DEDUCTIBLES
---------------- ------------ ------------ ------------------------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
Worker's Employer No. TBD TBD
Compensation E 1344308
South Australia
Employer Cost CPA 000134 7/31/95-96 CIGNA Maximum Weekly
Control Benefit: $500
Insurance
Professional 9517VK18625 7/28/95-96 HIH Casualty & General Insurance Ltd. TBD A $20,000
Indemnity each and every claim
Motor Vehicle MV 452743 7/31/95-96 CIC Insurance Own Damage:
$24,000
T/P Claim: $1,000
Each and Every Claim
Personal Accident 5 011 9265 9/1/95-96 CIGNA PERSONAL ACCIDENT:
Insurance GBP 2,500,000
Any One Claim or
Series of Claims
Arising Out of
Single Incident
GBP 900,000
Per Person Any
One Claim
MEDICAL EXPENSES:
GBP 75,000
Per Event and
Per Person
Increased to
GBP 500,000
Per Event and
Per Person for
Claims Arising in
USA/Canada
RESCUE
Unlimited
</TABLE>
32
<PAGE>
EXHIBIT I TO
DISTRIBUTION AGREEMENT
SHIPBUILDING BUSINESS
PRO FORMA BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(MILLIONS)
<TABLE>
<CAPTION>
COMPANY PRO FORMA PRO FORMA
ASSETS HISTORICAL ADJUSTMENTS COMBINED
------ ---------- ----------- ---------
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents................... $ 1 $ 4 (a) $ 5
614 (b)
(614)(d)
Contracts in process........................ 282 282
Other current assets........................ 190 190
------ ----- ------
Total current assets...................... 473 4 477
------ ----- ------
Noncurrent Assets
Property, plant and equipment, net.......... 824 824
Other assets................................ 155 (9)(c) 160
14 (d)
------ ----- ------
Total noncurrent assets................... 979 5 984
------ ----- ------
$1,452 $ 9 $1,461
====== ===== ======
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
Current Liabilities
Accounts payable............................ $ 177 $ (73)(c) $ 104
Short-term debt............................. 95 28 (b) 28
(95)(e)
Other accrued liabilities................... 160 160
------ ----- ------
Total current liabilities................. 432 (140) 292
------ ----- ------
Noncurrent Liabilities
Long-term debt.............................. 282 586 (b) 586
(282)(e)
Deferred income taxes....................... 140 140
Other long-term liabilities................. 249 249
------ ----- ------
Total noncurrent liabilities.............. 671 304 975
------ ----- ------
Equity
Common stock................................ 1 (f) 1
Paid-in capital............................. 193 (f) 193
Retained earnings........................... -- (f) --
Combined equity............................. 349 4 (a) --
64 (c)
(600)(d)
377 (e)
(194)(f)
------ ----- ------
Total equity.............................. 349 (155) 194
------ ----- ------
$1,452 $ 9 $1,461
====== ===== ======
</TABLE>
See the accompanying notes to Unaudited Pro Forma Combined Financial
Statements.
1
<PAGE>
SHIPBUILDING BUSINESS
NOTES TO PRO FORMA BALANCE SHEET
(a) To reflect a cash contribution from Tenneco to the Company pursuant to the
Cash Realignment provisions in the Distribution Agreement covering the
Shipbuilding Distribution.
(b) To reflect $614 million in total borrowings under various credit
facilities which borrowings will consist of (i) a $200 million six-year
amortizing Term Loan with an estimated annual interest rate of 8%, (ii)
$200 million Senior Notes due 2006 with an estimated annual interest rate
of 9.25%, (iii) $200 million Senior Subordinated Notes due 2006 with an
estimated annual interest rate of 9.75%, and (iv) $14 million in
borrowings under a $215 million six-year Revolving Credit Facility, with
an estimated annual interest rate of 8% and commitment fees due on the
unused portion of the facility, for payment of certain fees and expenses
described in (d) below. Approximately $28 million of the assumed Term Loan
borrowings will mature within one year from the consummation of the
Transaction, and such amount is reflected as short-term debt in the
accompanying Pro Forma Combined Balance Sheet.
(c) To reflect the settlement or capitalization of intercompany accounts
payable with Tenneco affiliates and the transfer of certain assets prior
to the Shipbuilding Distribution pursuant to certain Corporate
Restructuring Transactions.
(d) To reflect: (i) a cash dividend of $600 million to be paid by the Company
to Tenneco or one or more of its subsidiaries, principally using
borrowings under the Senior Credit Facility and the Notes and (ii) a
payment of $14 million for certain fees and expenses in connection with
the Senior Credit Facility and Notes.
(e) To reflect the elimination of corporate debt and related interest expense
allocated by Tenneco to the Company. See the Combined Financial
Statements, and notes thereto, included elsewhere in this Information
Statement.
(f) To reflect the distribution of NNS Common Stock to holders of Tenneco
Common Stock at an exchange ratio of one share of NNS Common Stock for
five shares of Tenneco Common Stock.
(g) To reflect: (i) interest expense related to the borrowings assumed
outstanding under the Senior Credit Facility and the Notes at the assumed
annual interest rates discussed in (b), (ii) the cost of commitment fees
on the unused borrowing capacity under the Revolving Credit Facility, and
(iii) the amortization of deferred debt financing costs incurred in
connection with the Senior Credit Facility and the Notes, as well as the
related tax effects of these items at an assumed statutory rate of 35%. A
1/8% change in these assumed annual interest rates would change pro forma
annual interest expense by $0.8 million, before the effect of income
taxes.
(h) EBITDA, on a pro forma basis, was $113 million and $227 million for the
six months ended June 30, 1996 and the year ended December 31, 1995,
respectively. EBITDA represents earnings before cumulative effect of
changes in accounting principles, income taxes, interest expense and
depreciation and amortization. EBITDA is not a calculation based upon
GAAP; however, the amounts included in the EBITDA calculation are derived
from amounts included in the combined pro forma Statements of Earnings. In
addition, EBITDA shall not be considered as an alternative to net income
or operating income, as an indicator of the operating performance of the
Company or as an alternative to operating cash flows as a measure of
liquidity.
2
<PAGE>
EXHIBIT J
TO
DISTRIBUTION AGREEMENT
SHIPBUILDING SUBSIDIARIES
<TABLE>
<S> <C>
Subsidiaries of Tenneco InterAmerica Inc. (Delaware)
Newport News Shipbuilding and Dry Dock Company (Virginia)................. 100%
Asheville Industries Inc. (North Carolina).............................. 100
Greeneville Industries Inc. (Virginia).................................. 100
Newport News GlobalCorporation (U.S. Virgin Islands).................... 100
Newport News Industrial Corporation (Virginia).......................... 100
Newport News Industrial Corporation of Ohio (Ohio).................... 100
Newport News Reactor Services, Inc. (Virginia).......................... 100
Tenneco Tanker Holding Corporation (Delaware)........................... 100
The James River Oyster Corporation (Virginia)........................... 100
</TABLE>
1
<PAGE>
EXHIBIT 10.4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT K
TO
DISTRIBUTION AGREEMENT
TAX SHARING AGREEMENT
AMONG
TENNECO INC.,
NEW TENNECO INC.,
NEWPORT NEWS SHIPBUILDING INC.,
AND
EL PASO NATURAL GAS COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 1. Definition of Terms......................................... 1
Section 2. Allocation of Tax Liabilities............................... 6
Section 3. Proration of Taxes for Straddle Periods..................... 10
Section 4. Preparation and Filing of Tax Returns....................... 10
Section 5. Tax Payments and Intercompany Billings...................... 13
Section 6. Tax Benefits................................................ 16
Section 7. Assistance and Cooperation.................................. 17
Section 8. Tax Records................................................. 17
Section 9. Tax Contests................................................ 18
Effective Date; Termination of Prior Intercompany Tax
Section 10. Allocation Agreements....................................... 19
Section 11. No Inconsistent Actions..................................... 19
Section 12. Survival of Obligations..................................... 19
Section 13. Employee Matters............................................ 20
Section 14. Treatment of Payments; Tax Gross Up......................... 20
Section 15. Disagreements............................................... 20
Section 16. Late Payments............................................... 20
Section 17. Expenses.................................................... 21
Section 18. Special Rules for Determining Members of Groups............. 21
Section 19. General Provisions.......................................... 21
</TABLE>
<PAGE>
TAX SHARING AGREEMENT
This Agreement is entered into as of October 31, 1996 by and between Tenneco
Inc., a Delaware corporation ("Tenneco"), Newport News Shipbuilding Inc.
(formerly known as Tenneco InterAmerica Inc.), a Delaware corporation
("Shipbuilding Company"), New Tenneco Inc., a Delaware corporation
("Industrial Company"), and El Paso Natural Gas Company, a Delaware
corporation ("Acquiror"). Tenneco, Shipbuilding Company, and Industrial
Company are sometimes collectively referred to herein as the "Companies."
Capitalized terms used in this Agreement are defined in Section 1 below.
Unless otherwise indicated, all "Section" references in this Agreement are to
sections of this Agreement.
RECITALS
WHEREAS, as of the date hereof, Tenneco is the common parent of an
affiliated group of corporations, including Shipbuilding Company and
Industrial Company, which has elected to file consolidated Federal income tax
returns; and
WHEREAS, the Companies have entered into a Distribution Agreement setting
forth the corporate transactions pursuant to which Tenneco will distribute all
of the outstanding shares of common stock of Shipbuilding Company and all of
the outstanding shares of common stock of Industrial Company to Tenneco
shareholders in transactions intended to qualify as tax-free distributions
under Section 355 of the Code (as defined below); and
WHEREAS, as a result of the Distributions, Shipbuilding Company and
Industrial Company, and their respective subsidiaries, will cease to be
members of the affiliated group of which Tenneco is the common parent,
effective as of the Distribution Date; and
WHEREAS, the Companies desire to provide for and agree upon the allocation
between the parties of liabilities for Taxes arising prior to, as a result of,
and subsequent to the transactions contemplated by the Distribution Agreement,
and to provide for and agree upon other matters relating to Taxes;
NOW THEREFORE, in consideration of the mutual agreements contained herein,
the Companies hereby agree as follows:
Section 1. Definition of Terms. For purposes of this Agreement (including
the recitals hereof), the following terms have the following meanings:
"ACCOUNTING CUTOFF DATE" means, with respect to each of Shipbuilding Company
and Industrial Company, any date as of the end of which there is a closing of
the financial accounting records for such entity.
"ACCOUNTING FIRM" shall have the meaning provided in Section 15.
"ACQUIROR" means El Paso Natural Gas Company, a Delaware corporation, and
any successor.
"ADJUSTMENT REQUEST" means any formal or informal claim or request filed
with any Tax Authority, or with any administrative agency or court, for the
adjustment, refund, or credit of Taxes, including (a) any amended Tax return
claiming adjustment to the Taxes as reported on the Tax Return or, if
applicable, as previously adjusted, or (b) any claim for refund or credit of
Taxes previously paid.
"AFFILIATE" means any entity that directly or indirectly is "controlled" by
the person or entity in question. "Control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of a person, whether through ownership of voting securities, by
contract or otherwise. Except as otherwise provided herein, the term Affiliate
shall refer to Affiliates of a person as determined immediately after the
Distributions.
"AGREEMENT" shall mean this Tax Sharing Agreement.
1
<PAGE>
"ALLOCATED FEDERAL TAX LIABILITY" shall have the meaning provided in Section
5.01(b)(i).
"BASE AMOUNT ADJUSTMENT ITEMS" means any Tax Items arising from the amounts
described in clause (i)(A) of the definition of Base Amount in the Debt and
Cash Allocation Agreement attached as Exhibit C to the Distribution Agreement
(relating to gas supply realignment costs and recoveries of such costs) or in
clause (i)(C) of such definition of Base Amount (relating to payments made in
settlement of any significant Energy Liability (as defined in the Merger
Agreement)), and any Tax Items related to such amounts (such as income accrued
with respect to payments to be received after the Distribution Date from
customers, insurers, or other third parties with respect to gas supply
realignment costs or settlements of Energy Liabilities).
"CARRYBACK" means any net operating loss, net capital loss, excess tax
credit, or other similar Tax item which may or must be carried from one Tax
Period to another Tax Period under the Code or other applicable Tax Law.
"CODE" means the U.S. Internal Revenue Code of 1986, as amended, or any
successor law.
"COMPANIES" means Tenneco, Shipbuilding Company, and Industrial Company,
collectively, and "COMPANY" means any one of Tenneco, Shipbuilding Company, or
Industrial Company.
"CONSOLIDATED OR COMBINED INCOME TAX" means any Income Tax computed by
reference to the assets and activities of members of more than one Group.
"CONSOLIDATED OR COMBINED STATE INCOME TAX" means any State Income Tax
computed by reference to the assets and activities of members of more than one
Group.
"CONSOLIDATED TAX LIABILITY" means, with respect to any Tenneco Federal
Consolidated Return, the "tax liability of the group" as that term is used in
Treasury Regulation Section 1.1552-1(a)(1) (including applicable interest,
additions to the tax, additional amounts, and penalties as provided in the
Code), adjusted as follows:
(i) such tax liability shall be treated as including any alternative
minimum tax liability under Code Section 55;
(ii) in the case of the Tax Period which includes the Distribution Date,
the Consolidated Tax Liability shall be computed as if the Distribution
Date were the last day of the Tax Period; and
(iii) Base Amount Adjustment Items and Debt Discharge Items shall be
disregarded.
"CUMULATIVE FEDERAL TAX PAYMENT" shall have the meaning provided in Section
5.01(b)(ii).
"DEBT DISCHARGE ITEMS" means any Tax Items arising from the Debt Realignment
(as defined in the Merger Agreement).
"DISTRIBUTION AGREEMENT" means the agreement, as amended from time to time,
setting forth the corporate transactions required to effect the distribution
to Tenneco shareholders of Shipbuilding Common Shares and Industrial Common
Shares, and to which this Tax Sharing Agreement is attached as an exhibit.
"DISTRIBUTION DATE" means the Distribution Date as that term is defined in
the Distribution Agreement.
"DISTRIBUTIONS" means the distributions to Tenneco shareholders on the
Distribution Date of all of the outstanding stock of Industrial Company and
Shipbuilding Company owned by Tenneco.
"EFFECTIVE TIME" shall have the meaning provided in the Merger Agreement.
"ENERGY INVESTMENTS GROUP" means the corporations, or divisions of
corporations, identified on Schedule 3.
"FEDERAL ALLOCATION METHOD" shall have the meaning provided in Section
2.02(a).
2
<PAGE>
"FEDERAL INCOME TAX" means any Tax imposed by Subtitle A or F of the Code.
"FEDERAL TAX ADJUSTMENT" shall have the meaning provided in Section 2.02(b).
"FOREIGN INCOME TAX" means any Tax imposed by any foreign country or any
possession of the United States, or by any political subdivision of any
foreign country or United States possession, which is an income tax as defined
in Treasury Regulation Section 1.901-2.
"GROUP" means the Tenneco Group, the Shipbuilding Group, and the Industrial
Group, as the context requires.
"GSR ITEMS" means, for any Tax Period: (a) the deductions or losses
allowable in such Tax Period attributable to (i) the payment of gas supply
realignment costs as described in clause (i) of the definition of Base Amount
in the Debt and Cash Allocation Agreement attached as Exhibit C to the
Distribution Agreement, or (ii) the payment in any Post-Distribution Tax
Period of gas supply realignment costs incurred pursuant to contracts entered
into on or prior to the Distribution Date; and (b) any taxable income or gain
recognized in such Tax Period attributable to the recovery of such costs from
customers, insurers, or third parties or attributable to any reduction in any
previously deducted payments.
"INCOME TAX" means any Federal Income Tax, State Income Tax, or Foreign
Income Tax.
"INDUSTRIAL ADJUSTMENT" means any proposed adjustment by a Tax Authority or
claim for refund asserted in a Tax Contest to the extent Industrial Company
would be exclusively liable for any resulting Tax under this Agreement and
exclusively entitled to receive any resulting Tax Benefit under this
Agreement. For purposes of this Agreement, any proposed adjustment relating to
Tenneco Business Services Inc. (or the predecessor shared services project of
Tenneco) shall be an Industrial Adjustment, and Industrial Company shall be
liable for any Taxes (and shall be entitled to receive any Tax Benefit)
arising from such adjustments.
"INDUSTRIAL COMPANY" means New Tenneco Inc., a Delaware corporation, and any
successor.
"INDUSTRIAL GROUP" means Industrial Company and its Affiliates as determined
immediately after the Distributions, modified as provided in Section 18.
"INDUSTRIAL GROUP PRIOR FEDERAL TAX LIABILITY" shall have the meaning
provided in Section 2.02(b)(ii).
"INDUSTRIAL GROUP PRIOR STATE TAX LIABILITY" shall have the meaning provided
in Section 2.03(b)(ii)(B).
"INDUSTRIAL GROUP RECOMPUTED FEDERAL TAX LIABILITY" shall have the meaning
provided in Section 2.02(b)(i).
"INDUSTRIAL GROUP RECOMPUTED STATE TAX LIABILITY" shall have the meaning
provided in Section 2.03(b)(ii)(A).
"JOINT ADJUSTMENT" means any proposed adjustment by a Tax Authority or claim
for refund asserted in a Tax Contest which is neither an Industrial
Adjustment, a Shipbuilding Adjustment, nor a Tenneco Adjustment.
"MERGER" means the merger of El Paso Merger Company with and into Tenneco as
described in the Merger Agreement.
"MERGER AGREEMENT" means the Agreement and Plan of Merger among Tenneco,
Acquiror, and El Paso Merger Company dated as of June 19, 1996, as amended
from time to time.
"PAYMENT DATE" means (i) with respect to any Tenneco Federal Consolidated
Return, the due date for any required installment of estimated taxes
determined under Code Section 6655, the due date (determined without regard to
extensions) for filing the return determined under Code Section 6072, and the
date the return is filed,
3
<PAGE>
and (ii) with respect to any Tax Return for any Consolidated or Combined State
Income Tax, the corresponding dates determined under the applicable Tax Law.
"POST-DISTRIBUTION PERIOD" means any Tax Period beginning after the
Distribution Date, and, in the case of any Straddle Period, the portion of
such Straddle Period beginning the day after the Distribution Date.
"PRE-DISTRIBUTION PERIOD" means any Tax Period ending on or before the
Distribution Date, and, in the case of any Straddle Period, the portion of
such Straddle Period ending on the Distribution Date.
"PRIME RATE" means the base rate on corporate loans charged by Citibank,
N.A., New York, New York from time to time, compounded daily on the basis of a
year of 365 or 366 (as applicable) days and actual days elapsed.
"PRIOR INTERCOMPANY TAX ALLOCATION AGREEMENTS" means any written or oral
agreement or any other arrangements relating to allocation of Taxes existing
between or among the Tenneco Group, the Shipbuilding Group, and the Industrial
Group as of the Distribution Date (other than this Agreement and other than
any such agreement or arrangement between or among persons who are members of
a single Group). The following agreements, including any amendments thereto,
shall not be considered a Prior Intercompany Tax Allocation Agreement: (i) the
agreement by and between Tenneco and Case Equipment Corporation (now known as
Case Corporation) dated June 23, 1994; (ii) the agreement by and among
Tenneco, Tenneco United Kingdom Holdings Limited, and Albright and Wilson plc
dated February 16, 1995; and (iii) the agreement by and between Tennessee Gas
Pipeline Company, Tenneco Gas Marketing Company, and IGC Energy, Inc. dated
November 1, 1995.
"PROHIBITED ACTION" shall have the meaning provided in Section 11.
"RESPONSIBLE COMPANY" means, with respect to any Tax Return, the Company
having responsibility for preparing and filing such Tax Return under this
Agreement.
"RESTRUCTURING TAX" means the Taxes described in Sections 2.06(a)(ii) or
2.06(a)(iii) (relating to Tax resulting from any income or gain recognized as
a result of the Transactions).
"RULING REQUEST" means the letter filed by Tenneco with the Internal Revenue
Service requesting a ruling from the Internal Revenue Service regarding
certain tax consequences of the Transactions (including all attachments,
exhibits, and other materials submitted with such ruling request letter) and
any amendment or supplement to such ruling request letter.
"SEPARATE COMPANY TAX" means any Tax computed by reference to the assets and
activities of a member or members of a single Group.
"SHIPBUILDING ADJUSTMENT" means any proposed adjustment by a Tax Authority
or claim for refund asserted in a Tax Contest to the extent Shipbuilding
Company would be exclusively liable for any resulting Tax under this Agreement
and exclusively entitled to receive any resulting Tax Benefit under this
Agreement.
"SHIPBUILDING COMPANY" means Newport News Shipbuilding Inc. (formerly known
as Tenneco InterAmerica Inc.), a Delaware corporation, and any successor.
"SHIPBUILDING GROUP" means Shipbuilding Company and its Affiliates as
determined immediately after the Distributions, modified as provided in
Section 18.
"STRADDLE PERIOD" means any Tax Period that begins on or before and ends
after the Distribution Date.
4
<PAGE>
"STATE INCOME TAX" means any Tax imposed by any State of the United States
or by any political subdivision of any such State which is imposed on or
measured by net income, including state and local franchise or similar Taxes
measured by net income.
"TAX" or "TAXES" means any income, gross income, gross receipts, profits,
capital stock, franchise, withholding, payroll, social security, workers
compensation, unemployment, disability, property, ad valorem, stamp, excise,
severance, occupation, service, sales, use, license, lease, transfer, import,
export, value added, alternative minimum, estimated or other similar tax
(including any fee, assessment, or other charge in the nature of or in lieu of
any tax) imposed by any governmental entity or political subdivision thereof,
and any interest, penalties, additions to tax, or additional amounts in
respect of the foregoing.
"TAX AUTHORITY" means, with respect to any Tax, the governmental entity or
political subdivision thereof that imposes such Tax, and the agency (if any)
charged with the collection of such Tax for such entity or subdivision.
"TAX BENEFIT" means any refund, credit, or other reduction in otherwise
required Tax payments (including any reduction in estimated tax payments).
"TAX CONTEST" means an audit, review, examination, or any other
administrative or judicial proceeding with the purpose or effect of
redetermining Taxes of any of the Companies or their Affiliates (including any
administrative or judicial review of any claim for refund) for any Tax Period
ending on or before the Distribution Date or any Straddle Period.
"TAX CONTEST COMMITTEE" shall have the meaning provided in Section 9.02(b).
"TAX ITEM" means, with respect to any Income Tax, any item of income, gain,
loss, deduction, and credit.
"TAX LAW" means the law of any governmental entity or political subdivision
thereof relating to any Tax.
"TAX OPINION" means the opinion letter to be issued by Tenneco's tax counsel
as required by the Merger Agreement, a form of which is attached as Exhibit K
of the Merger Agreement.
"TAX PERIOD" means, with respect to any Tax, the period for which the Tax is
reported as provided under the Code or other applicable Tax Law.
"TAX RECORDS" means Tax Returns, Tax Return workpapers, documentation
relating to any Tax Contests, and any other books of account or records
required to be maintained under the Code or other applicable Tax Laws or under
any record retention agreement with any Tax Authority.
"TAX RETURN" means any report of Taxes due, any claims for refund of Taxes
paid, any information return with respect to Taxes, or any other similar
report, statement, declaration, or document required to be filed under the
Code or other Tax Law, including any attachments, exhibits, or other materials
submitted with any of the foregoing, and including any amendments or
supplements to any of the foregoing.
"TENNECO" means Tenneco Inc., a Delaware corporation, and any successor.
"TENNECO ADJUSTMENT" means any proposed adjustment by a Tax Authority or
claim for refund asserted in a Tax Contest to the extent Tenneco would be
exclusively liable for any resulting Tax under this Agreement and exclusively
entitled to receive any resulting Tax Benefit under this Agreement.
"TENNECO FEDERAL CONSOLIDATED RETURN" means any United States federal Tax
Return for the affiliated group (as that term is defined in Code Section 1504)
that includes Tenneco as the common parent and includes any member of the
Shipbuilding Group or the Industrial Group.
"TENNECO GROUP" means Tenneco and its Affiliates, excluding any entity that
is a member of the Industrial Group or the Shipbuilding Group.
5
<PAGE>
"TRANSACTIONS" means the transactions contemplated by the Distribution
Agreement (including the Corporate Restructuring Steps and Distributions, as
defined in such agreement) and by the Merger Agreement (including the Debt
Realignment, as defined in such agreement).
"TREASURY REGULATIONS" means the regulations promulgated from time to time
under the Code as in effect for the relevant Tax Period.
Section 2. Allocation of Tax Liabilities. The provisions of this Section 2
are intended to determine each Company's liability for Taxes with respect to
Pre-Distribution Periods. Once the liability has been determined under this
Section 2, Section 5 determines the time when payment of the liability is to
be made, and whether the payment is to be made to the Tax Authority directly
or to another Company.
2.01 General Rule
(a) Tenneco Liability. Tenneco shall be liable for all Taxes not
specifically allocated to either Industrial Company or Shipbuilding Company
under this Section 2. Tenneco shall indemnify and hold harmless the
Industrial Group and the Shipbuilding Group from and against any liability
for Taxes which Tenneco is liable for under this Section 2.01(a).
(b) Industrial Company Liability. Industrial Company shall be liable for,
and shall indemnify and hold harmless the Tenneco Group and the
Shipbuilding Group from and against any liability for, Taxes which are
allocated to Industrial Company under this Section 2.
(c) Shipbuilding Company Liability. Shipbuilding Company shall be liable
for, and shall indemnify and hold harmless the Tenneco Group and the
Industrial Group from and against any liability for, Taxes which are
allocated to Shipbuilding Company under this Section 2.
2.02 Allocation of United States Federal Income Tax. Except as provided in
Sections 2.06, 6.02, and 6.03:
(a) Allocation of Tax Relating to Tenneco Federal Consolidated Returns
Filed After the Distribution Date. With respect to any Tenneco Federal
Consolidated Return filed after the Distribution Date, the Consolidated Tax
Liability shall be allocated among the Groups in accordance with the method
prescribed in Treasury Regulation Section 1.1552-1(a)(1) (as in effect on
the date hereof) determined by treating each Group as a single member of
the consolidated group and by disregarding Base Amount Adjustment Items and
Debt Discharge Items in computing each Group's taxable income (the "Federal
Allocation Method"). For purposes of such allocation, the excess, if any,
of (i) Consolidated Tax Liability over (ii) Consolidated Tax Liability
determined without regard to any alternative minimum tax liability under
Code Section 55, shall be allocated among the Groups in accordance with
their respective amounts of alternative minimum taxable income, and any
corresponding alternative minimum tax credit shall be allocated in
accordance with the allocation of such alternative minimum tax liability.
Any amount so allocated to the Industrial Group shall be a liability of
Industrial Company to Tenneco under this Section 2, and any amount so
allocated to the Shipbuilding Group shall be a liability of Shipbuilding
Company to Tenneco under this Section 2. Amounts described in Code Section
1561 (relating to limitations on certain multiple benefits) shall be
divided equally among the Tenneco Group, the Industrial Group, and the
Shipbuilding Group to the extent permitted by the Code.
(b) Allocation of Tenneco Federal Consolidated Return Tax Adjustments. If
there is any adjustment to the reported Tax liability with respect to any
Tenneco Federal Consolidated Return, or to such Tax liability as previously
adjusted, Industrial Company shall be liable to Tenneco for the excess (if
any) of--
(i) the Consolidated Tax Liability of the Industrial Group computed
as if all members of the Industrial Group included in the Tax Return
had filed a consolidated Tax Return for such members based on the Tax
Items of such members as so adjusted (the "Industrial Group Recomputed
Federal Tax Liability"); over
(ii) the Consolidated Tax Liability of the Industrial Group computed
as if such members of the Industrial Group had filed a consolidated Tax
Return for such members based on the Tax Items of such
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members as reported (or, if applicable, as previously adjusted) (the
"Industrial Group Prior Federal Tax Liability").
If the Industrial Group Prior Federal Tax Liability exceeds the Industrial
Group Recomputed Federal Tax Liability, Tenneco shall be liable to
Industrial Company for such excess. The Shipbuilding Group liability shall
be recomputed in a like manner, and Shipbuilding Company shall be liable to
Tenneco for any excess of the Shipbuilding Group Recomputed Federal Tax
Liability over the Shipbuilding Group Prior Federal Tax Liability, and
Tenneco shall be liable to Shipbuilding Company for any excess of the
Shipbuilding Group Prior Federal Tax Liability over the Shipbuilding Group
Recomputed Federal Tax Liability. For purposes of this Section 2.02(b), if
the Industrial Group or the Shipbuilding Group has a net operating loss
after taking into account the adjustments allocable to such group, the
Recomputed Federal Tax Liability of the group shall be less than zero to
the extent such net operating loss produces a Tax Benefit in consolidation
for the applicable taxable year.
(c) Special Allocation With Respect to Energy Investments Group. If the
net operating loss of the Energy Investments Group as reported on the
Tenneco Federal Consolidated Tax Return for the taxable year ended December
31, 1996 (but computed as if the Distribution Date were the last day of the
Tax Period) is less than $185,000,000, Industrial Company shall be liable
to Tenneco for an amount equal to 35% of the difference between
$185,000,000 and the Energy Investments Group net operating loss or net
taxable income. If such net operating loss of the Energy Investments Group
is greater than $213,000,000, Tenneco shall be liable to Industrial Company
for an amount equal to 35% of the difference between $213,000,000 and the
amount of the Energy Investments Group net operating loss. If there is any
subsequent adjustment to the Energy Investment Group's net operating loss
or taxable income, the amount payable by or to Industrial Company under
this Section 2.02(c) shall be adjusted accordingly based on the net
operating loss or taxable income as adjusted.
2.03 Allocation of State Income Taxes. Except as provided in Sections 2.04,
2.05, 2.06, 6.02, and 6.03, State Income Taxes shall be allocated as follows:
(a) Separate Company Taxes. In the case of any State Income Tax which is
a Separate Company Tax, Industrial Company shall be liable for such Tax
imposed on any members of the Industrial Group, and Shipbuilding Company
shall be liable for such Tax imposed on any members of the Shipbuilding
Group.
(b) Consolidated or Combined State Income Taxes. In the case of any
Consolidated or Combined State Income Tax, the liability of Industrial
Company and Shipbuilding Company with respect to such Tax for any Tax
Period shall be computed as follows:
(i) Allocation of Tax Reported on Tax Returns Filed After the
Distribution Date. In the case of any Consolidated or Combined State
Income Tax reported on any Tax Return filed after the Distribution Date
(excluding any amended return), Industrial Company shall be liable to
Tenneco for the State Income Tax liability computed as if all members
of the Industrial Group included in the computation of such Tax had
filed a consolidated or combined Tax Return for such Industrial Group
members based on the income, apportionment factors, and other items of
such members, and Shipbuilding Company shall be liable to Tenneco for
the State Income Tax liability computed as if all members of the
Shipbuilding Group included in the computation of such Tax had filed a
consolidated or combined Tax Return for such Shipbuilding Group members
based on the income, apportionment factors, and other items of such
members.
(ii) Allocation of Combined or Consolidated State Income Tax
Adjustments. If there is any adjustment to the amount of Consolidated
or Combined State Income Tax reported on any Tax Return (or as
previously adjusted), the liability of the Industrial Group and the
Shipbuilding Group shall be recomputed as provided in this
subparagraph. Industrial Company shall be liable to Tenneco for the
excess (if any) of--
(A) the State Income Tax liability computed as if all members of
the Industrial Group included in the Tax Return had filed a
consolidated or combined Tax Return for such members
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based on the income, apportionment factors, and other items of such
members as so adjusted (the "Industrial Group Recomputed State Tax
Liability"); over
(B) the State Income Tax liability computed as if such members of
the Industrial Group had filed a consolidated or combined Tax Return
for such members based on the income, apportionment factors, and
other items of such members as reported (or, if applicable, as
previously adjusted) (the "Industrial Group Prior State Tax
Liability").
If the Industrial Group Prior State Tax Liability exceeds the
Industrial Group Recomputed State Tax Liability, Tenneco shall be
liable to Industrial Company for such excess. The Shipbuilding Group
liability shall be recomputed in a like manner, and Shipbuilding
Company shall be liable to Tenneco for any excess of the Shipbuilding
Group Recomputed State Tax Liability over the Shipbuilding Group Prior
State Tax Liability, and Tenneco shall be liable to Shipbuilding
Company for any excess of the Shipbuilding Group Prior State Tax
Liability over the Shipbuilding Group Recomputed State Tax Liability.
For purposes of this paragraph, the determination and payment of
estimated Taxes (including the determination and payment of any Tax
required to be paid with a request for an extension of time to file a
Tax Return) shall not be treated as an adjustment to the related
Consolidated or Combined State Income Tax.
2.04 Allocation of State Income Tax Effects of Federal Audit Adjustments.
Tenneco shall be liable for any State Income Taxes resulting from the
adjustments to Tenneco Federal Consolidated Returns for Tax Periods ending on
or before December 31, 1989. In accordance with Section 6, any Tax Benefit
realized by the Shipbuilding Group or by the Industrial Group as a result of
Tenneco's payment of such State Income Taxes shall be for the account of
Tenneco and shall be paid to Tenneco under Section 6. For example, if Tenneco
pays a State Income Tax liability of $100x related to adjustments to the Tax
Return of a member of the Shipbuilding Group, and if such payment is available
as a deduction on the Shipbuilding Group's Tax Return for Federal Income Tax,
Shipbuilding Company shall pay to Tenneco the Federal Income Tax benefit
attributable to the deduction (i.e., $35x assuming a 35% maximum marginal tax
rate under Code Section 11, and assuming the payment is treated as a
nondeductible dividend under the Code in accordance with Section 14 of this
Agreement).
2.05 Allocation of Other Taxes. Except as provided in Section 2.06, all
Taxes other than those specifically allocated pursuant to Sections 2.03
through 2.04 shall be allocated based on the legal entity on which the legal
incidence of the Tax is imposed. As between the parties to this Agreement,
Industrial Company shall be liable for all Taxes imposed on any member of the
Industrial Group (including Taxes imposed on the separate consolidated federal
income tax return of Tenneco International Holding Corp.), and Shipbuilding
Company shall be liable for all Taxes imposed on any member of the
Shipbuilding Group. The Companies believe that there is no Tax not
specifically allocated pursuant to Sections 2.03 through 2.04 which is legally
imposed on more than one legal entity (e.g., joint and several liability);
however, if there is any such Tax, it shall be allocated in accordance with
past practices as reasonably determined by the affected Companies, or in the
absence of such practices, in accordance with any allocation method agreed
upon by the affected Companies.
2.06 Transaction and Other Taxes
(a) Tenneco Liability. Except as otherwise provided in Sections 2.06 and
6.02, Tenneco shall be liable for, and shall indemnify and hold harmless
Industrial Group and the Shipbuilding Group from and against any liability
for, all Taxes resulting from the Transactions (other than Taxes allocated
to the Acquiror under the Merger Agreement), including:
(i) Any sales and use, gross receipts, or other transfer Taxes
imposed on the transfers occurring pursuant to the Transactions;
(ii) any Tax resulting from any income or gain recognized under
Treasury Regulation Sections 1.1502-13 or 1.1502-19 (or any
corresponding provisions of other applicable Tax Laws) as a result of
the Transactions; and
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(iii) any Tax resulting from any income or gain recognized as a
result of any of the transactions contemplated by the Distribution
Agreement failing to qualify for tax-free treatment under Code Sections
332, 351, 355, 361, or other provisions of the Code (as contemplated in
the Ruling Request) or other applicable Tax Laws, or as a result of the
Merger failing to qualify for tax-free treatment under Code Sections
354 and 361 or other provisions of the Code or other applicable Tax
Laws (as contemplated in the Merger Agreement).
If any Tax referred to in this Section 2.06(a) is included in the
definition of Actual Energy Debt Amount, but cannot be calculated on the
Energy Determination Date (as such terms are defined in the Debt and Cash
Allocation Agreement attached as Exhibit C to the Distribution Agreement),
then Industrial Company shall pay to Tenneco the amount which would have
been included in the Actual Energy Debt Amount. Such payments shall be made
at the time such amounts are determinable. For the purposes of this Section
2.06(a) and the definition of Actual Energy Debt Amount (as defined in the
Debt and Cash Allocation Agreement), the term "transfer Taxes" includes any
Illinois franchise tax imposed under Ill. Rev. Stat. ch. 805, (S) 15.65(b)
in connection with the transfer by Tenneco Corporation of net intercompany
receivables in the approximate amount of $6.9 billion to a subsidiary of
Midwestern Gas Transmission Company in connection with the Corporate
Restructuring Transactions.
(b) Indemnity for Inconsistent Acts. Industrial Company shall be liable
for, and shall indemnify and hold harmless the Tenneco Group and the
Shipbuilding Group from and against any liability for, any Restructuring
Tax (described in subparagraphs (ii) and (iii) above) to the extent arising
from any breach of Industrial Company's representations or covenants under
Section 11. Shipbuilding Company shall be liable for, and shall indemnify
and hold harmless the Tenneco Group and the Industrial Group from and
against any liability for, any Restructuring Tax to the extent arising from
any breach of Shipbuilding Company's representations or covenants under
Section 11. Acquiror shall be liable for, and shall indemnify and hold
harmless the Industrial Group and Shipbuilding Group from and against any
liability for, any Restructuring Tax to the extent arising from any breach
of Acquiror's representations or covenants under Section 11.
(c) Indemnity for Representations. Industrial Company shall be liable
for, and shall indemnify and hold harmless the Tenneco Group and the
Shipbuilding Group from and against any liability for, any Restructuring
Tax to the extent arising from the inaccuracy of any factual statements or
representations in connection with the Ruling Request or the Tax Opinion,
but in each case only to the extent such inaccuracy arises from facts in
existence prior to the Effective Time, and excluding any inaccuracy with
respect to any statements or representations relating to Acquiror,
Shipbuilding Company, or their Affiliates or any plan or intention on the
part of Acquiror, Shipbuilding Company, or their Affiliates as to actions
to be taken at or subsequent to the Effective Time. Shipbuilding Company
shall be liable for, and shall indemnify and hold harmless the Tenneco
Group and the Industrial Group from and against any liability for, any
Restructuring Tax to the extent arising from the inaccuracy of any factual
statements or representations relating to the Shipbuilding Company or its
Affiliates in connection with the Ruling Request or the Tax Opinion.
Acquiror shall be liable for, and shall indemnify and hold harmless the
Industrial Group and the Shipbuilding Group from and against any liability
for, any Restructuring Tax to the extent arising from the inaccuracy of any
factual statements or representations relating to Acquiror or its
Affiliates (other than the Tenneco Group) in connection with the Ruling
Request or the Tax Opinion.
(d) Change in Law Relating to Deferred Gains. If between the date of the
Merger Agreement and the Effective Time there is a change in law and as a
result of such change in law Tenneco is required to restore to income as a
result of the Merger the deferred gains identified on Schedule 2 to the
Debt and Cash Allocation Agreement attached as Exhibit C to the
Distribution Agreement, then any resulting Tax shall be allocated equally
between Industrial Company and Tenneco. For purposes of this Section
2.06(d), the term "change in law" shall mean any of the following occurring
between the date of the Merger Agreement and the Effective Time: (i) an
amendment to the Code; (ii) an amendment to the Treasury Regulations
(including any issuance of proposed, temporary, or final Treasury
Regulations); (iii) a decision of the Tax Court, any Federal District
Court, the Court of Federal Claims, the Federal Circuit Court, or the
United States Supreme Court; and (iv) any notice, announcement, or other
administrative pronouncement published by the Internal
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Revenue Service in the Internal Revenue Bulletin to the effect that the
Treasury Department intends to issue Treasury Regulations after the
Effective Time that will be effective with respect to the Transactions.
(e) Taxes Relating to Settlement Receipts For Account of Industrial
Company. To the extent the economic benefit of any amounts received by the
Energy Business prior to the Effective Time from the settlement of pending
litigation (as identified on Schedule G2 to Exhibit G of the Merger
Agreement) is allocated to Industrial Company under the Debt and Cash
Allocation Agreement, any corresponding tax liability with respect to such
amounts shall be allocated to Industrial Company.
Section 3. Proration of Taxes for Straddle Periods
3.01 General Method of Proration. In the case of any Straddle Period, Tax
Items shall be apportioned between Pre-Distribution Periods and Post-
Distribution Periods in accordance with the principles of Treasury Regulation
Section 1.1502-76(b) as reasonably interpreted and applied by the Companies.
No election shall be made under Treasury Regulation Section 1.1502-
76(b)(2)(ii) (relating to ratable allocation of a year's items). If the
Distribution Date is not an Accounting Cutoff Date, the provisions of Treasury
Regulation Section 1.1502-76(b)(2)(iii) will be applied to ratably allocate
the items (other than extraordinary items) for the month which includes the
Distribution Date.
