<PAGE>
FILING IS MADE UNDER RULE 424(b)(3) OF THE SECURITIES ACT OF 1933.
FILE NO. 33-68282
PROXY STATEMENT, PROSPECTUS AND
CONSENT SOLICITATION
TESORO PETROLEUM CORPORATION
OFFER TO EXCHANGE 13% EXCHANGE NOTES DUE DECEMBER 1, 2000
FOR UP TO $54,500,000 OF THE AGGREGATE PRINCIPAL AMOUNT OF ITS EXISTING
12 3/4% SUBORDINATED DEBENTURES DUE MARCH 15, 2001
------------------------
1993 ANNUAL MEETING OF STOCKHOLDERS AT WHICH A VOTE WILL BE TAKEN TO RECLASSIFY
1,319,563 SHARES OF $2.16 CUMULATIVE CONVERTIBLE PREFERRED STOCK INTO
APPROXIMATELY 6,465,859 SHARES OF COMMON STOCK AND TO APPROVE AMENDMENTS TO THE
CERTIFICATE OF INCORPORATION OF THE COMPANY
This Proxy Statement, Prospectus and Consent Solicitation (the 'Proxy
Statement -- Prospectus') constitutes (i) the Prospectus of Tesoro Petroleum
Corporation with respect to its 13% Exchange Notes due December 1, 2000
('Exchange Notes') and shares of Common Stock, $.16 2/3 par value ('Common
Stock'), of Tesoro Petroleum Corporation to be issued pursuant to a proposed
Recapitalization, (ii) the Proxy Statement of Tesoro Petroleum Corporation to be
used in soliciting proxies from its stockholders to be voted at its 1993 Annual
Meeting of Stockholders to be held on Wednesday, February 9, 1994 (the 'Annual
Meeting') in connection with the proposed Reclassification, certain proposed
amendments to its Certificate of Incorporation, the election of directors and
other matters and (iii) the Consent Solicitation of Tesoro Petroleum Corporation
to be used in soliciting consents from the holders of its 12 3/4% Subordinated
Debentures due March 15, 2001 ('Subordinated Debentures') to certain amendments
to the indenture governing the Subordinated Debentures. The Recapitalization
consists of the Exchange Offer, the Reclassification, the Charter Amendments,
the Indenture Amendments and the agreements to be entered into pursuant to the
Amended MetLife Memorandum, all as defined and described below.
THE EXCHANGE OFFER
FOR EACH THE HOLDER WILL RECEIVE
-------- -----------------------
$1,000 Principal Amount of 12 3/4% $1,000 Principal Amount of 13%
Subordinated Debentures (up to $54.5 Exchange Notes
million aggregate principal amount)
THE RECLASSIFICATION
1.0 Share of $2.16 Cumulative Convertible 4.9 Shares of Common Stock
Preferred Stock ('$2.16 Preferred Stock'),
including all accrued and unpaid dividends
The Company will also issue .1 share of Common Stock for each share
of $2.16 Preferred Stock on behalf of the holders of $2.16 Preferred Stock to
pay certain legal fees and expenses in connection with the settlement of
certain litigation. See 'The Recapitalization -- Croyden Associates'
Litigation.'
THE AMENDED METLIFE MEMORANDUM
Pursuant to the Amended MetLife Memorandum, MetLife Louisiana, the sole
holder of the $2.20 Preferred Stock (as hereinafter defined), will agree,
subject to certain conditions, to waive all mandatory redemption requirements,
to consider all accrued and unpaid dividends on the $2.20 Preferred Stock to
have been paid (aggregating approximately $20.0 million at November 30, 1993),
to allow the Company to pay future dividends on the $2.20 Preferred Stock in
Common Stock in lieu of cash, to waive or refrain from the exercise of other
rights under the $2.20 Preferred Stock, and to grant to the Company an option to
purchase all shares of $2.20 Preferred Stock and Common Stock held by MetLife
Louisiana, all in consideration for, among other things, the issuance by the
Company to MetLife Louisiana of 1,900,075 shares of Common Stock.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
FEBRUARY 8, 1994, UNLESS EXTENDED. THE RECLASSIFICATION WILL BE
VOTED ON AT THE ANNUAL MEETING TO BE HELD ON FEBRUARY 9, 1994.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE 'RISK FACTORS.'
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT -- PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(cover continued on next page)
The date of this Proxy Statement, Prospectus and Consent Solicitation
is January 3, 1994.
<PAGE>
This Proxy Statement -- Prospectus, together with the accompanying Consent
and Letter of Transmittal, is first being sent on or about January ----, 1994,
to all stockholders of record of Tesoro Petroleum Corporation, a Delaware
corporation (collectively with its consolidated subsidiaries, unless the context
otherwise requires, the 'Company'), and to all the holders of record of
Subordinated Debentures (the 'Debentureholders').
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Proxy Statement -- Prospectus and in the accompanying Consent and
Letter of Transmittal, to exchange $1,000 principal amount of Exchange Notes for
each $1,000 principal amount of Subordinated Debentures, up to a maximum
aggregate principal amount of $54,500,000 of Subordinated Debentures (the
'Maximum Amount'), as described below. This Proxy Statement -- Prospectus and
the Consent and Letter of Transmittal together constitute the 'Exchange Offer.'
If the requisite consents to the Indenture Amendments (as hereinafter
defined) are obtained, the Exchange Notes will be senior debt of the Company,
senior in right of payment to all subordinated indebtedness of the Company,
including the Subordinated Debentures and the ANS Debt (as hereinafter defined).
Assuming the requisite consents to the Indenture Amendments are obtained, the
Exchange Notes would be pari passu with $27 million of other senior debt as of
November 30, 1993 and effectively subordinated to $67.8 million of secured debt
and debt of the Company's subsidiaries. If the requisite consents to the
Indenture Amendments are not obtained, the Exchange Notes will be senior in
right of payment to the ANS Debt and all other subordinated indebtedness of the
Company, pari passu with $27 million of other senior debt of the Company
as of November 30, 1993 and with the Subordinated Debentures, and effectively
subordinated to $67.8 million of secured debt and debt of the Company's
subsidiaries. Assuming the minimum amount of Subordinated Debentures are
tendered and accepted in the Exchange Offer and the requisite consents
to the Indenture Amendments are not obtained, as of November 30,
1993, $129.5 million of debt will be either secured or effectively
senior to the Subordinated Debentures such that such debt will rank before the
Subordinated Debentures in liquidation or bankruptcy, and $49.5 million of debt
will be pari passu with the Subordinated Debentures. Assuming the maximum amount
of Subordinated Debentures are tendered and accepted in the Exchange Offer, as
of November 30, 1993, $184 million of debt will be either secured or effectively
senior to the Subordinated Debentures such that such debt will rank before the
Subordinated Debentures upon liquidation or bankruptcy, and $27 million of debt
will be pari passu with the Subordinated Debentures. Interest on the Exchange
Notes will commence to accrue at the annual rate of 13% as of the date on which
the Exchange Notes are issued in exchange for Subordinated Debentures. Interest
on Subordinated Debentures accepted for exchange into Exchange Notes will accrue
to, but cease on, such date. Such accrued but unpaid interest on Subordinated
Debentures will be paid in cash as soon as practicable after the Subordinated
Debentures are accepted for exchange. Interest on the Exchange Notes will be
payable semiannually on June 1 and December 1 of each year, commencing June 1,
1994. See 'Description of Exchange Notes.'
Concurrently with the Exchange Offer, the Company is soliciting from the
Debentureholders consents to amendments (the 'Indenture Amendments') to the
Indenture dated as of March 15, 1983 (the 'Existing Indenture'), between the
Company and NBD Bank, N.A., formerly National Bank of Detroit, as trustee (the
'Debenture Trustee'), pursuant to which the Subordinated Debentures were issued
(the 'Consent Solicitation'). The Indenture Amendments will make the Exchange
Notes senior in right of payment to the Subordinated Debentures and modify the
restriction that currently prohibits the Company from declaring or paying
dividends on the Common Stock, making any distributions to its stockholders or
purchasing or redeeming its capital stock. The restriction under the Existing
Indenture does not prohibit any aspect of the Recapitalization or prohibit the
Company from paying dividends on the $2.16 Preferred Stock or $2.20 Preferred
Stock, however, the proposed amendment will afford the Company greater
flexibility in purchasing or redeeming shares of $2.20 Preferred Stock and
Common Stock in the future. The Company will continue to be prohibited under the
Existing Indenture from exercising the Company's MetLife Option (as defined
below) in full in
i
<PAGE>
the absence of future earnings or sales of capital stock of the Company. THE
VALID TENDER OF SUBORDINATED DEBENTURES BY A DEBENTUREHOLDER PURSUANT TO THE
EXCHANGE OFFER WILL INCLUDE THE CONSENT OF SUCH DEBENTUREHOLDER TO THE INDENTURE
AMENDMENTS WITH RESPECT TO SUCH TENDERED SUBORDINATED DEBENTURES. The consents
of holders of at least a majority in outstanding principal amount of
Subordinated Debentures are necessary to effect the Indenture Amendments. As of
December 15, 1993, there was approximately $108.8 million aggregate principal
amount of Subordinated Debentures outstanding. See 'Proposed Amendments to
Existing Indenture -- Solicitation of Consents; Indenture Amendments.'
The Company's obligation to consummate the Exchange Offer is subject to
several conditions, including (i) at least $22.5 million in outstanding
principal amount of Subordinated Debentures shall have been validly tendered and
not withdrawn on or prior to the Expiration Date (as hereinafter defined), and
(ii) other customary conditions. The Company reserves the right, subject to
certain limitations, to withdraw, cancel, modify or terminate the Exchange
Offer. See 'The Exchange Offer -- Conditions of the Exchange Offer.'
Subordinated Debentures tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. See 'The Exchange Offer -- Revocation
and Withdrawal.'
The Exchange Offer will expire at 5:00 p.m., New York City time, on
February 8, 1994, subject to extension by the Company by notice to the Exchange
Agent as herein provided. The term 'Expiration Date' means 5:00 p.m., New York
City time, on February 8, 1994, unless and until such time as the Company shall
have extended the period of time for which the Exchange Offer is open, in which
event the term 'Expiration Date' shall mean the latest time and date to which
the Exchange Offer is extended by the Company. After the Expiration Date,
Subordinated Debentures may no longer be tendered for exchange.
This Proxy Statement -- Prospectus also constitutes the Proxy Statement of
the Company relating to the Annual Meeting and will be used in the solicitation
of proxies from the Company's stockholders in connection with a proposed
reclassification (the 'Reclassification') of the $2.16 Preferred Stock into
Common Stock and certain amendments to the Company's Certificate of
Incorporation (the 'Charter Amendments'), all as described below, and certain
other matters described herein. Each outstanding share of $2.16 Preferred Stock
(including all accrued and unpaid dividends) will be reclassified into 4.9
shares of Common Stock. In addition, the Company will issue .1 share of
Common Stock for each share of $2.16 Preferred Stock on behalf of the holders
of $2.16 Preferred Stock to pay certain legal fees and expenses in connection
with the settlement of certain litigation. See 'The Recapitalization -- Croyden
Associates' Litigation.' At November 30, 1993, accrued and unpaid dividends on
the $2.16 Preferred Stock aggregated approximately $8.9 million ($6.75 per
share). One Purchase Right ('Purchase Right') will be simultaneously issued with
respect to each new share of Common Stock issued in the Reclassification
pursuant to the Rights Agreement dated December 16, 1985, as amended, between
the Company and Chemical Bank, N.A. ('Chemical Bank'), Trustee, successor to
InterFirst Bank Fort Worth, N.A. The Purchase Rights outstanding at the time the
Reclassification is consummated will not be affected by the Reclassification.
The Company's Certificate of Incorporation will be amended to (i) eliminate
staggered terms of directors, (ii) require, in the absence of the approval of
66 2/3% of the disinterested directors, the approval of the holders of at least
80% of the Company's outstanding shares of capital stock to amend, in a manner
adverse to the Company, the Amended MetLife Memorandum or an agreement to be
entered into between the Company and MetLife Security Insurance Company of
Louisiana (together with its affiliates, unless the context otherwise requires,
'MetLife Louisiana'), a wholly-owned subsidiary of Metropolitan Life Insurance
Company ('MetLife'), pursuant to which MetLife Louisiana will grant the Company
a three-year option to acquire all shares of $2.20 Preferred Stock and Common
Stock held by MetLife Louisiana upon effectiveness of the Reclassification, plus
any shares of Common Stock issued in lieu of payment of cash dividends on such
shares of $2.20 Preferred Stock (the 'Company's MetLife Option'), and (iii)
eliminate, upon the occurrence of certain events, the
ii
<PAGE>
requirement that certain transactions by the Company with beneficial holders of
10% or more of the Company's outstanding shares of capital stock be approved by
the holders of at least 80% of the Company's outstanding shares of capital
stock. The proposal relating to the Reclassification and the Charter Amendments
to eliminate staggered terms of directors and establish the amendment approval
requirement ('Proposal No. 1') requires the approval of the holders of a
majority of the outstanding shares of Common Stock, $2.16 Preferred Stock and
$2.20 Preferred Stock, voting together as a single class, and the approval of
the holders of two-thirds of the outstanding shares of $2.16 Preferred Stock,
voting as a separate class. The proposal relating to the Charter Amendments to
eliminate the 80% approval requirement ('Proposal No. 2') requires the approval
of the holders of 80% of the outstanding shares of Common Stock, $2.16 Preferred
Stock and $2.20 Preferred Stock, voting together as a single class.
The sole holder of the $2.20 Preferred Stock is MetLife Louisiana. MetLife
Louisiana, which holds shares of $2.20 Preferred Stock and Common Stock
constituting approximately 28% of the outstanding shares of capital stock
entitled to vote at the Annual Meeting, has indicated to the Company that it
intends to vote all its shares in favor of Proposal No. 1 and Proposal No. 2.
See 'The Recapitalization -- MetLife Louisiana Conditions.'
Effectiveness of Proposal No. 2 is conditioned upon effectiveness of
Proposal No. 1. MetLife Louisiana's agreement to support Proposal No. 1 is
subject to effectiveness of Proposal No. 2, consummation of the Exchange Offer
and other conditions. See 'The Recapitalization -- MetLife Louisiana
Conditions.'
Jefferies & Company, Inc. ('Jefferies') has opined and, as a condition to
the Reclassification, will confirm their opinion immediately prior to the
consummation of the Reclassification to the effect that the Reclassification is
fair from a financial point of view to the holders of $2.16 Preferred Stock and
to the holders of Common Stock.
As of December 15, 1993, there were issued and outstanding 14,069,236
shares of Common Stock, 1,319,563 shares of $2.16 Preferred Stock, 2,875,000
shares of $2.20 Preferred Stock and approximately $108.8 million aggregate
principal amount of Subordinated Debentures. The Common Stock is listed on the
New York Stock Exchange and the Pacific Stock Exchange under the symbol TSO, and
on December 27, 1993, the closing sale price of the Common Stock on the New York
Stock Exchange was $5.625 per share. The $2.16 Preferred Stock is listed on the
New York Stock Exchange under the symbol TSO Pr, and on December 27, 1993, the
closing sale price of the $2.16 Preferred Stock on the New York Stock Exchange
was $21.125 per share. The Subordinated Debentures are listed on the New York
Stock Exchange, and on December 27, 1993, the closing sale price of the
Subordinated Debentures on the New York Stock Exchange was $1001.25 per $1,000
principal amount.
No appraisal rights are available to Debentureholders or stockholders of
the Company with respect to any aspect of the Recapitalization.
Smith Barney Shearson Inc. ('Smith Barney') is acting as financial advisor
to the Company in connection with the Recapitalization and will be compensated
therefor. For information regarding the relationship of Smith Barney to the
Company and the indemnification of and the fees to be paid to Smith Barney, see
'Financial Advisor.'
Georgeson & Company Inc. (the 'Information Agent') has agreed to provide
certain services as information agent for the Exchange Offer, Bankers Trust
Company (the 'Exchange Agent') has agreed to provide certain services as
exchange agent for the Exchange Offer and Chemical Bank has agreed to provide
certain services as exchange agent for the Reclassification. See 'The Exchange
Offer -- Exchange Agent and Information Agent.'
The total expenditures to be incurred in connection with the
Recapitalization, including printing, accounting and legal fees, the maximum
fees and the expenses of the financial advisor and the fees and expenses of the
Information Agent, the exchange agents, New York Stock Exchange and the
iii
<PAGE>
Securities and Exchange Commission (the 'Commission'), are estimated to be
approximately $4.0 million, all of which will be paid by the Company.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES OF THIS PROXY
STATEMENT -- PROSPECTUS AND THE ACCOMPANYING CONSENT AND LETTER OF TRANSMITTAL
MAY BE DIRECTED TO THE INFORMATION AGENT OR THE EXCHANGE AGENT AS SET FORTH ON
THE BACK COVER PAGE OF THIS PROXY STATEMENT -- PROSPECTUS.
------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT -- PROSPECTUS IN CONNECTION
WITH THE MATTERS CONTAINED IN THIS PROXY STATEMENT -- PROSPECTUS, AND IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON. THIS PROXY
STATEMENT -- PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO PURCHASE, ANY SECURITIES OTHER THAN THE SECURITIES COVERED BY
THIS PROXY STATEMENT -- PROSPECTUS, BY THE COMPANY OR ANY OTHER PERSON, OR AN
OFFER OR SOLICITATION OF SUCH SECURITIES, OR THE SOLICITATION OF A PROXY OR
CONSENT, IN ANY JURISDICTION, TO OR FROM ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION OR SUCH PROXY OR CONSENT SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT -- PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES MADE UNDER THIS PROXY STATEMENT -- PROSPECTUS
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR IN THE INFORMATION SET FORTH HEREIN
SINCE THE DATE OF THIS PROXY STATEMENT -- PROSPECTUS.
ADDITIONAL INFORMATION
This Proxy Statement -- Prospectus is a prospectus of the Company delivered
in compliance with the Securities Act of 1933, as amended (the 'Act'). A
registration statement on Form S-4 (the 'Registration Statement') under the Act
has been filed by the Company with the Commission with respect to the securities
offered hereby. As permitted by the rules and regulations of the Commission,
this Proxy Statement -- Prospectus omits certain information contained in the
Registration Statement on file with the Commission. For further information
pertaining to the securities offered hereby, reference is made to the
Registration Statement, including the exhibits filed as a part thereof. The
Company is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the 'Exchange Act'), and, in accordance therewith,
files periodic reports, proxy statements and other information with the
Commission. The Registration Statement, including the exhibits thereto, as well
as such reports, proxy statements and other information, can be inspected and
copied at the public reference facilities maintained by the Commission at
Northwestern Atrium Center, 500 West Madison Street, 14th Floor, Chicago,
Illinois 60661-2511 and 75 Park Place, 14th Floor, New York, New York 10007.
Copies of such documents can be obtained from the Commission at prescribed rates
by writing to it at 450 Fifth Street, N.W., Washington, D.C. 20549. Reports and
other information concerning the Company are also available for inspection and
copying at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005, and the Pacific Stock Exchange, 115 Sansome, San
Francisco, California 94104, on which exchanges certain securities of the
Company are listed.
iv
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<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
SUMMARY---------------------------------------------------------------------------------------------------- 1
RISK FACTORS----------------------------------------------------------------------------------------------- 20
Risk Factors of Not Effecting the Recapitalization---------------------------------------------------- 20
Risk Factors for All Securityholders------------------------------------------------------------------ 21
Risk Factors for Debentureholders Following Consummation of the Exchange Offer------------------------ 25
Risk Factors for Holders of Exchange Notes------------------------------------------------------------ 26
Risk Factors for Holders of Existing Preferred Stock-------------------------------------------------- 27
Risk Factors for Holders of Common Stock-------------------------------------------------------------- 28
THE RECAPITALIZATION--------------------------------------------------------------------------------------- 30
Background-------------------------------------------------------------------------------------------- 30
Purposes and Effects of the Recapitalization---------------------------------------------------------- 37
Conditions to the Recapitalization-------------------------------------------------------------------- 40
MetLife Louisiana Conditions-------------------------------------------------------------------------- 41
Fairness Opinion-------------------------------------------------------------------------------------- 42
Compliance with New York Stock Exchange Stockholder Approval Policy----------------------------------- 43
Croyden Associates' Litigation------------------------------------------------------------------------ 43
PRO FORMA CAPITALIZATION----------------------------------------------------------------------------------- 45
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION----------------------------------------------------- 46
SELECTED FINANCIAL DATA------------------------------------------------------------------------------------ 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS---------------------------------------------------------------------- 54
Capital Resources and Liquidity----------------------------------------------------------------------- 54
Results of Operations--------------------------------------------------------------------------------- 58
Summary of Operations--------------------------------------------------------------------------------- 59
Segment Results of Operations------------------------------------------------------------------------- 60
Consolidated Results of Operations-------------------------------------------------------------------- 63
Nine Months Ended September 30, 1993 Compared to the
Nine Months Ended September 30, 1992---------------------------------------------------------------- 63
1992 Compared to 1991--------------------------------------------------------------------------------- 64
1991 Compared to 1990--------------------------------------------------------------------------------- 64
Three Months Ended December 31, 1991 Compared to the
Three Months Ended December 31, 1990---------------------------------------------------------------- 65
Litigation and Environmental-------------------------------------------------------------------------- 66
BUSINESS--------------------------------------------------------------------------------------------------- 67
General----------------------------------------------------------------------------------------------- 67
Refining and Marketing-------------------------------------------------------------------------------- 67
Exploration and Production---------------------------------------------------------------------------- 69
Oil Field Supply and Distribution--------------------------------------------------------------------- 74
Employees--------------------------------------------------------------------------------------------- 74
Government Regulation and Legislation----------------------------------------------------------------- 74
Taxes------------------------------------------------------------------------------------------------- 77
MANAGEMENT------------------------------------------------------------------------------------------------- 78
LEGAL PROCEEDINGS------------------------------------------------------------------------------------------ 79
PROPOSAL NO. 1--------------------------------------------------------------------------------------------- 82
General----------------------------------------------------------------------------------------------- 82
The Reclassification---------------------------------------------------------------------------------- 82
Elimination of Staggered Terms of Directors----------------------------------------------------------- 84
Establishment of Amendment Approval Requirement------------------------------------------------------- 84
Conditions to Effectiveness--------------------------------------------------------------------------- 85
Board Recommendation---------------------------------------------------------------------------------- 85
PROPOSAL NO. 2--------------------------------------------------------------------------------------------- 86
General----------------------------------------------------------------------------------------------- 86
Conditions to Effectiveness--------------------------------------------------------------------------- 87
Board Recommendation---------------------------------------------------------------------------------- 88
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PAGE
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THE EXCHANGE OFFER----------------------------------------------------------------------------------------- 88
Exchange Terms---------------------------------------------------------------------------------------- 88
Expiration Date; Extension; Amendment; Termination---------------------------------------------------- 89
Procedures for Tendering------------------------------------------------------------------------------ 89
Book-Entry Transfer Facilities------------------------------------------------------------------------ 90
Guaranteed Delivery----------------------------------------------------------------------------------- 91
Backup Withholding------------------------------------------------------------------------------------ 92
Revocation and Withdrawal----------------------------------------------------------------------------- 92
Acceptance of Subordinated Debentures for Exchange; Delivery of Exchange Notes------------------------ 93
Interest on Subordinated Debentures and Exchange Notes------------------------------------------------ 94
Proration--------------------------------------------------------------------------------------------- 95
Proration Priority for Tenders by Small Lot Holders--------------------------------------------------- 95
Conditions of the Exchange Offer---------------------------------------------------------------------- 96
Exchange Agent and Information Agent------------------------------------------------------------------ 96
Expenses---------------------------------------------------------------------------------------------- 96
PROPOSED AMENDMENTS TO EXISTING INDENTURE------------------------------------------------------------------ 97
General----------------------------------------------------------------------------------------------- 97
Solicitation of Consents; Indenture Amendments-------------------------------------------------------- 98
FINANCIAL ADVISOR------------------------------------------------------------------------------------------ 99
FAIRNESS OPINION------------------------------------------------------------------------------------------- 99
TRADING AND MARKET PRICES---------------------------------------------------------------------------------- 100
Subordinated Debentures------------------------------------------------------------------------------- 100
$2.16 Preferred Stock--------------------------------------------------------------------------------- 101
Common Stock------------------------------------------------------------------------------------------ 101
DESCRIPTION OF EXCHANGE NOTES------------------------------------------------------------------------------ 102
General----------------------------------------------------------------------------------------------- 102
Optional Redemption----------------------------------------------------------------------------------- 102
Certain Covenants------------------------------------------------------------------------------------- 102
Events of Default------------------------------------------------------------------------------------- 104
Modifications of the New Indenture-------------------------------------------------------------------- 104
Successor Corporation--------------------------------------------------------------------------------- 105
Satisfaction and Discharge of New Indenture----------------------------------------------------------- 105
Governing Law----------------------------------------------------------------------------------------- 105
The Note Trustee-------------------------------------------------------------------------------------- 105
DESCRIPTION OF CAPITAL STOCK------------------------------------------------------------------------------- 106
General----------------------------------------------------------------------------------------------- 106
Common Stock------------------------------------------------------------------------------------------ 106
$2.16 Preferred Stock--------------------------------------------------------------------------------- 107
$2.20 Preferred Stock--------------------------------------------------------------------------------- 108
Rights Agreement and Participating Preferred Stock---------------------------------------------------- 111
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS------------------------------------------------------------------ 113
Introduction------------------------------------------------------------------------------------------ 113
Federal Income Tax Consequences of the Exchange Offer and Indenture Amendments
to Holders of Subordinated Debentures--------------------------------------------------------------- 113
Federal Income Tax Consequences of Holding the Exchange Notes----------------------------------------- 115
Federal Income Tax Consequences of the Reclassification----------------------------------------------- 117
Federal Income Tax Consequences Related to Croyden Associates' Litigation----------------------------- 117
Federal Income Tax Consequences of the Amended MetLife Memorandum------------------------------------- 118
Federal Income Tax Consequences of Holding $2.20 Preferred Stock
and Common Stock------------------------------------------------------------------------------------ 119
Reporting Requirements-------------------------------------------------------------------------------- 121
Backup Withholding------------------------------------------------------------------------------------ 121
Federal Income Tax Consequences of the Recapitalization to the Company-------------------------------- 121
CERTAIN BANKRUPTCY AND INSOLVENCY CONSIDERATIONS----------------------------------------------------------- 123
General----------------------------------------------------------------------------------------------- 123
Fraudulent Transfer----------------------------------------------------------------------------------- 123
Voidable Preference----------------------------------------------------------------------------------- 124
vi
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PAGE
-----
DESCRIPTION OF FUTURE PREFERRED STOCK---------------------------------------------------------------------- 125
Dividends--------------------------------------------------------------------------------------------- 125
Liquidation Rights------------------------------------------------------------------------------------ 125
Ranking----------------------------------------------------------------------------------------------- 126
Redemption-------------------------------------------------------------------------------------------- 126
Purchase Obligation----------------------------------------------------------------------------------- 126
Voting Rights----------------------------------------------------------------------------------------- 127
Failure to Pay Dividends------------------------------------------------------------------------------ 127
Miscellaneous----------------------------------------------------------------------------------------- 127
DESCRIPTION OF SUBORDINATED DEBENTURES--------------------------------------------------------------------- 127
LEGAL OPINIONS--------------------------------------------------------------------------------------------- 127
EXPERTS---------------------------------------------------------------------------------------------------- 128
GENERAL INFORMATION CONCERNING PROXIES--------------------------------------------------------------------- 128
Solicitation of Proxies------------------------------------------------------------------------------- 128
Voting of Proxies------------------------------------------------------------------------------------- 128
Record Date------------------------------------------------------------------------------------------- 128
Voting Rights----------------------------------------------------------------------------------------- 129
Revocation of Proxy----------------------------------------------------------------------------------- 129
Proposals of Stockholders----------------------------------------------------------------------------- 129
THE ANNUAL MEETING----------------------------------------------------------------------------------------- 129
Proposal No. 3 -- Election of Directors--------------------------------------------------------------- 129
Information Concerning Directors, Nominees and Committees of the Board of Directors------------------- 130
Proposal No. 4 -- Approval of Executive Long-Term Incentive Plan-------------------------------------- 135
Awards Under the 1993 Plan---------------------------------------------------------------------------- 136
Change-in-Control------------------------------------------------------------------------------------- 138
Accounting Treatment of 1993 Plan Awards-------------------------------------------------------------- 138
Federal Income Tax Consequences of 1993 Plan Awards--------------------------------------------------- 139
Voting on Proposal No. 4------------------------------------------------------------------------------ 139
Proposal No. 5 -- Appointment of Auditors------------------------------------------------------------- 139
Voting on Proposal No. 5------------------------------------------------------------------------------ 139
EXECUTIVE COMPENSATION------------------------------------------------------------------------------------- 140
Summary of Compensation------------------------------------------------------------------------------- 140
Option Grants and Exercises--------------------------------------------------------------------------- 141
Aggregated Option/SAR Exercises in 1992 and Option/SAR Values at
December 31, 1992----------------------------------------------------------------------------------- 142
Report of Compensation Committee---------------------------------------------------------------------- 142
Performance Graph------------------------------------------------------------------------------------- 146
Other Benefits---------------------------------------------------------------------------------------- 147
Compensation of Directors----------------------------------------------------------------------------- 148
Employment Contracts and Change-In-Control Arrangements----------------------------------------------- 148
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS------------------------------------------------------------ 150
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS----------------------------------------------------------------- F-1
APPENDIX A -- GLOSSARY------------------------------------------------------------------------------------- A-1
APPENDIX B -- FAIRNESS OPINION----------------------------------------------------------------------------- B-1
APPENDIX C -- RESTATED CERTIFICATE OF INCORPORATION-------------------------------------------------------- C-1
APPENDIX D -- THE CURRENT CERTIFICATE OF INCORPORATION----------------------------------------------------- D-1
APPENDIX E -- DESCRIPTION OF SUBORDINATED DEBENTURES------------------------------------------------------- E-1
APPENDIX F -- EXECUTIVE LONG-TERM INCENTIVE PLAN----------------------------------------------------------- F-1
</TABLE>
vii
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SUMMARY
The following is a summary of certain information contained in this Proxy
Statement -- Prospectus and is qualified in its entirety by the more detailed
information, financial statements, including the notes thereto, and pro forma
information contained elsewhere in this Proxy Statement -- Prospectus, all of
which should be carefully reviewed. For the definition of certain terms used
herein, see the Glossary set forth as Appendix A hereto.
THE COMPANY
The Company is a natural resource company engaged in the refining of crude
oil, the marketing of certain refined products, oil and gas exploration and
production, environmental product sales and oil field supply and distribution.
The Company was organized under the laws of the State of Delaware in 1968.
Its principal executive offices are located at 8700 Tesoro Drive, San Antonio,
Texas 78217, and its telephone number is (210) 828-8484.
BACKGROUND OF THE RECAPITALIZATION
General. The Company's operating results in recent years have been poor.
These results have primarily been caused by (i) significantly lower operating
results from the Company's refining and marketing operations, (ii) reduced
revenues and operating profits from the Company's foreign exploration and
production operations, and (iii) lower margins on sales of products from the
Company's oil field supply and distribution segment. During the year ended
December 31, 1992, the Company experienced a net loss of $65.9 million, or $5.34
per share, and it has experienced losses in five of its past seven fiscal years.
Common Stock and Other Stockholders' Equity has declined from $137.0 million as
of December 31, 1991, to $44.2 million as of September 30, 1993. During this
period, the Company's stockholders' equity was adversely affected by, in
addition to the factors discussed above, accrued and unpaid dividends of $27.4
million on the $2.16 Preferred Stock and $2.20 Preferred Stock (sometimes
referred to herein collectively as the 'Existing Preferred Stock') and charges
of $10.5 million for the settlement of a contractual dispute with the State of
Alaska (the 'State'), $20.6 million for the cumulative effect of accounting
changes relating to postretirement benefits and income taxes and $9.1 million
for expenses to implement a cost reduction program and other employee
terminations in 1992.
The Company's operations over the past several years have not generated
cash sufficient to meet all of the Company's obligations. As a result, the
Company has been unable to pay dividends on the Existing Preferred Stock and has
relied, in part, on cash from the sale of assets to meet its other cash
requirements.
The Company's Financial Requirements. The Company is subject to a number
of significant financial requirements, including the following:
1. Debt service requirements
The Subordinated Debentures require sinking fund payments each March 15
sufficient to retire $11.25 million principal amount of Subordinated Debentures
per year through 2000. Under its settlement agreement with the State (the 'ANS
Agreement'), the Company is obligated to make variable monthly payments for at
least nine years plus a payment of $60 million in 2002, subject to deferral (the
'ANS Debt'). Under a consent order with the U.S. Department of Energy (the
'DOE'), the Company is obligated to make payments aggregating $13.2 million,
plus interest at the rate of 6% per annum, during the next nine years.
2. Existing Preferred Stock requirements
Pursuant to the terms of the $2.20 Preferred Stock, and as a result of
accumulated dividend arrearages of 12 quarters, MetLife Louisiana currently has
the option (the '2.20 Preferred Stock Put Option') to require the Company to
redeem all of the outstanding $2.20 Preferred Stock out of funds
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legally available therefor at $20 per share (an aggregate of $57.5 million),
plus accrued and unpaid dividends (aggregating approximately $20.0 million or
$6.97 per share at November 30, 1993). In addition, the $2.20 Preferred Stock
provides for annual mandatory redemptions out of funds legally available
therefor, beginning February 15, 1994, of 6 2/3% of the number of
shares of $2.20 Preferred Stock outstanding on February 15, 1994,
at a redemption price of $20 per share, plus accrued and unpaid
dividends. Pursuant to an agreement dated March 24, 1993 (the 'MetLife
Forbearance Agreement'), as amended, between the Company and MetLife
Louisiana, the $2.20 Preferred Stock Put Option is not exercisable and the 1994
mandatory redemption is not required to be made until March 10, 1994, or earlier
under certain circumstances. See 'The Recapitalization -- Background -- The
Recapitalization.' The $2.20 Preferred Stock has an annual cash dividend
obligation of approximately $6.3 million.
The terms of the $2.16 Preferred Stock require that, in connection with any
redemption of the $2.20 Preferred Stock, all accrued and unpaid dividends on the
$2.16 Preferred Stock (aggregating approximately $8.9 million or $6.75 per share
at November 30, 1993) be paid. The $2.16 Preferred Stock has an annual cash
dividend obligation of approximately $2.9 million.
The Existing Indenture includes covenants that currently prohibit the
Company from redeeming the Existing Preferred Stock for cash. Moreover, even
absent such prohibitions, the Company does not believe that its current
financial resources are sufficient to make the payments that would be required
upon exercise of the $2.20 Preferred Stock Put Option, and the Company may not
be permitted under the Delaware General Corporation Law (the 'Delaware Law') to
make such payment.
3. Working capital requirements
On October 29, 1993, in order to avoid a $700,000 facility fee, the Company
elected to terminate its secured Letter of Credit Facility Agreement ('Letter of
Credit Facility') with a group of banks. Letters of credit are issued to obtain
crude oil feedstocks for the Company's refinery and for other operating and
corporate needs. In connection with the termination, the Company negotiated
certain interim credit arrangements in order to meet its near term operating and
corporate credit requirements. With respect to these interim credit
arrangements, the Company has entered into several uncommitted letter of credit
facilities which provide for the issuance of letters of credit on a cash-secured
basis and has entered into a substitution agreement with the Company's largest
supplier of crude oil, to secure its purchases from this supplier through the
end of 1994.
In order to provide the Company with additional financial liquidity, during
October 1993, Tesoro Exploration and Production Company, a wholly-owned
subsidiary of the Company ('Tesoro E&P'), entered into a $30 million reducing
revolving credit facility (the 'E&P Facility') which is secured principally by
its natural gas properties in the Company's South Texas gas field (the 'Bob West
Field') and contains restrictions that prohibit borrowings under the facility to
be used by Tesoro E&P or the Company for debt service, including interest and
principal on the Subordinated Debentures, or for payment of common or preferred
dividends. See 'The Recapitalization -- Background -- The Company's Financial
Requirements.' In addition, the Company initiated discussions with several
financial institutions with regard to providing a long-term credit facility to
finance the Company's working capital requirements. Based on these discussions,
the Company believes it will be able to enter into a long-term credit facility
on terms more favorable than the Company's terminated Letter of Credit Facility
upon successful completion of the proposed Recapitalization. If the Company is
unsuccessful in completing the Recapitalization, and is thereafter unable to
arrange a long-term credit facility, or is otherwise unable to arrange such a
facility, the Company may be required to reduce its refinery throughput to
reduce its working capital requirements. The Company is unable to predict if it
would be able to operate the refinery at an economically viable rate under such
circumstances.
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4. Capital expenditure requirements
The Company anticipates that it will incur capital expenditures of
approximately $40 million during 1993, approximately $29 million of which are
expected to be incurred for the continuing
development of the Bob West Field, and approximately $9 million of which are
expected to be incurred to fund capital expenditures at the Company's Alaska
refinery and to expand or enhance the Company's Alaska retail and wholesale
marketing operations. Through September 30, 1993, the Company had incurred
approximately $26 million of capital expenditures. Management of the Company has
under consideration total capital expenditures for fiscal 1994 ranging from
approximately $70 million to $80 million which would include approximately $29
million for the continued development of the Bob West Field and $32 million for
the Alaska refinery, including $25 million associated with the upgrading of
refinery hardware through the installation of a vacuum unit which will allow the
Company to upgrade residual fuel oil into higher value products. The Board of
Directors of the Company (the 'Board of Directors') has not approved the
Company's proposed capital expenditures for fiscal 1994 and the Company
anticipates that such approval will be subject to, among other things,
the Board of Directors being satisfied with the Company's ability to
finance such capital expenditures, and the consummation of the
Recapitalization. The aggregate capital expenditures the Company will be able to
incur in 1994 will also depend upon the Company's ability to generate funds from
operations, financings and other sources.
The Company's Initial Response. In response to the factors described
above, the Board of Directors made changes in management of the Company and
the Company took the following actions:
1. Developed and implemented a market-driven operational strategy for
the Company's refining and marketing operations. This strategy includes
reducing refinery throughput and altering the mix of feedstocks, which is
intended to enable the Company to match its refined product yield more
closely to the product demand in Alaska.
2. Concentrated its domestic exploration and production activities in
the Bob West Field and increased its net proved natural gas reserves in
such field from 37 billion cubic feet at December 31, 1991, to 102 billion
cubic feet at September 30, 1993.
3. Sold various interests in oil and gas properties in Indonesia and
certain domestic properties outside of the Bob West Field for cash of $8.7
million during 1992.
4. Reduced general and administrative expenses by approximately 27%
for the nine months ended September 30, 1993 when compared with the nine
months ended September 30, 1992 as a result of asset sales, consolidations
and cost reduction programs and other employee terminations.
5. Entered into the ANS Agreement, which settled its contractual
dispute with the State concerning the price paid by the Company to the
State in the past for Alaska North Slope royalty crude oil.
The Recapitalization. Management of the Company determined that the
foregoing actions, although significant, would not be sufficient to solve the
Company's financial difficulties. Accordingly, during the first quarter of 1993,
the Company retained Smith Barney as Financial Advisor to assist the Company in
reviewing the Company's financial condition and alternatives to improve such
financial condition. As a result of its discussions with Smith Barney,
management of the Company determined that, in light of the cash demands on the
Company, it would be desirable to reduce its near-term debt sinking fund
requirements and to reclassify the Existing Preferred Stock into other equity
securities and thereby eliminate the $2.20 Preferred Stock Put Option, increase
equity, reduce future cash obligations and provide that dividends and mandatory
redemption payments on preferred stock be payable at the option of the Company
in cash or shares of Common Stock or any combination thereof.
Based upon the market prices of the Common Stock and the $2.16 Preferred
Stock, continuing discussions with various securityholders of the Company,
including certain holders of a substantial principal amount of the Subordinated
Debentures, continuing input from the Company's advisors,
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the fact that the reclassification was not consummated prior to
November 15, 1993 at which time an additional date for payment of
dividends on the $2.16 Preferred Stock and the $2.20 Preferred Stock
passed without payment thereof, and further consideration by the Special
Committee of the Board of Directors (as hereinafter defined), the Company
decided to propose the following:
1. The exchange of a minimum of $22.5 million and a maximum of $54.5
million of Subordinated Debentures for Exchange Notes.
2. The reclassification of the $2.16 Preferred Stock into an
aggregate of approximately 6,465,859 shares of Common Stock.
3. The amendment of the Existing Indenture to modify the restriction
that currently prohibits the Company from declaring or paying dividends on
the Common Stock, making any distributions to its stockholders or
purchasing or redeeming its capital stock.
4. An agreement with MetLife Louisiana, the sole holder of the $2.20
Preferred Stock, pursuant to which MetLife Louisiana (a) will agree to
waive the $2.20 Preferred Stock Put Option and other $2.20 Preferred Stock
mandatory redemption requirements, (b) will consider all accrued and unpaid
dividends on the $2.20 Preferred Stock to have been paid, (c) will allow
the Company to pay future dividends on $2.20 Preferred Stock in Common
Stock in lieu of cash, (d) will waive or refrain from the exercise of
certain other rights under the $2.20 Preferred Stock and (e) will grant to
the Company an option to purchase all shares of $2.20 Preferred Stock and
Common Stock held by MetLife Louisiana.
Since the $2.20 Preferred Stock will remain outstanding after
consummation of the Recapitalization, the Company and MetLife Louisiana
have entered into an Amended and Restated Memorandum of Understanding dated
December 14, 1993 (the 'Amended MetLife Memorandum') pursuant to which
MetLife Louisiana will agree to waive or refrain from taking action with
respect to certain rights under the $2.20 Preferred Stock, including
waiving the $2.20 Preferred Stock Put Option and the other annual mandatory
redemption requirements of the $2.20 Preferred Stock, considering all
accrued and unpaid dividends on the $2.20 Preferred Stock to have been paid
and agreeing to allow the Company to pay future dividends on the $2.20
preferred Stock in Common Stock in lieu of cash. MetLife Louisiana will
grant the Company a three-year option to acquire all shares of $2.20
Preferred Stock and Common Stock held by MetLife Louisiana at an initial
aggregate option price of $51.5 million, subject to adjustments. Pursuant
to the Amended MetLife Memorandum, the Company has agreed to issue to
MetLife Louisiana upon consummation of the Reclassification an aggregate of
1,900,075 shares of Common Stock. See 'The
Recapitalization -- Background -- The Recapitalization.'
PURPOSES AND EFFECTS OF THE RECAPITALIZATION
General. The Recapitalization consists of the following components: (i)
the Exchange Offer, (ii) the Indenture Amendments, (iii) the Reclassification,
(iv) the Charter Amendments and (v) the agreements to be entered into pursuant
to the Amended MetLife Memorandum. The primary purposes of the Recapitalization
are to improve the short-term and long-term liquidity of the Company and
increase its equity capital.
As a result of the Recapitalization, on a pro forma basis at September 30,
1993, assuming consumation of the Reclassification and assuming a maximum
acceptance of the Exchange Offer, ($54.5 million) total long-term debt and
redeemable preferred stock would decrease from $257 million to approximately
$186 million, current liabilities (excluding the current portion of long-term
debt and amounts currently due on the $2.20 Preferred Stock) would decrease from
approximately $77 million to approximately $68 million and Common Stock and
Other Stockholders' Equity would increase from $44 million to $120 million.
Under the same pro forma assumptions, book value per share of Common Stock would
increase from $.80 to $2.78 and the number of shares of Common
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Stock outstanding would increase from 14,069,799 to 22,567,689. See '-- Pro
Forma Capitalization.'
Under the same assumptions, on a pro forma basis for the year ending
December 31, 1992, interest expense would decrease from $21.1 million to $20.4
million and preferred stock dividends would decrease from $9.2 million to $6.3
million. See '-- Pro Forma Capitalization.' In addition, the dividends on the
$2.20 Preferred Stock will, subject to certain conditions, be payable at the
Company's option in shares of Common Stock. See '-- Selected Summary Pro Forma
Financial Data.'
The Recapitalization will (1) satisfy the annual sinking fund requirements
of $11.25 million on the unexchanged Subordinated Debentures until at least 1996
and possibly until 1998 (because the Subordinated Debentures acquired in the
Exchange Offer can be tendered in satisfaction of the sinking fund
requirements), (2) waive the $2.20 Preferred Stock Put Option and the annual
cash redemption requirements of the $2.20 Preferred Stock, which begin in 1994,
and create an annual obligation of the Company to offer to purchase the $2.20
Preferred Stock or, if issued in lieu thereof, the Future Preferred Stock (as
hereinafter defined), beginning in 1998, under which the purchase price may be
paid in cash or, subject to certain conditions, shares of Common Stock or any
combination thereof, (3) enable the Company to make future dividend payments on
the $2.20 Preferred Stock in cash or, subject to certain conditions, shares of
Common Stock or any combination thereof, (4) reclassify all amounts representing
the $2.20 Preferred Stock and accrued and unpaid dividends on the $2.16
Preferred Stock as equity, and extinguish the accrued and unpaid dividends on
the Existing Preferred Stock ($28.9 million at November 30, 1993), and (5) allow
the Company the option to repurchase the entire equity interest in the Company
currently held by MetLife Louisiana.
The Exchange Offer. The Company is offering to exchange $1,000 principal
amount of Exchange Notes for each $1,000 principal amount of Subordinated
Debentures, up to the Maximum Amount. In the event that Subordinated Debentures
in excess of the Maximum Amount are tendered, Subordinated Debentures will be
accepted on a pro rata basis, except that tenders from Small Lot Holders (as
hereinafter defined) will be accepted first.
The Consent Solicitation. Concurrently with the Exchange Offer, the
Company is soliciting from Debentureholders consents to the Indenture
Amendments. The Indenture Amendments will make the Exchange Notes senior in
right of payment to the Subordinated Debentures and modify the restriction which
currently prohibits the Company from declaring and paying dividends on its
Common Stock, making any distributions to its stockholders, or purchasing or
redeeming its capital stock. See 'Proposed Amendments to Existing Indenture.'
Proposal No. 1. Proposal No. 1 consists of the proposal to approve the
Reclassification and the Charter Amendments to eliminate staggered terms of
directors and to restrict amendments to the Company's MetLife Option. The Board
of Directors has proposed that each share of $2.16 Preferred Stock (including
accrued and unpaid dividends) be reclassified into 4.9 shares of Common Stock.
In addition, the Company will issue .1 share of Common Stock for each
share of $2.16 Preferred Stock on behalf of the holders of $2.16 Preferred Stock
to pay certain legal fees and expenses in connection with the settlement of
certain litigation. See 'The Recapitalization -- Croyden Associates'
Litigation.' At November 30, 1993, accrued and unpaid dividends on the $2.16
Preferred Stock aggregated approximately $8.9 million ($6.75 per share).
As a result of the proposed amendment to the Company's Certificate of
Incorporation to eliminate staggered terms of directors, the terms of all
directors would extend only until the next annual meeting of stockholders of the
Company or until their respective successors are duly elected and qualified. See
'The Annual Meeting -- Proposal No. 3 -- Election of Directors.' The Board of
Directors has also proposed an amendment to the Company's Certificate of
Incorporation to require,
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in the absence of the approval of 66 2/3% of the disinterested directors,
the approval of the holders of at least 80% of the Company's
outstanding shares of capital stock to amend, in a manner adverse to the
Company, the agreement between the Company and MetLife Louisiana pursuant to the
Amended MetLife Memorandum which will contain, among other terms, the Company's
MetLife Option.
Proposal No. 2. Proposal No. 2 consists of the proposal to approve the
Charter Amendment to eliminate, in the event the Company's MetLife Option
terminates without being exercised in full, the requirement that certain
transactions by the Company with beneficial holders of 10% or more of the
Company's outstanding shares of capital stock be approved by the holders of at
least 80% of the Company's outstanding shares of capital stock. Upon adoption of
such amendment, subject to the requirements of the Delaware Law, approval only
by the Board of Directors and, under certain limited circumstances, the holders
of a majority of the Company's outstanding shares of capital stock would be
required for approval of all transactions by the Company with any beneficial
holder of 10% or more of the Company's outstanding shares of capital stock,
including MetLife Louisiana.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED PROPOSAL NO. 1 AND PROPOSAL
NO. 2.
MetLife Louisiana, the holder of all the outstanding $2.20 Preferred Stock
and 2,184,085 shares of Common Stock, which together constitute approximately
28% of the outstanding shares of capital stock entitled to vote on Proposal No.
1 and Proposal No. 2, has indicated to the Company that it intends to vote all
of its shares in favor of Proposal No. 1 and Proposal No. 2. MetLife Louisiana's
willingness to vote in favor of Proposal No. 1 is subject to certain conditions.
See 'The Recapitalization -- MetLife Louisiana Conditions.'
The Amended MetLife Memorandum. Pursuant to the Amended MetLife
Memorandum, MetLife Louisiana will grant to the Company the Company's MetLife
Option and will agree to certain waivers and to refrain from taking certain
actions in connection with the $2.20 Preferred Stock. MetLife Louisiana will
agree that it will accept the payment of dividends on the $2.20 Preferred Stock
in Common Stock, provided that the Company continues to pay all quarterly
dividends when due, either in Common Stock or in cash. MetLife Louisiana will
also agree to refrain from exercising the conversion rights under the terms of
the $2.20 Preferred Stock, to refrain from requiring the Company to repurchase
or redeem any of the shares of the $2.20 Preferred Stock under the terms
thereof, and to consider all accrued and unpaid dividends (aggregating
approximately $20.0 million or $6.97 per share at November 30, 1993) on the
$2.20 Preferred Stock to have been paid as of the date of the Reclassification.
The Company will agree not to exercise its rights to optionally redeem the $2.20
Preferred Stock at any time prior to the fourth anniversary of the date of the
Reclassification and in the event that the Company's MetLife Option is not
exercised in full, will agree to exchange, upon request of MetLife Louisiana, on
a share for share basis, the $2.20 Preferred Stock for a new series of Preferred
Stock (the 'Future Preferred Stock') having substantially the same terms as the
$2.20 Preferred Stock but modified to reflect the agreements and waivers
contemplated by the Amended MetLife Memorandum, will agree to offer to
repurchase 287,500 shares of the $2.20 Preferred Stock or, if issued in lieu
thereof, the Future Preferred Stock, each year commencing June 30, 1998, and
will agree to issue 1,900,075 shares of Common Stock to MetLife Louisiana on the
date of the Reclassification. See 'Description of Future Preferred Stock' for a
description of such new series of preferred stock. Pursuant to the terms of the
Company's MetLife Option, upon completion of the Recapitalization, the Company
will initially be entitled to purchase from MetLife Louisiana 2,875,000 shares
of $2.20 Preferred Stock, having a liquidation preference of $57.5 million, and
4,084,160 shares of Common Stock, having a pro forma net book value of
approximately $11.4 million at September 30, 1993, in consideration for cash in
the amount of $51.5 million. See 'The Recapitalization -- Background.'
Croyden Associates' Litigation. In October 1993, Croyden Associates, a
holder of shares of $2.16 Preferred Stock, filed a class action suit in Delaware
Chancery Court on behalf of itself and all
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other holders of the $2.16 Preferred Stock. The suit alleges that the
Company and its directors have breached their fiduciary duties to the
holders of the $2.16 Preferred Stock based on the terms of the
proposed recapitalization as described in this Proxy Statement -- Prospectus as
originally filed with the Commission on September 2, 1993. The plaintiff in this
litigation has advised that it is satisfied with the terms of the
reclassification of the $2.16 Preferred Stock and has agreed in principle to
recommend that the court approve a settlement based upon the terms set forth in
this Proxy Statement - Prospectus. See 'The Recapitalization -- Croyden
Associates' Litigation.'
CONDITIONS TO THE RECAPITALIZATION
Consummation of the Exchange Offer is conditioned upon, among other
matters, (i) the tender and acceptance of at least $22.5 million in principal
amount of the outstanding Subordinated Debentures and (ii) other customary
conditions. Consummation of the Exchange Offer is not conditioned upon
effectiveness of Proposal No. 1 or Proposal No. 2 or the adoption of the
Indenture Amendments. Adoption of the Indenture Amendments will require the
consent of the holders of a majority in principal amount of the outstanding
Subordinated Debentures but is not conditioned on any other component of the
Recapitalization. The valid tender of Subordinated Debentures pursuant to the
Exchange Offer will include the consent to the Indenture Amendments with respect
to such tendered Subordinated Debentures.
Proposal No. 1 requires the approval of the holders of a majority of the
outstanding shares of Common Stock, $2.16 Preferred Stock and $2.20 Preferred
Stock, voting together as a single class, and the approval of the holders of
two-thirds of the outstanding shares of $2.16 Preferred Stock, voting as a
separate class. Proposal No. 2 requires the approval of the affirmative vote of
the holders of 80% of the shares of Common Stock, $2.16 Preferred Stock and
$2.20 Preferred Stock, voting together as a single class. Effectiveness of
Proposal No. 2 is conditioned upon effectiveness of Proposal No. 1. See 'General
Information Concerning Proxies.' All directors and executive officers of the
Company as a group beneficially own 16.912% of the shares of Common Stock
outstanding as of December 15, 1993.
The approval by MetLife Louisiana of Proposal No. 1 is conditioned on,
among other matters, effectiveness of Proposal No. 2, consummation of the
Exchange Offer and MetLife Louisiana's satisfaction with the membership of the
Board of Directors upon effectiveness of the Reclassification. Proposal No. 1 is
effectively conditioned on consummation of the Exchange Offer and cannot occur
alone, unless MetLife Louisiana waives the condition that the Exchange Offer be
consummated prior to its approval of Proposal No. 1. MetLife Louisiana has not
advised the Company of any circumstances under which it might waive such
condition. See 'The Recapitalization -- MetLife Louisiana Conditions.'
The provisions of the Amended MetLife Memorandum relating to the $2.20
Preferred Stock and the Company's MetLife Option are conditioned on the
Reclassification. In the event Proposal No. 1 is not approved but the requisite
consents to the Indenture Amendments are obtained, MetLife Louisiana will have
the right under the $2.20 Preferred Stock Put Option, beginning as soon as March
10, 1994, or earlier under certain circumstances, to require a cash redemption
of the entire issue of $2.20 Preferred Stock out of funds legally available
therefor at an aggregate price of $57.5 million, together with accrued and
unpaid dividends (aggregating approximately $20.0 million or $6.97 per share as
of November 30, 1993).
CERTAIN RISK FACTORS
Investment in the Exchange Notes and the Common Stock issuable in the
Recapitalization involves a high degree of risk. See 'Risk Factors' for a
description of various risk factors.
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PROCEDURES
Tendering and Giving Consents. Debentureholders electing to tender
Subordinated Debentures or to consent to the Indenture Amendments (whether or
not also tendering Subordinated Debentures) must complete and sign the Consent
and Letter of Transmittal in accordance with the instructions contained
therein and forward it (together with any other required documents in
the case of a tender) to the Exchange Agent at its address set forth on the back
cover of this Proxy Statement -- Prospectus or request a broker or bank to
effect the transaction for such Debentureholders. Debentureholders whose
Subordinated Debentures are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee are urged to contact such
registered holder promptly if they wish to accept the Exchange Offer. See 'The
Exchange Offer -- Procedures for Tendering' and the Consent and Letter of
Transmittal. CONSENTS AND LETTERS OF TRANSMITTAL AND SUBORDINATED DEBENTURES
SHOULD NOT BE SENT TO THE COMPANY. SUBORDINATED DEBENTURES, TOGETHER WITH
CONSENTS AND LETTERS OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS, SHOULD BE
SENT TO THE EXCHANGE AGENT ONLY.
Proration. If an aggregate principal amount of Subordinated Debentures
greater than the Maximum Amount is validly tendered and not properly withdrawn
prior to the Expiration Date, the Company will, upon the terms and subject to
the conditions of the Exchange Offer, accept for exchange and payment on a pro
rata basis an aggregate principal amount of Subordinated Debentures so tendered
and not properly withdrawn equal to the Maximum Amount. See 'The Exchange
Offer -- Proration' for information regarding the order of priority in which
tendered Subordinated Debentures will be accepted.
Small Lot Holders. Notwithstanding the foregoing, upon the terms and
subject to the conditions of the Exchange Offer, the Company will give priority
in accepting for exchange and payment tenders by Debentureholders who
beneficially own $10,000 or less aggregate principal amount of Subordinated
Debentures. See 'The Exchange Offer -- Proration Priority for Tenders by Small
Lot Holders.'
Delivery of Exchange Notes. Exchange Notes will be delivered in exchange
for Subordinated Debentures accepted in the Exchange Offer promptly after the
acceptance thereof and the satisfaction or waiver of all conditions to the
Exchange Offer. See 'The Exchange Offer -- Acceptance of Subordinated Debentures
for Exchange; Delivery of Exchange Notes.'
Withdrawal and Revocation. Tenders of Subordinated Debentures are
revocable at any time prior to the Expiration Date. If any Debentureholder who
has consented to the adoption of the Indenture Amendments and who has tendered
Subordinated Debentures subsequently effects a valid revocation of consent to
the Indenture Amendments, such action will render the prior tender of
Subordinated Debentures defective, and the Company will have the right, which it
may waive, to reject such tender as invalid and ineffective. See 'The Exchange
Offer -- Revocation and Withdrawal' and 'Proposed Amendments to Existing
Indenture -- Solicitation of Consents; Indenture Amendments.'
ANNUAL MEETING OF STOCKHOLDERS
General. The Annual Meeting will be held at The Hotel Intercontinental,
111 East 48th Street, New York, New York, at 10:00 a.m., New York City time, on
Wednesday, February 9, 1994. The close of business on December 15, 1993, has
been fixed by the Board of Directors as the date of determining the stockholders
entitled to notice of, and to vote at, the Annual Meeting and at any adjournment
thereof. See 'The Annual Meeting.'
The Annual Meeting is being held (1) to act on Proposal No. 1 and Proposal
No. 2, (2) to elect four directors, (3) to approve the Executive Long-Term
Incentive Plan of the Company, (4) to ratify the appointment of Deloitte &
Touche as the Company's independent auditors for 1993, and (5) to transact such
other business as may properly come before the meeting or any adjournment
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thereof. The terms of the four directors will be until the next annual meeting
of stockholders of the Company if Proposal No. 1 becomes effective, and will
otherwise be until the 1996 annual meeting of stockholders of the Company. See
'The Annual Meeting -- Proposal No. 3 -- Election of Directors.'
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED PROPOSAL NO. 1 AND PROPOSAL
NO. 2 AND RECOMMENDS THAT STOCKHOLDERS VOTE IN FAVOR OF PROPOSAL NO. 1 AND
PROPOSAL NO. 2.
Voting Rights. Holders of record of Common Stock, $2.16 Preferred Stock
and $2.20 Preferred Stock at the close of business on December 15, 1993 are
entitled to notice of and to vote at the Annual Meeting. On December 15, 1993,
there were issued and outstanding 14,069,236 shares of Common Stock, 1,319,563
shares of $2.16 Preferred Stock and 2,875,000 shares of $2.20 Preferred Stock.
Each share of Common Stock, $2.16 Preferred Stock and $2.20 Preferred Stock
is entitled to one vote with respect to each matter brought before the Annual
Meeting. Proposal No. 1 requires the approval of the holders of a majority of
the outstanding shares of Common Stock, $2.16 Preferred Stock and $2.20
Preferred Stock, voting together as a single class, and the approval of the
holders of two-thirds of the outstanding shares of $2.16 Preferred Stock, voting
as a separate class. Proposal No. 2 requires the approval of the holders of 80%
of the shares of Common Stock, $2.16 Preferred Stock and $2.20 Preferred Stock,
voting together as a single class. The election of directors and each other
matter brought before the Annual Meeting requires the approval of the holders of
a plurality of the shares of Common Stock, $2.16 Preferred Stock and $2.20
Preferred Stock present or represented at the Annual Meeting, voting together as
a single class. See 'General Information Concerning Proxies.'
MetLife Louisiana, which owns all the outstanding shares of $2.20 Preferred
Stock and 2,184,085 shares of Common Stock, which together constitute
approximately 28% of the outstanding shares of capital stock entitled to vote at
the Annual Meeting, has indicated to the Company that it intends to vote all of
its shares in favor of Proposal No. 1 and Proposal No. 2. MetLife Louisiana's
willingness to vote in favor of Proposal No. 1 is subject to certain conditions.
See 'The Recapitalization -- MetLife Louisiana Conditions.'