3.02 Transaction Treated as Extraordinary Item. In determining the
apportionment of Tax Items between Pre-Distribution Periods and Post-
Distribution Periods, any Tax Items relating to the Transactions shall be
treated as an extraordinary item described in Treasury Regulation Section
1.1502-76(b)(2)(ii)(C) and shall be allocated to Pre-Distribution Periods, and
any Taxes related to such items shall be treated under Treasury Regulation
Section 1.1502-76(b)(2)(iv) as relating to such extraordinary item and shall
be allocated to Pre-Distribution Periods.
Section 4. Preparation and Filing of Tax Returns
4.01 General. Except as otherwise provided in this Section 4, Tax Returns
shall be prepared and filed when due (including extensions) by the person
obligated to file such Tax Returns under the Code or applicable Tax Law. The
Companies shall provide, and shall cause their Affiliates to provide,
assistance and cooperate with one another in accordance with Section 7 with
respect to the preparation and filing of Tax Returns, including providing
information required to be provided in Section 7. As used in this Section 4,
the terms "domestic" and "foreign" have the meanings ascribed to such terms in
Code Section 7701.
4.02 Industrial Company's Responsibility. Industrial Company has the
exclusive obligation and right to prepare and file, or to cause to be prepared
and filed:
(a) Tenneco Federal Consolidated Returns for Tax Periods ending on or
before December 31, 1996.
(b) Tax Returns for State Income Taxes (including Tax Returns with
respect to State Income Taxes that are Separate Company Taxes) which the
Companies reasonably determine, in accordance with Tenneco's past
practices, are required to be filed by the Companies or any of their
Affiliates for Tax Periods ending on or before December 31, 1996, other
than Tax Returns with respect to State Income Taxes that are Separate
Company Taxes of the Shipbuilding Group for Tax Periods beginning on or
after the Distribution Date. If Acquiror elects or is required to combine
the income of any Company or its Affiliates with the income of the Acquiror
or any of its Affiliates (other than any Company or its Affiliates) with
respect to any Tax Return for State Income Taxes for any Tax Period ending
on or before December 31, 1996, Industrial Company shall provide to
Acquiror in accordance with a compliance schedule to be agreed to by
Industrial Company and Acquiror information and documents reasonably
required by Acquiror to prepare and file such Tax Return, and Acquiror
shall have the exclusive obligation and right to prepare and file such Tax
Return, or to cause such Tax Return to be prepared and filed.
(c) Tax Returns that are required to be filed by the members of the
Industrial Group (including the federal consolidated Tax Return required to
be filed by Tenneco International Holding Corp.).
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Nothing in this Section 4.02 shall impose on Industrial Company any liability
for any failure to file any Tax Return, or for failure to file any Tax Return
when due, with respect to any Pre-Distribution Period if the due date for such
return (including extensions) was prior to the Distribution Date.
4.03 Shipbuilding Company's Responsibility. Shipbuilding Company has the
exclusive obligation and right to prepare and file, or to cause to be prepared
and filed, Tax Returns required to be filed by members of the Shipbuilding
Group other than those Tax Returns which Industrial Company is required to
prepare and file under Section 4.02.
4.04 Tenneco Responsibility. Tenneco shall prepare and file, or shall cause
to be prepared and filed, Tax Returns required to be filed by or with respect
to members of the Tenneco Group other than those Tax Returns which Industrial
Company is required to prepare and file under Section 4.02. The Tax Returns
required to be prepared and filed by Tenneco under this Section 4.04 shall
include (a) the Tenneco Federal Consolidated Return for Tax Periods ending
after December 31, 1996, (b) Tax Returns for Consolidated or Combined State
Income Taxes which the Companies reasonably determine, in accordance with
Tenneco's past practices, are required to be filed by the Companies or any of
their Affiliates for Tax Periods ending after December 31, 1996, and (c) Tax
Returns for State Income Taxes for Tax Periods ending on or before December
31, 1996 if Acquiror elects or is required to combine the income of any
Company or its Affiliates with the income of the Acquiror or any of its
Affiliates (other than any Company or its Affiliates) with respect to such Tax
Return.
4.05 Tax Accounting Practices
(a) General Rule. Except as otherwise provided in this Section 4.05, any
Tax Return for any Pre-Distribution Period or any Straddle Period, and any
Tax Return for any Post-Distribution Period to the extent items reported on
such Tax Return might reasonably affect items reported on any Tax Return
for any Pre-Distribution Period or any Straddle Period, shall be prepared
in accordance with past Tax accounting practices used with respect to the
Tax Returns in question (unless such past practices are no longer
permissible under the Code or other applicable Tax Law), and to the extent
any items are not covered by past practices (or in the event such past
practices are no longer permissible under the Code or other applicable Tax
Law), in accordance with reasonable Tax accounting practices selected by
the Responsible Company. The Companies agree to report their portion of the
consolidated cumulative overall foreign loss based on the notional account
balances determined on a legal entity basis in a manner consistent with
past practices.
(b) Reporting of Transaction Tax Items Other Than Debt Discharge Items
and Base Amount Adjustment Items. The tax treatment reported on any Tax
Return of Tax Items relating to the Transactions shall be consistent with
the treatment of such item in the IRS Ruling Letter (as defined in the
Merger Agreement) and the Tax Opinion (unless such treatment is not
permissible under the Code). To the extent there is a Tax Item relating to
the Transactions which is not covered by the IRS Ruling Letter or the Tax
Opinion, the Companies shall agree on the tax treatment of any such Tax
Item reported on any Tax Return. For this purpose, the tax treatment of
such Tax Items on a Tax Return by the Responsible Company with respect to
such Tax Return shall be agreed to by the other Company unless either (i)
there is no reasonable basis for such tax treatment, or (ii) such tax
treatment is inconsistent with the tax treatment contemplated in the Ruling
Request or in the Tax Opinion. Such Tax Return shall be submitted for
review pursuant to Section 4.07(a), and any dispute regarding such proper
tax treatment shall be referred for resolution pursuant to Section 15,
sufficiently in advance of the filing date of such Tax Return (including
extensions) to permit timely filing of the return.
(c) Debt Discharge Items. Industrial Company shall determine the tax
treatment of any Debt Discharge Item on any Tax Return, subject only to the
other Companies' rights of review under Section 4.07.
(d) Base Amount Adjustment Items. Tenneco shall determine the tax
treatment of any Base Amount Adjustment Item on any Tax Return, subject
only to the other Companies' rights of review under Section 4.07.
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4.06 Consolidated or Combined Returns. The Companies will elect and join,
and will cause their respective Affiliates to elect and join, in filing
consolidated, unitary, combined, or other similar joint Tax Returns, to the
extent each entity is eligible to join in such Tax Returns, if the Companies
reasonably determine that the filing of such Tax Returns is consistent with
past reporting practices, or in the absence of applicable past practices, will
result in the minimization of the net present value of the aggregate Tax to
the entities eligible to join in such Tax Returns.
4.07 Right to Review Tax Returns
(a) General. The Responsible Company with respect to any Tax Return shall
make such Tax Return and related workpapers available for review by the
other Companies, if requested, to the extent (i) such Tax Return relates to
Taxes for which the requesting party may be liable, (ii) such Tax Return
relates to Taxes for which the requesting party may be liable in whole or
in part for any additional Taxes owing as a result of adjustments to the
amount of Taxes reported on such Tax Return, (iii) such Tax Return relates
to Taxes for which the requesting party may have a claim for Tax Benefits
under this Agreement, or (iv) the requesting party reasonably determines
that it must inspect such Tax Return to confirm compliance with the terms
of this Agreement. The Responsible Company shall use its reasonable best
efforts to make such Tax Return available for review as required under this
paragraph sufficiently in advance of the due date for filing such Tax
Returns to provide the requesting party with a meaningful opportunity to
analyze and comment on such Tax Returns and have such Tax Returns modified
before filing, taking into account the person responsible for payment of
the tax (if any) reported on such Tax Return and the materiality of the
amount of Tax liability with respect to such Tax Return. The Companies
shall attempt in good faith to resolve any issues arising out of the review
of such Tax Returns.
(b) Execution of Returns Prepared by Other Party. In the case of any Tax
Return which is required to be prepared and filed by one Company under this
Agreement and which is required by law to be signed by another Company (or
by its authorized representative), the Company which is legally required to
sign such Tax Return shall not be required to sign such Tax Return under
this Agreement if there is no reasonable basis for the tax treatment of any
material items reported on the Tax Return.
4.08 Claims for Refund, Carrybacks, and Self-Audit Adjustments ("Adjustment
Requests")
(a) Consent Required for Adjustment Requests Related to Consolidated or
Combined Income Taxes. Except as provided in paragraphs (b), (c), and (d)
below, each of the Companies hereby agrees that, unless each of the other
Companies consents in writing, which consent shall not be unreasonably
withheld, (i) no Adjustment Request with respect to any Consolidated or
Combined Income Tax for a Pre-Distribution Period shall be filed, and (ii)
any available elections to waive the right to claim in any Pre-Distribution
Period with respect to any Consolidated or Combined Income Tax any
Carryback arising in a Post-Distribution Period shall be made, and no
affirmative election shall be made to claim any such Carryback. Any
Adjustment Request which the Companies consent to make under this Section
4.08 shall be prepared and filed by the Responsible Company under Section
4.02 for the Tax Return to be adjusted. The Company requesting the
Adjustment Request shall provide to the Responsible Company all information
required for the preparation and filing of such Adjustment Request in such
form and detail as reasonably requested by the Responsible Company.
(b) Exception for Adjustment Requests Related to Debt Discharge Items.
Industrial Company shall have the right, without the consent of any other
party, to file (i) IRS Form 4466 (Corporation Application for Quick Refund
of Overpayment of Estimated Tax) (or any similar Adjustment Request allowed
under the Code or other Tax Laws) to claim the benefit of any reduction of
required estimated Federal Income Tax as a result of Debt Discharge Items,
or (ii) IRS Form 1139 (Corporation Application for Tentative Refund) or IRS
Form 1120X (Corporation Amended Return) (or any similar Adjustment Request
allowed under the Code or other Tax Laws), and to make any elections
necessary to file such forms, with respect to any net operating loss
Carryback arising in any Tax Period in which there is any reduction of
Taxes as a result of Debt Discharge Items if any portion of such Carryback
is attributable to such Debt Discharge Items (determined in accordance with
the principles of Section 6.04). If Industrial Company is not the
Responsible
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Company with respect to any such return, then the Responsible Company shall
file such return upon request of the Industrial Company.
(c) Exception for Adjustment Requests Related to Base Amount Adjustment
Items. Tenneco shall have the right, without the consent of any other
party, to file (i) IRS Form 4466 (Corporation Application for Quick Refund
of Overpayment of Estimated Tax) (or any similar Adjustment Request allowed
under the Code or other Tax Laws) to claim the benefit of any reduction of
required estimated Federal Income Tax as a result of Base Amount Adjustment
Items, or (ii) IRS Form 1139 (Corporation Application for Tentative Refund)
or IRS Form 1120X (Corporation Amended Return) (or any similar Adjustment
Request allowed under the Code or other Tax Laws), and to make any
elections necessary to file such forms, with respect to any net operating
loss Carryback arising in Tax Period in which there is any reduction of
Taxes as a result of Base Amount Adjustment Items if any portion of such
Carryback is attributable to Base Amount Adjustment Items (determined in
accordance with the principles of Section 6.04). If Tenneco is not the
Responsible Company with respect to any such return, then the Responsible
Company shall file such return upon request of the Industrial Company.
(d) Exception for Adjustment Requests Related to Audit Adjustments. Each
of the Companies shall be entitled, without the consent of any other
Company, to require Industrial Company to file an Adjustment Request to
take into account any net operating loss, net capital loss, deduction,
credit, or other adjustment attributable to such Company or any member of
its Group corresponding to any adjustment resulting from any audit by the
Internal Revenue Service or other Tax Authority with respect to
Consolidated or Combined Income Taxes for any Pre-Distribution Tax Period.
For example, if the Internal Revenue Service requires a Company to
capitalize an item deducted for the taxable year 1993, the Company shall be
entitled, without the consent of any other Company, to require Industrial
Company to file an Adjustment Request for the taxable year 1994 (and later
years) to take into account any depreciation or amortization deductions in
such years directly related to the item capitalized in 1993.
(e) Other Adjustment Requests Permitted. Nothing in this Section 4.08
shall prevent any Company or its Affiliates from filing any Adjustment
Request with respect to Income Taxes which are not Consolidated or Combined
Income Taxes or with respect to any Taxes other than Income Taxes. Any
refund or credit obtained as a result of any such Adjustment Request (or
otherwise) shall be for the account of the person liable for the Tax under
this Agreement.
(f) Payment of Refunds. Any refunds or other Tax Benefits received by any
Company (or any of its Affiliates) as a result of any Adjustment Request
which are for the account of another Company (or member of such other
Company's Group) shall be paid by the Company receiving (or whose Affiliate
received) such refund or Tax Benefit to such other Company in accordance
with Section 6.
Section 5. Tax Payments and Intercompany Billings
5.01 Payment of Taxes With Respect to Tenneco Federal Consolidated Returns
Filed After the Distribution Date. In the case of any Tenneco Federal
Consolidated Return the due date for which (including extensions) is after the
Distribution Date,
(a) Computation and Payment of Tax Due. At least three business days
prior to any Payment Date, the Responsible Company shall compute the amount
of Tax required to be paid to the Internal Revenue Service (taking into
account the requirements of Section 4.05 relating to consistent accounting
practices) with respect to such Tax Return on such Payment Date and, if
Tenneco is not the Responsible Company with respect to such Tax Return,
shall notify Tenneco in writing of the amount of Tax required to be paid on
such Payment Date. Tenneco will pay such amount to the Internal Revenue
Service on or before such Payment Date.
(b) Computation and Payment of Industrial Company Liability With Respect
to Tax Due. Within 30 days following any Payment Date, Industrial Company
will pay to Tenneco the excess (if any) of--
(i) the Consolidated Tax Liability determined as of such Payment Date
with respect to the applicable Tax Period allocable to the members of
the Industrial Group as determined by the
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Responsible Company in a manner consistent with the provisions of
Section 2.02(a) (relating to allocation of the Consolidated Tax
Liability in accordance with the Federal Allocation Method) (the
"Allocated Federal Tax Liability"), over
(ii) the cumulative net payments with respect to such Tax Return
prior to such Payment Date by the members of the Industrial Group (the
"Cumulative Federal Tax Payment").
If the Industrial Group Cumulative Federal Tax Payment is greater than the
Industrial Group Allocated Federal Tax Liability as of any Payment Date,
then Tenneco shall pay such excess to Industrial Company within 30 days of
Tenneco's receipt of the corresponding Tax Benefit (i.e., through either a
reduction in Tenneco's otherwise required Tax payment, or a refund of prior
tax payments). Any amount due under Section 2.02(c) with respect to the
Energy Investments Group net operating loss or taxable income as reported
on the Tenneco Federal Consolidated Tax Return for the taxable year ended
December 31, 1996 shall be paid within 30 days following the Payment Date
which is the date the return is filed, and any subsequent adjustment to the
payment due under Section 2.02(c) shall be paid with interest as determined
in a manner consistent with the provisions of Section 5.02.
(c) Computation and Payment of Shipbuilding Company Liability With
Respect to Tax Due. Within the time for any payment under paragraph (b) of
this subsection, the Responsible Company shall also notify Tenneco, if
necessary, and Shipbuilding Company in writing of the Shipbuilding Group
Allocated Federal Tax Liability and the Shipbuilding Group Cumulative
Federal Tax Payment (computed in manner consistent with paragraph (b) of
this subsection). If the Shipbuilding Group Allocated Federal Tax Liability
exceeds the Shipbuilding Group Cumulative Federal Tax Payment, then
Shipbuilding Company shall pay such excess to Tenneco within three business
days following receipt of such notice. If the Shipbuilding Group Cumulative
Federal Tax Payment exceeds the Shipbuilding Group Allocated Federal Tax
Liability, then Tenneco shall pay such excess to Shipbuilding Company
within 30 days of Tenneco's receipt of the corresponding Tax Benefit (i.e.,
either a reduction in Tenneco's otherwise required Tax payment, or a refund
of estimated tax payments).
(d) Deemed Cumulative Federal Tax Payment for First Payment Date After
the Distribution Date. For purposes of Sections 5.01(b)(ii) and 5.01(c)
with respect to the Tenneco Federal Consolidated Tax Return for the taxable
year ended December 31, 1996, the Industrial Group's Cumulative Federal Tax
Payment shall be equal to $49,000,000, and the Shipbuilding Group's
Cumulative Federal Tax Payment shall be equal to $40,000,000.
(e) Interest on Intergroup Tax Allocation Payments. In the case of any
payments to Tenneco required under paragraphs (b) or (c) of this subsection
5.01, the payor shall also pay to Tenneco an amount of interest computed at
the Prime Rate on the amount of the payment required based on the number of
days from the applicable Payment Date to the date of payment. In the case
of any payments by Tenneco required under paragraphs (b) or (c) of this
subsection 5.01, Tenneco shall also pay to the payee an amount of interest
computed at the Prime Rate on the amount of the payment required based on
the number of days from the date of receipt of the Tax Benefit to the date
of payment of such amount to the payee.
(f) Representation Regarding Cumulative 1996 Federal Income Tax Payments.
Industrial Company represents and warrants to Tenneco that, as of the the
date hereof, $205,500,000 of cumulative net payments have been made by
Tenneco, and credited by the Internal Revenue Service, with respect to the
1996 Tenneco Federal Consolidated Return.
5.02 Payment of Federal Income Tax Related to Adjustments
(a) Adjustments Resulting in Underpayments. Tenneco shall pay to the
Internal Revenue Service when due any additional Federal Income Tax
required to be paid as a result of any adjustment to the Tax liability with
respect to any Tenneco Federal Consolidated Return for any Pre-Distribution
Period. The Responsible Company shall compute the amount attributable to
Industrial Group and the Shipbuilding Group in accordance with Section
2.02(b) and Industrial Company and Shipbuilding Company shall pay to
Tenneco any amount due Tenneco under Section 2.02(b) within 30 days from
the later of (i) the date the additional Tax was paid by Tenneco or (ii)
the date of receipt by Industrial Company or Shipbuilding Company (as
applicable) of a written notice and demand from Tenneco for payment of the
amount due, accompanied by evidence of payment and a statement detailing
the Taxes paid and describing in reasonable detail the
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particulars relating thereto. Any amount due to Industrial Company or
Shipbuilding Company under Section 2.02(b) shall be paid within 30 days
from the date the additional Tax was paid by Tenneco to the Internal
Revenue Service. Any payments required under this Section 5.02(a) shall
include interest computed at the Prime Rate based on the number of days
from the date the additional Tax was paid by Tenneco to the date of the
payment under this Section 5.02(a).
(b) Adjustments Resulting in Overpayments. Within 30 days of receipt by
Tenneco of any Tax Benefit resulting from any adjustment to the
Consolidated Tax Liability with respect to any Tenneco Federal Consolidated
Return for any Pre-Distribution Period, Tenneco shall pay to Industrial
Company and Shipbuilding Company, or Industrial Company and Shipbuilding
Company shall pay to Tenneco (as the case may be), their respective amounts
due from or to Tenneco as determined by the Responsible Company in
accordance with Section 2.02(b). Any payments required under this Section
5.02(a) shall include interest computed at the Prime Rate based on the
number of days from the date the Tax Benefit was received by Tenneco to the
date of payment to Industrial Company or Shipbuilding Company under this
Section 5.02(b).
5.03 Payment of State Income Tax With Respect to Returns Filed After the
Distribution Date
(a) Computation and Payment of Tax Due. At least three business days
prior to any Payment Date for any Tax Return with respect to any State
Income Tax, the Responsible Company shall compute the amount of Tax
required to be paid to the applicable Tax Authority (taking into account
the requirements of Section 4.05 relating to consistent accounting
practices) with respect to such Tax Return on such Payment Date and--
(i) If such Tax Return is with respect to a Consolidated or Combined
State Income Tax, the Responsible Company shall, if Tenneco is not the
Responsible Company with respect to such Tax Return, notify Tenneco in
writing of the amount of Tax required to be paid on such Payment Date.
Tenneco will pay such amount to such Tax Authority on or before such
Payment Date.
(ii) If such Tax Return is with respect to a Separate Company Tax,
the Responsible Company shall, if it is not the Company liable for the
Tax reported on such Tax Return, notify the Company liable for such Tax
in writing of the amount of Tax required to be paid on such Payment
Date. The Company liable for such Tax will pay such amount to such Tax
Authority on or before such Payment Date.
(b) Computation and Payment of Industrial Company Liability and
Shipbuilding Company Liability With Respect to Tax Due. Within 120 days
following the due date (including extensions) for filing any Tax Return for
any Consolidated or Combined State Income Tax (excluding any Tax Return
with respect to payment of estimated Taxes or Taxes due with a request for
extension of time to file), (i) Industrial Company shall pay to Tenneco the
tax liability allocable to the Industrial Group as determined by the
Responsible Company under the provisions of Section 2.03(b)(i), plus
interest computed at the Prime Rate on the amount of the payment based on
the number of days from the due date (including extensions) to the date of
payment by Industrial Company to Tenneco, and (ii) the Responsible Company
shall notify Tenneco (if Tenneco is not the Responsible Company with
respect to such Tax Return) and Shipbuilding Company in writing of the tax
liability allocable to the Shipbuilding Group as determined by the
Responsible Company under the provisions of Section 2.03(b)(i). Within
three business days following receipt of such notice, Shipbuilding Company
shall pay to Tenneco the Shipbuilding Group's allocated tax liability as
set forth in such notice, plus interest computed at the Prime Rate on the
amount of the payment based on the number of days from the due date
(including extensions) to the date of payment by Shipbuilding Company to
Tenneco.
5.04 Payment of State Income Taxes Related to Adjustments
(a) Adjustments Resulting in Underpayments. Tenneco shall pay to the
applicable Tax Authority when due any additional State Income Tax required
to be paid as a result of any adjustment to the tax liability with respect
to any Tax Return for any Consolidated or Combined State Income Tax for any
Pre-Distribution Period. Industrial Company and Shipbuilding Company shall
pay to Tenneco their respective shares of any such additional Tax payment
determined by the Responsible Company in accordance with Section
2.03(b)(ii) within 120 days from the later of (i) the date the additional
Tax was paid by Tenneco or
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(ii) the date of receipt by Industrial Company or Shipbuilding Company (as
applicable) of a written notice and demand from Tenneco for payment of the
amount due, accompanied by evidence of payment and a statement detailing
the Taxes paid and describing in reasonable detail the particulars relating
thereto. Industrial Company and Shipbuilding Company shall also pay to
Tenneco interest on their respective shares of such Tax computed at the
Prime Rate based on the number of days from the date the additional Tax was
paid by Tenneco to the date of their payment to Tenneco under this Section
5.04(a).
(b) Adjustments Resulting in Overpayments. Within 120 days of receipt by
Tenneco of any Tax Benefit resulting from any adjustment to the tax
liability with respect to any Tax Return for any Consolidated or Combined
State Income Tax for any Pre-Distribution Period, Tenneco shall pay to
Industrial Company and Shipbuilding Company their respective shares of any
such Tax Benefit determined by the Responsible Company in accordance with
Section 2.03(b)(ii). Tenneco shall also pay to Industrial Company or
Shipbuilding Company interest on their respective shares of such Tax
Benefit computed at the Prime Rate based on the number of days from the
date the Tax Benefit was received by Tenneco to the date of payment to
Industrial Company or Shipbuilding Company under this Section 5.04(b).
5.05 Payment of Separate Company Taxes. Each Company shall pay, or shall
cause to be paid, to the applicable Tax Authority when due all Separate
Company Taxes owed by such Company or a member of such Company's Group.
5.06 Indemnification Payments. If any Company (the "payor") is required to
pay to a Tax Authority a Tax that another Company (the "responsible party") is
required to pay to such Taxing Authority under this Agreement, the responsible
party shall reimburse the payor within 30 days of delivery by the payor to the
responsible party of an invoice for the amount due, accompanied by evidence of
payment and a statement detailing the Taxes paid and describing in reasonable
detail the particulars relating thereto. The reimbursement shall include
interest on the Tax payment computed at the Prime Rate based on the number of
days from the date of the payment to the Tax Authority to the date of
reimbursement under this Section 5.06.
Section 6. Tax Benefits
6.01 General Rule. If a member of one Group receives any Tax Benefit with
respect to any Taxes for which a member of another Group is liable hereunder,
the Company receiving such Tax Benefit shall make a payment to the Company who
is liable for such Taxes hereunder within 30 days following receipt of the Tax
Benefit in an amount equal to the Tax Benefit (including any Tax Benefit
realized as a result of the payment), plus interest on such amount computed at
the Prime Rate based on the number of days from the date of receipt of the Tax
Benefit to the date of payment of such amount under this Section 6.01.
6.02 Debt Discharge Items
(a) Any Tax Benefit attributable to Debt Discharge Items (determined in
accordance with the principles of Section 6.04) shall be credited against
any amount owed by Industrial Company to Tenneco under Sections 5.01(b) or
5.03(b), and any excess Tax Benefit shall be paid by Tenneco to Industrial
Company as an amount owed by Tenneco to Industrial Company under Sections
5.01(b) or 5.03(b). If the Tax Benefit is subsequently adjusted (including
any adjustment to the Tax Benefit received as a reduction in otherwise
required estimated tax payments), Industrial Company shall pay to Tenneco
an amount equal to any reduction in the Tax Benefit, and Tenneco shall pay
to Industrial Company an amount equal to any increase in the Tax Benefit,
in each case under Section 5.01(b) (in the case of adjustments to Tax
payments), or Sections 5.02 or 5.04 (in the case of audit adjustments).
(b) Any Tax liability attributable to Debt Discharge Items (determined in
accordance with the principles of Section 6.04) shall be paid by Industrial
Company to Tenneco as an additional amount owed by Industrial Company to
Tenneco under Section 5.01(b) or 5.03(b). Any adjustment to such Tax
liability shall be paid under Section 5.01(b) (in the case of adjustments
to Tax payments), or Sections 5.02 or 5.04 (in the case of audit
adjustments).
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(c) Payments under this Section 6.02 shall include interest as provided
under Sections 5.01, 5.02, 5.03, or 5.04, as applicable.
6.03 Base Amount Adjustment Items. Any Tax Benefit (or Tax liability)
attributable to Base Amount Adjustment Items (determined in accordance with
the principles of Section 6.04) shall be for the account of Tenneco,
regardless of the legal entity reporting such Tax Benefit or Tax liability.
Pursuant to this Section 6.03, to the extent any net operating loss of the
Tenneco Group is attributable to Base Amount Adjustment Items (determined in
accordance with the principles of Section 6.04), any Tax Benefit associated
with the deduction of such net operating loss (either in the current year or
as a carryback or carryover) shall be for the account of Tenneco.
6.04 Ordering of Tax Items. Tax Items for any Tax Period shall be taken into
account for purposes of this Agreement in the following order of priority:
(a) First, Tax Items other than Debt Discharge Items and Base Amount
Adjustment Items.
(b) Second, Debt Discharge Items and Base Amount Adjustment Items (other
than GSR Items) in proportion to the relative net amounts of such items.
(c) Third, GSR Items.
Section 7. Assistance and Cooperation
7.01 General. After the Distribution Date, each of the Companies shall
cooperate (and cause their respective Affiliates to cooperate) with each other
and with each other's agents, including accounting firms and legal counsel, in
connection with Tax matters relating to the Companies and their Affiliates
including (i) preparation and filing of Tax Returns, (ii) determining the
liability for and amount of any Taxes due (including estimated Taxes) or the
right to and amount of any refund of Taxes, (iii) examinations of Tax Returns,
and (iv) any administrative or judicial proceeding in respect of Taxes
assessed or proposed to be assessed. Such cooperation shall include making all
information and documents in their possession relating to the other Companies
and their Affiliates available to such other Companies as provided in Section
8. Each of the Companies shall also make available to each other, as
reasonably requested and available, personnel (including officers, directors,
employees and agents of the Companies or their respective Affiliates)
responsible for preparing, maintaining, and interpreting information and
documents relevant to Taxes, and personnel reasonably required as witnesses or
for purposes of providing information or documents in connection with any
administrative or judicial proceedings relating to Taxes. Any information or
documents provided under this Section 7 shall be kept confidential by the
Company receiving the information or documents, except as may otherwise be
necessary in connection with the filing of Tax Returns or in connection with
any administrative or judicial proceedings relating to Taxes.
7.02 Income Tax Return Information. Each Company will provide to each other
Company information and documents relating to their respective Groups required
by the other Companies to prepare Tax Returns. The Responsible Company shall
determine a reasonable compliance schedule for such purpose in accordance with
Tenneco's past practices. Any additional information or documents the
Responsible Company requires to prepare such Tax Returns will be provided in
accordance with past practices, if any, or as the Responsible Company
reasonably requests and in sufficient time for the Responsible Company to file
such Tax Returns timely.
Section 8. Tax Records
8.01 Retention of Tax Records. Except as provided in Section 8.02, each
Company shall preserve and keep all Tax Records exclusively relating to the
assets and activities of their respective Groups for Pre-Distribution Tax
Periods, and Tenneco shall preserve and keep all other Tax Records relating to
Taxes of the Groups for Pre-Distribution Tax Periods, for so long as the
contents thereof may become material in the administration of any matter under
the Code or other applicable Tax Law, but in any event until the later of (i)
the expiration of any applicable statutes of limitation, and (ii) seven years
after the Distribution Date. If, prior to the expiration of the applicable
statute of limitation and such seven-year period, a Company reasonably
determines that any Tax Records which it is required to preserve and keep
under this Section 8 are no longer material in the administration
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of any matter under the Code or other applicable Tax Law, such Company may
dispose of such records upon 90 days prior notice to the other Companies. Such
notice shall include a list of the records to be disposed of describing in
reasonable detail each file, book, or other record accumulation being
disposed. The notified Companies shall have the opportunity, at their cost and
expense, to copy or remove, within such 90-day period, all or any part of such
Tax Records.
8.02 State Income Tax Returns. Tax Returns with respect to State Income
Taxes and workpapers prepared in connection with preparing such Tax Returns
shall be preserved and kept, in accordance with the guidelines of Section
8.01, by the Company responsible for preparing and filing the applicable Tax
Return.
8.03 Access to Tax Records. The Companies and their respective Affiliates
shall make available to each other for inspection and copying during normal
business hours upon reasonable notice all Tax Records in their possession to
the extent reasonably required by the other Company in connection with the
preparation of Tax Returns, audits, litigation, or the resolution of items
under this Agreement.
Section 9. Tax Contests
9.01 Notice. Each of the parties shall provide prompt notice to the other
parties of any pending or threatened Tax audit, assessment or proceeding or
other Tax Contest of which it becomes aware related to Taxes for Tax Periods
for which it is indemnified by one or more other parties hereunder. Such
notice shall contain factual information (to the extent known) describing any
asserted Tax liability in reasonable detail and shall be accompanied by copies
of any notice and other documents received from any Tax Authority in respect
of any such matters. If an indemnified party has knowledge of an asserted Tax
liability with respect to a matter for which it is to be indemnified hereunder
and such party fails to give the indemnifying party prompt notice of such
asserted Tax liability, then (i) if the indemnifying party is precluded from
contesting the asserted Tax liability in any forum as a result of the failure
to give prompt notice, the indemnifying party shall have no obligation to
indemnify the indemnified party for any Taxes arising out of such asserted Tax
liability, and (ii) if the indemnifying party is not precluded from contesting
the asserted Tax liability in any forum, but such failure to give prompt
notice results in a monetary detriment to the indemnifying party, then any
amount which the indemnifying party is otherwise required to pay the
indemnified party pursuant to this Agreement shall be reduced by the amount of
such detriment.
9.02 Control of Tax Contests
(a) Separate Company Taxes. In the case of any Tax Contest with respect
to any Separate Company Tax, the Company having liability for the Tax shall
have exclusive control over the Tax Contest, including exclusive authority
with respect to any settlement of such Tax liability.
(b) Consolidated or Combined Income Taxes. In the case of any Tax Contest
with respect to any Consolidated or Combined Income Tax, (i) Shipbuilding
Company shall control the defense or prosecution of the portion of the Tax
Contest directly and exclusively related to any Shipbuilding Adjustment,
including settlement of any such Shipbuilding Adjustment, (ii) Tenneco
shall control the defense or prosecution of the portion of the Tax Contest
directly and exclusively related to any Tenneco Adjustment, including
settlement of any such Tenneco Adjustment, and (iii) Industrial Company
shall control the defense or prosecution of the portion of the Tax Contest
directly and exclusively related to any Industrial Adjustment, including
any settlement of any Industrial Adjustment, and (iv) the Tax Contest
Committee shall control the defense or prosecution of Joint Adjustments and
any and all administrative matters not directly and exclusively related to
any Shipbuilding Adjustment, Tenneco Adjustment, or Industrial Adjustment.
The Tax Contest Committee shall be comprised of two persons, one person
selected by Industrial Company (as designated in writing to Tenneco) and
one person selected by Tenneco (as designated in writing to Industrial
Company). Each person serving on the Tax Contest Committee shall continue
to serve unless and until he or she is replaced by the party designating
such person. Any and all matters to be decided by the Tax Contest Committee
shall require the unanimous approval of both persons serving on the
committee. In the event the Tax Contest Committee shall be deadlocked on
any matter, the provisions of Section 15 of this
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Agreement shall apply. The Tax Contest Committee shall consult in good
faith with Shipbuilding Company to the extent Shipbuilding Company might
reasonably be expected to be materially affected by such matters. A Company
shall not agree to any Tax liability for which another Company may be
liable under this Agreement, or compromise any claim for any Tax Benefit
which another Company may be entitled under this Agreement, without such
other Company's written consent (which consent may be given or withheld at
the sole discretion of the Company from which the consent would be
required).
Section 10. Effective Date; Termination of Prior Intercompany Tax Allocation
Agreements. This Agreement shall be effective on the Distribution Date.
Immediately prior to the close of business on the Distribution Date (i) all
Prior Intercompany Tax Allocation Agreements shall be terminated, and (ii)
amounts due under such agreements as of the Distribution Date shall be settled
as of the Distribution Date (including capitalization or distribution of
amounts due or receivable under such agreements). Upon such termination and
settlement, no further payments by or to Tenneco, by or to the Shipbuilding
Group, or by or to the Industrial Group, with respect to such agreements shall
be made, and all other rights and obligations resulting from such agreements
between the Companies and their Affiliates shall cease at such time. Any
payments pursuant to such agreements shall be ignored for purposes of
computing amounts due under this Agreement.
Section 11. No Inconsistent Actions. Each of the Companies and the Acquiror
covenants and agrees that it will not take any action, and it will cause its
Affiliates to refrain from taking any action, which is inconsistent with the
Tax treatment of the Transactions as contemplated in the Ruling Request or in
the Tax Opinion (any such action is referred to in this Section 11 as a
"Prohibited Action"), unless such Prohibited Action is required by law, or the
person acting has obtained the prior written consent of each of the other
parties (which consent shall not be unreasonably withheld). With respect to
any Prohibited Action proposed by a Company or the Acquiror (the "Requesting
Party"), each of the other parties (the "Requested Parties") shall grant its
consent to such Prohibited Action if the Requesting Party obtains a ruling
with respect to the Prohibited Action from the Internal Revenue Service or
other applicable Tax Authority that is reasonably satisfactory to each of the
Requested Parties (except that the Requesting Party shall not submit any such
ruling request if a Requested Party determines in good faith that filing such
request might have a materially adverse effect upon such Requested Party).
Without limiting the foregoing:
(a) No Inconsistent Plan or Intent
(i) Each of Industrial Company and Shipbuilding Company represents
and warrants that neither it nor any of its Affiliates has any plan or
intent to take any action which is inconsistent with any factual
statements or representations in the Ruling Request or in the Tax
Opinion. Regardless of any change in circumstances, each of Industrial
Company and Shipbuilding Company covenants and agrees that it will not
take, and it will cause its Affiliates to refrain from taking, any such
inconsistent action on or before the last day of the calendar year
ending after the second anniversary of the Distribution Date other than
as permitted in this Section 11. For purposes of applying this Section
11(a) to any such inconsistent action prior to the Effective Time, the
members of the Tenneco Group shall be treated as Affiliates of
Industrial Company.
(ii) Acquiror represents and warrants that neither it nor any of its
Affiliates has any plan or intent to take any action which is
inconsistent with any factual statements or representations in the
Ruling Request or in the Tax Opinion. Regardless of any change in
circumstances, Acquiror covenants and agrees that it will not take, and
it will cause Tenneco and the other Affiliates of Acquiror to refrain
from taking, any such inconsistent action on or before the last day of
the calendar year ending after the second anniversary of the
Distribution Date other than as permitted in this Section 11.
(b) Amended or Supplemental Rulings. Each of the Companies covenants and
agrees that it will not file, and it will cause its Affiliates to refrain
from filing, any amendment or supplement to the Ruling Request subsequent
to the Distribution Date without the consent of the other Companies, which
consent shall not be unreasonably withheld.
Section 12. Survival of Obligations. The representations, warranties,
covenants and agreements set forth in this Agreement shall be unconditional
and absolute and shall remain in effect without limitation as to time.
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Section 13. Employee Matters. Each of the Companies agrees to utilize, or
cause its Affiliates to utilize, the alternative procedure set forth in
Revenue Procedure 84-77, 1984-2 C.B. 753, with respect to wage reporting.
Section 14. Treatment of Payments; Tax Gross Up
14.01 Treatment of Tax Indemnity and Tax Benefit Payments. In the absence of
any change in tax treatment under the Code or other applicable Tax Law,
(a) any Tax indemnity payments made by a Company under Section 5 shall be
reported for Tax purposes by the payor and the recipient as distributions
or capital contributions, as appropriate, occurring immediately before the
distribution of the Industrial Common Shares and the Shipbuilding Common
Shares to Tenneco shareholders on the Distribution Date, but only to the
extent the payment does not relate to a Tax allocated to the payor in
accordance with Treasury Regulation Section 1.1502-33(d) (or under
corresponding principles of other applicable Tax Laws), and
(b) any Tax Benefit payments made by a Company under Section 6, shall be
reported for Tax purposes by the payor and the recipient as distributions
or capital contributions, as appropriate, occurring immediately before the
distribution of Industrial Common Shares and Shipbuilding Common Shares to
Tenneco shareholders on the Distribution Date, but only to the extent the
payment does not relate to a Tax allocated to the payor in accordance with
Treasury Regulation Section 1.1502-33(d) (or under corresponding principles
of other applicable Tax Laws).
14.02 Tax Gross Up. If notwithstanding the manner in which Tax indemnity
payments and Tax Benefit payments were reported, there is an adjustment to the
Tax liability of a Company as a result of its receipt of a payment pursuant to
this Agreement, such payment shall be appropriately adjusted so that the
amount of such payment, reduced by the amount of all Income Taxes payable with
respect to the receipt thereof (but taking into account all correlative Tax
Benefits resulting from the payment of such Income Taxes), shall equal the
amount of the payment which the Company receiving such payment would otherwise
be entitled to receive pursuant to this Agreement.
14.03 Interest Under This Agreement. Anything herein to the contrary
notwithstanding, to the extent one Company ("indemnitor") makes a payment of
interest to another Company ("indemnitee") under this Agreement with respect
to the period from the date that the indemnitee made a payment of Tax to a Tax
Authority to the date that the indemnitor reimbursed the indemnitee for such
Tax payment, or with respect to the period from the date that the indemnitor
received a Tax Benefit to the date indemnitor paid the Tax Benefit to the
indemnitee, the interest payment shall be treated as interest expense to the
indemnitor (deductible to the extent provided by law) and as interest income
by the indemnitee (includible in income to the extent provided by law). The
amount of the payment shall not be adjusted under Section 14.02 to take into
account any associated Tax Benefit to the indemnitor or increase in Tax to the
indemnitee.
Section 15. Disagreements. If after good faith negotiations the parties
cannot agree on the application of this Agreement to any matter, then the
matter will be referred to a nationally recognized accounting firm acceptable
to each of the parties (the "Accounting Firm"). The Accounting Firm shall
furnish written notice to the parties of its resolution of any such
disagreement as soon as practical, but in any event no later than 45 days
after its acceptance of the matter for resolution. Any such resolution by the
Accounting Firm will be conclusive and binding on all parties to this
Agreement. In accordance with Section 17, each party shall pay its own fees
and expenses (including the fees and expenses of its representatives) incurred
in connection with the referral of the matter to the Accounting Firm. All fees
and expenses of the Accounting Firm in connection with such referral shall be
shared equally by the parties affected by the matter.
Section 16. Late Payments. Any amount owed by one party to another party
under this Agreement which is not paid when due shall bear interest at the
Prime Rate plus two percent, compounded semiannually, from the due date of the
payment to the date paid. To the extent interest required to be paid under
this Section 16 duplicates interest required to be paid under any other
provision of this Agreement, interest shall be computed at
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the higher of the interest rate provided under this Section 16 or the interest
rate provided under such other provision.
Section 17. Expenses. Except as provided in Section 15, each party and its
Affiliates shall bear their own expenses incurred in connection with
preparation of Tax Returns, Tax Contests, and other matters related to Taxes
under the provisions of this Agreement.
Section 18. Special Rules for Determining Members of Groups. For purposes of
this Agreement, the following special rules shall apply for determining the
members of the Industrial Group and members of the Shipbuilding Group:
18.01 Tennessee Gas Pipeline Company. The assets and activities of Tennessee
Gas Pipeline Company for Pre-Distribution Periods that comprise the Walker
Manufacturing Company Division, the Tenneco Automotive Headquarters Division,
and the Tenneco Brakes Division, as jointly determined by Industrial Company
and Tenneco in accordance with past practices, shall be combined and treated
as a separate corporate entity which is a member of the Industrial Group.
18.02 Former Affiliates of Shipbuilding Group or Industrial Group. The
entities listed on Schedule 1 attached hereto shall be treated as members of
the Shipbuilding Group, and the entities listed on Schedule 2 attached hereto
shall be treated as members of the Industrial Group. Any entity substantially
all of the assets and liabilities of which have been transferred to a member
of the Shipbuilding Group (e.g., by a statutory merger) shall be treated as a
member of the Shipbuilding Group, and any entity substantially all of the
assets and liabilities of which have been transferred to a member of the
Industrial Group shall be treated as a member of the Industrial Group. For
example, Newport News Shipbuilding and Dry Dock Company, a Virginia
corporation, shall, by virtue of its merger into Tenneco InterAmerica Inc., be
treated as a member of the Shipbuilding Group. For purposes of this paragraph,
Tenneco's Affiliates shall not be limited to persons who are Affiliates
immediately after the Distributions.
Section 19. General Provisions
19.01 Addresses and Notices. Any notice, demand, request or report required
or permitted to be given or made to any party under this Agreement shall be in
writing and shall be deemed given or made when delivered in party or when sent
by first class mail or by other commercially reasonable means of written
communication (including delivery by an internationally recognized courier
service or by facsimile transmission) to the party at the party's address as
follows:
If to Shipbuilding Company:
Director, Taxes
Newport News Shipbuilding and Dry Dock Company
4101 Washington Avenue
Newport News, VA 23607
If to Tenneco:
Director, Taxes
Tennessee Gas Pipeline Co.
1010 Milam Street
Houston, Texas 77002
With a copy to:
Director, Taxes
El Paso Natural Gas Co.
One Paul Kayser Center
100 North Stanton Street
El Paso, Texas 79901
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If to Industrial Company:
Robert G. Simpson
Vice President, Tax
Tenneco Inc.
1275 King Street
Greenwich, CT 06831
If to Acquiror:
Director, Taxes
El Paso Natural Gas Co.
One Paul Kayser Center
100 North Stanton Street
El Paso, Texas 79901
A party may change the address for receiving notices under this Agreement by
providing written notice of the change of address to the other parties.
19.02 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their successors and assigns.
19.03 Waiver. No failure by any party to insist upon the strict performance
of any obligation under this Agreement or to exercise any right or remedy
under this Agreement shall constitute waiver of any such obligation, right, or
remedy or any other obligation, rights, or remedies under this Agreement.
19.04 Invalidity of Provisions. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity,
legality, and enforceability of the remaining provisions contained herein
shall not be affected thereby.
19.05 Further Action. The parties shall execute and deliver all documents,
provide all information, and take or refrain from taking action as may be
necessary or appropriate to achieve the purposes of this Agreement, including
the execution and delivery to the other parties and their Affiliates and
representatives of such powers of attorney or other authorizing documentation
as is reasonably necessary or appropriate in connection with Tax Contests (or
portions thereof) under the control of such other parties in accordance with
Section 9.
19.06 Integration. This Agreement constitutes the entire agreement among the
parties pertaining to the subject matter of this Agreement and supersedes all
prior agreements and understandings pertaining thereto. In the event of any
inconsistency between this Agreement and the Distribution Agreement or any
other agreements relating to the transactions contemplated by the Distribution
Agreement, the provisions of this Agreement shall control.
19.07 Construction. The language in all parts of this Agreement shall in all
cases be construed according to its fair meaning and shall not be strictly
construed for or against any party.
19.08 No Double Recovery; Subrogation. No provision of this Agreement shall
be construed to provide an indemnity or other recovery for any costs, damages,
or other amounts for which the damaged party has been fully compensated under
any other provision of this Agreement or under any other agreement or action
at law or equity. Unless expressly required in this Agreement, a party shall
not be required to exhaust all remedies available under other agreements or at
law or equity before recovering under the remedies provided in this Agreement.
Subject to any limitations provided in this Agreement (for example, the
limitation on filing claims for refund in Section 4.08), the indemnifying
party shall be subrogated to all rights of the indemnified party for recovery
from any third party.
19.09 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
taken together shall constitute one and the same instrument.
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19.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts
executed in and to be performed in that State.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
the respective officers as of the date set forth above.
Tenneco Inc.
By: _________________________________
Its: ________________________________
Newport News Shipbuilding Inc.
By: _________________________________
Its: ________________________________
New Tenneco Inc.
By: _________________________________
Robert G. Simpson
Vice President, Taxes
El Paso Natural Gas Company
By: _________________________________
Its: ________________________________
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TAX SHARING AGREEMENT
SCHEDULE 1
ADDITIONAL MEMBERS OF THE SHIPBUILDING GROUP
For purposes of this Agreement, in addition to Shipbuilding Company and its
Affiliates as determined immediately after the Distribution Date, the
Shipbuilding Group shall be deemed to include any corporation which was (1) a
member of the affiliated group (as defined in Code Section 1504(a), but
treating all corporations as "includible corporations" for purposes of such
Code Section) of which Tenneco is the common parent, (2) was included in the
"shipbuilding" segment for purposes of segment reporting in Tenneco's Annual
Reports on Form 10-K, and (3) sold, transferred, otherwise disposed of, or
discontinued prior to the date hereof. Without limiting the foregoing, the
Shipbuilding Group shall include:
Sperry Marine Inc.
Sperry Marine-Asia Inc.
Sperry Marine (S) PTE Ltd. (Singapore)
Sperry Marine S.p.A. (Italy)
Sperry Marine S.A.R.L. (France)
Sperry Marine Limited (United Kingdom)
Sperry Marine GmbH (Germany)
Sperry Marine A/S (Denmark)
Sperry Marine A/S (Norway)
Sperry Marine B.V. (Netherlands)
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TAX SHARING AGREEMENT
SCHEDULE 2
ADDITIONAL MEMBERS OF THE INDUSTRIAL GROUP
For purposes of this Agreement, in addition to Industrial Company and its
Affiliates as determined immediately after the Distribution Date, the
Industrial Group shall be deemed to include any corporation which was (1) a
member of the affiliated group (as defined in Code Section 1504(a), but
treating all corporations as "includible corporations" for purposes of such
Code Section) of which Tenneco is the common parent, (2) was included in the
"automotive parts" or "packaging" segment for purposes of segment reporting in
Tenneco's Annual Reports on Form 10-K, and (3) sold, transferred, otherwise
disposed of, or discontinued prior to the date hereof.
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TAX SHARING AGREEMENT
SCHEDULE 3
ENERGY INVESTMENTS GROUP
KERN COUNTY LAND COMPANY
PETRO-TEX CHEMICAL CORPORATION
TENFAC CORPORATION
TENNCHASE, INC.
TENNECO COAL COMPANY
TENNECO CORPORATION
TENNECO CREDIT CORPORATION
TENNECO EQUIPMENT CORPORATION (f/k/a Case Corporation)
TENNECO EQUIPMENT HOLDING IV CO. (f/k/a Case Finance Co.)
TENNECO EQUIPMENT HOLDING V CO. (f/k/a Integrated Technical Systems, Inc.)
TENNECO EQUIPMENT HOLDING VI CO. (f/k/a Viscosity Oil Co.)
TENNECO INC.
TENNECO INSURANCE VENTURES
TENNECO INTERAMERICA, INC.
TENNECO INTERNATIONAL, INC.
TENNECO MINERALS COMPANY--CALIFORNIA
TENNECO MINERALS COMPANY--NEVADA
TENNECO OIL COMPANY
TENNECO POLYMERS, INC.
TENNECO SHALE OIL COMPANY
TENNECO SNG, INC.
TENNECO SYNFUELS COMPANY
TENNECO WEST
TENNESSEE GAS PIPELINE COMPANY--CORPORATE DIVISION
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EXHIBIT L
TO
DISTRIBUTION AGREEMENT
TBS SERVICES AGREEMENT
[To be Negotiated Among TBS, Industrial Company
and Shipbuilding Company]
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EXHIBIT 10.5
EXHIBIT M TO
DISTRIBUTION AGREEMENT
TRANSITION SERVICES AGREEMENT
Transition Services Agreement (this "Agreement") dated as of June 19, 1996,
between Tenneco Business Services, Inc. ("TBS"), Tenneco Inc. ("Tenneco") and
El Paso Natural Gas Company ("EPG").
WHEREAS, TBS currently provides certain business services to Tenneco,
including mainframe computing services, backup, recovery and related
operations, consulting services and payroll services (collectively, the
"Services"); and
WHEREAS, Tenneco may desire to continue certain of the Services following
the consummation of the merger (the "Merger") contemplated by the Agreement
and Plan of Merger dated as of June 19, 1996 among EPG, El Paso Merger Company
and Tenneco ("the Merger Agreement");
NOW, THEREFORE, the parties hereto agree as follows:
1. Notice. No later than 45 days prior to the Effective Time (as defined in
the Merger Agreement) but only if and to the extent requested to do so by EPG,
Tenneco shall notify TBS in writing of its election to continue Services
following the Merger. This Agreement shall be of no further force or effect if
such notice is not received prior to the time provided in the preceding
sentence.
2. Services; Term. If Tenneco exercises the election set forth in paragraph
1 above, TBS shall provide the Services specified in the notice delivered by
Tenneco for a period of twelve months from the date of the Merger; provided
that any or all of the Services may be terminated by Tenneco at any time on
not less than 45 days' prior written notice to TBS. The Services shall be
performed in a manner consistent with the manner in which they have heretofore
been performed by TBS. TBS will also assist Tenneco in transferring data from
TBS' systems and establishing interconnection between TBS' and Tenneco's or
EPG's mainframes and otherwise in transferring the operations performed by TBS
on behalf of Tenneco to Tenneco's or EPG's systems.
3. Compensation. The price that Tenneco shall pay to TBS for the Services
shall be a mutually agreed to market-based rate for comparable services. TBS
shall invoice Tenneco monthly for the Services, providing a breakdown of the
Services for such month and the charges for each category of Services. In the
event of any dispute with respect to amounts payable under this Agreement, the
parties shall work together in good faith to resolve such dispute and, if the
parties are unable to resolve such dispute, it shall be referred to an
independent accounting firm mutually agreed by TBS and Tenneco.
4. Consents of Third Parties. TBS shall use commercially reasonable efforts,
at Tenneco's direction and expense, to obtain any consents or software
licenses from third parties necessary to the continuation of the requested
Services; provided that TBS shall have no obligation to provide Services for
which such consent is required and shall not have been obtained.
5. Limitations. TBS shall not be liable for any consequential, incidental,
special or punitive damages in connection with the Services.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth above.
TENNECO BUSINESS SERVICES, INC.
By __________________________________
TENNECO INC.
By __________________________________
EL PASO NATURAL GAS COMPANY
By __________________________________
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EXHIBIT N
RESTATED CERTIFICATE OF INCORPORATION
OF
NEW TENNECO INC.
* * * * *
The present name of the corporation is New Tenneco Inc. The corporation was
incorporated under that name by the filing of its original Certificate of
Incorporation with the Secretary of State of the State of Delaware on August
26, 1996. This Restated Certificate of Incorporation of the corporation, which
both restates and further amends the provisions of the corporation's
Certificate of Incorporation, was duly adopted in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware and by the written consent of its sole stockholder in accordance
with Section 228 of the General Corporation Law of the State of Delaware. The
Certificate of Incorporation of the corporation is hereby amended and restated
to read in its entirety as follows:
FIRST: The name of the corporation is New Tenneco Inc.
SECOND: The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: A. The total number of shares of all classes of stock which the
corporation shall be authorized to issue is 400,000,000 shares, divided into
350,000,000 shares of Common Stock, par value $.01 per share (herein called
"Common Stock"), and 50,000,000 shares of Preferred Stock, par value $.01 per
share (herein called "Preferred Stock").
B. The Board of Directors of the corporation (the "Board of Directors") is
hereby expressly authorized, by resolution or resolutions thereof, to provide,
out of the unissued shares of Preferred Stock, for series of Preferred Stock
and, with respect to each such series, to fix the number of shares
constituting such series and the designation of such series, the voting powers
(if any) of the shares of such series, and the preferences and relative,
participating, optional or other special rights, if any, and any
qualifications, limitations or restrictions thereof, of the shares of such
series. The powers, preferences and relative, participating, optional and
other special rights of each series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding.
C. Except as may otherwise be provided in this Restated Certificate of
Incorporation (including any certificate filed with the Secretary of State of
the State of Delaware establishing the terms of a series of Preferred Stock in
accordance with Section B of this Article FOURTH) or by applicable law, each
holder of Common Stock, as such, shall be entitled to one vote for each share
of Common Stock held of record by such holder on all matters on which
stockholders generally are entitled to vote, and no holder of any series of
Preferred Stock, as such, shall be entitled to any voting powers in respect
thereof.
D. Subject to applicable law and the rights, if any, of the holders of any
outstanding series of Preferred Stock, dividends may be declared and paid on
the Common Stock at such times and in such amounts as the Board of Directors
in its discretion shall determine.
E. Upon the dissolution, liquidation or winding up of the corporation,
subject to the rights, if any, of the holders of any outstanding series of
Preferred Stock, the holders of the Common Stock shall be entitled to receive
the assets of the corporation available for distribution to its stockholders
ratably in proportion to the number of shares held by them.
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F. The corporation shall be entitled to treat the person in whose name any
share of its stock is registered as the owner thereof for all purposes and
shall not be bound to recognize any equitable or other claim to, or interest
in, such share on the part of any other person, whether or not the corporation
shall have notice thereof, except as expressly provided by applicable law.
FIFTH: A. The business and affairs of the corporation shall be managed by or
under the direction of the Board of Directors consisting of not less than
eight nor more than sixteen directors, with the exact number of directors
constituting the entire Board of Directors to be determined from time to time
by resolution adopted by the affirmative vote of a majority of the entire
Board of Directors. For purposes of this Restated Certificate of
Incorporation, "the entire Board of Directors" shall mean the number of
directors that would be in office if there were no vacancies nor any unfilled
newly created directorships.
The Board of Directors shall be divided into three classes, Class I, Class
II and Class III. Each class shall consist, as nearly as may be possible, of
one-third of the number of directors constituting the entire Board of
Directors. Class I directors shall be initially elected for a term expiring at
the first succeeding annual meeting of stockholders, Class II directors shall
be initially elected for a term expiring at the second succeeding annual
meeting of stockholders, and Class III directors shall be initially elected
for a term expiring at the third succeeding annual meeting of stockholders. At
each annual meeting of the stockholders following 1996, successors to the
class of directors whose term expires at that annual meeting shall be elected
for a term expiring at the third succeeding annual meeting of stockholders. If
the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in
each class as nearly equal as possible, and any additional director of any
class elected to fill a newly created directorship resulting from an increase
in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case shall a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his term expires and
until his successor shall be elected and shall qualify, subject, however, to
prior death, resignation, retirement, disqualification or removal from office.
Any vacancy on the Board of Directors that results from an increase in the
number of directors may be filled by a majority of the Board of Directors then
in office, provided that a quorum is present, and any other vacancy occurring
in the Board of Directors may be filled by a majority of the directors then in
office, even if less than a quorum, or by a sole remaining director. Directors
chosen to fill any such vacancy shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to
which they have been elected expires and until such director's successor shall
have been duly elected and qualified.
Notwithstanding the foregoing, whenever the holders of any one or more
series of Preferred Stock shall have the right, voting separately as a class
or series, to elect directors, the election, removal, term of office, filling
of vacancies and other features of such directorships shall be governed by the
terms of this Restated Certificate of Incorporation applicable thereto, and
such directors so elected shall not be divided into classes pursuant to this
Article FIFTH unless expressly provided by such terms.
B. The Board of Directors shall be authorized to adopt, make, amend, alter,
change, add to or repeal the By-Laws of the corporation, subject to the power
of the stockholders to amend, alter, change, add to or repeal the By-Laws made
by the Board of Directors.
C. Unless and except to the extent that the By-Laws of the corporation shall
so require, the election of directors of the corporation need not be by
written ballot.
SIXTH: A. In addition to any affirmative vote required by law or this
Restated Certificate of Incorporation or the By-Laws of the corporation, and
except as otherwise expressly provided in Section B of this Article SIXTH, a
Business Combination (as hereinafter defined) with, or proposed by or on
behalf of, any Interested Stockholder (as hereinafter defined) or any
Affiliate or Associate (as hereinafter defined) of any Interested Stockholder
or any person who thereafter would be an Affiliate or Associate of such
Interested Stockholder shall, except as otherwise prohibited by applicable
law, require the affirmative vote of not less than 66 2/3% of the votes
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entitled to be cast by the holders of all the then outstanding shares of
Voting Stock (as hereinafter defined), voting together as a single class,
excluding Voting Stock beneficially owned by any Interested Stockholder. Such
affirmative vote shall be required notwithstanding the fact that no vote may
be required, or that a lesser percentage or separate class vote may be
specified, by law or in any agreement with any national securities exchange or
otherwise.
B. The provisions of Section A of this Article SIXTH shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote, if any, as is required by law or by any
other provision of this Restated Certificate of Incorporation or the By-Laws
of the corporation, or any agreement with any national securities exchange, if
all of the conditions specified in either of the following Paragraphs 1 or 2
are met or, in the case of a Business Combination not involving the payment of
consideration to the holders of the corporation's outstanding Capital Stock
(as hereinafter defined), if the condition specified in the following
Paragraph 1 is met:
1. The Business Combination shall have been approved, either specifically
or as a transaction which is within an approved category of transactions,
by a majority (whether such approval is made prior to or subsequent to the
acquisition of, or announcement or public disclosure of the intention to
acquire, beneficial ownership of the Voting Stock that caused the
Interested Stockholder to become an Interested Stockholder) of the
Continuing Directors (as hereinafter defined).
2. All of the following conditions shall have been met:
a. the aggregate amount of cash and the Fair Market Value (as
hereinafter defined), as of the date of the consummation of the
Business Combination, of consideration other than cash to be received
per share by holders of Common Stock in such Business Combination shall
be at least equal to the highest amount determined under clauses (i)
and (ii) below:
(i) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid by or on behalf of the Interested Stockholder for any share of
Common Stock in connection with the acquisition by the Interested
Stockholder of beneficial ownership of shares of Common Stock (x)
within the two-year period immediately prior to the first public
announcement of the proposed Business Combination (the "Announcement
Date") or (y) in the transaction in which it became an Interested
Stockholder, whichever is higher, in either case as adjusted for any
subsequent stock split, stock dividend, subdivision or
reclassification with respect to Common Stock; and
(ii) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested Stockholder
became an Interested Stockholder (the "Determination Date"),
whichever is higher, as adjusted for any subsequent stock split,
stock dividend, subdivision or reclassification with respect to
Common Stock.
b. The aggregate amount of cash and the Fair Market Value, as of the
date of the consummation of the Business Combination, of consideration
other than cash to be received per share by holders of shares of any
class or series of outstanding Capital Stock, other than Common Stock,
shall be at least equal to the highest amount determined under clauses
(i), (ii), (iii) and (iv) below:
(i) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees)
paid by or on behalf of the Interested Stockholder for any share of
such class or series of Capital Stock in connection with the
acquisition by the Interested Stockholder of beneficial ownership of
shares of such class or series of Capital Stock (x) within the two-
year period immediately prior to the Announcement Date, or (y) in
the transaction in which it became an Interested Stockholder,
whichever is higher, in either case as adjusted for any subsequent
stock split, stock dividend, subdivision or reclassification with
respect to such class or series of Capital Stock;
(ii) the Fair Market Value per share of such class or series of
Capital Stock on the Announcement Date or on the Determination Date,
whichever is higher, as adjusted for any
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subsequent stock split, stock dividend, subdivision or
reclassification with respect to such class or series of Capital
Stock;
(iii) (if applicable) the price per share equal to the Fair Market
Value per share of such class or series of Capital Stock determined
pursuant to the immediately preceding clause (ii), multiplied by the
ratio of (x) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by or
on behalf of the Interested Stockholder for any share of such class
or series of Capital Stock in connection with the acquisition by the
Interested Stockholder of beneficial ownership of shares of such
class or series of Capital Stock within the two-year period
immediately prior to the Announcement Date, as adjusted for any
subsequent stock split, stock dividend, subdivision or
reclassification with respect to such class or series of Capital
Stock to (y) the Fair Market Value per share of such class or series
of Capital Stock on the first day in such two-year period on which
the Interested Stockholder acquired beneficial ownership of any
share of such class or series of Capital Stock, as adjusted for any
subsequent stock split, stock dividend, subdivision or
reclassification with respect to such class or series of Capital
Stock; and
(iv) (if applicable) the highest preferential amount per share to
which the holders of shares of such class or series of Capital Stock
would be entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
corporation regardless of whether the Business Combination to be
consummated constitutes such an event.
The provisions of this Paragraph 2 shall be required to be met with
respect to every class or series of outstanding Capital Stock, whether
or not the Interested Stockholder has previously acquired beneficial
ownership of any shares of a particular class or series of Capital
Stock.
c. The consideration to be received by holders of a particular class
or series of outstanding Capital Stock shall be in cash or in the same
form as previously has been paid by or on behalf of the Interested
Stockholder in connection with its direct or indirect acquisition of
beneficial ownership of shares of such class or series of Capital
Stock. If the consideration so paid for shares of any class or series
of Capital Stock varied as to form, the form of consideration for such
class or series of Capital Stock shall be either cash or the form used
to acquire beneficial ownership of the largest number of shares of such
class or series of Capital Stock previously acquired by the Interested
Stockholder.
d. After the Determination Date and prior to the consummation of such
Business Combination: (i) except as approved by a majority of the
Continuing Directors, there shall have been no failure to declare and
pay at the regular date therefor any full quarterly dividends (whether
or not cumulative) payable in accordance with the terms of any
outstanding Capital Stock; (ii) there shall have been no reduction in
the annual rate of dividends paid on the Common Stock (except as
necessary to reflect any stock split, stock dividend or subdivision of
the Common Stock), except as approved by a majority of the Continuing
Directors; (iii) there shall have been an increase in the annual rate
of dividends paid on the Common Stock as necessary to reflect any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction that has the effect of
reducing the number of outstanding shares of Common Stock, unless the
failure so to increase such annual rate is approved by a majority of
the Continuing Directors; and (iv) such Interested Stockholder shall
not have become the beneficial owner of any additional shares of
Capital Stock except as part of the transaction that results in such
Interested Stockholder becoming an Interested Stockholder and except in
a transaction that, after giving effect thereto, would not result in
any increase in the Interested Stockholder's percentage beneficial
ownership of any class or series of Capital Stock.
e. A proxy or information statement describing the proposed Business
Combination and complying with the requirements of the Securities
Exchange Act of 1934 and the rules and regulations thereunder (the
"Act") (or any subsequent provisions replacing such Act, rules or
regulations) shall be mailed to all stockholders of the corporation at
least 30 days prior to the consummation of such Business Combination
(whether or not such proxy or information statement is required to be
mailed pursuant to such Act or subsequent provisions). The proxy or
information statement shall contain on
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the first page thereof, in a prominent place, any statement as to the
advisability (or inadvisability) of the Business Combination that the
Continuing Directors, or any of them, may choose to make and, if deemed
advisable by a majority of the Continuing Directors, the opinion of an
investment banking firm selected by a majority of the Continuing
Directors as to the fairness (or not) of the terms of the Business
Combination from a financial point of view to the holders of the
outstanding shares of Capital Stock other than the Interested
Stockholder and its Affiliates or Associates (as hereinafter defined),
such investment banking firm to be paid a reasonable fee for its
services by the corporation.
f. Such Interested Stockholder shall not have made any major change
in the corporation's business or equity capital structure without the
approval of a majority of the Continuing Directors.
C. The following definitions shall apply with respect to this Article SIXTH:
1. The term "Business Combination" shall mean:
a. any merger or consolidation of the corporation or any Subsidiary
(as hereinafter defined) with (i) any Interested Stockholder or (ii)
any other company (whether or not itself an Interested Stockholder)
which is or after such merger or consolidation would be an Affiliate or
Associate of an Interested Stockholder; or
b. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition or security arrangement, investment, loan, advance,
guarantee, agreement to purchase, agreement to pay, extension of
credit, joint venture participation or other arrangement (in one
transaction or a series of transactions) with or for the benefit of any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder involving any assets, securities or commitments of the
corporation, any Subsidiary or any Interested Stockholder or any
Affiliate or Associate of any Interested Stockholder which (except for
any arrangement, whether as employee, consultant or otherwise, other
than as a director, pursuant to which any Interested Stockholder or any
Affiliate or Associate thereof shall, directly or indirectly, have any
control over or responsibility for the management of any aspect of the
business or affairs of the corporation, with respect to which
arrangements the value tests set forth below shall not apply), together
with all other such arrangements (including all contemplated future
events), has an aggregate Fair Market Value and/or involves aggregate
commitments of $25,000,000 or more or constitutes more than five
percent of the book value of the total assets (in the case of
transactions involving assets or commitments other than capital stock)
or five percent of the stockholders' equity (in the case of
transactions in capital stock) of the entity in question (the
"Substantial Part"), as reflected in the most recent fiscal year-end
consolidated balance sheet of such entity existing at the time the
stockholders of the corporation would be required to approve or
authorize the Business Combination involving the assets, securities
and/or commitments constituting any Substantial Part; or
c. the adoption of any plan or proposal for the liquidation or
dissolution of the corporation or for any amendment to the
corporation's By-Laws; or
d. any reclassification of securities (including any reverse stock
split), or recapitalization of the corporation, or any merger or
consolidation of the corporation with any of its Subsidiaries or any
other transaction (whether or not with or otherwise involving an
Interested Stockholder) that has the effect, directly or indirectly, of
increasing the proportionate share of any class or series of Capital
Stock, or any securities convertible into Capital Stock or into equity
securities of any Subsidiary, that is beneficially owned by any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder, or
e. any agreement, contract or other arrangement providing for any one
or more of the actions specified in the foregoing clauses (a) to (d).
2. The term "Capital Stock" shall mean all capital stock of the
corporation authorized to be issued from time to time under Article FOURTH
of this Restated Certificate of Incorporation, and the term "Voting Stock"
shall mean all Capital Stock which by its terms may be voted on all matters
submitted to stockholders of the corporation generally.
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3. The term "person" shall mean any individual, firm, company or other
entity and shall include any group comprised of any person and any other
person with whom such person or any Affiliate or Associate of such person
has any agreement, arrangement or understanding, directly or indirectly,
for the purpose of acquiring, holding, voting or disposing of Capital
Stock.
4. The term "Interested Stockholder" shall mean any person (other than
(i) the corporation or any Subsidiary, any profit-sharing, employee stock
ownership or other employee benefit plan of the corporation or any
Subsidiary or any trustee or fiduciary with respect to any such plan or
holding Voting Stock for the purpose of funding any such plan or funding
other employee benefits for employees of the corporation or any Subsidiary
when acting in such capacity, and (ii) until immediately following the
Industrial Distribution (as defined in the Distribution Agreement, dated as
of , 1996, among the corporation, Newport News Shipbuilding Inc., a
Delaware corporation, and the corporation known as of the date thereof as
Tenneco Inc., a Delaware corporation ("Old Tenneco")), Old Tenneco or any
subsidiary of Old Tenneco) who (a) is or has announced or publicly
disclosed a plan or intention to become the beneficial owner of Voting
Stock representing five percent or more of the votes entitled to be cast by
the holders of all then outstanding shares of Voting Stock; or (b) is an
Affiliate or Associate of the corporation and at any time within the two-
year period immediately prior to the date in question was the beneficial
owner of Voting Stock representing five percent or more of the votes
entitled to be cast by the holders of all then outstanding shares of Voting
Stock.
5. A person shall be a "beneficial owner" of any Capital Stock (a) which
such person or any of its Affiliates or Associates beneficially owns,
directly or indirectly; (b) which such person or any of its Affiliates or
Associates has, directly or indirectly, (i) the right to acquire (whether
such right is exercisable immediately or subject only to the passage of
time), pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote pursuant to any agreement, arrangement
or understanding; or (c) which are beneficially owned, directly or
indirectly, by any other person with which such person or any of its
Affiliates or Associates has any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of any shares of
Capital Stock. For the purposes of determining whether a person is an
Interested Stockholder pursuant to Paragraph 4 of this Section C, the
number of shares of Capital Stock deemed to be outstanding shall include
shares deemed beneficially owned by such person through application of this
Paragraph 5 of Section C, but shall not include any other shares of Capital
Stock that may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options,
or otherwise. Notwithstanding the foregoing, for purposes of this Article
SIXTH, a person shall not be deemed a "beneficial owner" of any Capital
Stock which such person has the right to acquire upon exercise of the
Rights issued pursuant to the Rights Agreement, dated as of , 1996,
between the corporation and First Chicago Trust Company of New York
(including any successor rights plan thereto, the "Rights Agreement"), if
such person would not be deemed the beneficial owner of such Capital Stock
under the terms of such Rights Agreement.
6. The terms "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 under the Act as in effect on
, 1996 (the term "registrant" in said Rule 12b-2 meaning in this case
the corporation).
7. The term "Subsidiary" means any company of which a majority of any
class of equity securities are beneficially owned by the corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in Paragraph 4 of this Section C, the term
"Subsidiary" shall mean only a company of which a majority of each class of
equity security is beneficially owned by the corporation.
8. The term "Continuing Director" means any member of the Board of
Directors, while such person is a member of the Board of Directors, who is
not an Affiliate or Associate or representative of the Interested
Stockholder and was a member of the Board of Directors prior to the time
that the Interested Stockholder became an Interested Stockholder, and any
successor of a Continuing Director while such successor is a member of the
Board of Directors, who is not an Affiliate or Associate or representative
of the Interested
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Stockholder and is recommended or elected to succeed the Continuing
Director by a majority of Continuing Directors.
9. The term "Fair Market Value" means (a) in the case of cash, the amount
of such cash; (b) in the case of stock, the highest closing sale price
during the 30-day period immediately preceding the date in question of a
share of such stock on the Composite Tape for New York Stock Exchange-
Listed Stocks, or, if such stock is not quoted on the Composite Tape, on
the New York Stock Exchange, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered
under the Act on which such stock is listed, or, if such stock is not
listed on any such exchange, the highest closing bid quotation with respect
to a share of such stock during the 30-day period preceding the date in
question on The Nasdaq Stock Market or any similar system then in use, or
if no such quotations are available, the fair market value on the date in
question of a share of such stock as determined by a majority of the
Continuing Directors in good faith; and (c) in the case of property other
than cash or stock, the fair market value of such property on the date in
question as determined in good faith by a majority of the Continuing
Directors.
10. In the event of any Business Combination in which the corporation
survives, the phrase "consideration other than cash to be received" as used
in Paragraphs 2.a and 2.b of Section B of this Article SIXTH shall include
the shares of Common Stock and/or the shares of any other class or series
of Capital Stock retained by the holders of such shares.
D. A majority of the Continuing Directors shall have the power and duty to
determine for the purposes of this Article SIXTH, on the basis of information
known to them after reasonable inquiry, all questions arising under this
Article SIXTH, including, without limitation, (a) whether a person is an
Interested Stockholder, (b) the number of shares of Capital Stock or other
securities beneficially owned by any person, (c) whether a person is an
Affiliate or Associate of another, (d) whether a Proposed Action is with, or
proposed by, or on behalf of an Interested Stockholder or an Affiliate or
Associate of an Interested Stockholder, (e) whether the assets that are the
subject of any Business Combination have, or the consideration to be received
for the issuance or transfer of securities by the corporation or any
Subsidiary in any Business Combination has, an aggregate Fair Market Value of
$25,000,000 or more, and (f) whether the assets or securities that are the
subject of any Business Combination constitute a Substantial Part. Any such
determination made in good faith shall be binding and conclusive on all
parties.
E. Nothing contained in this Article SIXTH shall be construed to relieve any
Interested Stockholder from any fiduciary obligation imposed by law.
F. The fact that any Business Combination complies with the provisions of
Section B of this Article SIXTH shall not be construed to impose any fiduciary
duty, obligation or responsibility on the Board of Directors, or any member
thereof, to approve such Business Combination or recommend its adoption or
approval to the stockholders of the corporation, nor shall such compliance
limit, prohibit or otherwise restrict in any manner the Board of Directors, or
any member thereof, with respect to evaluations of or actions and responses
taken with respect to such Business Combination.
G. For the purposes of this Article SIXTH, a Business Combination or any
proposal to amend or repeal, or to adopt any provision of this Restated
Certificate of Incorporation inconsistent with, this Article SIXTH
(collectively, "Proposed Action"), is presumed to have been proposed by or on
behalf of an Interested Stockholder or an Affiliate or Associate of an
Interested Stockholder or a person who thereafter would become such if (1)
after the Interested Stockholder became such, the Proposed Action is proposed
following the election of any director of the corporation who with respect to
such Interested Stockholder would not qualify to serve as a Continuing
Director or (2) such Interested Stockholder, Affiliate, Associate or person
votes for or consents to the adoption of any such Proposed Action, unless as
to such Interested Stockholder, Affiliate, Associate or person a majority of
the Continuing Directors makes a good faith determination that such Proposed
Action is not proposed by or on behalf of such Interested Stockholder,
Affiliate, Associate or person, based on information known to them after
reasonable inquiry.
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H. Notwithstanding any other provisions of this Restated Certificate of
Incorporation or the By-Laws of the corporation (and notwithstanding the fact
that a lesser percentage or separate class vote may be specified by law, this
Restated Certificate of Incorporation or the By-Laws of the corporation), any
proposal to amend or repeal, or to adopt any provision of this Restated
Certificate of Incorporation inconsistent with, this Article SIXTH which is
proposed by or on behalf of an Interested Stockholder or an Affiliate or
Associate of an Interested Stockholder shall require the affirmative vote of
the holders of not less than 66 2/3% of the votes entitled to be cast by the
holders of all the then outstanding shares of Voting Stock, voting together as
a single class, excluding Voting Stock beneficially owned by any Interested
Stockholder, provided, however, that this Section H shall not apply to, and
such 66 2/3% vote shall not be required for, any amendment or repeal of, or
the adoption of any provision inconsistent with, this Article SIXTH
unanimously recommended by the Board of Directors if all of such directors are
persons who would be eligible to serve as Continuing Directors within the
meaning of Paragraph 8 of Section C of this Article SIXTH.
SEVENTH: A director of the corporation shall not be liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended. Any
amendment, modification or repeal of the foregoing sentence shall not
adversely affect any right or protection of a director of the corporation
hereunder in respect of any act or omission occurring prior to the time of
such amendment, modification or repeal.
EIGHTH: Subject to the provisions of this Restated Certificate of
Incorporation and applicable law, the corporation reserves the right at any
time and from time to time to amend, alter, change or repeal any provision
contained in this Restated Certificate of Incorporation, and any other
provisions authorized by the laws of the State of Delaware at the time in
force may be added or inserted, in the manner now or hereafter prescribed
herein or by applicable law, and all rights, preferences and privileges of
whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Restated Certificate of Incorporation in
its present form or as hereafter amended are granted subject to the right
reserved in this Article EIGHTH.
IN WITNESS WHEREOF, the undersigned has executed this Restated Certificate
of Incorporation this day of , 1996.
NEW TENNECO INC.
By:__________________________________
Name:
Office:
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EXHIBIT N
RESTATED CERTIFICATE OF INCORPORATION
OF
NEWPORT NEWS SHIPBUILDING INC.
* * * * *
The present name of the corporation is Newport News Shipbuilding Inc. The
corporation was incorporated under the name "Dixemer Petroleum Corporation" by
the filing of its original Certificate of Incorporation with the Secretary of
State of the State of Delaware on June 16, 1965. This Restated Certificate of
Incorporation of the corporation, which both restates and further amends the
provisions of the corporation's Certificate of Incorporation, was duly adopted
in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware and by the written consent of its
sole stockholder in accordance with Section 228 of the General Corporation Law
of the State of Delaware. The Certificate of Incorporation of the corporation
is hereby amended and restated to read in its entirety as follows:
FIRST: The name of the corporation is Newport News Shipbuilding Inc.
SECOND: The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: A. The total number of shares of all classes of stock which the
corporation shall be authorized to issue is 80,000,000 shares, divided into
70,000,000 shares of Common Stock, par value $.01 per share (herein called
"Common Stock"), and 10,000,000 shares of Preferred Stock, par value $.01 per
share (herein called "Preferred Stock").
B. The Board of Directors of the corporation (the "Board of Directors") is
hereby expressly authorized, by resolution or resolutions thereof, to provide,
out of the unissued shares of Preferred Stock, for series of Preferred Stock
and, with respect to each such series, to fix the number of shares
constituting such series and the designation of such series, the voting powers
(if any) of the shares of such series, and the preferences and relative,
participating, optional or other special rights, if any, and any
qualifications, limitations or restrictions thereof, of the shares of such
series. The powers, preferences and relative, participating, optional and
other special rights of each series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding.
C. Except as may otherwise be provided in this Restated Certificate of
Incorporation (including any certificate filed with the Secretary of State of
the State of Delaware establishing the terms of a series of Preferred Stock in
accordance with Section B of this Article FOURTH) or by applicable law, each
holder of Common Stock, as such, shall be entitled to one vote for each share
of Common Stock held of record by such holder on all matters on which
stockholders generally are entitled to vote, and no holder of any series of
Preferred Stock, as such, shall be entitled to any voting powers in respect
thereof.
D. Subject to applicable law and the rights, if any, of the holders of any
outstanding series of Preferred Stock, dividends may be declared and paid on
the Common Stock at such times and in such amounts as the Board of Directors
in its discretion shall determine.
E. Upon the dissolution, liquidation or winding up of the corporation,
subject to the rights, if any, of the holders of any outstanding series of
Preferred Stock, the holders of the Common Stock shall be entitled to receive
the assets of the corporation available for distribution to its stockholders
ratably in proportion to the number of shares held by them.
<PAGE>
F. The corporation shall be entitled to treat the person in whose name any
share of its stock is registered as the owner thereof for all purposes and
shall not be bound to recognize any equitable or other claim to, or interest
in, such share on the part of any other person, whether or not the corporation
shall have notice thereof, except as expressly provided by applicable law.
FIFTH: A. The business and affairs of the corporation shall be managed by or
under the direction of the Board of Directors consisting of not less than
three nor more than sixteen directors, with the exact number of directors
constituting the entire Board of Directors to be determined from time to time
by resolution adopted by the affirmative vote of a majority of the entire
Board of Directors. For purposes of this Restated Certificate of
Incorporation, "the entire Board of Directors" shall mean the number of
directors that would be in office if there were no vacancies nor any unfilled
newly created directorships.
The Board of Directors shall be divided into three classes, Class I, Class
II and Class III. Each class shall consist, as nearly as may be possible, of
one-third of the number of directors constituting the entire Board of
Directors. Class I directors shall be initially elected for a term expiring at
the first succeeding annual meeting of stockholders, Class II directors shall
be initially elected for a term expiring at the second succeeding annual
meeting of stockholders, and Class III directors shall be initially elected
for a term expiring at the third succeeding annual meeting of stockholders. At
each annual meeting of the stockholders following 1996, successors to the
class of directors whose term expires at that annual meeting shall be elected
for a term expiring at the third succeeding annual meeting of stockholders. If
the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in
each class as nearly equal as possible, and any additional director of any
class elected to fill a newly created directorship resulting from an increase
in such class shall hold office for a term that shall coincide with the
remaining term of that class, but in no case shall a decrease in the number of
directors shorten the term of any incumbent director. A director shall hold
office until the annual meeting for the year in which his term expires and
until his successor shall be elected and shall qualify, subject, however, to
prior death, resignation, retirement, disqualification or removal from office.