FINANCIAL ADVISOR, EXCHANGE AGENT AND INFORMATION AGENT
Smith Barney, 350 California Street, 21st Floor, San Francisco, California
94104, 415-955-1698 (collect calls will be accepted), is acting as financial
advisor to the Company in connection with the Recapitalization. The exchange
agent in connection with the Exchange Offer is Bankers Trust Company, Corporate
Trust and Agency Group, 123 Washington St., 1st Floor, New York, New York,
10006, 800-829-5628, and the exchange agent in connection with the
Reclassification is Chemical Bank, N.A. The Information Agent is Georgeson &
Company, Inc., Wall Street Plaza, New York, New York 10005, 800-223-2064 or
212-509-6240 (Banks and Brokers). See 'The Exchange Offer -- Exchange Agent and
Information Agent.'
FEDERAL INCOME TAX CONSEQUENCES
For a discussion of certain federal income tax considerations relating to
the Recapitalization, see 'Certain Federal Income Tax Considerations.'
APPRAISAL RIGHTS
No appraisal rights are available to Debentureholders or stockholders of
the Company with respect to any aspect of the Recapitalization.
REGULATORY APPROVALS
The Company is not aware of any regulatory approvals necessary to complete
the Recapitalization or any component thereof.
9
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1993, adjusted to give effect to the Recapitalization, assuming
(i) the Exchange Offer is consummated at the maximum tender level, so that $54.5
million in principal amount of Subordinated Debentures is exchanged for $54.5
million in principal amount of the Exchange Notes; the holder of the $2.20
Preferred Stock waives the mandatory redemption requirements thereon, considers
accrued and unpaid dividends thereon to have been paid and is issued 1,900,075
shares of Common Stock; the $2.16 Preferred Stock, including accrued and unpaid
dividends thereon, is reclassified into 6,465,859 shares of Common Stock; and
the Company will issue 131,956 shares of Common Stock on behalf of the holders
of $2.16 Preferred Stock to pay certain legal fees and expenses in connection
with the settlement of certain litigation (the Recapitalization), (ii) only the
debt exchange described in the Recapitalization occurs (the Exchange Offer Only)
and (iii) only the waivers and considerations indicated above relating to the
$2.20 Preferred Stock, the reclassification of the $2.16 Preferred Stock and the
issuance of Common Stock on behalf of the holders of $2.16 Preferred Stock to
pay certain legal fees and expenses in connection with the settlement of certain
litigation described in the Recapitalization occur (the Reclassification Only).
The Exchange Notes and Common Stock issued in the Recapitalization are recorded
at their estimated fair market value. The $2.20 Preferred Stock is recorded at
its liquidation value.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993
------------------------------------------------
EXCHANGE OFFER
HISTORICAL RECAPITALIZATION ONLY
---------- ---------------- --------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS;
NUMBER OF SHARES IN THOUSANDS)
<S> <C> <C> <C>
Current Liabilities(2)--------------------------------------------- $ 76,541 67,821 76,253
---------- ---------------- --------------
---------- ---------------- --------------
Long-Term Debt and Other Obligations:
Exchange Notes--------------------------------------------------- $ -- 54,500 54,500
Liability to State of Alaska------------------------------------- 61,633 61,633 61,633
Liability to Department of Energy-------------------------------- 13,194 13,194 13,194
Other------------------------------------------------------------ 8,015 8,015 8,015
Subordinated Debentures------------------------------------------ 97,656 48,716 48,716
---------- ---------------- --------------
Total Long-Term Debt and Other Obligations------------------------- 180,498 186,058(3) 186,058
---------- ---------------- --------------
$2.20 Preferred Stock; $1 stated value; 2,875,000 shares issued and
outstanding------------------------------------------------------ 76,461 -- (3) 76,461
---------- ---------------- --------------
Common Stock and Other Stockholders' Equity:(4)
$2.20 Preferred Stock; $1 stated value; 2,875,000 shares issued
and outstanding(4)--------------------------------------------- -- 57,500 --
$2.16 Preferred Stock; $1 stated value; 1,319,563 shares issued
and outstanding------------------------------------------------ 1,320 -- 1,320
Common stock, par value $.16 2/3; authorized 50,000,000 shares;
14,069,799 shares issued and outstanding; 8,497,890 additional
shares to be issued in the Recapitalization and in the
Reclassification Only------------------------------------------ 2,345 3,762 2,345
Additional paid-in capital--------------------------------------- 86,987 111,683 86,987
Accumulated deficit---------------------------------------------- (46,214) (52,431) (55,031)
Deferred compensation-------------------------------------------- (263) (263) (263)
---------- ---------------- --------------
Total Common Stock and Other Stockholders' Equity------------------ 44,175 120,251(3) 35,358
---------- ---------------- --------------
Total Capitalization----------------------------------------------- $ 301,134 306,309 297,877
---------- ---------------- --------------
---------- ---------------- --------------
Shares of Common Stock Issued and Outstanding---------------------- 14,070 22,568 14,070
Book Value Per Common Share(5)(6)---------------------------------- $ .80 2.78 .17
Ratio of Long-Term Debt and Redeemable Preferred Stock to Total
Capitalization--------------------------------------------------- 85% 61% 88%
<CAPTION>
RECLASSIFICATION
ONLY(1)
----------------
<S> <C>
Current Liabilities(2)--------------------------------------------- 68,109
----------------
----------------
Long-Term Debt and Other Obligations:
Exchange Notes--------------------------------------------------- --
Liability to State of Alaska------------------------------------- 61,633
Liability to Department of Energy-------------------------------- 13,194
Other------------------------------------------------------------ 8,015
Subordinated Debentures------------------------------------------ 97,656
----------------
Total Long-Term Debt and Other Obligations------------------------- 180,498
----------------
$2.20 Preferred Stock; $1 stated value; 2,875,000 shares issued and
outstanding------------------------------------------------------ --
----------------
Common Stock and Other Stockholders' Equity:(4)
$2.20 Preferred Stock; $1 stated value; 2,875,000 shares issued
and outstanding(4)--------------------------------------------- 57,500
$2.16 Preferred Stock; $1 stated value; 1,319,563 shares issued
and outstanding------------------------------------------------ --
Common stock, par value $.16 2/3; authorized 50,000,000 shares;
14,069,799 shares issued and outstanding; 8,497,890 additional
shares to be issued in the Recapitalization and in the
Reclassification Only------------------------------------------ 3,762
Additional paid-in capital--------------------------------------- 111,683
Accumulated deficit---------------------------------------------- (47,614)
Deferred compensation-------------------------------------------- (263)
----------------
Total Common Stock and Other Stockholders' Equity------------------ 125,068
----------------
Total Capitalization----------------------------------------------- 305,566
----------------
----------------
Shares of Common Stock Issued and Outstanding---------------------- 22,568
Book Value Per Common Share(5)(6)---------------------------------- 2.99
Ratio of Long-Term Debt and Redeemable Preferred Stock to Total
Capitalization--------------------------------------------------- 59%
- ------------
(1) The Reclassification is effectively conditioned upon consummation of the
Exchange Offer and cannot occur alone unless MetLife Louisiana waives a
related condition. MetLife Louisiana has not advised the Company of any
circumstances under which it might waive such condition. See 'The
Recapitalization -- MetLife Louisiana Conditions.'
(2) Current Liabilities on this table exclude the current portion of Long-Term
Debt and Other Obligations and current amounts of $2.20 Preferred Stock,
which amounts are included in the respective line items on this table. The
Historical and pro forma amounts excluded from current liabilities were
$38.8 million, $4.8 million, $27.6 million and $16.0 million, respectively.
(3) As a result of the Recapitalization, on a pro forma basis at September 30,
1993, and assuming the consummation of the Reclassification and a minimum
acceptance of the Exchange Offer ($22.5 million), versus the maximum
acceptance assumed above, Total Long-Term Debt and Redeemable Preferred
Stock would be $183 million and Common Stock and Other Stockholders' Equity
would be $124 million.
(4) The Company has entered into an agreement with MetLife Louisiana pursuant to
which MetLife Louisiana will give the Company a three-year option, subject
to certain conditions, to acquire all of the $2.20 Preferred Stock and all
of the Common Stock of the Company held by MetLife Louisiana at the date of
the Reclassification (2,875,000 shares of $2.20 Preferred Stock and
4,084,160 shares of Common Stock, based on MetLife Louisiana's holdings at
December 15, 1993), plus any shares of Common Stock issued in lieu of cash
payment of dividends on the $2.20 Preferred Stock for an initial option
price of $51.5 million, increasing by approximately 12% per annum through
December 31, 1995, and by approximately 14% per annum thereafter.
(5) Book Value Per Common Share represents Total Common Stock and Other
Stockholders' Equity reduced by the liquidation preference of $33 million
for the $2.16 Preferred Stock under the Historical and Exchange Offer Only
scenarios, or reduced by the liquidation preference of $58 million for the
$2.20 Preferred Stock under the Recapitalization and Reclassification Only
scenarios, divided by the number of shares of Common Stock issued and
outstanding.
(6) Assuming minimum acceptance of the Exchange Offer ($22.5 million), versus
the maximum acceptance assumed above, the Historical and pro forma Book
Value Per Common Share as of September 30, 1993 would be $.80, $2.94, $.43
and $2.99, respectively.
</TABLE>
10
<PAGE>
SELECTED SUMMARY PRO FORMA FINANCIAL DATA
The following sets forth certain financial information on a historical
basis and as adjusted to give effect to the Recapitalization, assuming (i) the
Exchange Offer is consummated at the maximum tender level, so that $54.5 million
in principal amount of Subordinated Debentures is exchanged for $54.5 million in
principal amount of the Exchange Notes (bearing interest at 13% per annum); the
holder of the $2.20 Preferred Stock waives the mandatory redemption requirements
thereon, considers accrued and unpaid dividends thereon to have been paid and is
issued 1,900,075 shares of Common Stock; the $2.16 Preferred Stock, including
accrued and unpaid dividends thereon, is reclassified into 6,465,859 shares of
Common Stock; and the Company will issue 131,956 shares of Common Stock
on behalf of the holders of $2.16 Preferred Stock to pay certain legal fees and
expenses in connection with the settlement of certain litigation (the
Recapitalization), (ii) only the debt exchange described in the Recapitalization
occurs (the Exchange Offer Only) and (iii) only the waiver and considerations
indicated above relating to the $2.20 Preferred Stock, the reclassification of
the $2.16 Preferred Stock and the issuance of Common Stock on behalf of the
holders of $2.16 Preferred Stock to pay certain legal fees and expenses in
connection with the settlement of certain litigation described in the
Recapitalization occur (the Reclassification Only). The Exchange Notes and
Common Stock issued in the Recapitalization are recorded at their estimated
fair market value. The $2.20 Preferred Stock is recorded at liquidation value.
The pro forma financial information is not necessarily indicative of the
Company's results of operations or financial position in the future or of what
the Company's results of operations or financial position would have been had
the Recapitalization been consummated during the periods, or as of the dates,
for which pro forma financial information is presented. This information should
be read in conjunction with the historical and pro forma financial statements
and related notes to historical and pro forma financial statements of the
Company included elsewhere herein.
<TABLE>
STATEMENT OF OPERATIONS DATA:
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
--------------------------------------------------------------------
EXCHANGE OFFER RECLASSIFICATION
HISTORICAL RECAPITALIZATION ONLY ONLY(1)
---------- ---------------- -------------- ----------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS;
NUMBER OF SHARES IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues(2)---------------------------------------- $ 954.4 954.4 954.4 954.4
---------- ---------------- -------------- ----------------
Costs and expenses:
Cost of sales and operating expenses---------- 926.1 926.1 926.1 926.1
General and administrative-------------------- 25.9 25.9 25.9 25.9
Depreciation, depletion and amortization------ 16.6 16.6 16.6 16.6
Interest-------------------------------------- 21.1 20.4(3) 20.4(3) 21.1
Other----------------------------------------- 4.6 4.6 4.6 4.6
---------- ---------------- -------------- ----------------
Total costs and expenses----------------- 994.3 993.6 993.6 994.3
---------- ---------------- -------------- ----------------
Loss before income taxes, extraordinary loss and
cumulative effect of accounting changes---------- (39.9) (39.2) (39.2) (39.9)
Income tax provision------------------------------- 5.4 5.4 5.4 5.4
---------- ---------------- -------------- ----------------
Loss before extraordinary loss and cumulative
effect of accounting changes(4)------------------ (45.3) (44.6) (44.6) (45.3)
Extraordinary loss(5)------------------------------ -- (7.4) (7.4) --
Cumulative effect of accounting changes------------ (20.6) (20.6) (20.6) (20.6)
---------- ---------------- -------------- ----------------
Net loss------------------------------------------- (65.9) (72.6) (72.6) (65.9)
Preferred stock dividend requirements-------------- 9.2 6.3 9.2 6.3
---------- ---------------- -------------- ----------------
Net loss applicable to common stock---------------- $ (75.1) (78.9) (81.8) (72.2)
---------- ---------------- -------------- ----------------
---------- ---------------- -------------- ----------------
Loss per primary and fully diluted* share before
extraordinary loss and cumulative effect of
accounting changes(4)(6)------------------------- $ (3.87) (2.26) (3.83) (2.29)
Average common shares outstanding(6)--------------- 14,063 22,561 14,063 22,561
Ratio of earnings to fixed charges(7)(8)----------- (9) (9) (9) (9)
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements(7)(10)----- (11) (11) (11) (11)
- ------------
* Anti-dilutive
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1993
--------------------------------------------------------------------
EXCHANGE OFFER RECLASSIFICATION
HISTORICAL RECAPITALIZATION ONLY ONLY(1)
---------- ---------------- -------------- ----------------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS;
NUMBER OF SHARES IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues(2)---------------------------------------- $ 627.9 627.9 627.9 627.9
---------- ---------------- -------------- ----------------
Costs and expenses:
Cost of sales and operating expenses---------- 581.6 581.6 581.6 581.6
General and administrative-------------------- 10.9 10.9 10.9 10.9
Depreciation, depletion and amortization------ 15.3 15.3 15.3 15.3
Interest-------------------------------------- 12.8 12.8(3) 12.8(3) 12.8
Other----------------------------------------- 4.6 4.6 4.6 4.6
---------- ---------------- -------------- ----------------
Total costs and expenses----------------- 625.2 625.2 625.2 625.2
---------- ---------------- -------------- ----------------
Earnings before income taxes----------------------- 2.7 2.7 2.7 2.7
Income tax provision------------------------------- 2.4 2.4 2.4 2.4
---------- ---------------- -------------- ----------------
Net earnings(4)------------------------------------ .3 .3 .3 .3
Preferred stock dividend requirements-------------- 6.9 4.7 6.9 4.7
---------- ---------------- -------------- ----------------
Net loss applicable to common stock---------------- $ (6.6) (4.4) (6.6) (4.4)
---------- ---------------- -------------- ----------------
---------- ---------------- -------------- ----------------
Loss per primary and fully diluted* share(4)(6)---- $ (.47) (.19) (.47) (.19)
Average common shares outstanding(6)--------------- 14,070 22,568 14,070 22,568
Ratio of earnings to fixed charges(7)(8)----------- 1.15 1.15 1.15 1.15
Ratio of earnings to combined fixed charges and
preferred stock dividend requirements(7)(10) (11) (11) (11) (11)
- ------------
* Anti-dilutive
</TABLE>
<TABLE>
BALANCE SHEET DATA:
<CAPTION>
SEPTEMBER 30, 1993
--------------------------------------------------------------------
EXCHANGE OFFER RECLASSIFICATION
HISTORICAL RECAPITALIZATION ONLY ONLY(1)
---------- ---------------- -------------- ----------------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Current assets---------------------------------- $ 185.6 181.3 181.3 181.6
Total assets------------------------------------ $ 414.7 411.1 411.1 410.7
Current liabilities(12)------------------------- $ 76.5 67.8 76.3 68.1
Long-term debt and other obligations:
Exchange Notes----------------------------- $ -- 54.5 54.5 --
Liability to State of Alaska--------------- $ 61.6 61.6 61.6 61.6
Liability to Department of Energy---------- $ 13.2 13.2 13.2 13.2
Subordinated Debentures-------------------- $ 97.7 48.7 48.7 97.7
Other-------------------------------------- $ 8.0 8.0 8.0 8.0
$2.20 Preferred Stock--------------------------- $ 76.5 -- 76.5 --
Common stock and other stockholders' equity----- $ 44.2 120.3 35.4 125.1
Capital expenditures---------------------------- $ 26.3 26.3 26.3 26.3
Book value per common share(13)(14)------------- $ .80 2.78 .17 2.99
- ------------
(1) The Reclassification is effectively conditioned upon consummation of the
Exchange Offer and cannot occur alone unless MetLife Louisiana waives a
related condition. MetLife Louisiana has not advised the Company of any
circumstances under which it might waive such condition. See 'The
Recapitalization -- MetLife Louisiana Conditions.'
(2) The Company is currently involved in a dispute with Tennessee Gas Pipeline
Company ('Tennessee Gas') relating to a gas contract. For additional
information concerning this dispute, see 'Legal Proceedings -- Tennessee
Gas Contract' and Notes I and N of Notes to Consolidated Financial
Statements.
(3) As a result of the Recapitalization, on a pro forma basis for the year
ended December 31, 1992, and assuming the consummation of the
Reclassification and a minimum acceptance of the Exchange Offer ($22.5
million), versus the maximum acceptance assumed above, interest expense
under the Recapitalization and Exchange Offer Only would be $21.0 million.
Under the same pro forma assumptions for the nine months ended September
30, 1993 interest expense under the Recapitalization and Exchange Offer
Only would be $ 12.9 million.
(Footnotes continued on following page)
12
<PAGE>
(4) The Selected Pro Forma Financial Data assume that the Exchange Offer is
consummated at the maximum tender level. If the Exchange Offer is
consummated at the minimum tender level, then (a) $22.5 million principal
amount of Subordinated Debentures would be exchanged for $22.5 million
principal amount of Exchange Notes at January 1, 1992; (b) the Historical
and pro forma net earnings for the nine months ended September 30, 1993
would be $.3 million; (c) the Historical and pro forma loss per primary and
fully diluted share for the nine months ended September 30, 1993 would be
$(.47), $(.20), $(.47) and $(.20), respectively; (d) the Historical and pro
forma loss before extraordinary loss and cumulative effect of accounting
changes for the year ended December 31, 1992 would be $(45.3) million,
$(45.1) million, $(45.1) million and $(45.3) million, respectively; and (e)
the Historical and pro forma loss per primary and fully diluted share
before extraordinary loss and cumulative effect of accounting changes for
the year ended December 31, 1992 would be $(3.87), $(2.28), $(3.86) and
$(2.29), respectively.
(5) The completion of the Exchange Offer for the Subordinated Debentures will
result in the recognition of an extraordinary loss from the early
extinguishment of debt equal to the excess of the estimated market value of
the Exchange Notes over the carrying value of the Subordinated Debentures
exchanged, increased by applicable unamortized debt issuance costs.
(6) If the Company elected to pay the dividends on the $2.20 Preferred Stock
solely in shares of Common Stock (assuming a market price of $6 per share):
(a) the historical and pro forma average common shares outstanding for the
nine months ended September 30, 1993 would be 14,069,937; 22,837,161;
14,069,937 and 22,837,161, respectively; (b) the Historical and pro forma
average common shares outstanding for the year ended December 31, 1992
would be 14,063,258; 22,963,320; 14,063,258 and 22,963,320, respectively;
(c) the Historical and pro forma loss per primary and fully diluted share
for the nine months ended September 30, 1993 would be $(.47), $(.19),
$(.47), and $(.19), respectively; and (d) the Historical and pro forma loss
per primary and fully diluted share before extraordinary loss and
cumulative effect of accounting changes for the year ended December 31,
1992 would be $(3.87), $(2.22), $(3.83) and $(2.25), respectively.
(7) For purposes of calculating the ratio of earnings to fixed charges and the
ratio of earnings to combined fixed charges and preferred stock dividend
requirements, earnings consists of net earnings before the cumulative
effect of accounting changes, extraordinary loss, income taxes and fixed
charges. Fixed charges consist of interest expense and that portion of
rental costs estimated to be equivalent to interest.
(8) If the Exchange Offer is consummated at the minimum tender level, as
discussed in (4) above, the Historical and pro forma Ratio of Earnings to
Fixed Charges for the nine months ended September 30, 1993 would be 1.15,
1.14, 1.14 and 1.15, respectively. The Historical and pro forma earnings
for the year ended December 31, 1992 would be inadequate to cover fixed
charges assuming the minimum tender level. The coverage deficiencies would
be $39.9 million, $39.7 million, $39.7 million and $39.9 million,
respectively.
(9) The Historical and pro forma earnings for the year ended December 31, 1992
were inadequate to cover fixed charges. The coverage deficiencies were
$39.9 million, $39.2 million, $39.2 million and $39.9 million,
respectively.
(10) If the Exchange Offer is consummated at the minimum tender level, as
discussed in (4) above, the Historical and pro forma earnings for the nine
months ended September 30, 1993 would be inadequate to cover combined fixed
charges and preferred stock dividend requirements. The coverage
deficiencies would be $4.1 million, $2.1 million, $4.2 million and $2.0
million, respectively. The Historical and pro forma earnings for the year
ended December 31, 1992 would be inadequate to cover combined fixed charges
and preferred stock dividend requirements. The coverage deficiencies would
be $49.1 million, $46.0 million, $48.9 million and $46.2 million,
respectively.
(11) The Historical and pro forma earnings for the nine months ended September
30, 1993 were inadequate to cover combined fixed charges and preferred
stock dividends requirements. The coverage deficiencies were $4.1 million,
$2.0 million, $4.1 million and $2.0 million, respectively. The Historical
and pro forma earnings for the year ended December 31, 1992 were inadequate
to cover combined fixed charges and preferred stock dividends. The coverage
deficiencies were $49.1 million, $45.5 million, $48.4 million and $46.2
million, respectively.
(12) Current Liabilities in this table exclude the current portion of Long-Term
Debt and Other Obligations and amounts currently due on the $2.20 Preferred
Stock, which amounts are included in the respective line items on this
table. The Historical and pro forma amounts excluded from current
liabilities were $38.8 million, $4.8 million, $27.6 million and $16.0
million, respectively.
(13) Book value per common share represents Total Common Stock and Other
Stockholders' Equity reduced by the liquidation preference of $33 million
for the $2.16 Preferred Stock under the Historical and Exchange Offer Only
scenarios or reduced by the liquidation preference of $58 million for the
$2.20 Preferred Stock under the Recapitalization and Reclassification Only
scenarios, divided by the number of shares of Common Stock issued and
outstanding.
(14) Assuming minimum acceptance of the Exchange Offer ($22.5 million), versus
the maximum acceptance assumed above, the Historical and pro forma book
value per common share as of September 30, 1993 would be $.80, $2.94, $.43
and $2.99, respectively.
</TABLE>
13
<PAGE>
<TABLE>
SUMMARY OF SELECTED HISTORICAL FINANCIAL AND OPERATIONS DATA
(DOLLARS IN MILLIONS EXCEPT PER SHARE)
<CAPTION>
NINE MONTHS
THREE MONTHS YEAR ENDED
YEARS ENDED SEPTEMBER 30, ENDED ENDED SEPTEMBER 30,
------------------------------------------ DECEMBER 31, DECEMBER 31, --------------------
1988 1989 1990 1991 1991 1992 1992 1993
--------- --------- --------- --------- ------------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF CONSOLIDATED
OPERATIONS DATA:
Revenues(1)--------------------- $ 1,171.8 767.0 1,006.5 1,091.0 243.9 954.4 718.8 627.9
Cost of Sales and Operating
Expenses-------------------- 1,059.2 718.6 920.5 1,015.9 228.6 926.1 688.4 581.6
General and Administrative---- 29.7 33.9 20.2 17.0 2.8 25.9 15.0 10.9
Depreciation, Depletion and
Amortization---------------- 28.4 21.9 12.8 15.0 4.2 16.6 12.4 15.3
Settlement with Department of
Energy---------------------- 27.0 -- -- -- -- -- -- --
Interest---------------------- 28.5 17.7 20.8 18.8 5.0 21.1 15.9 12.8
Other------------------------- 3.9 6.1 5.9 5.3 .7 4.6 3.4 4.6
Income Tax Provision
(Benefit)(primarily
foreign)-------------------- 14.5 (.7) 3.6 15.1 3.0 5.4 4.1 2.4
Cumulative Effect of
Accounting Changes---------- -- -- -- -- -- (20.6) (20.6) --
--------- --------- --------- --------- ------ ------ --------- ---------
Net Earnings (Loss)------------- (19.4) (30.5) 22.7 3.9 (.4) (65.9) (41.0) .3
Preferred Stock Dividend
Requirements---------------- 9.2 9.2 9.2 9.2 2.3 9.2 6.9 6.9
--------- --------- --------- --------- ------ ------ --------- ---------
Net Earnings (Loss) Applicable
to Common Stock--------------- $ (28.6) (39.7) 13.5 (5.3) (2.7) (75.1) (47.9) (6.6)
--------- --------- --------- --------- ------ ------ --------- ---------
--------- --------- --------- --------- ------ ------ --------- ---------
Earnings (Loss) Per Primary and
Fully Diluted* Share---------- $ (2.04) (2.83) .96 (.37) (.19) (5.34) (3.41) (.47)
Dividends Paid on Preferred
Stock------------------------- $ 3.8 9.2 6.9 8.0 -- -- -- --
Earnings (Loss) Before Interest,
Taxes, Cumulative Effect of
Accounting Changes and
Depreciation, Depletion and
Amortization (EBITDA)(2)------ $ 52.3 8.6 60.1 53.0 11.8 (2.2) 12.0 31.0
Ratio of Earnings to Fixed
Charges----------------------- (3) (3) 2.12 1.79 1.39 (3) (3) 1.15
Ratio of Earnings to Combined
Fixed Charges and Preferred
Stock Dividend Requirements--- (4) (4) 1.52 1.30 1.03 (4) (4) (4)
OTHER SELECTED FINANCIAL DATA:
Capital Expenditures------------ $ 6.0 13.2 23.1 24.5 3.9 15.4 10.3 26.3
Working Capital----------------- $ 110.8 105.1 117.9 95.4 106.1 122.6 85.8 70.2
Property, Plant and Equipment,
Net--------------------------- $ 209.8 200.1 192.0 207.5 207.2 198.5 197.6 209.3
Total Assets-------------------- $ 484.9 445.3 504.9 496.8 494.7 446.7 469.8 414.7
Long-Term Debt and Other
Obligations, Including Current
Portion----------------------- $ 186.0 163.2 168.0 184.7 189.4 201.7 195.7 180.5
Redeemable Preferred Stock------ $ 57.3 57.4 57.4 57.4 57.4 71.7 70.1 76.5
Common Stock and Other
Stockholders' Equity---------- $ 164.6 125.4 141.4 137.4 137.0 50.7 77.8 44.2
- ------------
* Anti-dilutive
(1) The Company is currently involved in a dispute with Tennessee Gas relating
to a gas contract. For additional information concerning this dispute, see
'Legal Proceedings -- Tennessee Gas Contract' and Notes I and N of Notes to
Consolidated Financial Statements.
(2) EBITDA represents earnings (loss) before cumulative effect of accounting
changes, interest, income taxes and depreciation, depletion and
amortization. EBITDA, while not purporting to reflect any measure of the
Company's operations or cash flow, is presented for additional analysis as
the Company believes that certain investors use EBITDA as one measure of an
issuer's historical ability to service debt.
(3) Earnings were inadequate to cover fixed charges by $4.8 million, $31.3
million, $39.9 million, and $16.2 million for the years ended September 30,
1988, September 30, 1989 and December 31, 1992 and the nine months ended
September 30, 1992, respectively.
(4) Earnings were inadequate to cover combined fixed charges and preferred stock
dividend requirements by $14.0 million, $40.5 million, $49.1 million, $23.2
million and $4.1 million for the years ended September 30, 1988, September
30, 1989 and December 31, 1992 and the nine months ended September 30, 1992
and September 30, 1993, respectively.
</TABLE>
14
<PAGE>
<TABLE>
SUMMARY OF SELECTED HISTORICAL FINANCIAL AND OPERATIONS DATA
<CAPTION>
THREE NINE MONTHS
MONTHS YEAR ENDED
YEARS ENDED SEPTEMBER 30, ENDED ENDED SEPTEMBER 30,
------------------------------------------ DECEMBER 31, DECEMBER 31, --------------------
1988 1989 1990 1991 1991 1992 1992 1993
--------- --------- --------- --------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING STATISTICS:
REFINING AND MARKETING:
Refinery Capacity (average
daily barrels)------------- 72,000 72,000 72,000 72,000 72,000 72,000 72,000 72,000
Refinery Throughput (average
daily barrels)------------- 71,784 65,045 67,904 68,192 67,323 61,425 62,574 50,503
Total Product Sales Excluding
Residual Fuel Oil Sales
(average daily barrels)---- 66,735 59,413 65,417 61,426 57,363 63,509 64,892 53,551
Residual Fuel Oil Sales
(average daily
barrels)(1)---------------- 35,536 27,502 28,332 28,729 28,197 23,931 22,929 16,290
OIL FIELD SUPPLY AND
DISTRIBUTION:
Product Sales (average daily
barrels)------------------- 5,943 6,455 7,846 10,470 12,859 8,476 8,517 7,114
NATURAL GAS -- UNITED STATES:
Net Production (average daily
Mcf)----------------------- 12,421 292 727 7,435 9,741 13,960 12,618 32,313
Average Sales Prices (dollars
per Mcf)(1)---------------- $ 1.89 1.66 1.40 1.88 2.49 3.68 2.38 3.45
NATURAL GAS -- BOLIVIA:
Net Production (average daily
Mcf)----------------------- -- -- 12,668 19,322 18,793 19,421 19,502 19,183
Average Sales Prices (dollars
per Mcf)------------------- $ -- -- 2.74 3.06 2.42 1.67 1.82 1.20
CRUDE OIL--INDONESIA (sold
effective May 1, 1992):
Net Production
(average daily barrels)---- 2,562 1,994 2,565 3,315 2,892 2,714 2,714 --
Net Sales Price (dollars per
barrel)-------------------- $ 17.65 15.89 17.95 24.39 20.57 18.20 18.20 --
PROVED RESERVES AT END OF
PERIOD:
Natural Gas (millions of cubic
feet):
United States---------------- 208 568 11,118 33,141 36,884 73,753 * 101,598
Bolivia---------------------- -- -- 85,040 115,229 113,465 107,008 * * (2)
Crude Oil (thousands of
barrels):
United States---------------- 4 -- 4 5 4 -- * *
Bolivia---------------------- -- -- 2,058 2,828 2,771 2,263 * * (2)
Indonesia-------------------- -- 3,815 11,226 4,504 5,571 -- -- --
STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH
FLOWS RELATING TO PROVED
RESERVES (MILLIONS OF
DOLLARS):
United States(3)------------- $ .3 .5 6.5 30.4 30.9 87.1 * *
Bolivia---------------------- $ -- -- 37.0 54.3 50.9 23.6 * *
Indonesia-------------------- $ -- 6.3 58.9 4.4 5.2 -- -- --
- ------------
(1) All sales of residual fuel oil represent sales of residual fuel oil produced
at the Company's refinery.
(2) At April 30, 1993, proved reserves in Bolivia were approximately 103,293
million cubic feet of natural gas and 2,291 thousand barrels of crude oil.
(3) The Company is involved in a dispute with Tennessee Gas relating to a gas
contract. For additional information concerning this dispute, see 'Legal
Proceedings -- Tennessee Gas Contract' and Notes I and N of Notes to
Consolidated Financial Statements.
* Data not available.
</TABLE>
15
<PAGE>
COMPARISON OF EXCHANGE NOTES AND SUBORDINATED DEBENTURES
The following is a comparison of some of the principal features of the
Exchange Notes and the Subordinated Debentures. Such comparisons are summaries
which do not purport to be complete and are qualified in their entirety by
reference to the more complete descriptions under 'Description of Exchange
Notes' herein and 'Description of Subordinated Debentures' in Appendix E.
Capitalized terms used below and not otherwise defined herein are as defined in
the indenture governing the Exchange Notes or the Subordinated Debentures, as
the case may be.
<TABLE>
<CAPTION>
EXCHANGE NOTES SUBORDINATED DEBENTURES
--------------------------------------- ---------------------------------------
<S> <C> <C>
Issuer------------------------ Tesoro Petroleum Corporation. Tesoro Petroleum Corporation.
Interest Rate:---------------- 13% per annum payable semiannually on 12 3/4% per annum payable semiannually
June 1 and December 1. on March 15 and September 15.
Maturity:--------------------- December 1, 2000. March 15, 2001.
Optional Redemption:---------- At the option of the Company, at 100% At the option of the Company, at 100%
of principal amount plus accrued of principal amount plus accrued
interest, except that no optional interest.
redemption may be made unless an equal
principal amount of, or all the
outstanding, Subordinated Debentures
are concurrently redeemed.
Sinking Fund:----------------- None. $11,250,000 on March 15 of each year,
up to and including 2000, with credit
for the principal amount of
Subordinated Debentures otherwise
acquired and retired by the Company.
Upon consummation of the Exchange
Offer, the annual sinking fund
requirements will be satisfied until at
least 1996 and possibly until 1998.
Ranking:---------------------- If the requisite consents to the Subordinated indebtedness ranking
Indenture Amendments are obtained, the junior to all Senior Indebtedness,
Exchange Notes will be pari passu with including indebtedness under the
all other senior indebtedness, and Company's letter of credit facilities.
senior to all subordinated indebtedness
of the Company, including the
Subordinated Debentures and the ANS
Debt. If the requisite consents to the
Indenture Amendments are not obtained,
the Exchange Notes will be pari passu
with the other senior debt of the
Company and with the Subordinated
Debentures, and senior in right of
payment to the ANS Debt and all other
subordinated indebtedness of the
Company.
Limitation on Dividends:------ Prohibition on the payment of dividends Prohibition on the payment of cash
or distributions on, or purchasing or dividends on the Common Stock or making
acquiring, equity securities of the distributions on or purchasing or
Company (except dividends on the acquiring capital stock in an amount in
Company's preferred stock and stock excess of the sum of (1) consolidated
dividends) unless, giving effect to net income of the Company subsequent to
such transaction (1) no event of September 30, 1982; (2) net proceeds
default shall occur and (2) the from the sale of its capital stock
aggregate amount expended for such pur- subsequent to September 30, 1982; (3)
poses subsequent to September 30, 1993 net proceeds from the sale of its
is less than the sum of (a) 50% of the indebtedness subsequent to September
aggregate consolidated income of the 30, 1982 which is subsequently
Company earned subsequent to September converted into capital stock; (4)
30, 1993 or 100% if such aggregate dividends or distributions subsequent
consolidated net income for such period to September 30, 1982, or sale
is negative and (b) the net proceeds proceeds, in respect of its interest in
from the sale after September 30, 1993 Trinidad-Tesoro Petroleum Company
of certain equity securities of the Limited; and (5) $30,000,000, subject
Company and indebtedness which has been to certain limitations; provided,
converted into certain equity however, that regular cash dividends on
securities of the Company; provided, the $2.20 Preferred Stock and the $2.16
however, that the Company may make Preferred Stock may be paid.
redemptions and repurchases of Common
Stock and preferred stock in an aggre- The limitation on dividends will be
gate amount not to exceed $30,465,000 modified to parallel the limitation of
(approximately equal to the accrued and dividends included in the indenture
unpaid dividends that will exist on the governing the Exchange Notes upon
Existing Preferred Stock at January 31, receipt of the requisite consents to
1994) and from the proceeds of contem- the Indenture Amendments.
poraneous sales of certain capital
stock and may make dividend payments
on preferred stock.
Listing:---------------------- New York Stock Exchange (applied for). New York Stock Exchange.
</TABLE>
16
<PAGE>
COMPARISON OF $2.16 PREFERRED STOCK, $2.20 PREFERRED STOCK AND COMMON STOCK
The following is a comparison of some of the principal features of the
$2.16 Preferred Stock, $2.20 Preferred Stock and Common Stock. Such comparisons
are summaries which do not purport to be complete.
<TABLE>
<CAPTION>
$2.16 PREFERRED STOCK $2.20 PREFERRED STOCK COMMON STOCK
----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
Dividends:------------------- Cumulative annual cash divi- Cumulative annual cash divi- Dividends, when and as
dends of $2.16 per share, dends of $2.20 per share, declared by the Board of
payable on March 15, June 15, payable on February 15, May Directors, but only out of
September 15 and December 15 15, August 15 and November 15 funds legally available
of each year ($8.9 million in of each year (aggregating therefor, subject to the
arrears at December 15, $19.8 million in arrears at rights of the holders of
1993), but only out of funds December 15, 1993), but only shares ranking prior to Com-
legally available therefor. out of funds legally mon Stock as to dividends and
Ranks senior to the Common available therefor. Ranks distributions. Ranks junior
Stock and pari passu with the senior to the Common Stock to the Existing Preferred
$2.20 Preferred Stock as to and pari passu with the $2.16 Stock as to dividends. The
dividends. Preferred Stock as to Company is presently
dividends. prohibited from paying cash
The Company will agree with dividends on the Common
MetLife Louisiana that divi- Stock. See Note H of Notes to
dends may be paid at the Consolidated Financial
election of the Company in Statements included else-
any combination of cash or, where herein.
subject to certain
conditions, shares of Common
Stock, with shares of Common
Stock being valued at the
average closing price on the
New York Stock Exchange for
the 10 trading days
commencing on the first
trading day after the Company
announces its intention to
pay the dividend in Common
Stock.
MetLife Louisiana will also
agree with the Company to
consider all accrued and
unpaid dividends on the $2.20
Preferred Stock to have been
paid.
Liquidation Rights:---------- Liquidation preference of $25 Liquidation preference of $20 After the amounts payable
per share, plus accrued and per share, plus accrued and upon liquidation on the
unpaid dividends, before any unpaid dividends, before any Existing Preferred Stock have
distribution of assets is distribution of assets is been paid, the remaining net
made to holders of Common made to holders of Common assets of the Company will be
Stock or any other junior Stock or any other junior distributed pro rata to the
stock. If assets available stock. If assets available holders of Common Stock.
for distribution are in- for distribution are in-
sufficient to pay the full sufficient to pay the full
liquidation preference, all liquidation preference, all
classes of capital stock, if classes of capital stock, if
any, ranking on a parity as any, ranking on a parity as
to liquidation rights with to liquidation rights with
the $2.16 Preferred Stock the $2.20 Preferred Stock
(currently only the $2.20 (currently only the $2.16
Preferred Stock) are entitled Preferred Stock) are entitled
to share ratably in any to share ratably in any
distribution. distribution.
Voting Rights:--------------- One vote per share, voting One vote per share, voting One vote per share for all
together as a single class together as a single class purposes.
with the holders of shares of with the holders of shares of
Common Stock and $2.20 Common Stock and $2.16
Preferred Stock and any other Preferred Stock and any other
class entitled to vote with class entitled to vote with
the holders of Common Stock, the holders of Common Stock,
on all matters on which the on all matters on which the
shares of Common Stock may shares of Common Stock may
vote, including elections of vote, including elections of
directors. directors.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
$2.16 PREFERRED STOCK $2.20 PREFERRED STOCK COMMON STOCK
----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
Holders of two-thirds of the Holders of two-thirds of the
outstanding shares, voting as outstanding shares, voting as
a separate class, are a separate class, are
required: (i) to authorize or required: (i) to authorize or
increase the authorized increase the authorized
amount of any additional amount of any additional
class of stock ranking prior class of stock ranking prior
to the $2.16 Preferred Stock, to the $2.20 Preferred Stock,
or (ii) to amend, alter or or (ii) to amend, alter or
repeal the voting powers, repeal the voting powers,
preferences or rights of the preferences or rights of the
$2.16 Preferred Stock in any $2.20 Preferred Stock in any
respect adverse to the respect adverse to the
holders thereof. holders thereof.
Holders of a majority of the Holders of a majority of the
outstanding shares, voting as outstanding shares, voting as
a single class, are required a single class, are required
to authorize or increase the to authorize or increase the
authorized amount of any authorized amount of any
additional class of stock additional class of stock
ranking on parity with the ranking on parity with the
$2.16 Preferred Stock. $2.20 Preferred Stock.
Failure to pay dividends
(or redeem $2.20
Preferred Stock):---------- If the Company fails to pay If the Company fails to pay None.
dividends on the $2.16 dividends on the $2.20
Preferred Stock for at least Preferred Stock for at least
six quarters (whether or not six quarters (whether or not
consecutive), the holders of consecutive), the holders of
the $2.16 Preferred Stock, the $2.20 Preferred Stock,
voting together as a single voting together as a single
class with the holders class with the holders of the
of $2.20 Preferred Stock, $2.16 Preferred Stock, have a
have the right to elect two right to elect two additional
additional members of the members of the Board of
Board of Directors. Directors.
As of December 15, 1993, the As of November 15, 1993, the
Company had omitted dividends Company had omitted dividends
on the $2.16 Preferred Stock on the $2.20 Preferred Stock
for a total of 12 1/2 for a total of 12 1/2
quarters. quarters.
If the Company fails to make
redemptions of $2.20
Preferred Stock when required
on any two redemption dates,
and if the default in
dividends described in the
preceding paragraph is not
then in effect, the holders
of the $2.20 Preferred Stock,
voting as a separate class,
have the right to elect two
additional members of the
Board of Directors.
Optional
Redemption:---------------- At the option of the Company, At the option of the Company, None.
on a pro rata basis, at $25 on a pro rata basis, at $20
per share plus accrued and per share plus accrued and
unpaid dividends (totalling unpaid dividends (totalling
$31.75 per share at November $26.97 per share at November
30, 1993), but only out of 30, 1993), but only out of
funds legally available funds legally available
therefor. therefor.
The Company will agree with
MetLife Louisiana not to
redeem the $2.20 Preferred
Stock prior to the fourth
anniversary date of the
Reclassification. The Company
reserves the right to redeem
the $2.20 Preferred Stock
during such period if such
agreement with MetLife Loui-
siana terminates or is waived
for any reason.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
$2.16 PREFERRED STOCK $2.20 PREFERRED STOCK COMMON STOCK
----------------------------- ----------------------------- -----------------------------
<S> <C> <C> <C>
Mandatory Redemption
or Offer to Purchase:------ None. If not redeemed earlier, on None.
each February 15, beginning
on February 15, 1994, the
Company is required to
redeem, but only out of funds
legally available therefor,
6 2/3% of the shares of $2.20
Preferred Stock outstanding
on February 15, 1994. In
addition, if the Company
fails to pay dividends on the
$2.20 Preferred Stock for at
least 12 quarters (whether or
not consecutive), the Company
is required to redeem, at the
option of MetLife Louisiana
or its affiliates, but only
out of funds legally
available therefor, all of
the outstanding shares of
$2.20 Preferred Stock.
As of November 15, 1993, the
Company had omitted dividends
on the $2.20 Preferred Stock
for a total of 12 1/2
quarters.
MetLife Louisiana will agree
to waive and not to require
the Company to effect, any
and all mandatory redemptions
which a holder of $2.20
Preferred Stock has the right
to require.
The Company will agree with
MetLife Louisiana that on
June 30, 1998 and on June 30
of each subsequent year
through 2007, the Company
must offer to purchase, but
only out of funds legally
available therefor, 287,500
shares of $2.20 Preferred
Stock or, if issued in lieu
thereof, the Future Preferred
Stock, on a cumulative basis.
The purchase price shall be
$20 per share, plus accrued
and unpaid dividends, payable
at the election of the
Company in any combination of
cash or, subject to certain
conditions, shares of Common
Stock, with shares of Common
Stock being valued at the
average closing price on the
New York Stock Exchange for
the 10 trading days
commencing on the first
trading day after the Company
announces its intention to
make such purchase with
Common Stock.
Conversion:------------------ Convertible, at the option of Convertible, at the option of None.
the holder, into 1.7241 the holder, into .8696 shares
shares of Common Stock for of Common Stock for each
each share of $2.16 Preferred share of $2.20 Preferred
Stock, subject to adjustment. Stock, subject to adjustment.
MetLife Louisiana will agree
to refrain from exercising
the conversion rights under
the terms of the $2.20
Preferred Stock.
Listing:--------------------- New York Stock Exchange. Unlisted. New York Stock Exchange and
Pacific Stock Exchange.
</TABLE>
19
<PAGE>
RISK FACTORS
Retention of Subordinated Debentures, the exchange of Subordinated
Debentures for Exchange Notes, the reclassification of shares of $2.16 Preferred
Stock into shares of Common Stock and the adoption of the Charter Amendments are
each subject to a number of risks, including those discussed below. Prior to
deciding whether to tender Subordinated Debentures pursuant to the Exchange
Offer or to vote for Proposal No. 1 or Proposal No. 2, as applicable, each
Debentureholder and stockholder of the Company should carefully consider the
following risk factors, together with all other information set forth in this
Proxy Statement -- Prospectus. Such risk factors have been listed in five
sections: (i) risk factors of not effecting the Recapitalization; (ii) risk
factors for all securityholders; (iii) risk factors for Debentureholders
following consummation of the Exchange Offer; (iv) risk factors for holders of
Exchange Notes; (v) risk factors for holders of Existing Preferred Stock; and
(vi) risk factors for holders of Common Stock.
RISK FACTORS OF NOT EFFECTING THE RECAPITALIZATION
High Leverage and Adverse Financial Condition. The Company is highly
leveraged, with significant funding requirements for near-term obligations. At
September 30, 1993, the Company had $257 million of long-term debt and
redeemable preferred stock outstanding. The Subordinated Debentures require
sinking fund payments sufficient to retire $11.25 million principal amount of
Subordinated Debentures per year, and the $2.20 Preferred Stock provides for
annual mandatory redemptions, beginning in 1994, of 6 2/3% of the number of
shares of $2.20 Preferred Stock outstanding at the time of the first redemption,
at a redemption price of $20 per share, plus accrued and unpaid dividends. In
addition, pursuant to the $2.20 Preferred Stock Put Option, since the Company is
in default in the payment of 12 full quarterly dividends on the $2.20 Preferred
Stock, the holder of the $2.20 Preferred Stock has the option to require the
Company to redeem, out of funds legally available therefor, all the $2.20
Preferred Stock at $20 per share (an aggregate of $57.5 million), plus accrued
and unpaid dividends (approximately $20.0 million or $6.97 per share at November
30, 1993). MetLife Louisiana, the current holder of the $2.20 Preferred Stock,
has agreed, subject to certain conditions, that it will not exercise the $2.20
Preferred Stock Put Option before March 10, 1994 or earlier under certain
circumstances. The terms of the $2.16 Preferred Stock require that, in
connection with any redemption of the $2.20 Preferred Stock, all accrued and
unpaid dividends on the $2.16 Preferred Stock (aggregating approximately $8.9
million or $6.75 per share at November 30, 1993) be paid.
The Company's operations over the past several years have not generated
cash sufficient to meet all of the Company's obligations. As a result, the
Company has been unable to pay dividends on the Existing Preferred Stock and has
relied, in part, on cash from the sale of assets to meet its other cash
requirements. Poor operating results have in large part been caused by
significantly lower operating results from the Company's refining and marketing
operations, which have been principally due to the deterioration of gross
margins on sales of the Company's refined products, particularly residual fuel
oil, which has approximated 40% of the total output of the refinery during the
last three fiscal years. The Company cannot predict future prices for residual
fuel oil; however, the Company does not believe there will be any meaningful
improvement in the residual fuel oil market in the foreseeable future.
The Recapitalization will (1) satisfy the annual sinking fund requirements
of $11.25 million on the unexchanged Subordinated Debentures until at least 1996
and possibly until 1998 (because the Subordinated Debentures acquired in the
Exchange Offer can be tendered in satisfaction of the sinking fund
requirements), (2) waive the $2.20 Preferred Stock Put Option and the annual
cash redemption requirements of the $2.20 Preferred Stock, which begin in 1994,
and create an annual obligation of the Company to offer to purchase the $2.20
Preferred Stock or, if issued in lieu thereof, the Future Preferred Stock,
beginning in 1998, under which the purchase price may be paid in cash or,
subject to certain conditions, shares of Common Stock or any combination
thereof, (3) enable the Company to make future dividend payments on the $2.20
Preferred Stock in cash or, subject to certain conditions, shares of Common
Stock or any combination thereof, (4) reclassify all amounts
20
<PAGE>
representing the $2.20 Preferred Stock and accrued and unpaid dividends on the
$2.16 Preferred Stock as equity, and extinguish the accrued and unpaid dividends
on the Existing Preferred Stock ($28.9 million at November 30, 1993), and (5)
allow the Company the option to repurchase the entire equity interest in the
Company currently held by MetLife Louisiana.
For information concerning the Company's response to its financial
condition, see 'The Recapitalization -- Background.'
Termination of Letter of Credit Facility. On October 29, 1993, in order to
avoid a $700,000 facility fee, the Company elected to terminate its secured
Letter of Credit Facility with a group of banks. Letters of credit are issued to
obtain crude oil feedstocks for the Company's refinery and for other operating
and corporate needs. In connection with the termination, the Company negotiated
certain interim credit arrangements in order to meet its near term operating and
corporate credit requirements. See 'The Recapitalization -- Background -- The
Company's Financial Requirements.' In addition, the Company initiated
discussions with several financial institutions with regard to providing a
long-term credit facility to finance the Company's working capital requirements.
Based on these discussions, the Company believes it will be able to enter into a
long-term credit facility on terms more favorable than the Company's terminated
Letter of Credit Facility upon successful completion of the proposed
Recapitalization. If the Company is unsuccessful in completing the
Recapitalization, and is thereafter unable to arrange a long-term credit
facility, or is otherwise unable to arrange such a facility, the Company may be
required to reduce its refinery throughput to reduce its working capital
requirements. The Company is unable to predict if it would be able to operate
the refinery at an economically viable rate under such circumstances.
Requirements for Financial Responsibilities. The State requires the
Company, as the operator of a terminal, pipeline or tanker vessel, to have a
satisfactory contingency plan concerning oil spills and to maintain proof of
certain minimum standards of financial responsibility. Such minimum standards of
financial responsibility are also required under The Oil Pollution Act of 1990
and by the agreement covering the Company's transportation of feedstock through
the Trans Alaska Pipeline System. During any period in which the $2.20 Preferred
Stock Put Option is exercisable, the Company might not meet such minimum
standards. In the event the Company were unable to meet such minimum standards,
its ability to operate could be materially adversely affected.
Earnings and Fixed Charges. Earnings were inadequate to cover combined
fixed charges and preferred stock dividend requirements by $49.1 million and
$4.1 million during fiscal 1992 and the nine months ended September 30, 1993,
respectively.
RISK FACTORS FOR ALL SECURITYHOLDERS
Risk Factors Specific to the Company
Concentration of Oil and Gas Operations. 100% of the Company's operating
profit during 1992, and approximately 87% of its operating profit during the
nine months ended September 30, 1993, were attributable to its oil and gas
operations. Oil and gas production is subject to interruption as a result of a
variety of conditions and events, including natural disaster, reservoir damage,
mechanical difficulties, unavailability of equipment and supplies, normal
production declines, transportation problems, title and contractual
controversies, governmental regulation and others. Because the Company's
domestic oil and gas production is confined to the Bob West Field and its
international oil and gas production is confined to two blocks in Bolivia, the
effect of any of such conditions or events on the Company could be particularly
adverse. Any interruption of oil and gas production in any one or more of the
Company's areas of operation could have a material adverse effect on the
Company.
Interruption of Feedstock Availability. The Company's Alaska refinery
currently utilizes crude oil which is transported through the Trans Alaska
Pipeline to Valdez and from there to the refinery by the Company's
time-chartered American flag vessel. The Company has a contract through 1994
with the State which presently provides for the purchase of approximately 27,500
barrels of oil per day of Alaska North Slope crude oil, which constituted
approximately 54% of the Company's feedstock
21
<PAGE>
requirements during the first nine months of 1993. The remainder of the
Company's feedstock requirements are generally met through short-term contracts
and spot market purchases. In the event of any significant interruption in this
supply or transportation system, the Company might not have ready access to any
other source of feedstocks, which situation could have a material adverse effect
on the Company's operations.
Damage to Refinery; Natural Hazards. All refinery operations are conducted
at the Company's facility in Kenai, Alaska. As a result, the operations of the
Company would be subject to significant interruption if its refinery or its
associated dock facilities were to experience a major accident or were damaged
by severe weather or other natural disaster. The Company, however, maintains
business interruption insurance in amounts which management of the Company
believes to be adequate to cover any material losses which might be incurred in
such event.
New Refining and Marketing Operational Strategy. The Company's poor
operating results in recent years have been caused in large part by
significantly lower operating results from the Company's refining and marketing
operations, which have been principally due to the deterioration of gross
margins on sales of the Company's refined products, particularly residual fuel
oil. To address this situation, the Company's new management has developed and
implemented a market-driven operational strategy for the refining and marketing
operations. This strategy includes reducing refinery throughput and altering the
mix of feedstocks, which is intended to enable the Company to match its refined
product yield more closely to the product demand in Alaska, its primary market,
and reduce shipments of refined products to less profitable markets. The
strategy is also intended to reduce the Company's working capital requirements
and reduce the volume of residual fuel oil produced by the Company's Alaska
refinery, which has approximated 40% of the total output of the refinery during
the past three fiscal years. Implementation of this strategy has resulted in a
decrease in total refinery production from 60,900 barrels per day in 1992 to
49,700 barrels per day during the nine months ended September 30, 1993 and a
decrease in the level of residual fuel oil production from approximately 23,400
barrels per day in 1992 to approximately 17,600 barrels per day during the nine
months ended September 30, 1993. The Company's ability to further reduce
production of residual fuel oil, other than by further reducing total refinery
production, is currently limited by constraints on the supply of lighter
feedstocks. The new strategy has been implemented only recently, and there can
be no assurance that it will ultimately prove successful.
Possible Adverse Impact of Pending Litigation. The Company is involved in
certain litigation in Texas state court regarding a gas purchase contract
expiring in January 1999 with Tennessee Gas Pipeline Company ('Tennessee Gas').
Two producing acreage units within the Bob West Field are subject to such
contract, pursuant to which Tennessee Gas is currently paying in excess of $7.50
per thousand cubic feet ('Mcf') of gas, which is greatly in excess of the spot
market price for natural gas ($1.88 per Mcf during October 1993). During the
nine months ended September 30, 1993, the Tennessee Gas contract price was paid
with respect to 26% of the Company's net production from the Bob West Field. As
of September 30, 1993, the cumulative difference between the amount which
Tennessee Gas has paid for gas purchases under the gas purchase agreement and
the price that would have been paid based on spot market prices totaled
approximately $22.3 million. During the remainder of 1993, the Company expects
this difference to continue to increase as the Company continues development of
the Bob West Field. The trial court judgment in the case in favor of the Company
was reversed in part and remanded to the trial court by the Court of Appeals.
Tennessee Gas has filed a motion for rehearing with the Court of Appeals
regarding the portions of its decisions upholding the judgment of the trial
court. An adverse judgment in this case could have a material adverse effect on
the Company. If Tennessee Gas ultimately prevails in the litigation, the Company
could be required to return to Tennessee Gas the $22.3 million representing the
difference between the spot price for gas and the contract price. See 'Legal
Proceedings -- Tennessee Gas Contract' and Notes I and N of Notes to
Consolidated Financial Statements.
22
<PAGE>
Possible Limitation on Company's Use of its Net Operating Loss
Carryforwards and General Business Credits. Under Sections 382 and 383 of the
Internal Revenue Code of 1986, if the Company has an 'ownership change,' as
defined therein, the Company's use of its net operating loss carryforwards and
general business credits after the ownership change will be subject to an annual
limit (the '382 Limit'). Under certain interpretations of the existing Treasury
regulations, the Reclassification will result in an ownership change. The
Company intends to take the position that an ownership change under existing law
has not occurred prior to the Reclassification and will not occur as a result
thereof. Because there are substantial interpretive questions concerning such
Sections 382 and 383 and there is uncertainty as to events which may occur after
the Recapitalization, there can be no assurance that an ownership change will
not occur as a result of the Recapitalization or future events. If an ownership
change occurs, the 382 Limit would be approximately $7.4 million per year based
upon the Company's estimate of the value of its outstanding stock as of December
27, 1993. See 'Certain Federal Income Tax Considerations -- Federal Income Tax
Consequences of the Recapitalization to the Company.'
Bankruptcy and Insolvency Considerations. If the Company were to seek
protection or become the subject of a filing of an involuntary bankruptcy
petition under the Bankruptcy Code, the Company believes that the ability of its
securityholders, including holders of Subordinated Debentures and Exchange
Notes, to recover their investment may be significantly impaired as a result of
various factors. See 'Certain Bankruptcy and Insolvency Considerations.'
General Industry Risk Factors
Environmental Regulations and Liabilities. The Company is subject to
extensive federal, state and local laws and regulations governing releases into
the environment and the storage, transportation, disposal and cleanup of
hazardous waste materials. Future environmental regulations could result in
increased capital expenditures and operating costs that may adversely affect the
Company's results of operation and financial condition. At present, the Company
has been identified by the EPA as a potentially responsible party ('PRP')
pursuant to the Comprehensive Environmental Response, Compensation and Liability
Act ('CERCLA') for the D.L. Mud, Inc. ('Mud') and Gulf Coast Vacuum Services
('Gulf Coast') Superfund sites in Abbeville, Louisiana. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity,' 'Business -- Government
Regulation and Legislation' and 'Legal Proceedings -- Mud and Gulf Coast
Superfund Sites.' While the Company has from time to time been, and presently
is, the subject of litigation and investigations relating to environmental and
related matters, management of the Company does not believe that such litigation
and investigations will have a material adverse effect on the earnings or
competitive position of the Company. However, there can be no assurance that the
Company will not become involved in further litigation or other proceedings, or
that if the Company were to be held responsible for damage in any litigation or
proceedings (including existing ones), such costs would not be material. See
'Business -- Government Regulation and Legislation.'
Possible Liability for Underground Storage Tanks. In the past, the Company
has operated service stations in various jurisdictions which have had
underground fuel storage tanks. The Company currently operates service stations
in Alaska which have underground fuel storage tanks. All such storage tanks are
subject to governmental regulation and legislation. See 'Business -- Government
Regulation and Legislation.' The operation of underground storage tanks poses
certain risks apart from costs associated with regulatory requirements. These
risks are predominately damages associated with the underground leaks of
petroleum products. The Company currently has leak detection and tank testing
programs in effect to mitigate the threat of such risks. In addition, the
majority of the Company's operating service stations are in non-residential
locations further reducing the risks associated with contamination of
residential areas. However, there can be no assurance that the Company will not
become liable for damages from its underground storage tanks at some future
date. See 'Legal Proceedings -- Stanislaus County Matters.'
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Volatility of Earnings and Cash Flows. The feedstocks for the Company's
Alaska refinery and the refined products produced at the refinery are
commodities and their prices are subject to considerable volatility. An increase
in crude oil prices could adversely affect the Company's operating margins. The
markets and prices for the Company's refined products depend upon factors beyond
the control of the Company, including the demand for crude oil, gasoline and
other refined products, which fluctuates with changes in the economy, price
levels and seasons, the level of domestic production and refinery utilization
rates, the availability of imports, the availability and marketing of
competitive fuels, the impact of energy conservation efforts and the extent of
governmental regulation and taxation. Additionally, worldwide residual fuel oil
markets have been extremely depressed since the Persian Gulf War, and such
depressed prices have had and continue to have a significantly negative effect
on the Company's results. The Company cannot predict either the future markets
and prices for the Company's refined products or, specifically, whether the
market for residual fuel oil will improve in the foreseeable future.
Competition. The oil and gas industry is highly competitive in all phases,
including the refining and marketing of crude oil and petroleum products and the
search for and development of oil and gas reserves. This industry also competes
with industries that supply the energy and fuel requirements of industrial,
commercial, individual and other consumers. The Company competes with a
substantial number of major integrated oil companies and other companies having
materially greater financial and other resources. These competitors have a
greater ability to bear the economic risks inherent in all phases of this
industry. In addition, unlike the Company, many competitors also produce large
volumes of crude oil which may be used in connection with their operations.
Uncertainty in Estimating Oil and Gas Reserves. There are numerous
uncertainties inherent in estimating quantities of proved reserves of oil and
gas and in projecting future rates of production and timing of development
expenditures, including many factors beyond the control of the Company. The
reserve data set forth in this Proxy Statement -- Prospectus represent only
estimates. In addition, the estimates of future net cash flow from proved
reserves of the Company and the present value thereof are based upon certain
assumptions about future production levels, prices and costs that may not prove
correct over time. For information concerning the risk of litigation which, if
adversely determined, could affect such estimates, see '-- Risk Factors for all
Securityholders -- Litigation.'