Any vacancy on the Board of Directors that results from an increase in the
number of directors may be filled by a majority of the Board of Directors then
in office, provided that a quorum is present, and any other vacancy occurring
in the Board of Directors may be filled by a majority of the directors then in
office, even if less than a quorum, or by a sole remaining director. Directors
chosen to fill any such vacancy shall hold office for a term expiring at the
annual meeting of stockholders at which the term of office of the class to
which they have been elected expires and until such director's successor shall
have been duly elected and qualified.
Notwithstanding the foregoing, whenever the holders of any one or more
series of Preferred Stock shall have the right, voting separately as a class
or series, to elect directors, the election, removal, term of office, filling
of vacancies and other features of such directorships shall be governed by the
terms of this Restated Certificate of Incorporation applicable thereto, and
such directors so elected shall not be divided into classes pursuant to this
Article FIFTH unless expressly provided by such terms.
B. The Board of Directors shall be authorized to adopt, make, amend, alter,
change, add to or repeal the By-Laws of the corporation, subject to the power
of the stockholders to amend, alter, change, add to or repeal the By-Laws made
by the Board of Directors.
C. Unless and except to the extent that the By-Laws of the corporation shall
so require, the election of directors of the corporation need not be by
written ballot.
SIXTH: A director of the corporation shall not be liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the General Corporation Law of the State of
Delaware as the same exists or may hereafter be amended. Any amendment,
modification or repeal of the foregoing sentence shall not adversely affect
any right or protection of a director of the corporation hereunder in respect
of any act or omission occurring prior to the time of such amendment,
modification or repeal.
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EXHIBIT O
BY-LAWS
OF
NEW TENNECO INC.
AMENDED AND RESTATED AS OF , 1996
ARTICLE I
PLACE OF STOCKHOLDER MEETINGS
Section 1. All meetings of the stockholders of the corporation shall be held
at such place or places, within or without the State of Delaware, as may from
time to time be fixed by the Board of Directors of the corporation (the
"Board"), or as shall be specified or fixed in the respective notices or
waivers of notice thereof.
ANNUAL MEETING
Section 2. The Annual Meeting of Stockholders shall be held on such date and
at such time as may be fixed by the Board and stated in the notice thereof,
for the purpose of electing directors and for the transaction of only such
other business as is properly brought before the meeting in accordance with
these By-Laws.
To be properly brought before the meeting, business must be either (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board, (b) otherwise properly brought before the meeting
by or at the direction of the Board, or (c) otherwise properly brought before
the meeting by a stockholder. In addition to any other applicable
requirements, for business to be properly brought before the Annual Meeting by
a stockholder, the stockholder must have given timely notice thereof in
writing to the Secretary of the corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation, not less than 50 days nor more than 75 days prior
to the meeting; provided, however, that in the event that less than 65 days'
notice or prior public disclosure of the date of the meeting is given or made
to stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the 15th day following the day on
which such notice of the date of the Annual Meeting was mailed or such public
disclosure was made, whichever first occurs. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the Annual Meeting (i) a brief description of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and record address of the
stockholder proposing such business, (iii) the class and number of shares of
the corporation which are beneficially owned by the stockholder, and (iv) any
material interest of the stockholder in such business.
Notwithstanding anything in these By-Laws to the contrary, no business shall
be transacted at the Annual Meeting except in accordance with the procedures
set forth in this Section, provided, however, that nothing in this Section
shall be deemed to preclude discussion by any stockholder of any business
properly brought before the Annual Meeting.
The Chairman of the Annual Meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section, and if he should so
determine, he shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
SPECIAL MEETING
Section 3. Subject to the rights of the holders of any series of preferred
stock, par value $.01 per share, of the corporation (the "Preferred Stock") to
elect additional directors under specified circumstances, special
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meetings of the stockholders shall be called by the Board. The business
transacted at a special meeting shall be confined to the purposes specified in
the notice thereof. Special meetings shall be held at such date and at such
time as the Board may designate.
NOTICE OF MEETING
Section 4. Written notice of each meeting of stockholders, stating the
place, date and hour of the meeting, and the purpose or purposes thereof,
shall be mailed not less than ten nor more than sixty days before the date of
such meeting to each stockholder entitled to vote thereat.
QUORUM
Section 5. Unless otherwise provided by statute, the holders of shares of
stock entitled to cast a majority of votes at a meeting, present either in
person or by proxy, shall constitute a quorum at such meeting. The Secretary
of the corporation or in his absence an Assistant Secretary or an appointee of
the presiding officer of the meeting, shall act as the Secretary of the
meeting.
VOTING
Section 6. Except as otherwise provided by law or the Restated Certificate
of Incorporation, each stockholder entitled to vote at any meeting shall be
entitled to one vote, in person or by written proxy, for each share held of
record on the record date fixed as provided in Section 4 of Article V of these
By-Laws for determining the stockholders entitled to vote at such meeting.
Except as otherwise provided by law, the Restated Certificate of Incorporation
or these By-Laws, the vote of a majority of any quorum shall be sufficient to
elect directors and to pass any resolution within the power of the holders of
all the outstanding shares.
Elections of directors need not be by written ballot; provided, however,
that by resolution duly adopted, a vote by written ballot may be required.
PROXIES
Section 7. Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for him by proxy, but no such
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. A proxy shall be irrevocable if it states
that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A stockholder may
revoke any proxy which is not irrevocable by attending the meeting and voting
in person or by filing an instrument revoking the proxy or by delivering a
proxy in accordance with applicable law bearing a later date to the Secretary
of the corporation. In order to be exercised at a meeting of stockholders,
proxies shall be delivered to the Secretary of the corporation or his
representative at or before the time of such meeting.
INSPECTORS
Section 8. At each meeting of the stockholders the polls shall be opened and
closed; the proxies and ballots shall be received and be taken in charge, and
all questions touching the qualification of voters and the validity of proxies
and the acceptance or rejection of votes shall be decided by three Inspectors,
two of whom shall have power to make a decision. Such Inspectors shall be
appointed by the Board before the meeting, or in default thereof by the
presiding officer at the meeting, and shall be sworn to the faithful
performance of their duties. If
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any of the Inspectors previously appointed shall fail to attend or refuse or
be unable to serve, substitutes shall be appointed by the presiding officer.
CONDUCT OF MEETINGS
Section 9. The date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting by the chairman of the meeting. The Board may adopt
by resolution such rules and regulations for the conduct of the meeting of
stockholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the Board, the chairman of any
meeting of stockholders shall have the right and authority to prescribe such
rules, regulations and procedures and to do all such acts as, in the judgment
of such chairman, are appropriate for the proper conduct of the meeting. Such
rules, regulations or procedures, whether adopted by the Board or prescribed
by the chairman of the meeting, may include, without limitation, the
following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and
the safety of those present; (iii) limitations on attendance at or
participation in the meeting to stockholders of record of the corporation,
their duly authorized and constituted proxies or such other persons as the
chairman of the meeting shall determine; (iv) restrictions on entry to the
meeting after the time fixed for the commencement thereof; and (v) limitations
on the time allotted to questions or comments by participants. Unless and to
the extent determined by the Board or the chairman of the meeting, meetings of
stockholders shall not be required to be held in accordance with the rules of
parliamentary procedure.
ARTICLE II
BOARD OF DIRECTORS
NUMBER; METHOD OF ELECTION;
TERMS OF OFFICE AND QUALIFICATION
Section 1. The business and affairs of the corporation shall be managed
under the direction of the Board. The number of directors which shall
constitute the entire Board shall not be less than eight nor more than sixteen
and shall be determined from time to time by resolution adopted by a majority
of the entire Board.
Nominations of persons for election to the Board of the corporation at the
Annual Meeting of Stockholders may be made at a meeting of stockholders by or
at the direction of the Board of Directors by any nominating committee or
person appointed by the Board or by any stockholder of the corporation
entitled to vote for the election of directors at the meeting who complies
with the notice procedures set forth in this Article II. Such nominations,
other than those made by or at the direction of the Board, shall be made
pursuant to timely notice in writing to the Secretary of the corporation. To
be timely, a stockholder's notice shall be delivered to or mailed and received
at the principal executive offices of the corporation not less than 50 days
nor more than 75 days prior to the meeting; provided, however, that in the
event that less than 65 days' notice or prior public disclosure of the date of
the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the 15th
day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made, whichever first occurs. Such
stockholder's notice to the Secretary shall set forth (a) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director, (i) the name, age, business address and residence of the person,
(ii) the principal occupation or employment of the person, (iii) the class and
number of shares of capital stock of the corporation which are beneficially
owned by the person and (iv) any other information relating to the person that
is required to be disclosed in solicitations for proxies for election of
directors pursuant to Rule 14A under the Securities Exchange Act of 1934 as
amended; and (b) as to the stockholder giving the notice (i) the name and
record address of the stockholder and (ii) the class and number of shares of
capital stock of the corporation which are beneficially owned by the
stockholder. The corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the corporation to
determine the eligibility of such proposed
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nominee to serve as director of the corporation. No person shall be eligible
for election as a director of the corporation at the Annual Meeting of
Stockholders unless nominated in accordance with the procedures set forth
herein. The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
Any director may resign his office at any time by delivering his resignation
in writing to the corporation, and the acceptance of such resignation unless
required by the terms thereof shall not be necessary to make such resignation
effective.
No person who shall have attained the age of 72 shall be eligible for
election or reelection, as the case may be, as a director of the corporation.
MEETINGS
Section 2. The Board may hold its meetings and have an office in such place
or places within or without the State of Delaware as the Board by resolution
from time to time may determine.
The Board may in its discretion provide for regular or stated meetings of
the Board. Notice of regular or stated meetings need not be given. Special
meetings of the Board shall be held whenever called by direction of the Chief
Executive Officer, the President or any two of the directors.
Notice of any special meeting shall be given by the Secretary to each
director either by mail or by telegram, facsimile, telephone or other
electronic communication or transmission. If mailed, such notice shall be
deemed adequately delivered when deposited in the United States mails so
addressed, with postage thereon prepaid, at least three days before such
meeting. If by telegram, such notice shall be deemed adequately delivered when
the telegram is delivered to the telegraph corporation at least twenty-four
hours before such meeting. If by facsimile, telephone or other electronic
communication or transmission, such notice shall be transmitted at least
twenty-four hours before such meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
Except as otherwise provided by applicable law, at any meeting at which
every director shall be present, even though without notice, any business may
be transacted. No notice of any adjourned meeting need be given.
The Board shall meet immediately after election, following the Annual
Meeting of Stockholders, for the purpose of organizing, for the election of
corporate officers as hereinafter specified, and for the transaction of any
other business which may come before it. No notice of such meeting shall be
necessary.
QUORUM
Section 3. Except as otherwise expressly required by these By-Laws or by
statute, a majority of the directors then in office (but not less than one-
third of the total number of directors constituting the entire Board) shall be
present at any meeting of the Board in order to constitute a quorum for the
transaction of business at such meeting, and the vote of a majority of the
directors present at any such meeting at which quorum is present shall be
necessary for the passage of any resolution or for an act to be the act of the
Board. In the absence of a quorum, a majority of the directors present may
adjourn such meeting from time to time until a quorum shall be present. Notice
of any adjourned meeting need not be given.
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COMPENSATION OF BOARD OF DIRECTORS
Section 4. Each director (other than a director who is a salaried officer of
the corporation or of any subsidiary of the corporation), in consideration of
his serving as such, shall be entitled to receive from the corporation such
amount per annum and such fees for attendance at meetings of the Board or of
any committee of the Board (a "Committee"), or both, as the Board shall from
time to time determine. The Board may likewise provide that the corporation
shall reimburse each director or member of a Committee for any expenses
incurred by him on account of his attendance at any such meeting. Nothing
contained in this Section shall be construed to preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.
ARTICLE III
COMMITTEES OF THE BOARD
COMMITTEES
Section 1. The Board shall elect from the directors an Executive Committee,
an Audit Committee, a Compensation Committee and any other Committee which the
Board may by resolution prescribe. Any such other Committee shall be comprised
of such persons and shall possess such authority as shall be set forth in such
resolution.
PROCEDURE
Section 2. (1) Each Committee shall fix its own rules of procedure and shall
meet where and as provided by such rules. Unless otherwise stated in these By-
Laws, a majority of a Committee shall constitute a quorum.
(2) In the absence or disqualification of a member of any Committee, the
members of such Committee present at any meeting, and not disqualified from
voting, whether or not they constitute a quorum, may unanimously appoint
another member of the Board to act at the meeting in the place of any such
absent or disqualified member. Fees in connection with such appointments shall
be established by the Board.
REPORTS TO THE BOARD
Section 3. All completed actions by the Executive, Audit and Compensation
Committees shall be reported to the Board at the next succeeding Board meeting
and shall be subject to revision or alteration by the Board, provided, that no
acts or rights of third parties shall be affected by any such revision or
alteration.
EXECUTIVE COMMITTEE
Section 4. The Board shall elect an Executive Committee comprised of the
Chief Executive Officer and not less than four additional members of the
Board. During the interval between the meetings of the Board, the Executive
Committee shall possess and may exercise all the powers of the Board in the
management and direction of all the business and affairs of the corporation
(except the matters hereinafter assigned to the Compensation Committee)
including, without limitation, the power and authority to declare dividends
and to authorize the issuance of stock, in such manner as the Executive
Committee shall deem best for the interests of the corporation in all cases in
which specific directions shall not have been given by the Board.
COMPENSATION COMMITTEE
Section 5. The Board shall elect a Compensation Committee consisting of at
least four members of the Board, none of whom shall be officers or employees
of the corporation or of any subsidiary corporation. The
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Board shall appoint a chairman of such Committee who shall be one of its
members. The Compensation Committee shall have such authority and duties as
the Board by resolution shall prescribe.
AUDIT COMMITTEE
Section 6. The Board shall elect from among its members an Audit Committee
consisting of at least three members. The Board shall appoint a chairman of
said Committee who shall be one of its members. The Audit Committee shall have
such authority and duties as the Board by resolution shall prescribe. In no
event shall a director who is also an officer or employee of the corporation
or any of its subsidiary companies serve as a member of such Committee. The
Chief Executive Officer shall have the right to attend (but not vote at) each
meeting of such Committee.
NOMINATING AND MANAGEMENT DEVELOPMENT COMMITTEE
Section 7. The Board shall elect from among its members a Nominating and
Management Development Committee consisting of at least three members. The
Board shall appoint a chairman of said Committee who shall be one of its
members. The Nominating and Management Development Committee shall have such
authority and duties as the Board by resolution shall prescribe. In no event
shall a director who is also an officer or employee of the corporation or any
of its subsidiary companies serve as a member of such Committee. The Chief
Executive Officer shall have the right to attend (but not vote at) each
meeting of such Committee.
ARTICLE IV
OFFICERS
GENERAL PROVISIONS
Section 1. The corporate officers of the corporation shall consist of the
following: a Chairman and/or a President, one of whom shall be designated
Chief Executive Officer and each of whom shall be chosen from the Board; one
or more Vice Chairman, Executive Vice Presidents, Senior Vice Presidents, Vice
Presidents and Assistant Vice Presidents; a General Counsel, a Secretary, one
or more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers,
a Controller, and such other officers as the Board may from time to time
designate. Insofar as permitted by statute, the same person may hold two or
more offices. All officers chosen by the Board shall each have such powers and
duties as generally pertain to their respective offices, subject to the
specific provisions of this Article IV.
The Chairman and/or President, each Vice Chairman, Executive Vice President,
Senior Vice President and Vice President, the Secretary and the Treasurer
shall be elected by the Board. Each such officer shall hold office until his
successor is elected or appointed and qualified or until his earlier death,
resignation or removal.
Any officer may be removed, with or without cause, at any time by the Board.
A vacancy in any office may be filled for the unexpired portion of the term
in the same manner as provided in these By-Laws for election or appointment to
such office.
POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER
Section 2. The Chief Executive Officer shall have general charge and
management of the affairs, property and business of the corporation, subject
to the Board, the Executive Committee and the provisions of these By-Laws. The
Chief Executive Officer or in his absence such other individual as the Board
may select, shall preside at all meetings of the stockholders. He shall also
preside at meetings of the Board and the Executive Committee,
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and in his absence the Board or the Executive Committee, as the case may be,
shall appoint one of their number to preside.
The Chief Executive Officer shall perform all duties assigned to him in
these By-Laws and such other duties as may from time to time be assigned to
him by the Board. He shall have the power to appoint and remove, with or
without cause, such officers, other than those elected by the Board as
provided for in these By-Laws, as in his judgment may be necessary or proper
for the transaction of the business of the corporation, and shall determine
their duties, all subject to ratification by the Board.
POWERS AND DUTIES OF OTHER OFFICERS
Section 3. The Chairman shall perform such duties as may from time to time
be assigned to him by the Board, the Executive Committee or the Chief
Executive Officer.
Section 4. Each Vice Chairman shall perform such duties as may from time to
time be assigned to him by the Board, the Executive Committee or the Chief
Executive Officer.
Section 5. The President shall perform such duties as may from time to time
be assigned to him by the Board, the Executive Committee or the Chief
Executive Officer.
Section 6. Each Executive Vice President shall perform such duties as may
from time to time be assigned to him by the Board, the Executive Committee or
the Chief Executive Officer.
Section 7. Each Senior Vice President shall perform such duties as may from
time to time be assigned to him by the Board, the Executive Committee or the
Chief Executive Officer.
Section 8. Each Vice President and Assistant Vice President shall perform
such duties as may from time to time be assigned to him by the Board, the
Executive Committee, the Chief Executive Officer or an Executive Vice
President.
Section 9. The General Counsel shall have general supervision and control of
all of the corporation's legal business. He shall perform such other duties as
may be assigned to him by the Board, the Executive Committee or the Chief
Executive Officer.
Section 10. The Secretary or an Assistant Secretary shall record the
proceedings of all meetings of the Board, the Executive Committee of the Board
and the stockholders, in books kept for that purpose. The Secretary shall be
the custodian of the corporate seal, and he or an Assistant Secretary shall
affix the same to and countersign papers requiring such acts; and he and the
Assistant Secretaries shall perform such other duties as may be required by
the Board, the Executive Committee or the Chief Executive Officer.
Section 11. The Treasurer and Assistant Treasurers shall have care and
custody of all funds of the corporation and disburse and administer the same
under the direction of the Board, the Executive Committee or the Chief
Executive Officer and shall perform such other duties as the Board, the
Executive Committee or the Chief Executive Officer shall assign to them.
Section 12. The Controller shall maintain adequate records of all assets,
liabilities and transactions of the corporation and see that audits thereof
are currently and regularly made; and he shall perform such other duties as
may be required by the Board, the Executive Committee or the Chief Executive
Officer.
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SALARIES AND APPOINTMENTS
Section 13. The salaries of corporate officers shall be fixed by the
Compensation Committee provided for in Section 5 of Article III hereof, except
that the fixing of salaries below certain levels, determinable from time to
time by the Compensation Committee, may in the discretion of the Committee be
delegated to the Chief Executive Officer, subject to the approval of the
Board.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 14. (1) The corporation shall indemnify and hold harmless, to the
fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person (an "Indemnitee") who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative,
including appeals (a "proceeding"), by reason of the fact that he, or a person
for whom he is the legal representative, is or was a director or officer of
the corporation or, while a director or officer of the corporation, is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect to employee
benefit plans, against all liability and loss suffered and expenses (including
attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the
preceding sentence, except as otherwise provided in paragraph (3) of this
Section 14, the corporation shall be required to indemnify an Indemnitee in
connection with a proceeding (or part thereof) commenced by such Indemnitee
only if the commencement of such proceeding (or part thereof) by the
Indemnitee was authorized by the Board.
(2) The corporation shall pay the expenses (including attorneys' fees)
incurred by an Indemnitee in defending any proceeding in advance of its final
disposition, provided, however, that, to the extent required by law, such
payment of expenses in advance of the final disposition of the proceeding
shall be made only upon receipt of an undertaking by the Indemnitee to repay
all amounts advanced if it should be ultimately determined that the Indemnitee
is not entitled to be indemnified under this Section 14 or otherwise.
(3) If a claim for indemnification or payment of expenses under this Section
14 is not paid in full within thirty days after a written claim therefor by
the Indemnitee has been received by the corporation, the Indemnitee may file
suit to recover the unpaid amount of such claim and, if successful in whole or
in part, shall be entitled to be paid the expense of prosecuting such claim.
In any such action the corporation shall have the burden of proving that the
Indemnitee is not entitled to the requested indemnification or payment of
expenses under applicable law.
(4) The rights conferred on any Indemnitee by this Section 14 shall not be
exclusive of any other rights which such Indemnitee may have or hereafter
acquire under any statute, provision of the Restated Certificate of
Incorporation, these By-Laws, agreement, vote of stockholders or disinterested
directors or otherwise.
(5) The corporation's obligation, if any, to indemnify or to advance
expenses to any Indemnitee who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, enterprise or nonprofit entity shall be reduced by any amount such
Indemnitee may collect as indemnification or advancement of expenses from such
other corporation, partnership, joint venture, trust, enterprise or nonprofit
enterprise.
(6) Any repeal or modification of the foregoing provisions of this Section
14 shall not adversely affect any right or protection hereunder of any
Indemnitee in respect of any act or omission occurring prior to the time of
such repeal or modification.
(7) This Section 14 shall not limit the right of the corporation, to the
extent and in the manner permitted by law, to indemnify and to advance
expenses to persons other than Indemnitees when and as authorized by
appropriate corporate action.
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ARTICLE V
CAPITAL STOCK
CERTIFICATES OF STOCK
Section 1. Certificates of stock certifying the number of shares owned shall
be issued to each stockholder in such form not inconsistent with the Restated
Certificate of Incorporation as shall be approved by the Board. Such
certificates of stock shall be numbered and registered in the order in which
they are issued and shall be signed by the Chairman, the President or a Vice
President, and by the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary. Any and all the signatures on the certificates may be
a facsimile.
TRANSFER OF SHARES
Section 2. Transfers of shares shall be made only upon the books of the
corporation by the holder, in person, or by power of attorney duly executed
and filed with the Secretary of the corporation, and on the surrender of the
certificate or certificates of such shares, properly assigned. The corporation
may, if and whenever the Board shall so determine, maintain one or more
offices or agencies, each in charge of an agent designated by the Board, where
the shares of the capital stock of the corporation shall be transferred and/or
registered. The Board may also make such additional rules and regulations as
it may deem expedient concerning the issue, transfer and registration of
certificates for shares of the capital stock of the corporation.
LOST, STOLEN OR DESTROYED CERTIFICATES
Section 3. The corporation may issue a new certificate of capital stock of
the corporation in place of any certificate theretofore issued by the
corporation, alleged to have been lost, stolen or destroyed, and the
corporation may, but shall not be obligated to, require the owner of the
alleged lost, stolen or destroyed certificate, or his legal representatives,
to give the corporation a bond sufficient to indemnify it against any claim
that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate,
as the officers of the corporation may, in their discretion, require.
FIXING OF RECORD DATE
Section 4. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the Board may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board, and which record date: (1) in the case of determination
of stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than sixty nor
less than ten days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to corporate action
in writing without a meeting, shall not be more than ten days from the date
upon which the resolution fixing the record date is adopted by the Board; and
(3) in the case of any other action, shall not be more than sixty days prior
to such other action. If no record date is fixed by the Board: (1) the record
date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting shall be determined
in accordance with Article VI of these By-Laws; and (3) the record date for
determining stockholders for any other purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto.
A determination of stockholders of record entitled to
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notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board may fix a new
record date for the adjourned meeting.
ARTICLE VI
CONSENTS TO CORPORATE ACTION
RECORD DATE
Section 1. The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting shall be as fixed by
the Board or as otherwise established under this Section. Any person seeking
to have the stockholders authorize or take corporate action by written consent
without a meeting shall by written notice addressed to the Secretary and
delivered to the corporation, request that a record date be fixed for such
purpose. The Board may fix a record date for such purpose which shall be no
more than 10 days after the date upon which the resolution fixing the record
date is adopted by the Board and shall not precede the date such resolution is
adopted. If the Board fails within 10 days after the corporation receives such
notice to fix a record date for such purpose, the record date shall be the day
on which the first written consent is delivered to the corporation in the
manner described in Section 2 below unless prior action by the Board is
required under the General Corporation Law of Delaware, in which event the
record date shall be at the close of business on the day on which the Board
adopts the resolution taking such prior action.
PROCEDURES
Section 2. Every written consent purporting to take or authorizing the
taking of corporate action and/or related revocations (each such written
consent and related revocation is referred to in this Article VI as a
"Consent") shall bear the date of signature of each stockholder who signs the
Consent, and no Consent shall be effective to take the corporate action
referred to therein unless, within 60 days of the earliest dated Consent
delivered in the manner required by this Section 2, Consents signed by a
sufficient number of stockholders to take such action are delivered to the
corporation.
A Consent shall be delivered to the corporation by delivery to its
registered office in the State of Delaware, its principal place of business,
or an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery to the
corporation's registered office shall be made by hand or by certified or
registered mail, return receipt requested.
In the event of the delivery to the corporation of a Consent, the Secretary
of the corporation shall provide for the safe-keeping of such Consent and
shall promptly conduct such ministerial review of the sufficiency of the
Consents and of the validity of the action to be taken by shareholder consent
as he deems necessary or appropriate, including, without limitation, whether
the holders of a number of shares having the requisite voting power to
authorize or take the action specified in the Consent have given consent;
provided, however, that if the corporate action to which the Consent relates
is the removal or replacement of one or more members of the Board, the
Secretary of the corporation shall promptly designate two persons, who shall
not be members of the Board, to serve as Inspectors with respect to such
Consent and such Inspectors shall discharge the functions of the Secretary of
the corporation under this Section 2. If after such investigation the
Secretary or the Inspectors (as the case may be) shall determine that the
Consent is valid and that the action therein specified has been validly
authorized, that fact shall forthwith be certified on the records of the
corporation kept for the purpose of recording the proceedings of meetings of
stockholders, and the Consent shall be filed in such records, at which time
the Consent shall become effective as stockholder action. In conducting the
investigation required by this Section 2, the Secretary or the Inspectors (as
the case may be) may, at the expense of the corporation, retain special legal
counsel and any other necessary or appropriate professional advisors, and such
other personnel as they may deem necessary or appropriate to assist them, and
shall be fully protected in relying in good faith upon the opinion of such
counsel or advisors.
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ARTICLE VII
MISCELLANEOUS
DIVIDENDS AND RESERVES
Section 1. Dividends upon the capital stock of the corporation may be
declared as permitted by law by the Board or the Executive Committee at any
regular or special meeting. Before payment of any dividend or making any
distribution of profits, there may be set aside out of the surplus or net
profits of the corporation such sum or sums as the Board or the Executive
Committee, from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for such other purposes as the Board or
Executive Committee shall think conducive to the interests of the corporation,
and any reserve so established may be abolished and restored to the surplus
account by like action of the Board or the Executive Committee.
SEAL
Section 2. The seal of the corporation shall bear the corporate name of the
corporation, the year of its incorporation and the words "Corporate Seal,
Delaware".
WAIVER
Section 3. Whenever any notice whatever is required to be given by statute
or under the provisions of the Restated Certificate of Incorporation or these
By-Laws, a waiver thereof in writing signed by the person or persons entitled
to such notice, whether before or after the time stated therein, shall be
deemed equivalent thereto. Neither the business to be transacted at, nor the
purpose of, any annual or special meeting of the stockholders or the Board, as
the case may be, need be specified in any waiver of notice of such meeting.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall begin with January first
and end with December thirty-first.
CONTRACTS
Section 5. Except as otherwise required by law, the Restated Certificate of
Incorporation or these By-Laws, any contracts or other instruments may be
executed and delivered in the name and on the behalf of the corporation by
such officer or officers of the corporation as the Board may from time to time
direct. Such authority may be general or confined to specific instances as the
Board may determine. The Chairman of the Board, the President or any Vice
President may execute bonds, contracts, deeds, leases and other instruments to
be made or executed for or on behalf of the corporation. Subject to any
restrictions imposed by the Board, the Chairman of the Board, the President or
any Vice President of the corporation may delegate contractual powers to
others under his jurisdiction, it being understood, however, that any such
delegation of power shall not relieve such officer of responsibility with
respect to the exercise of such delegated power.
PROXIES
Section 6. Unless otherwise provided by resolution adopted by the Board, the
Chairman of the Board, the President or any Vice President may from time to
time appoint an attorney or attorneys or agent or agents of the corporation,
in the name and on behalf of the corporation, to cast the votes which the
corporation may be entitled to cast as the holder of stock or other securities
in any other corporation or other entity, any of whose stock or
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other securities may be held by the corporation, at meetings of the holders of
the stock or other securities of such other corporation or other entity, or to
consent in writing, in the name of the corporation as such holder, to any
action by such other corporation or other entity, and may instruct the person
or persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed in the name and on behalf of
the corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the
premises.
AMENDMENTS
Section 7. The Board from time to time shall have the power to make, alter,
amend or repeal any and all of these By-Laws, but any By-Laws so made, altered
or repealed by the Board may be amended, altered or repealed by the
stockholders.
CERTIFICATION
The undersigned hereby certifies that he is the duly elected and acting
Secretary of New Tenneco Inc., a Delaware corporation, and the keeper of
its corporate records and minutes. The undersigned further hereby certifies
that the above and foregoing is a true and correct copy of the By-Laws of said
corporation, as in force at the date hereof.
WITNESS the hand of the undersigned and the seal of said corporation, this
day of , 19 .
_____________________________________
___________________________ Secretary
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EXHIBIT O
BY-LAWS
OF
NEWPORT NEWS SHIPBUILDING INC.
AMENDED AND RESTATED AS OF _____ __, 1996
ARTICLE I
PLACE OF STOCKHOLDER MEETINGS
Section 1. All meetings of the stockholders of the corporation shall be held
at such place or places, within or without the State of Delaware, as may from
time to time be fixed by the Board of Directors of the corporation (the
"Board"), or as shall be specified or fixed in the respective notices or
waivers of notice thereof.
ANNUAL MEETING
Section 2. The Annual Meeting of Stockholders shall be held on such date and
at such time as may be fixed by the Board and stated in the notice thereof,
for the purpose of electing directors and for the transaction of only such
other business as is properly brought before the meeting in accordance with
these By-Laws.
To be properly brought before the meeting, business must be either (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board, (b) otherwise properly brought before the meeting
by or at the direction of the Board, or (c) otherwise properly brought before
the meeting by a stockholder. In addition to any other applicable
requirements, for business to be properly brought before the Annual Meeting by
a stockholder, the stockholder must have given timely notice thereof in
writing to the Secretary of the corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the corporation, not less than 50 days nor more than 75 days prior
to the meeting; provided, however, that in the event that less than 65 days'
notice or prior public disclosure of the date of the meeting is given or made
to stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the 15th day following the day on
which such notice of the date of the Annual Meeting was mailed or such public
disclosure was made, whichever first occurs. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the Annual Meeting (i) a brief description of the business desired to
be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and record address of the
stockholder proposing such business, (iii) the class and number of shares of
the corporation which are beneficially owned by the stockholder, and (iv) any
material interest of the stockholder in such business.
Notwithstanding anything in these By-Laws to the contrary, no business shall
be transacted at the Annual Meeting except in accordance with the procedures
set forth in this Section, provided, however, that nothing in this Section
shall be deemed to preclude discussion by any stockholder of any business
properly brought before the Annual Meeting.
The Chairman of the Annual Meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section, and if he should so
determine, he shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
SPECIAL MEETING
Section 3. Subject to the rights of the holders of any series of preferred
stock, par value $.01 per share, of the corporation (the "Preferred Stock") to
elect additional directors under specified circumstances, special meetings of
the stockholders shall be called by the Board. The business transacted at a
special meeting shall be confined to the purposes specified in the notice
thereof. Special meetings shall be held at such date and at such time as the
Board may designate.
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NOTICE OF MEETING
Section 4. Written notice of each meeting of stockholders, stating the
place, date and hour of the meeting, and the purpose or purposes thereof,
shall be mailed not less than ten nor more than sixty days before the date of
such meeting to each stockholder entitled to vote thereat.
QUORUM
Section 5. Unless otherwise provided by statute, the holders of shares of
stock entitled to cast a majority of votes at a meeting, present either in
person or by proxy, shall constitute a quorum at such meeting. The Secretary
of the corporation or in his absence an Assistant Secretary or an appointee of
the presiding officer of the meeting, shall act as the Secretary of the
meeting.
VOTING
Section 6. Except as otherwise provided by law or the Restated Certificate
of Incorporation, each stockholder entitled to vote at any meeting shall be
entitled to one vote, in person or by written proxy, for each share held of
record on the record date fixed as provided in Section 4 of Article V of these
By-Laws for determining the stockholders entitled to vote at such meeting.
Except as otherwise provided by law, the Restated Certificate of Incorporation
or these By-Laws, the vote of a majority of any quorum shall be sufficient to
elect directors and to pass any resolution within the power of the holders of
all the outstanding shares.
Elections of directors need not be by written ballot; provided, however,
that by resolution duly adopted, a vote by written ballot may be required.
PROXIES
Section 7. Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for him by proxy, but no such
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. A proxy shall be irrevocable if it states
that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A stockholder may
revoke any proxy which is not irrevocable by attending the meeting and voting
in person or by filing an instrument revoking the proxy or by delivering a
proxy in accordance with applicable law bearing a later date to the Secretary
of the corporation. In order to be exercised at a meeting of stockholders,
proxies shall be delivered to the Secretary of the corporation or his
representative at or before the time of such meeting.
INSPECTORS
Section 8. At each meeting of the stockholders the polls shall be opened and
closed; the proxies and ballots shall be received and be taken in charge, and
all questions touching the qualification of voters and the validity of proxies
and the acceptance or rejection of votes shall be decided by three Inspectors,
two of whom shall have power to make a decision. Such Inspectors shall be
appointed by the Board before the meeting, or in default thereof by the
presiding officer at the meeting, and shall be sworn to the faithful
performance of their duties. If any of the Inspectors previously appointed
shall fail to attend or refuse or be unable to serve, substitutes shall be
appointed by the presiding officer.
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CONDUCT OF MEETINGS
Section 9. The date and time of the opening and the closing of the polls for
each matter upon which the stockholders will vote at a meeting shall be
announced at the meeting by the chairman of the meeting. The Board may adopt
by resolution such rules and regulations for the conduct of the meeting of
stockholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the Board, the chairman of any
meeting of stockholders shall have the right and authority to prescribe such
rules, regulations and procedures and to do all such acts as, in the judgment
of such chairman, are appropriate for the proper conduct of the meeting. Such
rules, regulations or procedures, whether adopted by the Board or prescribed
by the chairman of the meeting, may include, without limitation, the
following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and
the safety of those present; (iii) limitations on attendance at or
participation in the meeting to stockholders of record of the corporation,
their duly authorized and constituted proxies or such other persons as the
chairman of the meeting shall determine; (iv) restrictions on entry to the
meeting after the time fixed for the commencement thereof; and (v) limitations
on the time allotted to questions or comments by participants. Unless and to
the extent determined by the Board or the chairman of the meeting, meetings of
stockholders shall not be required to be held in accordance with the rules of
parliamentary procedure.
ARTICLE II
BOARD OF DIRECTORS
NUMBER; METHOD OF ELECTION;
TERMS OF OFFICE AND QUALIFICATION
Section 1. The business and affairs of the corporation shall be managed
under the direction of the Board. The number of directors which shall
constitute the entire Board shall not be less than three nor more than sixteen
and shall be determined from time to time by resolution adopted by a majority
of the entire Board.
Nominations of persons for election to the Board of the corporation at the
Annual Meeting of Stockholders may be made at a meeting of stockholders by or
at the direction of the Board of Directors by any nominating committee or
person appointed by the Board or by any stockholder of the corporation
entitled to vote for the election of directors at the meeting who complies
with the notice procedures set forth in this Article II. Such nominations,
other than those made by or at the direction of the Board, shall be made
pursuant to timely notice in writing to the Secretary of the corporation. To
be timely, a stockholder's notice shall be delivered to or mailed and received
at the principal executive offices of the corporation not less than 50 days
nor more than 75 days prior to the meeting; provided, however, that in the
event that less than 65 days' notice or prior public disclosure of the date of
the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the 15th
day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made, whichever first occurs. Such
stockholder's notice to the Secretary shall set forth (a) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director, (i) the name, age, business address and residence of the person,
(ii) the principal occupation or employment of the person, (iii) the class and
number of shares of capital stock of the corporation which are beneficially
owned by the person and (iv) any other information relating to the person that
is required to be disclosed in solicitations for proxies for election of
directors pursuant to Rule 14A under the Securities Exchange Act of 1934 as
amended; and (b) as to the stockholder giving the notice (i) the name and
record address of the stockholder and (ii) the class and number of shares of
capital stock of the corporation which are beneficially owned by the
stockholder. The corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the corporation to
determine the eligibility of such proposed nominee to serve as director of the
corporation. No person shall be eligible for election as a director of the
corporation at the Annual Meeting of Stockholders unless nominated in
accordance with the procedures set forth herein. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the foregoing procedure, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
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Any director may resign his office at any time by delivering his resignation
in writing to the corporation, and the acceptance of such resignation unless
required by the terms thereof shall not be necessary to make such resignation
effective.
No person who shall have attained the age of 72 shall be eligible for
election or reelection, as the case may be, as a director of the corporation,
except that the foregoing qualification shall not apply to any director who,
at the time of the adoption of these By-Laws, is then in office and has
attained such age.
MEETINGS
Section 2. The Board may hold its meetings and have an office in such place
or places within or without the State of Delaware as the Board by resolution
from time to time may determine.
The Board may in its discretion provide for regular or stated meetings of
the Board. Notice of regular or stated meetings need not be given. Special
meetings of the Board shall be held whenever called by direction of the Chief
Executive Officer, the President or any two of the directors.
Notice of any special meeting shall be given by the Secretary to each
director either by mail or by telegram, facsimile, telephone or other
electronic communication or transmission. If mailed, such notice shall be
deemed adequately delivered when deposited in the United States mails so
addressed, with postage thereon prepaid, at least three days before such
meeting. If by telegram, such notice shall be deemed adequately delivered when
the telegram is delivered to the telegraph corporation at least twenty-four
hours before such meeting. If by facsimile, telephone or other electronic
communication or transmission, such notice shall be transmitted at least
twenty-four hours before such meeting. Unless otherwise indicated in the
notice thereof, any and all business may be transacted at a special meeting.
Except as otherwise provided by applicable law, at any meeting at which
every director shall be present, even though without notice, any business may
be transacted. No notice of any adjourned meeting need be given.
The Board shall meet immediately after election, following the Annual
Meeting of Stockholders, for the purpose of organizing, for the election of
corporate officers as hereinafter specified, and for the transaction of any
other business which may come before it. No notice of such meeting shall be
necessary.
QUORUM
Section 3. Except as otherwise expressly required by these By-Laws or by
statute, a majority of the directors then in office (but not less than one-
third of the total number of directors constituting the entire Board) shall be
present at any meeting of the Board in order to constitute a quorum for the
transaction of business at such meeting, and the vote of a majority of the
directors present at any such meeting at which quorum is present shall be
necessary for the passage of any resolution or for an act to be the act of the
Board. In the absence of a quorum, a majority of the directors present may
adjourn such meeting from time to time until a quorum shall be present. Notice
of any adjourned meeting need not be given.
COMPENSATION OF BOARD OF DIRECTORS
Section 4. Each director (other than a director who is a salaried officer of
the corporation or of any subsidiary of the corporation), in consideration of
his serving as such, shall be entitled to receive from the corporation such
amount per annum and such fees for attendance at meetings of the Board or of
any committee of the Board (a "Committee"), or both, as the Board shall from
time to time determine. The Board may likewise provide that the corporation
shall reimburse each director or member of a Committee for any expenses
incurred by him on account of his attendance at any such meeting. Nothing
contained in this Section shall be construed to preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.
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ARTICLE III
COMMITTEES OF THE BOARD
COMMITTEES
Section 1. The Board shall elect from the directors an Executive Committee,
an Audit Committee, a Compensation Committee and any other Committee which the
Board may by resolution prescribe. Any such other Committee shall be comprised
of such persons and shall possess such authority as shall be set forth in such
resolution.
PROCEDURE
Section 2. (1) Each Committee shall fix its own rules of procedure and shall
meet where and as provided by such rules. Unless otherwise stated in these By-
Laws, a majority of a Committee shall constitute a quorum.
(2) In the absence or disqualification of a member of any Committee, the
members of such Committee present at any meeting, and not disqualified from
voting, whether or not they constitute a quorum, may unanimously appoint
another member of the Board to act at the meeting in the place of any such
absent or disqualified member. Fees in connection with such appointments shall
be established by the Board.
REPORTS TO THE BOARD
Section 3. All completed actions by the Executive, Audit and Compensation
Committees shall be reported to the Board at the next succeeding Board meeting
and shall be subject to revision or alteration by the Board, provided, that no
acts or rights of third parties shall be affected by any such revision or
alteration.
EXECUTIVE COMMITTEE
Section 4. The Board shall elect an Executive Committee comprised of the
Chief Executive Officer and not less than four additional members of the
Board. During the interval between the meetings of the Board, the Executive
Committee shall possess and may exercise all the powers of the Board in the
management and direction of all the business and affairs of the corporation
(except the matters hereinafter assigned to the Compensation Committee)
including, without limitation, the power and authority to declare dividends
and to authorize the issuance of stock, in such manner as the Executive
Committee shall deem best for the interests of the corporation in all cases in
which specific directions shall not have been given by the Board.
COMPENSATION COMMITTEE
Section 5. The Board shall elect a Compensation Committee consisting of at
least four members of the Board, none of whom shall be officers or employees
of the corporation or of any subsidiary corporation. The Board shall appoint a
chairman of such Committee who shall be one of its members. The Compensation
Committee shall have such authority and duties as the Board by resolution
shall prescribe.
AUDIT COMMITTEE
Section 6. The Board shall elect from among its members an Audit Committee
consisting of at least three members. The Board shall appoint a chairman of
said Committee who shall be one of its members. The Audit Committee shall have
such authority and duties as the Board by resolution shall prescribe. In no
event shall a director who is also an officer or employee of the corporation
or any of its subsidiary companies serve as a member of such Committee. The
Chief Executive Officer shall have the right to attend (but not vote at) each
meeting of such Committee.
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NOMINATING AND MANAGEMENT DEVELOPMENT COMMITTEE
Section 7. The Board shall elect from among its members a Nominating and
Management Development Committee consisting of at least three members. The
Board shall appoint a chairman of said Committee who shall be one of its
members. The Nominating and Management Development Committee shall have such
authority and duties as the Board by resolution shall prescribe. In no event
shall a director who is also an officer or employee of the corporation or any
of its subsidiary companies serve as a member of such Committee. The Chief
Executive Officer shall have the right to attend (but not vote at) each
meeting of such Committee.
ARTICLE IV
OFFICERS
GENERAL PROVISIONS
Section 1. The corporate officers of the corporation shall consist of the
following: a Chairman and/or a President, one of whom shall be designated
Chief Executive Officer and each of whom shall be chosen from the Board; one
or more Vice Chairman, Executive Vice Presidents, Senior Vice Presidents, Vice
Presidents and Assistant Vice Presidents; a General Counsel, a Secretary, one
or more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers,
a Controller, and such other officers as the Board may from time to time
designate. Insofar as permitted by statute, the same person may hold two or
more offices. All officers chosen by the Board shall each have such powers and
duties as generally pertain to their respective offices, subject to the
specific provisions of this Article IV.
The Chairman and/or President, each Vice Chairman, Executive Vice President,
Senior Vice President and Vice President, the Secretary and the Treasurer
shall be elected by the Board. Each such officer shall hold office until his
successor is elected or appointed and qualified or until his earlier death,
resignation or removal.
Any officer may be removed, with or without cause, at any time by the Board.
A vacancy in any office may be filled for the unexpired portion of the term
in the same manner as provided in these By-Laws for election or appointment to
such office.
POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER
Section 2. The Chief Executive Officer shall have general charge and
management of the affairs, property and business of the corporation, subject
to the Board, the Executive Committee and the provisions of these By-Laws. The
Chief Executive Officer or in his absence such other individual as the Board
may select, shall preside at all meetings of the stockholders. He shall also
preside at meetings of the Board and the Executive Committee, and in his
absence the Board or the Executive Committee, as the case may be, shall
appoint one of their number to preside.
The Chief Executive Officer shall perform all duties assigned to him in
these By-Laws and such other duties as may from time to time be assigned to
him by the Board. He shall have the power to appoint and remove, with or
without cause, such officers, other than those elected by the Board as
provided for in these By-Laws, as in his judgment may be necessary or proper
for the transaction of the business of the corporation, and shall determine
their duties, all subject to ratification by the Board.
POWERS AND DUTIES OF OTHER OFFICERS
Section 3. The Chairman shall perform such duties as may from time to time
be assigned to him by the Board, the Executive Committee or the Chief
Executive Officer.
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Section 4. Each Vice Chairman shall perform such duties as may from time to
time be assigned to him by the Board, the Executive Committee or the Chief
Executive Officer.
Section 5. The President shall perform such duties as may from time to time
be assigned to him by the Board, the Executive Committee or the Chief
Executive Officer.
Section 6. Each Executive Vice President shall perform such duties as may
from time to time be assigned to him by the Board, the Executive Committee or
the Chief Executive Officer.
Section 7. Each Senior Vice President shall perform such duties as may from
time to time be assigned to him by the Board, the Executive Committee or the
Chief Executive Officer.
Section 8. Each Vice President and Assistant Vice President shall perform
such duties as may from time to time be assigned to him by the Board, the
Executive Committee, the Chief Executive Officer or an Executive Vice
President.
Section 9. The General Counsel shall have general supervision and control of
all of the corporation's legal business. He shall perform such other duties as
may be assigned to him by the Board, the Executive Committee or the Chief
Executive Officer.
Section 10. The Secretary or an Assistant Secretary shall record the
proceedings of all meetings of the Board, the Executive Committee of the Board
and the stockholders, in books kept for that purpose. The Secretary shall be
the custodian of the corporate seal, and he or an Assistant Secretary shall
affix the same to and countersign papers requiring such acts; and he and the
Assistant Secretaries shall perform such other duties as may be required by
the Board, the Executive Committee or the Chief Executive Officer.
Section 11. The Treasurer and Assistant Treasurers shall have care and
custody of all funds of the corporation and disburse and administer the same
under the direction of the Board, the Executive Committee or the Chief
Executive Officer and shall perform such other duties as the Board, the
Executive Committee or the Chief Executive Officer shall assign to them.
Section 12. The Controller shall maintain adequate records of all assets,
liabilities and transactions of the corporation and see that audits thereof
are currently and regularly made; and he shall perform such other duties as
may be required by the Board, the Executive Committee or the Chief Executive
Officer.
SALARIES AND APPOINTMENTS
Section 13. The salaries of corporate officers shall be fixed by the
Compensation Committee provided for in Section 5 of Article III hereof, except
that the fixing of salaries below certain levels, determinable from time to
time by the Compensation Committee, may in the discretion of the Committee be
delegated to the Chief Executive Officer, subject to the approval of the
Board.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 14. (1) The corporation shall indemnify and hold harmless, to the
fullest extent permitted by applicable law as it presently exists or may
hereafter be amended, any person (an "Indemnitee") who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative,
including appeals (a "proceeding"), by reason of the fact that he, or a person
for whom he is the legal representative, is or was a director or officer of
the corporation or, while a director or officer of the corporation, is or was
serving at the request of the corporation as a director, officer,
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employee or agent of another corporation or of a partnership, joint venture,
trust, enterprise or nonprofit entity, including service with respect to
employee benefit plans, against all liability and loss suffered and expenses
(including attorneys' fees) reasonably incurred by such Indemnitee.
Notwithstanding the preceding sentence, except as otherwise provided in
paragraph (3) of this Section 14, the corporation shall be required to
indemnify an Indemnitee in connection with a proceeding (or part thereof)
commenced by such Indemnitee only if the commencement of such proceeding (or
part thereof) by the Indemnitee was authorized by the Board.
(2) The corporation shall pay the expenses (including attorneys' fees)
incurred by an Indemnitee in defending any proceeding in advance of its final
disposition, provided, however, that, to the extent required by law, such
payment of expenses in advance of the final disposition of the proceeding
shall be made only upon receipt of an undertaking by the Indemnitee to repay
all amounts advanced if it should be ultimately determined that the Indemnitee
is not entitled to be indemnified under this Section 14 or otherwise.
(3) If a claim for indemnification or payment of expenses under this Section
14 is not paid in full within thirty days after a written claim therefor by
the Indemnitee has been received by the corporation, the Indemnitee may file
suit to recover the unpaid amount of such claim and, if successful in whole or
in part, shall be entitled to be paid the expense of prosecuting such claim.
In any such action the corporation shall have the burden of proving that the
Indemnitee is not entitled to the requested indemnification or payment of
expenses under applicable law.
(4) The rights conferred on any Indemnitee by this Section 14 shall not be
exclusive of any other rights which such Indemnitee may have or hereafter
acquire under any statute, provision of the Restated Certificate of
Incorporation, these By-Laws, agreement, vote of stockholders or disinterested
directors or otherwise.
(5) The corporation's obligation, if any, to indemnify or to advance
expenses to any Indemnitee who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, enterprise or nonprofit entity shall be reduced by any amount such
Indemnitee may collect as indemnification or advancement of expenses from such
other corporation, partnership, joint venture, trust, enterprise or nonprofit
enterprise.
(6) Any repeal or modification of the foregoing provisions of this Section
14 shall not adversely affect any right or protection hereunder of any
Indemnitee in respect of any act or omission occurring prior to the time of
such repeal or modification.
(7) This Section 14 shall not limit the right of the corporation, to the
extent and in the manner permitted by law, to indemnify and to advance
expenses to persons other than Indemnitees when and as authorized by
appropriate corporate action.
ARTICLE V
CAPITAL STOCK
CERTIFICATES OF STOCK
Section 1. Certificates of stock certifying the number of shares owned shall
be issued to each stockholder in such form not inconsistent with the Restated
Certificate of Incorporation as shall be approved by the Board. Such
certificates of stock shall be numbered and registered in the order in which
they are issued and shall be signed by the Chairman, the President or a Vice
President, and by the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary. Any and all the signatures on the certificates may be
a facsimile.
TRANSFER OF SHARES
Section 2. Transfers of shares shall be made only upon the books of the
corporation by the holder, in person, or by power of attorney duly executed
and filed with the Secretary of the corporation, and on the surrender of
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the certificate or certificates of such shares, properly assigned. The
corporation may, if and whenever the Board shall so determine, maintain one or
more offices or agencies, each in charge of an agent designated by the Board,
where the shares of the capital stock of the corporation shall be transferred
and/or registered. The Board may also make such additional rules and
regulations as it may deem expedient concerning the issue, transfer and
registration of certificates for shares of the capital stock of the
corporation.
LOST, STOLEN OR DESTROYED CERTIFICATES
Section 3. The corporation may issue a new certificate of capital stock of
the corporation in place of any certificate theretofore issued by the
corporation, alleged to have been lost, stolen or destroyed, and the
corporation may, but shall not be obligated to, require the owner of the
alleged lost, stolen or destroyed certificate, or his legal representatives,
to give the corporation a bond sufficient to indemnify it against any claim
that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate,
as the officers of the corporation may, in their discretion, require.
FIXING OF RECORD DATE
Section 4. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the Board may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board, and which record date: (1) in the case of determination
of stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than sixty nor
less than ten days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to corporate action
in writing without a meeting, shall not be more than ten days from the date
upon which the resolution fixing the record date is adopted by the Board; and
(3) in the case of any other action, shall not be more than sixty days prior
to such other action. If no record date is fixed by the Board: (1) the record
date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting shall be determined
in accordance with Article VI of these By-Laws; and (3) the record date for
determining stockholders for any other purpose shall be at the close of
business on the day on which the Board adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote at
a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
ARTICLE VI
CONSENTS TO CORPORATE ACTION
RECORD DATE
Section 1. The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting shall be as fixed by
the Board or as otherwise established under this Section. Any person seeking
to have the stockholders authorize or take corporate action by written consent
without a meeting shall by written notice addressed to the Secretary and
delivered to the corporation, request that a record date be fixed for such
purpose. The Board may fix a record date for such purpose which shall be no
more than 10 days after the date upon which the resolution fixing the record
date is adopted by the Board and shall not precede the date such resolution is
adopted. If the Board fails within 10 days after the corporation receives such
notice to fix a record date for such purpose, the record date shall be the day
on which the first written consent is delivered to
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the corporation in the manner described in Section 2 below unless prior action
by the Board is required under the General Corporation Law of Delaware, in
which event the record date shall be at the close of business on the day on
which the Board adopts the resolution taking such prior action.
PROCEDURES
Section 2. Every written consent purporting to take or authorizing the
taking of corporate action and/or related revocations (each such written
consent and related revocation is referred to in this Article VI as a
"Consent") shall bear the date of signature of each stockholder who signs the
Consent, and no Consent shall be effective to take the corporate action
referred to therein unless, within 60 days of the earliest dated Consent
delivered in the manner required by this Section 2, Consents signed by a
sufficient number of stockholders to take such action are delivered to the
corporation.
A Consent shall be delivered to the corporation by delivery to its
registered office in the State of Delaware, its principal place of business,
or an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery to the
corporation's registered office shall be made by hand or by certified or
registered mail, return receipt requested.
In the event of the delivery to the corporation of a Consent, the Secretary
of the corporation shall provide for the safe-keeping of such Consent and
shall promptly conduct such ministerial review of the sufficiency of the
Consents and of the validity of the action to be taken by shareholder consent
as he deems necessary or appropriate, including, without limitation, whether
the holders of a number of shares having the requisite voting power to
authorize or take the action specified in the Consent have given consent;
provided, however, that if the corporate action to which the Consent relates
is the removal or replacement of one or more members of the Board, the
Secretary of the corporation shall promptly designate two persons, who shall
not be members of the Board, to serve as Inspectors with respect to such
Consent and such Inspectors shall discharge the functions of the Secretary of
the corporation under this Section 2. If after such investigation the
Secretary or the Inspectors (as the case may be) shall determine that the
Consent is valid and that the action therein specified has been validly
authorized, that fact shall forthwith be certified on the records of the
corporation kept for the purpose of recording the proceedings of meetings of
stockholders, and the Consent shall be filed in such records, at which time
the Consent shall become effective as stockholder action. In conducting the
investigation required by this Section 2, the Secretary or the Inspectors (as
the case may be) may, at the expense of the corporation, retain special legal
counsel and any other necessary or appropriate professional advisors, and such
other personnel as they may deem necessary or appropriate to assist them, and
shall be fully protected in relying in good faith upon the opinion of such
counsel or advisors.
ARTICLE VII
MISCELLANEOUS
DIVIDENDS AND RESERVES
Section 1. Dividends upon the capital stock of the corporation may be
declared as permitted by law by the Board or the Executive Committee at any
regular or special meeting. Before payment of any dividend or making any
distribution of profits, there may be set aside out of the surplus or net
profits of the corporation such sum or sums as the Board or the Executive
Committee, from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for such other purposes as the Board or
Executive Committee shall think conducive to the interests of the corporation,
and any reserve so established may be abolished and restored to the surplus
account by like action of the Board or the Executive Committee.
SEAL
Section 2. The seal of the corporation shall bear the corporate name of the
corporation, the year of its incorporation and the words "Corporate Seal,
Delaware".
WAIVER
Section 3. Whenever any notice whatever is required to be given by statute
or under the provisions of the Restated Certificate of Incorporation or these
By-Laws, a waiver thereof in writing signed by the person or persons entitled
to such notice, whether before or after the time stated therein, shall be
deemed equivalent thereto.
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Neither the business to be transacted at, nor the purpose of, any annual or
special meeting of the stockholders or the Board, as the case may be, need be
specified in any waiver of notice of such meeting.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall begin with January first
and end with December thirty-first.
CONTRACTS
Section 5. Except as otherwise required by law, the Restated Certificate of
Incorporation or these By-Laws, any contracts or other instruments may be
executed and delivered in the name and on the behalf of the corporation by
such officer or officers of the corporation as the Board may from time to time
direct. Such authority may be general or confined to specific instances as the
Board may determine. The Chairman of the Board, the President or any Vice
President may execute bonds, contracts, deeds, leases and other instruments to
be made or executed for or on behalf of the corporation. Subject to any
restrictions imposed by the Board, the Chairman of the Board, the President or
any Vice President of the corporation may delegate contractual powers to
others under his jurisdiction, it being understood, however, that any such
delegation of power shall not relieve such officer of responsibility with
respect to the exercise of such delegated power.
PROXIES
Section 6. Unless otherwise provided by resolution adopted by the Board, the
Chairman of the Board, the President or any Vice President may from time to
time appoint an attorney or attorneys or agent or agents of the corporation,
in the name and on behalf of the corporation, to cast the votes which the
corporation may be entitled to cast as the holder of stock or other securities
in any other corporation or other entity, any of whose stock or other
securities may be held by the corporation, at meetings of the holders of the
stock or other securities of such other corporation or other entity, or to
consent in writing, in the name of the corporation as such holder, to any
action by such other corporation or other entity, and may instruct the person
or persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed in the name and on behalf of
the corporation and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the
premises.
AMENDMENTS
Section 7. The Board from time to time shall have the power to make, alter,
amend or repeal any and all of these By-Laws, but any By-Laws so made, altered
or repealed by the Board may be amended, altered or repealed by the
stockholders.
CERTIFICATION
The undersigned hereby certifies that he is the duly elected and acting
Secretary of Newport News Shipbuilding Inc., a Delaware
corporation, and the keeper of its corporate records and minutes. The
undersigned further hereby certifies that the above and foregoing is a true
and correct copy of the By-Laws of said corporation, as in force at the date
hereof.
WITNESS the hand of the undersigned and the seal of said corporation, this
day of , 19 .
_____________________________________
____________________________Secretary
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<PAGE>
EXHIBIT P
TO
DISTRIBUTION
AGREEMENT
TRADEMARK TRANSITION LICENSE AGREEMENT
Agreement made as of , ("Effective Date") by and between
[Industrial Company], a corporation organized and existing under the laws of
the State of Delaware, whose principal place of business is located at 1275
King St., Greenwich, CT 06831-2946, hereinafter referred to as Licensor, and
Tenneco Inc., a corporation organized under the laws of the State of Delaware,
whose principal place of business is located at 1010 Milam St., Houston, TX
77002, hereinafter referred to as Licensee,
Whereas, Licensor has adopted and is using the name and mark "Tenneco",
alone and in combination with other terms and/or symbols and variations
thereof including "Tenn-Speed", "Tenn-Speed 2" and "Tennnet", in the United
States and elsewhere throughout the world and is the owner of the U.S.
Trademark Applications and the U.S. Trademark Registrations, listed on Exhibit
A of this Agreement, from the United States Patent and Trademark Office,
(hereinafter collectively referred to as the "Trademark"); and
Whereas, Licensee is desirous of using said Trademark with respect to the
goods and services listed on Exhibit B, to assist Licensee in its transition
to a new identity and for the limited purposes more fully described below;
Now, therefore, in consideration of the foregoing Recitals which are hereby
incorporated into the operative terms hereof, the mutual promises contained in
this Agreement and good and valuable consideration from the Licensee to the
Licensor, the receipt and sufficiency of which is hereby acknowledged by said
Licensor, the parties hereby agree as follows:
1. License. Licensor grants to Licensee and its subsidiary companies the
limited, non-exclusive right to use the Trademark under the common law and
under the auspices and privileges provided by any of the registrations
covering the same during the term of this Agreement, and Licensee hereby
undertakes to use the Trademark as follows:
a. For a period of 30 days following the Effective Date of this
Agreement, Licensee may use the Trademark in its corporate name. After 30
days following the Effective Date of this Agreement, Licensee shall change,
if necessary, its corporate name to delete the Trademark or any other word
that is confusingly similar to the Trademark (except the word "Tennessee");
b. For a period of six (6) months following the Effective Date of this
Agreement, Licensee shall be entitled to use its existing supplies and
documents which have imprinted thereon the Trademark to the extent that
such supplies and documents were existing inventory prior to the Effective
Date of this Agreement. Licensee shall not print any new supplies or
documents bearing the Trademark as of the Effective Date of this Agreement.
c. For a period of two years from the Effective Date of this Agreement,
Licensee may use the Trademark on existing signs, displays or other
identifications or advertising material (except as limited in b above).
Licensee shall not prepare or install any new signs, displays or other
identifications or advertising material bearing the Trademark. Licensee
shall remove any and all references to the Trademark from any and all
signs, displays or other identifications or advertising material by the end
of the two year period.
2. Quality of Services. Licensee agrees to maintain such quality standards
as shall be prescribed by Licensor in the conduct of the business operations
with which the Trademark is used. Licensee shall use the Trademark only with
goods and services listed in Exhibit B rendered by Licensee in accordance with
the terms of this agreement and with the guidance and directions furnished to
the Licensee by the Licensor, or its authorized representatives or agents,
from time to time, if any; but always the quality of the goods and services
shall be satisfactory to the Licensor or as specified by it.
1
<PAGE>
3. Inspection. Licensee will permit duly authorized representatives of the
Licensor to inspect the premises of Licensee using the Trademarks at all
reasonable times, for the purpose of ascertaining or determining compliance
with Paragraphs 1 and 2 hereof.
4. Use of Trademark. When using the Trademark under this Agreement, Licensee
undertakes to comply substantially with all laws pertaining to the Trademark.
This provision includes compliance with marking requirements. Licensee
represents and warrants that all goods and services to be sold under the
Trademark and the marketing, sales, and distribution of them shall meet or
exceed all federal, state, and local laws, ordinances, standards, regulations,
and guidelines pertaining to such products or activities, including, but not
limited to, those pertaining to product safety, quality, labeling and
propriety. Licensee agrees that it will not package, market, sell, or
distribute any goods or services or cause or permit any goods or services to
be packaged, marketed, sold, or distributed in violation of any such federal,
state, or local law, ordinance, standard, regulation, or guideline.
5. Extent of License. The license granted herein is for the sole purpose of
assisting Licensee in its transition to a new identity and is not assignable
or transferable in any manner whatsoever. Licensee has no right to grant any
sublicenses or to use the Trademark for any other purpose.
6. Indemnity. Licensee acknowledges that it will have no claims against
Licensor for any damage to property or injury to persons arising out of the
operation of Licensee's business. Licensee agrees to indemnify, hold harmless,
and defend Licensor and its subsidiaries and its authorized representatives
with legal counsel acceptable to Licensor from and against any and all
demands, claims, injuries, losses, damages, actions, suits, causes of action,
proceedings, judgments, liabilities and expenses, including attorneys' fees,
court costs and other legal expenses, arising out of or connected with:
a. Licensee's use of the Trademark; or
b. any breach by Licensee of any provision of this Agreement or of any
warranty made by Licensee in this Agreement.
No approval by Licensor of any action by Licensee shall affect any right of
Licensor to indemnification hereunder.
7. Termination. Except as otherwise provided herein, this Agreement shall
remain in full force and effect for the periods stated in Paragraph 1, above.
However, Licensor retains the right to immediately terminate this Agreement in
the event of a material breach of any term of this Agreement by Licensee, upon
written notice to the Licensee.
8. Ownership of Trademark. The Licensee acknowledges Licensor's exclusive
right, title and interest in and to the Trademark and will not at any time do
or cause to be done any act or thing contesting or in any way impairing or
tending to impair any part or all of such right, title and interest. In
connection with the use of the Trademark, Licensee shall not in any manner
represent that it has any ownership in the Trademark or registrations thereof,
and acknowledges that use of the Trademark shall enure to the benefit of the
Licensor. On termination of this Agreement or any portion thereof in any
manner provided herein, the Licensee will destroy all signs, displays or other
identifications or advertising material, supplies and documents, and any other
materials bearing the Trademark and will certify to Licensor in writing that
it has done so. Furthermore, Licensee will not at any time adopt or use
without the Licensor's prior written consent, any word or mark which is likely
to be similar to or confusing with the Trademark (except the word
"Tennessee").
9. Infringement of Trademark. If Licensee learns of any actual or threatened
infringement of the Trademark or of the existence, use, or promotion of any
mark or design similar to the Trademark, Licensee shall promptly notify
Licensor. Licensor has the right to decide at its sole discretion what legal
proceedings or other action, if any, shall be taken, by who, how such
proceedings or other action shall be conducted, and in whose name such
proceedings or other action shall be performed. Any legal proceedings
instituted pursuant to this Section shall be for the sole benefit of Licensor
and all sums recovered in such proceedings, whether by judgment, settlement,
or otherwise, shall be retained solely and exclusively by Licensor.
2
<PAGE>
10. Injunctive Relief. Licensee acknowledges that any breach or threatened
breach of any of Licensee's covenants in this Agreement relating to the
Trademark, including, without limitation, Licensee's failure to cease the
manufacture, sale, marketing, or distribution of the goods bearing the
Trademark at the termination or expiration of this Agreement will result in
immediate and irreparable damage to Licensor and to the rights of any
subsequent Licensee of them. Licensee acknowledges and admits that there is no
adequate remedy at law for failure to cease such activities, and Licensee
agrees that in the event of such breach or threatened breach, Licensor shall
be entitled to temporary and permanent injunctive relief and such other relief
as any court with jurisdiction may deem just and proper.
11. Severability. If any provision of this Agreement shall be determined to
be illegal and unenforceable by any court of law or any competent government
or other authority, the remaining provisions shall be severable and
enforceable in accordance with their terms so as this Agreement without such
terms or provisions does not fail of its essential purpose or purposes. The
parties will negotiate in good faith to replace any such illegal or
unenforceable provision or provisions with suitable substitute provisions
which maintain the economic purposes and intentions of this Agreement.
12. Notice. Any notices required or permitted to be given under this
Agreement shall be deemed sufficiently given if mailed by registered mail,
postage prepaid, addressed to the party to be notified at its address shown
above, (followed by facsimile) or at such other address as may be furnished in
writing to the notifying party.
13. Miscellaneous.
a. Captions. The captions for each Section have been inserted for the sake
of convenience and shall not be deemed to be binding upon the parties for the
purpose of interpretation of this Agreement.
b. Interpretation. The parties agree that each party and its counsel has
reviewed this Agreement and the normal rule of construction that any
ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement.
c. Waiver. The failure of Licensor to insist in any one or more instances
upon the performance of any term, obligation, or condition of this Agreement
by Licensee or to exercise any right or privilege herein conferred upon
Licensor shall not be construed as thereafter waiving such term, obligation,
or condition, or relinquishing such right or privilege, and the acknowledged
waiver or relinquishment by Licensor of any default or right shall not
constitute waiver of any other default or right. No waiver shall be deemed to
have been made unless expressed in writing.
d. Time of Essence. Time is of the essence with respect to the obligations
to be performed under this Agreement, and Licensee shall use its best efforts
to transition all existing materials, including signs and displays, bearing
the Trademark to a new name and mark.
e. Rights Cumulative. Except as expressly provided in this Agreement, and to
the extent permitted by law, any remedies described in this Agreement are
cumulative and not alternative to any other remedies available at law or in
equity.
Attest: LICENSOR
- -------------------------------
By: _________________________________
Attest:
- ------------------------------- LICENSOR
By: _________________________________
3
<PAGE>
EXHIBIT "A"
<TABLE>
<CAPTION>
REGISTRATION EXPIRATION
TRADEMARK NO. DATE
--------- ------------ -----------
<S> <C> <C> <C>
Tenneco 1050475 19OC1996
Tenneco 866995 25MR2009
Tenneco 823408 31JA2007
Tenneco 786614 16MR2005
Tenneco 783055 12JA2005
Tenneco 827435 18AP2007
Tenneco 1250178 06SE2003
Tenneco 1251601 20SE2003
Tenneco 1310943 25DE2004
Tenneco 1930571 31OC2005
Tenneco 1917869 12SE2005
Tennnet 1956845 13FE2006
Tennnet 1929997 24OC2005
Tenneco & Shield 831633 14JL2007
Tenneco & Shield 857262 24SE1998
Tenneco & Shield 823409 31JA2007
Tenneco & Shield 827436 18AP2007
Tenneco & Shield 786595 16MR2005
Tenneco & Shield 786984 23MR2005
Tenneco & Shield 1250177 06SE2003
Tenneco & Shield 1236187 03MY2003
Tenneco & Shield 1310944 25DE2004
Tenneco & Shield 1614779 25SE2000
Tenn-Speed 1542283 06JU2009
Tenn-Speed 2 1841694 28JU2004
Tenn-Speed 2 1855752 27SE2004
<CAPTION>
APPLICATION APPLICATION
TRADEMARK NO. DATE
--------- ------------ ----------- ---
<S> <C> <C> <C>
Tenneco 731906 13SE1995
Tenneco 521074 09MY1994
Tenneco & Horizon 731464 13SE1995
</TABLE>
4
<PAGE>
EXHIBIT B
Natural gas.
Business management and planning services in the field of natural gas,
liquefied natural gas, power generation and cogeneration projects; and
economic analysis.
Telephone calling card services.
Computer programs for use as an interactive request system for the
transportation and exchange of natural gas.
Books, brochures, printed instructional materials and computer manuals in
the field of computer programs which are used as an interactive request system
for the transportation and exchange of natural gas.
Management of construction.
Telecommunications services.
Transportation by pipeline and storage of natural gas, and transmission of
oil or gas through pipelines.
Educational services, namely conducting classes, conferences, and workshops,
regarding the training of others in the operation, maintenance, and management
of facilities relating to the natural gas industry, natural gas pipelines,
natural gas and liquefied natural gas facilities, and cogeneration and power
generation stations.
Engineering and drafting services; technical consulting in the field of
energy; and inspection and supervision of maintenance services provided by
others.
Ships
Custom and naval shipbuilding, drydock and ship repair services.
Naval architectural design.
5
<PAGE>
EXHIBIT 10.5
EXHIBIT Q
TO
DISTRIBUTION
AGREEMENT
TRADEMARK TRANSITION LICENSE AGREEMENT
Agreement made as of , ("Effective Date") by and between
[Industrial Company], a corporation organized and existing under the laws of
the State of Delaware, whose principal place of business is located at 1275
King St., Greenwich, CT 06831-2946, hereinafter referred to as Licensor, and
[Newport News Shipbuilding and Drydock Company], a corporation organized under
the laws of the State of Virginia, whose principal place of business is
located at 4101 Washington Avenue, Newport News, Virginia 23607, hereinafter
referred to as Licensee,
Whereas, Licensor has adopted and is using the name and mark "Tenneco",
alone and in combination with other terms and/or symbols and variations
thereof including "Tenn-Speed", "Tenn-Speed 2" and "Tennnet", in the United
States and elsewhere throughout the world and is the owner of the U.S.
Trademark Applications and the U.S. Trademark Registrations, listed on Exhibit
A of this Agreement, from the United States Patent and Trademark Office,
(hereinafter collectively referred to as the "Trademark"); and
Whereas, Licensee is desirous of using said Trademark with respect to the
goods and services listed on Exhibit B, to assist Licensee in its transition
to a new identity and for the limited purposes more fully described below;
Now, therefore, in consideration of the foregoing Recitals which are hereby
incorporated into the operative terms hereof, the mutual promises contained in
this Agreement and good and valuable consideration from the Licensee to the
Licensor, the receipt and sufficiency of which is hereby acknowledged by said
Licensor, the parties hereby agree as follows:
1. License. Licensor grants to Licensee and its subsidiary companies the
limited, non-exclusive right to use the Trademark under the common law and
under the auspices and privileges provided by any of the registrations
covering the same during the term of this Agreement, and Licensee hereby
undertakes to use the Trademark as follows:
a. For a period of 30 days following the Effective Date of this
Agreement, Licensee may use the Trademark in its corporate name. After 30
days following the Effective Date of this Agreement, Licensee shall change,
if necessary, its corporate name to delete the Trademark or any other word
that is confusingly similar to the Trademark (except the word "Tennessee");
b. For a period of six (6) months following the Effective Date of this
Agreement, Licensee shall be entitled to use its existing supplies and
documents which have imprinted thereon the Trademark to the extent that
such supplies and documents were existing inventory prior to the Effective
Date of this Agreement. Licensee shall not print any new supplies or
documents bearing the Trademark as of the Effective Date of this Agreement.
c. For a period of one year from the Effective Date of this Agreement,
Licensee may use the Trademark on existing signs, displays or other
identifications or advertising material (except as limited in b above).
Licensee shall not prepare or install any new signs, displays or other
identifications or advertising material bearing the Trademark. Licensee
shall remove any and all references to the Trademark from any and all
signs, displays or other identifications or advertising material by the end
of the one year period.
2. Quality of Services. Licensee agrees to maintain such quality standards
as shall be prescribed by Licensor in the conduct of the business operations
with which the Trademark is used. Licensee shall use the Trademark only with
goods and services listed in Exhibit B rendered by Licensee in accordance with
the terms of this
1
<PAGE>
agreement and with the guidance and directions furnished to the Licensee by
the Licensor, or its authorized representatives or agents, from time to time,
if any; but always the quality of the goods and services shall be satisfactory
to the Licensor or as specified by it.
3. Inspection. Licensee will permit duly authorized representatives of the
Licensor to inspect the premises of Licensee using the Trademarks at all
reasonable times, for the purpose of ascertaining or determining compliance
with Paragraphs 1 and 2 hereof.
4. Use of Trademark. When using the Trademark under this Agreement, Licensee
undertakes to comply substantially with all laws pertaining to the Trademark.
This provision includes compliance with marking requirements. Licensee
represents and warrants that all goods and services to be sold under the
Trademark and the marketing, sales, and distribution of them shall meet or
exceed all federal, state, and local laws, ordinances, standards, regulations,
and guidelines pertaining to such products or activities, including, but not
limited to, those pertaining to product safety, quality, labeling and
propriety. Licensee agrees that it will not package, market, sell, or
distribute any goods or services or cause or permit any goods or services to
be packaged, marketed, sold, or distributed in violation of any such federal,
state, or local law, ordinance, standard, regulation, or guideline.
5. Extent of License. The license granted herein is for the sole purpose of
assisting Licensee in its transition to a new identity and is not assignable
or transferable in any manner whatsoever. Licensee has no right to grant any
sublicenses or to use the Trademark for any other purpose.
6. Indemnity. Licensee acknowledges that it will have no claims against
Licensor for any damage to property or injury to persons arising out of the
operation of Licensee's business. Licensee agrees to indemnify, hold harmless,
and defend Licensor and its subsidiaries and its authorized representatives
with legal counsel acceptable to Licensor from and against any and all
demands, claims, injuries, losses, damages, actions, suits, causes of action,
proceedings, judgments, liabilities and expenses, including attorneys' fees,
court costs and other legal expenses, arising out of or connected with:
a. Licensee's use of the Trademark; or
b. any breach by Licensee of any provision of this Agreement or of any
warranty made by Licensee in this Agreement.
No approval by Licensor of any action by Licensee shall affect any right of
Licensor to indemnification hereunder.
7. Termination. Except as otherwise provided herein, this Agreement shall
remain in full force and effect for the periods stated in Paragraph 1, above.
However, Licensor retains the right to immediately terminate this Agreement in
the event of a material breach of any term of this Agreement by Licensee, upon
written notice to the Licensee.
8. Ownership of Trademark. The Licensee acknowledges Licensor's exclusive
right, title and interest in and to the Trademark and will not at any time do
or cause to be done any act or thing contesting or in any way impairing or
tending to impair any part or all of such right, title and interest. In
connection with the use of the Trademark, Licensee shall not in any manner
represent that it has any ownership in the Trademark or registrations thereof,
and acknowledges that use of the Trademark shall enure to the benefit of the
Licensor. On termination of this Agreement or any portion thereof in any
manner provided herein, the Licensee will destroy all signs, displays or other
identifications or advertising material, supplies and documents, and any other
materials bearing the Trademark and will certify to Licensor in writing that
it has done so. Furthermore, Licensee will not at any time adopt or use
without the Licensor's prior written consent, any word or mark which is likely
to be similar to or confusing with the Trademark (except the word
"Tennessee").
9. Infringement of Trademark. If Licensee learns of any actual or threatened
infringement of the Trademark or of the existence, use, or promotion of any
mark or design similar to the Trademark, Licensee shall promptly notify
Licensor. Licensor has the right to decide at its sole discretion what legal
proceedings or other action, if
2
<PAGE>
any, shall be taken, by who, how such proceedings or other action shall be
conducted, and in whose name such proceedings or other action shall be
performed. Any legal proceedings instituted pursuant to this Section shall be
for the sole benefit of Licensor and all sums recovered in such proceedings,
whether by judgment, settlement, or otherwise, shall be retained solely and
exclusively by Licensor.
10. Injunctive Relief. Licensee acknowledges that any breach or threatened
breach of any of Licensee's covenants in this Agreement relating to the
Trademark, including, without limitation, Licensee's failure to cease the
manufacture, sale, marketing, or distribution of the goods bearing the
Trademark at the termination or expiration of this Agreement will result in
immediate and irreparable damage to Licensor and to the rights of any
subsequent Licensee of them. Licensee acknowledges and admits that there is no
adequate remedy at law for failure to cease such activities, and Licensee
agrees that in the event of such breach or threatened breach, Licensor shall
be entitled to temporary and permanent injunctive relief and such other relief
as any court with jurisdiction may deem just and proper.
11. Severability. If any provision of this Agreement shall be determined to
be illegal and unenforceable by any court of law or any competent government
or other authority, the remaining provisions shall be severable and
enforceable in accordance with their terms so as this Agreement without such
terms or provisions does not fail of its essential purpose or purposes. The
parties will negotiate in good faith to replace any such illegal or
unenforceable provision or provisions with suitable substitute provisions
which maintain the economic purposes and intentions of this Agreement.
12. Notice. Any notices required or permitted to be given under this
Agreement shall be deemed sufficiently given if mailed by registered mail,
postage prepaid, addressed to the party to be notified at its address shown
above, (followed by facsimile) or at such other address as may be furnished in
writing to the notifying party.
13. Miscellaneous.
a. Captions. The captions for each Section have been inserted for the
sake of convenience and shall not be deemed to be binding upon the parties
for the purpose of interpretation of this Agreement.
b. Interpretation. The parties agree that each party and its counsel has
reviewed this Agreement and the normal rule of construction that any
ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement.
c. Waiver. The failure of Licensor to insist in any one or more instances
upon the performance of any term, obligation, or condition of this
Agreement by Licensee or to exercise any right or privilege herein
conferred upon Licensor shall not be construed as thereafter waiving such
term, obligation, or condition, or relinquishing such right or privilege,
and the acknowledged waiver or relinquishment by Licensor of any default or
right shall not constitute waiver of any other default or right. No waiver
shall be deemed to have been made unless expressed in writing.
d. Time of Essence. Time is of the essence with respect to the
obligations to be performed under this Agreement, and Licensee shall use
its best efforts to transition all existing materials, including signs and
displays, bearing the Trademark to a new name and mark.
e. Rights Cumulative. Except as expressly provided in this Agreement, and
to the extent permitted by law, any remedies described in this Agreement
are cumulative and not alternative to any other remedies available at law
or in equity.
3
<PAGE>
f. Governing Law and Consent to Jurisdiction. ALL QUESTIONS AND/OR
DISPUTES CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS
AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS, AND NOT THE LAW OF
CONFLICTS, OF THE STATE OF DELAWARE. EACH OF THE PARTIES TO THIS AGREEMENT
HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES TO BE SUBJECT TO, AND HEREBY
CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE COURTS OF THE STATE OF
DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE OF DELAWARE.
Attest: LICENSOR
- -------------------------------
By: _________________________________
Attest:
- ------------------------------- LICENSEE
By: _________________________________
4
<PAGE>
EXHIBIT "A"
<TABLE>
<CAPTION>
REGISTRATION EXPIRATION
TRADEMARK NO. DATE
--------- ------------ -----------
<S> <C> <C>
Tenneco 1050475 19OC1996
Tenneco 866995 25MR2009
Tenneco 823408 31JA2007
Tenneco 786614 16MR2005
Tenneco 783055 12JA2005
Tenneco 827435 18AP2007
Tenneco 1250178 06SE2003
Tenneco 1251601 20SE2003
Tenneco 1310943 25DE2004
Tenneco 1930571 31OC2005
Tenneco 1917869 12SE2005
Tennnet 1956845 13FE2006
Tennnet 1929997 24OC2005
Tenneco & Shield 831633 14JL2007
Tenneco & Shield 857262 24SE1998
Tenneco & Shield 823409 31JA2007
Tenneco & Shield 827436 18AP2007
Tenneco & Shield 786595 16MR2005
Tenneco & Shield 786984 23MR2005
Tenneco & Shield 1250177 06SE2003
Tenneco & Shield 1236187 03MY2003
Tenneco & Shield 1310944 25DE2004
Tenneco & Shield 1614779 25SE2000
Tenn-Speed 1542283 06JU2009
Tenn-Speed 2 1841694 28JU2004
Tenn-Speed 2 1855752 27SE2004
<CAPTION>
APPLICATION APPLICATION
TRADEMARK NO. DATE
--------- ------------ -----------
<S> <C> <C>
Tenneco 731906 13SE1995
Tenneco 521074 09MY1994
Tenneco & Horizon 731464 13SE1995
</TABLE>
5
<PAGE>
EXHIBIT B
Ships
Custom and naval shipbuilding, drydock and ship repair services.