Depletion of Reserves, Risk of Oil and Gas Operations. The Company must
continually acquire or explore for and develop new oil and gas reserves to
replace those being depleted by production. Without successful acquisition or
drilling ventures, the Company's oil and gas assets, production and reserves
will decline. To the extent the Company engages in drilling activities, such
activities carry the risk that no commercially viable oil and gas production
will be obtained. The cost of drilling, completing and operating wells is often
uncertain. Moreover, drilling may be curtailed, delayed or canceled as a result
of many factors, including title problems, weather conditions and shortages or
delays in delivery of equipment, as well as the financial instability of well
operators, major working interest owners and well servicing companies. Also, the
availability of a ready market for the Company's oil and gas production depends
on numerous factors beyond its control, including the demand for and supply of
oil and gas, the proximity of the Company's gas reserves to pipelines, the
capacity of such pipelines, fluctuations in seasonal demand, the effects of
inclement weather and government regulation.
Risk of Oil Field Supply and Distribution. The Company's oil field supply
and distribution business is largely dependent upon the level and nature of
domestic oil and gas drilling and workover activity. The levels of drilling
activity are influenced by numerous factors, including general economic
conditions, demand for and price of oil and gas, development of alternative
energy sources, availability of equipment and materials, availability of new oil
leases or concessions, governmental regulations and other political conditions.
In recent years, the level of drilling activity has been depressed. Therefore,
no assurance can be given as to the level of future demand for the Company's oil
field supply and distribution business.
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Operations in Foreign Countries. A portion of the Company's operations are
conducted in foreign countries where the Company is also subject to risks of a
political nature and other risks inherent in foreign operations. The Company's
operations outside the United States have been, and in the future may be,
materially affected by host governments through increases or variations in
taxes, royalty payments, export taxes and export restrictions and adverse
economic conditions in the foreign countries, the future effects of which the
Company is unable to predict.
Personal Injury and Property Damage Liabilities. The Company's refining
and oil and gas operations are hazardous due to the combination of individuals
and machines operating in restricted work areas and the highly flammable nature
of crude oil, natural gas and refined products. As a result, the Company has
experienced personal injury and property damage incidents in the past and
expects such incidents to occur in the future. The frequency and severity of
such incidents affect the Company's operating costs and insurability and its
relationship with customers, employees and regulators. Any significant increase
in the frequency or severity of such incidents, or the general level of
compensation awards with respect thereto, could affect the ability of the
Company to obtain insurance and could have a material adverse effect on the
Company.
New Energy Tax. The Revenue Reconciliation Act of 1993 imposed a new 4.3
per gallon 'transportation fuels tax' effective October 1, 1993, and a tax on
commercial aviation fuel effective October 1, 1995. The Company is uncertain of
the impact, if any, such taxes may have on the Company's operations.
RISK FACTORS FOR DEBENTUREHOLDERS FOLLOWING CONSUMMATION OF THE EXCHANGE OFFER
Sinking Fund Requirements. The Company's mandatory sinking fund
requirements under the Subordinated Debentures will be met to the extent
Subordinated Debentures are tendered and accepted in the Exchange Offer.
Assuming that the minimum tender condition is met and the Exchange Offer is
consummated, the Company will have no mandatory sinking fund requirements under
the Subordinated Debentures until at least 1996 and possibly until 1998. The
resulting increase in the average life of the remaining Subordinated Debentures
could adversely affect their market price.
Effect of the Indenture Amendments. If the requisite consents to the
Indenture Amendments are obtained, a supplemental indenture amending the
Existing Indenture will be executed, to become effective on completion of the
Exchange Offer. Any persons who remain Debentureholders following consummation
of the Exchange Offer, including those who have not consented to the Indenture
Amendments, will hold unexchanged Subordinated Debentures that no longer will be
entitled to the benefits of the covenant currently prohibiting the Company from
declaring or paying dividends on the Common Stock, making any distributions to
its stockholders and purchasing or redeeming any of its capital stock currently
contained in the Existing Indenture. If the requisite consents to the Indenture
Amendments are obtained, the Exchange Notes will constitute 'Senior
Indebtedness' as defined in the Existing Indenture. Accordingly, the
indebtedness represented by the Exchange Notes will rank senior in right of
payment to the indebtedness represented by the Subordinated Debentures that
remain outstanding after consummation of the Exchange Offer, including with
regard to their respective claims upon any liquidation or bankruptcy of the
Company. As a result, upon liquidation or bankruptcy of the Company, holders of
such Subordinated Debentures may recover ratably less than holders of Exchange
Notes. See 'Proposed Amendments to Existing Indenture.'
Possible Limited Liquidity and Effect on Market Price of Subordinated
Debentures. To the extent that Subordinated Debentures are tendered and
accepted in the Exchange Offer, the trading market for any Subordinated
Debentures that remain outstanding after the Exchange Offer is consummated will
become more limited. Trading in a security with a smaller aggregate principal
amount outstanding may be less liquid, and such a security may command a lower
price than a comparable security with a greater aggregate principal amount
outstanding. Therefore, the liquidity of and the market price for any
Subordinated Debentures that remain outstanding after the Exchange
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Offer is consummated may be adversely affected to the extent that the
Subordinated Debentures tendered pursuant to the Exchange Offer reduce the
aggregate outstanding principal amount of Subordinated Debentures. The reduced
aggregate outstanding principal amount may also make the trading price of any
remaining Subordinated Debentures more volatile.
Maturity. The Exchange Notes will have an earlier maturity date than the
Subordinated Debentures and the principal of the Exchange Notes is scheduled to
be paid in its entirety prior to the final maturity of the Subordinated
Debentures.
Possible Constructive Exchange of Subordinated Debentures. If the
Indenture Amendments are deemed to be material modifications to the Subordinated
Debentures within the meaning of Section 1001 of the Code and the regulations
thereunder, a holder of Subordinated Debentures who did not tender his
Subordinated Debentures would nevertheless be deemed to have exchanged his
Subordinated Debentures for new debt instruments. Although tax counsel believes
the changes to the Existing Indenture resulting from the Indenture Amendments
will not be treated as a constructive exchange by a non-tendering holder of an
'old' Subordinated Debenture for a 'new' Subordinated Debenture, the issue is
not free from doubt. See 'Federal Income Tax Consequences to a Holder Who Does
Not Receive Exchange Notes in Exchange for All of Its Subordinated Debentures'
for a discussion of the effect upon a holder of Subordinated Debentures of a
determination that the Indenture Amendments will cause such a constructive
exchange. The balance of this Proxy Statement -- Prospectus assumes that the
Indenture Amendments will not cause such a constructive exchange, except as
noted to the contrary.
RISK FACTORS FOR HOLDERS OF EXCHANGE NOTES
No Previous Trading Market. No Exchange Notes have previously been issued.
The Company intends to apply to list the Exchange Notes on the New York Stock
Exchange, but no assurance can be given that the Exchange Notes will be listed.
In addition, no assurance can be given as to the relationship that the market
price of the Exchange Notes will bear to the market price of the Subordinated
Debentures, either currently or in the future.
Certain Differences between Exchange Notes and Subordinated
Debentures. The Subordinated Debentures require sinking fund payments each
March 15 sufficient to retire $11.25 million principal amount of Subordinated
Debentures each year through year 2000. The Exchange Notes do not have a sinking
fund requirement. The Existing Indenture currently prohibits the Company from
declaring or paying dividends on the Common Stock and purchasing or redeeming
any of its capital stock. The indenture governing the Exchange Notes will
contain less restrictive prohibitions which will afford the Company greater
flexibility in purchasing or redeeming shares of $2.20 Preferred Stock and
Common Stock in the future. See 'Comparison of Exchange Notes and Subordinated
Debentures' and 'Proposed Amendments to Existing Indenture -- General.'
Fraudulent Transfer. Under revelant federal and state fraudulent transfer
or conveyance statutes, generally stated, if a court found that the Company, in
exchanging Exchange Notes for Subordinated Debentures, (i) intended to hinder,
delay or defraud creditors or (ii) was insolvent or rendered insolvent by reason
of such exchange, (iii) was engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital or (iv) intended to
incur, or believed that it would incur, debts beyond its ability to pay as they
matured, the court could take action that could include, under certain
circumstances, invalidating such exchange. The Company does not believe that
such exchange would constitute a fraudulent transfer on any of the grounds
described above, but there is no assurance that a court would agree with such
belief. The measure of insolvency for purposes of the foregoing will vary
depending upon the law of the jurisdiction which is being applied. See 'Certain
Bankruptcy and Insolvency Considerations -- Fraudulent Transfer.'
Gain Recognition Upon Receipt of Exchange Note. The holder of a
Subordinated Debenture will recognize, for federal income tax purposes, on the
receipt of an Exchange Note in exchange for a Subordinated Debenture gain in an
amount equal to the lesser of (i) the gain realized on the Debt
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Exchange (as defined herein) and (ii) the cash and fair market value of property
treated as being received by the holder in the Debt Exchange. In addition, if
either the Subordinated Debentures or the Exchange Notes do not constitute
'securities' for federal income tax purposes, an exchanging holder of a
Subordinated Debenture will recognize all gain realized in the exchange. Counsel
believes that the Subordinated Debentures are securities for federal income tax
purposes, and also believes, although the issue is not free from doubt, that the
Exchange Notes are securities for federal income tax purposes. See 'Certain
Federal Income Tax Considerations -- Federal Income Tax Consequences of the
Exchange Offer and Indenture Amendments to Holders of Subordinated Debentures.'
RISK FACTORS FOR HOLDERS OF EXISTING PREFERRED STOCK
Loss of Preference. Presently, the $2.16 Preferred Stock ranks senior to
the Common Stock upon any liquidation or bankruptcy of the Company. Following
the Reclassification, in the event of liquidation or bankruptcy of the Company,
former holders of $2.16 Preferred Stock will share pro rata with other holders
of Common Stock in any distributions to be made to such holders and, therefore,
may recover less than they would have recovered absent the Reclassification.
Use of Common Stock for Dividends or Purchases. As a result of the Amended
MetLife Memorandum, dividends on the $2.20 Preferred Stock and purchases of the
$2.20 Preferred Stock pursuant to the Company's obligation to make offers to
purchase may, at the election of the Company, be made in cash or, subject to
certain conditions, shares of Common Stock or any combination thereof. See
'-- Risk Factors for Holders of Common Stock.'
Elimination of Accrued and Unpaid Dividends. At November 30, 1993, there
were approximately $8.9 million ($6.75 per share) of accrued and unpaid
dividends on the $2.16 Preferred Stock and approximately $20.0 million ($6.97
per share) of accrued and unpaid dividends on the $2.20 Preferred Stock. As a
result of the Reclassification and the Amended MetLife Memorandum, all accrued
and unpaid dividends on the Existing Preferred Stock will be extinguished.
Elimination of Existing Redemption Requirements. As a result of the
Amended MetLife Memorandum, the annual mandatory redemption requirements of the
$2.20 Preferred Stock and the $2.20 Preferred Stock Put Option will be waived.
Elimination of Right to Elect Two Directors. Under the terms of the $2.20
Preferred Stock and the $2.16 Preferred Stock, the holders thereof as a single
class currently have the right to elect two additional members to the Board of
Directors due to the Company's failure to pay dividends in an amount equal to at
least six quarterly dividends. If the Reclassification is consummated, the $2.16
Preferred Stock will cease to exist and, therefore, will no longer have a right
to elect two additional directors. The right of the holder of $2.20 Preferred
Stock to elect two additional directors will no longer be immediately
exercisable because MetLife Louisiana, as the sole holder of the $2.20 Preferred
Stock, will agree pursuant to the Amended MetLife Memorandum that all accrued
and unpaid dividends on the $2.20 Preferred Stock will be considered to have
been paid. Following the Reclassification, the holders of $2.20 Preferred Stock
will continue to have the right to elect two additional members to the Board of
Directors if the Company again fails to pay dividends in an amount equal to at
least six quarterly dividends.
Reclassification Only. If the Exchange Offer is not consummated but the
Reclassification is consummated, the Company would be obligated to make sinking
fund payments of $11,250,000 with respect to the Subordinated Debentures on
March 15 of each year, including 1994, with a resulting reduction in the
Company's liquidity. In addition, without the Indenture Amendments, the Company
would not be able to exercise in full the Company's MetLife Option except with
the proceeds from the issuance of capital stock or substantial future earnings.
This would substantially reduce the Company's flexibility to fund the exercise
of the Company's MetLife Option. MetLife Louisiana's agreement to vote its
shares of $2.20 Preferred Stock in favor of the Reclassification is conditioned
upon consummation of the Exchange Offer. MetLife Louisiana has not advised the
Company of any
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circumstances under which it might waive the condition that the Exchange Offer
be consummated prior to its approval of Proposal No. 1.
Possible Taxable Dividend from Reclassification to Holders of $2.16
Preferred Stock. With respect to the 4.9 shares of Common Stock to be
received in the Reclassification the holders of $2.16 Preferred Stock will
have a constructive distribution in an amount equal to the lesser of (i) the
excess of the fair market value (as determined for federal income tax purposes)
of the 4.9 shares of Common Stock received in exchange for one share of $2.16
Preferred Stock over $25 or (ii) the dividends in arrears on a share of $2.16
Preferred Stock determined, in each case, immediately after the
Reclassification. Based on the value of the Common Stock as of December 27,
1993, the Reclassification would result in a constructive distribution of
approximately $2.87 per share of $2.16 Preferred Stock. The Company believes
it has sufficient accumulated earnings and profits for such constructive
distributions to be taxed as a dividend. See 'Certain Federal Income Tax
Considerations-- Federal Income Tax Consequences of the Reclassification.'
Possible Taxable Dividend to $2.16 Preferred Stock Holders from Croyden
Associates' Litigation. Although the federal income tax consequences are
subject to substantial interpretive questions and counsel does not express an
opinion regarding these consequences, it is likely that holders of $2.16
Preferred Stock will have a distribution equal to such holder's proportionate
share of the fair market value of the 131,956 shares of Common Stock set aside
and available to pay, and the money of the Company used to pay, the attorneys
representing such class. The Company believes it has sufficient accumulated
earnings and profits for all such distributions to be taxed as dividends. See
'Certain Federal Income Tax Considerations -- Federal Income Tax Consequences
Related to Croyden Associates' Litigation.'
Possible Taxable Dividend from Amended MetLife Memorandum. MetLife
Louisiana will receive a constructive distribution on each share of $2.20
Preferred Stock in an amount equal to the lesser of (i) the fair market value of
the Common Stock received for each share of $2.20 Preferred Stock held plus the
amount, if any, by which the fair market value of a share of the 'new' $2.20
Preferred Stock exceeds $20, and (ii) the dividend arrearages on the $2.20
Preferred Stock, determined, in each case, immediately after the
Reclassification. Based on the Company's estimate of the value of Common Stock
and 'old' $2.20 Preferred Stock as of December 27, 1993, the Company estimates
that MetLife Louisiana will have a constructive distribution equal to
approximately $10.8 million. Since the Company believes it has sufficient
accumulated earnings and profits, such constructive distributions will be taxed
as dividends. See 'Certain Federal Income Tax Considerations -- Federal Income
Tax Consequences of the Amended MetLife Memorandum.'
See '-- Risk Factors for Holders of Common Stock.'
RISK FACTORS FOR HOLDERS OF COMMON STOCK
Issuance of Additional Shares of Common Stock. If the Reclassification is
completed, approximately 6,465,859 additional shares of Common Stock will be
issued to holders of $2.16 Preferred Stock, 131,956 additional shares of Common
Stock will be issued on behalf of the holders of $2.16 Preferred Stock to pay
certain legal fees and expenses in connection with the settlement of certain
litigation and 1,900,075 additional shares of Common Stock will be issued to
MetLife Louisiana, an increase of approximately 60% over the 14,069,236 shares
of Common Stock outstanding at December 15, 1993. Accordingly, approval of the
Reclassification will result in substantial dilution to holders of Common Stock.
Pursuant to the terms of the Amended MetLife Memorandum, dividends on the
$2.20 Preferred Stock will be payable at the election of the Company in cash or,
subject to certain conditions, shares of Common Stock or any combination
thereof. Additionally, the Company will be required annually to offer to
purchase, beginning June 30, 1998, 287,500 shares of $2.20 Preferred Stock or,
if issued in lieu thereof, Future Preferred Stock, if the Company's MetLife
Option shall have expired without being exercised in full. The purchase price
payable pursuant to each such offer may be paid at the election of the Company
in cash or, subject to certain conditions, shares of Common Stock or any
combination thereof. Accordingly, additional shares of Common Stock may in the
future be issued to holders of the $2.20 Preferred Stock, or the Future
Preferred Stock issued in lieu thereof.
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Voting Concentration. As of December 15, 1993, MetLife Louisiana owned
Common Stock and $2.20 Preferred Stock constituting approximately 28% of the
outstanding capital stock of the Company entitled to vote. Upon completion of
the Reclassification, MetLife Louisiana will beneficially own 4,084,160 shares
of Common Stock and 2,875,000 shares of $2.20 Preferred Stock, constituting
approximately 27% of the outstanding shares of capital stock of the Company
entitled to vote. If the Company pays dividends on the $2.20 Preferred Stock in
Common Stock or repurchases shares of $2.20 Preferred Stock, or Future Preferred
Stock issued in lieu thereof, with Common Stock pursuant to its obligation to
make offers to purchase, MetLife Louisiana's percentage holdings of Common Stock
could increase.
Other major stockholders include Oakville N.V. and United Partners, which
own approximately 10% and 9%, respectively, of the outstanding shares of capital
stock of the Company at December 15, 1993 and, after giving effect to the
Reclassification, will each own approximately 7% of the outstanding shares of
capital stock of the Company.
Five of the 13 current directors of the Company are associated with or have
been recommended by major stockholders of the Company. Upon consummation of the
Reclassification and the expansion of the Board of Directors as required by the
Amended MetLife Memorandum, eight of the 16 directors of the Company will be
associated with or will have been recommended by major stockholders of the
Company. See 'The Recapitalization -- MetLife Louisiana Conditions.'
If Proposal No. 2 is approved and as a result the 80% voting requirement of
Article Seventh of the Company's Certificate of Incorporation later ceases to be
effective, a transaction set forth in Article Seventh between the Company and
any beneficial owner of 10% or more of the outstanding shares of the capital
stock of the Company entitled to vote in the election of directors, including
MetLife Louisiana, including a merger with, sale of substantially all the assets
of the Company to, or the issuance of voting stock of the Company to any such
owner, will no longer require such 80% vote. In that event, unless certain
provisions of the Delaware Law requiring a greater vote were applicable to the
specific transaction, such a transaction would require at most a vote of the
majority of stockholders and might, depending on the transaction, not require
stockholder approval at all.
Lack of Dividends. No dividends have been declared on the Common Stock
since 1986, and the Company does not anticipate paying dividends on the Common
Stock in the foreseeable future. See 'Description of Exchange Notes' and
'Proposed Amendments to Existing Indenture.' For information on market prices of
the Common Stock, see 'Trading and Market Prices.'
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THE RECAPITALIZATION
BACKGROUND
General. The Company's operating results in recent years have been poor.
These results have primarily been caused by (i) significantly lower operating
results from the Company's refining and marketing operations, which have been
principally due to the deterioration of gross margins on sales of its refined
products, particularly residual fuel oil, which has approximated 40% of the
total output of the Company's Alaska refinery during the past three fiscal
years, (ii) reduced revenues and operating profits from the Company's foreign
exploration and production operations, and (iii) lower margins on sales of
products from the Company's oil field supply and distribution segment. During
the year ended December 31, 1992, the Company experienced a net loss of $65.9
million, or $5.34 per share, and it has experienced losses in five of its past
seven fiscal years. Common Stock and Other Stockholders' Equity has declined
from $137.0 million as of December 31, 1991, to $44.2 million as of September
30, 1993. During this period, the Company's stockholders' equity was adversely
affected by, in addition to the factors discussed above, accrued and unpaid
dividends of $27.4 million on the Existing Preferred Stock and charges of $10.5
million for the settlement of a contractual dispute with the State, $20.6
million for the cumulative effect of accounting changes relating to
postretirement benefits and income taxes and $9.1 million for expenses to
implement a cost reduction program and other employee terminations in 1992.
The Company's operations over the past several years have not generated
cash sufficient to meet all of the Company's obligations. As a result, the
Company has been unable to pay dividends on the Existing Preferred Stock and has
relied, in part, on cash from the sale of assets to meet its other cash
requirements.
The Company's Financial Requirements. The Company is subject to a number
of significant financial requirements, including the following:
1. Debt service requirements
The Subordinated Debentures require sinking fund payments each March 15
sufficient to retire $11.25 million principal amount of Subordinated Debentures
per year through 2000. Under the ANS Agreement, the Company is obligated to make
variable monthly payments for at least nine years plus a payment of $60 million
in 2002, subject to deferral. Under a consent order with the U.S. Department of
Energy, the Company is obligated to make payments aggregating $13.2 million,
plus interest at the rate of 6% per annum, during the next nine years.
Earnings were inadequate to cover combined fixed charges and preferred
stock dividend requirements by $49.1 million and $4.1 million during fiscal 1992
and the nine months ended September 30, 1993, respectively.
2. Existing Preferred Stock requirements
Pursuant to the terms of the $2.20 Preferred Stock, and as a result of
accumulated dividend arrearages of 12 quarters, MetLife Louisiana currently has
the option to require the Company to redeem all of the outstanding $2.20
Preferred Stock out of funds legally available therefor at $20 per share (an
aggregate of $57.5 million), plus accrued and unpaid dividends. At November 30,
1993, accrued and unpaid dividends on the $2.20 Preferred Stock aggregated
approximately $20.0 million ($6.97 per share). Dividend arrearages on the $2.20
Preferred Stock exceeded 12 full quarterly dividends on November 15, 1993.
MetLife Louisiana has agreed, subject to certain conditions, that it will not
exercise the $2.20 Preferred Stock Put Option before March 10, 1994. See '-- The
Recapitalization.' In addition, the $2.20 Preferred Stock provides for annual
mandatory redemptions, beginning February 15, 1994, of 6 2/3% of the number of
shares of $2.20 Preferred Stock outstanding on February 15, 1994, at a
redemption price of $20 per share, plus accrued and unpaid dividends. Pursuant
to the MetLife Forbearance Agreement, as amended, the $2.20 Preferred Stock Put
Option is not exercisable and the 1994 mandatory redemption is not required to
be made until March 10,
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1994, or earlier under certain circumstances. See 'Background -- The
Recapitalization.' The $2.20 Preferred Stock has a cumulative annual cash
dividend of $2.20 per share, payable quarterly, out of funds legally available
therefor, which results in an annual cash dividend obligation of approximately
$6.3 million.
The terms of the $2.16 Preferred Stock require that, in connection with any
redemption of the $2.20 Preferred Stock, all accrued and unpaid dividends on the
$2.16 Preferred Stock be paid. At November 30, 1993, accrued and unpaid
dividends on the $2.16 Preferred Stock aggregated approximately $8.9 million
($6.75 per share). The $2.16 Preferred Stock has a cumulative annual cash
dividend of $2.16 per share, payable quarterly, which results in an annual cash
dividend obligation of approximately $2.9 million.
The Existing Indenture includes covenants that currently prohibit the
Company from redeeming the $2.20 Preferred Stock for cash. Moreover, even absent
such prohibitions, the Company does not believe that its current financial
resources are sufficient to make the payments that would be required upon
exercise of the $2.20 Preferred Stock Put Option, and the Company may not be
permitted under the Delaware Law to make such payment.
3. Working capital requirements
On October 29, 1993, in order to avoid a $700,000 facility fee, the Company
elected to terminate its secured Letter of Credit Facility with a group of
banks. Letters of credit are issued to obtain crude oil feedstocks for the
Company's refinery and for other operating and corporate needs. In connection
with the termination, the Company negotiated certain interim credit arrangements
in order to meet its near term operating and corporate credit requirements. In
addition, the Company has initiated discussions with several financial
institutions with regard to providing a long-term credit facility to finance the
Company's working capital requirements. Based on these discussions, the Company
believes it will be able to enter into a long-term credit facility on terms more
favorable than the Company's terminated Letter of Credit Facility Agreement upon
successful completion of the proposed Recapitalization. If the Company is
unsuccessful in completing the Recapitalization, and is thereafter unable to
arrange a long-term credit facility, or is otherwise unable to arrange such a
facility, the Company may be required to reduce its refinery throughput to
reduce its working capital requirements. The Company is unable to predict if it
would be able to operate the refinery at an economically viable rate under such
circumstances.
During September 1993 and subsequent, the Company negotiated several
interim credit arrangements in order to meet its operating and corporate credit
requirements. With respect to these interim credit arrangements, the Company has
entered into several uncommitted letter of credit facilities which provide for
the issuance of letters of credit on a cash-secured basis and has entered into
an agreement (the 'Substitution Agreement') with the Company's largest supplier
of crude oil to secure the Company's purchases from this supplier through the
end of 1994 principally with the Company's crude oil and refined product
inventory in Alaska.
In order to provide the Company with additional financial liquidity, during
October 1993, Tesoro E&P entered into the $30 million E&P Facility which is
secured principally by Tesoro E&P's natural gas properties in the Bob West
Field. The E&P Facility is subject to a quarterly borrowing base determination
which was initially determined to be $20 million. Although the E&P Facility
contains restrictions that prohibit borrowings under the facility to be used by
Tesoro E&P or the Company for debt service, including interest and principal on
the Subordinated Debentures, or for payment of common or preferred dividends,
the Company can use loan proceeds for capital requirements associated with
development of the Company's South Texas natural gas properties, the acquisition
and development of other oil and gas properties and, subject to certain
limitations, general working capital requirements of the Company.
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4. Capital expenditure requirements
The Company anticipates that it will incur capital expenditures of
approximately $40 million during 1993, approximately $29 million of which are
expected to be incurred for the continuing development of the Company's Bob West
Field and approximately $9 million of which are expected to be incurred to fund
capital expenditures at the Company's Alaska refinery and to expand or enhance
the Company's Alaska retail and wholesale marketing operations. Through
September 30, 1993, the Company had incurred approximately $26 million of
capital expenditures. Management of the Company has under consideration total
capital expenditures for fiscal 1994 ranging from approximately $70 million to
$80 million which would include approximately $29 million for the continued
development of the Bob West Field and $32 million for the Alaska refinery,
including $25 million associated with the upgrading of refinery hardware through
the installation of a vacuum unit which will allow the Company to upgrade
residual fuel oil into higher value products. The Board of Directors has not
approved the Company's proposed capital expenditures for fiscal 1994 and the
Company anticipates that such approval will be subject to, among other things,
the Board of Directors being satisfied with the Company's ability to finance
such capital expenditures, and the consummation of the Recapitalization. The
aggregate capital expenditures the Company will be able to incur in 1994 will
also depend upon the Company's ability to generate funds from operations,
financings and other sources.
The Company's Initial Response. In response to the factors described
above, in early 1992 the Board of Directors initiated a review of the Company's
financial condition and began to formulate and implement a strategy to increase
liquidity and stockholders' equity and improve the financial results of the
Company in order to achieve greater financial stability. In furtherance of these
goals, the Board of Directors made changes in management of the Company.
Management has developed new operational and financial strategies, reduced
general and administrative expenses, sold certain assets and resolved the
Company's dispute with the State regarding the pricing of crude oil feedstocks.
Since July 1992, several new executive officers have joined the Company. In
July 1992, Michael D. Burke joined the Company as President and Chief Executive
Officer. Mr. Burke had previously served as President and Chief Executive
Officer of T.E. Products Pipeline Company, L.P., an affiliate of Texas Eastern
Corporation, from 1990 to 1992. In September 1992, Bruce A. Smith joined the
Company as Vice President and Chief Financial Officer. Mr. Smith had previously
served as Vice President and Treasurer of Valero Energy Corporation from 1986 to
1992. In January 1993, Gaylon H. Simmons joined the Company as Senior Vice
President, Refining, Marketing and Crude Supply. Mr. Simmons had served as
President and Chief Executive Officer of Permian Corporation from 1989 to 1991
and Vice President, Supply and Marketing for MAPCO Petroleum, Inc. from 1985
through 1989. In September 1993, Mr. Smith was promoted to Executive Vice
President and Chief Financial Officer and Mr. Simmons was promoted to Executive
Vice President.
The Company's poor operating results in recent years have been caused in
large part by significantly lower operating results from the Company's refining
and marketing operations, which have been principally due to the deterioration
of gross margins on sales of the Company's refined products, particularly
residual fuel oil. To address this situation, the Company's new management has
developed and implemented a market-driven operational strategy for the refining
and marketing operations. This strategy includes reducing refinery throughput
and altering the mix of feedstocks, which is intended to enable the Company to
match its refined product yield more closely to the product demand in Alaska,
its primary market, and therefore reduce shipments of refined products to less
profitable markets. The strategy is also intended to reduce the Company's
working capital requirements and reduce the volume of residual fuel oil produced
by the Company's Alaska refinery, which has approximated 40% of the total output
of the refinery during the past three fiscal years. Implementation of this
strategy has resulted in a decrease in total refinery production from 60,900
barrels per day in 1992 to 49,700 barrels per day during the nine months ended
September 30, 1993 and a decrease in the level of residual fuel oil production
from approximately 23,400 barrels per day
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in 1992 to approximately 17,600 barrels per day during the nine months ended
September 30, 1993. The Company's ability to further reduce production of
residual fuel oil, other than by further reducing total refinery production, is
currently limited by constraints on the supply of lighter feedstocks. The new
strategy has been implemented only recently, and there can be no assurance that
it will ultimately prove successful.
During 1992 and 1993, the Company has concentrated its domestic exploration
and production activities in the Bob West Field, which was discovered in 1990.
The Company has increased its net proven natural gas reserves in such field from
37 billion cubic feet at December 31, 1991 to 102 billion cubic feet at
September 30, 1993. Six wells were drilled and completed during 1992 and ten
wells have been since drilled and completed, bringing the number of producing
wells to 20. Fifteen additional well locations have currently been selected for
further development of the 3,800 acre field, of which six are expected to be
drilled during the remainder of 1993. During November 1993, net production from
the Bob West Field averaged 57.4 million cubic feet per day. The Company, which
does not operate the field, owns an average 54% revenue interest in
approximately two-thirds of the field and a 28% revenue interest in the
remainder. The Company owns a 70% interest in the central gas processing
facility which is currently capable of handling 125 million cubic feet of
production per day. The Company owns a 70% interest in Starr County Gathering
System's ten-inch diameter pipeline, which transports gas eight miles from the
field to common carrier pipeline facilities.
Two producing acreage units within the Bob West Field, each consisting of
352 acres, are subject to a gas purchase contract with Tennessee Gas expiring in
January 1999, pursuant to which Tennessee Gas is currently paying in excess of
$7.50 per Mcf of gas, which is significantly in excess of the spot market price
for natural gas ($1.88 per Mcf during October 1993). During the nine months
ended September 30, 1993, the Tennessee Gas contract price was paid with respect
to approximately 26% of the Company's gas production from the Bob West Field.
The gas purchase contract is presently the subject of litigation with Tennessee
Gas. See 'Legal Proceedings -- Tennessee Gas Contract' and Notes I and N of
Notes to Consolidated Financial Statements included elsewhere herein.
During 1992, the Company sold its 100% interest in two contracts with the
state-owned petroleum company of Indonesia for cash of $6.6 million and the
assumption by the purchaser of liabilities of approximately $6.3 million,
resulting in a pretax net gain to the Company of approximately $5.8 million
after related expenses. In addition, during 1992, the Company sold its interest
in certain domestic producing and undeveloped oil and gas properties outside of
its Bob West Field for cash of $2.1 million.
The Company's general and administrative expenses have been reduced by
approximately 27% for the nine months ended September 30, 1993 when compared
with the nine months ended September 30, 1992. These reductions have primarily
been the result of asset sales, consolidations and cost reduction programs and
other employee terminations which have reduced the Company's administrative
employee complement by approximately 30% from January 1992 to September 1993.
The Company incurred costs of $9.1 million during 1992 in connection with these
programs.
In January 1993, the Company purchased $11.25 million in principal amount
of the Subordinated Debentures at their then current market value (aggregate of
$9.7 million) and used such purchases to satisfy the March 1993 sinking fund
requirement under the Subordinated Debentures.
The Company's present and certain past contracts with the State contained
provisions which would have required the Company to pay the State additional
retroactive amounts if the State had prevailed in the ANS Royalty Litigation
against the producers of North Slope crude oil (the 'Producers'). The State
settled with each of the Producers, with the last settlement occurring in April
1992. As a result of the settlements between the State and the Producers, the
State claimed that the crude oil it sold to the Company and others was
undervalued to the extent that the Producers undervalued their oil. The State's
claim against the Company amounted to $141.9 million (including
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interest), of which $44.8 million (the 'Chevron Portion') was reimbursable to
the Company under a crude oil purchase/sale agreement with Chevron U.S.A. Inc.
('Chevron').
In January 1993, the Company entered into the ANS Agreement that settled
this contractual dispute. The ANS Agreement provides that $97.1 million (which
does not include the Chevron Portion) is owed to the State by the Company and
that the Company would cooperate with the State in seeking to recover the
Chevron Portion. Under the ANS Agreement, the State has released the Company
from liability for the Chevron Portion.
Under the ANS Agreement, the Company paid the State approximately $10.3
million in January 1993, and agreed to make variable monthly payments to the
State over the next nine years based on a per barrel charge that increases over
the nine-year term from 16 to 33 on the volume of feedstock processed at the
Company's Alaska refinery. At the end of the nine-year period, the Company is
obligated to pay the State $60 million; provided, however, that such payment may
be deferred indefinitely by continuing the variable monthly payments to the
State beginning at 34 per barrel in 2002 and increasing one cent per barrel
annually thereafter. The variable monthly payments will not reduce the $60
million obligation to the State. The $60 million obligation is evidenced by a
security bond, and the bond and the variable monthly payments are secured by a
second mortgage on the Alaska refinery. The Company's obligations under the ANS
Agreement and the mortgage may be subordinated to current and future senior debt
obligations (including, without limitation, principal, interest and related
expenses) of up to $175 million, plus any indebtedness incurred in the future to
improve the Alaska refinery.
In 1992, the Company recorded charges totaling $38.9 million for accounting
changes and certain other significant transactions. The principal charges
included approximately $20.6 million, or $1.47 per share, resulting from the
cumulative effect of adopting statements of Financial Accounting Standards No.
106, 'Employer's Accounting for Postretirement Benefits Other Than Pensions,'
and No. 109, 'Accounting for Income Taxes,' both effective January 1, 1992,
approximately $10.5 million related to the ANS Agreement, $9.1 million related
to the Company's cost reduction program and other employee terminations, $4.4
million for environmental provisions and $1.8 million on assets held for sale.
These charges were partially offset by the gain on the sale of the Company's
Indonesian operations of approximately $5.8 million and a transportation rebate
of $1.7 million. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Summary of Operations.'
The Recapitalization. Management of the Company determined that the
foregoing steps, although significant, would not be sufficient to solve the
Company's financial difficulties. Accordingly, during the first quarter of 1993,
the Company retained Smith Barney as financial advisor to assist the Company in
reviewing the Company's financial condition and alternatives to improve such
financial condition. As a result of its discussions with Smith Barney,
management of the Company determined that, in light of the cash demands on the
Company, it would be highly desirable to reduce its near-term debt sinking fund
requirements and to reclassify the Existing Preferred Stock into other equity
securities and thereby eliminate the $2.20 Preferred Stock Put Option, increase
equity, reduce future cash obligations and provide that dividends and mandatory
redemption payments on preferred stock be payable at the option of the Company
in cash or shares of Common Stock or any combination thereof.
Accordingly, management of the Company initiated discussions with
representatives of MetLife Louisiana who were not directors of or otherwise
affiliated with the Company regarding both a deferral of the $2.20 Preferred
Stock Put Option and the February 1994 mandatory partial redemption of the $2.20
Preferred Stock and a reclassification of the $2.20 Preferred Stock into other
securities. In March 1993, the Company and MetLife Louisiana entered into the
MetLife Forbearance Agreement, pursuant to which MetLife Louisiana agreed not to
exercise the $2.20 Preferred Stock Put Option and to take no action to enforce
the February 1994 mandatory partial redemption of the $2.20 Preferred Stock
before the earlier of May 10, 1994 or the day after a reduction of 15% or
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more of the commitment of the banks participating in the Letter of Credit
Facility as a result of either (i) a refusal of any one or more of the banks to
issue letters of credit under the Letter of Credit Facility or (ii) the Company
no longer being contractually entitled to obtain any further letters of credit
under the Letter of Credit Facility from any one or more of the banks.
As a result of the Company eliminating its Letter of Credit Facility, the
Company and MetLife Louisiana amended the MetLife Forbearance Agreement in
November 1993. The MetLife Forbearance Agreement, as amended, defers the initial
redemption of the $2.20 Preferred Stock scheduled for February 1994 and MetLife
Louisiana's right to accelerate redemption of the $2.20 Preferred Stock upon the
occurrence of a default in the payment of dividends, as described above, to the
earlier of March 10, 1994, or the day following an occurrence of either (i) an
event of default under the E&P Facility or the Substitution Agreement or (ii)
any event which has resulted in or is likely to result in a material adverse
effect on the assets, business, operations, financial condition or cash flow of
the Company and its subsidiaries taken as a whole.
In June 1993, the Board of Directors met and heard a presentation regarding
the discussions with MetLife Louisiana, which had resulted in an agreement in
principle as to the reclassification of the $2.20 Preferred Stock. At that
meeting, the Board of Directors reviewed and discussed a possible structure for
a recapitalization, which consisted of an offer to exchange a maximum $76.125
million principal amount of new 10% senior secured notes for an equal principal
amount of Subordinated Debentures, the reclassification of each share of $2.20
Preferred Stock (including accrued and unpaid dividends) into .6122 shares of
Common Stock and one share of a new series of preferred stock substantially
identical to the Future Preferred Stock and the reclassification of each share
of $2.16 Preferred Stock (including accrued and unpaid dividends) into three
shares of Common Stock and .2563 shares of the new series of preferred stock. At
the meeting, the directors were also advised by Jefferies that, at that time,
Jefferies believed that the Reclassification would be fair to the holders of
$2.16 Preferred Stock and Common Stock from a financial point of view. After
review and discussion, the Board of Directors authorized management of the
Company to proceed with the preparation of a registration statement and other
appropriate documentation reflecting those terms.
On August 31, 1993, the Company entered into the MetLife Memorandum of
Understanding (the 'MetLife Memorandum') with MetLife Louisiana, subject to the
approval of the board of directors of MetLife Louisiana, whereby if the
Reclassification was approved, the 2,875,000 shares of $2.20 Preferred Stock
currently held by MetLife Louisiana would be exchanged for 2,875,000 shares of a
new series of preferred stock and 1,760,075 shares of Common Stock.
On September 2, 1993, the Company filed a Registration Statement on Form
S-4 with the Commission which included a prospectus and proxy statement relating
to the proposed reclassification of the $2.16 Preferred Stock into Common Stock,
or, at the option of the holder thereof, into Common Stock and a new series of
preferred stock, to the proposed reclassification of the $2.20 Preferred Stock
into the same new series of preferred stock, and to a proposed exchange offer of
the Subordinated Debentures into 9 3/4% secured notes.
Based upon the market prices of the Common Stock and the $2.16 Preferred
Stock, continuing discussions with various securityholders of the Company,
including certain holders of a substantial principal amount of the Subordinated
Debentures, continuing input from the Company's advisors, the fact that the
reclassification was not consummated prior to November 15, 1993 at which time an
additional date for payment of dividends on the $2.20 Preferred Stock passed
without payment thereof, and further consideration by the Special Committee of
the Board of Directors (as hereinafter defined), the Company decided to modify
certain terms of the proposed Recapitalization. The Company decided to eliminate
the option to convert part of the $2.16 Preferred Stock into a new series of
preferred stock and elected not to propose the reclassification of the existing
$2.20 Preferred Stock into a new series of $2.20 Preferred Stock. The Company
also decided to change the terms of the debt instrument to be offered in
exchange for the Subordinated Debentures to eliminate the lien on the Company's
Alaskan refinery because of the Company's belief that the Company would not
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obtain appropriate benefit for the secured aspects of the debt instruments
originally proposed. At the same time, the Company elected to limit the maximum
amount of Exchange Notes to be offered to the minimal amount necessary to obtain
the consents to the Indenture Amendments because of the Company's belief that
the Company may be required to pay a higher interest rate on the Exchange Notes
and the Company's desire to avoid paying such rate on a principal amount in
excess of that required to obtain the exchange of the majority of the
Subordinated Debentures.
Since the $2.20 Preferred Stock will remain outstanding after consummation
of the Proposed Recapitalization, the Company and MetLife Louisiana have entered
into the Amended MetLife Memorandum pursuant to which MetLife Louisiana will
agree to waive or refrain from taking action with respect to certain rights
under the $2.20 Preferred Stock, including waiving the $2.20 Preferred Stock Put
Option and the other annual $2.20 Preferred Stock mandatory redemption
requirements, considering all accrued and unpaid dividends on the $2.20
Preferred Stock to have been paid and agreeing to allow the Company to pay
future dividends on the $2.20 Preferred Stock in Common Stock in lieu of cash.
Pursuant to the Amended MetLife Memorandum, the Company has agreed to issue to
MetLife Louisiana upon the reclassification of the $2.16 Preferred Stock an
aggregate of 1,900,075 shares of Common Stock. The Amended MetLife Memorandum
continues to provide for the Company's MetLife Option, pursuant to which, if the
Recapitalization is consummated, MetLife Louisiana will grant the Company a
three-year option to acquire all shares of $2.20 Preferred Stock and Common
Stock held by MetLife Louisiana upon effectiveness of the Reclassification and
any shares of Common Stock received by MetLife Louisiana in payment of dividends
on the $2.20 Preferred Stock at an initial aggregate option price of $51.5
million, reduced by the proceeds of any sales of Common Stock by MetLife
Louisiana and by any cash dividend payments on the $2.20 Preferred Stock. The
option price will be increased on the first day of each quarter, beginning on
January 1, 1994, through the quarter ending December 31, 1995, by 3% of the
unpaid option price and by 3.5% of the unpaid option price thereafter. The
Company's MetLife Option is subject to early termination if certain requirements
beginning in 1994 are not satisfied. To keep the Company's MetLife Option in
effect for calendar year 1995, the Company must have exercised such option in
part, prior to January 1, 1995, and the portion of such exercise must have been
at least $5.0 million, subject to adjustment. To keep the Company's MetLife
Option in effect after December 31, 1995, the Company must have exercised such
option, in part, one or more times, prior to January 1, 1996, and the aggregate
of the portions of such exercises must have been at least $15 million, subject
to adjustment. Notwithstanding the minimum annual exercise requirements, the
Company's MetLife Option will not expire before the third anniversary of the
Reclassification if the Company pays all regular quarterly dividends on the
$2.20 Preferred Stock which become due and payable after the Reclassification in
cash on the regular payment date.
MetLife Louisiana will also agree not to sell any shares of its $2.20
Preferred Stock, unless the buyer agrees that such shares will be subject to the
Company's MetLife Option and the other agreements and waivers relating to the
$2.20 Preferred Stock, and the Company has agreed with MetLife Louisiana not to
redeem any shares of $2.20 Preferred Stock pursuant to the optional redemption
provisions of the $2.20 Preferred Stock until the fourth anniversary of the
Reclassification. The Company reserves the right to redeem shares of $2.20
Preferred Stock during such period if such agreement with MetLife Louisiana
terminates or is waived for any reason. In the event the Company's MetLife
Option is terminated without being exercised in full, the Company will, upon
request of MetLife Louisiana, exchange, on a share for share basis, the $2.20
Preferred Stock for a new series of preferred stock (the Future Preferred Stock)
having substantially the same terms as the $2.20 Preferred Stock but modified to
reflect the agreements and waivers contemplated by the Amended MetLife
Memorandum, will grant certain registration rights for the shares of the Future
Preferred Stock and the Common Stock held by MetLife Louisiana and will cause
the Purchase Rights associated with the Common Stock to cease to exist. See
'Description of Future Preferred Stock' for a description of the terms of such
new series of preferred stock.
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The Amended MetLife Memorandum provides that the approval by MetLife
Louisiana of Proposal No. 1 is conditioned on, among other matters,
effectiveness of Proposal No. 2, consummation of the Exchange Offer and MetLife
Louisiana's satisfaction with the membership of the Board of Directors upon
effectiveness of the Reclassification. To satisfy the requirements of MetLife
Louisiana with respect to the membership of the Board of Directors, the current
directors intend, upon effectiveness of the Reclassification, to increase the
size of the Board of Directors from 13 to 16 directors and to elect three new
directors proposed by MetLife Louisiana to fill the vacancies created thereby.
In addition, MetLife Louisiana has required as a condition to its support of
Proposal No. 1 an amendment to the By-Laws of the Company (the 'By-Laws') to
provide that in the event a majority of the 16-member Board of Directors cannot
be obtained on a consistent basis, any eight directors may call a special
meeting of stockholders to elect one additional director. See '-- MetLife
Louisiana Conditions.'
PURPOSES AND EFFECTS OF THE RECAPITALIZATION
General. The Recapitalization consists of the following components: (i)
the Exchange Offer, (ii) the Indenture Amendments, (iii) the Reclassification,
(iv) the Charter Amendments and (v) the agreements to be entered into pursuant
to the Amended MetLife Memorandum. The primary purposes of the Recapitalization
are to improve the short-term and long-term liquidity of the Company and
increase the Company's equity capital. The proposed changes are intended to
improve the financial condition of the Company and allow the Company to execute
its new strategy of improving its refining and marketing operations and
accelerating the growth of its oil and gas exploration and production
activities, with the goal of returning the Company to profitability.
As a result of the Recapitalization, on a pro forma basis at September 30,
1993, assuming consummation of the Reclassification and assuming a maximum
acceptance of the Exchange Offer ($54.5 million), total long-term debt and
redeemable preferred stock would decrease from $257 million to approximately
$186 million, current liabilities (excluding the current portion of long-term
debt and the current amounts due on the $2.20 Preferred Stock) would decrease
from approximately $77 million to approximately $68 million and Common Stock and
Other Stockholders' Equity would increase from $44 million to $120 million.
Under the same pro forma assumptions, book value per share of Common Stock would
increase from $.80 to $2.78 and the number of shares of Common Stock outstanding
would increase from 14,069,799 to 22,567,689. See 'Pro Forma Capitalization.'
Under the same assumptions, on a pro forma basis for the year ending
December 31, 1992, interest expense would decrease from $21.1 million to $20.4
million and preferred stock dividends would decrease from $9.2 million to $6.3
million. See 'Pro Forma Capitalization.' In addition, the dividends on the $2.20
Preferred Stock will, at the Company's option be payable in any combination of
cash or, subject to certain conditions, in shares of Common Stock. See 'Pro
Forma Condensed Consolidated Financial Information.'
The Recapitalization will (1) satisfy the annual sinking fund requirements
of $11.25 million on the unexchanged Subordinated Debentures until at least 1996
and possibly until 1998 (because the Subordinated Debentures acquired in the
Exchange Offer can be tendered in satisfaction of the sinking fund
requirements), (2) waive the $2.20 Preferred Stock Put Option and the annual
cash redemption requirements of the $2.20 Preferred Stock (which begin in 1994)
and create an annual obligation of the Company to offer to purchase the $2.20
Preferred Stock, or, if issued in lieu thereof, the Future Preferred Stock,
beginning in 1998, under which the purchase price may be paid in cash or,
subject to certain conditions, shares of Common Stock or any combination
thereof, (3) enable the Company to make future dividend payments on the $2.20
Preferred Stock in cash or, subject to certain conditions, shares of Common
Stock or any combination thereof, (4) reclassify all amounts representing the
$2.20 Preferred Stock and accrued and unpaid dividends on the $2.16 Preferred
Stock as equity, and extinguish the accrued and unpaid dividends on the Existing
Preferred Stock ($28.9 million at November 30, 1993), and (5) allow the Company
the option to repurchase the entire equity interest in the Company currently
held by MetLife Louisiana.
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The Exchange Offer. The Company is offering to exchange $1,000 principal
amount of Exchange Notes for each $1,000 principal amount of Subordinated
Debentures, up to the Maximum Amount. In the event that Subordinated Debentures
in excess of the Maximum Amount are tendered, Subordinated Debentures will be
accepted on a pro rata basis, except that tenders from Small Lot Holders will be
accepted first. If the requisite consents to the Indenture Amendments (as
hereinafter defined) are obtained, the Exchange Notes will be senior debt of the
Company, senior in right of payment to all subordinated indebtedness of the
Company, including the Subordinated Debentures and the ANS Debt (as hereinafter
defined). Assuming the requisite consents to the Indenture Amendments are
obtained, the Exchange Notes would be pari passu with $27 million of other
senior debt as of November 30, 1993 and effectively subordinated to $67.8
million of secured debt and debt of the Company's subsidiaries. If the requisite
consents to the Indenture Amendments are not obtained, the Exchange Notes will
be senior in right of payment to the ANS Debt, and all other subordinated
indebtedness of the Company, pari passu with $27 million of
other senior debt of the Company as of November 30, 1993 and with the
Subordinated Debentures, and effectively subordinated to $67.8
million of secured debt and debt of the Company's subsidiaries. Assuming the
minimum amount of Subordinated Debentures are tendered and accepted in the
Exchange Offer and the requisite consents to the Indenture Amendments are not
obtained, as of November 30, 1993, $129.5 million of debt will be either secured
or effectively senior to the Subordinated Debentures such that such debt will
rank before the Subordinated Debentures in liquidation or bankruptcy, and $49.5
million of debt will be pari passu with the Subordinated Debentures. Assuming
the maximum amount of Subordinated Debentures are tendered and accepted in the
Exchange Offer, as of November 30, 1993, $184 million of debt will be either
secured or effectively senior to the Subordinated Debentures such that such debt
will rank before the Subordinated Debentures upon liquidation or bankruptcy, and
$27 million of debt will be pari passu with the Subordinated Debentures.
The Consent Solicitation. Concurrently with the Exchange Offer, the
Company is soliciting from Debentureholders consents to the Indenture
Amendments. The Indenture Amendments will make the Exchange Notes senior in
right of payment to the Subordinated Debentures and modify the restriction which
currently prohibits the Company from declaring and paying dividends on its
Common Stock, making any distributions to its stockholders, or purchasing or
redeeming its capital stock. THE VALID TENDER OF SUBORDINATED DEBENTURES BY A
DEBENTUREHOLDER PURSUANT TO THE EXCHANGE OFFER WILL CONSTITUTE THE CONSENT OF
SUCH DEBENTUREHOLDER TO THE INDENTURE AMENDMENTS WITH RESPECT TO SUCH TENDERED
SUBORDINATED DEBENTURES.
Proposal No. 1. Proposal No. 1 consists of the proposal to approve the
Reclassification and the Charter Amendments to eliminate staggered terms of
directors and to restrict amendments to the Company's MetLife Option. The Board
of Directors has proposed that each share of $2.16 Preferred Stock (including
all accrued and unpaid dividends) be reclassified into 4.9 shares of Common
Stock. In addition, the Company will issue .1 share of Common Stock for
each share of $2.16 Preferred Stock on behalf of the holders of $2.16 Preferred
Stock to pay certain legal fees and expenses in connection with the settlement
of certain litigation. See 'The Recapitalization -- Croyden Associates'
Litigation.' At November 30, 1993, accrued and unpaid dividends on the $2.16
Preferred Stock aggregated approximately $8.9 million ($6.75 per share). One
Purchase Right will be simultaneously issued with respect to each new share of
Common Stock issued in the Reclassification. The Purchase Rights outstanding at
the time the Reclassification is consummated will not be affected by the
Reclassification.
As a result of the proposed amendment to the Company's Certificate of
Incorporation to eliminate staggered terms of directors, each incumbent director
whose term is scheduled to extend beyond the 1994 annual meeting of stockholders
has agreed to resign upon adoption of such amendment. Such directors will then
be reappointed by the remaining directors for one-year terms. As a result, upon
the adoption of such amendment and the occurrence of such resignations and
reappointments, the terms of all directors would extend only until the next
annual meeting of
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stockholders of the Company or until their respective successors are duly
elected and qualified. See 'The Annual Meeting -- Proposal No. 3 -- Election of
Directors.' In addition, the provisions of the Delaware Law which permit the
removal of a director elected to a staggered term only for cause would no longer
apply, and a director could be removed without cause by a majority vote of
stockholders. The Board of Directors has also proposed an amendment to the
Company's Certificate of Incorporation to require, in the absence of the
approval of 66 2/3% of the disinterested directors, the approval of the holders
of at least 80% of the Company's outstanding shares of capital stock to amend,
in a manner adverse to the Company, the Amended MetLife Memorandum or an
agreement to be entered into between the Company and MetLife Louisiana which
will contain the Company's MetLife Option.
Proposal No. 2. Proposal No. 2 consists of the proposal to approve the
Charter Amendment to eliminate, in the event the Company's MetLife Option
terminates without being exercised in full, the requirement that certain
transactions by the Company with beneficial holders of 10% or more of the
Company's outstanding shares of capital stock be approved by the holders of at
least 80% of the Company's outstanding shares of capital stock. Upon adoption of
such amendment, subject to the requirements of the Delaware Law, approval only
by the Board of Directors and, under certain limited circumstances, the holders
of a majority of the Company's outstanding shares of capital stock would be
required for approval of all transactions by the Company with any beneficial
holder of 10% or more of the Company's outstanding shares of capital stock,
including MetLife Louisiana.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED PROPOSAL NO. 1 AND PROPOSAL
NO. 2. The recommendation of the Board of Directors is based on the
recommendation of a special committee of the Board of Directors (the 'Special
Committee'), comprised of Michael D. Burke, Robert J. Caverly, Steven H.
Grapstein, John J. McKetta, Jr. and Charles Wohlstetter, appointed to consider
the fairness of the Reclassification to stockholders of the Company (other than
MetLife Louisiana) and a fairness opinion of Jefferies. The Special Committee
retained Jefferies to consider the fairness of various aspects of the
Recapitalization, and Jefferies has opined and, as a condition to the
Reclassification, will confirm their opinion immediately prior to the
consummation of the Reclassification, to the effect that the Reclassification is
fair from a financial point of view to the holders of $2.16 Preferred Stock and
to the holders of Common Stock. A copy of the opinion of Jeffries is set forth
in Appendix B hereto.
MetLife Louisiana, the holder of all the outstanding $2.20 Preferred Stock
and 2,184,085 shares of Common Stock, which together constitute approximately
28% of the outstanding shares of capital stock entitled to vote on Proposal No.
1 and Proposal No. 2, has indicated to the Company that it intends to vote all
of its shares in favor of Proposal No. 1 and Proposal No. 2. MetLife Louisiana's
willingness to vote in favor of Proposal No. 1 is subject to certain conditions.
See '-- MetLife Louisiana Conditions.'
The Amended MetLife Memorandum. Pursuant to the Amended MetLife
Memorandum, MetLife Louisiana will grant to the Company the Company's MetLife
Option and will agree to certain waivers and to refrain from taking certain
actions in connection with the $2.20 Preferred Stock. MetLife Louisiana will
agree that it will accept the payment of dividends on the $2.20 Preferred Stock
in Common Stock provided that the Company continues to pay all quarterly
dividends when due, either in Common Stock, or in cash. For purposes of
determining the number of shares of Common Stock to be issued in payment as
dividends, the Common Stock will be valued at the average closing price of the
Common Stock on the New York Stock Exchange for the ten trading days commencing
on the first trading day after the Company publicly announces its intention to
use Common Stock in lieu of cash to pay the dividend. MetLife Louisiana will
also agree to refrain from exercising the conversion rights under the terms of
the $2.20 Preferred Stock, to refrain from requiring the Company to repurchase
or redeem any of the shares of the $2.20 Preferred Stock under the terms
thereof, and to consider all accrued and unpaid dividends (aggregating
approximately $20.0 million or $6.97 per share at November 30, 1993) on the
$2.20 Preferred Stock to have been paid as of the
39
<PAGE>
date of the Reclassification. The Company will agree not to exercise its rights
to optionally redeem the $2.20 Preferred Stock at any time prior to the fourth
anniversary of the date of the Reclassification, will agree to issue to MetLife
Louisiana upon request a new series of preferred stock in the event that the
Company's MetLife Option is not exercised in full, will agree to offer to
repurchase 287,500 shares of the $2.20 Preferred Stock, or if issued in lieu
thereof, the Future Perferred Stock, each year commencing June 30, 1998, and
will agree to issue 1,900,075 shares of Common Stock to MetLife Louisiana on the
date of the Reclassification. See 'Description of Future Preferred Stock' for a
description of the Future Preferred Stock. Pursuant to the terms of the
Company's MetLife Option, upon completion of the Recapitalization, the Company
will initially be entitled to purchase from MetLife Louisiana 2,875,000 shares
of $2.20 Preferred Stock, having a liquidation preference of $57.5 million, and
4,084,160 shares of Common Stock, having a pro forma net book value of
approximately $11.4 million at September 30, 1993, in consideration for cash in
the amount of $51.5 million. See '--Background -- The Recapitalization.' The
Company's ability to exercise the Company's MetLife Option may be subject to,
among other matters, legal restrictions, the terms of agreements relating to the
Company's existing or future indebtedness and the Company's financial condition.
There can be no assurance that the Company will elect to exercise the Company's
MetLife Option.
CONDITIONS TO THE RECAPITALIZATION
Consummation of the Exchange Offer is conditioned upon, among other
matters, (i) the tender and acceptance of at least $22.5 million in principal
amount of the outstanding Subordinated Debentures and (ii) other customary
conditions. Consummation of the Exchange Offer is not conditioned upon
effectiveness of Proposal No. 1 and Proposal No. 2 or the adoption of the
Indenture Amendments. Adoption of the Indenture Amendments will require the
consent of the holders of a majority in principal amount of the outstanding
Subordinated Debentures but is not conditioned on any other component of the
Recapitalization. The valid tender of Subordinated Debentures pursuant to the
Exchange Offer will include the consent to the Indenture Amendments with respect
to such tendered Subordinated Debentures.
Proposal No. 1 requires the approval of the holders of a majority of the
outstanding shares of Common Stock, $2.16 Preferred Stock and $2.20 Preferred
Stock, voting together as a single class, and the approval of the holders of
two-thirds of the outstanding shares of $2.16 Preferred Stock, voting as a
separate class. Proposal No. 2 requires the approval of the affirmative vote of
the holders of 80% of the shares of Common Stock, $2.16 Preferred Stock and
$2.20 Preferred Stock, voting together as a single class. Effectiveness of
Proposal No. 2 is conditioned upon effectiveness of Proposal No. 1. Proposal No.
1 is effectively conditioned on consummation of the Exchange Offer and cannot
occur alone, unless MetLife Louisiana waives the condition that the Exchange
Offer be consummated prior to its approval of Proposal No. 1. MetLife Louisiana
has not advised the Company of any circumstances under which it might waive such
condition. See 'General Information Concerning Proxies.'
In the event Proposal No. 1 is not approved but the requisite consents to
the Indenture Amendments are obtained, MetLife Louisiana will have the right
under the $2.20 Preferred Stock Put Option, beginning as soon as March 10, 1994,
or earlier under certain circumstances, to require a cash redemption of the
entire issue of $2.20 Preferred Stock out of funds legally available therefor at
an aggregate price of $57.5 million, together with accrued and unpaid dividends
on the $2.20 Preferred Stock (approximately $20.0 million as of November 30,
1993). However, the indenture governing the Exchange Notes will contain a
covenant restricting certain restrictive payments, including, but not limited
to, redemption of the $2.20 Preferred Stock, pursuant to the $2.20 Preferred
Stock Put Option. Moreover, even absent such restrictions, the Company does not
believe that its current financial resources are sufficient to make the payment
that would be required under the $2.20 Preferred Stock Put Option, and the
Company may not be permitted under the Delaware Law to make such payments. In
addition, the terms of the $2.16 Preferred Stock require that, in
40
<PAGE>
connection with any redemption of the $2.20 Preferred Stock, all accrued and
unpaid dividends on the $2.16 Preferred Stock (approximately $8.9 million or
$6.75 per share at November 30, 1993) be paid.
If the Exchange Offer is not consummated but the Reclassification is
consummated, the Company would be obligated to make sinking fund payments of
$11,250,000 with respect to the Subordinated Debentures on March 15 of each
year, including 1994, with a resulting reduction in the Company's liquidity. In
addition, without the Indenture Amendments, the Company would not be able to
exercise in full the Company's MetLife Option except with the proceeds from the
issuance of capital stock or substantial future earnings. This would
substantially reduce the Company's flexibility to fund the exercise of the
Company's MetLife Option. MetLife Louisiana's agreement to vote its shares of
$2.20 Preferred Stock in favor of the Reclassification is conditioned upon
consummation of the Exchange Offer. MetLife Louisiana has not advised the
Company of any circumstances under which it might waive the condition that the
Exchange Offer be consummated prior to its approval of Proposal No. 1.
METLIFE LOUISIANA CONDITIONS
MetLife Louisiana's approval of Proposal No. 1 is conditioned on, among
other matters, the following items: (i) the adoption of Proposal No. 2 (the
Charter Amendment relating to the elimination of the 80% approval requirement);
(ii) the consummation of the Exchange Offer; (iii) approval by the MetLife
Louisiana board of directors; (iv) the Recapitalization being legal and
permissible under applicable insurance law; (v) no material adverse change
having occurred in the financial condition of the Company; and (vi)
documentation reasonably acceptable to MetLife Louisiana and consistent with the
Amended MetLife Memorandum. The provisions of the Amended MetLife Memorandum
relating to the $2.20 Preferred Stock and the Company's MetLife Option are
conditioned on the Reclassification.
In the negotiations between the Company and non-director MetLife Louisiana
representatives, MetLife Louisiana conditioned its willingness to make economic
and structural concessions and to support the Reclassification upon an
acceptable change in the composition of the existing Board of Directors. During
the negotiations, MetLife Louisiana's position was that a majority of the
members of the Board of Directors after the Reclassification must be recommended
by the major stockholders of the Company. Certain members of the Board of
Directors who were not recommended or elected at the request of the major
stockholders did not agree to this condition and expressed their belief that the
directors that are associated with or recommended by the major stockholders
should not control or constitute a majority of the Board of Directors. As a
compromise, Mr. Wohlstetter, Chairman of the Board of Directors, proposed
even-numbered membership of the Board of Directors, half of whom were to be
associated with or recommended by the major stockholders, and, on the
understanding that none of the existing members of the Board of Directors wished
to resign, Mr. Nagler proposed a 16-member Board of Directors, the election of
three new directors (including a representative of the United Partners group)
from a list to be proposed by MetLife Louisiana to fill the vacancies created
thereby upon effectiveness of the Reclassification and an amendment to the
Certificate of Incorporation or By-Laws to allow for the calling of a special
meeting of stockholders to elect one additional director in the event a majority
of the 16-member Board of Directors cannot be obtained on a consistent basis.
The Board of Directors agreed to these proposals and subsequently MetLife
Louisiana proposed three persons to the Nominating Committee of the Board of
Directors to fill the vacancies which will be created by the expansion of the
Board of Directors. The Nominating Committee and the Board of Directors have
approved those persons. The following is information on the three persons
proposed by MetLife Louisiana and whom the Board of Directors will elect to fill
the three vacancies created by the expansion of the Board of Directors upon
consummation of the Reclassification.
Fred Manocherian, age 61, has been a private real estate developer in New
York for the past 30 years. For more than the past five years, Mr. Manocherian
has been the owner of Pan Am Equities,
41
<PAGE>
Inc., New York, New York, a real estate management company which manages and
operates his real estate holdings in New York and other areas of the United
States, and is the founder of the New York Racquet Club. Mr. Manocherian is
associated with United Partners, a group of investors who own approximately 9%
of the voting stock of the Company.
James Q. Riordan, age 66, was the President of Bekaert Corporation from
1989 until his retirement in 1992, and is the former Senior Vice President and
Vice Chairman of Mobil Corporation. Mr. Riordon is also a director of Dow Jones
& Co., Inc., Tri-Continental Corporation (and a director or trustee of each of
the Seligman Group Investment Companies), Brooklyn Union Gas, Public
Broadcasting Service, and a trustee of the Brooklyn Museum. He is a trustee of
the Committee for Economic Development and Co-Chairman of the Policy Council of
the Tax Foundation.
William S. Sneath, age 67, was President and Chief Operating Officer of
Union Carbide Corporation from 1971 to 1976, and Chairman of the Board and Chief
Executive Officer from 1977-1981. Mr. Sneath is a Director of Union Carbide
Corporation, Metropolitan Life Insurance Company and Rockwell International.
If the Reclassification is consummated and the three new directors are
elected, then four of the 16 directors (Messrs. Nagler, Luce, Adam and Sneath)
will be current or former directors or officers of MetLife and one additional
director (Mr. Riordan) will have been proposed for election by MetLife
Louisiana; one director (Mr. Manocherian), who was proposed by MetLife Louisiana
to fill one of the vacancies when the Board of Directors is expanded to 16
members, will be associated with United Partners; one director (Mr. Grapstein)
will be associated with Oakville N.V.; and one director (Mr. Spitzer) will be
the beneficial owner of approximately 1% of the Common Stock.
Under the terms of the $2.20 Preferred Stock and the $2.16 Preferred Stock,
the holders thereof as a single class have the right to elect two additional
members to the Board of Directors of the Company if dividends on the Existing
Preferred Stock are six quarters or more in arrears. On July 2, 1993, MetLife
Louisiana made a written request of the Company to hold a special meeting of the
holders of the Existing Preferred Stock to elect two additional directors.
Subsequently, MetLife Louisiana indicated to the Board of Directors that it
would not take further action with respect to the request as long as the Company
was making progress satisfactory to MetLife Louisiana in submitting the proposed
Recapitalization to the Company's stockholders. If the Reclassification is
consummated, the $2.16 Preferred Stock will cease to exist and, therefore, will
no longer have a right to elect two additional directors. Pursuant to the
Amended MetLife Memorandum, MetLife Louisiana will agree to consider all
dividends on the $2.20 Preferred Stock which are accrued and unpaid at the time
the Reclassification is consummated to have been paid, which will result in the
$2.20 Preferred Stock losing the right to elect two additional directors until
the dividends on the $2.20 Preferred Stock or Future Preferred Stock are again
six quarters or more in arrears.
FAIRNESS OPINION
The Special Committee has retained Jefferies to consider the fairness of
various aspects of the Reclassification, and Jefferies has opined and, as a
condition to the Reclassification, will confirm its opinion immediately prior to
the consummation of the Reclassification, to the effect that the
Reclassification is fair from a financial point of view to the holders of $2.16
Preferred Stock and to the holders of Common Stock. The text of the opinion is
set forth in Appendix B to this Proxy Statement -- Prospectus.
Jefferies is a nationally recognized investment banking firm that regularly
engages in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. The Special Committee
selected Jefferies on the basis of such valuation experience and specifically
for its experience in valuing companies in the energy industry. In requesting
the opinion, the Special Committee did not give any special instructions to
Jefferies or impose any limitations upon the scope of the investigation that
42
<PAGE>
Jefferies deemed necessary to enable it to deliver its opinion. Jefferies did
not participate in negotiating the terms of any aspect of the Recapitalization.
The terms of the Reclassification, including the number of shares of Common
Stock into which each share of $2.16 Preferred Stock will be reclassified, were
recommended and approved by the Special Committee on December 28, 1993.
The Company has agreed to pay Jefferies a fee of $125,000 upon delivery of
Jefferies' fairness opinion. In addition, the Company has agreed to reimburse
Jefferies for its reasonable out-of-pocket expenses and to indemnify Jefferies
against certain liabilities, including liabilities under the federal securities
laws, or to contribute to payments Jefferies may be required to make in respect
of such liabilities.
In the course of its review, Jefferies: (i) analyzed certain public and
non-public operating data of the Company prepared by the Company; (ii) discussed
the historical operating results and the future prospects of the business with
the management of the Company; (iii) reviewed the recent performance, liquidity
and volatility of the Company's existing equity securities; (iv) considered the
value of certain intangible benefits which would accrue to the Company as a
result of the Reclassification; (v) took into account its general experience in
similar transactions; and (vi) undertook such additional reviews, analyses and
inquiries as it deemed relevant under the circumstances.
Jefferies also analyzed published information regarding the financial and
market performance of a limited group of companies that Jefferies deemed
comparable to the Company, including independent exploration and production
companies and refining and marketing companies. The independent exploration and
production companies analyzed included: Basin Exploration, Coho Resources, Devon
Energy Corporation, Gerrity Oil & Gas Corporation, Snyder Oil Corporation,
Vintage Petroleum and Wainoco. The refining and marketing companies analyzed
included: Crown Central, Giant Industries, Holly Corporation, Tosco Corporation
and Total Petroleum (North America) Limited.
Financial performance of the comparable group of companies was measured by
estimated earnings, cash flow, and earnings before interest, income taxes and
depreciation, depletion and amortization ('EBITDA') for the fiscal periods 1993
and 1994. Market performance was determined by deriving multiples of earnings,
cash flow, and EBITDA for each comparable company. The Company's financial and
market performance was measured on a relative basis against the average
performance of the group of comparable companies.
The Company's implied enterprise value was computed by multiplying the
Company's projected operating data by comparable company multiples previously
determined. Asset valuation was determined by adding cash and subtracting debt
to yield a total enterprise value range per share.
COMPLIANCE WITH NEW YORK STOCK EXCHANGE STOCKHOLDER APPROVAL POLICY
Approval of Proposal No. 1 will also constitute approval under the rules
of the New York Stock Exchange by the stockholders of the issuance of Common
Stock and Future Preferred Stock to MetLife Louisiana pursuant to the terms of
the Amended MetLife Memorandum.
CROYDEN ASSOCIATES' LITIGATION
In October 1993, Croyden Associates, a holder of shares of $2.16 Preferred
Stock, filed a class action suit in Delaware Chancery Court on behalf of itself
and all other holders of the $2.16 Preferred Stock. The suit alleges that the
Company and its directors have breached their fiduciary duties to the holders of
the $2.16 Preferred Stock based on the terms of the proposed recapitalization as
described in this Proxy Statement-Prospectus as originally filed with the
Commission on September 2, 1993 which provided for the reclassification of a
share of $2.16 Preferred Stock into either 3.5 shares of Common Stock or 2.75
shares of Common Stock and .25 shares of a new issue of preferred stock. The
suit seeks, among other things, to enjoin the Recapitalization and monetary
damages.
43
<PAGE>
After Croyden Associates filed the lawsuit, representatives of the Company
and representatives of Croyden Associates, including the attorneys for the
holders of $2.16 Preferred Stock, had numerous discussions over a period of four
months concerning the possible settlement of the litigation. During the course
of such discussions, various rates for exchanging the $2.16 Preferred Stock into
Common Stock were proposed by the parties, ranging from four shares to six
shares of Common Stock per share of $2.16 Preferred Stock. In addition, the
parties discussed the possibility of issuing shares of Common Stock based on the
market price for such shares during a period immediately before or after
consummation of the Recapitalization. During the course of such discussions,
Croyden Associates proposed a fixed rate of five shares of Common Stock per
share of $2.16 Preferred Stock and, the parties ultimately reached agreement on
such rate. Discussions then took place between attorneys for the Company and the
attorneys for the holders of the $2.16 Preferred Stock with respect to payment
of fees and expenses of the attorneys for the holders of the $2.16 Preferred
Stock, which fees and expenses are the obligations of the holders of the
$2.16 Preferred Stock, the class benefiting from the services of such counsel.
As a result of these discussions, the Company agreed to pay up to $500,000 in
cash of the fees and expenses awarded by the Chancery Court, and the attorneys
for the holders of the $2.16 Preferred Stock agreed to limit their fee
application to $500,000 in cash plus .1 share of Common Stock for each share of
$2.16 Preferred Stock. The Company agreed to issue .1 share of Common Stock for
each share of $2.16 Preferred Stock on behalf of the holders of $2.16 Preferred
Stock so that such shares will be available to pay the fees and expenses of such
attorneys if awarded by the Chancery Court.
Croyden Associates has agreed in principle to recommend that the court
approve a settlement based upon the terms set forth in this Proxy Statement -
Prospectus.
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PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1993, adjusted to give effect to the Recapitalization, assuming
(i) the Exchange Offer is consummated at the maximum tender level, so that $
54.5 million in principal amount of Subordinated Debentures is exchanged for
$54.5 million in principal amount of the Exchange Notes; the holder of the $2.20
Preferred Stock waives the mandatory redemption requirements thereon, considers
accrued and unpaid dividends thereon to have been paid and is issued 1,900,075
shares of Common Stock; the $2.16 Preferred Stock, including accrued and unpaid
dividends thereon, is reclassified into 6,465,859 shares of Common Stock; and
the Company will issue 131,956 shares of Common Stock on behalf of the holders
of $2.16 Preferred Stock to pay certain legal fees and expenses in connection
with the settlement of certain litigation (the Recapitalization), (ii) only the
debt exchange described in the Recapitalization occurs (the Exchange Offer Only)
and (iii) only the waiver and considerations indicated above relating to the
$2.20 Preferred Stock, the reclassification of the $2.16 Preferred Stock and the
issuance of Common Stock on behalf of the holders of $2.16 Preferred Stock to
pay certain legal fees and expenses in connection with the settlement of certain
litigation described in the Recapitalization occur (the Reclassification Only).
The Exchange Notes and Common Stock issued in the Recapitalization are recorded
at their estimated fair market value. The $2.20 Preferred Stock is recorded at
liquidation value.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1993
------------------------------------------------
EXCHANGE OFFER
HISTORICAL RECAPITALIZATION ONLY
---------- ---------------- --------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS;
NUMBER OF SHARES IN THOUSANDS)
<S> <C> <C> <C>
Current Liabilities(2)------------------------------------------ $ 76,541 67,821 76,253
---------- ---------------- --------------
---------- ---------------- --------------
Long-Term Debt and Other Obligations:
Exchange Notes------------------------------------------------ $ -- 54,500 54,500
Liability to State of Alaska---------------------------------- 61,633 61,633 61,633
Liability to Department of Energy----------------------------- 13,194 13,194 13,194
Other--------------------------------------------------------- 8,015 8,015 8,015
Subordinated Debentures--------------------------------------- 97,656 48,716 48,716
---------- ---------------- --------------
Total-Long Term Debt and Other Obligations---------------------- 180,498 186,058(3) 186,058
---------- ---------------- --------------
$2.20 Preferred Stock; $1 stated value; 2,875,000 shares issued
and outstanding----------------------------------------------- 76,461 -- (3) 76,461
---------- ---------------- --------------
Common Stock and Other Stockholders' Equity:(4)
$2.20 Preferred Stock; $1 stated value; 2,875,000 shares
issued and outstanding(4)----------------------------------- -- 57,500 --
$2.16 Preferred Stock; $1 stated value; 1,319,563 shares
issued and outstanding-------------------------------------- 1,320 -- 1,320
Common stock, par value $.16 2/3; authorized 50,000,000
shares; 14,069,799 shares issued and outstanding; 8,497,890
additional shares to be issued in the Recapitalization and
in the Reclassification Only-------------------------------- 2,345 3,762 2,345
Additional paid-in capital------------------------------------ 86,987 111,683 86,987
Accumulated deficit------------------------------------------- (46,214) (52,431) (55,031)
Deferred compensation----------------------------------------- (263) (263) (263)
---------- ---------------- --------------
Total Common Stock and Other Stockholders' Equity--------------- 44,175 120,251(3) 35,358
---------- ---------------- --------------
Total Capitalization-------------------------------------------- $ 301,134 306,309 297,877
---------- ---------------- --------------
---------- ---------------- --------------
Shares of Common Stock issued and outstanding------------------- 14,070 22,568 14,070
Book Value Per Common Share(5)(6)------------------------------- $ .80 2.78 .17
Ratio of Long-Term Debt and Redeemable Preferred Stock to Total
Capitalization------------------------------------------------ 85% 61% 88%
<CAPTION>
RECLASSIFICATION
ONLY (1)
----------------
<S> <C>
Current Liabilities(2)------------------------------------------ 68,109
----------------
----------------
Long-Term Debt and Other Obligations:
Exchange Notes------------------------------------------------ --
Liability to State of Alaska---------------------------------- 61,633
Liability to Department of Energy----------------------------- 13,194
Other--------------------------------------------------------- 8,015
Subordinated Debentures--------------------------------------- 97,656
----------------
Total-Long Term Debt and Other Obligations---------------------- 180,498
----------------
$2.20 Preferred Stock; $1 stated value; 2,875,000 shares issued
and outstanding----------------------------------------------- --
----------------
Common Stock and Other Stockholders' Equity:(4)
$2.20 Preferred Stock; $1 stated value; 2,875,000 shares
issued and outstanding(4)----------------------------------- 57,500
$2.16 Preferred Stock; $1 stated value; 1,319,563 shares
issued and outstanding-------------------------------------- --
Common stock, par value $.16 2/3; authorized 50,000,000
shares; 14,069,799 shares issued and outstanding; 8,497,890
additional shares to be issued in the Recapitalization and
in the Reclassification Only-------------------------------- 3,762
Additional paid-in capital------------------------------------ 111,683
Accumulated deficit------------------------------------------- (47,614)
Deferred compensation----------------------------------------- (263)
----------------
Total Common Stock and Other Stockholders' Equity--------------- 125,068
----------------
Total Capitalization-------------------------------------------- 305,566
----------------
----------------
Shares of Common Stock issued and outstanding------------------- 22,568
Book Value Per Common Share(5)(6)------------------------------- 2.99
Ratio of Long-Term Debt and Redeemable Preferred Stock to Total
Capitalization------------------------------------------------ 59%
- ------------
(1) The Reclassification is effectively conditioned upon consummation of the
Exchange Offer and cannot occur alone unless MetLife Louisiana waives a
related condition. MetLife Louisiana has not advised the Company of any
circumstances under which it might waive such condition. See 'The
Recapitalization -- MetLife Louisiana Conditions.'
(2) Current Liabilities on this table exclude the current portion of Long-Term
Debt and Other Obligations and current amounts of $2.20 Preferred Stock, as
such amounts are included in the respective line items on this table. The
Historical and pro forma amounts excluded from current liabilities were
$38.8 million, $4.8 million, $27.6 million and $16.0 million, respectively.
(3) As a result of the Recapitalization, on a pro forma basis at September 30,
1993, and assuming the consummation of the Reclassification and a minimum
acceptance of the Exchange Offer ($22.5 million), versus the maximum
acceptance assumed above, Total Long-Term Debt and Redeemable Preferred
Stock would be $183 million and Total Common Stock and Other Stockholders'
Equity would be $124 million.
(4) The Company has entered into an agreement with MetLife Louisiana pursuant to
which MetLife Louisiana will give the Company a three-year option, subject
to certain conditions, to acquire all of the $2.20 Preferred Stock and all
of the Common Stock of the Company held by MetLife Louisiana at the date of
the Reclassification (2,875,000 shares of $2.20 Preferred Stock and
4,084,160 shares of Common Stock, based on MetLife Louisiana's holdings at
November 30, 1993, plus any shares of common stock issued in lieu of cash
payment of dividends on the $2.20 Preferred Stock) for an initial option
price of $51.5 million, increasing by approximately 12% per annum through
December 31, 1995, and by approximately 14% per annum thereafter.
(5) Book Value Per Common Share represents Total Common Stock and Other
Stockholders' Equity reduced by the liquidation preference of $33 million
for the $2.16 Preferred Stock under the Historical and Exchange Offer Only
scenarios or reduced by the liquidation preference of $58 million for the
$2.20 Preferred Stock under the Recapitalization and Reclassification Only
scenarios, divided by the number of shares of Common Stock issued and
outstanding.
(6) Assuming minimum acceptance of the Exchange Offer ($22.5 million), versus
the maximum acceptance assumed above, the Historical and pro forma Book
Value Per Common Share as of September 30, 1993 would be $.80, $2.94, $.43
and $2.99, respectively.
</TABLE>
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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The pro forma financial statements set forth the Company's historical
financial statements adjusted to give effect to the Recapitalization, assuming
(i) the Exchange Offer is consummated at the maximum tender level, so that $54.5
million in principal amount of Subordinated Debentures is exchanged for $54.5
million in principal amount of the Exchange Notes (bearing interest at 13% per
annum); the holder of the $2.20 Preferred Stock waives the mandatory redemption
requirements thereon, considers accrued and unpaid dividends thereon to have
been paid and is issued 1,900,075 shares of Common Stock; the $2.16 Preferred
Stock, including accrued and unpaid dividends thereon, is reclassified into
6,465,859 shares of Common Stock; and the Company will issue 131,956 shares of
Common Stock on behalf of the holders of $2.16 Preferred Stock to pay certain
legal fees and expenses in connection with the settlement of certain litigation
(the Recapitalization), (ii) only the debt exchange described in the
Recapitalization scenario occurs (the Exchange Offer Only) and (iii) only the
waiver and considerations indicated above relating to the $2.20 Preferred Stock,
the reclassification of the $2.16 Preferred Stock and the issuance of Common
Stock on behalf of the holders of $2.16 Preferred Stock to pay certain legal
fees and expenses in connection with the settlement of certain litigation
described in the Recapitalization occur (the Reclassification Only). The
Exchange Notes and Common Stock issued in the Recapitalization are recorded at
their estimated fair market value. The $2.20 Preferred Stock is recorded at its
liquidation value.
The pro forma financial statements have been prepared as if the
Recapitalization occurred on September 30, 1993 for balance sheet presentation
purposes and as of January 1, 1992 for statement of operations presentation
purposes, subject to the assumptions and adjustments in the accompanying Notes
to Pro Forma Condensed Consolidated Balance Sheets and Notes to Pro Forma
Statements of Condensed Consolidated Operations. The pro forma financial
information is not necessarily indicative of the Company's results of operations
or financial position in the future or of what the Company's results of
operations or financial position would have been had the Recapitalization been
consummated during the periods, or as of the dates for which pro forma financial
information is presented. These statements should be read in conjunction with
the historical financial statements of the Company included elsewhere herein.
The Exchange Offer is being accounted for as an early extinguishment of
debt. Therefore, the Company will recognize an extraordinary loss on such
transactions equal to the excess of the estimated market value of the Exchange
Notes over the carrying value of the Subordinated Debentures, increased by the
applicable unamortized debt issue costs. The Reclassification is being accounted
for as equity transactions whereby (i) the liquidation value of the $2.20
Preferred Stock, based upon the waiver of its mandatory redemption requirements
by the holder thereof, is classified as permanent equity and (ii) the excess of
the carrying value of the $2.16 Preferred Stock and the accrued and unpaid
dividends on the $2.20 Preferred Stock and the $2.16 Preferred Stock over the
estimated market value of the Common Stock issued is reflected as an increase in
additional paid-in capital.
46
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1993
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RECAPITALIZATION EXCHANGE OFFER ONLY RECLASSIFICATION ONLY (1)
------------------------- ------------------------- -------------------------
HISTORICAL ADJUSTMENTS ADJUSTED ADJUSTMENTS ADJUSTED ADJUSTMENTS ADJUSTED
---------- ----------- -------- - ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
(288)(a) (288)(a)
Current Assets------- $ 185,557 (4,000)(d) 181,269 (4,000)(d) 181,269 (4,000)(d) 181,557
Net Property, Plant and
Equipment------------- 209,273 209,273 209,273 209,273
1,400(d) 1,400(d)
Other Assets--------- 19,821 (657)(a) 20,564 (657)(a) 20,564 19,821
---------- --------- --------- ---------
$ 414,651 411,106 411,106 410,651
---------- --------- --------- ---------
---------- --------- --------- ---------
Liabilities and
Stockholders' Equity:
Current Portion of
Subordinated
Debentures------------ $ 11,250 (11,250)(a) -- (11,250)(a) -- 11,250
(8,432)(c)
Other Current
Liabilities----------- 104,134 (288)(a) 72,606 (288)(a) 103,846 8,432)(c)
(22,808)(b) (22,808)(b) 72,894
Other Liabilities------- 36,976 36,976 36,976 36,976
Exchange Notes---------- -- 54,500(a) 54,500(e) 54,500(a) 54,500 --
Other Long-term Debt and
Other Obligations----- 164,463 (37,690)(a) 126,773(e) (37,690)(a) 126,773 164,463
$2.20 Preferred
Stock----------------- 53,653 (b) (53,653)(b) -- 53,653 (53,653)(b) --
Common Stock and Other
Stockholders' Equity:
$2.16 Preferred
Stock--------------- 1,320 (1,320)(c) -- 1,320 (1,320)(c) --
$2.20 Preferred
Stock--------------- -- 57,500(b) 57,500 -- 57,500(b) 57,500
317(b) 317(b)
Common Stock------- 2,345 1,100(c) 3,762 2,345 1,100(c) 3,762
Additional Paid-in (2,600)(d) (2,600)(d)
Capital---------- 86,987 8,652(c) 111,683 86,987 8,652(c) 111,683
18,644(b) 18,644(b)
(2,600)(d)
Accumulated
Deficit----------- (46,214 ) (6,217)(a) (52,431) (6,217)(a) (55,031) (1,400)(d) (47,614)
Deferred Compensa-
tion---------------- (263 ) (263) (263) (263)
---------- --------- --------- ---------
Total Common Stock and
Other Stockholders'
Equity-------------- 44,175 120,251(e) 35,358 125,068
---------- --------- --------- ---------
$ 414,651 411,106 411,106 410,651
---------- --------- --------- ---------
---------- --------- --------- ---------
Book Value Per Common
Share(f)---------------- $ .80 2.78 .17 2.99
---------- --------- --------- ---------
---------- --------- --------- ---------
Shares of Common Stock
Issued and Outstand-
ing------------------- 14,070 22,568 14,070 22,568
Working Capital----------- $ 70,173 108,663 77,423 97,413
- ------------
(1) The Reclassification is effectively conditioned upon consummation of the
Exchange Offer and cannot occur alone unless MetLife Louisiana waives a
related condition. MetLife Louisiana has not advised the Company of any
circumstances under which it might waive such condition. See 'The
Recapitalization -- MetLife Louisiana Conditions.'
</TABLE>
See Notes to Pro Forma Condensed Consolidated Balance Sheets.
47
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(a) The Recapitalization and Exchange Offer Only scenarios assume $54.5 million
principal amount of Subordinated Debentures is exchanged for $54.5 million
principal amount of Exchange Notes on September 30, 1993.
The completion of the Exchange Offer of the Subordinated Debentures for the
Exchange Notes will be accounted for as an early extinguishment of debt. The
resulting extraordinary loss will be equal to the excess of the estimated
market value of the Exchange Notes over the carrying amount of the
Subordinated Debentures, increased by the applicable unamortized debt issue
costs, calculated as follows:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1993
<S> <C>
($000)
Carrying amount of Subordinated Debentures--------------- $ 48,940
Market value of Exchange Notes--------------------------- (54,500)
Unamortized debt issue costs----------------------------- (657)
-------------------
Extraordinary loss--------------------------------------- $ (6,217)
-------------------
-------------------
</TABLE>
These scenarios assume payment of $288,000 of accrued interest on the
Subordinated Debentures acquired in the exchange. No tax benefit has been
provided for the extraordinary loss of $6.2 million as the Company has
provided a 100% valuation allowance to the extent of its deferred tax assets.
(b) The Recapitalization and Reclassification Only scenarios assume the $2.20
Preferred Stock and $19.0 million of related accrued and unpaid dividends
are reclassified into $2.20 Preferred Stock having a liquidation preference
of $57.5 million and 1,900,075 shares of Common Stock. At September 30,
1993, 6 2/3% ($3.8 million) of the $2.20 Preferred Stock has been recorded
in current liabilities as that portion of the issue will be required to be
redeemed within one year under the existing terms of the $2.20 Preferred
Stock. Therefore, the total amount reclassified from Other Current
Liabilities under the Recapitalization and Reclassification Only scenarios
associated with the existing $2.20 Preferred Stock is $22.8 million.
(c) The Recapitalization and Reclassification Only scenarios assume that $33
million of liquidation preference of $2.16 Preferred Stock and $8.4 million
of related accrued and unpaid dividends are reclassified into 6,465,859
shares of Common Stock and the Company issues 131,956 shares of Common Stock
on behalf of the holders of $2.16 Preferred Stock to pay certain legal fees
and expenses in connection with the settlement of certain litigation.
(d) All scenarios assume issuance costs of $4 million. The Recapitalization
scenario assumes stock issuance costs of $2.6 million and debt issue costs
of $1.4 million. In the Exchange Offer Only and the Reclassification Only
scenarios, the issue costs associated with the transaction not completed are
assumed to be charged to expense.
(e) As a result of the Recapitalization, on a pro forma basis at September 30,
1993, and assuming minimum acceptance of the Exchange Offer, versus the
maximum acceptance assumed above, (i) the Exchange Notes would be $22.5
million; (ii) Long-term Debt and Other Obligations would be $155.5 million;
and (iii) Total Common Stock and Other Stockholders' Equity would be $123.9
million.
(f) Book Value Per Common Share represents Total Common Stock and Other
Stockholders' Equity reduced by the liquidation preference of $33 million
for the $2.16 Preferred Stock under the Historical and Exchange Offer Only
scenarios or reduced by the liquidation preference of $57.5 million for the
$2.20 Preferred Stock under the Recapitalization and Reclassification Only,
scenarios divided by the number of shares of Common Stock issued and
outstanding. Assuming minimum acceptance of the Exchange Offer, versus the
maximum acceptance assumed above, the Historical and pro forma Book Value
Per Common Share as of September 30, 1993 would be $.80, $2.94, $.43 and
$2.99, respectively.
48
<PAGE>
PRO FORMA STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1993
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS;
NUMBER OF SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
RECAPITALIZATION EXCHANGE OFFER ONLY RECLASSIFICATION ONLY(1)
------------------------- ------------------------- -------------------------
HISTORICAL ADJUSTMENTS ADJUSTED ADJUSTMENTS ADJUSTED ADJUSTMENTS ADJUSTED
---------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues(2)--------------- $ 627,848 627,848 627,848 627,848
---------- --------- --------- ---------
Cost of Sales and
Operating Expenses---- 581,536 581,536 581,536 581,536
General and Administra-
tive Expenses(b)------ 10,946 10,946 10,946 10,946
Depreciation, Depletion
and Amortization------ 15,350 15,350 15,350 15,350
Interest Expense-------- 12,801 (17)(c) 12,784(i) (17)(c) 12,784 12,801
Other------------------- 4,441 4,441 4,441 4,441
---------- --------- --------- ---------
Total Costs and
Expenses------------ 625,074 625,057 625,057 625,074
---------- --------- --------- ---------
Earnings Before Income
Taxes------------------- 2,774 2,791 2,791 2,774
Income Tax
Provision(j)------------ 2,435 2,435 2,435 2,435
---------- --------- --------- ---------
Net Earnings(h)----------- 339 356 356 339
Preferred Stock Dividend
Requirements------------ 6,906 (2,162) (d) 4,744 6,906 (2,162)(d) 4,744
---------- --------- --------- ---------
Net Loss Applicable to
Common Stock(h)--------- $ (6,567 ) (4,388) (6,550) (4,405)
---------- --------- --------- ---------
---------- --------- --------- ---------
Loss Per Primary and Fully
Diluted* Share(e)(h)---- $ (.47 ) (.19) (.47) (.19)
---------- --------- --------- ---------
---------- --------- --------- ---------
Average Shares of Common
Stock Outstanding:
Primary(e)-------------- 14,070 22,568 14,070 22,568
Fully Diluted(m)-------- 18,845 25,068 18,845 25,068
EBITDA(3)----------------- $ 31,071 31,071 31,071 31,071
Capital Expenditures------ $ 26,286 26,286 26,286 26,286
Ratio of EBITDA to Total
Interest---------------- 2.4 2.4 2.4 2.4
Ratio of Earnings to Fixed
Charges(k)-------------- 1.15 1.15 1.15 1.15
Ratio of Earnings to
Combined Fixed Charges
and Preferred Stock
Dividend
Requirements(l)--------- (g ) (g) (g) (g)
- ------------
(1) The Reclassification is effectively conditioned upon consummation of the
Exchange Offer and cannot occur alone unless MetLife Louisiana waives a
related condition. MetLife Louisiana has not advised the Company of any
circumstances under which it might waive such condition. See 'The
Recapitalization -- MetLife Louisiana Conditions.'
(2) The Company is currently involved in a dispute with Tennessee Gas relating
to a gas contract. For additional information concerning this dispute, see
'Legal Proceedings -- Tennessee Gas Contract' and Notes I and N of Notes to
Consolidated Financial Statements.
(3) EBITDA represents earnings before interest, income taxes and depreciation,
depletion and amortization. EBITDA, while not purporting to reflect any
measure of the Company's operations or cash flow, is presented for
additional analysis as the Company understands that certain investors use
EBITDA as one measure of an issuer's historical ability to service debt.
* Anti-dilutive
</TABLE>
See Notes to Pro Forma Statements of Condensed Consolidated Operations.
49
<PAGE>
PRO FORMA STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS
YEAR ENDED DECEMBER 31, 1992
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS;
NUMBERS OF SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
RECLASSIFICATION
RECAPITALIZATION EXCHANGE OFFER ONLY ONLY(1)
------------------------- ------------------------- -----------
HISTORICAL ADJUSTMENTS ADJUSTED ADJUSTMENTS ADJUSTED ADJUSTMENTS
---------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues(2)--------------------------- $ 954,372 954,372 954,372
---------- --------- ---------
Cost of Sales and Operating
Expenses-------------------------- 926,082 926,082 926,082
General and Administrative
Expenses(b)----------------------- 25,849 25,849 25,849
Depreciation, Depletion and
Amortization---------------------- 16,552 16,552 16,552
Interest Expense-------------------- 21,115 (645)(c) 20,470(i) (645)(c) 20,470
Other------------------------------- 4,636 4,636 4,636
---------- --------- ---------
Total Costs and Expenses---------- 994,234 993,589 993,589
---------- --------- ---------
Loss Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Accounting Changes-------- (39,862 ) (39,217) (39,217)
Income Tax Provision(j)--------------- 5,383 5,383 5,383
---------- --------- ---------
Loss Before Extraordinary Loss and
Cumulative Effect of Accounting
Changes(h)-------------------------- (45,245 ) (44,600) (44,600)
Extraordinary Loss------------------ -- (7,370)(a) (7,370) (7,370)(a) (7,370)
Cumulative Effect of Accounting
Changes--------------------------- (20,630 ) (20,630) (20,630)
---------- --------- ---------
Net Loss------------------------------ (65,875 ) (72,600) (72,600)
Preferred Stock Dividend
Requirements------------------------ 9,207 (2,882)(d) 6,325 9,207 (2,882)(d)
---------- --------- ---------
Net Loss Applicable to Common
Stock(h)---------------------------- $ (75,082 ) (78,925) (81,807)
---------- --------- ---------
---------- --------- ---------
Loss Per Primary and Fully Diluted*
Share:(e)(h)
Loss Before Extraordinary Loss------ $ (3.87 ) (2.26) (3.83)
Extraordinary Loss------------------ -- (.33) (.52)
Cumulative Effect of Accounting
Changes--------------------------- (1.47 ) (.91) (1.47)
---------- --------- ---------
Net Loss---------------------------- $ (5.34 ) (3.50) (5.82)
---------- --------- ---------
---------- --------- ---------
Average Common Shares Outstanding:(e)
Primary----------------------------- 14,063 22,561 14,063
Fully Diluted(m)-------------------- 18,838 25,061 18,838
EBITDA(3)----------------------------- $ (2,000 ) (2,000) (2,000)
Ratio of Earnings to Fixed
Charges(k)-------------------------- (f ) (f) (f)
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend
Requirements (l)-------------------- (g ) (g) (g)
<CAPTION>
ADJUSTED
---------
<S> <C>
Revenues(2)--------------------------- 954,372
---------
Cost of Sales and Operating
Expenses-------------------------- 926,082
General and Administrative
Expenses(b)----------------------- 25,849
Depreciation, Depletion and
Amortization---------------------- 16,552
Interest Expense-------------------- 21,115
Other------------------------------- 4,636
---------
Total Costs and Expenses---------- 994,234
---------
Loss Before Income Taxes,
Extraordinary Loss and Cumulative
Effect of Accounting Changes-------- (39,862)
Income Tax Provision(j)--------------- 5,383
---------
Loss Before Extraordinary Loss and
Cumulative Effect of Accounting
Changes(h)-------------------------- (45,245)
Extraordinary Loss------------------ --
Cumulative Effect of Accounting
Changes--------------------------- (20,630)
---------
Net Loss------------------------------ (65,875)
Preferred Stock Dividend
Requirements------------------------ 6,325
---------
Net Loss Applicable to Common
Stock(h)---------------------------- (72,200)
---------
---------
Loss Per Primary and Fully Diluted*
Share:(e)(h)
Loss Before Extraordinary Loss------ (2.29)
Extraordinary Loss------------------ --
Cumulative Effect of Accounting
Changes--------------------------- (.91)
---------
Net Loss---------------------------- (3.20)
---------
---------
Average Common Shares Outstanding:(e)
Primary----------------------------- 22,561
Fully Diluted(m)-------------------- 25,061
EBITDA(3)----------------------------- (2,000)
Ratio of Earnings to Fixed
Charges(k)-------------------------- (f)
Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend
Requirements (l)-------------------- (g)
- ------------
(1) The Reclassification is effectively conditioned upon consummation of the
Exchange Offer and cannot occur alone unless MetLife Louisiana waives a
related condition. MetLife Louisiana has not advised the Company of any
circumstances under which it might waive such condition. See 'The
Recapitalization -- MetLife Louisiana Conditions.'
(2) The Company is currently involved in a dispute with Tennessee Gas relating
to a gas contract. For additional information concerning this dispute, see
'Legal Proceedings -- Tennessee Gas Contract' and Notes I and N of Notes to
Consolidated Financial Statements.
(3) EBITDA represents loss before extraordinary loss, cumulative effect of
accounting changes, interest, income taxes and depreciation, depletion and
amortization. EBITDA, while not purporting to reflect any measure of the
Company's operations or cash flow, is presented for additional analysis as
the Company understands that certain investors use EBITDA as one measure of
an issuer's historical ability to service debt.
* Anti-dilutive
</TABLE>
See Notes to Pro Forma Statements of Condensed Consolidated Operations.
50
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF CONDENSED CONSOLIDATED OPERATIONS
(a) The Recapitalization and Exchange Offer Only scenarios assume $54.5
million principal amount of Subordinated Debentures is exchanged for $54.5
million principal amount of Exchange Notes as of January 1, 1992.
The completion of the Exchange Offer of the Subordinated Debentures for the
Exchange Notes will be accounted for as an early extinguishment of debt. The
resulting extraordinary loss will be equal to the excess of the estimated market
value of the Exchange Notes over the carrying amount of the Subordinated
Debentures, increased by applicable unamortized debt issue costs, calculated as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1992
-----------------
($000)
<S> <C>
Carrying amount of Subordinated Debentures----------------------------------------------------- $ 47,948
Market value of Exchange Notes----------------------------------------------------------------- (54,500)
Unamortized debt issue costs------------------------------------------------------------------- (818)
-----------------
Extraordinary loss------------------------------------------------------------------------ $ (7,370)
-----------------
-----------------
</TABLE>
(b) All scenarios assume issuance costs of $4 million. The
Recapitalization scenario assumes stock issuance costs of $2.6 million and debt
issue costs of $1.4 million. In the Exchange Offer Only and the Reclassification
Only scenarios, the issue costs associated with the transaction not completed
would be charged to expense. As these charges are non-recurring charges directly
attributable to the Exchange Offer Only and the Reclassification Only scenarios
they have not been considered in the calculation of the pro forma results for
the nine months ended September 30, 1993 or the year ended December 31, 1993.
(c) The Recapitalization and Exchange Offer Only scenarios assume a net
decrease in interest expense and amortization of debt issuance costs relating to
the Exchange Notes as the result of a reduction in interest expense and
amortization of debt issue costs relating to the Subordinated Debentures
exchanged. The amounts are calculated as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1993 YEAR ENDED DECEMBER 31, 1992
------------------------------------------------ ----------------------------
EXCHANGE EXCHANGE
OFFER RECLASSIFICATION OFFER
RECAPITALIZATION ONLY ONLY RECAPITALIZATION ONLY
---------------- -------- ---------------- ---------------- --------
($000)
<S> <C> <C> <C> <C> <C>
Interest on Exchange Notes-------- $ 5,299 5,299 -- 7,085 7,085
Amortization of debt issue costs
relating to Exchange Notes------ 150 150 -- 200 200
Interest and amortization of
discount on Subordinated
Debentures---------------------- (5,400) (5,400 ) -- (7,842) (7,842)
Amortization of debt issue costs
relating to Subordinated
Debentures---------------------- (66) (66 ) -- (88) (88)
-------- -------- -------- -------- --------
Net decrease in interest expense
and amortization of debt
issuance cost------------------- $ (17) (17 ) -- (645) (645)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<CAPTION>
RECLASSIFICATION
ONLY
----------------
<S> <C>
Interest on Exchange Notes-------- --
Amortization of debt issue costs
relating to Exchange Notes------ --
Interest and amortization of
discount on Subordinated
Debentures---------------------- --
Amortization of debt issue costs
relating to Subordinated
Debentures---------------------- --
--------
Net decrease in interest expense
and amortization of debt
issuance cost------------------- --
--------
--------
</TABLE>
(d) The Recapitalization and Reclassification Only scenarios include
dividend requirements on the $2.20 Preferred Stock of $4.7 million and $6.3
million for the nine months ended September 30, 1993 and the year ended December
31, 1992, respectively, and the elimination of the dividend requirements on the
$2.16 Preferred Stock aggregating $2.2 million and $2.9 million for the nine
months ended September 30, 1993 and the year ended December 31, 1992,
respectively.
(e) If the Company elects to pay the dividends on the $2.20 Preferred
Stock solely in shares of Common Stock (assuming a market price of $6 per
share): (i) the Historical and pro forma average common shares outstanding for
the nine months ended September 30, 1993 would be 14,069,937; 22,837,161;
14,069,937 and 22,837,161, respectively; (ii) the Historical and pro forma
average common shares outstanding for the year ended December 31, 1992 would be
14,063,258; 22,963,320; 14,063,258 and 22,963,320, respectively; (iii) the
Historical and pro forma loss per primary and fully diluted share for the nine
months ended September 30, 1993 would be $(.47), $(.19), $(.47) and $(.19),
respectively; and (iv) the Historical and pro forma loss per primary
51
<PAGE>
and fully diluted share before extraordinary loss and cumulative effect of
accounting changes for the year ended December 31, 1992 would be $(3.87),
$(2.22), $(3.83) and $(2.25), respectively.
(f) The Historical and pro forma earnings for the year ended December 31,
1992 were inadequate to cover fixed charges. The coverage deficiencies were
$39.9 million, $39.2 million, $39.2 million and $39.9 million, respectively.
(g) The Historical and pro forma earnings for the nine months ended
September 30, 1993 were inadequate to cover combined fixed charges and preferred
stock dividend requirements. The coverage deficiencies were $ 4.1 million, $2.0
million, $4.1 million and $2.0 million, respectively. The Historical and pro
forma earnings for the year ended December 31, 1992 were inadequate to cover
combined fixed charges and preferred stock dividend requirements. The coverage
deficiencies were $49.1 million, $45.5 million, $48.4 million and $46.2 million,
respectively.
(h) The Pro Forma Statements of Condensed Consolidated Operations assume
the Exchange Offer is consummated at the maximum tender level. If the Exchange
Offer is consummated at the minimum tender level, then (i) $22.5 million
principal amount of Subordinated Debentures would be exchanged for $22.5 million
principal amount of Exchange Notes at January 1, 1992; (ii) the Historical and
pro forma earnings for the nine months ended September 30, 1993 would be $.3
million for all scenarios; (iii) the Historical and pro forma loss per primary
and fully diluted share for the nine months ended September 30, 1993 would be
$(0.47), $(.20), $(.47) and $(.20), respectively; (iv) the Historical and pro
forma loss before extraordinary loss and cumulative effect of accounting changes
for the year ended December 31, 1992 would be $(45.3) million, $(45.1) million,
$(45.1) million and $(45.3) million, respectively; and (v) the Historical and
pro forma loss per primary and fully diluted share before extraordinary loss and
cumulative effect of accounting changes for the year ended December 31, 1992
would be $(3.87), $(2.28), $(3.86) and $(2.29), respectively.
(i) As a result of the Recapitalization, on a pro forma basis for the year
ending December 31, 1992 and assuming minimum acceptance of the Exchange Offer
($22.5 million), versus the maximum acceptance assumed above, interest expense
under the Recapitalization would be $21.0 million. Under the same pro forma
assumptions, interest expense under the Recapitalization for the nine months
ended September 30, 1993 would be $12.9 million.
(j) No tax effect has been reflected in the above adjustments to the Pro
Forma Statements of Condensed Consolidated Operations, as the Company has
provided a 100% valuation allowance to the extent of its net deferred tax
assets.
(k) If the Exchange Offer is consummated at the minimum tender level, as
discussed in (h) above, then the Historical and pro forma Ratio of Earnings to
Fixed Charges for the nine months ended September 30, 1993 would be 1.15, 1.14,
1.14 and 1.15, respectively. The Historical and pro forma earnings for the year
ended December 31, 1992 would be inadequate to cover fixed charges assuming the
minimum tender level. The coverage deficiencies would be $39.9 million, $39.7
million, $39.7 million and $39.9 million, respectively.
(l) If the Exchange Offer is consummated at the minimum tender level, as
discussed in (h) above, then the Historical and pro forma earnings for the nine
months ended September 30, 1993 would be inadequate to cover combined fixed
charges and preferred stock dividend requirements. The coverage deficiencies
would be $4.1 million, $2.1 million, $4.2 million and $2.0 million,
respectively. The Historical and pro forma earnings for the year ended December
31, 1992 would be inadequate to cover combined fixed charges and preferred stock
dividend requirements. The coverage deficiencies would be $49.1 million, $46.0
million, $48.9 million and $46.2 million, respectively.
(m) Each share of $2.20 Preferred Stock is convertible by its terms into
.8696 shares of Common Stock; however, the Company has entered into an agreement
with MetLife Louisiana, pursuant to which MetLife Louisiana has agreed not to
convert the $2.20 Preferred Stock into Common Stock.
52
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data for the four years ended September 30, 1991,
the three months ended December 31, 1991 and the year ended December 31, 1992 is
taken from the selected financial data contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1992. The selected financial data
for the nine months ended September 30, 1992 and September 30, 1993 is taken
from the Company's Condensed Consolidated Financial Statements contained in the
Company's Quarterly Reports on Form 10-Q for the quarters ended September 30,
1992 and September 30, 1993, respectively. Certain amounts for the nine months
ended September 30, 1992 have been restated for the adoption of Statements of
Financial Accounting Standards No. 106, 'Employers' Accounting for
Postretirement Benefits Other Than Pensions,' and No. 109, 'Accounting for
Income Taxes,' both effective January 1, 1992. The historical financial data
below should be read in conjunction with the Consolidated Financial Statements
and Notes thereto and 'Management's Discussion and Analysis of Financial
Condition and Results of Operations' included elsewhere in this Proxy
Statement -- Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS YEAR ENDED
YEARS ENDED SEPTEMBER 30, ENDED ENDED SEPTEMBER 30
----------------------------------------------- DECEMBER 31, DECEMBER 31, --------
1988 1989 1990 1991 1991 1992(1)(2) 1992(2)
----------- -------- -------- --------- ------------ ------------ --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Operating Revenues(3)------------ $ 1,124,133 762,597 996,554 1,084,954 240,586 946,446 710,859
----------- -------- -------- --------- ------------ ------------ --------
----------- -------- -------- --------- ------------ ------------ --------
Net Earnings (Loss):
Earnings (Loss) Before the Cumulative
Effect of Accounting Changes----- $ (19,355) (30,520) 22,702 3,939 (416) (45,245) (20,375)
Cumulative Effect of Accounting
Changes-------------------------- -- -- -- -- -- (20,630) (20,630)
----------- -------- -------- --------- ------------ ------------ --------
Net Earnings (Loss)---------------- $ (19,355) (30,520) 22,702 3,939 (416) (65,875) (41,005)
----------- -------- -------- --------- ------------ ------------ --------
----------- -------- -------- --------- ------------ ------------ --------
Earnings (Loss) per Primary and Fully
Diluted* Share:
Earnings (Loss) Before the Cumulative
Effect of Accounting Changes----- $ (2.04) (2.83) .96 (.37) (.19) (3.87) (1.94)
Cumulative Effect of Accounting
Changes-------------------------- -- -- -- -- -- (1.47) (1.47)
----------- -------- -------- --------- ------------ ------------ --------
Net Earnings (Loss)---------------- $ (2.04) (2.83) .96 (.37) (.19) (5.34) (3.41)
----------- -------- -------- --------- ------------ ------------ --------
----------- -------- -------- --------- ------------ ------------ --------
Capital Expenditures------------------- $ 6,046 13,206 23,082 24,484 3,858 15,446 10,292
Total Assets--------------------------- $ 484,938 445,348 504,914 496,826 494,706 446,722 469,756
Working Capital------------------------ $ 110,784 105,090 117,857 95,448 106,119 122,583 85,839
Long-Term Debt and Other Obligations,
Including Current Portion------------ $ 186,016 163,209 167,960 184,738 189,398 201,748 195,688
Redeemable Preferred Stock, Including
Current Portion---------------------- $ 57,328 57,360 57,392 57,424 57,432 71,695 70,106
Common Stock and Other Stockholders'
Equity(4)---------------------------- $ 164,573 125,402 141,385 137,373 136,971 50,665 77,839
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
1993
-------------
<S> <C>
Gross Operating Revenues(3)-------------- 624,581
-------------
-------------
Net Earnings (Loss):
Earnings (Loss) Before the Cumulative
Effect of Accounting Changes------- 339
Cumulative Effect of Accounting
Changes---------------------------- --
------------
Net Earnings (Loss)------------------ 339
------------
------------
Earnings (Loss) per Primary and Fully
Diluted* Share:
Earnings (Loss) Before the Cumulative
Effect of Accounting Changes------- (.47)
Cumulative Effect of Accounting
Changes---------------------------- --
------------
Net Earnings (Loss)------------------ (.47)
------------
------------
Capital Expenditures--------------------- 26,286
Total Assets----------------------------- 414,651
Working Capital-------------------------- 70,173
Long-Term Debt and Other Obligations,
Including Current Portion-------------- 180,498
Redeemable Preferred Stock, Including
Current Portion------------------------ 76,461
Common Stock and Other Stockholders'
Equity(4)------------------------------ 44,175
- ------------
* Anti-Dilutive
(1) The Company's fiscal year was changed from September 30 to December 31,
effective January 1, 1992.
(2) The following significant transactions (increased) decreased the net loss
reflected for 1992:
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
(IN MILLIONS) DECEMBER 31, 1992 1992
----------------- -----------------
<S> <C> <C>
Settlement with State of Alaska----------------------------------------------- $ (10.5) --
Cost Reduction Program and Other Employee Terminations------------------------ (9.1) (3.5)
Environmental Provisions------------------------------------------------------ (4.4) (1.5)
Loss on Assets Held for Sale-------------------------------------------------- (1.8) (1.1)
Gain on Sale of Indonesian Operations----------------------------------------- 5.8 5.8
Transportation Rebate--------------------------------------------------------- 1.7 1.7
Cumulative Effect of Accounting Changes--------------------------------------- (20.6) (20.6)
-------- -------
$ (38.9) (19.2)
-------- -------
-------- -------
(3) The Company is currently involved in a dispute with Tennessee Gas relating
to a gas contract. For additional information concerning this dispute, see
'Legal Proceedings -- Tennessee Gas Contract' and Notes I and N of Notes to
Consolidated Financial Statements.
(4) No dividends were paid on common shares during the periods presented above.
</TABLE>
53
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Although the Company's net working capital at September 30, 1993 totaled
$70.2 million, including $58.3 million of cash and short-term investments, the
Company currently has significant short-term and long-term cash requirements.
The Company's operations over the past several years have not generated cash
sufficient to meet all of the Company's obligations. In large part, this was
caused by significantly lower operating results from the Company's refining and
marketing operations. As a result, the Company has been unable to pay dividends
on its preferred stock and has relied, in part, on cash from the sale of assets
to meet its other cash requirements.
In the past two years, management has reviewed various alternatives with
respect to the Company's overall capitalization and liquidity, including its (i)
credit arrangements and working capital requirements; (ii) debt service
requirements with respect to the Subordinated Debentures; (iii) preferred stock
redemption obligations; and (iv) preferred stock dividend requirements,
including arrearages. During the first quarter of 1993, the Company retained
Smith Barney as its financial advisor to assist the Company in reviewing such
matters and alternatives.
With respect to the Company's refining and marketing operations, during the
second quarter of 1993 the Company implemented a market-driven operational
strategy which emphasizes the upgrading of refinery feedstocks and matching
production from the Company's Alaska refinery with the refined product demand
within Alaska. A positive result of this strategy has been to reduce the
production of less profitable residual fuel oil and shipments of other refined
products into less profitable markets.
In implementing the Company's operational strategy, the Company has reduced
its daily refinery throughput during the first nine months of 1993 by 19% from
the comparable prior year period. This reduction in throughput has enabled the
Company to reduce the portion of lower quality crude oil in the feedstock blend.
By utilizing a greater percentage of higher quality feedstocks (which results in
production yields with greater margins than production yields from a higher
percentage of lower quality Alaska North Slope crude oil), the Company can
successfully operate the refinery at the reduced throughput levels. Operating
the refinery at lower throughput levels results in less production of certain
products, particularly residual fuel oil, for which there is no market in Alaska
and which therefore must be exported from Alaska and sold into less profitable
West Coast and Far Eastern markets. For the past two quarters, implementation of
this strategy has resulted in an improvement in the Company's aggregate refinery
gross margin, enabling the Company to operate the refinery more profitably at
the lower throughput level. An ancillary benefit of this strategy has been to
reduce the level of working capital required for the refinery operations
resulting in reduced letter of credit requirements for purchases of crude oil
feedstocks.
Another major element in the Company's operating strategy has been to focus
on the continued development of its natural gas reserves in the Bob West Field
in South Texas. Even though substantial amounts of capital will be required to
fund the drilling of additional development wells, the Company believes such
capital commitment will significantly increase the Company's cash flow and
proved natural gas reserves, which will benefit the Company's long-term capital
resources.
During 1992, the Company completed the sale of its Indonesian oil and gas
assets and operations and received $6.6 million in cash and the purchaser
assumed liabilities of $6.3 million. Also during 1992, the Company sold certain
domestic producing and undeveloped oil and gas properties outside of its Bob
West Field for approximately $2.1 million in cash. The Company has explored the
possibility of selling certain other noncore assets; however, the Company did
not receive offers that management considered to be representative of the value
of such assets. Accordingly, management is developing strategies to maximize the
value of these assets and is not actively seeking the sale of any of its assets
or operations at the present time.
54
<PAGE>
Long-Term Debt and Preferred Stock Requirements
Letters of credit are issued to obtain crude oil feedstocks for the
Company's refinery and for other operating and corporate needs. As of September
30, 1993, the Company had arranged for the issuance of outstanding letters of
credit of $45 million. As noted above, the Company's letter of credit
requirements have been significantly reduced due to the Company's new operating
strategy.
On October 29, 1993, in order to avoid a $700,000 facility fee, the Company
elected to terminate its secured Letter of Credit Facility dated July 27, 1989,
between the Company, two of its wholly-owned subsidiaries, The Chase Manhattan
Bank, N.A., as Agent, and a consortium of other banks. The facility, which was
scheduled to expire in March 1994, was secured by the Company's refinery, a
second lien on the Company's Bob West Field gas reserves and a security interest
in substantially all of the current assets of the Company, including cash,
accounts receivables and inventory. The Company had previously amended the
Letter of Credit Facility on September 30, 1993 to reduce the commitment under
the facility from $80 million to $40 million and to permit the Company to issue
up to $30 million of letters of credit with other banks. The Company has
initiated discussions with several financial institutions with regard to
providing a long-term credit facility to finance the Company's working capital
requirements. Based on these discussions, the Company believes it will be able
to enter into a long-term credit facility on terms more favorable than the
Company's terminated Letter of Credit Facility upon successful completion of the
proposed recapitalization. If the Company is unsuccessful in completing the
Recapitalization, and is thereafter unable to arrange a long-term credit
facility, or is otherwise unable to arrange such a facility, the Company may be
required to reduce its refinery throughput to reduce its working capital
requirements. The Company is unable to predict if it would be able to operate
the refinery at an economically viable rate under such circumstances.
During September 1993 and subsequent, the Company negotiated several
interim credit arrangements collateralized by either cash or inventory to permit
it to secure the purchases of crude oil feedstocks and to meet other operating
and corporate credit requirements. With respect to these interim credit
arrangements, the Company has entered into several uncommitted letter of credit
facilities which provide for the issuance of letters of credit on a cash-secured
basis. Total availability pursuant to the uncommitted letter of credit
arrangements is in excess of $65 million.
In addition, effective September 30, 1993, the Company entered into the
Substitution Agreement with the State of Alaska, the Company's largest supplier
of crude oil. Under the Substitution Agreement, the Company has pledged the
capital stock of Tesoro Alaska Petroleum Company ('Tesoro Alaska'), a
wholly-owned subsidiary of the Company, and substantially all of its crude oil
and refined product inventory in Alaska to secure its purchase of royalty crude
oil from the State. The Substitution Agreement has allowed the Company to reduce
its letter of credit requirements to $28 million as of November 1, 1993. This
agreement extends through 1994 and contains various covenants and restrictions
customary to inventory financing transactions.
Effective October 29, 1993, Tesoro E&P entered into the $30 million E&P
Facility which is secured by the capital stock of Tesoro E&P and its natural gas
properties in the Bob West Field. Proceeds from the E&P Facility may be used for
capital requirements associated with the development of the Company's South
Texas natural gas properties, the acquisition and development of other oil and
gas properties and, subject to certain limitations, the repayment of outstanding
borrowings or advances to the Company. The E&P Facility is subject to a
quarterly borrowing base determination which was initially determined to be $20
million. Based on discussions with its lenders, the Company expects that its
borrowing base will increase upon redetermination effective as of December 31,
1993. Since the Company does not have any immediate requirement for additional
borrowing availability, it does not expect to request an increase in the amount
of borrowing capacity under the E&P Facility as a result of anticipated
increases in the borrowing base. The facility, which expires December 31, 1996,
is guaranteed by the Company, contains certain financial covenants that must be
maintained by Tesoro E&P and bears interest at prime plus 1% or, at Tesoro E&P's
option, Libor plus 2.5%. The
55
<PAGE>
E&P Facility contains restrictions that prohibit borrowings under the facility
to be used by Tesoro E&P or the Company for debt service, including interest and
principal on the Company's Subordinated Debentures, or for payment of common or
preferred dividends.
The Company's funded debt obligations as of September 30, 1993 include
approximately $108.8 million of Subordinated Debentures, which require sinking
fund payments sufficient to annually retire $11.25 million principal amount of
Subordinated Debentures. During January 1993, the Company satisfied its initial
sinking fund obligation by purchasing $11.25 million face amount of Subordinated
Debentures for approximately $9.7 million. The Existing Indenture contains
certain covenants, including a restriction which prevents the current payment of
dividends on the Common Stock and currently limits the Company's ability to
purchase or redeem any shares of its capital stock. This restriction is proposed
to be modified. See 'Proposed Amendments to Existing Indenture.'
The Subordinated Debentures bear interest at the rate of 12 3/4% per annum
and require sinking fund payments sufficient to retire $11.25 million principal
amount of Subordinated Debentures per year through 2000. Under the ANS
Agreement, the Company is obligated to make variable monthly payments for at
least nine years plus a payment of $60 million in 2002, subject to deferral.
Under a consent order with the U.S. Department of Energy, the Company is
obligated to make payments aggregating $13.2 million, plus interest at the rate
of 6% per annum, during the next nine years.
Earnings were inadequate to cover combined fixed charges and dividend
requirements on the Existing Preferred Stock by $49.1 million and $4.1 million
during 1992 and the nine months ended September 30, 1993, respectively.