Naval architectural design.
6
<PAGE>
EXHIBIT 2.C
AGREEMENT
Agreement (this "Agreement") dated June 19, 1996, between Tenneco Inc., a
Delaware corporation ("Tenneco"), and El Paso Natural Gas Company, a Delaware
corporation ("Consultant").
1. Consulting Services. During the term of this paragraph, Consultant will
consult and provide assistance and services to Tenneco with respect to (a)
discussions and negotiations with customers of the Energy Business (as defined
in the Agreement and Plan of Merger dated as of June 19, 1996 among Tenneco,
Consultant and El Paso Merger Company (the "Merger Agreement"), plaintiffs in
material litigation involving the Energy Business and regulatory authorities
having jurisdiction over the operations of the Energy Business, including
assisting the Energy Business in enhancing its relationships with customers,
plaintiffs and regulatory authorities and in making progress towards, or
achieving settlement of, litigation, rate or regulatory proceedings and (b)
capital spending by the Energy Business.
2. Compensation.
(a) Tenneco recognizes that the foregoing consultation, assistance and
services (collectively, the "Consulting Services") involve a substantial
contribution of time, effort and expertise on the part of Consultant and
will result in incremental value accruing to the Energy Business after the
date of this Agreement.
(b) As compensation for the foregoing Consulting Services ("Consulting
Compensation"), Tenneco shall pay to Consultant a fixed consulting fee. The
fee is intended to reflect appropriate compensation to Consultant for the
incremental value that it is believed will accrue to the Energy Business
arising out of the Consulting Services. This belief takes into account the
nature and extent of the Consulting Services to be provided by the
Consultant, the expected impact of the Consulting Services on the Energy
Business, expected progress towards settlement achieved by the Energy
Business with respect to rate matters, regulatory proceedings and
litigation, the expected terms of any settlements obtained by the Energy
Business with respect to rate matters, regulatory proceedings and
litigation, the expected contribution of Consultant to achieving progress
towards any such settlement or obtaining any such settlement, and the
expected impact of any capital spending programs on the operations of the
Energy Business including improvements to facilities, property, plant and
equipment. In order to avoid any dispute between Tenneco and Consultant as
to the incremental value attributable to the Consulting Services and the
amount of the Consulting Compensation and to limit the aggregate amount of
the Consulting Compensation, Tenneco and Consultant have agreed that the
Consulting Compensation shall be in the amount of $10,000,000 per month for
the six-month term of this Agreement. The aggregate $60,000,000 amount of
the Compensation shall be payable by Tenneco immediately prior to any
termination of the Merger Agreement dated the date hereof among Tenneco,
Consultant and El Paso Merger Company (the "Merger Agreement"), pursuant to
(x) Section 8.1(iii), (y) Section 8.1(iv)(B) or 8.1(v)(B), if Tenneco's
Board of Directors withdrew, amended or modified in a manner materially
adverse to Consultant its recommendation concerning the Merger or the
Spinoffs prior to the vote of Tenneco's stockholders which is the subject
of Section 8.1(iv)(B) or 8.1(v)(B), or (z) Section 8.1(vi) of the Merger
Agreement, whether such termination occurs prior or subsequent to the
expiration of paragraph 1 of this Agreement.
(c) Consultant shall have no liability arising out of or relating to its
performance of the Consulting Services, except for its gross negligence or
wilful misconduct.
3. Term. The term of the Consulting Services provided in paragraph 1 of this
Agreement shall commence on the date of this Agreement and shall expire on
December 19, 1996. All other provisions of this Agreement shall survive the
expiration of paragraph 1 of this Agreement.
<PAGE>
4. Entire Agreement; Severability. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof. If
this Agreement is held to be prohibited or invalid under applicable laws, such
prohibition or invalidity shall have no effect upon any provision of the
Merger Agreement or any other agreement between the parties hereto.
5. Proceedings. Consultant shall indemnify and hold harmless Tenneco, its
directors and officers from and against any liabilities, losses, damages,
claims, costs and expenses (including reasonable attorneys' fees and expenses)
arising out of, resulting from or relating to any action, suit or proceeding
relating to this Agreement.
6. Counterparts. This Agreement may be executed simultaneously in two
counterparts, which taken together will constitute one and the same Agreement.
7. Governing Law. ALL QUESTIONS AND/OR DISPUTES CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY THE
INTERNAL LAWS, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF DELAWARE. EACH OF
THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES TO
BE SUBJECT TO, AND HEREBY CONSENTS AND SUBMITS TO, THE JURISDICTION OF THE
COURTS OF THE STATE OF DELAWARE AND OF THE FEDERAL COURTS SITTING IN THE STATE
OF DELAWARE.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date
first written above.
Tenneco Inc.
/s/ M.W. Meyer
By: _________________________________
Title: Vice President and Deputy
General Counsel
El Paso Natural Gas Company
/s/ Britton White, Jr.
By: _________________________________
Title: Sr. V.P. and General
Counsel
EX2C-2
<PAGE>
EXHIBIT 3(III)
FORM OF CERTIFICATE OF DESIGNATION OF POWERS, PREFERENCES AND RIGHTS OF THE
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK OF EL PASO NATURAL GAS COMPANY
El Paso Natural Gas Company, a Delaware corporation (the "Company"),
pursuant to Section 151 of the General Corporation Law of the State of
Delaware does hereby make this Certificate of Designation of Powers,
Preferences and Rights (this "Certificate of Designation") and does hereby
state and certify that pursuant to the authority conferred upon the Board of
Directors of the Company (the "Board") by the Restated Certificate of
Incorporation of the Company (the "Restated Certificate of Incorporation"),
the Board on , 199 duly adopted the following resolution:
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Company in accordance with the provisions of the Restated
Certificate of Incorporation, which authorizes 25,000,000 shares of preferred
stock, $.01 par value per share (the "Preferred Stock"), the Board hereby
creates a series of preferred stock of the Company and hereby states the
designation and number of shares, and fixes the relative rights, preferences
and limitations thereof (in addition to the provisions set forth in the
Restated Certificate of Incorporation which are applicable to the preferred
stock of all classes and series) as follows:
SECTION 1. Designation, Rank. This series of preferred stock shall be
designated the "Adjustable Rate Cumulative Preferred Stock", with a par value
of $.01 per share (the "AR Preferred Stock"). The AR Preferred Stock will
rank, with respect to dividend rights and rights on liquidation, winding-up
and dissolution, (i) senior to all classes of common stock of the Company, as
they exist on the date hereof or as such stock may be constituted from time to
time (the "Common Stock"), and each other class of capital stock or series of
preferred stock established by the Board to the extent the terms of such stock
do not expressly provide that it ranks senior to or on a parity with the AR
Preferred Stock as to dividend rights and rights on liquidation, winding-up
and dissolution, including the Company's Series A Junior Preferred Stock, par
value $.01 per share (collectively, together with the Common Stock, the
"Junior Securities"); (ii) on a parity with each other class of capital stock
or series of preferred stock issued by the Company established by the Board to
the extent the terms of such stock expressly provide that it will rank on a
parity with the AR Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution (collectively, the "Parity
Securities"); and (iii) junior to each other class of capital stock or series
of preferred stock established by the Board to the extent the terms of such
stock expressly provide that it will rank senior to the AR Preferred Stock as
to dividend rights and rights on liquidation, winding-up and dissolution
(collectively, the "Senior Securities"). Shares of additional series of AR
Preferred Stock may be issued from time to time by the Board of Directors,
subject to limitations set forth in the Restated Certificate of Incorporation
and the resolutions of the Board of Directors providing for any such series,
which shall be mutually fixed by Tenneco Inc. and the Company.
SECTION 2. Authorized Number. The authorized number of shares constituting
the AR Preferred Stock shall be [505,875] shares. Such number of shares may be
increased or decreased by resolution of the Board of Directors, provided that
no decrease shall reduce the number of shares of the AR Preferred Stock to a
number less than that of the shares then outstanding.
SECTION 3. Dividends.
(a) Dividend Periods and Rates. Dividends on each share of AR Preferred
Stock shall be payable with respect to each quarter beginning on the last day
of March, June, September and December of each year and ending on the day
immediately prior to the first day of the next succeeding period (each, a
"Quarterly Dividend Period"). Dividends shall be payable in cash when, as and
if declared by the Board out of funds of the Company legally available
therefor, quarterly in arrears on the last day of March, June, September and
December of each year (each a "Quarterly Dividend Payment Date"), commencing
on the next Quarterly Dividend Payment
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Date following the issuance of the AR Preferred Stock. Dividends will be
payable at a per annum rate equal to the Applicable Rate in effect for the
Quarterly Dividend Period to which such dividend relates, multiplied by the
Liquidation Preference (as defined in Section 4) of each such share. Dividends
for each full Quarterly Dividend Period will be computed by dividing the
Applicable Rate by four. Dividends payable for any period less than a full
Quarterly Dividend Period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Each dividend will be payable to holders
of record as they appear on the books of the Company at the close of business
on a record date, not more than 60 nor less than 15 days before the related
Quarterly Dividend Payment Date fixed by the Board. Dividends will be
cumulative from the date of original issuance of the AR Preferred Stock. The
AR Preferred Stock will not entitle the holder thereof to any dividends,
whether payable in cash, property or stock, in excess of full cumulative
dividends. No interest, or sum of money in lieu of interest, will be payable
in respect of any accrued and unpaid dividends. Dividends in arrears for any
past Quarterly Dividend Periods may be declared and paid at any time without
reference to any regular Quarterly Dividend Payment Date, to holders of record
on such date, not exceeding 45 days preceding the payment date thereof, as may
be fixed by the Board of Directors of the Company.
(b) Priority. So long as shares of AR Preferred Stock are outstanding, no
dividends may be declared or paid and no funds may be set apart for the
payment of dividends or other distributions on any Parity Securities (except
dividends on Parity Securities paid in shares of Junior Securities) for any
period unless the full cumulative dividends on all outstanding shares of AR
Preferred Stock shall have been declared and paid in full for all past
Quarterly Dividend Periods. No dividends or other distributions may be paid or
declared and set apart for such payment on Junior Securities or Parity
Securities (except dividends paid in additional shares of Junior Securities)
and no Parity Securities or Junior Securities may be repurchased, redeemed or
otherwise retired nor may funds be declared and set apart for payment with
respect thereto, nor shall the Company permit any corporation or entity
directly or indirectly controlled by the Company to purchase any Parity
Securities or Junior Securities, unless, in each case, the full cumulative
dividends on all outstanding shares of AR Preferred Stock shall have been
declared and paid in full for all past Quarterly Dividend Periods.
Notwithstanding the foregoing, the Company may (i) make redemptions, purchases
or other acquisitions of Parity Securities or Junior Securities payable in
Junior Securities and (ii) make, pursuant to the Company's Shareholder Rights
Plan (the "Plan"), redemptions of Rights (as defined in the Plan) distributed
pursuant to the Plan.
(c) Applicable Rate. Except as provided below in this subsection (c), the
"Applicable Rate" for each Quarterly Dividend Period shall be a per annum
rate, rounded to the nearest one-hundredth of a percentage point, equal to the
arithmetic average of the [ ] Rates quoted by the Reference Banks. In
the event that the [ ] Rates quoted by the Reference Banks with respect to
the Quarterly Dividend Period preceding the first Quarterly Dividend Payment
Date are not identical to within one-one hundredth of a percentage point, then
the Applicable Rate with respect to such period will be determined by Morgan
Stanley & Co. Incorporated. ["Reference Banks" shall mean two major banks in
the New York interbank market, one of which shall be selected by the Company
and the other by Tenneco Inc. with respect to the calculation of the
Applicable Rate for any Quarterly Dividend Period.] Notwithstanding the
foregoing, in no event shall the Applicable Rate for any dividend period be
less than 6% per annum or greater than 10% per annum.
SECTION 4. Liquidation Rights. The liquidation preference of each share of
AR Preferred Stock shall be $1,000.00 (the "Liquidation Preference"). In the
event of any voluntary or involuntary liquidation, dissolution or winding-up
of the Company, after satisfaction of the claims of creditors and before any
payment or distribution of assets is made on any Junior Securities, including,
without limitation, the Common Stock, the holders of AR Preferred Stock shall
receive an amount equal to the Liquidation Preference of their shares,
and shall be entitled to receive an amount equal to all accrued and unpaid
dividends through the date of distribution (whether or not declared). If, upon
such a voluntary or involuntary liquidation, dissolution or winding-up of the
Company, the assets of the Company are insufficient to pay in full the amounts
described above as payable with respect to the AR Preferred Stock, the holders
of the AR Preferred Stock and any Parity Securities will share ratably in any
distribution of assets of the Company, first in proportion to their respective
liquidation preferences until such preferences are paid in full, and then in
proportion to their respective amounts
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<PAGE>
of accrued but unpaid dividends. After payment in full of any such liquidation
preference and accrued but unpaid dividends, the AR Preferred Stock will not
be entitled to any further participation in any distribution of assets by the
Company. Neither the sale or transfer of all or any part of the assets of the
Company, nor the merger or consolidation of the Company into or with any other
corporation or a merger of any other corporation with or into the Company,
will be deemed to be a liquidation, dissolution or winding-up of the Company.
SECTION 5. Voting Rights.
(a) Except as provided below and as may be required by Delaware law, the
holders of AR Preferred Stock will be entitled to vote together as one class
with the holders of Common Stock on all matters submitted for a vote of the
Company's stockholders. Each share of AR Preferred Stock shall entitle the
holder thereof to 15 votes.
(b) (i) If at any time dividends on the AR Preferred Stock shall be in
arrears in an amount equal to six (6) or more quarterly dividends thereon, the
occurrence of such contingency shall mark the beginning of a period (herein
called a "Default Period") which shall extend until such time when all accrued
and unpaid dividends for all previous Quarterly Dividend Periods and for the
current Quarterly Dividend Period on all shares of AR Preferred Stock then
outstanding shall have been paid or set apart for payment. During each Default
Period, all holders of AR Preferred Stock, voting as a class, shall have the
right to elect two (2) directors.
(ii) So long as any shares of AR Preferred Stock shall be outstanding,
during any Default Period, the voting right described in subsection (i) above
may be exercised initially at a special meeting called pursuant to subsection
(iii) below or at any annual meeting of stockholders and thereafter at annual
meetings of stockholders. The absence of a quorum of holders of Common Stock
(or any class thereof) shall not affect the exercise of such voting rights by
the holders of AR Preferred Stock. At any meeting at which the holders of AR
Preferred Stock shall exercise such voting right initially during an existing
Default Period, they shall have the right, voting as a class, to elect
directors to fill such vacancies, if any, in the Board of Directors as may
then exist up to two (2) directors or, if such right is exercised at an annual
meeting, to elect two (2) directors. If the number of directors which may be
so elected at any special meeting does not amount to the required number of
directors, the holders of the AR Preferred Stock shall have the right to make
such increase in the number of directors as shall be necessary to permit the
election by them of the required number of directors. After the holders of the
AR Preferred Stock shall have exercised their right to elect directors in any
Default Period and during the continuance of such period, the number of
directors on the Board of Directors shall not be increased or decreased except
by vote of the holders of AR Preferred Stock as herein provided or pursuant to
the rights of any Senior Securities or Parity Securities.
(iii) Unless the holders of AR Preferred Stock, if any such shares are then
outstanding, have, during an existing Default Period, previously exercised
their right to elect directors, the Board may, and upon the request of the
holders of record of not less than 10% of the aggregate liquidation preference
of AR Preferred Stock then outstanding, the Board shall, order the calling of
a special meeting of holders of AR Preferred Stock, which meeting shall
thereupon be called by the Chairman of the Board or the President and Chief
Executive Officer of the Company. Notice of such meeting and of any annual
meeting at which holders of AR Preferred Stock are entitled to vote pursuant
to this subsection (iii) shall be given to each holder of record of AR
Preferred Stock by mailing a copy of such notice to such holder at such
holder's last address as it appears on the books of the Company. Such meeting
shall be called for a date not earlier than 10 days and not later than 60 days
after such order or request, or, in default of the calling of such meeting
within 60 days after such order or request, such meeting may be called on
similar notice by any stockholder or stockholders owning in the aggregate not
less than 10% of the aggregate liquidation preference of the AR Preferred
Stock then outstanding. Any holder of the AR Preferred Stock shall have access
to the stock books of the Company for the purpose of causing a meeting of
stockholders to be called pursuant to these provisions. [Notwithstanding the
provisions of this subsection (iii), no such special meeting shall be called
during the period within 60 days immediately preceding the date fixed for the
next annual meeting of stockholders of the Company.]
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(iv) During any Default Period, the holders of Common Stock, and other
classes of stock of the Company, if applicable, shall continue to be entitled
to elect all of the directors unless and until the holders of AR Preferred
Stock shall have exercised their right pursuant to this Section 5(b) to elect
two directors voting as a class. After the exercise of such right (x) the
directors so elected by the holders of AR Preferred Stock shall continue in
office until the earlier of (A) such time as their successors shall have been
elected by such holders and (B) the expiration of the Default Period, and (y)
any vacancy in the Board with respect to a directorship to be elected pursuant
to this Section 5(b) by the holders of AR Preferred Stock may be filled by
vote of the remaining director previously elected by such holders. References
in this subsection (b)(iv) to directors elected by the holders of a particular
class of stock shall include directors elected by such directors to fill
vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a Default Period (and subject to
revesting of the rights provided for in this Section 5(b) upon the subsequent
occurrence of a Default Period), (x) the right of the holders of AR Preferred
Stock to elect directors pursuant to this Section 5(b) shall cease, (y) the
term of any directors elected by the holders of AR Preferred Stock pursuant to
this Section 5(b) shall terminate, and (z) the number of directors shall be
such number as may be provided for in the Restated Certificate of
Incorporation or bylaws of the Company irrespective of any increase made
pursuant to subsection (ii) of this subsection (b) (such number being subject,
however, to subsequent change in any manner provided by law or in the Restated
Certificate of Incorporation or bylaws of the Company). Any vacancies in the
Board of Directors effected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining Directors.
(c) Except as set forth herein, holders of AR Preferred Stock shall have no
special voting rights and their consent shall not be required (except to the
extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
SECTION 6. Redemption.
(a) On or after [ ], 200 [the fifth anniversary of the Merger],
the Company may, at its option, redeem all or any part of the shares of AR
Preferred Stock, in cash out of funds legally available therefor, at any time
upon giving a notice of redemption as set forth in section (c) below, at the
Liquidation Preference thereof plus an amount equal to accrued and unpaid
dividends, if any (whether or not declared), up to but excluding the date
fixed for redemption. If fewer than all of the outstanding shares of the AR
Preferred Stock are to be redeemed, the number of shares to be redeemed shall
be determined by the Board in good faith and the shares to be redeemed will be
determined pro rata as nearly as practicable, or by such other method as the
Board in its discretion may determine is fair and appropriate. AR Preferred
Stock may not be redeemed unless full cumulative dividends have been paid on
the AR Preferred Stock for all past dividend periods.
(b) On [ ], 201 [the twentieth anniversary of the Merger], the
Company shall redeem, in cash out of funds legally available therefor, all
outstanding shares of AR Preferred Stock, at the Liquidation Preference
thereof plus an amount equal to accrued and unpaid dividends, if any (whether
or not declared), up to but excluding such date.
(c) Notice of redemption of AR Preferred Stock will be given by (i) first-
class mail, not less than 30 nor more than 60 days prior to the date fixed for
redemption thereof, to each record holder of shares of AR Preferred Stock to
be redeemed at the address of such holder in the books of the Company and (ii)
publication in the Wall Street Journal. On the date such notices are mailed,
the Company shall issue a press release announcing the redemption. The mailed
and published notice shall state, as appropriate: (1) the redemption date and
record date for purposes of such redemption; (2) the number of shares of AR
Preferred Stock to be redeemed and, if fewer than all shares of AR Preferred
Stock held by any holder are to be redeemed, the number of shares to be
redeemed from such holder; (3) the place or places at which certificates for
such shares are to be surrendered; (4) the redemption price; and (5) that
dividends on the AR Preferred Stock to be redeemed shall cease to accrue on
such redemption date, except as otherwise provided herein. If a notice of
redemption has been given, from
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<PAGE>
and after the specified redemption date (unless the Company defaults in making
payment of the redemption price), dividends on the AR Preferred Stock so
called for redemption will cease to accrue, such shares will no longer be
deemed to be outstanding, and all rights of the holders thereof as
stockholders of the Company (except the right to receive the redemption price
and any dividend due on a Quarterly Dividend Payment Date after the redemption
date relating to a dividend record date prior to such redemption date) will
cease.
SECTION 7. Exchange.
(a) At any time, the Company shall have the right to exchange the
outstanding shares of the AR Preferred Stock for shares of Common Stock,
subject to the notice provisions set forth below. On the date fixed for such
exchange by the Board (the "Exchange Date"), the Company shall deliver to the
holders of the AR Preferred Stock, in exchange for each share of AR Preferred
Stock (i) the number of shares of Common Stock equal to the Common Equivalent
Rate in effect on the Exchange Date, plus (ii) an amount in cash equal to all
accrued and unpaid dividends on such shares of AR Preferred Stock up to but
excluding the Exchange Date. The Common Equivalent Rate shall be subject to
adjustment from time to time as provided herein, but all adjustments to the
Common Equivalent Rate shall be calculated to the nearest one one-hundredth of
a share of Common Stock.
(b) The "Common Equivalent Rate" shall be determined by dividing 1,000 by
the Current Market Price. "Current Market Price" means the average of the
daily Closing Prices for the five consecutive Trading Dates ending on and
including the date immediately preceding the Exchange Date. The term "Closing
Price" on any day shall mean the closing sale price regular way (with any
relevant due bills attached) of a share of Common Stock on such day, or in
case no such sale takes place on such day, the average of the reported closing
bid and asked prices regular way (with any relevant due bills attached) of a
share of Common Stock on such day, in each case on the New York Stock Exchange
Consolidated Tape (or any successor composite tape reporting transactions on
national securities exchanges), or, if the Common Stock is not listed or
admitted to trading on such Exchange, on the principal national securities
exchange on which the Common Stock is listed or admitted to trading (which
shall be the national securities exchange on which the greatest number of
shares of Common Stock has been traded during the five consecutive Trading
Dates ending on and including the date immediately preceding the Exchange
Date) or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the average of the closing bid and asked prices
regular way (with any relevant due bills attached) of a share of the Common
Stock on the over-the-counter market on the day in question as reported by the
National Association of Securities Dealers Automated Quotations System, or a
similarly generally accepted reporting service, or if not so available, the
market price of a share of Common Stock as determined in good faith by the
Board of Directors on the basis of such relevant factors as the Board of
Directors in good faith considers appropriate. The term "Trading Date" shall
mean a date on which the New York Stock Exchange (or any successor to such
Exchange) is open for the transaction of business.
(c) Before taking any action which would cause an adjustment to the Common
Equivalent Rate that would cause the Company to issue shares of Common Stock
for consideration below the then par value (if any) of the Common Stock upon
redemption of the AR Preferred Stock, the Company will take any corporate
action that may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable shares of
such Common Stock at the Common Equivalent Rate, including registration of
such Common Stock under applicable federal and state securities laws.
(d) Notice of exchange of AR Preferred Stock will be given by (i) first-
class mail, not less than 30 nor more than 60 days prior to the date fixed for
exchange thereof, to each record holder of shares of AR Preferred Stock at the
address of such holder in the books of the Company and (ii) publication in the
Wall Street Journal. On the date such notices are mailed, the Company shall
issue a press release announcing the exchange. The mailed and published notice
shall state, as appropriate: (1) the Exchange Date and record date for
purposes of such exchange;
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<PAGE>
(2) the place or places at which certificates for shares of AR Preferred Stock
are to be surrendered, and (3) that dividends on the AR Preferred Stock shall
cease to accrue on the Exchange Date, except as otherwise provided herein. If
a notice of exchange has been given, from and after the Exchange Date (unless
the Company defaults in delivery of the shares of Common Stock to be exchanged
for AR Preferred Stock, or any cash with respect to accrued and unpaid
dividends up to the Exchange Date, in which event the exchange shall be null
and void as to all shares of AR Preferred Stock), dividends on the AR
Preferred Stock will cease to accrue, such shares will no longer be deemed to
be outstanding, and all rights of the holders thereof with respect to such
shares (except the right to receive shares of Common Stock in exchange
therefor and any dividends due on a Quarterly Dividend Payment Date after the
Exchange Date relating to a dividend record date prior to the Exchange Date)
will cease.
(e) Each holder of shares of the AR Preferred Stock shall surrender the
certificates evidencing such shares (properly endorsed or assigned for
transfer, if the Board of Directors of the Company shall so require and the
notice shall so state) to the Company at the place designated in the notice of
such exchange and shall thereupon be entitled to receive certificates
evidencing shares of Common Stock and to receive any other funds payable
pursuant to this Section 7 upon such surrender and following the Exchange
Date.
(f) No fractional shares or script representing fractional shares of Common
Stock shall be issued upon the exchange of any shares of AR Preferred Stock.
In lieu of any fractional interest in a share of Common Stock which would
otherwise be deliverable upon the exchange of a share of AR Preferred Stock,
the Company shall, at its election, either (i) sell such fractional share, as
agent for the person entitled thereto, and distribute the proceeds of such
sale, net of any discounts, commissions, fees or expenses associated with such
sale, to such person, all in accordance with applicable rules under the
Securities Act of 1933, as amended, or (ii) pay to the holder entitled thereto
an amount in cash (computed to the nearest cent) equal to the current value
such fraction represents of the Current Market Price, or (iii) round such
fractional share otherwise issuable to any holder up to the nearest whole
number of shares of Common Stock. If more than one share shall be surrendered
for exchange by the same holder, the number of full shares of Common Stock
issuable upon exchange thereof shall be computed on the basis of the aggregate
number of shares of AR Preferred Stock so surrendered.
SECTION 8. Status of Reacquired Shares. If shares of AR Preferred Stock are
redeemed pursuant to Section 6 or exchanged pursuant to Section 7, the shares
so reacquired shall, upon compliance with any statutory requirements, assume
the status of authorized but unissued shares of preferred stock of the
Company, but may not be reissued as AR Preferred Stock.
SECTION 9. Preemptive Rights. The AR Preferred Stock is not entitled to any
preemptive or subscription rights in respect of any securities of the Company.
SECTION 10. Notices. Except as otherwise provided herein, all notices,
requests, demands, and other communications hereunder shall be in writing and
shall be deemed to have been duly given if delivered by and when sent by telex
or telecopier (with receipt confirmed), provided a copy is also sent by
express (overnight, if possible) courier, addressed (i) in the case of a
holder of AR Preferred Stock, to such holder's address as it appears on the
books of the Company, and (ii) in the case of the Company, to the Company's
principal executive offices to the attention of the Company's Chief Executive
Officer or President.
SECTION 11. Severability of Provisions. Whenever possible, each provision
hereof shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof would be valid or
enforceable if a period of time were extended or shortened or a particular
percentage were increased or decreased, then such court may make such change
as shall be necessary to render the provision in question effective and valid
under applicable law.
IN WITNESS WHEREOF, El Paso Natural Gas Company has caused this Certificate
of Designation to be duly executed by its duly authorized officer and attested
by its Secretary this day of , 199 .
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EXHIBIT 3(IV)
FORM OF
DEPOSIT AGREEMENT
DEPOSIT AGREEMENT, dated as of [ , 1996,] between El Paso Natural Gas
Company, a Delaware corporation, and [ ], as Depositary.
WITNESSETH:
WHEREAS, it is desired to provide, as hereinafter set forth in this Deposit
Agreement, for the deposit of shares of Stock with the Depositary, as agent
for the beneficial owners of the Stock, for the purposes set forth in this
Deposit Agreement and for the issuance hereunder of the Receipts evidencing
Adjustable Rate Depositary Shares representing an interest in the Stock so
deposited; and
WHEREAS, the Receipts are to be substantially in the form of the Depositary
Receipt annexed as Exhibit A to this Deposit Agreement, with appropriate
insertions, modifications and omissions, as hereinafter provided in this
Deposit Agreement;
NOW, THEREFORE, in consideration of the premises contained herein, it is
agreed by and among the parties hereto as follows:
ARTICLE I
DEFINITIONS
The following definitions shall apply to the respective terms (in the
singular and plural forms of such terms) used in this Deposit Agreement and
the Depositary Receipts:
"Adjustable Rate Depositary Share" shall mean an interest in one twenty-
fifth of a share of Stock deposited with the Depositary hereunder, as
evidenced by the Receipts issued hereunder. Subject to the terms of this
Deposit Agreement, each owner of an Adjustable Rate Depositary Share is
entitled, proportionately, to all the rights and preferences of the Stock
represented by such Adjustable Rate Depositary Share, including the dividend,
voting, redemption and liquidation rights contained in the Certificate of
Designation.
"Certificate of Designation" shall mean the Certificate of Designation
annexed as Exhibit B to this Deposit Agreement, as amended from time to time,
establishing and setting forth the rights, preferences, privileges and
limitations of the Stock.
"Certificate of Incorporation" shall mean the Restated Certificate
Incorporation, as amended from time to time, of the Company.
"Common Stock" shall mean the Company's Common Stock, par value $3 per
share.
"Company" shall mean El Paso Natural Gas Company, a Delaware corporation,
and its successors.
"Corporate Office" shall mean the office of the Depositary at which at any
particular time its depositary receipt business shall be administered, which
at the date of this Deposit Agreement is located at [ ].
"Deposit Agreement" shall mean this agreement, as the same may be amended,
modified or supplemented from time to time.
"Depositary" shall mean [ ], and any successor as depositary hereunder.
"Depositary's Agent" shall mean an agent appointed by the Depositary as
provided, and for the purposes specified, in Section 7.05.
<PAGE>
"Depositary Successor" means a successor to the Depositary taking title to
the Stock in accordance with Section 5.04.
"Operating Guidelines" means the operating and administrative procedures
relating to the functions of the Depositary pursuant to this Deposit
Agreement, as agreed between the Company and the Depositary from time to time.
"Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, a government or any agency or political subdivision
thereof, or any other entity of whatever nature.
"Receipt" shall mean a Depositary Receipt issued hereunder to evidence one
or more Adjustable Rate Depositary Shares, whether in temporary or definitive
form.
"Record holder" as applied to a Receipt shall mean the person in whose name
a Receipt is registered on the books maintained by the Depositary for such
purpose.
"Redemption Date" shall have the meaning assigned to it in Section 2.03.
"Registrar" shall mean any qualified Person appointed by the Company to
register ownership of Receipts as herein provided.
"Securities" shall have the meaning assigned to it in Section 3.02.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Stock" shall mean shares of the Company's Adjustable Rate Cumulative
Preferred Stock, par value $.01 per share, heretofore validly issued, fully
paid and nonassessable.
ARTICLE II
FORM OF RECEIPTS, DEPOSIT OF STOCK,
EXECUTION AND DELIVERY, TRANSFER,
SURRENDER AND REDEMPTION OF RECEIPTS
SECTION 2.01. Form and Transferability of Receipts. Receipts shall be
engraved or printed or lithographed with steel-engraved borders and underlying
tint and shall be substantially in the form set forth in Exhibit A annexed to
this Deposit Agreement, with appropriate insertions, modifications and
omissions, as hereinafter provided. Pending the preparation of definitive
Receipts, the Depositary, upon the written order of the Company or any holder
of Stock, as the case may be, delivered for deposit in compliance with Section
2.02, shall execute and deliver temporary Receipts that are printed,
lithographed, typewritten, mimeographed or otherwise substantially of the
tenor of the definitive Receipts in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the persons executing such Receipts may determine, as evidenced by their
execution of such Receipts. If temporary Receipts are issued, the Company and
the Depositary will cause definitive Receipts to be prepared without
unreasonable delay. After the preparation of definitive Receipts, the
temporary Receipts shall be exchangeable for definitive Receipts upon
surrender of the temporary Receipts at an office described in the second to
last paragraph of Section 2.02, without charge to the holder. Upon surrender
for cancellation of any one or more temporary Receipts, the Depositary shall
execute and deliver in exchange therefor definitive Receipts representing the
same number of Adjustable Rate Depositary Shares as represented by the
surrendered temporary Receipt or Receipts. Such exchange shall be made at the
Company's expense and without any charge to the holder thereof. Until so
exchanged, the temporary Receipts shall in all respects be entitled to the
same benefits under this Agreement, and with respect to the Stock deposited
hereunder, as definitive Receipts.
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Receipts shall be executed by the Depositary by the manual signature of a
duly authorized signatory of the Depositary, provided, however, that such
signature may be a facsimile if a Registrar (other than the Depositary) shall
have countersigned the Receipts by manual signature of a duly authorized
signatory of the Registrar. No Receipt shall be entitled to any benefits under
this Deposit Agreement or be valid or obligatory for any purpose unless it
shall have been executed as provided in the preceding sentence. The Depositary
shall record on its books each Receipt executed as provided above and
delivered as hereinafter provided.
Except as the Depositary may otherwise determine, Receipts shall be in
denominations of any number of whole Adjustable Rate Depositary Shares. All
Receipts shall be dated the date of their execution.
Receipts may be endorsed with or have incorporated in the text thereof such
legends or recitals or changes not inconsistent with the provisions of this
Deposit Agreement as may be required by the Depositary or required to comply
with any applicable law or regulation or with the rules and regulations of any
securities exchange upon which the Stock, the Adjustable Rate Depositary
Shares or the Receipts may be listed or to conform with any usage with respect
thereto, or to indicate any special limitations or restrictions to which any
particular Receipts are subject by reason of the date of issuance of the Stock
or otherwise.
Title to any Receipt (and to the Adjustable Rate Depositary Shares evidenced
by such Receipt) that is properly endorsed or accompanied by a properly
executed instrument of transfer or endorsement shall be transferable by
delivery with the same effect as in the case of a negotiable instrument;
provided, however, that until a Receipt shall be transferred on the books of
the Depositary as provided in Section 2.04, the Depositary may,
notwithstanding any notice to the contrary, treat the record holder thereof at
such time as the absolute owner thereof for the purpose of determining the
person entitled to distribution of dividends or other distributions or to any
notice provided for in this Deposit Agreement and for all other purposes.
SECTION 2.02. Deposit of Stock; Execution and Delivery of Receipts in
Respect Thereof. On the date any Stock is initially issued by the Company, the
Depositary, upon receipt of a written order from the Company and a certificate
or certificates for the Stock to be deposited under this Deposit Agreement in
accordance with the provisions of this Section, shall execute and deliver a
Receipt or Receipts for the number of Adjustable Rate Depositary Shares
representing such deposited Stock to the person or persons stated in such
order.
Subject to the terms and conditions of this Deposit Agreement, any holder of
Stock may deposit such Stock under this Deposit Agreement by delivery to the
Depositary of a certificate or certificates for the Stock to be deposited,
properly endorsed or accompanied, if required by the Depositary, by a properly
executed instrument of transfer or endorsement in form satisfactory to the
Depositary, together with (i) all such certifications as may be required by
the Depositary in accordance with the provisions of this Deposit Agreement and
(ii) a written order directing the Depositary to execute and deliver to or
upon the written order of the person or persons stated in such order a Receipt
or Receipts for the number of Adjustable Rate Depositary Shares representing
such deposited Stock.
If required by the Depositary, Stock presented for deposit at any time,
whether or not the register of stockholders of the Company is closed, shall
also be accompanied by an agreement or assignment, or other instrument
satisfactory to the Depositary, that will provide for the prompt transfer to
the Depositary or its nominee of any dividend or right to subscribe for
additional Stock or to receive other property that any person in whose name
the Stock is or has been registered may thereafter receive upon or in respect
of such deposited Stock, or in lieu thereof such agreement of indemnity or
other agreement as shall be satisfactory to the Depositary.
Upon receipt by the Depositary of a certificate or certificates for Stock to
be deposited hereunder, together with the other documents specified above, the
Depositary shall, as soon as transfer and registration can be accomplished,
present such certificate or certificates to the registrar and transfer agent
of the Stock for transfer and registration in the name of the Depositary or
its nominee of the Stock being deposited. Deposited Stock shall be held by the
Depositary in an account to be established by the Depositary at the Corporate
Office.
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Upon receipt by the Depositary of a certificate or certificates for Stock to
be deposited hereunder, together with the other documents specified above, the
Depositary, subject to the terms and conditions of this Deposit Agreement,
shall execute and deliver to or upon the order of the person or persons named
in the written order delivered to the Depositary referred to in the first or
second paragraph of this Section 2.02 a Receipt or Receipts for the number of
whole Adjustable Rate Depositary Shares representing the Stock so deposited
and registered in such name or names as may be requested by such person or
persons. The Depositary shall execute and deliver such Receipt or Receipts at
the Corporate office, except that, at the request, risk and expense of any
person requesting such delivery, such delivery may be made at such other place
as may be designated by such person. In each case, delivery will be made only
upon payment by such person to the Depositary of all taxes and other
governmental charges and any fees payable in connection with such deposit and
the transfer of the Deposited Stock.
The Company shall deliver to the Depositary from time to time such
quantities of Receipts as the Depositary may reasonably request to enable the
Depositary to perform its obligations under this Deposit Agreement.
SECTION 2.03. Redemptions of Stock. Whenever the Company shall elect to
redeem shares of Stock in accordance with the Certificate of Designation, it
shall (unless otherwise agreed in writing with the Depositary) give the
Depositary in its capacity as Depositary not less than two business days prior
notice of the proposed date of the mailing of the notice of redemption of
Stock required pursuant to paragraphs 6(b) or 7(d) of the Certificate of
Designation to be effected in connection with a redemption of Stock and of the
number of such shares of Stock hold by the Depositary to be redeemed as
hereinafter provided.
On the date of any redemption of Stock in accordance with the Certificate of
Designation, provided that the Company shall then have deposited with the
Depositary the shares of Common Stock and any funds required pursuant to the
Certificate of Designation for the Stock deposited with the Depositary to be
redeemed, the Depositary shall redeem (using the shares of Common Stock and
funds, if any, deposited with it) the number of Adjustable Rate Depositary
Shares representing such redeemed Stock. The distribution of the shares of
Common Stock and funds, if any, used to effect such redemption shall be
governed by Sections 4.01 and 4.02 hereof. The Depositary shall, as directed
by the Company, mail, first class postage prepaid, the notice of the
redemption of Stock and the proposed simultaneous redemption of the Adjustable
Rate Depositary Shares representing the Stock to be redeemed, not less than 30
and not more than 60 days prior to the date fixed for redemption (the
"Redemption Date") of such Stock and Adjustable Rate Depositary Shares. Such
notice shall be mailed to each holder of record on the record date fixed for
such redemption pursuant to Section 4.04 hereof of the Receipts evidencing the
Adjustable Rate Depositary Shares, at the address of such holder as the same
appears on the records of the Depositary; but neither failure to mail any such
notice to one or more such holders nor any defect in any notice shall affect
the sufficiency of the proceedings for redemption.
With respect to the notices provided in accordance with the first paragraph
of this Section 2.03, the Company shall provide the Depositary with such
notice, and each such notice shall, as appropriate and to the extent
determinable at the time of such notice, state: the record date for such
redemption; the redemption date; that all outstanding Adjustable Rate
Depositary Shares are to be redeemed or, in the case of a redemption of fewer
than all outstanding Adjustable Rate Depositary Shares in connection with a
partial redemption of Stock pursuant to paragraph 6(a) or 7(a) of the
Certificate of Designation, the number of such Adjustable Rate Depositary
Shares held by such holder to be so redeemed; in connection with a redemption
of Stock pursuant to paragraph 6(a) of the Certificate of Designation, the
redemption price for the Adjustable Rate Depositary Shares, in connection with
a redemption pursuant paragraph 7(a) of the Certificate of Designation, the
number of shares of Common Stock deliverable upon redemption of each
Adjustable Rate Depositary Share to be redeemed and the then effective Common
Equivalent Rate (as defined in the Certificate of Designation) used to
calculate the number of shares of Common Stock; the place or places where
Receipts evidencing Adjustable Rate Depositary Shares to be redeemed are to be
surrendered for redemption and that dividends in respect of the Stock
represented by the Adjustable Rate Depositary Shares to be redeemed will cease
to accrue on such redemption date, unless the Company shall default in
delivering the shares of Common Stock or cash, if any, payable by the Company
at the time and place specified in such notice. In case fewer than all the
outstanding Adjustable Rate Depositary
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Shares are to be redeemed, the Adjustable Rate Depositary Shares to be
redeemed shall be selected by lot or such other method as the Company in its
discretion may determine is fair and appropriate.