The Company has deferred and continues to defer its regular quarterly
dividends on its preferred stocks and, as of September 30, 1993, dividends in
arrears on preferred stocks totaled $26.4 million. Under the terms of the $2.20
Preferred Stock, the holder, currently MetLife Louisiana, has the right to
require the Company to redeem out of funds legally available therefor all of the
$2.20 Preferred Stock at $20 per share ($57.5 million aggregate) plus accrued
and unpaid dividends to the date of redemption, if at any time the Company (i)
shall be in default in the payment of dividends on the $2.20 Preferred Stock by
an amount at least equal to 12 full quarterly dividends or (ii) fails to make
three annual mandatory redemptions which are scheduled to commence in 1994. Upon
any such redemption, the Company would also be required to pay the dividend
arrearages on the $2.16 Preferred Stock. Since the Company has continued to
defer the payment of dividends, 12 1/2 quarterly dividends on the $2.20
Preferred Stock were in arrears as of November 15, 1993. In March 1993, the
Company entered into the MetLife Forbearance Agreement, that was subsequently
amended in November 1993, which defers the initial redemption of the $2.20
Preferred Stock scheduled for February 1994 and MetLife's right to accelerate
redemption of the $2.20 Preferred Stock upon the occurrence of a default in the
payment of dividends, as described above, to the earlier of March 10, 1994, or
the day following an occurrence of either (i) an event of default under the E&P
Facility or the Substitution Agreement or (ii) any event which has resulted in
or is likely to result in a material adverse effect on the assets, business,
operations, financial condition or cash flow of the Company and its subsidiaries
taken as a whole. Under the terms of the Existing Indenture, the Company is
currently prohibited from making any cash redemption of its common and preferred
stocks, including the total or partial redemption of its $2.20 Preferred Stock,
unless such proceeds are from the issuance of capital stock. MetLife currently
owns $2.20 Preferred Stock and Common Stock representing about 28% of the
Company's voting securities. Based upon the terms and conditions of the $2.20
Preferred Stock and the MetLife Forbearance Agreement, as amended, accrued
dividends on the Existing Preferred Stock and 6 2/3% of redeemable $2.20
Preferred Stock are classified as current liabilities at September 30, 1993.
Cash Flows From Operating, Investing and Financing Activities
During the nine months ended September 30, 1993, cash and cash equivalents
increased by $10.0 million and short-term investments decreased by $18.5
million. At September 30, 1993, the Company's cash and short-term investments
totaled $58.3 million, which included restricted funds of $22.4 million as
collateral for outstanding letters of credit. Net cash from operating activities
of $28.6
56
<PAGE>
million during this period was primarily due to net earnings for the period and
reduced working capital requirements (receivables and inventories), partially
offset by payments totaling $12.3 million to the State under the ANS Agreement
entered into in January 1993. Net cash used in investing activities of $7.8
million during the nine months ended September 30, 1993 included capital
expenditures of $26.3 million, mainly for exploration and production activities
in the Bob West Field. During 1993, the Company has completed the expansion of a
gas processing facility and pipeline and the drilling of ten development gas
wells in this field. In addition, drilling of three development wells in the Bob
West Field and three exploratory wells in other areas of South Texas were in
progress at September 30, 1993. These uses of cash in investing activities were
partially offset by the net decrease of $18.5 million in short-term investments.
Net cash used in financing activities of $10.8 million during the nine months
ended September 30, 1993 included the repurchase of $11.25 million principal
amount of the Subordinated Debentures for $9.7 million in cash.
During 1992, cash and cash equivalents decreased by $14.2 million and
short-term investments increased by $20.0 million. Cash flows from operating
activities of $11.4 million included a net loss, offset by certain significant
non-cash charges including the cumulative effect of accounting changes,
depreciation, depletion and amortization and the settlement with the State and
by reduced working capital requirements. See '-- Summary of Operations' below.
Net cash used in investing activities of $21.1 million in 1992 was mainly due to
capital expenditures of $15.4 million, primarily for continued exploration and
production activities in the Bob West Field and capital improvements in Alaska,
and to the purchase of short-term investments of $24.0 million. During 1992, the
Company began investing in short-term debt securities with original maturities
in excess of 90 days. These investments are classified as short-term investments
on the Consolidated Balance Sheets. Partially offsetting cash used in investing
activities in 1992 were net proceeds of $12.9 million from sales of assets.
During 1992, the Company received, before expenses, $6.8 million for the sale of
the Company's Indonesian operations, $3.3 million for the sale of the corporate
aircraft and related assets and $2.1 million for the sale of certain exploration
and production properties outside of the Bob West Field. Cash flows used in
financing activities of $4.5 million in 1992 included the repayment of $6.5
million of long-term debt, primarily borrowings under a secured financing
agreement for development of natural gas reserves in the Bob West Field. This
financing arrangement, under which the Company borrowed $2.0 million in 1992,
was terminated by the Company in December 1992. The Company deferred all four
quarterly preferred stock dividend payments in 1992.
During 1991, cash and cash equivalents decreased $16.1 million. Cash flows
from operating activities of $17.9 million included net earnings of $3.9
million, partially offset by a $5.2 million annual payment to the DOE. See
' -- Summary of Operations' below. Net cash used in investing activities of
$24.7 million in 1991 was primarily comprised of capital expenditures for
exploration and production activities in the Bob West Field and improvements in
Alaska. Cash flows used in financing activities of $9.3 million in 1991 was
primarily for dividend payments on Existing Preferred Stock for three and
one-half quarters which totaled $8.0 million.
During 1990, cash and cash equivalents increased $6.8 million. Operating
activities, which provided $17.8 million in net cash flows, included net
earnings of $22.7 million partially offset by a $5.2 million annual payment to
the DOE, a $2.8 million payment in settlement of litigation with the Government
of Trinidad and Tobago and increased working capital requirements. Operating
activities are further discussed in ' -- Summary of Operations' below. Net cash
used in investing activities of $3.0 million during 1990 included capital
expenditures of $23.1 million, primarily for exploration and production
activities in the Bob West Field and capital improvements in Alaska. Partially
offsetting the use of cash in investing activities were proceeds of $19.8
million from sales of assets, the majority of which related to the sales of
substantially all of the Company's oil field tool rental assets and business.
Net cash used in financing activities of $8.0 million during 1990 included
dividend payments on preferred stocks for three quarters totaling $6.9 million
and long-term debt repayments of $1.1 million.
57
<PAGE>
Capital Expenditures
The Company anticipates that it will incur expenditures of approximately
$40 million for existing operations during 1993, compared to $15.4 million
during 1992. The most significant capital expenditures which the Company expects
to incur during 1993 relate to its strategy to develop the Bob West Field. In
this regard, the Company expects to participate in the drilling of 13
development gas wells during 1993, of which ten had been completed at September
30, 1993, and the Company has completed an expansion of the field's gas
processing facility and pipeline. Further, the Company expects to participate in
drilling three exploratory wells in other areas of South Texas. Total 1993
capital expenditures for the Bob West Field are projected to be approximately
$29 million. In addition, the Company anticipates 1993 capital projects
associated with its refining and marketing operations to total approximately $9
million. A majority of such amount represents costs associated with various
capital projects at the Company's Alaska refinery and expenditures to expand or
enhance the Company's Alaska retail and marketing operations.
Management of the Company has under consideration total capital
expenditures for fiscal 1994 ranging from approximately $70 million to $80
million which would include approximately $29 million for the continued
development of the Bob West Field and $32 million for the Alaska refinery,
including $25 million associated with the upgrading of refinery hardware through
the installation of a vacuum unit which will allow the Company to upgrade
residual fuel oil into higher value products. The Board of Directors has not
approved the Company's proposed capital expenditures for fiscal 1994 and the
Company anticipates that such approval will be subject to, among other things,
the Board of Directors being satisfied with the Company's ability to finance
such capital expenditures, and the consummation of the Recapitalization. The
aggregate capital expenditures the Company will be able to incur in 1994 will
also depend upon the Company's ability to generate funds from operations,
financings and other sources.
Proposed Recapitalization
The Recapitalization is intended to improve the financial condition of the
Company, facilitate the Company's development of long-term financing and allow
the Company to execute its new strategy of improving its refining and marketing
operations and accelerating the growth of its oil and gas exploration and
production activities, with the goal of returning the Company to profitability.
Assuming the Exchange Offer is consummated at the minimum tender level, no
sinking fund payments, currently $11.25 million annually, will be required until
1996, and interest payments on the combined Exchange Notes and Subordinated
Debentures will be substantially unchanged. Further, assuming the
Reclassification is consummated, preferred stock dividend requirements will be
reduced from the current level of $9.2 million annually to $6.3 million annually
and, under certain conditions, such dividends can be paid in shares of Common
Stock. See 'The Recapitalization.'
RESULTS OF OPERATIONS
The selected financial data included in the remainder of this section
should be read in conjunction with the consolidated financial statements and
related footnotes thereto included elsewhere in this Proxy
Statement -- Prospectus.
In September 1992, the Company's fiscal year-end was changed from September
30 to December 31, effective January 1, 1992. Accordingly, the information
contained herein addresses the Company's results of operations for the year
ended December 31, 1992, compared to the two prior years ended September 30,
1991 and 1990, respectively. The results of operations for the three-month
period from October 1, 1991 to December 31, 1991 are discussed separately. Also
included herein are the Company's results of operations for the nine months
ended September 30, 1993 compared with the nine months ended September 30, 1992.
58
<PAGE>
SUMMARY OF OPERATIONS
Operating profit (loss) by segment is presented below. Operating profit
represents pretax earnings (loss) before certain corporate expenses, interest
income and interest expense.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1990 1991 1992 1992 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Segment Results of Operations (Dollars in millions):
Operating Profit (Loss), Including Gain or
Loss on Sales of Assets:
Refining and Marketing------------------------------- $ 48.2 19.3 (14.9) (1.4) 5.4
Exploration and Production--------------------------- 16.8 35.6 29.1 20.1 24.5
Oil Field Supply and Distribution-------------------- 2.9 (.5) (4.7) (2.8) (1.9)
------- ------- ------ ------ ------
Total Operating Profit------------------------------------ $ 67.9 54.4 9.5 15.9 28.0
------- ------- ------ ------ ------
------- ------- ------ ------ ------
Operating Statistics:
Refining and Marketing:
Refinery throughput (average daily barrels)---------- 67,904 68,192 61,425 62,574 50,503
Product sales (average daily barrels)---------------- 93,749 90,155 87,440 87,821 69,841
Natural Gas -- United States:
Net production (average daily Mcf)------------------- 727 7,435 13,960 12,618 32,313
Average sales price (dollars per Mcf)---------------- $ 1.40 1.88 3.68 2.38 3.45
Natural Gas -- Bolivia:
Net production (average daily Mcf)------------------- 12,668 19,322 19,421 19,502 19,183
Average sales price (dollars per Mcf)---------------- $ 2.74 3.06 1.67 1.82 1.20
Crude Oil -- Indonesia (sold effective May 1, 1992):
Net production (average daily barrels)--------------- 2,565 3,315 2,714 2,714 --
Average sales price (dollars per barrel)------------- $ 17.95 24.39 18.20 18.20 --
Oil Field Supply and Distribution:
Product sales (average daily barrels)---------------- 7,846 10,470 8,476 8,517 7,114
</TABLE>
The following table highlights certain significant transactions recorded in
1992 and their impact on the Company's operating segments:
<TABLE>
<CAPTION>
REFINING EXPLORATION OIL FIELD
AND AND SUPPLY AND CORPORATE
MARKETING PRODUCTION DISTRIBUTION AND OTHER TOTAL
--------- ----------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
Certain Significant 1992 Transactions (Dollars in
millions):
Settlement with State of Alaska------------------ $ (10.5) -- -- -- (10.5)
Cost Reduction Program and Other Employee
Terminations---------------------------------- (1.1) (.1) (.1) (7.8) (9.1)
Environmental Provisions------------------------- (2.1) -- (1.4) (.9) (4.4)
Loss on Assets Held for Sale--------------------- -- -- -- (1.8) (1.8)
Gain on Sales of Indonesian Operations----------- -- 5.8 -- -- 5.8
Transportation Rebate---------------------------- 1.7 -- -- -- 1.7
Cumulative Effect of Accounting
Changes--------------------------------------- -- -- -- (20.6) (20.6)
--------- ----- ------------ ---------- -------
$ (12.0) 5.7 (1.5) (31.1) (38.9)
--------- ----- ------------ ---------- -------
--------- ----- ------------ ---------- -------
</TABLE>
59
<PAGE>
The Company's net loss in 1992 of $65.9 million compares to net earnings of
$3.9 million in 1991 and net earnings of $22.7 million in 1990. The
comparability of the Company's operating results is affected by accounting
changes of $20.6 million and certain other significant transactions of $18.3
million in 1992. The Company adopted Statements of Financial Accounting
Standards No. 106, 'Employers' Accounting for Postretirement Benefits Other Than
Pensions,' and No. 109, 'Accounting for Income Taxes,' both effective January 1,
1992 (see Note A of Notes to Consolidated Financial Statements included
elsewhere herein).
Excluding the significant transactions presented above, the decrease in
results of operations in 1992 as compared to 1991 was primarily due to lower
operating results from the Company's refining and marketing operations and
reduced revenues from the Company's Bolivian and Indonesian operations,
partially offset by increased production and sales prices of natural gas from
the Bob West Field. The decrease in net earnings in 1991 as compared to 1990
also reflected lower operating results from the Company's refining and marketing
operations, partially offset by increased natural gas production volumes in
Bolivia and higher crude oil prices in Indonesia.
A discussion and analysis of the factors contributing to these results are
presented below. The consolidated financial statements and related footnotes,
included elsewhere herein, together with the following information, are intended
to provide shareholders and investors with a reasonable basis for assessing the
Company's operations, but should not serve as the sole criterion for predicting
the future performance of the Company.
SEGMENT RESULTS OF OPERATIONS
Refining and Marketing
The following table reflects average daily sales volumes and average sales
price per barrel of refined products sold in the Refining and Marketing segment
during the years ended September 30, 1990, September 30, 1991 and December 31,
1992 and the nine months ended September 30, 1992 and September 30, 1993:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1990 1991 1992 1992 1993
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales Volume (average daily barrels):
Gasoline-------------------------------------------------- 29,646 25,883 25,196 26,317 23,219
Jet fuel-------------------------------------------------- 16,256 15,055 19,060 18,506 11,107
Other distillates----------------------------------------- 19,515 20,488 19,253 20,069 19,225
Residual fuel oil----------------------------------------- 28,332 28,729 23,931 22,929 16,290
---------- --------- --------- --------- ---------
Total 93,749 90,155 87,440 87,821 69,841
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Sales Price (dollars per barrel):
Gasoline-------------------------------------------------- $ 29.83 30.69 28.89 28.82 28.01
Jet fuel-------------------------------------------------- $ 30.43 35.15 27.76 27.22 28.18
Other distillates----------------------------------------- $ 27.72 29.78 25.78 25.51 26.50
Residual fuel oil----------------------------------------- $ 14.85 15.15 11.60 11.13 11.73
</TABLE>
60
<PAGE>
The following table reflects average sales prices, margins and volumes for
sales of refined products produced at the Company's refinery and sales of
refined products purchased for resale during the years ended September 30, 1990,
September 30, 1991 and December 31, 1992 and the nine months ended September 30,
1992 and September 30, 1993:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1990 1991 1992 1992 1993
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales of Refinery Production:
Sales price (dollars per barrel)-------------------------- $ 23.10 24.40 21.30 21.24 22.45
Margin (dollars per barrel)------------------------------- $ 3.33 2.77 1.18 2.24 4.06*
Volume (average daily barrels)---------------------------- 65,786 66,837 62,218 60,934 50,730
Sales of Products Purchased for Resale:
Sales price (dollars per barrel)-------------------------- $ 29.35 31.48 27.58 27.34 27.50
Margins (dollars per barrel)------------------------------ $ 2.34 .37 1.09 1.98 1.24
Volume (average daily barrels)---------------------------- 27,963 23,318 25,222 26,887 19,111
- ------------
* Excludes the effect of a non-cash charge of $5.0 million for an inventory
liquidation discussed in Note C to Consolidated Financial Statements included
elsewhere herein.
</TABLE>
Nine Months Ended September 30, 1993 Compared to the Nine Months Ended
September 30, 1992. Revenues from the sales of refined products declined 20% in
the first nine months of 1993 when compared to the same period of 1992. This
decrease was primarily attributable to the 20% decrease in sales volumes in 1993
over the 1992 period. Average sales prices during the two periods were
essentially unchanged; however, average margins increased in 1993, particularly
with regard to the sales of refined products produced at the Company's refinery.
The reduction in sales volumes and the improvement in margins were primarily the
result of the implementation of the Company's market-driven operational strategy
during 1993 which reduced the overall production of refined products at the
Company's refinery, but which more significantly reduced the production of
residual fuel oil sold into a continuing depressed market. Refinery throughput
during the 1993 period averaged 50,503 barrels per day, a 19% reduction from the
1992 period average of 62,574 barrels per day. Sales of residual fuel oil, all
of which is produced at the Company's refinery, decreased to 16,290 barrels per
day during the 1993 period as compared to 22,929 barrels per day in the
comparable prior year period. Operating profit during the 1993 period reflected
an improvement of $6.8 million over the comparable 1992 period primarily as a
result of greater refined product sales margins; however, operating profit was
adversely impacted by a non-cash charge to earnings of $5.0 million in the 1993
period for the effect of a LIFO inventory valuation. In addition, during the
early months of 1993, the Company was required to produce more costly oxygenated
gasoline. The additional cost to produce the oxygenated gasoline was not offset
by a comparable increase in sales prices causing gasoline margins to be
negatively impacted.
1992 Compared to 1991; 1991 Compared to 1990. Revenues from the sales of
refined products decreased 15% in fiscal 1992. Although volumes decreased only
3%, average sales prices decreased almost 12%. Revenues in fiscal 1991 were
essentially unchanged from fiscal 1990. Decreases in sales volumes in 1991 were
substantially offset by increases in refined product sales prices. The operating
loss of $14.9 million for 1992 decreased $34.2 million from the $19.3 million
operating profit in 1991. This decrease was primarily due to a further
deterioration of gross margins on refined product sales, particularly residual
fuel oil. The recovery of crude oil costs at the Company's Alaska refinery
continued to be adversely impacted by weak markets for the refinery's output of
residual fuel oil, which approximated 40% of the total output of the refinery
during 1992 and the prior two fiscal years. Residual fuel oil markets have been
weak due to the global oversupply of this product since the Persian Gulf War and
current projections indicate that such markets will continue to be weak in the
future. During the latter months of 1992, the Company also incurred additional
costs to produce oxygenated gasoline. The market for oxygenated gasoline was
such that the additional cost to produce the oxygenated gasoline could not be
entirely recovered with increased sales prices. In addition to increased costs
for environmental issues and reductions in workforce, as presented above in the
Certain Significant 1992 Transactions table, operating results for 1992 also
included higher costs of
61
<PAGE>
sales resulting from the settlement of a contractual dispute with the State for
the purchase of crude oil (see Note H of Notes to Consolidated Financial
Statements included elsewhere herein). Both 1992 and 1991 results benefitted
from cost recoveries consisting of a transportation rebate in 1992 and an
insurance reimbursement in 1991. The 1991 operating profit of $19.3 million
decreased $28.9 million, or 60%, from the $48.2 million operating profit in
1990, due also primarily to the lower gross margins on refined product sales.
Exploration and Production
Nine Months Ended September 30, 1993 Compared to the Nine Months Ended
September 30, 1992. The improvement of $4.4 million in operating profit
resulted primarily from the significant increase in the Company's natural gas
production and average sales prices from the Bob West Field. Net production from
this field increased to 32,313 Mcf per day during the first nine months of 1993
as compared to 12,618 Mcf per day in the comparable period of 1992. Sales prices
from this production averaged $3.45 per Mcf in the first nine months of 1993 as
compared to $2.38 per Mcf in the 1992 period. This increase was partially offset
by the May 1992 sale of the Company's Indonesian operations and the reduction in
the contractual sales price for the Company's natural gas production in Bolivia.
1992 Compared to 1991; 1991 Compared to 1990. Operating profit of $29.1
million in 1992 declined $6.5 million from the $35.6 million operating profit in
1991, which was an $18.8 million improvement from the $16.8 million operating
profit in 1990. The decrease in 1992 was primarily due to reduced sales prices
and production levels of crude oil from the Company's former Indonesian
operations, which were sold effective May 1, 1992, and contractually reduced
sales prices for the Company's natural gas production in Bolivia, also effective
May 1, 1992. Under a sales contract with Yacimientos Petroliferos Fiscales
Bolivianos ('YPFB'), the Bolivian state-owned oil and gas company, the Company's
Bolivian natural gas production is sold to YPFB, which in turn sells the natural
gas to the Republic of Argentina. This contract, including the pricing
provision, is subject to renegotiation in April 1994 for another two-year
period. These decreases in 1992 were partially offset by the $5.8 million gain
from the sales of the Company's Indonesian operations and increased natural gas
production and sales prices from the Company's Bob West Field. See 'Legal
Proceedings' and Notes I and N of Notes to Consolidated Financial Statements
included elsewhere herein for information regarding litigation involving the
contract for the sale of gas from the Bob West Field. During 1991, operating
profit increased above 1990 levels primarily due to increased production volumes
and higher average sales prices of crude oil in Indonesia and natural gas in
Bolivia. Operating profit of $21.2 million from the Company's Bolivian
operations in 1991 included earnings from an additional 25% interest acquired in
one of the Company's Contracts of Operation in Bolivia effective October 1,
1990. During 1990, the Company received $1.3 million in settlement of a natural
gas price dispute relating to certain of its domestic operations.
Oil Field Supply and Distribution
Nine Months Ended September 30, 1993 Compared to the Nine Months Ended
September 30, 1992. Revenues from these operations during the 1993 period
decreased when compared to the 1992 period due to the discontinuance of the
operations, in the 1992 second quarter, of a wholesale distribution facility in
Oklahoma. In addition, the decrease in crude oil prices during the 1993 period
had a correlating decrease in refined product prices. Margins, however, improved
during the 1993 period as a result of the Company's efforts to consolidate
certain locations and eliminate marginally profitable locations, including the
facility in Oklahoma. Effective December 31, 1992, the Company acquired the
remaining 50% interest in Tesoro-Leevac Petroleum Company, a joint venture,
which has allowed the Company to consolidate certain of its marine terminals;
however, the Company does not anticipate that this acquisition will have a
material effect on the revenues and margins of this segment.
1992 Compared to 1991; 1991 Compared to 1990. Revenues from the sales of
refined products decreased in fiscal 1992 as compared to fiscal 1991 primarily
as a result of the Company's discontinuance, in the second quarter of fiscal
1992, of the operation of a wholesale distribution facility in Oklahoma which
had commenced operations in fiscal 1991. In addition, sales prices and refined
product margins decreased in fiscal 1992 as compared to the prior year, as a
result of a generally weak U.S. economy, continuing overall depressed drilling
activity and an oversupply of refined products
62
<PAGE>
following the Persian Gulf crisis. Operating expenses decreased during the 1992
period due to a decrease in business activity and the Company's efforts to
consolidate operations. During 1991, revenues from sales of refined products
increased over 1990 levels, primarily as a result of the increased volumes from
the operations of a wholesale distribution facility which commenced during the
third quarter of fiscal 1991. In addition, average sales prices increased during
fiscal 1991 even though margins remained weak due to the continuing concern over
the Persian Gulf crisis and its effect on crude oil prices. Operating expenses
during 1991 increased over 1990 levels primarily as the result of operations of
the wholesale distribution facility referred to above and because of the initial
costs of commencing operations of the segment's bioremediation subsidiary. The
operating loss of $4.7 million in 1992 was a further deterioration from the
operating loss of $.5 million in 1991. This decrease in operating results was
mainly attributable to lower margins on refined product sales, partially offset
by reduced operating expenses. The operating loss in 1991 was a decrease of $3.4
million from the $2.9 million operating profit in 1990. The decrease in
operating results was attributable primarily to higher operating margins in 1990
than in 1991 and gains from sales of surplus oil field tool rental equipment
during 1990.
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1990 1991 1992 1992 1993
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Results of Operations (Dollars in millions):
Total revenues------------------------------------------- $ 1,006.5 1,091.0 954.4 718.8 627.9
Costs of sales and operating expenses-------------------- 920.5 1,015.9 926.1 688.4 581.6
General and administrative------------------------------- 20.2 17.0 25.9 15.0 10.9
Depreciation, depletion and amortization----------------- 12.8 15.0 16.6 12.4 15.3
Interest expense----------------------------------------- 20.8 18.8 21.1 15.9 12.8
Other expense-------------------------------------------- 5.9 5.3 4.6 3.4 4.6
Income tax provision------------------------------------- 3.6 15.1 5.4 4.1 2.4
Cumulative effect of accounting changes------------------ -- -- (20.6) (20.6) --
---------- --------- --------- --------- ---------
Net earnings (loss)--------------------------------- $ 22.7 3.9 (65.9) (41.0) .3
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Earnings (Loss) Per Primary and Fully Diluted* Share:
Earnings (loss) before the cumulative effect of
accounting changes------------------------------------- .96 (.37) (3.87) (1.94) (.47)
Cumulative effect of accounting changes------------------ -- -- (1.47) (1.47) --
---------- --------- --------- --------- ---------
Net earnings (loss)--------------------------------- $ .96 (.37) (5.34) (3.41) (.47)
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
- ------------
* Anti-dilutive
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1993 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1992
Net earnings of $.3 million (a loss of $.47 per primary and fully diluted
share after preferred dividend requirements) for the first nine months of 1993
represented an improvement of $41.3 million from the net loss of $41.0 million
($3.41 per primary and fully diluted share) recorded during the first nine
months of 1992. The 1992 period has been restated for the $20.6 million ($1.47
per share) cumulative effect and the $1.0 million ($.07 per share) period effect
of accounting changes related to the Company's adoption of Statements of
Financial Accounting Standards No. 106, 'Employers' Accounting for
Postretirement Benefits Other Than Pensions,' and No. 109, 'Accounting for
Income Taxes,' both effective as of January 1, 1992. The decrease of $90.9
million in total revenues was primarily due to lower refined product sales
volumes which averaged 76,955 barrels per day in the 1993 period as compared to
96,338 average daily barrels in the comparable prior year period. In addition,
revenues from the Company's Bolivian operations were lower due to the reduced
contractual sales price for the decreased natural gas production. The 1992
period also included operating revenues of $6.0 million and a gain of $5.8
million resulting from the Company's former Indonesian operations. Partially
offsetting these decreases were increased revenues from the Company's Bob West
Field natural gas production. In addition, the 1993 period included a $1.4
million gain from the retirement of $11.25 million face amount of Subordinated
Debentures in January 1993. The decrease of $106.8 million in cost of sales and
operating expenses was also attributable to the
63
<PAGE>
lower refined product volumes and the effect of the disposition of Indonesian
operations. General and administrative expenses decreased by $4.1 million
primarily due to the 1992 charge of $1.3 million for expenses associated with a
cost reduction program, with the remaining decrease in 1993 attributable to the
savings from this program. Depreciation, depletion and amortization increased by
$2.9 million due to the increase in volumes of natural gas production from the
Company's Bob West Field. The decrease of $3.1 million in interest expense
resulted mainly from a settlement of certain tax issues. Income taxes decreased
by $1.7 million due to reduced earnings from foreign operations.
1992 COMPARED TO 1991
Total revenues of $954.4 million for 1992 decreased $136.6 million, or 13%,
from 1991, primarily due to lower refined product sales prices on reduced
volumes. Additionally, total revenues decreased due to the disposition of the
Company's Indonesian operations, effective May 1, 1992, which had provided $29.5
million of revenues in 1991 compared to $6.0 million in 1992. Revenues from the
Company's Bolivian operations decreased by $6.7 million, primarily due to
reduced sales prices under a contract for the Company's natural gas production.
Partially offsetting these decreases in 1992 were increases of $21.3 million in
sales of crude oil by the Company's refining and marketing operations and $13.7
million in revenues from natural gas production from the Company's Bob West
Field, together with a $4.0 million net gain from sales of assets. The gain from
sales of assets included a $5.8 million gain from the disposition of the
Company's Indonesian operations, partially offset by a $1.8 million loss
resulting from the sale of drilling rigs and costs related to the disposition of
the Company's remaining oil field tool rental assets.
Costs of sales and operating expenses of $926.1 million in 1992 decreased
$89.8 million, or 9%, from 1991, primarily due to lower crude oil and refined
product volumes and prices, together with a reduction in operating expenses
resulting from the disposition of the Company's Indonesian operations. These
decreases in 1992 were partially offset by increased crude oil costs, primarily
resulting from the additional accrual associated with the settlement of a
contractual dispute with the State and higher expenses for environmental issues
and workforce reductions.
General and administrative expenses of $25.9 million in 1992 increased $8.9
million from 1991, largely due to expenses for a cost reduction program and
other employee terminations which totaled $9.1 million, of which $1.3 million
was charged to the operating segments. The increase of $1.6 million in
depreciation, depletion and amortization in 1992 primarily resulted from
increased natural gas production in the Bob West Field, partially offset by the
effects of the disposition of the Company's Indonesian operations.
The income tax provision of $5.4 million in 1992 decreased by $9.7 million
from the prior year, primarily due to lower foreign income taxes resulting from
reduced revenues from the Company's Bolivian and former Indonesian operations.
1991 COMPARED TO 1990
Total revenues of $1.1 billion for 1991 increased $84.5 million, or 8%,
from 1990, primarily due to higher sales prices of refined products. In
addition, increased production volumes from the Company's exploration and
production operations experienced higher average sales prices for crude oil in
Indonesia and natural gas in Bolivia. Partially offsetting these increases in
total revenues in 1991 was a decline in interest income, resulting primarily
from lower interest rates on cash available for investment. Other income also
decreased, mainly due to the settlement of a natural gas price dispute and gains
from sales of surplus oil field tool rental equipment in 1990.
Costs of sales and operating expenses increased $95.4 million, or 10%, in
1991, compared to 1990, primarily due to higher crude oil and refined product
prices.
General and administrative expenses of $17.0 million in 1991 decreased $3.2
million from the prior year, primarily due to reduced professional fees. The
increase of $2.2 million in depreciation, depletion and amortization in 1991 was
mainly attributable to natural gas exploration and production activities in the
Bob West Field, partially offset by a reduction in expenses related to the
Company's oil field tool rental business, which was sold in 1990. Other expense
for 1991 included a $2.0 million charge for an arbitration award involving a
royalty dispute on Indonesian crude oil production, while 1990 included a $2.8
million settlement with the Government of Trinidad and Tobago.
64
<PAGE>
The income tax provision of $15.1 million for 1991 increased by $11.5
million from the prior year, primarily due to higher foreign taxes resulting
from increased revenues from the Company's Indonesian and Bolivian operations.
THREE MONTHS ENDED DECEMBER 31, 1991 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1990
The Statement of Consolidated Operations and Statement of Consolidated Cash
Flows for the three months ended December 31, 1991 are presented in the
Consolidated Financial Statements included elsewhere herein. For discussion
purposes, results for the three months ended December 31, 1991 are compared to
the unaudited three-month period ended December 31, 1990, as set forth in Note B
of Notes to Consolidated Financial Statements included elsewhere herein.
The net loss of $.4 million for the three months ended December 31, 1991
(the '1991 quarter') represented a decrease of $5.3 million from the net
earnings of $4.9 million recorded during the three months ended December 31,
1990 (the '1990 quarter'). Total revenues of $243.9 million for the 1991 quarter
decreased $92.3 million, or 27%, from the 1990 quarter, largely due to lower
sales prices for refined products. The 1990 quarter had been impacted by
escalating refined product and crude oil prices during the conflict in the
Persian Gulf. During the 1991 quarter, the Company's exploration and production
operations in Indonesia realized lower sales prices on reduced crude oil
production as compared to the 1990 quarter. Also contributing to the decrease in
total revenues in the 1991 quarter was reduced interest income resulting from
lower interest rates on less cash available for investment. Partially offsetting
these decreases in the 1991 quarter were revenues from the Company's convenience
store operations in Alaska and other income resulting from settlement of a
matter in litigation. Costs of sales and operating expenses decreased $83.4
million, or 27%, in the 1991 quarter as compared to the 1990 quarter, due
primarily to the lower prices of crude oil and refined products, partially
offset by costs from the Company's convenience store operations.
The Refining and Marketing segment's operating profit of $1.7 million in
the 1991 quarter was a decrease of $.8 million from the $2.5 million operating
profit recorded in the 1990 quarter. The decrease was primarily due to lower
sales prices for residual fuel oil, which continued to be adversely impacted by
the weak markets for this product.
The Exploration and Production segment's operating profit of $7.4 million
in the 1991 quarter decreased $8.2 million from the $15.6 million operating
profit recorded in the 1990 quarter. The decrease was mainly due to lower crude
oil sales prices on reduced production volumes from the Company's Indonesian
operations. The Company's Indonesian crude oil production decreased by 1,435
barrels per day, with an average sales price of $20.57 per barrel during the
1991 quarter as compared to $29.39 per barrel during the 1990 quarter. The
Company's operations in Bolivia also experienced lower natural gas sales prices
on reduced production volumes in the 1991 quarter. Natural gas production from
the Company's Bolivian operations decreased by 487 Mcf per day with an average
sales price of $2.42 per Mcf during the 1991 quarter as compared to $2.92 per
Mcf in the 1990 quarter. The Company's natural gas production in the Bob West
Field increased during the 1991 quarter; however, revenues from this production
were substantially offset by increased depreciation and depletion, insurance
costs and legal fees associated with these operations.
The Oil Field Supply and Distribution segment's operating loss of $1.2
million in the 1991 quarter was a decrease of $2.8 million from the $1.6 million
operating profit recorded in the 1990 quarter. This decrease in operating
results was primarily attributable to lower margins on refined product sales
caused by the decline in drilling rig activity in the United States. The 1990
quarter included the effect of increased demand experienced during the Persian
Gulf conflict.
General and administrative expenses of $2.8 million for the 1991 quarter
decreased by $1.2 million from the 1990 quarter, primarily due to an insurance
reimbursement during the 1991 quarter for certain costs incurred in defense of
litigation in prior years. Depreciation, depletion and amortization expense of
$4.2 million in the 1991 quarter increased by $1.2 million from the 1990
quarter, due mainly to exploration and production activities in the Bob West
Field. The income tax provision of $3.0 million in the 1991 quarter decreased by
$3.8 million from the 1990 quarter, primarily due to lower foreign taxes
resulting from reduced revenues from the Company's operations in Indonesia.
65
<PAGE>
LITIGATION AND ENVIRONMENTAL
The Company is subject to certain commitments and contingencies, including
a contingency relating to a natural gas sales contract dispute with Tennessee
Gas. The Company receives payment from Tennessee Gas for the purchase of a
portion of the natural gas from the Bob West Field at a contract price
substantially greater than spot market prices. Tennessee Gas filed suit,
claiming, among other things, that the contract is not in effect and, in the
alternative, that the contract price has been incorrectly calculated. The
Company prevailed on all issues at the trial court level, and Tennessee Gas
appealed the judgment to the Court of Appeals for the Fourth Supreme Judicial
District of Texas. On August 25, 1993, the Court of Appeals affirmed the
validity of the gas contract as to the Company's properties and held that the
price payable by Tennessee Gas for the gas was the contract price. The Court of
Appeals determined, however, (i) that the trial court erred in its summary
judgment ruling that the gas contract was not an output contract under the Texas
Business and Commerce Code ('TBCA') and (ii) that a fact issue exists as to
whether the increases in the volumes of gas tendered to Tennessee Gas under the
gas contract were made in bad faith or were unreasonably disproportionate to
prior tenders in contravention of the provisions of Section 2.306 of the TBCA.
Accordingly, the Court of Appeals directed that this issue be remanded back to
the trial court in Bexar County, Texas. The Company has filed a motion for
rehearing with the Appellate Court regarding its decision that the gas contract
creates an output contract governed by the TBCA. Tennessee Gas has also filed a
motion for rehearing with the Appellate Court regarding those portions of its
decision upholding the judgment of the trial court. If Tennessee Gas should
prevail in an appeal of the Court of Appeals decision, the case could be sent
back to the trial court for further proceedings or the Company could be required
to return to Tennessee Gas the difference between the spot price for gas and the
contract price. If the decision of the Court of Appeals is affirmed, the only
issue for trial will be whether the increases in the volumes of gas tendered to
Tennessee Gas from the Company's properties may have been made in bad faith or
were unreasonably disproportionate. Management of the Company believes its
tenders were reasonable under the gas contract and the market conditions at the
time and will vigorously defend on this issue if put to trial.
Although the outcome of any litigation is uncertain, management believes
that the Tennessee Gas claims are without merit and, based upon advice from
outside legal counsel, is confident that the decision of the trial court will
ultimately be upheld as to the validity of the gas contract and the contract
price; and that with respect to the output contract issue, the Company believes
that, if this issue is tried, the development of its gas properties and the
resulting increases in volumes tendered to Tennessee Gas will be found to have
been reasonable and in good faith. The Company continues to receive payment from
Tennessee Gas based upon the contract price; however, if Tennessee Gas appeals
the Court of Appeals decision, and ultimately prevails in the litigation, the
impact on the Company's future cash flows and liquidity would be material. For
further information, see 'Legal Proceedings -- Tennessee Gas Contract' and Notes
I and N of Notes to Consolidated Financial Statements included elsewhere herein.
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites or install additional controls
or other modifications or changes in use for certain emission sources. The
Company is currently involved in remedial response and has incurred cleanup
expenditures associated with environmental matters at a number of sites,
including certain of its own properties. Although it is difficult to quantify
the potential impact of compliance with environmental protection laws,
management believes that the ultimate aggregate cost to the Company of
environmental remediation with regard to these sites will not result in a
material adverse effect on the Company's financial condition. Although the level
of future expenditures for environmental purposes, including cleanup
obligations, is impossible to determine with any degree of probability, it is
management's opinion that, based on current knowledge and the extent of such
expenditures to date, the ultimate aggregate cost of environmental remediation
will not have a material adverse effect on the Company's financial condition.
66
<PAGE>
BUSINESS
GENERAL
The Company is a natural resource company engaged in the refining of crude
oil, marketing of certain refined products, oil and gas exploration and
production, environmental product sales and oil field supply and distribution.
The Company was incorporated in Delaware in 1968 (a successor by merger to a
California corporation incorporated in 1939). The Company changed its fiscal
year-end from September 30 to December 31, effective January 1, 1992. For
financial information relating to industry segments, see 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
Note L of Notes to Consolidated Financial Statements included elsewhere herein.
REFINING AND MARKETING
Refining and Marketing
The Company conducts refining operations in Alaska and sells products to a
wide variety of customers in Alaska, in the area west of the Rocky Mountains and
in certain Far Eastern markets. During 1992, products from the Company's Alaska
refinery accounted for approximately 77% of such sales, including products
received on exchange in the West Coast market, with the balance being purchased
from other refiners and suppliers.
The refinery, which is located in Kenai, Alaska, has a rated throughput
capacity of 72,000 barrels per day and is capable of producing liquefied
petroleum gas, motor gasoline, jet fuel, diesel fuel, heating oil and residual
fuel oil. The refinery is designed to process crude oil with a sulphur content
of up to 1%. Alaska North Slope ('ANS') and Cook Inlet crude oils, the primary
crude oils currently used as feedstock for the refinery, are below this limit.
To assure the availability of crude oil to the refinery, the Company holds a
royalty crude oil purchase contract with the State. See '-- Crude Oil Supply.'
During the second quarter of 1993, the Company implemented a market-driven
operational strategy for the Company's refining and marketing operations. This
strategy includes reducing refinery throughput and upgrading the mix of
feedstocks, which is intended to enable the Company to match its refined product
yield more closely to the product demand in Alaska, its primary market, and
reduce shipments of refined products to less profitable markets. The strategy is
also intended to reduce the Company's working capital requirements and reduce
the volume of residual fuel oil produced by the Company's Alaska refinery.
Implementation of this strategy has resulted in a decrease in total refinery
production from 60,900 barrels per day in 1992 to 49,700 barrels per day during
the nine months ended September 30, 1993 and a decrease in the level of residual
fuel oil production from approximately 23,400 barrels per day in 1992 to
approximately 17,600 barrels per day during the nine months ended September 30,
1993. The Company's ability to further reduce production of residual fuel oil,
other than by further reducing total refinery production, is currently limited
by constraints on the supply of lighter feedstocks. The new strategy has been
implemented only recently, and there can be no assurance that it will ultimately
prove successful. See '-- Government Regulation and Legislation -- Environmental
Controls' for a discussion of the effect of governmental regulations on the
production of low sulphur diesel fuel for on-highway use in Alaska.
During the nine months ended September 30, 1993, the refinery processed
approximately 69% ANS crude oil, 23% Cook Inlet crude oil and 8% of other
refinery feedstocks which yielded refined products consisting of approximately
24% gasoline, 24% jet fuel, 16% diesel fuel and other distillates and 36%
residual fuel oil. Of the refinery production in 1992, the Company distributed
approximately 76% of the gasoline to end-users in the State, either by retail
sales through its 7-Eleven convenience store operations, by wholesale sales
through 99 branded and 20 unbranded dealers and jobbers or by exchange
deliveries to major oil companies, with the remaining 24% being transported to
the West Coast. Virtually all of the jet fuel production is marketed in Alaska
to commercial airlines through sales or exchange deliveries. Substantially all
of the diesel fuel and other distillate production is marketed through exchange
deliveries or sales in Alaska. During 1992, substantially all of the residual
fuel oil production was sold to customers in Far Eastern markets. In recent
years, such residual fuel
67
<PAGE>
oil sales have been unprofitable. Since early 1993, under its new marketing
strategy, the Company commenced selling and transporting a substantial volume of
its residual fuel oil production to a customer in California.
In addition to its own refining capacity, the Company estimates the other
refiners in Alaska have the capacity to process approximately 153,000 barrels of
crude oil per day, all of which is ANS crude oil. After processing the crude oil
and removing the lighter-end products, such as gasoline and jet fuel, which
represent approximately 30% of each barrel processed, these refiners are
permitted, by paying a fee and because of their proximity to the Trans Alaska
Pipeline System, to return the remainder of the processed crude back into the
pipeline system as 'return oil.'
At current throughput levels, the production of gasoline by all refiners in
Alaska, including the Company, exceeds the market demand by approximately 2,400
barrels per day. The excess production is required to be exported from Alaska,
generally during the winter months when the demand for gasoline in Alaska is
lowest. The demand for jet fuel in Alaska currently exceeds the production of
the refiners in the State, and several marketers, including the Company, import
jet fuel into the State to meet this excess demand. The primary market for
diesel fuel in Alaska is the commercial fishing fleet. Generally, the production
of diesel fuel by refiners in Alaska and the demand for such diesel fuel is in
balance; however, because of the high variability of the demand, there are
occasions when diesel fuel is imported into or exported from the State. The
Company is the only producer in Alaska of residual fuel oil for sale. Since
there is no current demand for residual fuel oil in Alaska, the residual fuel
oil is exported from the State, generally to other refiners on the West Coast or
in the Far East where it is generally used as a refinery feedstock.
The Company conducts domestic wholesale marketing operations primarily in
California, Oregon and Washington, with its principal office in Long Beach,
California. During 1992, this operation sold, at wholesale, approximately 36,000
barrels per day of refined products, of which approximately 40% was received
from major oil companies in exchange for refined products from the Company's
Alaska refinery, approximately 11% was received directly from the Company's
Alaska refinery and the balance was purchased from other suppliers. The Company
sells its refined products in the bulk market and through 22 terminal locations,
of which three are owned by the Company.
The Company is the owner of all 7-Eleven convenience store operations in
Alaska and operates in 39 locations, 32 of which sell the Company's branded
gasoline and other petroleum products.
The following table summarizes the Company's refinery throughput and
product sales for the years ended September 30, 1990, September 30, 1991 and
December 31, 1992 and the nine months ended September 30, 1992 and September 30,
1993:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
(AVERAGE DAILY BARRELS) 1990 1991 1992 1992 1993
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Refinery Throughput------------------------------------------- 67,904 68,192 61,425 62,574 50,503
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Refining and Marketing Product Sales:
Gasoline------------------------------------------------- 29,646 25,883 25,196 26,317 23,219
Jet fuel------------------------------------------------- 16,256 15,055 19,060 18,506 11,107
Other distillates---------------------------------------- 19,515 20,488 19,253 20,069 19,225
Residual fuel oil---------------------------------------- 28,332 28,729 23,931 22,929 16,290
--------- --------- --------- --------- ---------
Total----------------------------------------------- 93,749 90,155 87,440 87,821 69,841
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Crude Oil Supply
The Company has a contract through 1994 with the State which provides for
the purchase of certain quantities of the State's Prudhoe Bay North Slope
royalty crude oil, based on a percentage of all Prudhoe Bay North Slope royalty
crude oil produced. At current levels of Prudhoe Bay production, this contract
provides for the purchase of approximately 37,500 barrels per day at the
weighted
68
<PAGE>
average net-back price of all North Slope producers at Pump Station No. 1. In
connection with its market-driven operational strategy, effective January 1,
1993, the Company exercised its right under this contract to reduce purchases to
approximately 27,500 barrels per day.
Additional ANS crude oil, other than that which is purchased from the
State, is acquired by the Company through various purchase and exchange
agreements with the Producers. All ANS crude oil is delivered to the Company's
Alaska refinery by tanker at the Kenai Pipeline Company marine terminal. In
addition, the Company obtains available Cook Inlet crude oil, which is delivered
by tanker or through an existing pipeline to the refinery. This Cook Inlet crude
oil is acquired through term contracts and spot purchases.
The Company from time to time evaluates the economic viability of
processing foreign crude oil in its Alaska refinery and occasionally purchases
spot quantities to supplement its normal crude oil supply. This foreign crude
oil is also delivered to the refinery by tanker through the Kenai Pipeline
Company marine terminal.
Transportation
The Company charters an American flag vessel, the Overseas Washington,
under an agreement expiring in 1994 with a two-year renewal option. The Overseas
Washington is used primarily to transport North Slope crude oil from the Trans
Alaska Pipeline System terminal at Valdez, Alaska, to the Company's Alaska
refinery. The Company also has a charter for an American flag vessel, the
Baltimore Trader, under an agreement expiring in July 1994 with a six-month
renewal option remaining. The Baltimore Trader is used primarily to transport
residual fuel oil to California and occasionally to transport feedstocks to the
Company's Alaska refinery. From time to time, the Company also charters tankers
and ocean-going barges to transport petroleum products to its customers within
Alaska, on the West Coast and in the Far East.
The Company operates a common carrier petroleum products pipeline from the
Company's Alaska refinery to its terminal in Anchorage. This ten-inch diameter
pipeline removes the uncertainty of transporting light products in the winter
months when icing conditions in the Cook Inlet restrict marine transportation.
During 1992, the pipeline transported an average of approximately 28,500 barrels
of petroleum products per day, all of which was transported for the Company. The
pipeline has a capacity of approximately 40,000 barrels of petroleum products
per day.
For further information on transportation in Alaska see '-- Government
Regulation and Legislation.'
EXPLORATION AND PRODUCTION
United States
During 1992, the Company concentrated its activities in the Bob West Field,
which is located in the southern part of the Wilcox Trend, Starr and Zapata
Counties, Texas. Continued successful development of this field, discovered in
1990, has resulted in net proven natural gas reserves increasing from 37 billion
cubic feet at December 31, 1991 to 102 billion cubic feet at September 30, 1993.
Six wells were drilled and completed during 1992 and ten wells have since been
drilled and completed, bringing the number of producing wells to 20 at September
30, 1993. Fifteen additional well locations have been selected for further
development of the 3,800 acre field, of which six are expected to be drilled
during the remainder of 1993. During November 1993, net production from the Bob
West Field wells averaged 57.4 million cubic feet per day. The Company, which
does not operate the field, owns an average 54% revenue interest in
approximately two-thirds of the field acreage and a 28% revenue interest in the
remainder. The Company owns a 70% interest in the central gas processing
facility which is currently capable of handling 125 million cubic feet of
production per day. The Company owns a 70% interest in Starr County Gathering
System's ten-inch diameter pipeline, which transports gas eight miles from the
field to common carrier pipeline facilities.
69
<PAGE>
Two producing acreage units within the Bob West Field, each consisting of
352 acres, are subject to a gas purchase contract expiring in January 1999, with
Tennessee Gas pursuant to which Tennessee Gas is currently paying in excess of
$7.50 per Mcf of gas, which is greatly in excess of the spot market price for
natural gas ($1.88 per Mcf for the month of October 1993). During the nine
months ended September 30, 1993, the Tennessee Gas contract price was paid with
respect to approximately 26% of the Company's net production from the Company's
Bob West Field. The gas purchase contract is presently the subject of litigation
with Tennessee Gas. See 'Legal Proceedings --Tennessee Gas Contract' and Notes I
and N of Notes to Consolidated Financial Statements included elsewhere herein.
During 1992, the Company sold its interest in all domestic producing and
undeveloped properties outside of the Bob West Field for $2.1 million in cash.
Bolivia
The Company is the operator of a joint venture which holds two Contracts of
Operation with YPFB, the Bolivian state-owned oil and gas company. The Company
has a 75% interest in a Contract of Operation, which expires in 2007, covering
approximately 93,000 acres in Block XVIII. The Company and its joint venture
participant are entitled to receive a quantity of hydrocarbons equal to 40% of
the total production, net of Bolivian taxes on production. After payment of
taxes on production, YPFB is entitled to the remainder. Under the sales contract
with YPFB covering hydrocarbons produced from the La Vertiente, Escondido and
Taiguati Fields in this block, the Company and its joint venture participant
have contracted to sell approximately 18,000 Mcf of natural gas per day to YPFB.
Effective May 1, 1992, the contractual sales price for natural gas production
from the Company's Bolivian operations was substantially reduced. At December
31, 1992, the Company was receiving $1.22 per Mcf, as compared to an average
price received during fiscal 1991 of $3.06 per Mcf. This contract, including the
pricing provision, is subject to renegotiation in April 1994 for another
two-year period. During 1992, the condensate produced in association with the
natural gas was sold to YPFB. Also during 1992, the Escondido Field was approved
for commercial production and the Company completed construction of an 11-mile
pipeline connecting the Escondido Field, previously shut-in, to the La Vertiente
gas distribution facility.
The Company has a 72.6% interest in a Contract of Operation, which expires
in 2008, covering approximately 1.2 million acres in Block XX. The Company and
its joint venture participant are entitled to receive a quantity of hydrocarbons
equal to 50% of the total production, net of Bolivian taxes on production, with
YPFB receiving the remainder. One successful commercial gas discovery well, the
Los Suris, has been drilled on the block and is shut-in pending the approval by
the Government of Bolivia of a commercialization agreement. A request by the
Company for postponement of YPFB's selection of inactive parcels was granted in
January 1993. The Company is currently considering the prospects of industry
participation in exploratory drilling opportunities on numerous undeveloped
structures in Block XX and has presented a plan of development for Block XX to
YPFB for its approval in order to postpone the relinquishment of inactive
acreage under the Contract of Operation. Under the plan of development, the
Company will be required to drill and complete an exploratory well by December
31, 1993, in order to postpone the relinquishment of inactive acreage until
January 15, 1994. The drilling of the second exploratory well must be started
after December 31, 1993 and completed by September 30, 1994, and the drilling of
a third exploratory well must be started no later than the fourth quarter of
fiscal 1994 and completed by April 30, 1995, in order to postpone the
relinquishment of inactive acreage until July 15, 1995. To guarantee the
drilling of the exploratory wells, the Company has submitted a bank guarantee to
YPFB for the drilling of the first exploratory well in the amount of $2 million
and must submit by January 15, 1994, a bank guarantee or guarantees in the
aggregate amount of $4 million for the drilling of the second and third wells.
The Company may further postpone the selection of inactive acreage until July
15, 1996, by submitting no later than July 1, 1995, an additional two-well
drilling program that is acceptable to YPFB. The plan of development has been
approved by YPFB and is awaiting final approval from the Government of
70
<PAGE>
Bolivia. If the plan is not accepted by the Government of Bolivia, the Company
could be required to forfeit a significant amount of acreage in Block XX,
possibly including the Los Suris well.
The joint venture has an agreement with the Government of Bolivia and YPFB
for the collection of receivables for the sale of natural gas and condensate
sales to YPFB, which in turn sells the natural gas to the Republic of Argentina.
The agreement allowed the joint venture to receive countertrade in the form of
Argentine commodities as payment by the Government of Bolivia and YPFB for
approximately $83.1 million of receivables due as of December 31, 1987. Of the
$83.1 million, $38.0 million was distributed free of restrictions and $45.1
million was deposited into a restricted bank account (the 'Restricted Account')
from which payments for investments and expenses in Bolivia could be made. The
agreement provides for direct receipts free of restrictions for sales of
condensate. The agreement further provided that receipts from natural gas sales
would also be placed in the Restricted Account until April 1992, or until
cumulative deposits to the Restricted Account equaled $90.0 million. Cumulative
deposits to the Restricted Account have totaled $90.0 million and receipts for
natural gas sales are now free of restrictions to the joint venture.
For further information regarding the Company's operations in Bolivia, see
Note E of Notes to Consolidated Financial Statements included elsewhere herein.
Indonesia
Effective May 1, 1992, the Company sold its 100% interest in two separate
contracts of operations with Pertamina, the state-owned petroleum company of
Indonesia. The sales included all of the Company's interests in fixtures, wells,
pipelines, tanks, compressors, rigs and other equipment in the contract areas,
and inventories of crude oil and material and supplies. The consideration
received by the Company totaled $6.6 million in cash and the assumption by the
purchaser of liabilities of approximately $6.3 million and all remaining
expenditure commitments. During 1992, these transactions resulted in pretax net
gains to the Company of approximately $5.8 million after related expenses.
Operating Statistics
The following table summarizes the Company's net natural gas and crude oil
production for the years ended September 30, 1990, September 30, 1991 and
December 31, 1992 and the nine months ended September 30, 1992 and September 30,
1993:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
1990 1991 1992 1992 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Natural Gas Production (average daily Mcf):
United States----------------------------------- 727 7,435 13,960 12,618 32,313
Bolivia----------------------------------------- 12,668 19,322 19,421 19,502 19,183
------- ------- ------- ------- -------
Total-------------------------------------- 13,395 26,757 33,381 32,120 51,496
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net Crude Oil Production (average daily barrels):
United States----------------------------------- 2 11 3 3 1
Bolivia (condensate)---------------------------- 433 663 660 665 660
Indonesia (sold effective May 1, 1992)---------- 2,565 3,315 2,714 2,714 --
------- ------- ------- ------- -------
Total-------------------------------------- 3,000 3,989 3,377 3,382 661
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
71
<PAGE>
The following table summarizes the Company's average realized prices for
the sale of natural gas and crude oil production during the years ended
September 30, 1990, September 30, 1991 and December 31, 1992 and the nine months
ended September 30, 1992 and September 30, 1993:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
1990 1991 1992 1992 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Natural Gas (dollars per Mcf):
United States(1)-------------------------------- $ 1.40 1.88 3.68 2.38 3.45
Bolivia----------------------------------------- $ 2.74 3.06 1.67 1.82 1.20
Crude Oil (dollars per barrel):
United States----------------------------------- $ 26.27 20.98 18.41 18.39 19.24
Bolivia (condensate)---------------------------- $ 16.09 21.11 17.65 18.32 15.00
Indonesia--------------------------------------- $ 17.95 24.39 18.20 18.20 --
- ------------
(1) See 'Legal Proceedings -- Tennessee Gas Contract' and Notes I and N of Notes
to Consolidated Financial Statements included elsewhere herein regarding
litigation concerning the Tennessee Gas gas purchase contract.
</TABLE>
The following table summarizes the Company's average production (lifting)
cost and depletion rates for the years ended September 30, 1990, September 30,
1991 and December 31, 1992 and the nine months ended September 30, 1992 and
September 30, 1993:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
1990 1991 1992 1992 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average Production (Lifting) Cost
(dollars per net equivalent Mcf):
United States----------------------------------- $ .41 .44 .74 .73 .51
Bolivia----------------------------------------- $ .13 .09 .08 .08 .16
Indonesia--------------------------------------- $ 1.66 1.35 1.94 1.94 --
Depletion Rates (dollars per net equivalent Mcf):
United States----------------------------------- $ .81 1.06 .95 1.02 .78
Indonesia--------------------------------------- $ .19 .22 .15 .15 --
</TABLE>
72
<PAGE>
The following table summarizes the Company's net wells drilled during the
years ended September 30, 1990, September 30, 1991 and December 31, 1992 and the
nine months ended September 30, 1993:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1990 1991 1992 1993
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Net Exploratory Wells Drilled:
United States:
Net productive wells----------------------------------------- .70 1.46 1.00 --
Net dry holes------------------------------------------------ .60 -- .50 --
Net Development Wells Drilled:
Net productive wells:
United States------------------------------------------------ .92 1.43 3.85 4.87
Indonesia---------------------------------------------------- 4.00 3.00 -- --
--------- --------- --------- -----
Total--------------------------------------------------- 4.92 4.43 3.85 4.87
--------- --------- --------- -----
--------- --------- --------- -----
Net dry holes:
United States------------------------------------------------ -- 1.00 -- --
Indonesia---------------------------------------------------- 1.00 2.00 -- --
--------- --------- --------- -----
Total--------------------------------------------------- 1.00 3.00 -- --
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
Acreage and Wells
The following tables set forth the Company's gross and net acreage and
productive wells at September 30, 1993:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED ACREAGE
ACREAGE
------------- --------------------
GROSS NET GROSS NET
----- --- --------- ---------
<S> <C> <C> <C> <C>
Acreage (in thousands):
United States--------------------------------------------------------- 3 2 10 3
Bolivia--------------------------------------------------------------- 38 29 1,210 880
----- --- --------- ---------
Total------------------------------------------------------------ 41 31 1,220 883
----- --- --------- ---------
----- --- --------- ---------
<CAPTION>
OIL GAS
------------- --------------------
GROSS NET GROSS NET
----- --- --------- ---------
<S> <C> <C> <C> <C>
Gross and Net Productive Wells:
United States--------------------------------------------------------- -- -- 20 8.8
Bolivia--------------------------------------------------------------- -- -- 14 10.5
----- --- --------- ---------
Total(1)--------------------------------------------------------- -- -- 34 19.3
----- --- --------- ---------
----- --- --------- ---------
- ------------
(1) Included in total productive wells are 1 gross (.6 net) well in the United
States and 8 gross (6.0 net) wells in Bolivia with multiple completions. At
September 30, 1993, the Company was participating in the drilling of 6 gross
(2.7 net) wells in the United States.
</TABLE>
For further information regarding the Company's exploration and production
activities, see Note N of Notes to Consolidated Financial Statements included
elsewhere herein.
73
<PAGE>
OIL FIELD SUPPLY AND DISTRIBUTION
Refined Products Supply and Distribution
The Company sells lubricants, fuels and specialty petroleum products
primarily to onshore and offshore drilling contractors. The Company's products
are sold through six land terminals and 14 marine terminals located in various
cities in Texas and Louisiana. These products are used to power and lubricate
machinery on drilling and production locations. The Company also provides
products for marine, commercial and industrial applications.
Effective December 31, 1992, the Company acquired all of the interest of
its partner in Tesoro-Leevac Petroleum Company ('Tesoro-Leevac'), a joint
venture formed in 1990. Acquisition of this interest allowed the Company to
completely integrate the marine terminals operated by Tesoro-Leevac into the
Company's existing operations.
Environmental Products Supply and Distribution
The Company is the exclusive worldwide distributor of hydrocarbon-digesting
bacteria products manufactured by Petroleum Environmental Services, Inc.
('PES'), located in San Antonio, Texas. PES products provide for the degradation
and removal of hydrocarbon contamination in the environment, including
contamination in soils, slurries and open pits; porous and nonporous surfaces;
and rocks and concrete bulkheads along shorelines. Currently, these products are
sold from offices in Texas, California and Alaska. The Company has funded a
Sponsored Research Agreement with The University of Texas at San Antonio for the
research and development of new and improved bioremediation products.
EMPLOYEES
As of September 30, 1993, the Company employed approximately 900 persons
worldwide, of which approximately 35 employees are located in foreign countries.
None of the Company's employees are represented by a union for collective
bargaining purposes. The Company considers its relations with its employees to
be satisfactory.
GOVERNMENT REGULATION AND LEGISLATION
United States
Natural Gas Regulations. Historically, all domestic natural gas sold in
so-called 'first sales' was subject to federal price regulations under the
Natural Gas Act of 1978 (the 'NGPA'), the Natural Gas Act (the 'NGA'), and the
regulations and orders issued by the Federal Energy Regulatory Commission (the
'FERC') in implementing such Acts. Under the Natural Gas Wellhead Decontrol Act
of 1989 ('Decontrol Act'), all remaining natural gas wellhead pricing, sales,
certificate and abandonment regulation of first sales by the FERC was terminated
on January 1, 1993.
The FERC also regulates interstate natural gas pipeline transportation
rates and service conditions, which affect the marketing of gas produced by the
Company, as well as the revenues received by the Company for sales of such
natural gas. Since the latter part of 1985, through its Order Nos. 436, 500 and
636 rulemakings, the FERC has endeavored to make natural gas transportation more
accessible to gas buyers and sellers on an open and non-discriminatory basis,
and the FERC's efforts have significantly altered the marketing and pricing of
natural gas. A related effort has been made with respect to intrastate pipeline
operations pursuant to the FERC's authority under ^ 311 of the NGPA, under which
the FERC establishes rules by which intrastate pipelines may participate in
certain interstate activities without becoming subject to full NGA jurisdiction.
These Orders have gone through various permutations, but have generally remained
intact as promulgated. The FERC considers these changes necessary to improve the
competitive structure of the interstate natural gas pipeline industry and to
create a regulatory framework that will put gas sellers into more direct
contractual relations with gas buyers than has historically been the case.
74
<PAGE>
The FERC's latest action in this area, Order No. 636, issued April 8, 1992,
reflected the FERC's finding that under the current regulatory structure,
interstate pipelines and other gas merchants, including producers, do not
compete on an equal basis. The FERC asserted that Order No. 636 was designed to
equalize that marketplace. This equalization process is being implemented
through negotiated settlements in individual pipeline service restructuring
proceedings, designed specifically to 'unbundle' those services (e.g .,
transportation, sales and storage) provided by many interstate pipelines so that
producers of natural gas may secure services from the most economical source,
whether interstate pipelines or other parties. In many instances, the result of
the FERC initiatives has been to substantially reduce or bring to an end the
interstate pipelines' traditional role as wholesalers of natural gas in favor of
providing only storage and transportation services for others which will buy and
sell natural gas. The FERC has issued final orders in numerous restructuring
proceedings and it is anticipated that final orders in the remaining
restructuring proceedings resulting from Order No. 636 will be issued during
1993.
Although Order No. 636 does not regulate gas producers such as the Company,
the FERC has stated that Order No. 636 is intended to foster increased
competition within all phases of the natural gas industry. It is unclear what
impact, if any, increased competition within the natural gas industry under
Order No. 636 will have on the Company and its gas marketing efforts. In
addition, numerous petitions seeking judicial review of Orders Nos. 636, 636A
and 636B have already been filed. Because the restructuring requirements that
emerge from this lengthy administrative and judicial review process may be
significantly different from those of Order No. 636 as originally promulgated,
it is not possible to predict what, if any, effect the final rule resulting from
Order No. 636 will have on the Company. The Company does not believe, however,
it will be affected by any action taken with respect to Order No. 636 any
differently than other gas producers and marketers with which it competes.
Environmental Controls. Federal, state, area and local laws, regulations
and ordinances relating to the protection of the environment affect all
operations of the Company to some degree. One example of a federal environmental
law that would require operational additions and modifications is the Clean Air
Act, which was amended in 1990. While the Company believes that its facilities
generally are in substantial compliance with current regulatory standards for
air emissions, its facilities may be required to comply with new requirements
being adopted and to be promulgated by the U.S. Environmental Protection Agency
(the 'EPA') and the states in which the Company operates over the next several
years. These regulations may necessitate the installation of additional controls
or other modifications or changes in use for certain emission sources. At this
time, the Company cannot estimate when new standards will be imposed by the EPA
or relevant state agencies or what technologies or changes in processes the
Company may have to install or undertake to achieve compliance with any
applicable new requirements.
The passage of the federal Clean Air Act Amendments of 1990 prompted
adoption of regulations by the State obligating the Company to produce
oxygenated gasoline for delivery to the Anchorage and Fairbanks, Alaska markets
starting on November 1, 1992. Controversies surrounding the potential health
effects in arctic regions of oxygenated gasoline containing methyl tertiary
butyl ether ('MTBE') prompted the early discontinuance of the program in
Fairbanks in December 1992. On October 21, 1993, the United States Congress
granted the State one additional year of exemption from requiring the use of
oxygenated gasoline. However, state and local officials may still require the
use of these fuels at their option. In addition, the EPA has been directed to
conduct additional studies of potential health effects of oxygenated fuel in
Alaska. Additional federal regulations promulgated on August 21, 1990, and
scheduled to go into effect on October 1, 1993, set limits on the quantity of
sulphur in on-highway diesel fuels which the Company produces. The State filed
an application with the federal government in February 1993 for a waiver from
this requirement since only 5% of the diesel fuel sold in Alaska is for
on-highway vehicles. The EPA supported the State's position and the formalities
for obtaining the exemption were completed on September 27, 1993. The EPA, in a
letter
75
<PAGE>
to the State dated September 30, 1993, indicated that the EPA was completing the
final documentation regarding the waiver and that Alaska would have a low
priority for enforcement of the diesel fuel regulations, pending the publication
of the final decision. The ultimate resolution of this matter is not expected to
have a material effect on the Company. The Company estimates that substantial
capital expenditures would be required to enable the Company to produce
low-sulphur diesel fuel to meet these federal regulations. If the State is
unable to obtain a waiver from the federal regulations, the Company would
discontinue the sales of diesel fuel for on-highway use. The Company estimates
that such sales accounted for less than 1% of its refined product sales in
Alaska during the nine months ended September 30, 1993. The Company is unable to
predict the outcome of these matters; however, the Company believes that the
ultimate resolution of these matters will not have a material impact on the
Company's operations.
Regulations promulgated by the EPA on September 23, 1988 require that all
underground storage tanks used for storing gasoline or diesel fuel either be
closed or upgraded not later than December 22, 1998, in accordance with
standards set forth in the regulations. The Company's service stations subject
to the upgrade requirements are limited to locations within the State of Alaska,
the majority of which are located in non-residential areas. Although the Company
continues to monitor, test and make physical improvements in its current
operations which result in a cleaner environment, the Company was not required
to make any material capital expenditures for environmental control purposes
during 1992. The Company may be required to make significant expenditures for
removal or upgrading of underground storage tanks at several of its current and
former service station locations by December 22, 1998; however, the Company does
not expect to make any material capital expenditures for such purposes during
1993 and 1994 and does not expect that such expenditures subsequent to 1994 will
have a material adverse effect on the financial condition of the Company. See
'Legal Proceedings -- Stanislaus County Matters.'
The Company currently charters a vessel to transport crude oil from the
Valdez, Alaska pipeline terminal through Prince William Sound and Cook Inlet to
its Alaska refinery. In addition, the Company routinely charters, on a term or
spot basis, additional tankers and barges for the shipment of crude oil and
refined products through Cook Inlet. The Federal Oil Pollution Act of 1990
requires, as a condition of operation, that the Company submit an oil spill
contingency plan for its Alaska refinery terminal facility located on Cook Inlet
that demonstrates the capability to respond to the 'worst case discharge' to the
maximum extent practicable. Alaska law requires a contingency plan for that
terminal providing for containment or control, and cleanup, within 72 hours, of
a spill equal to the volume of the terminal's largest storage tank. With respect
to the charter vessels employed by the Company to transport crude oil through
Prince William Sound and Cook Inlet to the Company's Alaska refinery, federal
and Alaska law both require contingency plans as a condition of navigation. The
Company has obtained State approval for its Cook Inlet Oil Discharge Contingency
Plan and conditional approval, which allows operations pending final State
review, for a Tanker Spill Prevention and Response Plan for Prince William
Sound. The federal plan must demonstrate the capability to respond to the 'worst
case discharge' to the maximum extent practicable, while the Alaska plan must be
based on containment or control, and cleanup, of a 50,000 barrel discharge
within 72 hours. To meet those standards, the Company has entered into a
contract with Alyeska Pipeline Service Company ('Alyeska') to provide the
initial spill response services in Prince William Sound with the Company to
assume those responsibilities after mutual agreement with Alyeska and the State
and Federal On-Scene Spill Response Coordinators. The Alaska legislature passed
legislation in 1992, providing limited immunity for spill response contractors,
which has facilitated access to contract extensions that will not be dependent
on further legislative action. The Company has also entered into an agreement
with Cook Inlet Spill Prevention and Response for oil spill response services in
Cook Inlet. The Company believes these contracts provide the additional services
necessary to meet the spill response requirements established by Alaska and
federal law.
For further information regarding environmental matters, see 'Legal
Proceedings.'
76
<PAGE>
Bolivia
The Company's operations in Bolivia are subject to the General Law of
Hydrocarbons and various other laws and regulations. The General Law of
Hydrocarbons imposes certain limitations on the Company's ability to conduct its
operations in Bolivia. In the Company's opinion, neither the General Law of
Hydrocarbons nor other limitations imposed by governmental laws, regulations and
practices will have a material adverse effect upon its Bolivian operations.
TAXES
United States
The Revenue Reconciliation Act of 1993 imposed a new 4.3 per gallon
'transportation fuels tax' effective October 1, 1993, and a tax on commercial
aviation fuel effective October 1, 1995. The Company is uncertain of the impact,
if any, such taxes may have on the Company's operations.
Bolivia
The Company is subject to taxation in Bolivia at the rate of 30% of the
gross production of hydrocarbons at the wellhead which is retained and paid by
YPFB for the Company's account. In 1987, the Bolivian General Corporate Income
Tax Law was replaced by a tax system, including a Value Added Tax, which is not
imposed on net income. As a result, it is uncertain whether the Company can
treat the Bolivian hydrocarbons tax as creditable in the United States for
federal income tax purposes. However, due to the Company's net operating loss
carryforwards, the Company does not now, or in the near future, expect to use
these taxes as credits for federal income tax purposes.
In 1990, the Bolivian Government passed a new General Law of Hydrocarbons
containing provisions designed to ensure the creditability, for United States
federal income tax purposes, of these hydrocarbon taxes if the Company makes an
election which may subject it to a higher Bolivian tax rate in the future.
Regulations under this new law have not been issued; however, the Company does
not anticipate that this new law will have a material effect on the Company's
Bolivian operations.
77
<PAGE>
MANAGEMENT
The following is a list of the Company's executive officers, their ages and
their positions with the Company as of December 27, 1993.
<TABLE>
<CAPTION>
PRESENT
POSITION
NAME AGE POSITION HELD SINCE
- ------------------------------ --- --------------------------------------------------- ----------------
<S> <C> <C> <C>
Michael D. Burke-------------- 49 President and Chief Executive Officer July 1992
Gaylon H. Simmons------------- 53 Executive Vice President September 1993
Bruce A. Smith---------------- 50 Executive Vice President and Chief Financial
Officer September 1993
James W. Queen---------------- 53 Senior Vice President, Oil Field Products
Distribution February 1992
Don E. Beere------------------ 52 Vice President, Controller February 1992
James E. Duncan--------------- 49 Vice President, Corporate Development March 1993
James C. Reed, Jr.------------ 48 Vice President, General Counsel and Secretary September 1993
William M. Sims--------------- 49 Vice President, Environmental Products January 1992
William T. Van Kleef---------- 41 Vice President, Treasurer March 1993
</TABLE>
There are no family relationships among the officers listed, and there are
no arrangements or understandings pursuant to which any of them were elected as
officers. Officers are elected annually by the Board of Directors at its first
meeting following the annual meeting of stockholders, each to hold office until
the corresponding meeting of the Board of Directors in the next year or until
his successor shall have been elected or shall have qualified.
All of the Company's executive officers have been employed by the Company
or its subsidiaries in an executive capacity for at least the past five years,
except for those named below who have had the business experience indicated
during that period. Positions, unless otherwise specified, are with the Company.
<TABLE>
<S> <C>
Michael D. Burke----------------------------- President and Chief Executive Officer from July 1992. Group Vice
President of Texas Eastern Corporation from 1986 to 1992.
President and Chief Executive Officer of T. E. Products Pipeline
Company, L.P., an affiliate of Texas Eastern Corporation, from
1990 to 1992. President of Texas Eastern Products Pipeline Company
from 1986 to 1990.
Gaylon H. Simmons---------------------------- Executive Vice President from September 1993. Senior Vice
President, Refining, Marketing and Crude Supply from January 1993
to September 1993. President and Chief Executive Officer of
Simmons Technology Group, Inc. from 1991 to December 1992.
President and Chief Executive Officer of the Permian Corporation
from 1989 to 1991. Vice President, Supply and Marketing for MAPCO
Petroleum, Inc. from 1985 through 1989.
Bruce A. Smith------------------------------- Executive Vice President and Chief Financial Officer from
September 1993. Vice President and Chief Financial Officer from
September 1992 to September 1993. Vice President and Treasurer of
Valero Energy Corporation from 1986 to 1992.
Don E. Beere--------------------------------- Vice President, Controller from February 1992. Vice President,
Internal Audit and Management Systems of Tesoro Petroleum
Companies, Inc. from February 1990 to 1992. Director, Internal
Audit and Management Systems from December 1989 to 1990. Director,
Internal Audit from February 1986 to 1989.
</TABLE>
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<TABLE>
<S> <C>
James E. Duncan------------------------------ Vice President, Corporate Development from March 1993. Vice
President, Treasurer from February 1992 to 1993. Vice President,
Controller of Tesoro Petroleum Companies, Inc. from February 1990
to 1992. Director, Corporate Accounting from April 1985 to 1990.
James C. Reed, Jr.--------------------------- Vice President, General Counsel and Secretary from September 1993.
Vice President, Secretary from December 1992 to September 1993.
Vice President, Secretary of Tesoro Petroleum Companies, Inc. from
February 1992 to December 1992. Vice President, Assistant Secre-
tary of Tesoro Petroleum Companies, Inc. from February 1990 to
1992. Assistant General Counsel and Assistant Secretary from
August 1982 to 1990.
William T. Van Kleef------------------------- Vice President, Treasurer from March 1993. Financial Consultant
from January 1992 to February 1993. Consultant to Parker & Parsley
(successor to the assets and operations of Damson Oil Corporation
and its affiliates) from February 1991 to December 1991. Vice
President and Chief Financial Officer of Damson Oil Corporation
from 1986 to February 1991.
</TABLE>
For information concerning the members of the Board of Directors, see 'The
Annual Meeting -- Proposal No. 3.' For information concerning compensation paid
to officers and directors of the Company, see 'Executive Compensation.'
LEGAL PROCEEDINGS
Tennessee Gas Contract. The Company is selling gas from its Bob West Field
to Tennessee Gas under a 1979 Gas Purchase and Sales Agreement (the 'Gas
Contract') which expires in January 1999. The Gas Contract provides that the
price of gas shall be the maximum price as calculated in accordance with the
then effective Section 102(b)(2) (the 'Contract Price') of the Natural Gas
Policy Act of 1978 ('NGPA').
In August 1990, Tennessee Gas filed a civil action in the District Court of
Bexar County, Texas against the Company and several other companies, seeking a
Declaratory Judgment that the Gas Contract is not applicable to the Company's
properties. Tennessee Gas claimed, among other things, that certain leases
covered by the Gas Contract had terminated and therefore were automatically
released from the Gas Contract, eliminating the obligation of Tennessee Gas to
purchase gas from the Company. Tennessee Gas also challenged the quantity of gas
which can be sold under the Gas Contract and contended that the gas sales price
was to be calculated under the provisions of Section 101 of the NGPA rather than
the Contract Price. At September 30, 1993, the Section 101 price of $4.45 per
Mcf was $3.16 per Mcf less than the Contract Price, but $2.14 per Mcf above spot
market prices.
On June 24, 1992, the District Court trial judge returned a verdict in
favor of the Company. The District Court's judgment, entered on July 8, 1992,
ruled that Tennessee Gas must honor the Gas Contract pursuant to its terms.
Tennessee Gas filed a motion for reconsideration in the District Court on the
issue of the price to be paid for the gas under the Gas Contract, which was
denied by the court. On September 11, 1992, Tennessee Gas appealed the judgment
to the Court of Appeals for the Fourth Supreme Judicial District of Texas. On
August 25, 1993, the Court of Appeals affirmed the validity of the Gas Contract
as to the Company's properties and held that the price payable by Tennessee Gas
for the gas was the Contract Price. The Court of Appeals determined, however,
(i) that the trial court erred in its summary judgment ruling that the Gas
Contract was not an output contract under the Texas Business and Commerce Code
('TBCA') and (ii) that a fact issue exists as to whether the increases in the
volumes of gas tendered to Tennessee Gas under the Gas Contract were made in bad
faith or were unreasonably disproportionate to prior tenders in contravention of
the provisions of Section 2.306 of the TBCA. Accordingly, the Court of Appeals
directed that this issue be remanded
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back to the trial court in Bexar County, Texas. The Company has filed a motion
for rehearing with the appellate court regarding its decision that the Gas
Contract creates an output contract governed by the TBCA. Tennessee Gas has also
filed a motion for rehearing with the appellate court regarding the portions of
its decision upholding the judgment of the trial court. If Tennessee Gas should
prevail in an appeal of the Court of Appeals' decision, the case could be sent
back to the trial court for further proceedings or the Company could be required
to return to Tennessee Gas the difference between the spot price for gas and the
Contract Price. The Company continues to receive payment from Tennessee Gas
based on the Contract Price. If the decision of the Court of Appeals is
affirmed, the only issue for trial will be whether the increases in the volumes
of gas tendered to Tennessee Gas from the Company's properties may have been
made in bad faith or were unreasonably disproportionate. Management of the
Company believes its tenders were reasonable under the Gas Contract and the
market conditions at the time and will vigorously defend on this issue if put to
trial.
Although the outcome of any litigation is uncertain, management believes
that the Tennessee Gas claims are without merit and, based upon advice from
outside legal counsel, is confident that the decision of the trial court will
ultimately be upheld as to the validity of the Gas Contract and the Contract
Price; and that with respect to the output contract issue, the Company believes
that, if this issue is tried, the development of its gas properties and the
resulting increases in volumes tendered to Tennessee Gas will be found to have
been reasonable and in good faith. Accordingly, the Company has recognized
revenues, net of production taxes and marketing charges, for natural gas sales
through September 30, 1993, under the Gas Contract based on the Contract Price,
which net revenues aggregated $12.1 million more than the Section 101 prices and
$22.3 million in excess of the spot market prices. An adverse judgment in this
case could have a material adverse effect on the Company. If Tennessee Gas
ultimately prevails in the litigation, the Company could be required to return
to Tennessee Gas $22.3 million, representing the difference between the spot
price for gas and the Contract Price.
ADEC Consent Order. In March 1991, the Company entered into a Consent
Order with the Alaska Department of Environmental Conservation ('ADEC'),
substantially similar to the Consent Orders reached with the EPA in September
1989. These Consent Orders provide for the investigation and cleanup of
hydrocarbons in the soil and groundwater at the Company's Alaska refinery which
resulted from the sewer hub seepage associated with the underground oil/water
sewer system. The Consent Orders formalized the Company's efforts, which
commenced in 1987, to remedy the presence of hydrocarbons in the soil and
groundwater and provide for the performance of additional future work. The
Company has replaced or rebuilt the drainage hubs and has initiated a subsurface
monitoring and interception system designed to identify the extent of
hydrocarbons present in the groundwater and to remove the hydrocarbons. The
Company estimates that annual expenditures of approximately $1.5 million will be
required in the future to operate these subsurface monitoring and interception
systems, the majority of which will be covered by insurance through 1995.
Clean Air Act Matters. On March 19, 1992, the Company received a
Compliance Order and Notice of Violation dated March 16, 1992 (the 'Notice')
from the EPA alleging possible violations by the Company of the New Source
Performance Standards under the Clean Air Act at its Alaska refinery. The Notice
alleged that the Company (i) failed to install a fuel gas combustion monitoring
device by October 2, 1991; (ii) failed to keep documentation on two storage
vessels reflecting quantities of petroleum liquid stored, the period of storage
and the maximum true vapor pressure of the liquid stored; (iii) failed to submit
documentation on two gas turbines (a) verifying the accuracy of the monitoring
system for recording fuel consumption and ratio of fuel to water being fired in
the turbines and (b) monitoring sulphur and nitrogen content of the fuel being
fired in the turbines; (iv) failed to conduct a monitoring and repair program
under the Standards for Equipment Leaks of Volatile Organic Compounds with
respect to one of the refinery units; and (v) failed to (a) equip the Company's
south bulk gasoline terminal with a vapor recovery system, (b) assure the
loading of liquid products into tanks with a compatible vapor collection system,
and (c) conduct performance tests and submit subsequent written reports to the
EPA to determine compliance with vapor collection systems
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<PAGE>
installed at the Company's south bulk terminal. The EPA has the statutory
authority to assess civil penalties for the alleged violations of up to $25,000
per day for each violation, but the EPA has not assessed a penalty against the
Company for its alleged violations to date. The Company continues to discuss
these issues with the EPA, and no final resolution has been reached. However,
the Company believes that the ultimate resolution of this matter will not have a
material adverse effect upon the Company's business or financial condition.
Mud and Gulf Coast Superfund Sites. The Company has been identified by the
EPA as a PRP pursuant to CERCLA for the Mud and Gulf Coast Superfund sites in
Abbeville, Louisiana. These sites are contiguous and at one time were owned by
the same company. Over 100 parties have been identified as PRPs for these sites.
The Company arranged for the disposal of a minimal amount of materials at these
locations. CERCLA imposes joint and several liability on PRPs; each PRP is
therefore responsible for 100% of the costs of the response actions necessary to
remediate the sites in the event a settlement with the EPA cannot be reached.
The EPA is seeking reimbursement for its response costs incurred to date at each
site, as well as a commitment from PRPs either to conduct future remedial
activities or to finance such activities.
The EPA has completed its investigation of the Gulf Coast site to determine
the type and extent of contamination. The EPA issued the Record of Decision and
sent out notice letters to PRPs. The Company has agreed to enter into a de
minimis settlement with the EPA at the Gulf Coast site. The Company's total
liability will be approximately $2,500 if the settlement is approved.
One of the larger PRPs in the Mud site has taken the lead in investigating
the site to determine the extent of contamination. Initial technical reports
have been reviewed by the EPA and are undergoing further preparation; however,
the reports are not yet available. At this time, the Company is unable to
determine the extent of the Company's liability related to the Mud site;
however, based on its proposed settlement in the Gulf Coast site, the Company
believes that the aggregate amount of such liability, if any, would not have a
material adverse effect on the Company.
Stanislaus County Matters. On September 25, 1990, the Company was
identified by the Department of Environmental Resources of Stanislaus County,
California ('DER') as a responsible party for hydrocarbon contamination present
at a service station location formerly leased and operated by the Company. On
February 24, 1993, the DER demanded that the Company and three other entities
named as responsible parties undertake action to remediate the contamination.
The owner of the location, Briggsmore Plaza Co. ('Briggsmore'), instituted
litigation in the California state court seeking compensation from the Company
for damages resulting from the contamination. Also named as a defendant was a
third party which became the operator of the service station in 1985, and which
filed for protection under the federal bankruptcy laws a short time after the
lawsuit commenced. In November 1993, a settlement agreement was entered into by
the Company and Briggsmore, which provides that the Company will assume
responsibility for the management and expense of remediating the location in
accordance with DER requirements. It is estimated that remediation to closure
will cost the Company $300,000 to $500,000. In addition, the Company has agreed
to pay Briggsmore approximately $48,000, representing past-due rent and property
taxes. Briggsmore has released all claims against the Company except the
remediation obligations arising under the settlement agreement.
Croyden Associates' Litigation. For information concerning a class action
lawsuit challenging the Recapitalization that was filed by a holder of the
Company's $2.16 Preferred Stock, see 'The Recapitalization -- Croyden
Associates' Litigation.'
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PROPOSAL NO. 1
GENERAL
The Board of Directors has unanimously authorized amendments to the
Company's Certificate of Incorporation pursuant to which (i) Article Fourth
thereof would be amended to give effect to the reclassification of the $2.16
Preferred Stock into Common Stock (the 'Reclassification Amendment'), (ii)
Article Fifth thereof would be eliminated to remove the provisions relating to
the division of directors into three classes, and (iii) Article Seventh thereof
would be amended to require, in the absence of the approval of 66 2/3% of the
disinterested directors, an 80% vote of stockholders to amend, in a manner
adverse to the Company, the Amended MetLife Memorandum or an agreement to be
entered into between the Company and MetLife Louisiana upon consummation of the
Recapitalization pursuant to which MetLife Louisiana will grant the Company's
MetLife Option. A copy of the Company's Restated Certificate of Incorporation,
which reflects such Charter Amendments, is set forth in full in Appendix C to
this Proxy Statement -- Prospectus, and the following description summarizes the
material provisions of such Charter Amendments but does not purport to be
complete and is qualified in its entirety by reference to such Appendix. A copy
of Articles Fourth, Fifth and Seventh of the Company's current Certificate of
Incorporation are set forth in full at Appendix D to this Proxy
Statement -- Prospectus.
THE RECLASSIFICATION
The Reclassification Amendment would reclassify each outstanding share of
$2.16 Preferred Stock (including accrued and unpaid dividends) into 4.9 shares
of Common Stock. In addition, the Company will issue .1 share of Common
Stock for each share of $2.16 Preferred Stock on behalf of the holders of $2.16
Preferred Stock to pay certain legal fees and expenses. See
'The Recapitalization -- Croyden Associates' Litigation.' At November 30, 1993,
accrued and unpaid dividends on the $2.16 Preferred Stock aggregated
approximately $8.9 million ($6.75 per share). One Purchase Right will be
simultaneously issued with respect to each new share of Common Stock issued in
the Reclassification. The Purchase Rights outstanding at the time the
Reclassification is consummated will not be affected by the Reclassification.
As of December 27, 1993, there were outstanding 1,319,563 shares of $2.16
Preferred Stock with an aggregate liquidation value of approximately $42.0
million and an aggregate market value of $27.9 million (based on a closing price
of $21.125 per share on December 27, 1993). As of December 27, 1993, there were
outstanding 14,069,236 shares of Common Stock. The closing price per share of
Common Stock on December 27, 1993 was $5.625.
No fractional shares of Common Stock will be issued upon conversion of the
$2.16 Preferred Stock in the Reclassification. In lieu thereof, such number of
shares will be rounded to the next higher whole number.
The Reclassification Amendment is being submitted for stockholder approval
as part of the Recapitalization, which also includes the Exchange Offer, the
Indenture Amendments, the Charter Amendments and the agreements to be entered
into pursuant to the Amended MetLife Memorandum. The Company believes that the
benefits of the Recapitalization, which will result in a reduction in the
Company's near term cash sinking fund requirements, the elimination of future
dividend and redemption obligations relating to its $2.16 Preferred Stock, the
waiver of the mandatory redemption provisions of the $2.20 Preferred Stock, and
the ability of the Company to pay dividends on the $2.20 Preferred Stock in
Common Stock in lieu of cash, will improve the Company's financial position and
increase its flexibility in financing its future operations. See 'The
Recapitalization -- Background.'
The Amended MetLife Memorandum and the adoption of the Reclassification
Amendment would eliminate the Company's substantial and increasing accrued and
unpaid dividends on the $2.16 Preferred Stock (approximately $8.9 million or
$6.75 per share at November 30, 1993) and the
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$2.20 Preferred Stock (approximately $20.0 million or $6.97 per share at
November 30, 1993), and eliminate the liquidation preferences of the $2.16
Preferred Stock (approximately $33.0 million), in exchange for approximately
8,365,934 shares of Common Stock with an aggregate market value of approximately
$47.1 million (based on a closing price of $5.625 per share on December 27,
1993).
In addition, the Amended MetLife Memorandum and the adoption of the
Reclassification Amendment would eliminate (a) annual redemption requirements on
the $2.20 Preferred Stock beginning in 1994, of 6 2/3% of the number of shares
of $2.20 Preferred Stock outstanding on the date of the first redemption, and
(b) annual dividends on the $2.16 Preferred Stock at the rate of $2.16 per share
(approximately $2.9 million aggregate).
The provisions of the Amended MetLife Memorandum relating to the $2.20
Preferred Stock and the Company's MetLife Option are conditioned on the
Reclassification.
The Reclassification Amendment will eliminate the $2.16 Preferred Stock
from the Company's capital structure, with the result that all powers and
preferences, privileges, voting and other special or relative rights and
qualifications of the $2.16 Preferred Stock will be terminated. See 'Description
of Capital Stock -- $2.16 Preferred Stock.'
The issuance of 1,900,075 shares of Common Stock pursuant to the Amended
MetLife Memorandum, 6,465,859 shares of Common Stock pursuant to the
Reclassification and 131,956 shares of Common Stock on behalf of the holders of
$2.16 Preferred Stock to pay certain legal fees and expenses, the settlement
of certain litigation will result in substantial dilution to holders of Common
Stock. The combined result is an increase of approximately 60% over the
14,069,236 shares of Common Stock outstanding at December 15, 1993. Based on the
assumptions used in preparing the pro forma financial information, the
Reclassification Amendment will result in the transfer of approximately $80.9
million to Common Stock and Other Stockholders' Equity. See 'Pro Forma
Capitalization.'
The following table sets forth, as of December 15, 1993 (i) the aggregate
voting power of the holders of the indicated classes of securities at such date,
and (ii) the pro forma aggregate voting power of the former holders of $2.16
Preferred Stock and $2.20 Preferred Stock, and the holders of Common Stock,
assuming completion of the Reclassification.
<TABLE>
<CAPTION>
VOTING POWER
AT DECEMBER 15, PRO FORMA
HOLDERS OF 1993 VOTING POWER
- ----------------------------------------------------------------------------- --------------- --------------
<S> <C> <C>
$2.16 Preferred Stock-------------------------------------------------------- 7.2% 25.9%
$2.20 Preferred Stock-------------------------------------------------------- 15.8 18.8
Common Stock----------------------------------------------------------------- 77.0 55.3
----- -----
100% 100%
----- -----
----- -----
</TABLE>
Chemical Bank, N.A., New York, New York, has been selected to act as
exchange agent to facilitate the exchange of certificates representing Common
Stock for certificates representing $2.16 Preferred Stock after the
Reclassification Amendment becomes effective. One year after such time, the
duties of such exchange agent will terminate and thereafter, subject to
applicable escheat laws, the Company or its agent will be responsible for the
exchange of certificates and the payment of any dividends and distributions on
such shares of Common Stock.
Pursuant to the Reclassification, each share of $2.16 Preferred Stock will
be reclassified into 4.9 shares of Common Stock. In addition, the Company will
issue .1 share of Common Stock for each share of $2.16 Preferred Stock on
behalf of the holders of $2.16 Preferred Stock to pay certain legal fees and
expenses, the settlement of certain litigation. See 'The Recapitalization --
Croyden Associates' Litigation.' Promptly after the Reclassification
Amendment becomes effective, former holders of $2.16 Preferred Stock
entitled to receive certificates representing shares of Common Stock into
which such $2.16 Preferred Stock was reclassified will be sent detailed
instructions concerning the procedures to be followed for the surrender to the
exchange agent of certificates formerly
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representing $2.16 Preferred Stock. Until such surrender, certificates formerly
representing $2.16 Preferred Stock will be deemed to represent the number of
shares of Common Stock into which such $2.16 Preferred Stock was reclassified,
except that the holders of such certificates formerly representing $2.16
Preferred Stock will not be entitled to receive dividends or distributions from
the Company until such certificates are so surrendered.
ELIMINATION OF STAGGERED TERMS OF DIRECTORS
The Board of Directors has unanimously authorized an amendment to the
Company's Certificate of Incorporation pursuant to which Article Fifth thereof
would be amended to remove the provisions relating to the division of the Board
of Directors into three classes. Such Charter Amendment is being proposed
pursuant to the requirements of the Amended MetLife Memorandum. Each incumbent
director whose term is scheduled to extend beyond the 1994 annual meeting of
stockholders has agreed to resign upon adoption of such amendment. Such
directors will then be reappointed by the remaining directors for a one year
term. As a result, the term of all directors would thereafter extend only until
the next annual meeting of stockholders or until their respective successors are
duly elected and qualified. The Charter Amendment regarding the elimination of
staggered terms of directors will facilitate the election of a majority of the
Board of Directors by the holders of a majority of the capital stock of the
Company and enable the stockholders to remove directors without cause. Under the
Delaware Law, directors elected to a staggered term may be removed only for
cause.
The Company's Certificate of Incorporation currently provides that the
Board of Directors shall be divided into three classes as nearly equal in number
of directors as possible and that the terms of office of the directors in each
class shall expire at different times in annual succession, such that one class
of directors is elected each year, with each director serving a term of three
years. The elimination of Article Fifth will remove such provisions. The
Certificate of Incorporation also currently provides, and as proposed to be
amended will provide, that the number of directors which shall constitute the
whole Board of Directors shall be as specified pursuant to the By-Laws. Section
2.1 of the By-Laws provides that the number of directors may be fixed from time
to time by resolution of the Board of Directors, but shall not be less than
three. Such section will be amended, to provide substantially as follows: 'The
number of directors which shall constitute the whole Board of Directors shall be
equal to the number fixed from time to time by the Board of Directors, which
number shall be not less than three. Directors who are elected at an annual
meeting of stockholders, and directors elected in the interim to fill vacancies
and newly created directorships shall hold office until the next annual meeting
of stockholders or until their successors are elected and qualified or until
their earlier resignation or removal. A director need not be a stockholder.'
Currently, the number of directors is fixed at 13. However, in connection with
the Recapitalization, the number of directors will be increased to 16. See 'The
Recapitalization -- MetLife Louisiana Conditions.'
The Board of Directors has proposed the amendment to the Company's
Certificate of Incorporation to remove the provisions relating to the division
of the Board of Directors into three classes because MetLife Louisiana
conditioned its willingness to make economic and structural concessions and to
support the Reclassification upon such an amendment. Because the amendment makes
it less time-consuming to change the composition of the Board of Directors,
major stockholders, including MetLife Louisiana, will be able to more quickly
gain control of the Board of Directors under certain circumstances. The decrease
in difficulty in changing the composition of the Board of Directors will reduce
the difficulty of effecting certain transactions, whether or not beneficial to
the Company's stockholders, that may result in a change of control of the
Company.
ESTABLISHMENT OF AMENDMENT APPROVAL REQUIREMENT
The Board of Directors has unanimously authorized an amendment to the
Company's Certificate of Incorporation pursuant to which Article Seventh thereof
would be added to provide that, in the absence of the approval of 66 2/3% of the
disinterested directors, the affirmative vote or consent of the holders of not
less than 80% of the outstanding shares of capital stock of the Company entitled
to vote
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in elections of directors, voting together as a single class, shall be required
to amend, in a manner adverse to the Company, the Amended MetLife Memorandum or
an agreement to be entered into between the Company and MetLife Louisiana which
will contain the Company's MetLife Option.
After the Recapitalization, absent adoption of proposed new Article
Seventh, an amendment to the Amended MetLife Memorandum or an agreement to be
entered into between the Company and MetLife Louisiana which will contain the
Company's MetLife Option, would require only the approval of the Board of
Directors. However, new Article Seventh provides the Company with additional
protection by requiring, in the absence of approval of 66 2/3% of the
disinterested directors, the affirmative vote of the holders of not less than
80% of the outstanding shares of capital stock of the Company entitled to vote
in elections of directors, voting together as a single class, to amend, in a
manner adverse to the Company, Amended MetLife Memorandum or an agreement to be
entered into between the Company and MetLife Louisiana which will contain the
Company's MetLife Option. The Board of Directors believes this protection is
appropriate because if the Reclassification is consummated, four of the 16
directors will be current or former directors or officers of MetLife, and one
additional director will have been proposed for election by MetLife Louisiana.
The establishment of the amendment approval requirement is intended to prevent
MetLife Louisiana or other major stockholders from using their influence on the
Board of Directors and the ownership of the Company's capital stock to amend, in
a manner adverse to the Company, the Amended MetLife Memorandum or an agreement
to be entered into between the Company and MetLife Louisiana which will contain
the Company's MetLife Option. New Article Seventh provides the Company and its
stockholders with additional protection in this regard. MetLife Louisiana has
indicated to the Company that it supports adoption of new Article Seventh.
CONDITIONS TO EFFECTIVENESS
Proposal No. 1 requires the approval of the holders of a majority of the
outstanding shares of Common Stock, $2.16 Preferred Stock and $2.20 Preferred
Stock, voting together as a single class, and the approval of the holders of
two-thirds of the outstanding shares of $2.16 Preferred Stock, voting as a
separate class.
The approval by MetLife Louisiana of Proposal No. 1 is conditioned on,
among other matters, effectiveness of Proposal No. 2, consummation of the
Exchange Offer and its satisfaction with the membership of the Board of
Directors upon effectiveness of the Reclassification. To satisfy the
requirements of MetLife Louisiana with respect to the membership of the Board of
Directors, the current directors, as a condition to consummation of the
Reclassification, intend, upon effectiveness of the Reclassification, to
increase the size of the Board of Directors from 13 to 16 directors and to elect
three new directors proposed by MetLife Louisiana to fill the vacancies created
thereby. MetLife Louisiana has recommended three persons to fill such vacancies
to the Nominating Committee of the Board of Directors, and the Nominating
Committee and the Board of Directors have approved such recommendations. For
information concerning such persons, see 'The Recapitalization -- MetLife
Louisiana Conditions.' In addition, MetLife Louisiana has required, as a
condition to its support of Proposal No. 1, an amendment to the By-Laws to
provide that in the event a majority of the 16-member Board of Directors cannot
be obtained on a consistent basis, any eight directors may call a special
meeting of stockholders to elect one additional director.See 'The
Recapitalization -- MetLife Louisiana Conditions.'
BOARD RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF COMMON
STOCK, $2.16 PREFERRED STOCK AND $2.20 PREFERRED STOCK VOTE IN FAVOR OF PROPOSAL
NO. 1.
At December 15, 1993, MetLife Louisiana held 2,184,085 shares of Common
Stock and all of the outstanding shares of $2.20 Preferred Stock. As a result of
a potential conflict of interest of certain board members due to their
affiliation with MetLife Louisiana, the Board of Directors appointed the
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Special Committee, comprised of Michael D. Burke, Robert J. Caverly, Steven H.
Grapstein, John J. McKetta, Jr. and Charles Wohlstetter, to consider the
fairness of the Reclassification to stockholders of the Company (other than to
MetLife Louisiana) and to obtain a fairness opinion from a firm to be selected
by the Special Committee. The foregoing recommendation of the Board of Directors
is based upon the recommendation of the Special Committee and the Jefferies
fairness opinion.
PROPOSAL NO. 2
GENERAL
The Board of Directors has unanimously authorized amendments to the
Company's Certificate of Incorporation pursuant to which Articles Seventh and
Eighth thereof, which require the affirmative vote of not less than 80% of the
outstanding shares of capital stock of the Company entitled to vote in elections
of directors, voting together as a single class, to approve certain transactions
by the Company, would be eliminated upon the occurrence of certain conditions in
the future. The elimination of Articles Seventh and Eighth will enable the
Company to engage in certain transactions with the approval of the Board of
Directors and, under limited circumstances, subject to the requirements of the
Delaware Law, the holders of a majority of the Company's capital stock. A copy
of the Company's Restated Certificate of Incorporation, which reflects such
Charter Amendment is set forth in full in Appendix C to this Proxy
Statement -- Prospectus, and the following description of such Charter Amendment
summarizes the material provisions of such Charter Amendment but does not
purport to be complete and is qualified in its entirety by reference to such
Appendix. A copy of Articles Seventh and Eighth of the Company's current
Certificate of Incorporation are set forth in full at Appendix D to this Proxy
Statement -- Prospectus.
The amendment to Articles Seventh and Eighth will become effective in the
event the Company's MetLife Option has not been exercised in full on the third
anniversary of the date of the Reclassification, on which date the Company's
MetLife Option will expire, or in the event the Company's MetLife Option
terminates on an earlier date unexercised. The Company's MetLife Option will
terminate on an earlier date if the Company does not satisfy minimum partial
exercises of the Company's MetLife Option prior to January 1, 1995 and January
1, 1996 and the Company fails to pay all regular quarterly dividends with
respect to the $2.20 Preferred Stock which become due and payable after the
Reclassification in cash on the regular payment dates. See 'The
Recapitalization -- Background -- the Recapitalization' for more information
regarding the Company's MetLife Option.
The Company's Certificate of Incorporation currently provides that the
affirmative vote of the holders of at least 80% of the outstanding shares of
capital stock of the Company entitled to vote in the elections of directors,
voting together as a single class, is required: (i) to adopt any agreement for
the merger or consolidation of the Company with or into any other person, (ii)
to authorize any sale, lease, transfer, exchange, mortgage or pledge or other
disposition to any other person of all or substantially all of the assets of the
Company, or any part of such assets having a then fair market value equal to or
greater than 50% of the then fair market value of the total assets of the
Company; or (iii) to authorize the issuance or transfer by the Company of any
voting securities of the Company in exchange or payment for the securities or
assets of any other person, if, in any such case, such other person is, or at
any time within the preceding twelve months has been, the beneficial owner of
10% or more of the outstanding shares of stock of the Company entitled to vote
in the elections of directors. The above provisions are not applicable to any
transaction if the Board of Directors by resolution shall have approved a
memorandum of understanding with such other person setting forth the principal
terms of such transaction and such transaction is substantially consistent
therewith, provided that a majority of those members of the Board of Directors
voting in favor of such resolution were duly elected and acting members of the
Board of Directors prior to the time such other person became the beneficial
owner of 10% or more of the outstanding shares of stock of the Company entitled
to vote in the elections of directors. Such super-majority voting provision may
discourage or
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render more difficult certain transactions, whether or not beneficial to the
Company's stockholders, and could discourage certain types of tactics that
involve an actual or threatened change of control of the Company. Articles
Seventh and Eighth were adopted prior to the promulgation of Section 203 of the
Delaware Law, which provides similar protection to stockholders under similar
circumstances. Section 203, however, allows greater flexibility to a corporation
by providing additional exceptions for certain transactions and by increasing
the beneficial ownership requirement from 10% to 15%. The Company proposes to
remove the charter provisions because MetLife Louisiana has conditioned its
approval of the Reclassification on the effectiveness of Proposal No. 2, because
the Company believes such provisions are unduly broad and because the
stockholders of the Company will continue to have the protection of Section 203.
Section 203 of the Delaware Law is not pertinent to transactions with interested
stockholders who have been such for a period of more than three years or who
were interested stockholders at the introduction of Section 203 into the
Delaware General Assembly on December 23, 1987. Section 203 is not applicable to
MetLife Louisiana since MetLife Louisiana has been an interested stockholder for
more than three years and was an interested stockholder on December 23, 1987.
MetLife Louisiana has conditioned its approval of the Reclassification on
the effectiveness of Proposal No. 2 because the amendment will eliminate the 80%
vote requirement for the Company to engage in any of the following transactions
with MetLife Louisiana, or any other owner of 10% or more of the outstanding
shares of the Company's capital stock entitled to vote in the election of
directors: a merger, a disposition of all or substantially all the Company's
assets, or a transaction which results in the issuance or transfer of its voting
securities in exchange for the securities or assets of MetLife Louisiana or such
other owner. The elimination of the 80% vote requirement will make it less
difficult for MetLife Louisiana or such other owner to use its influence on the
Board of Directors and its ownership of the Company's capital stock to cause the
Company to engage in the transactions discussed above. Following the elimination
of the 80% vote requirement, the Company will be able to engage in the above
transactions with the approval of the Board of Directors and, under limited
circumstances, subject to the requirements of Delaware Law, the holders of a
majority of the Company's capital stock. As discussed above, Section 203 of the
Delaware Law is not applicable to MetLife Louisiana since it has been an
interested stockholder for more than three years and was an interested
stockholder on December 23, 1987.
Pursuant to Article Eighth of the Certificate of Incorporation, the
affirmative vote or consent of the holders of 80% of the outstanding shares of
capital stock of the Company entitled to vote in the elections of directors,
voting together as a single class, is required to repeal or amend (i) Section
2.1 of the By-Laws and (ii) provisions in the Company's Certificate of
Incorporation relating to (A) business combinations, (B) the composition of the
Board of Directors as a classified board, (C) the ability of the Board of
Directors to repeal or amend the By-Laws and (D) the provisions requiring the
approval of 80% of the outstanding shares of stock of the Company entitled to
vote in the elections of directors in respect of the foregoing matters, unless
such amendment is unanimously approved by the Board of Directors, in which event
the vote of the stockholders holding a majority of the outstanding shares of
capital stock of the Company entitled to vote in the election of directors,
voting together as a single class, is required to repeal or modify any or all of
such provisions. In the event the Company's MetLife Option is not excercised in
full, such provisions of Article Eighth are also proposed to be removed pursuant
to the Charter Amendments in light of the removal of the other provisions
discussed above.
CONDITIONS TO EFFECTIVENESS
Proposal No. 2 must be approved by the affirmative vote of the holders of
80% of the shares of Common Stock, $2.16 Preferred Stock and $2.20 Preferred
Stock, voting together as a single class. Effectiveness of Proposal No. 2 is
conditioned upon effectiveness of Proposal No. 1. See 'General Information
Concerning Proxies.'
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BOARD RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF COMMON
STOCK, $2.16 PREFERRED STOCK AND $2.20 PREFERRED STOCK VOTE IN FAVOR OF PROPOSAL
NO. 2.
The foregoing recommendation of the Board of Directors is based upon the
recommendation of the Special Committee.
THE EXCHANGE OFFER
EXCHANGE TERMS
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth in this Proxy Statement -- Prospectus and the Consent and
Letter of Transmittal, $1,000 principal amount of Exchange Notes for each $1,000
principal amount of Subordinated Debentures, up to the Maximum Amount. Upon the
terms and subject to the conditions set forth in this Proxy Statement --
Prospectus and the Consent and Letter of Transmittal, the Company will accept
for exchange Subordinated Debentures that are properly tendered in accordance
with the terms of the Exchange Offer on or prior to the Expiration Date and not
withdrawn, and the Exchange Agent will deliver Exchange Notes, promptly after
the later of (i) the Expiration Date or (ii) the satisfaction or waiver of the
conditions specified in the Exchange Offer. The Company expressly reserves, in
its sole discretion, the right to delay acceptance of any of the Subordinated
Debentures or terminate the Exchange Offer and not accept for exchange any
Subordinated Debentures not theretofore accepted. See '-- Acceptance of
Subordinated Debentures for Exchange; Delivery of Exchange Notes.'
In the event that the aggregate principal amount of Subordinated Debentures
validly tendered and not properly withdrawn is in excess of the Maximum Amount,
the principal amount of Subordinated Debentures accepted for exchange and
payment shall be prorated and rounded to the next higher multiple of $1,000;
provided, however, that the Company will first accept for exchange and payment
on a pro rata basis the principal amount of Subordinated Debentures validly
tendered and not properly withdrawn by Small Lot Holders (as hereinafter
defined), until all tenders made by such holders have been accepted, and then,
to the extent that the Maximum Amount has not already been accepted, accept for
exchange and payment on a pro rata basis the principal amount of Subordinated
Debentures validly tendered and not properly withdrawn by all other
Debentureholders. See '-- Proration' and '-- Proration Priority for Tenders by
Small Lot Holders.'
As of December 15, 1993, approximately $108.8 million aggregate principal
amount of Subordinated Debentures was outstanding and there were approximately
247 registered holders of Subordinated Debentures, including Depository Trust
Company. It is a condition of the Exchange Offer that the holders of at least
$22.5 million of the outstanding principal amount of Subordinated Debentures
consent to the Indenture Amendments and such consents have not been revoked. THE
VALID TENDER OF SUBORDINATED DEBENTURES BY A DEBENTUREHOLDER PURSUANT TO THE
EXCHANGE OFFER WILL INCLUDE THE CONSENT OF SUCH DEBENTUREHOLDER TO THE INDENTURE
AMENDMENTS WITH RESPECT TO SUCH TENDERED SUBORDINATED DEBENTURES. Consents
included with tenders of Subordinated Debentures will only be utilized if the
tenders are accepted. The consents of holders of at least a majority in
outstanding principal amount of Subordinated Debentures are necessary to effect
the Indenture Amendments. See '-- Conditions of the Exchange Offer' and
'Proposed Amendments to Existing Indenture.'
The Company expressly reserves the right, in its sole discretion and
subject to applicable law, (i) to delay acceptance for exchange or, regardless
of whether such Subordinated Debentures were theretofore accepted for exchange,
to delay exchange of any Subordinated Debentures to be exchanged by the Company
pursuant to the Exchange Offer, or to terminate the Exchange Offer and not
accept for exchange any Subordinated Debentures not theretofore accepted for
exchange, by giving oral or written notice of such delay or termination to the
Exchange Agent; (ii) at any time or
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from time to time, to amend the Exchange Offer in any respect; (iii) to waive
any condition to the Exchange Offer and accept all Subordinated Debentures
previously tendered pursuant thereto; or (iv) to modify the form or amount of
the consideration to be paid pursuant to the Exchange Offer. The reservation by
the Company of the right to delay acceptance for exchange of or payment for
Subordinated Debentures is subject to the provisions of Rule 14e-1 under the
Exchange Act, which requires that the Company pay the consideration offered or
return the Subordinated Debentures deposited by or on behalf of Debentureholders
promptly after the termination of the Exchange Offer.
Tendering Debentureholders will not be obligated to pay brokerage
commissions or fees or to pay transfer taxes with respect to their exchange of
Subordinated Debentures unless the box entitled 'Special Issuance Instructions'
in the Consent and Letter of Transmittal has been completed, as described in the
Instructions to the Consent and Letter of Transmittal, or unless Exchange Notes
are to be issued to any person other than the holder of Subordinated Debentures
accepted for exchange. The Company will pay all other charges and expenses in
connection with the Exchange Offer. See '-- Expenses' below.
EXPIRATION DATE; EXTENSION; AMENDMENT; TERMINATION
The Exchange Offer will expire at 5:00 p.m., New York City time, on
February 8, 1994, unless extended by the Company. The Company reserves the right
to extend the Exchange Offer for such period or periods as it may determine in
its sole discretion from time to time by giving written or oral notice to the
Exchange Agent and by making a public announcement by press release to the Dow
Jones News Service prior to 9:00 a.m., New York City time, on the next business
day following the previously scheduled Expiration Date, as defined below. During
any such extension, all Subordinated Debentures previously tendered and not
accepted for exchange will remain subject to the Exchange Offer and may, subject
to the terms and conditions thereof, be accepted for exchange by the Company,
except to the extent such Subordinated Debentures may be withdrawn. See '--
Revocation and Withdrawal.' The term 'Expiration Date' means 5:00 p.m., New York
City time, on February 8, 1994, unless and until such time as the Company shall
have extended the period of time for which the Exchange Offer is open, in which
event the term 'Expiration Date' shall mean the latest time and date to which
the Exchange Offer is so extended by the Company.
The Commission has taken the position that the minimum period during which
an offer must remain open following material changes in the terms of or
information concerning such offer, other than a change in the price offered or a
change in percentage of securities sought, will depend upon the facts and
circumstances, including the relative materiality of the terms or information
changed. With respect to a change in price or a change in percentage of
securities sought, a minimum period of 10 business days is required by the
Exchange Act to allow for adequate dissemination. Except as required by the
Securities Act, the Exchange Act and the rules and regulations thereunder, the
Company does not intend to give written notification of any such changes to
Debentureholders.
The Company expressly reserves the right, in its sole discretion and
subject to applicable law, (i) to terminate the Exchange Offer and not to accept
for exchange any Subordinated Debentures, if any of the conditions specified
under 'Conditions of the Exchange Offer' below shall not have been satisfied, or
(ii) to amend the terms of the Exchange Offer in any respect. If the Company
exercises its right to terminate or amend the Exchange Offer, the Company shall
give written or oral notice of such termination or amendment to the Exchange
Agent and make a public announcement thereof. Without limiting the manner in
which the Company may choose to make public announcement of termination or
amendment, the Company shall have no obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a press
release to the Dow Jones News Service.
PROCEDURES FOR TENDERING
For a Debentureholder to validly tender Subordinated Debentures pursuant to
the Exchange Offer, the Subordinated Debentures, together with a properly
completed and duly executed Consent
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and Letter of Transmittal or facsimile thereof, with any signature guarantees
and any other documents required by the Instructions to the Consent and Letter
of Transmittal, must be received by the Exchange Agent at its address set forth
on the back cover of this Proxy Statement -- Prospectus on or prior to the
Expiration Date, or the tendering Debentureholder must comply with the
guaranteed delivery procedure described below. SUBMISSION OF A DULY EXECUTED
CONSENT AND LETTER OF TRANSMITTAL BY A DEBENTUREHOLDER WILL CONSTITUTE A CONSENT
TO THE INDENTURE AMENDMENTS WITH RESPECT TO THE TENDERED SUBORDINATED
DEBENTURES. Consents included with tenders of Subordinated Debentures will only
be utilized if the tenders are accepted. No Consent and Letter of Transmittal or
Subordinated Debentures should be sent to the Company or the Debenture Trustee.
SUBORDINATED DEBENTURES TOGETHER WITH CONSENTS AND LETTERS OF TRANSMITTAL AND
ANY OTHER REQUIRED DOCUMENTS SHOULD BE SENT TO THE EXCHANGE AGENT ONLY.
The authenticity of the signature on any Consent and Letter of Transmittal
must be guaranteed by a commercial bank or trust company having an office or
branch in the United States or by a firm which is a member of a registered
national securities exchange or a member of the National Association of
Securities Dealers, Inc. (each of which is an 'Eligible Institution'), unless
(a) the applicable Consent and Letter of Transmittal is signed by the registered
holder of the Subordinated Debentures tendered therewith, and Exchange Notes are
to be issued directly to such holder and neither the 'Special Issuance
Instructions' box nor the 'Special Delivery Instructions' box on the applicable
Consent and Letter of Transmittal has been completed, (b) such Subordinated
Debentures are being tendered for the account of an Eligible Institution, or (c)
a consent in respect of such Subordinated Debentures is being given by the
registered holder thereof with respect to the Indenture Amendments but such
Subordinated Debentures are not being tendered. If Subordinated Debentures are
registered in the name of a person other than the signer of a Consent and Letter
of Transmittal, the Subordinated Debentures must be endorsed or accompanied by
bond powers signed by the registered holder, with the signature on the
endorsement or bond powers guaranteed in each case by an Eligible Institution.
The method of delivery of Subordinated Debentures and other documents to
the Exchange Agent is at the election and risk of the tendering Debentureholder.
If delivery is by mail, it is recommended that the Debentureholder use properly
insured, registered mail with return receipt requested, and that the mailing be
made sufficiently in advance of the Expiration Date to permit delivery to the
Exchange Agent on or before the Expiration Date.
If any Subordinated Debentures are delivered to the Exchange Agent by or on
behalf of any Debentureholder in an amount in excess of the amount tendered by
the accompanying Consent and Letter of Transmittal, the Exchange Agent will
cause the Company to split such Subordinated Debentures into two Subordinated
Debentures (but only in denominations authorized under the Existing Indenture),
the aggregate principal amount of which will equal the principal amount of such
delivered Subordinated Debentures. The Exchange Agent will then return to the
tendering Debentureholder, unless otherwise requested by such Debentureholder
under 'Special Delivery Instructions' in the Consent and Letter of Transmittal,
as promptly as practicable following the expiration, withdrawal or termination
of the Exchange Offer, a new Subordinated Debenture in the principal amount of
the portion of such delivered Subordinated Debenture not tendered.
BOOK-ENTRY TRANSFER FACILITIES
The Exchange Agent will seek to establish an account with respect to the
Subordinated Debentures at each of The Depository Trust Company, the Midwest
Securities Trust Company and the Philadelphia Depository Trust Company (each a
'Book-Entry Transfer Facility') promptly after the date of this Proxy Statement
- -- Prospectus. A financial institution that is a participant in a Book-Entry
Transfer Facility's system may make book-entry delivery of Subordinated
Debentures by causing such Book-Entry Transfer Facility to transfer such
Subordinated Debentures into the
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Exchange Agent's account at such Book-Entry Transfer Facility in accordance with
the Book-Entry Transfer Facility's procedure for such transfer. Although
delivery of such Subordinated Debentures may be effected through book-entry
delivery at a Book-Entry Transfer Facility, in any case either (i) the Consent
and Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and all other required documents, must be transmitted to and received
by the Exchange Agent at its address set forth on the back cover of this Proxy
Statement -- Prospectus on or before the Expiration Date, or (ii) the guaranteed
delivery procedure set forth below must be followed. DELIVERY OF DOCUMENTS TO A
BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH SUCH BOOK-ENTRY TRANSFER
FACILITY'S PROCEDURE DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
GUARANTEED DELIVERY
If a Debentureholder desires to tender Subordinated Debentures pursuant to
the Exchange Offer and such Subordinated Debentures are not lost but are not
immediately available or time will not permit all required documents to reach
the Exchange Agent prior to the Expiration Date, a tender may be effected if all
of the following are satisfied:
(a) such tender is made by or through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by telegram, facsimile transmission, mail or hand
delivery), substantially in the form provided by the Company, signed and
dated, setting forth the name(s) and address(es) of the Debentureholder(s)
and the principal amount of Subordinated Debentures tendered, stating that
the tender is being made thereby and guaranteeing that, within eight New
York Stock Exchange trading days after the date of execution of such Notice
of Guaranteed Delivery, the duly executed Consent and Letter of Transmittal
(or facsimile thereof), together with the Subordinated Debentures and all
other documents required by the Consent and Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent;
(c) prior to the Expiration Date, the Debentureholder consents to the
Indenture Amendments by completing and executing the form of consent
included in such Notice of Guaranteed Delivery; and
(d) all tendered Subordinated Debentures in proper form for transfer,
together with a properly completed and duly executed Consent and Letter of
Transmittal (or facsimile thereof) and any signature guarantees, and all
other documents required by such Consent and Letter of Transmittal, are
received by the Exchange Agent within eight New York Stock Exchange trading
days after the Expiration Date.
Notwithstanding any other provision of the Exchange Offer, issuance of
Exchange Notes in exchange for Subordinated Debentures tendered and accepted for
exchange pursuant to the Exchange Offer will occur, in all cases, only after
timely receipt by the Exchange Agent of the tendered Subordinated Debentures,
together with a properly completed and duly executed Consent and Letter of
Transmittal and all other required documents.
If a Debentureholder desires to tender Subordinated Debentures pursuant to
the Exchange Offer but is unable to locate the Subordinated Debentures to be
tendered, such Debentureholder should write to or telephone the Debenture
Trustee at the address or telephone number listed below, about procedures for
obtaining replacement certificates for Subordinated Debentures or arranging for
indemnification or about any other matter which requires handling by the
Debenture Trustee:
NBD Bank, N.A., formerly National Bank of Detroit
611 Woodward Avenue
Detroit, Michigan 48226
Attention: Corporate Trust Administration
Telephone: (313) 225-1000
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The interpretation of the terms and conditions of the Exchange Offer
(including the Consent and Letter of Transmittal and the instructions thereto)
and all questions as to the form of all documents and validity (including time
of receipt) and acceptance of all tenders will be determined by the Company in
its sole discretion, which determination shall be final and binding. The Company
reserves the absolute right, in its sole discretion, to reject any or all
tenders that are not in proper form or the acceptance of which would, in the
Company's opinion, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Subordinated
Debentures. The Company's interpretations of the terms and conditions of the
Exchange Offer (including the instructions in the Consent and Letter of
Transmittal) will be final and binding. Any defect or irregularity in connection
with tenders must be cured within such time as the Company determines, unless
waived by the Company. No alternative, conditional or contingent tenders will be
accepted. Tenders of Subordinated Debentures will not be deemed to have been
made until all defects and irregularities have been waived by the Company or
cured. None of the Company, the Exchange Agent, the Information Agent or any
other person will be under any duty to give notice of any defects or
irregularities in tenders, or will incur any liability for failure to give any
such notice.
The tender of Subordinated Debentures pursuant to any of the procedures
described above and acceptance thereof by the Company will constitute an
agreement between the tendering Debentureholder and the Company upon the terms
and conditions of the Exchange Offer.
If the Consent and Letter of Transmittal is signed by a person or persons
other than the registered holder or holders of Subordinated Debentures, such
Subordinated Debentures must be endorsed or accompanied by appropriate powers of
attorney, in either case signed exactly as the name or names of the registered
holder or holders that appear on such Subordinated Debentures. If the Consent
and Letter of Transmittal or any Subordinated Debentures or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by the
Company, proper evidence satisfactory to the Company of their authority to so
act must be submitted to the Exchange Agent.
BACKUP WITHHOLDING
Federal income tax law requires that a Debentureholder whose tendered
Subordinated Debentures are accepted for exchange must provide the Exchange
Agent (as payor) with such Debentureholder's correct taxpayer identification
number, which, in the case of a Debentureholder who is an individual, is such
Debentureholder's social security number, or otherwise establish a basis for
exemption from backup withholding. If the Exchange Agent is not provided with
the correct taxpayer identification number or adequate basis for exemption, the
Debentureholder will be subject to a $50 penalty imposed by the Internal Revenue
Service (the 'IRS') and backup withholding at a rate of 31%. If withholding
results in an overpayment of taxes, a refund may be obtained.