Notice having been mailed by the Depositary as aforesaid, from and after the
redemption date (unless the Company shall have failed to redeem the shares of
Stock to be redeemed by it as set forth in the Company's notice provided for
in the preceding paragraphs), the Adjustable Rate Depositary Shares called for
redemption shall be deemed no longer to be outstanding and all rights of the
holders of Receipts evidencing such Adjustable Rate Depositary Shares (except
the right to receive the shares of Common Stock and any cash upon redemption)
shall, to the extent of such Adjustable Rate Depositary Shares, cease and
terminate. Upon surrender in accordance with said notices of the Receipts
evidencing such Adjustable Rate Depositary Shares (properly endorsed or
assigned for transfer, if the Depositary shall so require), such Adjustable
Rate Depositary Shares shall be redeemed (as nearly as may be practicable
without creating fractional shares) in exchange for cash or, if applicable,
shares of Common Stock at a rate equal to one twenty-fifth the number of
shares of Common Stock delivered in respect of the shares of Stock represented
by such Adjustable Rate Depositary Shares as is provided for in the
Certificate of Designation. The foregoing shall be subject further to the
terms and conditions of the Certificate of Designation.
If fewer than all of the Adjustable Rate Depositary Shares evidenced by a
Receipt are called for redemption, the Depositary will deliver to the holder
of such Receipt upon its surrender to the Depositary, a new Receipt evidencing
the Adjustable Rate Depositary Shares evidenced by such prior Receipt and not
called for redemption, together with the shares of Common Stock for the
Adjustable Rate Depositary Shares called for redemption.
SECTION 2.04. Transfer of Receipts. Subject to the terms and conditions of
this Deposit Agreement, the Depositary shall make transfers on its books from
time to time of Receipts upon any surrender thereof by the holder in person or
by a duly authorized attorney, properly endorsed or accompanied by a properly
executed instrument of transfer or endorsement, together with evidence of the
payment of any transfer taxes as may be required by law. Upon such surrender,
the Depositary shall execute a new Receipt or Receipts and deliver the same to
or upon the order of the person entitled thereto evidencing the same aggregate
number of Adjustable Rate Depositary Shares evidenced by the Receipt or
Receipts surrendered.
SECTION 2.05. Combination and Split-ups of Receipts. Upon surrender of a
Receipt or Receipts at the Corporate Office or such other office as the
Depositary may designate for the purpose of effecting a split-up or
combination of Receipts, subject to the terms and conditions of this Deposit
Agreement, the Depositary shall execute and deliver a new Receipt or Receipts
in the authorized denominations requested evidencing the same aggregate number
of Adjustable Rate Depositary Shares evidenced by the Receipt or Receipts
surrendered; provided, however, that the Depositary shall not issue any
Receipt evidencing a fractional Adjustable Rate Depositary Share.
SECTION 2.06. Surrender of Receipts and Withdrawal of Stock. Any holder of a
Receipt or Receipts may withdraw any or all of the Stock (but only in whole
shares of Stock) represented by the Adjustable Rate Depositary Shares
evidenced by such Receipts by surrendering such Receipt or Receipts at the
Corporate Office or at such other office as the Depositary may designate for
such withdrawals. After such surrender, without unreasonable delay, the
Depositary shall deliver to such holder, or to the person or persons
designated by such holder as hereinafter provided, the whole number of shares
of Stock represented by the Adjustable Rate Depositary Shares evidenced by the
Receipt or Receipts so surrendered for withdrawal, but holders of such shares
of Stock will not thereafter be entitled to deposit such shares of Stock
hereunder or to receive Adjustable Rate Depositary Shares therefor. If the
Receipt or Receipts delivered by the holder to the Depositary in connection
with such withdrawal shall evidence a number of Adjustable Rate Depositary
Shares in excess of the number of Adjustable Rate Depositary Shares
representing the whole number of shares of Stock to be withdrawn, the
Depositary shall at the same time, in addition to such whole number of shares
of Stock, deliver to such holder a new Receipt or Receipts evidencing such
excess number of Adjustable Rate Depositary Shares. Delivery of the Stock
being withdrawn may be made by the delivery of such certificates, documents of
title and other instruments
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as the Depositary may deem appropriate, which, if required by the Depositary,
shall be properly endorsed or accompanied by proper instruments of transfer.
If the Stock being withdrawn is to be delivered to a person or persons other
than the record holder of the Receipt or Receipts being surrendered for
withdrawal of Stock, such holder shall execute and deliver to the Depositary a
written order so directing the Depositary and the Depositary may require that
the Receipt or Receipts surrendered by such holder for withdrawal of such
shares of Stock be properly endorsed in blank or accompanied by a properly
executed instrument of transfer or endorsement in blank.
The Depositary shall deliver the Stock represented by the Adjustable Rate
Depositary Shares evidenced by Receipts surrendered for withdrawal at the
Corporate office, except that, at the request, risk and expense of the holder
surrendering such Receipt or Receipts and for the account of the holder
thereof, such delivery may be made at such other place as may be designated by
such holder.
SECTION 2.07. Limitations on Execution and Delivery, Transfer, Split-up,
Combination, Surrender and Exchange of Receipts. As a condition precedent to
the execution and delivery, transfer, split-up, combination, surrender or
exchange of any Receipt, the Depositary, any of the Depositary's Agents or the
Company may require any or all of the following: (i) payment to it of a sum
sufficient for the payment (or, in the event that the Depositary or the
Company shall have made such payment, the reimbursement to it) of any tax or
other governmental charge with respect thereto (including any such tax or
charge with respect to the Stock being deposited or withdrawn or with respect
to the Common Stock of the Company being issued upon redemption); (ii) the
production of proof satisfactory to it as to the identity and genuineness of
any signature; and (iii) compliance with such regulations, if any, as the
Depositary or the Company may establish not inconsistent with the provisions
of this Deposit Agreement.
The deposit of Stock may be refused, the delivery of Receipts against Stock
may be suspended, the transfer of Receipts may be refused, and the transfer,
split-up, combination, surrender or exchange of outstanding Receipts may be
suspended (i) during a period when the register of stockholders of the Company
is closed, (ii) if any such action is deemed necessary or advisable by the
Depositary, any of the Depositary's Agents or the Company at any time or from
time to time because of any requirement of law or of any government or
governmental body or commission, or under any provision of this Deposit
Agreement, or (iii) with the approval of the Company, for any other reason.
Without limitation of the foregoing, the Depositary shall not knowingly accept
for deposit under this Deposit Agreement any shares of Stock that are required
to be registered under the Securities Act unless a registration statement
under the Securities Act is in effect as to such shares of Stock.
SECTION 2.08. Lost Receipts, etc. In case any Receipt shall be mutilated or
destroyed or lost or stolen, the Depositary in its discretion may execute and
deliver a Receipt of like form and tenor in exchange and substitution for such
mutilated Receipt or in lieu of and in substitution for such destroyed, lost
or stolen Receipt; provided, however, that the holder thereof provides the
Depositary with (i) evidence satisfactory to the Depositary of such
destruction, loss or theft of such Receipt, of the authenticity thereof and of
his ownership thereof, (ii) reasonable indemnification satisfactory to the
Depositary and (iii) payment of any expense (including fees, charges and
expenses of the Depositary) in connection with such indemnification, execution
and delivery.
SECTION 2.09. Cancellation and Destruction of Surrendered Receipts. All
Receipts surrendered to the Depositary or any Depositary's Agent shall be
cancelled by the Depositary. Except as prohibited by applicable law or
regulation, the Depositary is authorized to destroy such Receipts so
cancelled.
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ARTICLE III
CERTAIN OBLIGATIONS OF HOLDERS
OF RECEIPTS AND THE COMPANY
SECTION 3.01. Filing Proofs, Certificates and Other Information. Any person
presenting stock for deposit or any holder of a Receipt may be required from
time to time to file such proof of residence or other information, to execute
such certificates and to make such representations and warranties as the
Depositary or the Company may reasonably deem necessary or proper. The
Depositary or the Company may withhold or delay the delivery of any Receipt,
the transfer, redemption or exchange of any Receipt, the withdrawal of the
Stock represented by the Adjustable Rate Depositary Shares evidenced by any
Receipt or the distribution of any dividend or other distribution until such
proof or other information is filed, such certificates are executed or such
representations and warranties are made.
SECTION 3.02. Payment of Taxes or Other Governmental Charges. If any tax or
other governmental charge shall become payable by or on behalf of the
Depositary with respect to any Receipt, the Adjustable Rate Depositary Shares
evidenced by such Receipt, the Stock (or fractional interest therein)
represented by such Adjustable Rate Depositary Shares or any transaction
referred to in Section 4.06, such tax (including transfer, issuance or
acquisition taxes, if any) or governmental charge shall be payable by the
holder of such Receipt. Until such payment is made, transfer of any Receipt or
any withdrawal of the Stock represented by the Adjustable Rate Depositary
Shares evidenced by such Receipt may be refused, any dividend or other
distribution may be withheld and any part or all of the Stock represented by
the Adjustable Rate Depositary Shares evidenced by such Receipt may be sold
for the account of the holder thereof (after attempting by reasonable means to
notify such holder prior to such sale). Any dividend or other distribution so
withheld and the proceeds of any such sale may be applied to any payment of
such tax or other governmental charge, the holder of such Receipt remaining
liable for any deficiency. Unless the Company determines otherwise, the
Depositary shall act as the withholding agent for any payments, distributions
and exchanges made with respect to the Adjustable Rate Depositary Shares and
Receipts, and the Stock represented thereby (collectively, the "Securities").
The Depositary shall be responsible with respect to the Securities for the
timely (i) collection and deposit of any required withholding or backup
withholding tax, and (ii) filing of any information returns or other documents
with federal (and other applicable) taxing authorities. In the event the
Depositary is required to pay any such amounts, the Company shall reimburse
the Depositary for payment thereof upon the request of the Depositary and the
Depositary shall, upon the Company's request and as instructed by the Company,
pursue its rights against such holder at the Company's expense.
SECTION 3.03. Representations and Warranties as to Stock. In the case of the
initial deposit of the Stock, the Company and, in the case of subsequent
deposits thereof, each person so depositing Stock under this Deposit Agreement
shall be deemed thereby to represent and warrant that such Stock and each
certificate therefor are valid, fully paid and nonassessable and that the
person making such deposit is duly authorized to do so. Such representations
and warranties shall survive the deposit of the Stock and the issuance of
Receipts.
ARTICLE IV
THE STOCK, NOTICES
SECTION 4.01. Cash Distributions. Whenever any cash dividend or other cash
distribution shall be paid on the Stock, the Company, on behalf of the
Depositary (or, if the Company determines otherwise, the Depositary), shall,
subject to Sections 3.01 and 3.02, distribute to record holders of Receipts on
the record date fixed pursuant to Section 4.04 such amounts of such sum as
are, as nearly as practicable, in proportion to the respective numbers of
Adjustable Rate Depositary Shares evidenced by the Receipts held by such
holders; provided, however, that in case the Company or the Depositary shall
be required to withhold and does withhold from any cash dividend or other cash
distribution in respect of the Stock an amount on account of taxes or as
otherwise required pursuant to law, regulation or court process, the amount
made available for distribution or
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distributed in respect of Adjustable Rate Depositary Shares shall be reduced
accordingly. The Company, on behalf of the Depositary (or, if the Company
determines otherwise, the Depositary), shall distribute or make available for
distribution, as the case may be, only such amount, however, as can be
distributed without attributing to any owner of Adjustable Rate Depositary
Shares a fraction of one cent. In the event that the calculation of any such
cash dividend or other cash distribution to be paid to any record holder on
the aggregate number of Adjustable Rate Depositary Shares held by such holder
results in an amount which is a fraction of a cent, the amount the Depositary
shall distribute to such record holder shall be rounded to the next highest
whole cent; and upon request of the Depositary, the Company shall pay the
additional amount to the Depositary for distribution.
SECTION 4.02. Distributions Other Than Cash. Whenever any distribution other
than cash shall be made on the Stock, the Company, on behalf of the Depositary
(or, if the Company determines otherwise, the Depositary), shall, subject to
Sections 3.01 and 3.02, distribute to record holders of Receipts on the record
date fixed pursuant to Section 4.04 such amounts of the securities or property
received by it as are, as nearly as practicable, in proportion to the
respective numbers of Adjustable Rate Depositary Shares evidenced by the
Receipts held by such holders, in any manner that the Company may deem
equitable and practicable for accomplishing such distribution. If, in the
opinion of the Company, such distribution cannot be made proportionately among
such record holders, or if for any other reason (including any requirement
that the Company or the Depositary withhold an amount on account of taxes or
as otherwise required pursuant to law, regulation or court process), the
Company deems such distribution not to be feasible, the Company on behalf of
the Depositary (or, if the Company determines otherwise, the Depositary) may
adopt such method as it deems equitable and practicable for the purpose of
effecting such distribution, including the sale (at public or private sale) of
the securities or property thus received, or any part thereof, at such place
or places and upon such terms as it may deem proper. The net proceeds of any
such sale shall, subject to Sections 3.01 and 3.02, be distributed or made
available for distribution, as the case may be, by the Company on behalf of
the Depositary (or, if the Company determines otherwise, the Depositary) to
record holders of Receipts as provided by Section 4.01 in the case of a
distribution received in cash.
SECTION 4.03. Subscription Rights, Preferences or Privileges. If the Company
shall at any time offer or cause to be offered to the persons in whose names
Stock is registered on the books of the Company any rights, preferences or
privileges to subscribe for or to purchase any securities or any rights,
preferences or privileges of any other nature, such rights, preferences or
privileges shall in each such instance be made available by the Depositary or
the Company to the record holders of Receipts if the Company so directs in
such manner as the Company shall instruct (including by the issue to such
record holders of warrants representing such rights, preferences or
privileges); provided, however, that (a) if at the time of issue or offer of
any such rights, preferences or privileges the Company determines that it is
not lawful or feasible to make such rights, preferences or privileges
available to some or all holders of Receipts (by the issue of warrants or
otherwise) or (b) if and to the extent instructed by holders of Receipts who
do not desire to exercise such rights, preferences or privileges, the
Depositary shall then, if so instructed by the Company, and if applicable laws
or the terms of such rights, preferences or privileges so permit, sell such
rights, preferences or privileges of such holders at public or private sale,
at such place or places and upon such terms as it may deem proper. The net
proceeds of any such sale shall, subject to Sections 3.01 and 3.02, be
distributed by the Depositary or the Company, as the case may be, to the
record holders of Receipts entitled thereto as provided by Section 4.01 in the
case of a distribution received in cash.
If registration under the Securities Act of the securities to which any
rights, preferences or privileges relate is required in order for holders of
Receipts to be offered or sold such securities, the Company shall promptly
file a registration statement pursuant to the Securities Act with respect to
such rights, preferences or privileges and securities and use its best efforts
and take all steps available to it to cause such registration statement to
become effective sufficiently in advance of the expiration of such rights,
preferences or privileges to enable such holders to exercise such rights,
preferences or privileges. In no event shall the Depositary make available to
the holders of Receipts any right, preference or privilege to subscribe for or
to purchase any securities unless and until the
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Depositary has been notified by the Company that such registration statement
has become effective or that the offering and sale of such securities to such
holders are exempt from registration under the provisions of the Securities
Act.
If any other action under the law of any jurisdiction or any governmental or
administrative authorization, consent or permit is required in order for such
rights, preferences or privileges to be made available to holders of Receipts,
the Company will use its best efforts to take such action or obtain such
authorization, consent or permit sufficiently in advance of the expiration of
such rights, preferences or privileges to enable such holders to exercise such
rights, preferences or privileges.
SECTION 4.04. Notice of Dividends, Fixing of Record Date for Holders of
Receipts. Whenever any cash dividend or other cash distribution shall become
payable, any distribution other than cash shall be made, or any rights,
preferences or privileges shall at any time be offered with respect to the
Stock, or whenever the Depositary shall receive notice of (i) any meeting at
which holders of Stock are entitled to vote or of which holders of Stock are
entitled to notice or any solicitation of consents in respect of the Stock,
(ii) any call for redemption of any shares of Stock or (iii) any event of
which holders of Stock are entitled to notice in accordance with the
Certificate of Designation, the Depositary shall in each such instance fix a
record date (which shall be the same date as the record date fixed by the
Company with respect to the Stock) for the determination of the holders of
Receipts who shall be entitled (i) to receive such dividend, distribution,
rights, preferences or privileges or the net proceeds of the sale thereof,
(ii) to receive notice of, and to give instructions for the exercise of voting
rights at, or the delivery of consents with respect to, any such meeting or
consent solicitation, as the case may be, or (iii) to receive notice of any
such redemption or other event.
SECTION 4.05. Voting Rights. Upon receipt of notice of any meeting at which
the holders of Stock are entitled to vote, the Depositary shall, as soon as
practicable thereafter (unless another arrangement for allowing holders of
Adjustable Rate Depositary Shares to exercise the voting rights associated
with the Adjustable Rate Depositary Shares is agreed by the Company and the
Depositary), mail to the record holders of Receipts a notice, which shall be
provided by the Company and which shall contain (i) such information as is
contained in such notice of meeting, (ii) a statement that the holders of
Receipts at the close of business on a specified record date fixed pursuant to
Section 4.04 will be entitled, subject to any applicable provision of law, the
Certificate of Incorporation or the Certificate of Designation, to instruct
the Depositary as to the exercise of the voting rights with respect to the
amount of Stock represented by their respective Adjustable Rate Depositary
Shares and (iii) a brief statement as to the manner in which such instructions
may be given. Upon the written request of a holder of a Receipt on such record
date, the Depositary shall endeavor insofar as practicable to vote or cause to
be voted with respect to the amount of Stock represented by the Adjustable
Rate Depositary Shares evidenced by such Receipt in accordance with the
instructions set forth in such request. In the absence of specific
instructions from the holder of a Receipt, the Depositary will abstain from
voting to the extent of the Stock represented by the Adjustable Rate
Depositary Shares evidenced by such Receipt.
SECTION 4.06. Changes Affecting Stock and Reclassifications,
Recapitalizations, etc. Upon any split-up, consolidation or any other
reclassification of Stock, or upon any recapitalization, reorganization,
merger, amalgamation or consolidation affecting the Company or to which it is
a party or sale of all or substantially all of the Company's assets, the
Depositary shall, upon the instructions of the Company, treat any shares of
stock or other securities (including depositary shares) or property (including
cash) that shall be received by the Depositary in exchange for or upon
conversion of or in respect of the Stock as now deposited property under this
Deposit Agreement, and Receipts then outstanding shall thenceforth represent
the proportionate interests of holders thereof in the new deposited property
so received in exchange for or upon conversion or in respect of such Stock. In
any such case the Depositary may, in its discretion, with the approval of the
Company, execute and deliver additional Receipts, or may call for the
surrender of all outstanding Receipts to be exchanged for new Receipts
specifically describing such new deposited property. If upon any split-up,
consolidation or any other reclassification of Stock, or upon any
recapitalization, reorganization, merger, amalgamation or consolidation
affecting the Company or to which it is a party or sale of all or
substantially all of the Company's assets the Company delivers to the
Depositary shares of stock or other securities (including depositary shares)
or property
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(including cash) a portion of which shall be distributed to record holders of
Receipts in accordance with Sections 4.01, 4.02 and 4.03 and a portion of
which shall be received by the Depositary in exchange for or upon conversion
of or in respect of the Stock as new deposited property under this Section
4.06, the Company shall clearly indicate such division in the instructions to
the Depositary provided pursuant to this Section 4.06.
ARTICLE V
THE DEPOSITARY AND THE COMPANY
SECTION 5.01. Maintenance of Offices, Agencies, Transfer Books by the
Depositary; the Registrar. Upon execution of this Deposit Agreement in
accordance with its terms, the Depositary shall maintain at the Corporate
Office facilities for the execution and delivery, transfer, surrender and
exchange, split-up and combination of Receipts and the deposit and withdrawal
of Stock and at the offices of the Depositary's Agents, if any, facilities for
the delivery, transfer, surrender and exchange, split-up, combination and
redemption of Receipts and the deposit and withdrawal of Stock, all in
accordance with the provisions of this Deposit Agreement.
The Depositary shall keep books at the Corporate Office for the registration
and transfer of Receipts, which books at all reasonable times shall be open
for inspection by the record holders of Receipts as and to the extent provided
by applicable law. The Depositary shall consult with the Company upon receipt
of any request for inspection. The Depositary may close such books, at any
time or from time to time, when deemed expedient by it in connection with the
performance of its duties hereunder.
The Depositary shall make available for inspection by holders of Receipts at
the Corporate Office and at such other places as it may from time to time deem
advisable during normal business hours any reports and communications received
from the Company that are both received by the Depositary as the holder of
Stock and made generally available to the holders of Stock.
Promptly upon request from time to time by the Company and at the Company's
sole expense, the Depositary shall furnish to it a list, as of a recent date,
of the names, addresses and holdings of Adjustable Rate Depositary Shares of
all persons in whose names Receipts are registered on the books of the
Depositary.
If the Receipts or the Adjustable Rate Depositary Shares evidenced thereby
or the Stock represented by such Adjustable Rate Depositary Shares shall be
listed on the New York Stock Exchange, Inc., the Depositary shall, if directed
by the Company, appoint a Registrar for registry of such Receipts or
Adjustable Rate Depositary Shares in accordance with the requirements of such
Exchange. Such Registrar (which may be the Depositary if so permitted by the
requirements of such Exchange) may be removed and a substitute registrar
appointed by the Depositary upon the request or with the approval of the
Company. If the Receipts, such Adjustable Rate Depositary Shares or such Stock
are listed on one or more other stock exchanges, the Depositary will, at the
request of the Company, arrange such facilities for the delivery, transfer,
surrender and exchange of such Receipts, such Adjustable Rate Depositary
Shares or such Stock as may be required by law or applicable stock exchange
regulations.
SECTION 5.02. Liability of the Depositary, the Depositary's Agents or the
Company. Neither the Depositary nor any Depositary's Agent nor the Company
shall incur any liability to any holder of any Receipt, if by reason of any
provision of any present or future law or regulation thereunder of the United
States of America or of any other governmental authority or, in the case of
the Depositary or the Depositary's Agent, by reason of any provision, present
or future, of the Certificate of Incorporation or the Certificate of
Designation or, in the case of the Company, the Depositary or the Depositary's
Agent, by reason of any act of God or war or other circumstances beyond the
control of the relevant party, the Depositary, any Depositary's Agent or the
Company shall be prevented or forbidden from doing or performing any act or
thing that the terms of this Deposit Agreement provide shall be done or
performed; nor shall the Depositary, any Depositary's Agent or the Company
incur any liability to any holder of a Receipt by reason of any nonperformance
or delay, caused as aforesaid, in the performance of any act or thing that the
terms of this Deposit Agreement provide shall or may be done or
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performed, or by reason of any exercise of, or failure to exercise, any
discretion provided for in this Deposit Agreement except, in case of any such
exercise or failure to exercise discretion not caused as aforesaid, if caused
by the negligence, bad faith or willful misconduct of the party charged with
such exercise or failure to exercise.
SECTION 5.03. Obligations of the Depositary, the Depositary's Agents and the
Company. Neither the Depositary nor any Depositary Agent nor the Company nor
the Registrar assumes any obligation or shall be subject to any liability
under this Deposit Agreement or any Receipt to holders of Receipts other than
that each of them agrees to use good faith in the performance of such duties
as are specifically set forth in this Deposit Agreement and other than for its
negligence, bad faith or willful misconduct.
Neither the Depositary nor any Depositary's Agent nor the Company nor the
Registrar shall be under any obligation to appear in, prosecute or defend any
action, suit or other proceeding with respect to Stock, Adjustable Rate
Depositary Shares or Receipts or Common Stock or other securities or property
that in its opinion may involve it in expense or liability, unless indemnity
satisfactory to it against all expense and liability be furnished as often as
may be required.
Neither the Depositary nor any Depositary's Agent nor the Company nor the
Registrar shall be liable for any action or any failure to act by it in
reliance upon the advice of or information from legal counsel, accountants,
any person presenting Stock for deposit, any holder of a Receipt or any other
person believed by it in good faith to be competent to give such advice or
information. The Depositary, any Depositary's Agent, the Registrar and the
Company may each rely and shall each be protected in acting upon any written
notice, request, direction or other document believed by it to be genuine and
to have been signed or presented by the proper party or parties.
Notwithstanding the first paragraph of this Section 5.03, the Depositary
shall not be responsible for any failure to carry out any instruction to vote
any of the deposited shares of Stock or for the manner or effect of any such
vote made, as long as any such action or non-action is in good faith or in
accordance with this Deposit Agreement. The Depositary undertakes, and any
Registrar shall be required to undertake, to perform such duties and only such
duties as are specifically set forth in this Deposit Agreement against the
Depositary or any Registrar. The Depositary will indemnify the Company against
any liability that may arise out of acts performed or omitted by the
Depositary or its agents due to its or their negligence, bad faith or willful
misconduct. The Depositary, its parent, affiliates or subsidiaries and any
Depositary's Agent may own, buy, sell or deal in any class of securities of
the Company and its affiliates and in Receipts or Adjustable Rate Depositary
Shares or become pecuniarily interested in any transaction in which the
Company or its affiliates may be interested or contract with or lend money to
or otherwise act as fully or as freely as if it were not the Depositary or the
Depositary's Agent hereunder. The Depositary may also act as transfer agent or
registrar of any of the securities of the Company and its affiliates or act in
any other capacity for the Company or its affiliates.
It is intended that neither the Depositary nor any Depositary's Agent shall
be deemed to be an "issuer" of the securities under the federal securities
laws or applicable state securities laws, it being expressly understood and
agreed that the Depositary and any Depositary's Agent are acting only in a
ministerial capacity as Depositary for the Stock.
The Depositary agrees to comply with all information reporting and
withholding requirements applicable to it under law or this Deposit Agreement
in its capacity as Depositary.
Each of the Company and the Depositary agrees to be bound by, and act in
accordance with, the Operating Guidelines current from time to time.
The Depositary shall not lend the Adjustable Rate Depositary Shares.
Neither the Depositary (or its officers, directors, employees or agents) nor
any Depositary's Agent nor the Registrar makes any representation or has any
responsibility as to the validity of the Prospectus pursuant to which
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the Adjustable Rate Depositary Shares are offered, the Stock, the Adjustable
Rate Depositary Shares or the Receipts (except its countersignature thereon),
or any instruments referred to therein or herein, or as to the correctness of
any statement made therein or herein; provided, however, that the Depositary
is responsible for its representations in this Deposit Agreement.
The Depositary assumes no responsibility for the correctness of the
description that appears in the Receipts, which can be taken as a statement of
the Company summarizing certain provisions of this Deposit Agreement.
Notwithstanding any other provision herein or in the Receipts, the Depositary
makes no warranties or representations as to the validity, genuineness or
sufficiency of any Stock at any time deposited with the Depositary hereunder
or of the Adjustable Rate Depositary Shares, as to the validity or sufficiency
of this Deposit Agreement, as to the value of the Adjustable Rate Depositary
Shares or as to any right, title or interest of the record holders of Receipts
in and to the Adjustable Rate Depositary Shares, except that the Depositary
hereby represents and warrants as follows: (i) the Depositary has been duly
organized and is validly existing and in good standing under the laws of
[ ], with full power, authority and legal right under such law to
execute, deliver and carry out the terms of this Deposit Agreement; (ii) this
Deposit Agreement has been duly authorized, executed and delivered by the
Depositary; and (iii) this Deposit Agreement constitutes a valid and binding
obligation of the Depositary, enforceable against the Depositary in accordance
with its terms, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting enforcement of
creditors' rights generally and except as enforcement thereof is subject to
general principles of equity (regardless of whether enforcement is considered
in a proceeding in equity or at law). The Depositary shall not be accountable
for the use or application by the Company of the Adjustable Rate Depositary
Shares or the Receipts or the proceeds thereof.
SECTION 5.04. Resignation and Removal of the Depositary, Appointment of
Successor Depositary. The Depositary may at any time resign as Depositary
hereunder by notice of its election to do so delivered to the Company, such
resignation to take affect upon the appointment of a successor depositary and
its acceptance of such appointment as hereinafter provided.
The Company may, by notice in writing to the Depositary, terminate the
engagement of the Depositary with respect to any or all of the duties or
obligations of the Depositary set out in this Deposit Agreement (including
such duties as are customarily associated with the role of a transfer agent or
paying agent), such termination to take effect upon the appointment of a
successor to fulfill those duties or obligations and its acceptance of such
appointment as hereinafter provided. In the event that the Company terminates
the engagement of the Depositary with respect to some, but not all, of the
duties or obligations of the Depositary, the Depositary shall thereafter be
deemed only to have such rights and obligations under this Deposit Agreement
as are necessary for it to fulfill its remaining duties or obligations. The
Depositary agrees to cooperate with the Company or any person appointed by the
Company or that person with respect to the performance of any of the duties
previously performed by the Depositary.
In case at any time the Depositary acting hereunder shall resign or the
Company shall terminate the engagement of the Depositary with respect to any
or all of the duties or obligations of the Depositary set out in this Deposit
Agreement, the Company shall, within 45 days after the delivery of the notice
of resignation or termination, as the case may be, appoint a successor with
respect to such duties and obligations so terminated. If such successor is to
take title to the Stock (a "Depositary Successor"), the Depositary Successor
shall be a bank or trust company, or an affiliate of a bank or trust company,
having its principal office in the United States of America and having a
combined capital and surplus of at least [$ ]. If a successor shall not have
been appointed in 45 days, the resigning Depositary may petition a court of
competent jurisdiction to appoint a successor.
Every Depositary Successor shall execute and deliver to its predecessor and
to the Company an instrument in writing accepting its appointment hereunder,
and thereupon such Depositary Successor, without any further act or deed,
shall become fully vested with all the duties and obligations of its
predecessor so terminated and all rights and powers with respect thereto and
for all purposes shall be the Depositary under this Deposit Agreement
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with respect to the duties and obligations of the predecessor so terminated,
and such predecessor, upon payment of all sums due it and on the written
request of the Company, shall promptly execute and deliver an instrument
transferring to such Depositary Successor all such rights and powers of such
predecessor hereunder, shall, if applicable, duly assign, transfer and deliver
all rights, title and interest in the Stock and any moneys or property held
hereunder to such Depositary Successor and shall, if applicable, deliver to
such Depositary Successor a list of the record holders of all outstanding
Receipts. Any Depositary Successor shall promptly mail notice of its
appointment to the record holders of Receipts.
Any corporation into or with which the Depositary may be merged,
consolidated or converted shall be the successor of such Depositary without
the execution or filing of any document or any further act. Such successor
depositary may execute the Receipts either in the name of the predecessor
depositary or in the name of the successor depositary.
SECTION 5.05. Corporate Notices and Reports. The Company agrees that it will
deliver to the Depositary, and the Depositary will, promptly after receipt
thereof, transmit to the record holders of Receipts, in each case at the
address recorded in the Depositary's books, copies of all notices and reports
(including financial statements) required by law, by the rules of any national
securities exchange upon which the Stock, the Adjustable Rate Depositary
Shares or the Receipts are listed or by the Certificate of Incorporation and
the Certificate of Designation to be furnished by the Company to holders of
Stock. Such transmission will be at the Company's expense and the Company will
provide the Depositary with such number of copies of such documents as the
Depositary may reasonably request. In addition, the Depositary will transmit
to the record holders of Receipts at the Company's expense such other
documents as may be requested by the Company. The Depositary will make
available for inspection by holders of Receipts at the Corporate office and at
such other places as it may from time to time deem advisable during normal
business hours any such notices and reports received from the Company.
SECTION 5.06. Deposit of Stock by the Company. Neither the Company nor any
company controlled by the Company will at any time deposit any Stock if such
Stock is required to be registered under the provisions of the Securities Act
and no registration statement is at such time in effect as to such Stock.
SECTION 5.07. Indemnification by the Company. The Company agrees to
indemnify the Depositary, any Depositary's Agent and any Registrar against,
and hold each of them harmless from, any liability, costs and expenses
(including reasonable attorneys' fees) that may arise out of or in connection
with its acting as Depositary, Depositary's Agent or Registrar, respectively,
under this Deposit Agreement and the Receipts, except for any liability
arising out of negligence, bad faith or willful misconduct on the part of any
such person or persons.
SECTION 5.08. Fees, Charges and Expenses. No fees, charges and expenses of
the Depositary or any Depositary's Agent hereunder or of any Registrar shall
be payable by any person other than the Company, except for any taxes and
other governmental charges and except as provided in this Deposit Agreement.
If the Depositary incurs fees, charges or expenses for which it is not
otherwise liable hereunder at the election of a holder of a Receipt or other
person, such holder or other person will be liable for such fees, charges and
expenses. All other fees, charges and expenses of the Depositary and any
Depositary's Agent hereunder and of any Registrar (including, in each case,
fees and expenses of counsel) incident to the performance of their respective
obligations hereunder will be paid from time to time upon consultation and
agreement between the Depositary and the Company as to the amount and nature
of such fees, charges and expenses.
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ARTICLE VI
AMENDMENT AND TERMINATION
SECTION 6.01. Amendment. The form of the Receipts and any provision of this
Deposit Agreement may at any time and from time to time be amended by
agreement between the Company and the Depositary in any respect that they may
deem necessary or desirable. Any amendment that shall impose any fees, taxes
or charges (other than fees and charges provided for herein or in the
Receipts), or that shall otherwise prejudice any substantial existing right of
holders of Receipts, shall not become effective as to outstanding Receipts
until the expiration of 15 days after notice of such amendment shall have been
given to the record holders of outstanding Receipts. Every holder of an
outstanding Receipt at the time any such amendment becomes effective shall be
deemed, by continuing to hold such Receipt, to consent and agree to such
amendment and to be bound by this Deposit Agreement an amended thereby. In no
event shall any amendment impair the right, subject to the provisions of
Sections 2.03, 2.06, 2.07 and Article III, of any owner of any Adjustable Rate
Depositary Shares to surrender the Receipt evidencing such Adjustable Rate
Depositary Shares with instructions to the Depositary to deliver to the holder
the Stock represented thereby, except in order to comply with mandatory
provisions of applicable law.
SECTION 6.02. Termination. This Deposit Agreement may be terminated by the
Company or the Depositary only after (a) (i) all outstanding Adjustable Rate
Depositary Shares shall have been redeemed pursuant to Section 2.03 or (ii)
there shall have been made a final distribution in respect of the Stock in
connection with any liquidation, dissolution or winding up of the Company and
such distribution shall have been distributed to the holders of Adjustable
Rate Depositary Shares pursuant to Section 4.01 or 4.02, as applicable, and
(b) reasonable notice has been given to any remaining holders of Receipts.
If any Receipts shall remain outstanding after the date of termination of
this Deposit Agreement, the Depositary thereafter shall discontinue the
transfer of Receipts, the Company or the Depositary, as the case may be, shall
suspend the distribution of dividends to the holders thereof, and the
Depositary shall not give any further notices (other than notice of such
termination) or perform any further acts under this Deposit Agreement, except
that the Depositary shall, if applicable, continue to collect dividends and
other distributions pertaining to Stock, sell rights, preferences or
privileges as provided in this Deposit Agreement and shall continue to deliver
the Stock and any money and other property represented by Receipts upon
surrender thereof by the holders thereof. At any time after the expiration of
two years from the date of termination, the Depositary may sell Stock then
held hereunder at public or private sale, at such places and upon such terms
as it deems proper and may thereafter hold the net proceeds of any such sale,
together with any money and other property held by it hereunder, without
liability for interest, for the benefit, pro rata in accordance with their
holdings, of the holders of Receipts that have not theretofore been
surrendered. After making such sale, the Depositary shall be discharged from
all obligations under this Deposit Agreement except to account for such net
proceeds and money and other property.
Upon the termination of this Deposit Agreement, the Company shall be
discharged from all obligations under this Deposit Agreement except for its
obligations to the Depositary, any Depositary's Agent and any Registrar under
Sections 5.07 and 5.08. In the event this Deposit Agreement is terminated, the
Company hereby agrees to use its best efforts to list any outstanding
underlying Stock on the New York Stock Exchange, Inc. or any other national
securities exchange on which the Common Stock is listed.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Counterparts. This Deposit Agreement may be executed by the
Company and the Depositary in separate counterparts, each of which
counterparts, when so executed and delivered, shall be deemed an original, but
all such counterparts taken together shall constitute one and the same
instrument. Delivery of an executed counterpart of a signature page to this
Deposit Agreement by telecopier shall be effective
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as delivery of a manually executed counterpart of this Deposit Agreement.
Copies of this Deposit Agreement shall be filed with the Depositary and the
Depositary's Agents and shall be open to inspection at all reasonable times
during normal business hours at the Corporate Office and the respective
offices of the Depositary's Agents, if any, by any holder of a Receipt.
SECTION 7.02. Exclusive Benefits of Parties. This Deposit Agreement is for
the exclusive benefit of the parties hereto, and their respective successors
hereunder, and shall not be deemed to give any legal or equitable right,
remedy or claim to any other person whatsoever.
SECTION 7.03. Invalidity of Provisions. In case any one or more of the
provisions contained in this Deposit Agreement or in the Receipts should be or
become invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein or
therein shall in no way be affected, prejudiced or disturbed thereby.
SECTION 7.04. Notices. Any notices to be given to the Company hereunder or
under the Receipts shall be in writing and shall be deemed to have been duly
given if personally delivered or sent by mail, or by telegram or telex or
telecopier confirmed by letter, addressed to the Company at El Paso Natural
Gas Company, One Paul Kayser Center, 100 North Stanton Street, El Paso, Texas
79901, Attention: Corporate Secretary, or at any other place to which the
Company may have transferred its principal executive office.
Any notices given to the Depositary hereunder or under the Receipts shall be
in writing and shall be deemed to have been duly given if personally delivered
or sent by mail, return receipt requested, addressed to the Depositary at the
Corporate Office.
Any notices given to any record holder of a Receipt hereunder or under the
Receipts shall be in writing and shall be deemed to have been duly given if
personally delivered or sent by mail, or by telegram or telex or telecopier
confirmed by letter, addressed to such record holder at the address of such
record holder as it appears on the books of the Depositary or, if such holder
shall have timely filed with the Depositary a written request that notices
intended for such holder be mailed to some other address, at the address
designated in such request.
Delivery of a notice sent by mail, or by telegram or telex or telecopier
shall be deemed to be effected at the time when a duly addressed letter
containing the same (or a duly addressed letter confirming an earlier notice
in the case of a telegram or telex or telecopier message) is deposited,
postage prepaid, in a post office letter box. The Depositary or the Company
may, in its sole discretion, act upon any telegram or telex or telecopier
message received by it from the other or from any holder of a Receipt,
notwithstanding that such telegram or telex or telecopier message shall not
have complied with the notice provisions set forth herein.
SECTION 7.05. Depositary's Agents. The Depositary may from time to time
appoint Depositary's Agents (with the Company's prior written consent and on
terms and conditions acceptable to the Company) to act in any respect for the
Depositary for the purposes of this Deposit Agreement and may at any time
appoint additional Depositary's Agents and vary or terminate the appointment
of such Depositary's Agents. The Depositary will notify the Company prior to
any such action.
SECTION 7.06. Holders of Receipts Are Parties. Notwithstanding that holders
of Receipts have not executed and delivered this Deposit Agreement or any
counterpart thereof, the holders of Receipts from time to time shall be deemed
to be parties to this Deposit Agreement and shall be bound by all of the terms
and conditions hereof and of the Receipts by acceptance of delivery of
Receipts.
SECTION 7.07. Governing Law. This Deposit Agreement and the Receipts and all
rights hereunder and thereunder and provisions hereof and thereof shall be
governed by, and construed in accordance with, the law of the State of New
York without giving effect to principles of conflict of laws.
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SECTION 7.08. Headings. The headings of articles and sections in this
Deposit Agreement and in the form of the Receipt set forth in Exhibit A hereto
have been inserted for convenience only and are not to be regarded as a part
of this Deposit Agreement or to have any bearing upon the meaning or
interpretation of any provision contained herein or in the Receipts.
IN WITNESS WHEREOF, El Paso Natural Gas Company, and [ ] have duly
executed this agreement as of the day and year first above set forth and all
holders of Receipts shall become parties hereto by and upon acceptance by them
of delivery of Receipts issued in accordance with the terms hereof.
EL PASO NATURAL GAS COMPANY
By: _________________________________
Name:
Title:
[ ]
By: _________________________________
Name:
Title:
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EXHIBIT A
DEPOSITARY RECEIPT
FOR
ADJUSTABLE RATE DEPOSITARY SHARES,
EACH REPRESENTING ONE TWENTY-FIFTH SHARE OF
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK
(PAR VALUE $.01 PER SHARE)
OF
EL PASO NATURAL GAS COMPANY
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
No. Adjustable Rate Depositary Shares (each Adjustable Rate
Depositary Share represents [one-fifteenth] share of Adjustable
Rate Cumulative Preferred Stock (par value $.01 per share)
l. [ ] trust company, as Depositary (the "Depositary"), hereby
certifies that is the registered owner of Depositary Shares (the
"Adjustable Rate Depositary Shares"), each Adjustable Rate Depositary Share
representing one twenty-fifth share of Adjustable Rate Cumulative Preferred
Stock, par value $.01 per share (the "Stock"), of El Paso Natural Gas Company,
a corporation duly organized and existing under the laws of the State of
Delaware (the "Company"), deposited with the Depositary, and the same
proportionate interest in any and all other property received by the
Depositary in respect of such share of Stock and held by the Depositary under
the Deposit Agreement (as defined below). Subject to the terms of the Deposit
Agreement, each owner of an Adjustable Rate Depositary Share is entitled,
proportionately, to all the rights, preferences and privileges of the Stock
represented thereby, including the dividend, voting, liquidation and other
rights contained in the Certificate of Designation of Adjustable Rate
Cumulative Preferred Stock, as amended from time to time, establishing the
rights, preferences, privileges and limitations of the Stock (the "Certificate
of Designation"), copies of which are on file at the Depositary's office
located at the time of the execution of the Deposit Agreement at
[ ] (such office or the corporate trust office of the Depositary at
which its business in respect of matters governed by the Deposit Agreement is
administered at any later time, being at the relevant time, the "Corporate
Officer").
2. The Deposit Agreement. Depositary Receipts (the "Receipts"), of which
this Receipt is one, are made available upon the terms and conditions set
forth in the Deposit Agreement, dated as of [ ], 1996 (the "Deposit
Agreement"), between the Company and the Depositary. The Deposit Agreement
(copies of which are on file at the Corporate Office and at the office of any
Depositary's Agent) sets forth the rights of holders of Receipts and the
rights and duties of the Depositary. The statements made on the face and the
reverse of this Receipt are summaries of certain provisions of the Deposit
Agreement and are subject to the detailed provisions thereof, to which
reference is hereby made. In the event of any conflict between the provisions
of this Receipt and the provisions of the Deposit Agreement, the provisions of
the Deposit Agreement will govern. Unless otherwise expressly herein provided,
all defined terms used herein shall have the meanings ascribed thereto in the
Deposit Agreement.
3. Redemptions of Stock. Whenever the Company shall elect to redeem shares
of Stock in accordance with the Certificate of Designation, it shall (unless
otherwise agreed in writing with the Depositary) give the Depositary in its
capacity as Depositary not less than two business days prior notice of the
proposed date of the mailing of the notice of redemption of the Stock required
pursuant to paragraph 4(h) of the Certificate of Designation in connection
with a redemption of Stock and of the number of such shares of Stock held by
the Depositary to be redeemed as provided herein.
On the date of any redemption of Stock in accordance with the Certificate of
Designation, provided that the Company shall then have deposited with the
Depositary the shares of Common Stock, par value $3 per share ("Common
Stock"), and any funds required pursuant to the Certificate of Designation for
the Stock deposited
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with the Depositary to be redeemed, the Depositary shall redeem (using the
shares of Common Stock and funds, if any, deposited with it) the number of
Adjustable Rate Depositary Shares representing such redeemed Stock. The
distribution of the shares of Common Stock and funds, if any, used to effect
such redemption shall be governed by Sections 4.01 and 4.02 of the Deposit
Agreement. The Depositary shall, as directed by the Company, mail, first class
postage prepaid, notice of the redemption of Stock and the proposed
simultaneous redemption of Adjustable Rate Depositary Shares representing the
Stock to be redeemed, not less than 30 and not more than 60 days prior to the
date fixed for redemption (the "Redemption Date") of such Stock and Adjustable
Rate Depositary Shares. Such notice shall be mailed to each holder of record on
the record date fixed for such redemption as provided in paragraph 14 below of
the Receipts evidencing Adjustable Rate Depositary Shares. In case fewer than
all the outstanding Adjustable Rate Depositary Shares are to be redeemed, the
Adjustable Rate Depositary Shares to be redeemed shall be selected by lot or
such other methods the Company in its discretion may determine is fair and
appropriate.
Notice having been mailed as aforesaid, from and after the redemption date
(unless the Company shall have failed to redeem the shares of Stock to be
redeemed by it, as set forth in the Company's notice provided for above), the
Adjustable Rate Depositary Shares called for redemption shall be deemed no
longer to be outstanding and all rights of the holders of Receipts evidencing
such Adjustable Rate Depositary Shares (except the right to receive the shares
of Common Stock and any cash upon redemption) shall, to the extent of such
Adjustable Rate Depositary Shares, cease and terminate. Upon surrender in
accordance with said notices of the Receipts evidencing such Adjustable Rate
Depositary Shares (properly endorsed or assigned for transfer, if the
Depositary shall so require), such Adjustable Rate Depositary Shares shall be
redeemed (as nearly as may be practicable without creating fractional shares)
in exchange for cash or, if applicable, shares of Common Stock at a rate equal
to one twenty-fifth of the number of shares of Common Stock delivered in
respect of the shares of Stock represented by such Depositary Shares as is
provided for in the Certificate of Designation. The foregoing shall be subject
further to the terms and conditions of the Certificate of Designation. If fewer
than all of the Adjustable Rate Depositary Shares evidenced by this Receipt are
called for redemption, the Depositary will deliver to the holder of this
Receipt upon its surrender to the Depositary, a new Receipt evidencing the
Adjustable Rate Depositary Shares evidenced by such prior Receipt and not
called for redemption, together with the shares of Common Stock or other
property for the Adjustable Rate Depositary Shares called for redemption.
4. Surrender of Receipts and Withdrawal of Stock. Upon surrender of this
Receipt to the Depositary at the Corporate Office, or at such other offices as
the Depositary may designate, and subject to the provisions of the Deposit
Agreement, the holder hereof is entitled to withdraw, and to obtain delivery,
to or upon the order of such holder, of any or all of the Stock (but only in
whole shares of Stock) and all money and other property, if any, at the time
represented by the Adjustable Rate Depositary Shares evidenced by this Receipt,
but holders of such shares of Stock will not thereafter be entitled to deposit
such shares of Stock hereunder or to receive Adjustable Rate Depositary Shares
therefor. If the Receipt or Receipts delivered by the holder to the Depositary
in connection with such withdrawal shall evidence a number of Adjustable Rate
Depositary Shares in excess of the number of Adjustable Rate Depositary Shares
representing the whole number of shares of Stock to be withdrawn, the
Depositary shall, in addition to such whole number of shares of Stock and such
money and other property, if any, to be withdrawn, deliver, to or upon the
order of such holder, a new Receipt or Receipts evidencing such excess number
of Adjustable Rate Depositary Shares.
5. Transfers, Split-ups, Combinations. Subject to paragraphs 6, 7 and 8
below, this Receipt is transferable on the books of the Depositary upon
surrender of this Receipt to the Depositary, properly endorsed or accompanied
by a properly executed instrument of transfer or endorsement, and upon such
transfer the Depositary shall sign and deliver a Receipt to or upon the order
of the person entitled thereto, all as provided in and subject to the Deposit
Agreement. This Receipt may be split into other Receipts or combined with other
Receipts into one Receipt evidencing the same aggregate number of Adjustable
Rate Depositary Shares evidenced by the Receipt or Receipts surrendered;
provided, however, that the Depositary shall not issue any Receipt evidencing a
fractional Adjustable Rate Depositary Share.
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<PAGE>
6. Conditions to Signing and Delivery, Transfer, etc., of Receipts. Prior to
the execution and delivery, transfer, split-up, combination, surrender or
exchange of this Receipt, the Depositary, any of the Depositary's Agents or
the Company may require any or all of the following: (i) payment to it of a
sum sufficient for the payment (or, in the event that the Depositary or the
Company shall have made such payment, the reimbursement to it) of any tax or
other governmental charge with respect thereto (including any such tax or
charge with respect to Stock being deposited or withdrawn or with respect to
Common Stock of the Company being issued upon redemption); (ii) the production
of proof satisfactory to it as to the identity and genuineness of any
signature; and (iii) compliance with such regulations, if any, as the
Depositary or the Company may establish not inconsistent with the Deposit
Agreement. Any person presenting Stock for deposit, or any holder of this
Receipt, may be required to file such proof of information, to execute such
certificates and to make such representations and warranties as the Depositary
or the Company may reasonably deem necessary or proper. The Depositary or the
Company may withhold or delay the delivery of this Receipt, the transfer,
redemption or exchange of this Receipt, the withdrawal of the Stock
represented by the Adjustable Rate Depositary Shares evidenced by this Receipt
or the distribution of any dividend or other distribution until such proof or
other information is filed, such certificates are executed or such
representations and warranties are made.
7. Suspension of Delivery, Transfer, etc. The deposit of Stock may be
refused, the delivery of this Receipt against Stock may be suspended, or the
transfer, split-up, combination, surrender or exchange of this Receipt may be
suspended (i) during any period when the register of stockholders of the
Company is closed, (ii) if any such action is deemed necessary or advisable by
the Depositary, any of the Depositary's Agents or the Company at any time or
from time to time because of any requirement of law or of any government or
governmental body or commission, or under any provision of the Deposit
Agreement, or (iii) with the approval of the Company, for any other reason.
8. Payment of Taxes or Other Governmental Charges. If any tax or other
governmental charge shall become payable by or on behalf of the Depositary
with respect to this Receipt, the Adjustable Rate Depositary Shares evidenced
by this Receipt, the Stock (or any fractional interest therein) represented by
such Adjustable Rate Depositary Shares or any transaction referred to in
Section 4.06 of the Deposit Agreement, such tax (including transfer, issuance
or acquisition taxes, if any) or governmental charge shall be payable by the
holder hereof. Until such payment is made, transfer of this Receipt or any
withdrawal of the Stock, represented by the Adjustable Rate Depositary Shares
evidenced by this Receipt may be refused, any dividend or other distribution
may be withheld and any part or all of the Stock represented by the Adjustable
Rate Depositary Shares evidenced by this Receipt may be sold for the account
of the holder hereof (after attempting by reasonable means to notify such
holder prior to such sale). Any dividend or other distribution so withheld and
the proceeds of any such sale may be applied to any payment of such tax or
other governmental charge, the holder of this Receipt remaining liable for any
deficiency.
9. Amendment. The form of the Receipts and any provision of the Deposit
Agreement may at any time and from time to time be amended by agreement
between the Company and the Depositary in any respect that they may deem
necessary or desirable. Any amendment that shall impose any fees, taxes or
charges (other than fees and charges provided for herein or in the Deposit
Agreement), or that shall otherwise prejudice any substantial existing right
of holders of Receipts, shall not become effective as to outstanding Receipts
until the expiration of 15 days after notice of such amendment shall have been
given to the record holders of outstanding Receipts. The holder of this
Receipt at the time any such amendment becomes effective shall be deemed, by
continuing to hold this Receipt, to consent and agree to such amendment and to
be bound by the Deposit Agreement an amended thereby. In no event shall any
amendment impair the right, subject to the provisions of paragraphs 3, 4, 7
and 8 hereof and of Sections 2.03, 2.06, 2.07 and Article III of the Deposit
Agreement, of the owner of the Adjustable Rate Depositary Shares evidenced by
this Receipt to surrender this Receipt with instructions to the Depositary to
deliver to the holder the Stock and all money and other property, if any,
represented thereby, except in order to comply with mandatory provisions of
applicable law.
10. Fees, Charges and Expenses. The Company will pay all fees, charges and
expenses of the Depositary, except for taxes (including transfer taxes, if
any) and other governmental charges and such charges as are
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<PAGE>
expressly provided in the Deposit Agreement to be at the expense of persons
depositing Stock, holders of Receipts or other persons.
11. Title to Receipts. It is a condition of this Receipt, and every
successive holder hereof by accepting or holding the same consents and agrees,
that title to this Receipt (and to the Adjustable Rate Depositary Shares
evidenced hereby), when properly endorsed or accompanied by a properly
executed instrument of transfer or endorsement, is transferable by delivery
with the same effect as in the case of a negotiable instrument; provided,
however, that until this Receipt shall be transferred on the books of the
Depositary as provided in Section 2.04 of the Deposit Agreement, the
Depositary and the Company may, notwithstanding any notice to the contrary,
treat the record holder hereof at such time as the absolute owner hereof for
the purpose of determining the person entitled to distribution of dividends or
other distributions or to any notice provided for in the Deposit Agreement and
for all other purposes.
12. Cash Dividends and Distributions. Whenever any cash dividend or other
cash distribution shall be paid on the Stock, the Company, on behalf of the
Depositary, (or, if the Company determines otherwise, the Depositary) will,
subject to the provisions of the Deposit Agreement, make such distribution to
record holders of Receipts as nearly as practicable in proportion to the
respective numbers of Adjustable Rate Depositary Shares evidenced by the
Receipts held by such holders; provided, however, that in the event the
Company or the Depositary shall be required to withhold and does withhold from
any cash dividend or other cash distribution in respect of the Stock an amount
on account of taxes or as otherwise required by law, regulation or court
process, the amount made available for distribution or distributed in respect
of Adjustable Rate Depositary Shares shall be reduced accordingly. The
Company, on behalf of the Depositary, (or, if the Company determines
otherwise, the Depositary) shall distribute or make available for
distribution, as the case may be, only such amount, however, as can be
distributed without attributing to any owner of Adjustable Rate Depositary
Shares a fraction of one cent. In the event that the calculation of any such
cash dividend or other cash distribution to be paid to any record holder on
the aggregate number of Adjustable Rate Depositary Shares held by such holder
results in an amount which is a fraction of a cent, the amount the Depositary
shall distribute to such record holder shall be rounded to the next highest
whole cent; and upon request of the Depositary, the Company shall pay the
additional amount to the Depositary for distribution.
13. Subscription Rights, Preferences or Privileges. If the Company shall at
any time offer or cause to be offered to the persons in whose name Stock is
registered on the books of the Company any rights, preferences or privileges
to subscribe for or to purchase any securities or any rights, preferences or
privileges of any other nature, such rights, preferences or privileges shall
in each such instance, subject to the provisions of the Deposit Agreement, be
made available by the Depositary or the Company to the record holders of
Receipts if the Company so directs in such manner as the Company shall
instruct.
14. Notice of Dividends, Fixing of Record Date. Whenever any cash dividend
or other cash distribution shall become payable, any distribution other than
cash shall be made, or any rights, preferences or privileges shall at any time
be offered with respect to the Stock, or whenever the Depositary shall receive
notice of (i) any meeting at which holders of Stock are entitled to vote or of
which holders of Stock are entitled to notice or any solicitation of consents
in respect of the Stock, (ii) any call for redemption or exchange of any
shares of Stock or (iii) any event of which holders of Stock are entitled to
notice in accordance with the Certificate of Designation, the Depositary shall
in each such instance fix a record date (which shall be the same date as the
record date fixed by the Company with respect to the Stock) for the
determination of the holders of Receipts who shall be entitled (i) to receive
such dividend, distribution, rights, preferences or privileges or the net
proceeds of the sale thereof, (ii) to receive notice of, and to give
instructions for the exercise of voting rights at, or the delivery of consents
with respect to, any such meeting or consent solicitation, as the case may be,
or (iii) to receive notice of any such redemption or other event.
15. Voting Rights. Upon receipt of notice of any meeting at which the
holders of Stock are entitled to vote, the Depositary shall, as soon as
practicable thereafter (unless another arrangement for allowing holders of
Adjustable Rate Depositary Shares to exercise the voting rights associated
with the Adjustable Rate Depositary
A-20
<PAGE>
Shares is agreed by the Company and the Depositary), mail to the record
holders of Receipts a notice, which shall contain (i) such information as is
contained in such notice of meeting, (ii) a statement that the holders of
Receipts at the close of business on a specified record date determined as
provided in paragraph 14 will be entitled, subject to any applicable provision
of law, the Certificate of Incorporation or the Certificate of Designation, to
instruct the Depositary as to the exercise of the voting rights with respect
to the amount of Stock represented by their respective Adjustable Rate
Depositary Shares, and (iii) a brief statement as to the manner in which such
instructions may be given. Upon the written request of a holder of a Receipt
on such record date, the Depositary shall endeavor insofar as practicable to
vote or cause to be voted with respect to the amount of Stock represented by
the Adjustable Rate Depositary Shares evidenced by such Receipt in accordance
with the instructions set forth in such request. In the absence of specific
instructions from the holder of a Receipt, the Depositary will abstain from
voting to the extent of the Stock represented by the Adjustable Rate
Depositary Shares evidenced by such Receipt.
16. Reports, Inspection of Transfer Books. The Depositary shall make
available for inspection by holders of Receipts at the Corporate office and at
such other places as it may from time to time deem advisable during normal
business hours any reports and communications received from the Company that
are both received by the Depositary as the holder of Stock and made generally
available to the holders of Stock by the Company. The Depositary shall keep
books at the Corporate Office for the registration and transfer of Receipts,
which books at all reasonable times during normal business hours will be open
for inspection by the record holders of Receipts as and to the extent provided
by applicable law.
17. Liability of the Depositary, the Depositary's Agent and the
Company. Neither the Depositary nor any Depositary's Agent nor the Company
shall incur any liability to any holder of any Receipt, if by reason of any
provision of any present or future law or regulation thereunder of any
governmental authority or, in the case of the Depositary or the Depositary's
Agent, by reason of any provision, present or future, of the Certificate of
Incorporation or the Certificate of Designation or, in the case of the
Company, the Depositary or the Depositary's Agent, by reason of any act of God
or war or other circumstances beyond the control of the relevant party, the
Depositary, any Depositary's Agent or the Company shall be prevented or
forbidden from doing or performing any act or thing that the terms of the
Deposit Agreement provide shall be done or performed; nor shall the
Depositary, any Depositary's Agent or the Company incur any liability to any
holder of a Receipt by reason of any nonperformance or delay, caused as
aforesaid, in the performance of any act or thing that the terms of the
Deposit Agreement provide shall or may be done or performed, or by reason of
any exercise of, or failure to exercise, any discretion provided for in the
Deposit Agreement.
18. Obligations of the Depositary, the Depositary's Agents and the
Company. Neither the Depositary nor any Depositary's Agent nor the Company
assumes any obligation or shall be subject to any liability hereunder or under
the Deposit Agreement to holders of Receipts other than that each of them
agrees to use good faith in the performance of such duties as are specifically
set forth in the Deposit Agreement and other than for its negligence, bad
faith or willful misconduct.
Neither the Depositary nor any Depositary's Agent nor the Company shall be
under any obligation to appear in, prosecute or defend any action, suit or
other proceeding with respect to Stock, Adjustable Rate Depositary Shares or
Receipts or Common Stock that in its opinion may involve it in expense or
liability, unless indemnity satisfactory to it against all expense and
liability be furnished as often as may be required.
Neither the Depositary nor any Depositary's Agent nor the Company shall be
liable for any action or any failure to act by it in reliance upon the advice
of or information from legal counsel, accountants, any person presenting Stock
for deposit, any holder of a Receipt or any other person believed by it in
good faith to be competent to give such advice or information.
19. Termination of Deposit Agreement. The Deposit Agreement may be
terminated by the Company or the Depositary only after (a) (i) all outstanding
Adjustable Rate Depositary Shares shall have been redeemed pursuant to Section
2.03 of the Deposit Agreement or there shall have been made a final
distribution in respect
A-21
<PAGE>
of the Stock in connection with any liquidation, dissolution or winding up of
the Company and such distribution shall have been distributed to the holders
of Adjustable Rate Depositary Shares pursuant to Section 4.01 or 4.02 of the
Deposit Agreement, as applicable and (b) reasonable notice has been given to
any remaining holders of Receipts. Upon the termination of the Deposit
Agreement, the Company shall be discharged from all obligations thereunder
except for its obligations to the Depositary, any Depositary's Agent and any
Registrar under Sections 5.07 and 5.08 of the Deposit Agreement.
If any Receipts remain outstanding after the date of termination, the
Depositary thereafter shall discontinue all functions and be discharged from
all obligations as provided in the Deposit Agreement, except as specifically
provided therein.
20. Governing Law. The Deposit Agreement and this Receipt and all rights
thereunder and hereunder and provisions thereof and hereof shall be governed
by, and construed in accordance with, the law of the State of New York without
giving effect to principles of conflict of laws.
This Receipt shall not be entitled to any benefits under the Deposit
Agreement or be valid or obligatory for any purpose unless this Receipt shall
have been executed manually or, if a Registrar for the Receipts (other than
the Depositary) shall have been appointed, by facsimile by the Depositary by
the signature of a duly authorized signatory and, if executed by facsimile
signature of the Depositary, shall have been countersigned manually by Such
Registrar by the signature of a duly authorized signatory.
THE DEPOSITARY IS NOT RESPONSIBLE FOR THE VALIDITY OF ANY DEPOSITED STOCK.
THE DEPOSITARY ASSUMES NO RESPONSIBILITY FOR THE CORRECTNESS OF THE FOREGOING
DESCRIPTION WHICH CAN BE TAKEN AS A STATEMENT OF THE COMPANY SUMMARIZING
CERTAIN PROVISIONS OF THE DEPOSIT AGREEMENT. UNLESS EXPRESSLY SET FORTH IN THE
DEPOSIT AGREEMENT, THE DEPOSITARY MAKES NO WARRANTIES OR REPRESENTATIONS AS TO
THE VALIDITY, GENUINENESS OR SUFFICIENCY OF ANY STOCK AT ANY TIME DEPOSITED
WITH THE DEPOSITARY UNDER THE DEPOSIT AGREEMENT OR OF THE ADJUSTABLE RATE
DEPOSITARY SHARES OR THE RECEIPTS (EXCEPT FOR ITS COUNTERSIGNATURE THEREON),
AS TO THE VALIDITY OR SUFFICIENCY OF THE DEPOSIT AGREEMENT, AS TO THE VALUE OF
THE ADJUSTABLE RATE DEPOSITARY SHARES OR AS TO ANY RIGHT, TITLE OR INTEREST OF
THE RECORD HOLDERS OF THE DEPOSITARY RECEIPTS IN AND TO THE ADJUSTABLE RATE
DEPOSITARY SHARES.
The Company will furnish to any holder of a Receipt without charge, upon
request addressed to its executive office or the office of its transfer agent,
a full statement of the designation, relative rights, preferences and
limitations of the shares of each authorized class, and of each series of
preferred stock authorized to be issued, so far as the same may have been
fixed, and a statement of the authority of the Board of Directors of the
Company to designate and fix the relative rights, preferences and limitations
of each series.
Dated:
[ ]
By __________________________________
Authorized Signatory
A-22
<PAGE>
[FORM OF ASSIGNMENT]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
the within Receipt and all rights and interests represented by the
Adjustable Rate Depositary Shares evidenced thereby, and hereby irrevocably
constitutes and appoints his attorney, to transfer the same on the
books of the within-named Depositary, with full power of substitution in the
premises.
Dated:
Signature: __________________________
NOTE: The signature to this
assignment must correspond
with the name as written
upon the face of the
Receipt in every
particular, without
alteration or enlargement,
or any change whatever.
Signature Guarantee:
_____________________________________
A-23
<PAGE>
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK
EL PASO NATURAL GAS COMPANY
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This certifies that is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE ADJUSTABLE RATE CUMULATIVE
PREFERRED STOCK OF
El Paso Natural Gas Company (hereinafter called the "Corporation"), transferable
on the books of the Corporation by the holder hereof in person or by duly
authorized attorney upon surrender of this certificate properly endorsed.
This certificate and the shares represented hereby are issued and shall be
held subject to all of the provisions of the Restated Certificate of
Incorporation of the Corporation and of any amendments thereto (copies of which
are on file with the Transfer Agent), to all of which the holder by the
acceptance hereof assents.
This certificate is not valid until countersigned by the Transfer Agent
and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Date:
[El Paso Natural Gas Company Corporate Seal]
SECRETARY CHAIRMAN
Countersigned and registered: The First National Bank of Boston
Transfer Agent and Registrar
By:
-------------------------
Authorized Signatory
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE
SECURITIES OR "BLUE SKY" LAWS AND MAY NOT BE TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THAT
ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE
A full statement of the designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights will be furnished by the
Corporation without charge to any stockholder who so requests upon application
to the Transfer Agent named in the face hereof or to the office of the Secretary
of the Corporation.
For value received _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________
| |
________________________________________________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL
ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
__________________________________________________________________________Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint ________________________________________________________________________
Attorney to transfer the said Shares on the books of the within named
Corporation with full power of substitution in the premises.
Dated: _______________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITH ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER
<PAGE>
EXHIBIT 5
[LETTERHEAD OF FRIED, FRANK, HARRIS, SHRIVER & JACOBSON]
212-859-8285
(FAX: 212-859-8585)
November 1, 1996
El Paso Natural Gas Company
One Paul Kayser Center
100 North Station Street
El Paso, Texas 79901
Ladies and Gentlemen:
We are acting as special counsel to El Paso Natural Gas Company, a Delaware
corporation ("El Paso"), in connection with the Registration Statement on Form
S-4 (No. 333-10911), as amended (the "Registration Statement"), under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
issuance by El Paso, in connection with the merger (the "Merger") of El Paso
Merger Company, a Delaware corporation and an indirect wholly owned subsidiary
of El Paso, with and into Tenneco Inc., a Delaware corporation, pursuant to
the Merger Agreement. Capitalized terms used herein have the meanings set
forth in the Registration Statement, unless otherwise defined herein.
Pursuant to the Merger, El Paso will issue to holders of Tenneco Stock:
(1) if the Stock Issuance is approved at the El Paso Special Meeting, up
to 23,894,862 shares of El Paso Common Stock; or
(2) if the Stock Issuance is not approved at the El Paso Special Meeting,
up to 7,000,000 shares of El Paso Common Stock and up to 7,588,125 El Paso
Preferred Depositary Shares, each representing a one twenty-fifth
fractional interest in a whole share of El Paso Preferred Stock.
We have examined the originals, or certified, conformed or reproduction
copies, of all such records, agreements, instruments and documents as we have
deemed relevant or necessary as the basis for the opinions hereinafter
expressed. In all such examinations, we have assumed the genuineness of all
signatures, the authenticity of all original or certified copies and the
conformity to original or certified copies of all copies submitted to us as
conformed or reproduction copies. We also have assumed, with respect to all
parties to agreements or instruments relevant hereto other than El Paso, that
such parties had the requisite power and authority (corporate or otherwise) to
execute, deliver and perform such agreements or instruments, that such
agreements or instruments have been duly authorized by all requisite action
(corporate or otherwise), executed and delivered by such parties and that such
agreements or instruments are the valid, binding and enforceable obligations
of such parties. As to various questions of fact relevant to such opinions, we
have relied upon, and
1
<PAGE>
have assumed the accuracy of, certificates and oral or written statements and
other information of or from public officials, officers or representatives of
El Paso, and others.
Based upon the foregoing and subject to the limitations set forth herein, we
are of the opinion that:
1. Assuming all the Tenneco Stock is validly issued, fully paid and non-
assessable, it is our opinion that, if the 23,894,862 shares of El Paso
Common Stock, or any portion thereof, are issued as described in the
Registration Statement, at such time of issuance such shares of El Paso
Common Stock will be validly issued, fully paid and nonassessable.
2. Assuming all the Tenneco Stock is validly issued, fully paid and non-
assessable, and assuming the due authorization, execution and delivery of
the Depositary Agreement by the parties thereto, and upon the fixing of the
designations, relative rights, preferences and limitations of the El Paso
Preferred Stock by the Board of Directors of El Paso and proper and valid
filing with the Office of the Secretary of State of the State of Delaware,
of a Certificate of Designation setting forth the powers, designations,
preferences and relative, participation, optional or other rights, if any,
or the qualifications, limitations or restrictions thereof, if any, with
respect to the El Paso Preferred Stock, all in accordance with Section 151
of the General Corporation Law of the State of Delaware and in conformity
with the El Paso Charter, it is our opinion that, if the El Paso Preferred
Depositary Shares, and the El Paso Preferred Stock represented thereby, are
issued as described in the Registration Statement, at such time of issuance
such El Paso Preferred Depositary Shares and the El Paso Preferred Stock
represented thereby will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the captions
"Legal Matters" in the Joint Proxy Statement--Prospectus forming a part of the
Registration Statement as having passed upon the validity of the issuance of
the El Paso Common Stock, the El Paso Preferred Depositary Shares and the El
Paso Preferred Stock. In giving this consent, we do not hereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act.
Very truly yours,
Fried, Frank, Harris, Shriver &
Jacobson
/s/ Warren de Wied
By: _______________________________
Warren de Wied
cc: Gary Paul Cooperstein, Esq.
2
<PAGE>
LAW OFFICES
JENNER & BLOCK EXHIBIT 8
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
ONE IBM PLAZA
CHICAGO, ILLINOIS 60611
(312) 222-8350
(312) 527-0484 FAX
November 1, 1996
Tenneco Inc.
1275 King Street
Greenwich, Connecticut 06831
Re: FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION
Dear Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax consequences
of the Transaction, as such term is defined in the Registration Statement on
Form S-4 (Reg. No. 333-10911), filed by El Paso Natural Gas Company, a
Delaware corporation, with the Securities and Exchange Commission, as amended
(the "Registration Statement"). Capitalized terms used herein and not
otherwise defined have the meanings given to them in the Registration
Statement.
In rendering our opinion, we have examined and relied upon the accuracy and
completeness of the facts, information, covenants and representations
contained in originals or copies, certified or otherwise identified to our
satisfaction, of the Joint Proxy Statement-Prospectus filed as part of the
Registration Statement (the "Joint Proxy Statement-Prospectus"), and such
other documents and representations of representatives of Tenneco and El Paso
as we have deemed necessary or appropriate. In our examination we have assumed
the genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or
photostatic copies and the authenticity of the originals of such documents. We
have also assumed the transactions related to the Transaction will be
consummated as described in the Joint Proxy Statement-Prospectus.
In rendering our opinion, we have considered the applicable provisions of
the Internal Revenue Code of 1986, as amended, proposed, temporary and final
Treasury Regulations promulgated thereunder, pertinent judicial authorities,
interpretative rulings of the Internal Revenue Service and other authorities
as we have considered relevant. We caution that statutes, regulations,
judicial decisions and administrative interpretations are subject to change at
any time and, in some circumstances, with retroactive effect. A change in the
authorities upon which our opinion is based could affect the conclusions
stated herein.
Based on the foregoing, we are of the opinion that the statements and legal
conclusions contained in the Joint Proxy Statement--Prospectus under the
captions "SUMMARY OF JOINT PROXY STATEMENT-PROSPECTUS--Certain Federal Income
Tax Consequences," "RISK FACTORS--Risks Relating to the Transaction--Potential
Federal Income Tax Liabilities" and "CERTAIN FEDERAL INCOME TAX CONSEQUENCES"
to the extent that they constitute matters of law or legal conclusions, are
correct in all material respects. In addition, we consent to the reference to
Jenner & Block in the Joint Proxy Statement-Prospectus under the caption
"Legal Matters" and to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not hereby admit that we
are in the category of persons whose consent is required under section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission.
Except as expressly set forth in the Joint Proxy Statement-Prospectus, we
express no opinion to any party as to the tax consequences, whether federal,
state, local or foreign, of the Transaction or of any transaction related to
the Transaction. This opinion is solely for your benefit and is not to be
used, circulated, quoted or otherwise referred to for any purpose without our
express prior written permission.
Very truly yours,
/s/ Jenner & Block
Jenner & Block
<PAGE>
EXHIBIT 12
EL PASO NATURAL GAS COMPANY
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------- ------------------------------------------
PRO PRO PRO PRO
FORMA FORMA FORMA FORMA
1996 1996 1995 1995
ASSUMING ASSUMING ASSUMING ASSUMING
STOCK STOCK STOCK STOCK
ISSUANCE ISSUANCE ISSUANCE ISSUANCE
IS IS NOT IS IS NOT
APPROVED APPROVED 1996 1995 APPROVED APPROVED 1995 1994 1993 1992 1991
-------- -------- ---- ---- -------- -------- ---- ---- ---- ---- ----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNINGS
Income (loss) from
continuing operations. $ 43 $ 43 $(11) $ 42 $167 $167 $ 85 $ 90 $ 92 $ 76 $ 89
Income taxes (benefit). (5) (5) (7) 28 2 2 48 58 59 47 52
Minority interest...... 12 12 -- -- 23 23 -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Income (loss) from
continuing operations
before income taxes and
minority interest...... 50 50 (18) 70 192 192 133 148 151 123 141
Minority interest...... 12 12 -- -- 23 23 -- -- -- -- --
Interest and debt
expense............... 109 109 43 42 222 222 85 76 71 68 74
Interest component of
rent.................. 2 2 2 2 3 3 3 3 3 3 2
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total earnings
available for fixed
charges............... $173 $173 $ 27 $114 $440 $440 $221 $227 $225 $194 $217
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
FIXED CHARGES(A)
Interest and debt
expense............... $109 $109 $ 43 $ 42 $222 $222 $ 85 $ 76 $ 71 $ 68 $ 74
Interest component of
rent.................. 2 2 2 2 3 3 3 3 3 3 2
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Fixed charges excluding
preferred stock
dividend requirements. 111 111 45 44 225 225 88 79 74 71 76
Preferred stock
dividend requirements. 20 66 -- -- 38 130 -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total fixed charges.... $131 $177 $ 45 $ 44 $263 $355 $ 88 $ 79 $ 74 $ 71 $ 76
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
Ratio of earnings to
combined fixed charges
and preferred stock
dividends............. 1.32 .98 (b) 0.60 (c) 2.59 1.67 1.24 2.51 2.87 3.04 2.73 2.86
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- --------
(a) Fixed charges consist of interest, exclusive of interest on rate refunds,
plus interest capitalized and a portion of operating lease rent expense
deemed to be representative of interest.
(b) Earnings were inadequate to cover fixed charges by $4 million.
(c) Earnings were inadequate to cover fixed charges by $18 million due to a
special charge for employee separation and asset impairments of $99
million pre-tax.
<PAGE>
EXHIBIT 23.A
CONSENT OF LAZARD FRERES & CO. LLC
We hereby consent to (i) the use of our opinion letter dated June 19, 1996
(as revised) to the Board of Directors of Tenneco Inc. (the "Company")
included as Appendix F to the Joint Proxy Statement/Prospectus which forms
part of the Registration Statement on Form S-4 relating to the proposed merger
involving the Company and El Plaso Merger Company and (ii) the references to
such opinion in such Joint Proxy Statement/Prospectus. In giving such consent,
we do not admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder,
nor do we hereby admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
LAZARD FRERES & CO. LLC
/s/ Melvin L. Heineman
By: _________________________________
Name: Melvin L. Heineman
Title: Managing Director
November 1, 1996
<PAGE>
EXHIBIT 23.E1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent accountants, we hereby consent to the use of our report dated
October 1, 1996 for the Businesses of Newport News included in the Newport
News Information Statement attached to this Registration Statement as Appendix
D; and to all references to our firm included in this Registration Statement.
ARTHUR ANDERSEN LLP
Washington, D.C.
November 1, 1996
<PAGE>
EXHIBIT 23.E2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our reports dated February 8, 1996
(except with respect to the matter discussed in Note 3, as to which the date
is March 7, 1996), included in Tenneco Inc.'s Annual Report on Form 10-K, as
amended, for the year ended December 31, 1995, and August 19, 1996 for (i) the
Businesses of Tenneco Energy included in the Joint Proxy Statement-Prospectus
which is a part of this Registration Statement and (ii) the Businesses of New
Tenneco included in the New Tenneco Information Statement attached to this
Registration Statement as Appendix C; and to all references to our Firm
included in this Registration Statement.
ARTHUR ANDERSEN LLP
Houston, Texas
November 1, 1996
<PAGE>
EXHIBIT 23.F
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
on Amendment No. 2 to the Form S-4 (File No. 333-10911) of our report dated
March 15, 1996, on our audits of the financial statements and financial
statement schedule of El Paso Natural Gas Company as of December 31, 1995 and
1994, and for the years ended December 31, 1995, 1994 and 1993, included in
its Annual Report on Form 10-K and to all references to our Firm included in
this registration statement. We also consent to the reference to our firm
under the caption "Experts".
Coopers & Lybrand L.L.P.
El Paso, Texas
November 1, 1996
<PAGE>
EXHIBIT 23.G
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in this
Amendment No. 2 to the Registration Statement (Form S-4) and to the
incorporation by reference therein of our report dated August 18, 1995 with
respect to the December 28, 1994 combined financial statements of Mobil
Plastics Division of Mobil Corporation included in the Current Report of
Tenneco Inc. on Form 8-K dated November 17, 1995 filed with the Securities and
Exchange Commission and to the use of our report dated August 9, 1996 with
respect to the combined financial statements of Mobil Plastics Division of
Mobil Oil Corporation for the period December 29, 1994 to November 17, 1995
and the year ended December 28, 1994 included in the New Tenneco Information
Statement attached to this Registration Statement.
Ernst & Young LLP
Buffalo, New York
November 1, 1996
<PAGE>
P
R
O
X
Y
SOLICITED BY THE BOARD OF DIRECTORS
EL PASO NATURAL GAS COMPANY
SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 9, 1996
The undersigned hereby appoints William A. Wise and Britton White, Jr.,
and each or either of them, with power of substitution, proxies for the
undersigned and authorizes them to represent and vote, as designated, all
of the shares of common stock of El Paso Natural Gas Company held of record
by the undersigned on November 6, 1996, at the Special Meeting of
Stockholders to be held at The Sheraton Crescent Hotel, 2620 West Dunlap
Avenue, Phoenix, Arizona on December 9, 1996, in connection with the
issuance of up to 23,894,862 shares of common stock of El Paso pursuant to
transactions contemplated by the Amended and Restated Agreement and Plan of
Merger, dated as of June 19, 1996, between El Paso Natural Gas Company, El
Paso Merger Company and Tenneco Inc., as such may be amended, supplemented
or modified from time to time, and at any adjournment(s) or postponement(s)
of such meeting for the purpose identified on the reverse side of this
proxy and with discretionary authority as to any other matters that may
properly come before the Special Meeting, including an adjournment of the
Special Meeting to obtain a quorum, to solicit additional votes in favor of
proposal 1 and/or to allow for the fulfillment of certain conditions
precedent to the Merger, in accordance with and as described in the Notice
of Special Meeting of Stockholders and Joint Proxy Statement-Prospectus of
El Paso Natural Gas Company and Tenneco Inc. This proxy when properly
executed will be voted in the manner directed herein by the undersigned
stockholder. If this proxy is returned without direction being given, this
proxy will be voted FOR proposal 1.
(IMPORTANT -- TO BE SIGNED AND DATED ON REVERSE SIDE) SEE
REVERSE
SIDE
<PAGE>
X PLEASE MARK
VOTES AS IN THIS EXAMPLE.
--
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1
ORF
AGAINST
ABSTAIN
1. Approval of the issuance by El Paso of up to 23,894,862 shares of common
stock, par value $3.00 per share, of El Paso or such greater number of such
shares as may be required in connection with the transactions contemplated
by the Amended and Restated Agreement and Plan of Merger, dated as of June
19, 1996, between El Paso Natural Gas Company, El Paso Merger Company and
Tenneco Inc., as such may be amended, supplemented or modified from time to
time.
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Special Meeting or any
adjournment(s) or postponement(s) thereof, including an adjournment of the
Special Meeting to obtain a quorum, to solicit additional votes in favor of
proposal 1 and/or to allow for the fulfillment of certain conditions
precedent to the Merger.
MARKHERE
FOCOMMENTSR
MARK
HERE
FOR
DDRESSA
CHANGE
AND
NOTE
AT
LEFT
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN EXACTLY AS YOUR NAME APPEARS. IF ACTING AS ATTORNEY, EXECUTOR,
TRUSTEE OR IN OTHER REPRESENTATIVE CAPACITY, SIGN NAME AND TITLE. IF A CORPORA-
TION, PLEASE SIGN IN FULL CORPORATION NAME BY PRESIDENT OR OTHER AUTHORIZED OF-
FICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
IF HELD JOINTLY, BOTH PARTIES MUST SIGN AND DATE.
Signature(s): _ Date: __ Signature(s): _ Date: _