To prevent backup withholding, each tendering Debentureholder must complete
and sign the substitute Form W-9 included in the Consent and Letter of
Transmittal and either (a) provide his correct taxpayer identification number
and certify under penalties of perjury that the taxpayer identification number
provided is correct (or that such Debentureholder is awaiting a taxpayer
identification number), and that (i) the Debentureholder has not been notified
by the IRS that the Debentureholder is subject to backup withholding as a result
of failure to report all interest or dividends, or (ii) the IRS has notified the
Debentureholder that the Debentureholder is no longer subject to backup
withholding; or (b) provide an adequate basis for an exemption.
REVOCATION AND WITHDRAWAL
Consents
Any Debentureholder who has consented (or whose predecessor in interest
with respect to Subordinated Debentures has consented) to the adoption of the
Indenture Amendments may revoke
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such consent by delivering written notice of such revocation to the Exchange
Agent or the Debenture Trustee at any time prior to the Expiration Date.
However, if a Debentureholder who has tendered Subordinated Debentures
subsequently effects a valid revocation of consent to the Indenture Amendments,
such action will render the prior tender of Subordinated Debentures defective,
and the Company will have the right, which it may waive, to reject the prior
tender as invalid and ineffective. To be effective, any such notice of
revocation of consents must indicate the certificate number or numbers of
Subordinated Debentures to which it relates and the aggregate principal amount
represented by such Subordinated Debentures and (a) be signed by the
Debentureholder in the same manner as the original Consent and Letter of
Transmittal, or (b) be accompanied by evidence satisfactory to the Company that
the Debentureholder revoking consent has succeeded to beneficial ownership of
such Subordinated Debentures. See 'Proposed Amendments to Existing Indenture --
Solicitation of Consents; Indenture Amendments.' None of the Company, the
Exchange Agent, the Information Agent or any other person will be under any duty
to give notice to any Debentureholder of any defect or irregularity in any
notice of revocation of consent or will incur any liability for failure to give
any such notification.
Tenders
Except as otherwise provided below, tenders of Subordinated Debentures
pursuant to the Exchange Offer are irrevocable and no withdrawal rights are
being afforded to Debentureholders.
For a withdrawal to be effective, a written, telegraphic, or facsimile
transmission notice of withdrawal must be timely received by the Exchange Agent
before acceptance by the Company of the Subordinated Debentures relating to such
withdrawal. Any such notice of withdrawal must specify the name of the person
who tendered the Subordinated Debentures, the principal amount of Subordinated
Debentures to be withdrawn and (where certificates for Subordinated Debentures
have been tendered) the names in which Subordinated Debentures in registered
form are registered, if different from that of the person tendering such
Subordinated Debentures. If Subordinated Debentures have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of such
Subordinated Debentures, the serial numbers shown on the particular Subordinated
Debentures to be withdrawn and a notice of withdrawal signed by the
Debentureholder in the same manner as the original Consent and Letter of
Transmittal with the signature(s) guaranteed by the Eligible Institution (except
in the case of Subordinated Debentures tendered by an Eligible Institution) must
be submitted prior to the physical release of the Subordinated Debentures to be
withdrawn. Withdrawals of tenders of Subordinated Debentures may not be
rescinded and any Subordinated Debentures withdrawn will thereafter be deemed
not validly tendered for purposes of the Exchange Offer. However, tendered
Subordinated Debentures withdrawn pursuant to the withdrawal rights described
above may be retendered at any subsequent time prior to the Expiration Date by
following the procedures described in 'Procedures for Tendering' above.
Compliance with the procedures for withdrawal of Subordinated Debentures will
revoke a consent to adoption of the Indenture Amendments.
All questions as to the form and validity (including time of receipt) of
any notice of withdrawal and revocations will be determined by the Company, in
its sole discretion, which determination will be final and binding. None of the
Company, the Exchange Agent, the Information Agent or any other person will be
under any duty to give notification of any defects or irregularities in any
notice of withdrawal or revocation or incur any liability for failure to give
such notification.
ACCEPTANCE OF SUBORDINATED DEBENTURES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will accept for exchange, and issue Exchange Notes in exchange for,
Subordinated Debentures validly tendered and not withdrawn promptly after the
later of (i) the Expiration Date, or (ii) the satisfaction or waiver of the
conditions specified in the Exchange Offer. The Company will not accept
Subordinated Debentures for exchange prior to the Expiration Date. The Company
expressly reserves the right, in its sole discretion, to delay the issuance of
Exchange Notes in exchange for Subordinated Debentures
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accepted for exchange (subject to Rule 14e-1 under the Exchange Act, which
requires that the Company pay the consideration offered or return the
Subordinated Debentures deposited by or on behalf of the Debentureholders
promptly after the termination or withdrawal of the Exchange Offer), if any of
the conditions of the Exchange Offer shall not have been satisfied or in order
to comply in whole or in part with any applicable law. The Company expressly
reserves the right, in its sole discretion, to accept for exchange, and issue
Exchange Notes in exchange for, Subordinated Debentures validly tendered and not
withdrawn promptly after the satisfaction or waiver of such conditions. In all
cases, Exchange Notes will be delivered in exchange for Subordinated Debentures
accepted for exchange pursuant to the Exchange Offer only after timely receipt
by the Exchange Agent of Subordinated Debentures, a properly completed and duly
executed Consent and Letter of Transmittal (or facsimile thereof) and all other
documents required by the Consent and Letter of Transmittal.
Tenders of Subordinated Debentures with respect to the Exchange Offer will
be accepted only in principal amounts equal to $1,000 or integral multiples
thereof. No fractional Exchange Notes will be issued in the Exchange Offer. If
less than the entire principal amount of any Subordinated Debentures evidenced
by a submitted certificate(s) is tendered, the tendering Debentureholder should
fill in the principal amount tendered in the appropriate box on the Consent and
Letter of Transmittal with respect to the deposit being made, but only to the
extent of the principal amount of Subordinated Debentures being tendered. The
entire principal amount represented by the certificates for all Subordinated
Debentures deposited with the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange Subordinated Debentures tendered to the Company pursuant
thereto when, as and if the Company gives oral or written notice to the Exchange
Agent of its acceptance for exchange of such Subordinated Debentures. Upon the
terms and subject to the conditions of the Exchange Offer, delivery of Exchange
Notes for Subordinated Debentures accepted for exchange pursuant to the Exchange
Offer will be made by the Exchange Agent as soon as practicable after issuance
and receipt of Exchange Notes by the Exchange Agent. The Exchange Agent will act
as agent for the tendering Debentureholders for the purpose of receiving
Exchange Notes and transmitting such Exchange Notes to such holders.
If, for any reason, acceptance for exchange of, or delivery of Exchange
Notes in exchange for, Subordinated Debentures pursuant to the Exchange Offer is
delayed or the Company is unable to accept for exchange, or issue or deliver
Exchange Notes in exchange for, Subordinated Debentures or the Note Trustee (as
hereinafter defined) or the transfer agent and registrar for the Exchange Notes
is unable to countersign or deliver Exchange Notes, as the case may be, pursuant
to the Exchange Offer, then, without prejudice to the rights of the Company
under '-- Expiration Date; Extension; Amendment; Termination' and '-- Revocation
and Withdrawal' above and '-- Conditions of the Exchange Offer' below, and
subject further to Rule 14e-1 under the Exchange Act, which requires that the
Company pay the consideration offered or return the Subordinated Debentures
tendered promptly after the termination or withdrawal of the Exchange Offer, the
Exchange Agent may, nevertheless, on behalf of the Company, retain tendered
Subordinated Debentures and such Subordinated Debentures may not be withdrawn
except to the extent tendering holders are entitled to withdrawal rights as
described in '-- Revocation and Withdrawal' above.
In the event of an increase in the consideration offered to
Debentureholders in the Exchange Offer, Debentureholders whose Subordinated
Debentures have previously been accepted for exchange by the Company will
receive such increase in consideration.
INTEREST ON SUBORDINATED DEBENTURES AND EXCHANGE NOTES
Interest on the Exchange Notes will commence to accrue at the annual rate
of 13% as of the date on which the Exchange Notes are issued in exchange for
Subordinated Debentures. Interest on Subordinated Debentures accepted for
exchange into Exchange Notes will accrue to, but not accrue
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<PAGE>
on, such date. Such accrued but unpaid interest on Subordinated Debentures will
be paid in cash as soon as practicable after the Subordinated Debentures are
accepted for exchange. Interest on the Exchange Notes will be payable
semiannually on June 1 and December 1 of each year, commencing June 1, 1994. See
'Description of Exchange Notes.'
PRORATION
If an aggregate principal amount of Subordinated Debentures greater than
the Maximum Amount is validly tendered and not properly withdrawn prior to the
Expiration Date, the Company will, upon the terms and subject to the conditions
of the Exchange Offer, accept for exchange and payment an aggregate principal
amount of Subordinated Debentures so tendered and not properly withdrawn equal
to the Maximum Amount, pro rata in the following order of priority: (i) first on
a pro rata basis from the Small Lot Holders, until all Subordinated Debentures
validly tendered and not properly withdrawn by such Small Lot Holders have been
accepted and (ii) then on a pro rata basis from all other Debentureholders, in
each case according to the principal amount of Subordinated Debentures validly
tendered by each such Debentureholder and not properly withdrawn prior to the
Expiration Date (calculated in all cases in units of $1,000 principal amount).
If the aggregate principal amount of Subordinated Debentures validly tendered
and not properly withdrawn prior to the Expiration Date is less than or equal to
the Maximum Amount and equal to or greater than $22.5 million, the Company will,
upon the terms and subject to the conditions of the Exchange Offer, accept for
exchange and payment all Subordinated Debentures so tendered and not properly
withdrawn.
Because of the difficulty of determining the aggregate principal amount of
Subordinated Debentures validly tendered and not properly withdrawn, the Company
may not be able to announce the final results of such proration until at least
approximately seven New York Stock Exchange trading days after the Expiration
Date. Preliminary results of proration will be announced by press release as
promptly as practicable after the Expiration Date. Debentureholders may obtain
such preliminary information from the Information Agent and may be able to
obtain such information from their brokers. THE COMPANY WILL NOT PAY FOR ANY
SUBORDINATED DEBENTURES ACCEPTED FOR EXCHANGE AND PAYMENT PURSUANT TO THE
EXCHANGE OFFER, OR RETURN SUBORDINATED DEBENTURES DELIVERED TO THE EXCHANGE
AGENT BUT NOT TENDERED, OR RETURN SUBORDINATED DEBENTURES TENDERED BUT NOT
ACCEPTED FOR EXCHANGE AND PAYMENT BECAUSE OF PRORATION, UNTIL THE FINAL
PRORATION FACTORS ARE KNOWN.
PRORATION PRIORITY FOR TENDERS BY SMALL LOT HOLDERS
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will give priority in accepting for exchange and payment tenders by
Debentureholders who (i) beneficially owned (either directly or indirectly,
through one or more accounts or certificates), as of the close of business on
December 15, 1993 and continue to own beneficially as of the Expiration Date,
$10,000 or less aggregate principal amount of Subordinated Debentures, (ii)
validly tendered and did not properly withdraw prior to the Expiration Date all
of such Subordinated Debentures and (iii) properly completed the box captioned
'Tenders by Small Lot Holders' on the Consent and Letter of Transmittal.
The priority accorded to the Small Lot Holders is not available to
Debentureholders who beneficially owned, as of close of business on December 15,
1993 or the Expiration Date, Subordinated Debentures in an aggregate principal
amount of more than $10,000, even if such Debentureholders had separate accounts
or certificates of Subordinated Debentures in principal amounts of $10,000 or
less.
IN ORDER TO BE TREATED AS A SMALL LOT HOLDER FOR PURPOSES OF THIS EXCHANGE
OFFER, THE DEBENTUREHOLDER MUST TENDER THE ENTIRE PRINCIPAL OF ALL SUBORDINATED
DEBENTURES BENEFICIALLY OWNED BY SUCH DEBENTUREHOLDER AND MUST SATISFY EACH OF
THE OTHER REQUIREMENTS SET FORTH ABOVE. PARTIAL TENDERS WILL HAVE THE EFFECT OF
DISQUALIFYING THE DEBENTUREHOLDER FROM THE PRORATION PRIORITY OTHERWISE ACCORDED
TO
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SMALL LOT HOLDERS AND SUCH PARTIAL TENDERS WILL THEREFORE BE TREATED AS ANY
OTHER TENDER PURSUANT TO THE EXCHANGE OFFER.
CONDITIONS OF THE EXCHANGE OFFER
It is a condition of the Exchange Offer that at least $22.5 million of the
outstanding principal amount of Subordinated Debentures be validly tendered and
not withdrawn prior to the Expiration Date.
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or issue Exchange Notes in
exchange for, Subordinated Debentures and may terminate, extend or amend the
Exchange Offer as provided in '-- Expiration Date; Extension; Amendment;
Termination' above, and may, subject to Rule 14e-1 under the Exchange Act,
postpone the acceptance for exchange of, and issuance of Exchange Notes for,
Subordinated Debentures tendered unless, prior to the time of acceptance for
exchange of, or issuance of Exchange Notes in exchange for, Subordinated
Debentures:
(a) there shall not have been instituted or threatened or be pending
any action or proceeding before or by any court or governmental regulatory
or administrative agency or instrumentality, or by any other person, in
connection with the Exchange Offer, and there shall not have occurred any
material adverse development with respect to any action or proceeding
concerning the Company;
(b) there shall not have occurred any material change in the
Company's assets, liabilities, operations or financial condition; and
(c) receipt of any necessary regulatory consents and approvals shall
have been obtained.
The conditions stated in the immediately preceding paragraph and the
conditions stated in the first paragraph of this section are for the sole
benefit of the Company and may be waived by the Company, in whole or in part, at
any time and from time to time in its sole discretion, except as otherwise
required by law. The Board of Directors has not made a decision as to what
circumstances would lead it to waive any such conditions, and any such waiver
would depend on circumstances prevailing at the time of such waiver. Any
determination by the Company concerning the events described in this paragraph
shall be final and binding upon all persons.
In addition, the Company will not accept for exchange any Subordinated
Debentures tendered, and no Exchange Notes will be issued in exchange for any
Subordinated Debentures, at any time at which there shall be a stop order issued
by the Commission which remains in effect with respect to the Registration
Statement of which this Proxy Statement -- Prospectus forms a part.
EXCHANGE AGENT AND INFORMATION AGENT
Bankers Trust Company has been appointed Exchange Agent for the Exchange
Offer. All deliveries and correspondence sent to the Exchange Agent should be
directed to one of the addresses set forth on the back cover of this Proxy
Statement -- Prospectus. Requests for additional copies of this Proxy
Statement -- Prospectus and the Consent and Letter of Transmittal should be
directed to Georgeson & Company, Inc., as Information Agent, at one of its
addresses set forth on the back cover of this Proxy Statement -- Prospectus.
EXPENSES
The Company has agreed to pay the Exchange Agent and the Information Agent
reasonable and customary fees for their services and to reimburse the Exchange
Agent and the Information Agent for their reasonable out-of-pocket expenses in
connection therewith. The Company has agreed to indemnify the Exchange Agent and
the Information Agent for certain liabilities, including liabilities under the
federal securities laws. In connection with the Exchange Offer, the Company has
retained the services of Georgeson & Company, Inc. to assist in the solicitation
of consents and to assist it in the
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<PAGE>
solicitation of proxies in connection with the Annual Meeting. See 'General
Information Concerning Proxies.' The Company has agreed to pay Georgeson a fee
of $40,000, plus $6.00 per call made by Georgeson to stockholders and
Debentureholders. In addition, the Company has agreed to reimburse Georgeson for
certain expenses and to indemnify Georgeson against certain liabilities. None of
the compensation to be paid to Georgeson is conditioned upon consummation of any
part of the Recapitalization. The Company will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Proxy Statement -- Prospectus and
related documents to the beneficial owners of the Subordinated Debentures and in
handling or forwarding tenders of their customers.
PROPOSED AMENDMENTS TO EXISTING INDENTURE
GENERAL
Set forth is a brief description of the Indenture Amendments, and a
description of the effects of the Indenture Amendments on Debentureholders
following consummation of the Exchange Offer. The following statements relating
to the Indenture Amendments summarize the material elements of such Indenture
Amendments but do not purport to be complete and are qualified in their entirety
by reference to the form of proposed supplemental indenture, a copy of which is
filed as an exhibit to the Registration Statement of which this Proxy
Statement -- Prospectus forms a part and is incorporated herein by reference.
Copies of the proposed supplemental indenture setting forth the Indenture
Amendments are available upon request to the Company, 8700 Tesoro Drive, San
Antonio, Texas 78217, Attention: Investor Relations, telephone (210) 828-8484,
and a copy of the proposed Supplemental Indenture is on file at the principal
office of the Trustee in the City of Detroit, State of Michigan, for inspection
by all Debentureholders. Each capitalized term used in this section of this
Proxy Statement -- Prospectus and not otherwise defined herein shall have the
meaning assigned to such term in the Existing Indenture.
Currently, the Existing Indenture prohibits the Company from declaring
dividends or making distributions on the Common Stock or purchasing or acquiring
capital stock in an amount in excess of the sum of (1) consolidated net income
of the Company subsequent to September 30, 1982; (2) net proceeds from the sale
of its capital stock subsequent to September 30, 1982; (3) dividends or
distributions subsequent to September 30, 1982, or sale proceeds, in respect of
its interest in Trinidad-Tesoro Petroleum Company Limited; and (4) $30,000,000,
subject to certain limitations. The Indenture Amendments will modify this
covenant to prohibit the payment of dividends or distributions on, or purchasing
or acquiring, equity securities of the Company (except stock dividends) unless,
giving effect to such transaction (1) no event of default shall occur and (2)
the aggregate amount expended for such purposes subsequent to September 30, 1993
is less than the sum of (a) 50% of the aggregate consolidated income of the
Company earned subsequent to September 30, 1993 or 100% if such aggregate
consolidated net income for such period is negative and (b) the net proceeds
from the sale after September 30, 1993 of certain equity securities of the
Company and indebtedness which has been converted into certain equity securities
of the Company; provided, however, that the Company may make redemptions and
repurchases of Common Stock and preferred stock in an aggregate amount not to
exceed $30,465,000 (approximately equal to the accrued and unpaid dividends that
will exist on the Existing Preferred Stock at January 31, 1994) and from the
proceeds of contemporaneous sales of certain capital stock and make dividend
payments on preferred stock of the Company. The payment of cash dividends on
preferred stock and redemptions and repurchases of Common Stock and preferred
stock pursuant to the proviso to the preceding sentence will not reduce the
amount determined in accordance with (2) of the immediately preceding sentence.
See 'Description of Exchange Notes -- Certain Covenants -- Limitation on
Restricted Payments' for a description of the parallel limitation in the New
Indenture.
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The Indenture Amendments will also amend the definition of 'Senior
Indebtedness' to expressly include the Exchange Notes. In the absence of such
amendment, it is not clear whether the Exchange Notes would rank senior in right
of payment to the Subordinated Debentures.
It is not a condition of the Exchange Offer that the Indenture Amendments
be approved. As of December 15, 1993, approximately $108.8 million aggregate
principal amount of Subordinated Debentures was outstanding. The principal
purpose of the Indenture Amendments is to modify the current restrictions on
dividends, distribution to stockholders and purchases and redemptions of capital
stock and to ensure that the Exchange Notes rank senior to the Subordinated
Debentures.
SOLICITATION OF CONSENTS; INDENTURE AMENDMENTS
The valid tender of Subordinated Debentures by a Debentureholder pursuant
to the Exchange Offer will include the consent of such Debentureholder to the
Indenture Amendments with respect to such tendered Subordinated Debentures. The
Company is also soliciting consents from Debentureholders who do not desire to
accept the Exchange Offer. Pursuant to the terms of the Consent and Letter of
Transmittal, the completion, execution and delivery thereof will include the
consent to the Indenture Amendments. Consents included with tenders of
Subordinated Debentures will only be utilized if the tenders are accepted.
Unless waived, any defects or irregularities in connection with tenders must be
cured within such time as the Company shall determine. None of the Company, the
Exchange Agent, the Information Agent or any other person shall be under any
duty to give notification of defects or irregularities in such tenders or shall
incur liabilities for failure to give such notification.
The purpose of limiting participation in the Exchange Offer to
Debentureholders who consent to the proposed amendments to the Existing
Indenture is to encourage the greatest number of such holders to consent.
Debentureholders who do not tender their Subordinated Debentures and who
wish to consent to the Indenture Amendments should complete the enclosed Consent
and Letter of Transmittal in accordance with the Instructions and return it
promptly to the Exchange Agent.
For the Indenture Amendments to become effective, the holders of at least a
majority in outstanding principal amount of Subordinated Debentures must consent
thereto and a supplemental indenture amending the Existing Indenture must be
executed by the Company and the Debenture Trustee. The effectiveness of the
supplemental indenture will be conditioned upon the closing of the Exchange
Offer and receipt by the Debenture Trustee of certain opinions of counsel and
certificates from the Company.
Only registered holders of Subordinated Debentures can effectively consent
to the Indenture Amendments. However, subsequent transfers of Subordinated
Debentures on the records of the Company will not have the effect of revoking
any consent theretofore given by such holder and such consent will remain valid,
unless revoked in accordance with the procedures described above under 'The
Exchange Offer -- Revocation and Withdrawal.'
In addition to the use of the mails, consents to the Indenture Amendments
may be solicited by directors, officers and employees of the Company in person
or by telephone, telegram or other means of communication. The Financial Advisor
and the Information Agent may also assist the Company in the solicitation of
consents to the Indenture Amendments.
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FINANCIAL ADVISOR
The Company has retained Smith Barney to act as Financial Advisor with
respect to the Recapitalization. Smith Barney is an internationally recognized
investment banking firm with substantial experience in advising clients with
respect to recapitalizations. Smith Barney has advised the Company on the
appropriate terms, from the Company's perspective, of the Recapitalization.
Smith Barney will oversee the solicitation of tenders of Subordinated Debentures
pursuant to the Exchange Offer, may assist in the solicitation of votes of the
holders of the $2.16 Preferred Stock and certain large holders of Common Stock
with respect to Proposal No. 1 and Proposal No. 2, and the solicitation of
consents of the holders of the Subordinated Debentures with respect to the
Indenture Amendments.
For the services of Smith Barney as Financial Advisor, the Company has
agreed to pay Smith Barney a fee in the amount of $200,000 plus .85% of the
principal amount of Subordinated Debentures tendered and accepted in the
Exchange Offer and 1.25% of the sum of the liquidation preference of the $2.16
Preferred Stock and all accrued and unpaid dividends thereon, and .50% of the
sum of the liquidation preference of the $2.20 Preferred Stock and all accrued
and unpaid dividends thereon, or a minimum of $700,000. In addition, the Company
has agreed to fully reimburse Smith Barney for all reasonable and necessary
expenses (including certain fees and disbursements of its counsel) incurred in
performance of such services. Smith Barney has not been retained to render an
opinion as to the fairness of the Recapitalization. Smith Barney has provided
financial advisory services to the Company in the past for which it has received
customary compensation.
The Company has agreed to indemnify Smith Barney against certain civil
liabilities, including liabilities under the Securities Act of 1933, and against
certain liabilities and expenses arising out of the Company's retention of Smith
Barney in connection with the Recapitalization.
FAIRNESS OPINION
The Special Committee has retained Jefferies to consider the fairness of
various aspects of the Recapitalization, and Jefferies has opined and, as a
condition to the Reclassification, will confirm its opinion immediately prior to
the consummation of the Reclassification, to the effect that the
Reclassification is fair from a financial point of view to the holders of $2.16
Preferred Stock and to the holders of Common Stock. The text of the opinion is
set forth in Appendix B to this Proxy Statement -- Prospectus.
Jefferies is a nationally recognized investment banking firm that regularly
engages in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. The Special Committee
selected Jefferies on the basis of such valuation experience and specifically
its experience in valuing companies in the energy industry. In requesting the
opinion, the Special Committee did not give any special instructions to
Jefferies or impose any limitations upon the scope of the investigation that
Jefferies deemed necessary to enable it to deliver its opinion. Jefferies did
not participate in negotiating the terms of the Recapitalization. The terms of
the Reclassification, including the number of shares of Common Stock into which
each share of $2.16 Preferred Stock will be reclassified, were recommended and
approved by the Special Committee on December 28, 1993.
The Company has agreed to pay Jefferies a fee of $125,000 upon delivery of
Jefferies' fairness opinion. In addition, the Company has agreed to reimburse
Jefferies for its reasonable out-of-pocket expenses and to indemnify Jefferies
against certain liabilities, including liabilities under the federal securities
laws, or to contribute to payments Jefferies may be required to make in respect
of such liabilities.
In the course of its review, Jefferies: (i) analyzed certain public and
non-public operating data of the Company prepared by the Company; (ii) discussed
the historical operating results and the future
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prospects of the business with the management of the Company; (iii) reviewed the
recent performance, liquidity and volatility of the Company's existing equity
securities; (iv) considered the value of certain intangible benefits which would
accrue to the Company as a result of the Reclassification; (v) took into account
its general experience in similar transactions; and (vi) undertook such
additional reviews, analyses and inquiries as it deemed relevant under the
circumstances.
Jefferies also analyzed published information regarding the financial and
market performance of a limited group of companies that Jefferies deemed
comparable to the Company, including independent exploration and production
companies and refining and marketing companies. The independent exploration and
production companies analyzed included Basin Exploration, Coho Resources, Devon
Energy Corporation, Gerrity Oil & Gas Corporation, Snyder Oil Corporation,
Vintage Petroleum and Wainoco. The refining and marketing companies analyzed
included Crown Central, Giant Industries, Holly Corporation, Tosco Corporation
and Total Petroleum (North America) Limited.
Financial performance of the comparable group of companies was measured by
estimated earnings, cash flow and earnings before interest, income taxes and
depreciation, depletion and amortization ('EBITDA') for the fiscal periods 1993
and 1994. Market performance was determined by deriving multiples of earnings,
cash flow, and EBITDA for each comparable company. The Company's financial and
market performance was measured on a relative basis against the average
performance of the group of comparable companies.
The Company's implied enterprise value was computed by multiplying the
Company's projected operating data by comparable company multiples previously
determined. Asset valuation was determined by adding cash and subtracting debt
to yield a total enterprise value range per share.
TRADING AND MARKET PRICES
SUBORDINATED DEBENTURES
The Subordinated Debentures are listed on the New York Stock Exchange. As
of December 27, 1993, approximately $108.8 million aggregate principal amount of
Subordinated Debentures was outstanding and there were 247 registered holders of
Subordinated Debentures, including Depository Trust Company. The following table
sets forth the high and low sales prices of the Subordinated Debentures on the
New York Stock Exchange -- Composite Tape, as reported by the Dow Jones
News/Retrieval Service, for each of the quarterly periods indicated. All prices
for the Subordinated Debentures are expressed per $100 principal amount.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1991:
First------------------------------------------------------------------------ $ 83 1/2 68
Second----------------------------------------------------------------------- $ 91 82 1/2
Third------------------------------------------------------------------------ $ 92 86 7/8
Fourth----------------------------------------------------------------------- $ 88 5/8 78
1992:
First------------------------------------------------------------------------ $ 89 3/8 79 5/8
Second----------------------------------------------------------------------- $ 89 7/8 84 3/4
Third------------------------------------------------------------------------ $ 92 1/4 85 5/8
Fourth----------------------------------------------------------------------- $ 88 68
1993:
First------------------------------------------------------------------------ $ 97 1/2 81 1/4
Second----------------------------------------------------------------------- $ 100 1/8 96
Third------------------------------------------------------------------------ $ 101 1/2 98 3/8
Fourth (through December 27)------------------------------------------------- $ 102 3/8 98 1/2
</TABLE>
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<PAGE>
$2.16 PREFERRED STOCK
The $2.16 Preferred Stock is listed on the New York Stock Exchange under
the symbol TSO Pr. The following table sets forth the high and low sales prices
of the $2.16 Preferred Stock on the New York Stock Exchange -- Composite Tape,
as reported by the Dow Jones/Retrieval Service, for each of the quarterly
periods indicated. No dividends were paid in respect of shares of $2.16
Preferred Stock during such periods. For a description of restrictions on the
payment of dividends and dividend arrearages on the shares of $2.16 Preferred
Stock and other matters, see 'Description of Capital Stock -- $2.16 Preferred
Stock.' As of December 27, 1993, there were 961 holders of record of $2.16
Preferred Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1991:
First------------------------------------------------------------------------ $ 16 1/4 12 1/2
Second----------------------------------------------------------------------- $ 19 1/8 16
Third------------------------------------------------------------------------ $ 17 12 1/2
Fourth----------------------------------------------------------------------- $ 13 7/8 10
1992:
First------------------------------------------------------------------------ $ 14 10 1/2
Second----------------------------------------------------------------------- $ 13 3/8 10 3/4
Third------------------------------------------------------------------------ $ 12 3/4 10 1/8
Fourth----------------------------------------------------------------------- $ 10 1/4 7 5/8
1993:
First------------------------------------------------------------------------ $ 16 5/8 9
Second----------------------------------------------------------------------- $ 19 3/4 16 1/8
Third------------------------------------------------------------------------ $ 23 1/2 18 3/4
Fourth (through December 27)------------------------------------------------- $ 23 1/2 19 3/4
</TABLE>
COMMON STOCK
The Common Stock is listed on the New York Stock Exchange under the symbol
TSO. The following table sets forth the high and low sales prices of the Common
Stock on the New York Stock Exchange -- Composite Tape, as reported by the Dow
Jones/Retrieval Service, for each of the quarterly periods indicated. No
dividends were paid in respect of shares of Common Stock during such periods.
For a description of restrictions on the payment of dividends on the Common
Stock and other matters, see 'Description of Capital Stock -- Common Stock.' As
of December 27, 1993, there were 3,875 holders of record of Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1991:
First------------------------------------------------------------------------ $ 8 1/4 5 3/4
Second----------------------------------------------------------------------- $ 9 3/8 7 3/8
Third------------------------------------------------------------------------ $ 7 7/8 6 1/4
Fourth----------------------------------------------------------------------- $ 6 7/8 4 3/8
1992:
First------------------------------------------------------------------------ $ 6 5/8 4 5/8
Second----------------------------------------------------------------------- $ 5 3/8 4 1/4
Third------------------------------------------------------------------------ $ 5 1/2 3
Fourth----------------------------------------------------------------------- $ 3 5/8 2 1/2
1993:
First------------------------------------------------------------------------ $ 5 5/8 3
Second----------------------------------------------------------------------- $ 6 5/8 5
Third------------------------------------------------------------------------ $ 7 3/4 5 1/8
Fourth (through December 27)------------------------------------------------- $ 7 1/2 5 1/8
</TABLE>
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DESCRIPTION OF EXCHANGE NOTES
The Exchange Notes are to be issued under an Indenture to be dated as of
the date of the Recapitalization (the 'New Indenture'), between the Company and
Bankers Trust Company, as trustee (the 'Note Trustee'), a copy of the form of
which is filed as an exhibit to the Registration Statement of which this Proxy
Statement -- Prospectus forms a part. The following description summarizes the
material provisions of the Exchange Notes and the New Indenture but does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Exchange Notes and the New Indenture, including the
definitions therein of certain terms.
GENERAL
The Exchange Notes will be general unsecured obligations of the Company
limited to $54,500,000 principal amount. Each Exchange Note will mature on
December 1, 2000 and will bear interest at 13% per annum from the date of
issuance, payable semiannually on June 1 and December 1 of each year to the
person in whose name the Exchange Note is registered at the close of business on
the May 15 or November 15 preceding such interest payment date. Principal and
interest will be payable at the office or agency of the Company maintained in
The City of New York for such purpose, provided that, at the option of the
Company, payment of interest may be made by check mailed to the address of the
person entitled thereto as it appears in the register of the Exchange Notes
maintained by the Note Trustee. The Exchange Notes will be transferable and
exchangeable at the office of the Note Trustee and will be issued in fully
registered form, without coupons, in denominations of $1,000 and any integral
multiple thereof. The Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection with certain
transfers and exchanges.
If the requisite consents to the Indenture Amendments are obtained, the
Exchange Notes will be senior debt of the Company, senior in right of payment to
all subordinated indebtedness of the Company, including the Subordinated
Debentures and the ANS Debt. If the requisite consents to the Indenture
Amendments are not obtained, the Exchange Notes will be senior in right of
payment to the ANS Debt, pari passu with the other senior debt of the Company
and with the Subordinated Debentures, and senior in right of payment to all
other subordinated indebtedness of the Company. As a result, the Exchange Notes
may share in assets of the Company with other senior debt at a time when the
holders of Subordinate Debentures may be obligated to turn over assets otherwise
payable to the holders of the Subordinated Debentures to the holders of senior
debt but would not be obligated to turn over assets to the holders of the
Exchange Notes.
OPTIONAL REDEMPTION
The Exchange Notes will be redeemable, at the option of the Company, in
whole or in part, at any time on not less than 30 days' or more than 60 days'
prior notice, mailed by first-class mail to the last address of each holder of
Exchange Notes as they shall appear in the register of the Exchange Notes
maintained by the Note Trustee, at the principal amount thereof together with
interest accrued to the redemption date. If at the time the Exchange Notes are
called for redemption Subordinated Debentures are outstanding, the Company will
not call the Exchange Notes for redemption unless it also calls either an equal
principal amount of the Subordinated Debentures, or all the outstanding
Subordinated Debentures for redemption.
If less than all of the outstanding Exchange Notes are to be redeemed, the
Exchange Notes will be redeemed by lot. The New Indenture will provide that, if
any Exchange Note is to be redeemed in part only, the notice which relates to
such Exchange Note shall state the portion of the principal amount to be
redeemed and shall state that, after the redemption date, upon surrender of such
Exchange Note, a new Exchange Note or Exchange Notes having a principal amount
equal to the unredeemed portion thereof will be issued. (Article Three)
CERTAIN COVENANTS
Limitations on Restricted Payments. The New Indenture will provide that
the Company shall not, and shall not permit any of its respective Subsidiaries
to, declare or pay any dividend or make
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any distribution on account of any Equity Securities of the Company (except
dividends or distributions payable in such Equity Securities, other than Equity
Securities that have mandatory redemption or repurchase requirements or are
exchangeable for, or convertible into, (x) Equity Securities that have such
requirements or (y) property or securities other than Equity Securities), or
purchase, redeem or otherwise acquire or retire for value any Equity Securities
of the Company (except in exchange for Equity Securities, other than Equity
Securities that have mandatory redemption or repurchase requirements or are
exchangeable for, or convertible into, (x) Equity Securities that have such
requirements or (y) property or securities other than Equity Securities), if,
upon giving effect thereto (a) an Event of Default shall occur and be continuing
or (b) the aggregate amount expended for such purposes subsequent to September
30, 1993 shall exceed the sum of (i) 50% of the aggregate Consolidated Net
Income of the Company earned subsequent to September 30, 1993 or 100% if such
aggregate Consolidated Net Income for such period is negative, (ii) the net
proceeds from the sale after September 30, 1993 of Equity Securities (other than
Equity Securities that have mandatory redemption or repurchase requirements or
are exchangeable for, or convertible into, (x) Equity Securities that have such
requirements or (y) Property or securities other than Equity Securities) of the
Company; and (iii) the net proceeds from the sale after September 30, 1993 of
any indebtedness of the Company which has been converted into Equity Securities
(other than Equity Securities that have mandatory redemption or repurchase
requirements or are exchangeable for, or convertible into, (x) Equity Securities
that have such requirements or (y) Property or securities other than Equity
Securities) of the Company; provided, however, that the foregoing will not
prevent (A) the payment of cash dividends on preferred stock of the Company,
whether outstanding on the date of the New Indenture or issued thereafter, (B)
the repurchase, redemption or acquisition of Common Stock or preferred stock of
the Company, provided that the aggregate price paid in all repurchases,
redemptions or acquisitions under this clause (B) shall not exceed $30,465,000,
(C) the repurchase, redemption or retirement of any Equity Securities of the
Company by exchange for, or out of the proceeds of the substantially concurrent
sale of, other Equity Securities of the Company (other than Equity Securities
that have mandatory redemption or repurchase requirements or are exchangeable
for, or convertible into, (x) Equity Securities that have such requirements or
(y) Property or securities other than Equity Securities) and neither such
repurchase, redemption or retirement nor the proceeds of any such sale or
exchange shall be included in any computation made under clause (b) above, or
(D) the payment of any dividend within 60 days after the date of declaration
thereof if at said date of declaration such payment would comply with these
provisions. Any payments made in reliance on clauses (A) or (B) of the
immediately preceding sentence shall not reduce the amount determined in
accordance with clause (b) of the immediately preceding sentence. (Section 4.03)
Transactions with Affiliates. The New Indenture will provide that the
Company shall not, and shall not permit any of its respective Subsidiaries to,
(a) sell, lease, exchange, swap, transfer or otherwise dispose of any of its
properties, assets or securities to, (b) purchase or lease any property, assets
or securities from, (c) make any investment in, or (d) enter into any contract
or agreement with or for the benefit of, an affiliate (an 'Affiliate
Transaction'); other than Affiliate Transactions that are on terms at least as
favorable to the Company or the Subsidiary contemplating such Affiliate
Transaction as could be obtained from an unaffiliated party; provided, however,
that this limitation shall not limit, or be applicable to, any idemnification or
similar payment made to any director or officer (x) in accordance with the
corporate charter or By-Laws of the Company or any Subsidiary, (y) under any
agreement or (z) under applicable law. (Section 4.11)
Highly Leveraged Transactions. The New Indenture provides, under certain
circumstances, that the Company shall not engage in certain transactions with
its affiliates. Other than this covenant, the New Indenture will not have any
covenants or provisions that may afford holders of Exchange Notes protection in
the event of a highly leveraged transaction, including a leveraged buyout
initiated or supported by the Company, the management of the Company or any
affiliate of either such party.
Certain Definitions. The term 'Consolidated Net Income' means, for any
period, the aggregate net income (or loss) of the Company and its respective
Subsidiaries for such period on a consolidated basis, determined in accordance
with generally accepted accounting principles, but exclusive of any gains or
losses realized on sales of property; provided that (a) the net income or loss
of any other
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person in which the Company or any of its respective Subsidiaries have an
interest (which interest does not cause the net income of such other person to
be consolidated with the net income of the Company in accordance with generally
accepted accounting principles) shall be excluded and instead an amount equal to
any dividends or distributions paid to the Company or its respective
Subsidiaries by such other person in such period shall be included and (b) the
net income (or loss) of any other person acquired in a pooling of interest
transaction for any period prior to the date of such acquisition shall be
excluded.
The term 'Equity Securities' of a corporation means capital stock of or
other equity interests in such corporation, or warrants, options or other rights
to acquire capital stock or other equity interests in such corporation (but
excluding any debt security that is convertible into, or exchangeable for,
capital stock prior to its conversion or exchange).
The term 'Subsidiary' means (i) a corporation a majority of whose
outstanding capital stock with voting power, under ordinary circumstances, to
elect directors is at the time, directly or indirectly, owned by the Company, by
one or more Subsidiaries or by the Company and one or more Subsidiaries or (ii)
any other person (other than a corporation) in which the Company, one or more
Subsidiaries or the Company and one or more Subsidiaries, directly or
indirectly, at the date of determination thereof, has at least a majority
beneficial ownership interest.
EVENTS OF DEFAULT
The term 'Event of Default' when used in the New Indenture means any one of
the following: (i) failure to pay interest for 30 days or principal when due;
(ii) failure to observe and perform any other covenants for 60 days after
notice; (iii) the occurrence of any event of default under any instrument
evidencing or securing any indebtedness of the Company or any Subsidiary for
borrowed money, in either case in excess of $1,000,000, resulting in the
acceleration of other indebtedness, which acceleration is not rescinded or
annulled pursuant to the terms of such instrument; and (iv) certain events of
bankruptcy, insolvency or reorganization. (Section 6.01)
The New Indenture will provide that the Note Trustee shall, within 90 days
after the occurrence of a default, give notice to the holders of Exchange Notes
of all uncured defaults known to it (the term 'default' to include the events
specified above without grace or notice); provided that, except in the case of
default in the payment of principal of or interest on any of the Exchange Notes,
the Note Trustee is protected in withholding such notice if it in good faith
determines that the withholding of such notice is in the interest of the holders
of Exchange Notes. (Section 9.03)
In case an Event of Default (other than an Event of Default relating to
certain events of bankruptcy, insolvency or reorganization) shall have occurred
and be continuing, the Note Trustee or the holders of at least 25% in aggregate
principal amount of the Exchange Notes then outstanding, by notice in writing to
the Company (and to the Note Trustee, if given by holders of Exchange Notes),
may declare the principal of and accrued but unpaid interest on all the Exchange
Notes to be due and payable immediately. Such declaration may be annulled and
past defaults (except, unless theretofore cured, a default in payment of
principal of or interest on the Exchange Notes) may be waived by the holders of
a majority in principal amount of outstanding Exchange Notes, upon the
conditions provided in the New Indenture. (Section 6.02)
In case an Event of Default relating to certain events of bankruptcy,
insolvency or reorganization shall have occurred, then the principal of and any
accrued interest to the date of such Event of Default shall be immediately due
and payable. (Section 6.03)
The New Indenture includes a covenant that the Company will file quarterly
with the Note Trustee a statement regarding compliance by the Company with the
terms thereof and specifying the occurrence of any defaults of which the signers
may have knowledge. (Section 4.07)
MODIFICATIONS OF THE NEW INDENTURE
Under the New Indenture, the rights and obligations of the Company and the
rights of the holders of Exchange Notes may be modified by the Company and the
Note Trustee, except in certain limited circumstances, only with the consent of
the holders of a majority in principal amount of the Exchange Notes then
outstanding, but no extension of the maturity of any Exchange Notes, reduction
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in the interest rate or extension of the time of payment of interest, any
Exchange Note, or any other modification in the terms of payment of the
principal of or interest on the Exchange Notes or reducing the percentage
required for modification of the New Indenture will be effective against any
holder of Exchange Notes without his or her consent. (Section 12.02)
Modifications and amendments of the New Indenture may be made by the Company and
the Note Trustee without the consent of any holders of Exchange Notes in certain
limited circumstances, including (a) to cure any ambiguity, defect or
inconsistency, provided such action is not inconsistent with the terms of the
New Indenture, (b) to provide for the continuation of the Company's obligations
under the New Indenture upon merger, consolidation or other reorganization of
the Company, or (c) to add covenants and agreements of the Company for the
protection or benefit of the holders of Exchange Notes. (Section 12.01)
SUCCESSOR CORPORATION
The New Indenture will provide that the Company shall not consolidate with,
merge into or sell, lease or transfer all or substantially all of its assets to
another person unless (a) the resulting, surviving or transferee person is a
corporation, partnership, other business association or trust organized and
existing under the laws of the United States or any state thereof or the
District of Columbia, (b) such person expressly assumes, by an indenture
supplemental hereto, executed and delivered to the Note Trustee, in a form
satisfactory to the Note Trustee, all of the obligations of the Company under
the New Indenture and under the Exchange Notes and (c) immediately before and
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing. (Section 5.01)
SATISFACTION AND DISCHARGE OF NEW INDENTURE
The New Indenture will be discharged and canceled upon payment or
redemption of all the Exchange Notes and may be discharged and canceled upon the
written request of the Company upon deposit with the Note Trustee, within not
more than six months prior to the maturity of the Exchange Notes, of funds
sufficient for such payment or redemption, plus costs and expenses to be
incurred by the Note Trustee. (Section 10.01 and 10.02)
GOVERNING LAW
The New Indenture will provide that it and the Exchange Notes will be
governed by, and construed in accordance with, the laws of the State of New
York. (Section 13.06)
THE NOTE TRUSTEE
Bankers Trust Company will be the Note Trustee and the initial Paying Agent
under the New Indenture. Its address is Four Albany Street, New York City, New
York 10006. (Section 13.01)
The New Indenture will contain certain limitations on the right of the Note
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Note Trustee will be permitted to
engage in other transactions; however, if it acquires any conflicting interest
(as defined in the Trust Indenture Act of 1939), it must eliminate such conflict
or resign within 90 days of the occurrence of an Event of Default. (Section
9.05)
The holders of a majority in principal amount of all outstanding Exchange
Notes have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Note Trustee under the New
Indenture. (Section 6.06). The New Indenture will provide that in case an Event
of Default shall occur (and be continuing), the Note Trustee will be required to
use the degree of care and skill of a prudent man in the conduct of his own
affairs. (Section 9.02) Subject to such provisions, the Note Trustee will be
under no obligation to exercise any of its powers under the New Indenture at the
request of any of the holders of the Exchange Notes, unless such holders shall
have offered the Note Trustee reasonable security or indemnity. (Section 9.01)
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock, of which 1,319,563
shares have been designated as $2.16 Preferred Stock, 2,875,000 shares have been
designated as $2.20 Preferred Stock, and 250,000 shares have been designated as
Series A Participating Preferred Stock, no par value. At December 15, 1993,
there were outstanding 14,069,236 shares of Common Stock, 1,319,563 shares of
$2.16 Preferred Stock and 2,875,000 shares of $2.20 Preferred Stock. Upon the
effectiveness of the Reclassification Amendment, the shares of $2.16 Preferred
Stock (including accrued and unpaid dividends) will be reclassified into shares
of Common Stock. At November 30, 1993, accrued and unpaid dividends on the $2.16
Preferred Stock aggregated approximately $8.9 million ($6.75 per share). One
Purchase Right will be simultaneously issued with respect to each new share of
Common Stock issued in the Reclassification. The Purchase Rights outstanding at
the time the Reclassification is consummated will not be affected by the
Reclassification. Each share of $2.16 Preferred Stock has a liquidation value of
$25 (plus accrued and unpaid dividends) and each share of $2.20 Preferred Stock
has a liquidation value of $20 (plus accrued and unpaid dividends). Chemical
Bank N.A. is the transfer agent and registrar for the Common Stock and the
Existing Preferred Stock.
Each outstanding share of the Company's capital stock is fully paid and
nonassessable.
The following descriptions summarize the material terms and provisions of
the Company's capital stock but do not purport to be complete and are qualified
in their entirety by reference to the Certificate of Incorporation, which has
been filed as Appendix D to the Registration Statement of which this Proxy
Statement -- Prospectus forms a part and which is incorporated herein by
reference.
COMMON STOCK
Dividends
Holders of the Common Stock are entitled to dividends, when and if declared
by the Board of Directors, but only out of funds legally available therefor,
subject to (i) the rights of the holders of shares ranking prior to Common Stock
as to dividends and distributions, including the Existing Preferred Stock and,
after the Reclassification, the New Preferred Stock, and (ii) limitations on the
payment of dividends on Common Stock contained in certain of the Company's
outstanding debt instruments. Holders of Existing Preferred Stock are entitled
to the payment of dividends for the current and all prior quarterly periods
before any dividend may be declared upon Common Stock or before any other
payment on account of, or the setting aside of money for, the purchase,
redemption or other retirement of Common Stock may be made. The Company is
presently prohibited from paying dividends on its Common Stock and Existing
Preferred Stock. See Note H of Notes to Consolidated Financial Statements
included elsewhere herein.
Liquidation Rights
Upon the liquidation, dissolution or winding up of the affairs of the
Company, whether voluntary or involuntary, each share of each class of Existing
Preferred Stock is entitled, before any distribution is made to holders of
Common Stock, to receive the amount of the liquidation value of such class of
Existing Preferred Stock, together with all accrued and unpaid dividends to the
date fixed for distribution. After the stated amounts payable upon liquidation
on the Existing Preferred Stock have been paid in full or provision for the
payment has been made, the remaining net assets of the Company will be
distributed pro rata to the holders of Common Stock.
Voting Rights
Each share of Common Stock is entitled to one vote for all purposes, except
as otherwise provided by law or as expressly provided in the Certificate of
Incorporation.
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$2.16 PREFERRED STOCK
Dividends
Holders of $2.16 Preferred Stock are entitled to receive, when and as
declared by the Board of Directors, but only out of funds legally available
therefor, cumulative cash dividends presently payable at, but not exceeding, the
rate of $2.16 per share per annum. Dividends are payable quarterly, in cash, on
March 15, June 15, September 15 and December 15, and are cumulative. The Company
is prohibited from declaring and paying dividends on any junior stock and from
redeeming, repurchasing or making a sinking fund payment on any junior stock
unless all prior dividends accumulated on the $2.16 Preferred Stock, including
the current quarterly period, have been paid or declared and set aside for
payment. See '-- Ranking.'
Liquidation Rights
The $2.16 Preferred Stock has a liquidation preference of $25 per share,
plus accrued and unpaid dividends, before any distribution of assets is made to
holders of Common Stock or any other junior stock. If assets available for
distribution are insufficient to pay the full liquidation preference, all
classes of capital stock, if any, ranking on a parity as to liquidation rights
with the $2.16 Preferred Stock (currently only the $2.20 Preferred Stock) are
entitled to share ratably in any such distribution.
Redemption
The $2.16 Preferred Stock is redeemable, but only out of funds legally
available therefor, at the option of the Company, in whole or in part, on not
more than 60 and not less than 45 days' notice, at $25 per share plus dividends
accrued to the redemption date. The Company may not redeem any shares of $2.16
Preferred Stock (i) unless all outstanding shares of $2.16 Preferred Stock are
simultaneously redeemed or (ii) until all dividend payment defaults on the $2.16
Preferred Stock have been cured.
Ranking
The $2.16 Preferred Stock ranks senior to the Common Stock and on a parity
with the $2.20 Preferred Stock as to liquidation and dividends. All accrued and
unpaid dividends on $2.16 Preferred Stock must be paid before shares of $2.20
Preferred Stock can be redeemed.
Conversion
The shares of $2.16 Preferred Stock are convertible, at the option of the
holder thereof, into shares of Common Stock at a rate of 1.7241 shares of Common
Stock for each share of $2.16 Preferred Stock. The conversion rate is subject to
adjustment in certain events, including (i) dividends (and other distributions)
payable to all holders of Common Stock in shares of the Company's capital stock,
including Common Stock, (ii) the issuance to all holders of Common Stock of
rights or warrants which entitle them to subscribe for or purchase Common Stock
at a price per share less than the current market price (as defined), (iii)
subdivisions, combinations and reclassifications of Common Stock, and (iv)
distributions to all holders of Common Stock of evidences of indebtedness of the
Company or assets (including securities, but excluding those rights or warrants
referred to above and dividends and distributions paid in cash out of current or
retained earnings). In case of certain consolidations or mergers to which the
Company is a party or the sale or transfer of all or substantially all of the
assets of the Company, each share of $2.16 Preferred Stock then outstanding and
entitled to be converted after such consolidation, merger, sale or transfer
would become convertible into the kind and amount of securities, cash and other
property receivable upon the
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consolidation, merger, sale or transfer by a holder of a number of shares of
Common Stock equal to the number of shares into which such share of $2.16
Preferred Stock might have been converted immediately prior to such
consolidation, merger, sale or transfer. Fractional shares of Common Stock are
not to be issued upon conversion, but, in lieu thereof, the Company will pay a
cash amount based on the then-current market price of the Common Stock.
Voting Rights
The holders of $2.16 Preferred Stock are entitled to one vote per share,
voting together as a single class with the holders of shares of Common Stock and
$2.20 Preferred Stock and any other class or series which may similarly be
entitled to vote with the holders of Common Stock, on all matters on which the
shares of Common Stock may vote, including the elections of directors.
The affirmative vote of the holders of two-thirds of the outstanding shares
of $2.16 Preferred Stock, voting as a separate class, is required: (i) to
authorize or increase the authorized amount of, or authorize any obligation or
security convertible into or evidencing the right to purchase shares of, any
additional class or series of stock ranking prior to the $2.16 Preferred Stock
as to the payment of dividends or the distribution of assets, (ii) to amend,
alter or repeal the voting powers, preferences or rights of the $2.16 Preferred
Stock in any respect adverse to the holders thereof, or (iii) to authorize the
merger or consolidation of the Company if such merger or consolidation would
have an effect on the $2.16 Preferred Stock substantially similar to those
described in (i) or (ii) above.
In addition, the affirmative vote of the holders of a majority of the
outstanding shares of Existing Preferred Stock, voting together as a single
class, is required in order to authorize any increase in authorized Existing
Preferred Stock or authorize or increase the authorized amount of, or authorize
any obligation or security convertible into or evidencing the right to purchase
shares of, any additional class or series of stock ranking on parity with the
$2.16 Preferred Stock as to the payment of dividends or the distribution of
assets.
Failure to Pay Dividends
If the Company fails to pay dividends on the $2.16 Preferred Stock in an
amount equal to at least six quarterly dividends (whether or not consecutive),
the number of directors then constituting the Board of Directors shall be
increased by two and the holders of the $2.16 Preferred Stock, voting together
as a single class with the holders of $2.20 Preferred Stock, and any other
series of preferred stock having such voting rights shall have the right to
elect the two additional members of the Board of Directors. Such right will
expire when all accrued but unpaid dividends on the preferred stock have been
paid and dividends on the preferred stock for the then current quarterly period
have been paid or declared and set apart. As of December 15, 1993, the Company
had omitted dividends on the $2.16 Preferred Stock for a total of 12 1/2
quarters. See Note H of Notes to Consolidated Financial Statements included
elsewhere herein. As a result, holders of the Existing Preferred Stock have the
right, which has not been exercised to date, to elect two additional members to
the Board of Directors at the Annual Meeting to serve until the earliest of (i)
the completion of the Reclassification, (ii) the date on which dividend
arrearages on the Existing Preferred Stock are eliminated or (iii) the date of
the next annual meeting of stockholders.
$2.20 PREFERRED STOCK
Dividends
Holders of $2.20 Preferred Stock are entitled to receive, when and as
declared by the Board of Directors, but only out of funds legally available
therefor, cumulative cash dividends presently payable at, but not exceeding, the
rate of $2.20 per share per annum. Dividends are payable quarterly, in cash, on
February 15, May 15, August 15 and November 15, and are cumulative. The Company
is prohibited from declaring and paying dividends on any junior stock and from
redeeming, repurchasing or making a sinking fund payment on any junior stock or
stock on a parity with the $2.20
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Preferred Stock in the payment of dividends unless all prior dividends
accumulated on the $2.20 Preferred Stock, including the current quarterly
period, have been paid or declared and set aside for payment. See '-- Ranking.'
Liquidation Rights
The $2.20 Preferred Stock has a liquidation preference of $20 per share,
plus accrued and unpaid dividends, before any distribution of assets is made to
holders of Common Stock or any other junior stock. If assets available for
distribution are insufficient to pay the full liquidation preference, all
classes of capital stock, if any, ranking on a parity as to liquidation rights
with the $2.20 Preferred Stock (currently only the $2.16 Preferred Stock) are
entitled to share ratably in any such distribution.
Redemption
The $2.20 Preferred Stock is redeemable, but only out of funds legally
available therefor, at the option of the Company, in whole or in part, on not
more than 45 and not less than 30 days' notice, at $20 per share plus dividends
accrued to the redemption date. If not sooner redeemed, on each February 15,
beginning on February 15, 1994, the Company is required to set aside funds and
effect the redemption of 6 2/3% (subject to certain credits) of the number of
shares of $2.20 Preferred Stock outstanding on February 15, 1994. If the Company
fails to pay dividends on the $2.20 Preferred Stock in an amount equal to at
least 12 quarterly dividends (whether or not consecutive) or if the Company
fails to make redemptions of $2.20 Preferred Stock when required with respect to
at least the number of shares to be redeemed in any three-year period, and if
all of the outstanding shares of $2.20 Preferred Stock are held by MetLife
Louisiana or by its affiliates, the Company is required to redeem, out of funds
legally available therefor, at the option of MetLife Louisiana or its
affiliates, within 60 days of the occurrence thereof, all of the outstanding
shares of $2.20 Preferred Stock at the applicable redemption price plus
dividends accrued to the redemption date. Prior to any such redemption, the
Company shall pay or make provision for payment of all accrued and unpaid
dividends on all shares of Existing Preferred Stock. As of November 30, 1993,
accrued and unpaid dividends on the $2.20 Preferred Stock aggregated
approximately $20.0 million ($6.97 per share). Dividend arrearages on the $2.20
Preferred Stock exceeded 12 full quarterly dividends on November 15, 1993.
Pursuant to the MetLife Forbearance Agreement, MetLife Louisiana has agreed,
subject to certain conditions, that it will not exercise the $2.20 Preferred
Stock Put Option and to take no action to enforce the February 1994 mandatory
partial redemption of the $2.20 Preferred Stock before March 10, 1994. See Note
J of Notes to Consolidated Financial Statements included elsewhere herein.
Ranking
The $2.20 Preferred Stock ranks senior to the Common Stock and on parity
with the $2.16 Preferred Stock as to liquidation and dividends.
Conversion
The shares of $2.20 Preferred Stock are convertible, at the option of the
holder thereof, into shares of Common Stock at a rate of 0.8696 shares of Common
Stock for each share of $2.20 Preferred Stock. The conversion price is subject
to adjustment in certain events, including (i) dividends (and other
distributions) payable to all holders of Common Stock in shares of the Company's
capital stock, including Common Stock, (ii) the issuance to all holders of
Common Stock of rights or warrants which entitle them to subscribe for or
purchase Common Stock at a price per share less than the current market price
(as defined), (iii) subdivisions, combinations and reclassifications of Common
Stock, and (iv) distributions to all holders of Common Stock of evidences of
indebtedness of the Company or assets (including securities, but excluding those
rights or warrants referred to above and dividends and distributions paid in
cash out of current or retained earnings). In case of certain consolidations or
mergers to which the Company is a party or the sale or transfer of all or
substantially all of the assets of the Company, each share of $2.20 Preferred
Stock then outstanding is
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entitled to be converted after such consolidation, merger, sale or transfer into
the kind and amount of securities, cash and other property receivable upon the
consolidation, merger, sale or transfer by a holder of a number of shares of
Common Stock into which such share of $2.20 Preferred Stock might have been
converted immediately prior to such consolidation, merger, sale or transfer.
Fractional shares of Common Stock are not to be issued upon conversion, but, in
lieu thereof, the Company will pay a cash adjustment based on market price.
Voting Rights
The holders of $2.20 Preferred Stock are entitled to one vote per share,
voting together as a single class with the holders of shares of Common Stock and
$2.16 Preferred Stock and any other class or series which may similarly be
entitled to vote with the holders of Common Stock, on all matters on which the
shares of Common Stock may vote, including the elections of directors.
The affirmative vote of the holders of two-thirds of the outstanding shares
of $2.20 Preferred Stock, voting as a separate class, is required: (i) to
authorize or increase the authorized amount of, or authorize any obligation or
security convertible into or evidencing the right to purchase shares of, any
additional class or series of stock ranking prior to the $2.20 Preferred Stock
as to the payment of dividends or the distribution of assets, (ii) to amend,
alter or repeal the voting powers, preferences or rights of the $2.20 Preferred
Stock in any respect adverse to the holders thereof, or (iii) to authorize the
merger or consolidation of the Company if such merger or consolidation would
have an effect on the $2.20 Preferred Stock substantially similar to (i) or (ii)
above.
In addition, the affirmative vote of the holders of a majority of the
outstanding shares of Existing Preferred Stock, voting together as a single
class, is required in order to authorize any increase in authorized Existing
Preferred Stock or authorize or increase the authorized amount of, or authorize
any obligation or security convertible into or evidencing the right to purchase
shares of, any additional class or series of stock ranking on parity with the
$2.20 Preferred Stock as to the payment of dividends or the distribution of
assets.
Failure to Redeem $2.20 Preferred Stock or Pay Dividends
If the Company fails to make redemptions of $2.20 Preferred Stock when
required with respect to at least the number of shares to be redeemed on any two
redemption dates, and if the default in dividends described in the next
paragraph is not then in effect ('Dividend Default'), the number of directors
then constituting the Board of Directors shall be increased by two and the
holders of the $2.20 Preferred Stock, voting separately as a single class, shall
have the right to elect the two additional members of the Board of Directors.
Such right will expire when the arrearage in such redemptions has been cured or
when a Dividend Default has occurred.
If the Company fails to pay dividends on the $2.20 Preferred Stock in an
amount equal to at least six quarterly dividends (whether or not consecutive),
the number of directors then constituting the Board of Directors shall be
increased by two and the holders of the $2.20 Preferred Stock, voting together
as a single class with the holders of the $2.16 Preferred Stock and any other
series of preferred stock having similar voting rights, shall have the right to
elect the two additional members of the Board of Directors. Such right will
expire when all accrued but unpaid dividends on the preferred stock have been
paid and dividends on the preferred stock for the then current quarterly period
have been paid or declared and set apart.
As of November 15, 1993, the Company had omitted dividends on the $2.20
Preferred Stock for a total of 12 1/2 quarters. See Note H of Notes to
Consolidated Financial Statements included elsewhere herein. As a result,
holders of the Existing Preferred Stock have the right, which has not been
exercised to date, to elect two additional members to the Board of Directors at
the Annual Meeting to serve until the earlier of (i) the completion of the
Reclassification, (ii) the date on which dividend arrearages on the Existing
Preferred Stock are eliminated or (iii) the date of the next annual meeting of
stockholders.
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The Amended MetLife Memorandum
The Company and MetLife Louisiana have entered into the Amended MetLife
Memorandum, pursuant to which MetLife Louisiana will agree to (i) waive or
refrain from taking action with respect to certain rights under the $2.20
Preferred Stock, including waiving the $2.20 Preferred Stock Put Option and the
other annual mandatory redemption requirements, (ii) consider all accrued and
unpaid dividends on the $2.20 Preferred Stock to have been paid and (iii) allow
the Company to pay dividends on the $2.20 Preferred Stock in Common Stock in
lieu of cash provided that the Company continues to pay all quarterly dividends
either in Common Stock or in cash. For purposes of determining the number of
shares of Common Stock to be issued in payment in lieu of a cash dividend, the
Common Stock will be valued at the average closing price for the Common Stock on
the New York Stock Exchange for the ten trading days commencing on the first
trading day after the Company publicly announces its intention to use Common
Stock in lieu of cash to pay the dividend. MetLife Louisiana will also agree to
refrain from exercising the conversion rights under the terms of the $2.20
Preferred Stock and to refrain from requiring the Company to repurchase or
redeem any of the shares of the $2.20 Preferred Stock under the terms thereof.
Pursuant to the Amended MetLife Memorandum, the Company will agree not to
exercise its rights to optionally redeem the $2.20 Preferred Stock at any time
prior to the fourth anniversary of the date of the Reclassification, will agree
to issue to MetLife Louisiana a new series of preferred stock in the event that
the Company's MetLife Option is not exercised in full, will agree to offer to
repurchase 287,500 shares of the $2.20 Preferred Stock or, if issued in lieu
thereof, the Future Preferred Stock, each year commencing June 30, 1998, and
will agree to issue 1,900,075 shares of Common Stock to MetLife Louisiana on the
date of the Reclassification.
RIGHTS AGREEMENT AND PARTICIPATING PREFERRED STOCK
Effective December 16, 1985, the Board of Directors declared a distribution
of one preferred stock purchase right on each outstanding share of Common Stock.
Each right entitles stockholders until December 16, 1995 (or such later date as
the Company may provide) to purchase one one-hundredth of a share of
Participating Preferred Stock, no par value ('Participating Preferred Stock'),
at an initial exercise price of $35.00 for each one one-hundredth of a share.
Certificates delivered upon transfer or new issuance of Common Stock contain a
notation incorporating by reference the agreement pursuant to which such rights
have been issued.
The rights are not exercisable, or transferable apart from the Common
Stock, until 10 days after any person acquires shares of the Company's capital
stock having at least 20% of the general voting power without approval of the
Board of Directors. Separate certificates representing the rights will be mailed
to holders of Common Stock as of such date.
If, after any person acquires shares of the Company's capital stock having
20% of the general voting power in a transaction not approved by the Board of
Directors, the Company were to be acquired in a merger or other business
combination transaction, each right would require that provision be made for its
holder to be allowed to purchase, at the then current exercise price of the
right, that number of shares of common stock of the surviving company which at
the time of such transaction would have a market value of two times the exercise
price of the right. Thus, for example, if the market value of the acquiring
company's common stock at the time of the transaction were $17.50 per share and
the exercise price of the rights were $35.00 per right, each right would entitle
a holder to receive upon exercise four shares of the acquiring company's common
stock.
If the Company were the surviving corporation in the merger and the Common
Stock was not changed, provision would be made so that each holder of a right
would receive upon its exercise that number of shares of Participating Preferred
Stock having a market value of two times the exercise price of the right.
In order to allow for flexibility, the rights are subject to redemption at
the election of the Board of Directors at $.05 per right at any time prior to 10
days after someone acquires shares of the
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Company's capital stock having 20% of the general voting power. Once any party
acquires such 20% interest and such ten-day period has elapsed, the rights
become nonredeemable. The rights have no voting or dividend rights.
The Participating Preferred Stock is nonredeemable and ranks on a parity
with other series of Preferred Stock. Each share has a minimum preferential
quarterly dividend rate of $1.00 per share, but is entitled to an aggregate
dividend of 100 times any dividend declared on the Common Stock (other than a
dividend payable in shares of Common Stock).
In the event of liquidation, the holders of the Participating Preferred
Stock will be entitled to receive a preferred liquidation payment of $35 per
share, but will be entitled to receive an aggregate liquidation payment equal to
such $35 per share plus 100 times any payment made per share of Common Stock.
Each share of Participating Preferred Stock will be entitled to 100 votes,
voting together with the Common Stock and any other class of the Company's
capital stock having general voting power. Finally, in the event of any merger,
consolidation or other transaction in which shares of Common Stock are exchanged
for or changed into other stock or securities, cash or other property, the
Participating Preferred Stock requires that provision be made so that each share
of Participating Preferred Stock will receive 100 times the amount received per
share of Common Stock. The foregoing rights of the Participating Preferred Stock
are protected against dilution. Fractional shares of Participating Preferred
Stock in integral multiples of 1/100 of a share will be issuable. Because of the
nature of the Participating Preferred Stock dividend, liquidation and voting
rights, the value of a one one-hundredth interest in a share of Participating
Preferred Stock purchasable with each right should generally approximate the
value of one share of Common Stock.
Pursuant to the Amended MetLife Memorandum, the Company has agreed to cause
the preferred stock purchase rights to cease to exist in the event the Company
has not, by the third anniversary date of the Reclassification, exercised its
option to purchase all shares of capital stock of the Company held by MetLife
Louisiana or earlier, if the Company's MetLife Option expires unexercised.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary sets forth the material federal income tax
considerations of the Recapitalization applicable to holders of the Subordinated
Debentures, holders of Existing Preferred Stock and the Company and of the
ownership and disposition of the Exchange Notes and Common Stock which are
acquired pursuant to the Recapitalization. The summary is based upon laws,
regulations, rulings and decisions now in effect, which are subject to change.
Moreover, the summary does not discuss all aspects of federal income taxation
that may be relevant to a particular investor in light of his personal
investment circumstances or to certain types of investors subject to special
treatment under the federal income tax laws (for example, life insurance
companies, tax exempt organizations and foreign taxpayers) and does not discuss
any aspects of state, local or foreign tax laws. In addition, as noted below in
each such case, certain of the matters discussed below are covered by recent
changes made by legislation and Treasury regulations as to which there are
substantial interpretive questions. Further, this discussion is limited to (1)
holders who hold the Subordinated Debentures as capital assets and will hold the
Exchange Notes as capital assets and (2) holders of shares of Existing Preferred
Stock who hold such shares as capital assets and will hold any shares of stock
received as capital assets.
Except as otherwise indicated, legal conclusions stated herein regarding
tax consequences are the opinion of Fulbright & Jaworski L.L.P., counsel to the
Company. Those opinions assume the accuracy of certain facts and information set
forth herein and in a certificate of the Company which is included in the
Registration Statement of which this Proxy Statement-Prospectus is part and are
based upon the Internal Revenue Code of 1986, as amended (the 'Code'), existing
regulations, rulings and decisions interpreting such provisions and where noted
upon proposed Treasury regulations.
No ruling has been requested from the Internal Revenue Service (the 'IRS')
with respect to any of the federal income tax consequences of the matters which
are discussed herein and the IRS may not agree with some of the conclusions set
forth in this section, particularly those conclusions as to which counsel's
opinion is qualified or as to which counsel does not express an opinion. If the
IRS contests a conclusion set forth herein, no assurance can be given that the
Company, a holder of Existing Preferred Stock or a holder of a Subordinated
Debenture would ultimately prevail in a final determination by a court.
BECAUSE THE TAX CONSEQUENCES OF THE RECAPITALIZATION WILL DEPEND ON THE
INDIVIDUAL CIRCUMSTANCES OF A PARTICULAR HOLDER, EACH HOLDER SHOULD CONSULT HIS
OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO HIM, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER AND INDENTURE AMENDMENTS
TO HOLDERS OF SUBORDINATED DEBENTURES
Holder Which Exchanges All of His Subordinated Debentures for Exchange Notes
General. The federal income tax consequences of the exchange by a holder
of all his Subordinated Debentures for Exchange Notes (the 'Debt Exchange')
depend in part upon whether the Subordinated Debentures and Exchange Notes
qualify as securities for federal income tax purposes. Although the Code and
Regulations do not provide clear guidelines and the administrative rulings and
judicial decisions do not answer all the questions and in some instances are in
conflict so that the resolution of the issue is not free from doubt, counsel is
of the opinion that the Exchange Notes constitute securities for federal income
tax purposes. Counsel is also of the opinion that the Subordinated Debentures
constitute securities for federal income tax purposes. The opinions of
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counsel are based upon the nature and terms of the Subordinated Debentures and
Exchange Notes and the Company's anticipated sources and schedule for repayment
of the Exchange Notes.
If either the Subordinated Debentures or the Exchange Notes are not
securities for federal income tax purposes, the following tax consequences will
result: (1) any gain or loss realized by a tendering holder of Subordinated
Debentures will be recognized; (2) the initial tax basis of the Exchange Notes
in the hands of the tendering holder of Subordinated Debentures will equal the
fair market value of the Subordinated Debentures on the date the Debt Exchange
is consummated; and (3) the holding period of the Exchange Notes will commence
on the date after the Debt Exchange is consummated.
The remaining discussion in this Section ' -- Federal Income Tax
Consequences to a Holder Which Exchanges All of His Subordinated Debentures for
Exchange Notes' and all of the discussion in 'Holder Who Retains All or Some of
His Subordinated Debentures' assumes that both the Subordinated Debentures and
the Exchange Notes constitute 'securities' for federal income tax purposes.
Loss. The holders of the Subordinated Debentures will not recognize loss
upon the Debt Exchange.
Gain. A holder of a Subordinated Debenture will recognize gain upon the
receipt of an Exchange Note in exchange for a Subordinated Debenture in an
amount equal to the lesser of (i) the fair market value of an Exchange Note
reduced by his adjusted tax basis in that Subordinated Debenture and (ii) cash
and other property (in either case, 'boot') received by the holder as provided
in Section 356 of the Code. 'Boot' includes any cash which is paid as interest
on a Subordinated Debenture for the period prior to the Exchange Date but which
is not allocated for federal income tax purposes to such interest. The Company
will not treat any portion of the cash, paid as interest on the Subordinated
Debentures for the period prior to the Exchange Date, as 'boot'. If this
allocation were not respected, the portion of the cash paid that is not deemed
to be attributable to accrued and unpaid interest on the Subordinated Debentures
would be treated as 'boot'. In any event, a cash method holder will recognize on
the Exchange Date the amount of Exchange Notes received that are allocated to
interest that has accrued on each Subordinated Debenture on or prior to the
Exchange Date. The balance of the discussion in 'Certain Federal Income Tax
Considerations' assumes that the Company's treatment of the cash will be
respected for federal income tax purposes.
Section 356(d) of the Code treats as 'boot' the fair market value of the
excess, if any, of the 'principal amount' of the Exchange Note over the
'principal amount' of the Subordinated Debenture. The meaning of 'principal
amount' for purposes of such Section 356(d) has not been definitively addressed
by either the courts or the IRS. If 'principal amount' means 'adjusted issue
price,' that is issue price plus accrued original issue discount, the Company
estimates the fair market value of such excess amount would be approximately $96
for each $1,000 face amount of Subordinated Debentures surrendered; assuming the
Debt Exchange occurs on January 31, 1994 and further assuming the issue price of
an Exchange Note on that date were equal to its face amount. Such amount will
increase or decrease as the fair market value of a Subordinated Debenture
increases or decreases after that date and as OID accrues after that date. On
the other hand, if 'principal amount' means face amount, then such excess amount
would be zero and the holders of the Subordinated Debentures would not recognize
any gain in the Debt Exchange. The Company believes that the IRS will likely
take the position that 'principal amount' means 'adjusted issue price'.
Any gain recognized on the receipt of an Exchange Note in exchange for a
Subordinated Debenture would be a capital gain, but any gain so recognized on
the exchange of one Subordinated Debenture may not be reduced by any loss which
is realized, but not recognized, on the exchange of another Subordinated
Debenture.
Tax Basis and Holding Period. The initial aggregate tax basis of any
Exchange Notes received by a tendering holder in the Debt Exchange will be equal
to the tax basis of the holder in the
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Subordinated Debentures exchanged therefor, increased by any gain recognized in
the Debt Exchange; and the holding period of the Exchange Notes will include the
period for which a tendering holder held such Subordinated Debentures.
Holder Who Retains All or Some of His Subordinated Debentures
If the Indenture Amendments are deemed to be material modifications to the
Subordinated Debentures within the meaning of Section 1001 of the Code and the
regulations thereunder, a holder of Subordinated Debentures who retains some or
all of such Subordinated Debentures would be deemed to have exchanged the
retained Subordinated Debentures for new debt instruments.
Although the issue is not free from doubt, counsel is of the opinion that
the Indenture Amendments will not cause the Subordinated Debentures to be deemed
to be exchanged for federal income tax purposes for 'new' Subordinated
Debentures. Because of the uncertainty surrounding the application of a recent
Supreme Court decision and the lack of any subsequent final regulations, cases
or rulings interpreting this decision, the law in this area is currently in an
uncertain state (although under recently proposed regulations which are not to
be effective until issued in final form, the Indenture Amendments would likely
not constitute material modifications to the Subordinated Debentures).
If the Indenture Amendments are not deemed to constitute material
modifications to the Subordinated Debentures, then a holder of a Subordinated
Debenture who exchanges a Subordinated Debenture for an Exchange Note will have
tax consequences for such exchange as described in '-- Holder Which Exchanges
All of His Subordinated Debentures for Exchange Notes'.
If a holder of a Subordinated Debenture is treated as exchanging all of his
retained Subordinated Debentures for new instruments because the Indenture
Amendments do cause a constructive exchange, then such holder will recognize
gain equal to the lesser of (i) the gain realized on the constructive exchange
and (ii) the 'boot' received by the holder. A holder of a Subordinated Debenture
will realize gain to the extent the fair market value of a 'new' Subordinated
Debenture constructively received exceeds the holder's adjusted tax basis in the
'old' Subordinated Debenture. For a general discussion of gain recognition see
'-- Holder Which Exchanges All of His Subordinated Debentures for Exchange
Notes - Gain' above.
A holder who receives Exchange Notes for only a portion of his Subordinated
Debentures would be deemed to receive a portion of a 'new' Subordinated
Debenture and a portion of an Exchange Note in exchange for each 'old'
Subordinated Debenture. The gain or loss realized upon the exchange of each
'old' Subordinated Debenture will be equal to the fair market value of the
portion of the 'new' Subordinated Debenture and the fair market value of the
portion of the Exchange Note received in exchange for the 'old' Subordinated
Debenture over the adjusted tax basis of the Subordinated Debenture received in
exchange therefor. No loss which is realized upon the exchange of an 'old'
Subordinated Debenture will be recognized if the 'old' Subordinated Debentures
are securities and at least one of the 'new' Subordinated Debentures and the
Exchange Notes are securities. All of any gain which is realized may be
recognized.
The 'new' Subordinated Debentures will have an issue price which will be
equal to the fair market value of the 'old' Subordinated Debenture on the date
of the Debt Exchange which will be used to determine whether such 'new'
Subordinated Debentures have original issue discount and the rate at which any
such original issue discount will accrue.
FEDERAL INCOME TAX CONSEQUENCES OF HOLDING THE EXCHANGE NOTES
Original Issue Discount. OID is generally defined by Section 1273(a) of
the Code as the excess of the stated redemption price at maturity of a debt
instrument over the issue price of the debt instrument. For purposes of
determining the amount of OID on an Exchange Note, the 'stated redemption price
at maturity' is the $1,000 face amount thereof. The issue price of an Exchange
Note will be equal to the fair market value on the date of the Debt Exchange of
a Subordinated
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Debenture. If the Debt Exchange had occurred on December 27, 1993, the Company
estimates that the amount of 'OID' on the Exchange Notes would be zero. Changes
in the fair market value of a Subordinated Debenture between December 27, 1993
and the occurrence of the Debt Exchange could result in OID.
A holder of an Exchange Note having OID will be required to include in
gross income an amount equal to the sum of the 'daily portions' of such OID for
all days during the taxable year in which he holds the debt instrument,
including the acquisition date and excluding the disposition date. Such daily
portion of OID is a pro rata portion of the OID on such debt instrument which is
attributable to the 'accrual period' in which such day is included.
OID Reduction. Proposed Treasury Regulation Section 1.1271-2 would extend
the definition of 'purchase' under Section 1272(d)(1) of the Code to include the
Debt Exchange. Based on such extended definition of purchase, in the case of a
holder whose initial tax basis in an Exchange Note ('Exchange Tax Basis')
exceeds the issue price, but is less than the face amount of the Exchange Note,
the amount of the daily portions of OID required to be included in income will
be reduced to be (i) the daily portions of OID otherwise includable in income
pursuant to the rules described in the preceding paragraph, multiplied by (ii) a
fraction, the numerator of which is the excess of the holder's Exchange Tax
Basis over the issue price of the Exchange Note and the denominator of which is
the excess of the face amount of an Exchange Note over the issue price of the
Exchange Note.
Purchase at Premium Exception. Based on the extended definition of
purchase under Proposed Treasury Regulation Section 1.1271-2, if a holder's
initial tax basis in an Exchange Note exceeds its face amount, such holder will
be considered to have purchased the security at a 'premium' under Section
1272(c)(1) of the Code. As a result, such a holder will not be required to
include OID in income with respect to such Exchange Note. In addition, if a
proper election is made, such holder will be able to deduct any bond premium
under Section 171 of the Code over the term of the Exchange Note. The premium
amortization may either serve as a deduction or as an offset to interest income.
The amount of the amortization is generally determined by a constant-yield
method, based upon the holder's adjusted tax basis in the Exchange Note.
Reporting. The Company will report to the holder of an Exchange Note and
to the IRS for each calendar year the amount of OID attributable to the Exchange
Note for such year. A holder whose tax basis in an Exchange Note exceeds the
issue price of the Exchange Note will reduce such reported amount in the manner
described under '-- OID Reduction' and '-- Purchase at Premium Exception' above
to arrive at the OID includable in his taxable income.
Effect on Tax Basis. The holder's basis in an Exchange Note will be
increased by the OID included by the holder in taxable income under the
foregoing rules with respect to such Exchange Note, and such basis will be
decreased by the deductions allowed (or the amount allowable as an offset of
interest income) by reason of amortization of any bond premium on the Exchange
Note.
Sale, Exchange or Redemption. In general, except as discussed below under
'-- Market Discount,' the sale, exchange or redemption of an Exchange Note will
result in capital gain or loss equal to the difference between the amount
realized (which will exclude any amount attributable to the payment of accrued
interest) and the holder's tax basis in the Exchange Note immediately before
such sale, exchange or redemption.
Market Discount. Special rules will apply with respect to Subordinated
Debentures and Exchange Notes with 'market discount.' The portion of market
discount that accrued while a holder owned a Subordinated Debenture and has not
otherwise been included in income at the time of the Debt Exchange and is not
recognized as gain in the Debt Exchange will be carried over to the Secured
Notes and treated as ordinary income when the holder disposes of the Exchange
Notes received in Debt Exchange (unless otherwise included in income pursuant to
an election made by the holder thereof). See '-- Federal Income Tax Consequences
of the Exchange Offer and Indenture Amendments to Holders of Subordinated
Debentures'.
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FEDERAL INCOME TAX CONSEQUENCES OF THE RECLASSIFICATION
Recapitalization
General. As described below under 'Constructive Distribution,' some of the
4.9 shares of Common Stock received in the Reclassification in exchange for a
share of $2.16 Preferred Stock may be treated as a constructive distribution.
The balance of the shares of Common Stock which are received in the
Reclassification in exchange for such share of $2.16 Preferred Stock will be
treated as having been received pursuant to a recapitalization within the
meaning of Section 368(a)(1)(E) of the Code. Except as provided under
'-- Constructive Distribution' below, the results of such exchange to the holder
of $2.16 Preferred Stock will be as follows:
(a) Gain or Loss. No gain or loss will be recognized by the holders of
the $2.16 Preferred Stock upon the exchange of a share of $2.16
Preferred Stock for shares of Common Stock (other than the shares
of Common Stock which are received as a distribution) pursuant to
the Reclassification.
(b) Tax Basis. The aggregate tax basis of the Common Stock received as
a result of the Reclassification (other than the shares of Common
Stock which are received as a distribution) will be the same as
the aggregate tax basis of the $2.16 Preferred Stock which is
reclassified.
(c) Holding Period. The holding period of the Common Stock received
will include the period that such holder held the $2.16 Preferred
Stock which is reclassified.
Constructive Distribution
General. Under Section 305(c) of the Code and the Treasury regulations
promulgated thereunder, the Reclassification will result in a constructive
distribution to the holder of a share of $2.16 Preferred Stock in an amount
equal to the lesser of (i) the excess of the fair market value (as determined
for federal income tax purposes) of the 4.9 shares of Common Stock received in
exchange for one share of $2.16 Preferred Stock over $25 and (ii) the dividend
arrearages on the share of $2.16 Preferred Stock at the time of the
Reclassification, in each case, as determined immediately after the
Reclassification. The Company believes that it has sufficient accumulated
earnings and profits for any such constructive distribution to be treated as a
dividend. If the Reclassification had occurred on December 27, 1993, then a
holder of $2.16 Preferred Stock would have received a dividend of approximately
$2.87 per share of $2.16 Preferred Stock.
See '-- Federal Income Tax Consequences of Holding $2.20 Preferred Stock
and Common Stock -- Dividends' for a discussion of dividend treatment, including
extraordinary dividend treatment to corporate holders, and deductions related
thereto.
Basis in Common Stock. A holder of $2.16 Preferred Stock who receives
shares of the Common Stock as a constructive distribution in the
Reclassification will have a tax basis in such shares equal to the fair market
value of such Common Stock immediately after the Reclassification.
Holding Period of Common Stock. A holder of shares of $2.16 Preferred
Stock who receives shares of Common Stock as a constructive distribution in the
Reclassification will have a holding period for such Common Stock beginning on
the date after the Reclassification.
FEDERAL INCOME TAX CONSEQUENCES RELATED TO CROYDEN ASSOCIATES' LITIGATION
Although the issue is subject to substantial interpretive and factual
questions and counsel does not render an opinion with respect to these
consequences, it is likely that a holder of $2.16 Preferred Stock
will have a distribution equal to such holder's proportionate share
of the fair market value of the 131,956 shares of Common Stock set aside and
available to pay, and the money of the Company used to pay, the fees and
expenses of the attorneys for such holders. The Company believes it
has sufficient accumulated earnings and profits for such distribution
to be taxed as a dividend. Such holder's tax basis in the
shares of Common Stock received as a
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distribution will equal the fair market value of such shares and the holding
period for such shares will begin on the day after such distribution. See
'-- Federal Income Tax Consequences of Holding $2.20 Preferred Stock and Common
Stock -- Dividends' for a discussion of dividend treatment, including
extraordinary dividend treatment to corporate holders, and deductions related
thereto.
A holder of $2.16 Preferred Stock will be treated as if he sold the shares
of Common Stock used to pay attorneys' fees and expenses for an amount equal
to the fair market value of such shares. If the shares of Common Stock received
as a distribution are properly allocated to the payment of such attorney fees
and expenses, such holder will have no recognized gain. However, if such
allocation is not respected, a holder will recognize gain equal to the excess,
if any, of the fair market value of such holder's proportionate share of the
Common Stock actually used to pay the class' attorneys' fees and expenses over
such holder's adjusted basis in such shares of Common Stock. It is unclear
whether a holder's share of the class' attorneys' fees and expenses will be
deductible or will be required to be capitalized and thereby increase the tax
basis in such holder's share of Common Stock.
FEDERAL INCOME TAX CONSEQUENCES OF THE AMENDED METLIFE MEMORANDUM
Recapitalization
General. Although the issue is not free from doubt, counsel for the
Company is of the opinion that the agreements with respect to the terms and
conditions of the $2.20 Preferred Stock included in the Amended MetLife
Memorandum would constitute an exchange for federal income tax purposes and,
accordingly, will be treated as the receipt, for federal income tax purposes, of
'new' $2.20 Preferred Stock and Common Stock in exchange for the 'old' $2.20
Preferred Stock. As discussed below under 'Constructive Distribution', a portion
of such shares will be treated as a constructive distribution. The exchange of
the balance of the shares for the 'old' $2.20 Preferred Stock will constitute a
recapitalization within the meaning of Section 368(a)(1)(E) of the Code. If the
agreements with respect to the $2.20 Preferred Stock pursuant to the Amended
MetLife Memorandum do not constitute an exchange for federal income tax
purposes, then the receipt of Common Stock would constitute a constructive
distribution equal to the fair market value of such Common Stock received. The
balance of this discussion assumes that the agreements with respect to the $2.20
Preferred Stock pursuant to the Amended MetLife Memorandum do constitute an
exchange for federal income tax purposes. The results of such constructive
exchange to MetLife Louisiana will be as follows:
(a) Gain or Loss. No gain or loss will be recognized by MetLife
Louisiana.
(b) Tax Basis. The tax basis of the stock received will be the same as
the basis of the 'old' $2.20 Preferred Stock.
(c) Holding Period. The holding period of the stock received will
include the period that MetLife Louisiana held the 'old' $2.20
Preferred Stock.
Constructive Distribution
General. As a result of the receipt of Common Stock pursuant to the
Amended MetLife Memorandum, MetLife Louisiana will have a constructive
distribution on each share of $2.20 Preferred Stock equal to the lesser of (i)
the fair market value of the Common Stock received attributable to one share of
$2.20 Preferred Stock plus the amount, if any, by which the fair market value of
one share of the 'new' $2.20 Preferred Stock exceeds $20 and (ii) the dividend
arrearages on a share of the $2.20 Preferred Stock determined in each case
immediately after the recapitalization. Based on the Company's estimate of the
value of Common Stock and 'old' $2.20 Preferred Stock as of December 27, 1993,
the Company estimates that MetLife Louisiana will have a constructive
distribution equal to approximately $10.8 million.
Dividend Treatment. The Company believes it has accumulated earnings and
profits sufficient to treat the distributions resulting from the receipt of
Common Stock by MetLife Louisiana as
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dividends. See '-- Federal Income Tax Consequences of Holding $2.20 Preferred
Stock and Common Stock -- Dividends' for a discussion of dividend treatment,
including extraordinary dividend treatment to corporate holders, and deductions
related thereto.
Basis in Common Stock. The stock received by MetLife as a constructive
distribution will have a tax basis equal to the fair market value of such stock.
Holding Period of Common Stock. The stock received as a constructive
distribution will have a holding period beginning on the date after such
constructive distribution is paid.
FEDERAL INCOME TAX CONSEQUENCES OF HOLDING $2.20 PREFERRED STOCK AND COMMON
STOCK
Tax Consequences of Holding $2.20 Preferred Stock and Common Stock
Dividends. A distribution made with respect to $2.20 Preferred Stock or
Common Stock (other than a distribution in redemption of such stock or in
liquidation of the Company) will be a dividend for federal income tax purposes
to the extent made out of the current or accumulated earnings and profits, as
determined for federal income tax purposes, of the Company. Although no
assurance can be given, the Company expects to have sufficient earnings and
profits so that each distribution (other than a distribution in redemption of
$2.20 Preferred Stock or Common Stock or in liquidation of the Company) will be
out of its earnings and profits. If a distribution exceeds the earnings and
profits of the Company, such distribution would be treated first as a return of
capital to the extent of the holder's adjusted basis in such stock and
thereafter would be treated as gain realized from the sale or exchange of such
stock.
A domestic corporation which holds $2.20 Preferred Stock and/or Common
Stock will be entitled to the 70 percent dividends received deduction with
respect to dividends received thereon, subject however to generally applicable
limitations thereon which are discussed below. (The special rule that the
dividends received deduction is 80 percent for a stockholder who owns 20 percent
by vote and value of the stock of the Company is not discussed herein.) The
dividends received deduction (taking into account dividends received from the
Company and from other corporations) may not exceed 70 percent of the taxable
income (adjusted as provided in Section 246(b) of the Code) of the corporate
stockholder. Moreover, the dividends received deduction is completely disallowed
if the Common Stock is not held for 46 days or more (91 days or more for
dividends paid with respect to $2.20 Preferred Stock that are attributable to a
period or periods of 366 days or more) or the holder of the $2.20 Preferred
Stock and/or Common Stock is obligated to make related payments with respect to
a position in substantially similar or related property. Certain special rules
for determining the holding period are included in Section 246(c) of the Code.
The dividends received deduction is reduced under Section 246A of the Code to
the extent that a holder of $2.20 Preferred Stock and/or Common Stock incurs
indebtedness directly attributable to his investment in such stock. A corporate
holder must reduce its basis, but not below zero, in $2.20 Preferred Stock
and/or Common Stock with respect to any extraordinary dividends which are not
subject to tax by reason of the dividends received deduction. An 'extraordinary
dividend' on $2.20 Preferred Stock or Common Stock will be, with an exception
that excludes qualified preferred dividends within the meaning of Section
1059(e)(3) of the Code from classification thereas, a dividend with respect to
$2.20 Preferred Stock or Common Stock held for two years or less on the dividend
announcement date (i) that exceeds five percent with respect to $2.20 Preferred
Stock, 10 percent with respect to Common Stock, of the holder's basis in such
stock, treating all dividends having ex-dividend dates within an 85-day period
as one dividend, or (ii) that exceeds 20 percent of the holder's basis in such
stock, treating all dividends having ex-dividend dates within a 365-day period
as one dividend. Fair market value, if it can be established by the holder to
the satisfaction of the IRS, may be substituted for basis for purposes of the
preceding sentence. In addition, an amount treated as a dividend in the case of
a redemption of stock that is not pro rata as to all stockholders and an amount
which is a dividend and is part of a partial liquidation, is an extraordinary
dividend without regard to the length of time that the stock has been held.
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Dividend income that is not subject to regular corporate taxation as a
consequence of the dividends received deduction may give rise to alternative
minimum tax liability.
Sale, Exchange or Redemption. Generally, any redemption of Common Stock or
$2.20 Preferred Stock will be treated as a sale or exchange thereof if the
redemption (a) results in a complete termination of the holder's stock interest
in the Company, (b) is substantially disproportionate with respect to the holder
or (c) is not essentially equivalent to a dividend with respect to the holder,
in each case within the meaning of Section 302(b) of the Code. In determining
whether any of these tests has been met, stock which is constructively owned by
reason of Section 318 of the Code (pursuant to which a holder will be deemed to
own stock owned (actually or constructively) by certain related individuals and
entities and to own stock subject to option), as well as stock actually owned,
is taken into account. A distribution will generally be treated as substantially
disproportionate if the percentage of the voting stock of the Company which is
owned immediately after the redemption is less than 80 percent of the percentage
of the voting stock of the Company which is owned immediately before the
redemption and if the percentage of the common stock of the Company which is
owned by such person is also so reduced. A distribution will not be essentially
equivalent to a dividend if it results in a 'meaningful reduction' in a holder's
stock interest in the Company. The IRS has stated in published rulings that a
redemption that results in a reduction in the actual and constructive stock
interest of a minority stockholder, whose relative actual and constructive stock
interest is minimal and who exercises no control over corporate affairs, will
generally be treated as not essentially equivalent to a dividend. If a
redemption does not satisfy any of the Section 302 tests, the amount received in
the redemption will be treated as a distribution which is made by the Company
with respect to the stock so redeemed which is taxable as provided in '--
Dividends' above, and the adjusted tax basis of the stock so redeemed will be
transferred to any retained stock interest in the Company.
The amount of gain a holder will realize upon a sale, exchange or
redemption of the $2.20 Preferred Stock or Common Stock is equal to the
difference between the sum of the cash and fair market value of property
received and the holder's tax basis in the $2.20 Preferred Stock and/or Common
Stock. Any gain or loss realized upon a sale, exchange or redemption will
generally be recognized. However, any realized gain or loss resulting from a
redemption of the $2.20 Preferred Stock with Common Stock will generally not be
recognized, except to the extent that such Common Stock received is attributable
to accrued and unpaid dividends. Any basis reduction resulting from dividend
received deductions attributable to extraordinary dividends on the $2.20
Preferred Stock or Common Stock, plus any such dividend received deductions in
excess of such corporate holder's tax basis in the $2.20 Preferred Stock or
Common Stock, will increase the realized gain or decrease the realized loss to
such corporate holder upon a sale, exchange or redemption of the $2.20 Preferred
Stock or Common Stock.
Tax Consequences Applicable to Holding $2.20 Preferred Stock
Extraordinary Dividends. If the issue price of the combination of the
$2.20 Preferred Stock and the agreements pursuant to the Amended MetLife
Memorandum exceeds its $20 liquidation preference, all dividends thereon will be
treated as extraordinary dividends.
Redemption Premium. MetLife Louisiana may be considered under Section
305(c) of the Code to have constructively received a distribution if the
combination of the $2.20 Preferred Stock and the agreements pursuant to the
Amended MetLife Memorandum is considered to bear an unreasonable redemption
premium. Redemption premium is the excess of the redemption price over the issue
price. The amount and reasonableness of any redemption premium is a question of
fact which will depend upon the determined fair market value of the stock on the
date of consummation of the Reclassification. In addition, Section 305(c) was
amended in 1990 to authorize the Treasury to issue regulations requiring the
economic accrual of any redemption premium in excess of a de minimis amount and
requiring the economic accrual of an unreasonable redemption premium
irrespective of the callable nature of the stock. The Treasury, however, has not
issued nor proposed any such
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regulations. For these reasons, counsel has not rendered an opinion with respect
to, and the Company cannot determine, the amount, if any, and timing of any
constructive dividends on the combination of the $2.20 Preferred Stock and the
agreements pursuant to the Amended MetLife Memorandum under Section 305(c) of
the Code relating to the existence of any redemption premium.
Common Stock in Lieu of Cash Dividends. If the Company elects to pay
dividends to MetLife Louisiana with Common Stock, the receipt of such Common
Stock will be a distribution equal to the fair market value of the Common Stock
taxable as a dividend to the extent of current or accumulated earnings and
profits of the Company. See '-- Federal Income Tax Consequences of Holding $2.20
Preferred Stock and Common Stock -- Dividends' for a discussion of dividend
treatment and deductions related thereto for certain corporate holders.
$2.20 Preferred Stock Exchange Option. The exercise by MetLife Louisiana
of its option under the MetLife Memorandum to exchange the $2.20 Preferred Stock
for the Future Preferred Stock should, under current law, be characterized as a
recapitalization under section 368(a)(1)(E) of the Code. As a recapitalization,
such exchange should be tax free, except to the extent, and have the same
general tax consequences, described under the caption '-- Federal Income Tax
Consequences of the Reclassification.'
REPORTING REQUIREMENTS
Treasury regulations require that every holder of Existing Preferred Stock
or Subordinated Debentures who receives stock or securities or other property in
a tax-free exchange in the Recapitalization must include in his income tax
return for the taxable year in which the exchange takes place a complete
statement of all facts pertinent to the non-recognition of gain or loss upon
such exchange including (1) a statement of the cost or other basis of the stock
or securities transferred in the exchange and (2) a statement of the fair market
value of the stock or securities and other property or money received from the
exchange. In addition, the Treasury regulations require that the above
information be kept in the permanent records of every such taxpayer.
BACKUP WITHHOLDING
Any federal income tax liability of a holder resulting from interest paid
on the Exchange Notes or dividends paid on the $2.20 Preferred Stock or Common
Stock ordinarily will not be collected by withholding. However, a withholding of
such tax at a rate of 31% ('backup withholding') may be required by reason of
the events specified by Section 3406 of the Code and Treasury regulations
promulgated thereunder, which include failure of a holder to supply the Company
or its agent with such holder's taxpayer identification number under penalty of
perjury. Corporations generally are not subject to backup withholding, provided
they properly establish their status when required to do so. Backup withholding
may also apply to other holders who are otherwise exempt from such withholding
if such holders fail to properly document their status as exempt recipients.
FEDERAL INCOME TAX CONSEQUENCES OF THE RECAPITALIZATION TO THE COMPANY
Limitation on Net Operating Loss Carryforwards. The Company estimates it
has as of December 31, 1992 approximately $63.2 million of net operating loss
carryforwards and $8.2 million of general business credits. Under Sections 382
and 383 of the Code, a corporation's future use of its net operating loss
carryforwards, built-in losses and general business and minimum tax credits will
be limited after the occurrence of an 'ownership change' to an amount which is,
in general, the value of the stock of the Company at the time of the ownership
change multiplied by the value of the long-term tax-exempt rate at that time. An
ownership change is a transaction or series of transactions resulting in the
increase in the percentage of the value of the stock of the Company owned by one
or more five-percent shareholders by more than 50 percentage points over the
lowest percentage of the value of the stock of the Company owned by such
five-percent shareholders during any three-year 'testing period.' In determining
whether an ownership change has occurred, certain complex rules (the '382
Rules') will apply. Currently the 382 Rules are contained in temporary
regulations. The
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Treasury, however, has issued additional proposed regulations under section 382
of the Code which will, if adopted, substantially modify the 382 Rules.
The determination as to whether an ownership change will occur as a result
of the Recapitalization is subject to substantial interpretative questions. The
Company intends to take the position that an ownership change has not occurred
prior to the Recapitalization and will not occur as a result thereof. Although
counsel has not rendered an opinion on whether the Reclassification will result
in an ownership change, counsel believes that the Company's position is based
upon a reasonable interpretation of the 382 Rules. No assurance can be given
that the IRS or the courts would agree with the position of the Company.
Because there is substantial uncertainty on this point, there can be no
assurance that an ownership change will not occur as a result of the
Recapitalization or future events.
In the event of an ownership change, the Company is permitted to reduce
taxable income in each year subsequent to the ownership change with net
operating losses and/or general business credits (to the extent attributable to
the tax liability related to such taxable income, the discussion of which is not
included herein) which arose prior to the ownership change in an amount which
the Company estimates would be approximately $7.4 million (the '382 Limit') if
the ownership change were to have occurred on December 27, 1993. Increases and
decreases in the value of the stock of the Company and in the long-term tax
exempt rate between December 27, 1993 and the date of any ownership change will
increase or decrease, respectively, the 382 Limit.
OID Deduction. Subject to certain limitations, which are described below,
the Company will be entitled to deduct as interest the amount of interest,
including OID, which accrues on the Exchange Notes. See '-- Federal Income Tax
Consequences of Holding the Exchange Notes -- Original Issue Discount.'
Limitations Relating to Certain High Yield Discount Obligation. The Code
imposes limitations on 'High Yield Discount Obligation.' An Exchange Note will
be a high yield discount obligation if its yield to maturity exceeds the
applicable Federal rate, for the calendar month of the issue, plus five
percentage points and such Exchange Note has 'significant' OID. A debt
instrument is treated as having significant OID if the aggregate amount which
would be includable in gross income with respect to such instrument for periods
before the close of any accrual period ending after the date five years after
the date of issue exceeds the sum of (a) the aggregate amount of interest to be
paid under the instrument before the close of such accrual period and (b) the
product of the issue price of the instrument and its yield to maturity.
See '-- Federal Income Tax Consequences of Holding the Exchange
Notes -- Original Issue Discount.'
If, however, the Exchange Notes have significant OID, (1) a portion of the
OID on the Exchange Notes may not be deductible by the Company at any time (the
'disqualified portion'), (2) the remaining OID will not be deductible until
paid, and (3) a corporate holder may be entitled to a dividends-received
deduction equal to 70% of the disqualified portion of the OID. See '-- Federal
Income Tax Consequences of Holding $2.20 Preferred Stock and Common
Stock -- Dividends' for a discussion of dividend treatment and deductions
related thereto for certain corporate holders.
Cancellation of Indebtedness Income. Based upon the Company's estimate of
the fair market value of the Exchange Notes as of December 27, 1993, the Company
does not anticipate the Debt Exchange will result in any cancellation of
indebtedness income. Should the fair market value of a $1,000 face amount
Subordinated Debenture decrease below $904 (the fair market value on December
27, 1993 of a Subordinated Debenture was approximately $1,001.25) before
consummation of the Debt Exchange, the Company could realize cancellation of
indebtedness income. Even if the Company should recognize cancellation of
indebtedness income, the Company anticipates that it will have sufficient net
operating losses to offset all or substantially all of such income. Absent a
ruling from the IRS, a portion of the cancellation of indebtedness income will
be allocated to that period, if
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any, of the Company's taxable year after there is a Section 382 ownership
change. The amount of net operating losses that may be used to offset such
cancellation of indebtedness so allocated would be limited by the 382 Limit. In
addition, only ninety percent of the cancellation of debt income may be offset
by net operating losses for purposes of calculating alternative minimum taxable
income with the result that any such cancellation of debt income will be subject
to a tax of at least 2 percent under current law. See ' -- Limitations on Net
Operating Loss Carryforwards' above.
CERTAIN BANKRUPTCY AND INSOLVENCY CONSIDERATIONS
GENERAL
Under the Bankruptcy Code, or other applicable bankruptcy and insolvency
laws, completion of the Exchange Offer may have, among other things, the
consequences indicated below.
If the Company voluntarily or involuntarily becomes a debtor under the
Bankruptcy Code, the ability of holders of the Company's debt securities,
including the Subordinated Debentures, to recover their investment may be
impaired. Given the risks inherent in the reorganization process, including (i)
the potential deterioration of the business of the Company and its subsidiaries
during a bankruptcy proceeding, (ii) the possible loss of a significant number
of employees, and (iii) the additional administrative expense associated with a
bankruptcy case, it is not possible to determine what percentage of their
investment holders of Subordinated Debentures and other debt security holders of
the Company are likely to recover in a bankruptcy reorganization. Ultimate
recovery would depend, among other things, on the impact of the bankruptcy
proceedings on the business of the Company, the treatment of the debt in a plan
of reorganization and the length of time necessary to complete the
reorganization process. It is not unusual for complex bankruptcy proceedings to
continue for a period of years before a plan of reorganization is confirmed and
payments under the plan are made. A reorganization could affect the Company's
ability to generate revenues from operations or asset sales and could
significantly diminish the saleable value of its assets. Alternatively, the
Company could be required to liquidate its assets under Chapter 7 or a
liquidating plan under Chapter 11. The foregoing factors, in addition to those
factors described below, would also be applicable with respect to the Exchange
Notes in the event a bankruptcy petition is filed after completion of the
Exchange Offer.
FRAUDULENT TRANSFER
One of three fraudulent transfer statutes may be applicable to the Exchange
Offer: (i) the Uniform Fraudulent Transfer Act ('UFTA') as codified by the state
of Texas (the state in which the Company's headquarters are located); (ii) the
Uniform Fraudulent Conveyance Act ('UFCA') as codified by the state of Delaware
(the state in which the Company is incorporated); and (iii) section 548 of the
Bankruptcy Code. Section 548 of the Bankruptcy Code governs fraudulent
conveyance as a matter of federal law applicable to persons or corporations who
are debtors in cases pending in the federal bankruptcy courts and is
substantially based upon the UFCA. The UFTA is generally modeled after both the
UFCA and section 548 of the Bankruptcy Code; each provides for the avoidance of
transfers made with actual intent to defraud creditors, or made with
constructively fraudulent intent. Alaska's law provides only that transfers made
with the intent to hinder, delay or defraud creditors are void. Alaska courts
look to the existence of various 'badges of fraud,' i.e., inadequate
consideration, transfer of property in anticipation of a pending suit and
transfer when debtor was insolvent, to determine intent.
To sustain a constructive fraud finding under section 548 of the Bankruptcy
Code, the UFCA and the UFTA, a two-prong test is applied involving: (1) the
value given and (2) the financial condition of the transferor. For the
constructive fraud provisions to apply, the court must find that the transfer or
obligation was for less than 'fair consideration' (under the UFCA) or for less
than a 'reasonably equivalent value' (under Section 548 of the Bankruptcy Code
or the UFTA). In addition to the finding of lack of fair consideration or
reasonably equivalent value, the court must find that the
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transfer (1) was made while the transferor was insolvent or rendered the
transferor insolvent, (2) would leave the transferor with insufficient capital,
or (3) would place the transferor in a position to incur debts which it is
unable to pay. The definition of 'insolvent' varies under the three statutes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. The Company would be
considered insolvent, under Texas law, if the sum of all its liabilities is
greater than the value of all its assets at a fair valuation or if it were
generally not able to pay its debts as they become due. Under the Bankruptcy
Code, the Company would be considered insolvent if the sum of all its
liabilities is greater than the value of all its property at a fair valuation.
Under Delaware law, the Company would be insolvent if the present fair saleable
value of its assets is less than the amount required to repay its probable
liability on its debts as they become absolute and matured. The foregoing
italicized terms are terms included in the UFTA (Texas) and are applied on a
case-by-case basis to determine the insolvency of a particular person. Because
there can be no assurance which jurisdiction's fraudulent transfer law would be
applied by a court, there can be no assurance as to what standard a court would
apply in order to determine insolvency.
If a court in a lawsuit by or on behalf of an unpaid creditor or a
representative of creditors, such as a trustee in bankruptcy or the Company as
debtor-in-possession, were to find that, at the time of the Exchange Offer, (a)
the Company received less than fair consideration or reasonably equivalent value
in exchange for the Exchange Notes pursuant to the Exchange Offer, and (b) the
Company (i) was insolvent, or was rendered insolvent as a result of the Exchange
Offer, (ii) had unreasonably small capital for its business, or (iii) intended
to incur or believed it would incur, debts beyond its ability to pay as such
debts matured, such court could, among other remedies, avoid the Exchange Offer
as a fraudulent transfer, reinstate, in full and without modification, the
rights and claims evidenced by the Subordinated Debentures and/or order holders
of Exchange Notes issued in the Exchange Offer to return to the Company or to a
fund for the benefit of its creditors an amount equal to any excess in value
that they received.
VOIDABLE PREFERENCE
If the Exchange Offer is consummated and the Company becomes subject to a
petition for relief under the Bankruptcy Code within 90 days (or, with respect
to insiders of the Company, within one year) after the delivery of the Exchange
Notes pursuant to the Exchange Offer and certain other conditions are met, the
delivery of the Exchange Notes could be avoided as a preferential transfer to
the recipients thereof and, to the extent avoided, the value of such transfer
could be recovered from such recipients and from subsequent transferees.
A bankruptcy trustee, or the Company as debtor-in-possession, may avoid as
a preference a transfer of property of the debtor to a creditor on account of an
antecedent debt while the debtor was insolvent, where that creditor received
more than it would have received in a liquidation of the Company under Chapter 7
of the Bankruptcy Code had the payment not been made, and if the payment was
made within 90 days of the date the bankruptcy case was commenced, or within one
year before the commencement of the bankruptcy case if the transfer is to or for
the benefit of a creditor that is found to have been an 'insider,' as defined in
the Bankruptcy Code. The debtor is rebuttably presumed to have been insolvent
during the 90 days preceding the commencement of the bankruptcy case. If, at any
time, all of these conditions are present with respect to any payment of the
principal of, and/or accrued interest on, (i) the Exchange Notes, (ii) the
Subordinated Debentures prior to completion of the Exchange Offer, or (iii) the
untendered Subordinated Debentures which remain outstanding after the Exchange
Offer, such payment could constitute a preferential transfer to the holder
thereof, and to the extent avoided, could be recovered from such holder.
Further, a bankruptcy trustee, or the Company as debtor-in-possession,
could seek to avoid the Exchange Offer as preferential if, and to the extent
that, the value of the Exchange Notes received in the Exchange Offer exceeds the
value of the Subordinated Debentures exchanged.
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DESCRIPTION OF FUTURE PREFERRED STOCK
The following is a description of the Future Preferred Stock which is a new
series of preferred stock that the Company will, after expiration of the
Company's MetLife Option without being exercised in full and upon request of
MetLife Louisiana, exchange on a share for share basis for $2.20 Preferred Stock
then owned by MetLife Louisiana. The Future Preferred Stock has substantially
the same terms as the $2.20 Preferred Stock but is modified to reflect the
agreements and waivers contemplated by the Amended MetLife Memorandum. See 'The
Recapitalization -- Background -- The Recapitalization.' The following
description of the Future Preferred Stock summarizes the material provisions of
the Future Preferred Stock.
DIVIDENDS
Holders of shares of Future Preferred Stock will be entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, annual dividends of $2.20 per share, payable at the election
of the Company in cash or shares of Common Stock or any combination thereof.
Such dividends will be cumulative, will be payable in equal quarterly
installments on March 30, June 30, September 30 and December 30 of each year and
will begin accruing on the date on which the Future Preferred Stock is issued;
provided that the first dividend payment date will be the thirtieth (30th) day
of the last month of the first full calendar quarter beginning after the date on
which the Future Preferred Stock is issued. Dividends will be payable to holders
of record of Future Preferred Stock as they appear on the stock transfer books
of the Company on such record dates as are fixed by the Board of Directors.
If the Company pays all or a portion of a dividend in shares of Common
Stock, the number of shares of Common Stock to be issued by the Company in
payment of such dividend or portion thereof will be the dollar amount of such
dividend divided by the average of the Closing Sales Prices (as defined below)
of the Common Stock for the ten (10) consecutive trading days beginning on the
first trading date after the Company publicly announces its intention to pay the
dividend in Common Stock. The Company must make such announcements not less than
20 trading days and not more than 30 trading days prior to the dividend payment
date.
The 'Closing Sales Price' as of a certain date will mean the average
closing price, regular way, as of such date, of the Common Stock on the New York
Stock Exchange, or, in case no sales take place on such date, the average of the
reported closing bid and asked prices, regular way, on such date on the New York
Stock Exchange Composite Tape, or, if the Common Stock is not listed or admitted
to trading on such exchange, the principal national securities exchange on which
the Common Stock is listed or admitted to trading, or if the Common Stock is not
listed or admitted to trading on any national securities exchange, the closing
sale prices, or, if there are no closing sale prices, the average of the closing
bid and asked prices, in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotation System, or, if not so
reported, as reported by the National Quotation Bureau, Incorporated, or any
successor thereof, or, if not so reported, the average of the closing bid and
asked prices as furnished by any member of the National Association of
Securities Dealers, Inc. selected from time to time by the Company for that
purpose.
The Company will be prohibited from declaring and paying dividends on any
junior stock and from redeeming, repurchasing or making a sinking fund payment
on any junior stock unless all prior dividends accumulated on the Future
Preferred Stock, including dividends for the current quarterly period, have been
paid or declared and set aside for payment. See '-- Ranking.'
LIQUIDATION RIGHTS
Each share of Future Preferred Stock will have a liquidation preference of
$20 per share. In the event of any liquidation, dissolution or winding up of the
Company, the holders of shares of Future Preferred Stock will be entitled to
receive the liquidation preference of $20 per share, plus an amount equal to any
accrued and unpaid dividends to the date of payment, before any distribution of
assets is
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made to holders of Common Stock or any other junior stock, and all series or
classes of capital stock of the Company hereafter issued that rank on a parity
as to liquidation rights with the Future Preferred Stock will be entitled to
share ratably, in accordance with the respective preferential amounts payable on
such stock, in any distribution which is not sufficient to pay in full the
aggregate of the amounts payable thereon. After payment in full of the
liquidation preference of the shares of Future Preferred Stock, the holders of
such shares will not be entitled to any further participation in any
distribution of assets by the Company. Neither a consolidation, merger or other
business combination of the Company with or into another corporation or other
entity nor a sale or transfer of all or part of the Company's assets for cash,
securities or other property will be considered a liquidation, dissolution or
winding up of the Company. See '--Ranking.'
RANKING
The Future Preferred Stock will rank senior to the Common Stock as to
liquidation and dividends. See '-- Dividends' and '-- Liquidation Rights.'
REDEMPTION
The Future Preferred Stock will not be subject to any sinking fund
provision or any mandatory redemption other than through the exercise of the
Purchase Obligation (as defined below). The Future Preferred Stock will be
redeemable, but only out of funds legally available therefor, on at least 45 but
not more than 60 days' notice, at the option of the Company, in whole or in
part, at a redemption price equal to $20 per share, plus dividends accrued and
accumulated but unpaid to the redemption date.
Pursuant to the terms of the Amended MetLife Memorandum, the Company has
agreed not to redeem any shares of $2.20 Preferred Stock, or the Future
Preferred Stock for which they are exchanged, prior to the fourth anniversary
date of the Reclassification. Such terms may be modified or waived at any time
with the consent of MetLife Louisiana. The Company reserves the right to redeem
$2.20 Preferred Stock or Future Preferred Stock during such period if such
agreement with MetLife Louisiana terminates or is waived for any reason.
PURCHASE OBLIGATION
The Company will be required, but only out of funds legally available
therefor, to offer to purchase ('Purchase Obligation'), on each June 30
beginning June 30, 1998 and ending June 30, 2007, (i) 287,500 shares of Future
Preferred Stock, plus (ii) with respect to years after 1998, the number of
shares subject to, but not purchased pursuant to, the previous year's offer
(including prior year carryovers). The purchase price payable pursuant to each
such offer shall be $20 per share, plus accrued and unpaid dividends to the date
of such purchase, which shall be payable at the election of the Company in cash
or shares of Common Stock or any combination thereof. The shares to be purchased
will be selected pro rata (as nearly as may be) so that the number of shares
purchased from each holder will be the same proportion of all the shares to be
purchased that the total number of shares then held by such holder bears to the
total number of shares then outstanding.
If the Company pays all or a portion of the Purchase Obligation in shares
of Common Stock, the number of shares of Common Stock to be issued by the
Company in payment of such Purchase Obligation or portion thereof will be the
dollar amount of such Purchase Obligation divided by the average of the Closing
Sales Prices of the Common Stock for the ten (10) consecutive trading days
beginning on the first trading date after the Company publicly announces its
intention to pay the Purchase Obligation in Common Stock. The Company must make
such announcements not less than 20 trading days and not more than 30 trading
days prior to the relevant purchase obligation payment date.
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VOTING RIGHTS
The holders of Future Preferred Stock will be entitled to one vote per
share, voting together as a single class with the holders of shares of Common
Stock and any other class or series which may similarly be entitled to vote with
the holders of Common Stock, on all matters on which the shares of Common Stock
may vote, including the elections of directors.
The affirmative vote of the holders of a majority of the outstanding shares
of Future Preferred Stock, voting as a separate class, will be required: (i) to
authorize or increase the authorized amount of, or authorize any obligation or
security convertible into or evidencing the right to purchase shares of, any
additional class or series of stock ranking prior to the Future Preferred Stock
as to the payment of dividends or the distribution of assets, (ii) to amend,
alter or repeal the voting powers, preferences or rights of the Future Preferred
Stock in any respect adverse to the holders thereof or (iii) to authorize the
merger or consolidation of the Company if such merger or consolidation would
have an effect on the Future Preferred Stock substantially similar to (i) or
(ii) above.
In addition, the affirmative vote of the holders of a majority of the
outstanding shares of all series of preferred stock, voting together as a single
class, will be required in order to authorize any increase in the authorized
amount of all series of preferred stock or authorize or increase the authorized
amount of, or authorize any obligation or security convertible into or
evidencing the right to purchase shares of, any additional class or series of
stock ranking prior to or on parity with the Future Preferred Stock as to the
payment of dividends or the distribution of assets.
FAILURE TO PAY DIVIDENDS
If the Company fails to pay dividends on the Future Preferred Stock in an
amount equal to at least six quarterly dividends (whether or not consecutive),
the number of directors then constituting the Board of Directors will be
increased by two, and the holders of the Future Preferred Stock, voting together
as a single class with the holders of any other series of preferred stock having
similar voting rights, shall have the right to elect the two additional members
of the Board of Directors. Such right shall expire when all accrued but unpaid
dividends on the Future Preferred Stock and such other preferred stock, if any,
have been paid and dividends on the Future Preferred Stock and such other
preferred stock, if any, for the then current quarterly period have been paid or
declared and set apart. In the event the Company fails to pay a dividend in cash
or Common Stock, the Company's right to pay dividends or to make repurchases in
Common Stock will terminate.
MISCELLANEOUS
The Future Preferred Stock will not be convertible into, or exchangeable
for, shares of Common Stock, and holders of the Future Preferred Stock will have
no preemptive rights with respect to any securities of the Company. The shares
of Future Preferred Stock, when issued, will be duly and validly issued, fully
paid and nonassessable.
DESCRIPTION OF SUBORDINATED DEBENTURES
Holders of Subordinated Debentures should read Appendix E for a summary of
the material provisions of the Subordinated Debentures.
LEGAL OPINIONS
The validity of the Exchange Notes issuable in the Exchange Offer and the
shares of Common Stock issuable in connection with the Reclassification are
being passed upon by Fulbright & Jaworski L.L.P., San Antonio, Texas.
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EXPERTS
The consolidated financial statements as of December 31, 1992 and September
30, 1991, for the years ended December 31, 1992, September 30, 1991 and
September 30, 1990 and for the three-month period ended December 31, 1991
included in this Proxy Statement -- Prospectus and the related financial
statement schedules included elsewhere in the registration statement have been
audited by Deloitte & Touche, independent auditors, as stated in their reports
appearing herein and elsewhere in the registration statement, and have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
Information set forth in this Proxy Statement -- Prospectus, including the
information included in Note N of Notes to Consolidated Financial Statements,
relating to estimated proved reserves of oil and gas and the related estimates
of future net cash flows and present values thereof (except for estimates of
future income tax expense related thereto) as of September 30, 1990; September
30, 1991; December 31, 1991; December 31, 1992 and September 30, 1993 for
properties in the United States and as of September 30, 1990; September 30,
1991; December 31, 1992 and April 30, 1993 for properties in Bolivia have been
prepared by Netherland, Sewell & Associates, Inc., independent petroleum
engineers, and are included herein and incorporated by reference herein upon the
authority of such firm as an expert in petroleum engineering.
GENERAL INFORMATION CONCERNING PROXIES
SOLICITATION OF PROXIES
This Proxy Statement -- Prospectus is furnished in connection with the
solicitation by the Board of Directors of the Company of proxies to be voted at
the Annual Meeting of Stockholders of the Company, which will be held on
Wednesday, February 9, 1994 at The Hotel Intercontinental, 111 East 48th Street,
New York, New York, and at any adjournments thereof. The mailing address of the
executive offices of the Company is 8700 Tesoro Drive, San Antonio, Texas 78217.
The enclosed form of proxy is solicited by the Board of Directors. The
Company has employed Georgeson to assist in the solicitation of proxies. See
'The Exchange Offer -- Expenses.' The cost of this solicitation will be borne by
the Company. Solicitation is being made by the use of the mails, but may also be
made by telephone, telegram and personal interviews.
VOTING OF PROXIES
Shares represented by proxies received by the Board of Directors will be
voted at the Annual Meeting in accordance with the directions made therein by
the stockholders, unless authority to do so is withheld. If no direction is made
in the proxy, shares represented by any unrevoked proxy in the enclosed form, if
such proxy is properly executed and is received by the Company prior to the
Annual Meeting, or any adjournment thereof, will be voted (1) FOR the proposal
to approve the Reclassification, the Charter Amendment relating to the
elimination of staggered terms for directors and the Charter Amendment relating
to the 90% approval requirement (Proposal No. 1), (2) FOR the Charter Amendment
relating to elimination of the 80% approval requirement (Proposal No. 2), (3)
FOR the election to the Board of Directors of the nominees listed herein, (4)
FOR approval of the Executive Long-Term Incentive Plan of the Company and (5)
FOR ratification of the appointment of Deloitte & Touche as the Company's
independent auditors for 1993. If any other matters are brought before the
Annual Meeting (including any adjourned meeting) and submitted to a vote, all
proxies will be voted in accordance with the judgment of the persons voting the
respective proxies unless authority is withheld. The Company knows of no other
business to be brought before the Annual Meeting.
RECORD DATE
Holders of Common Stock, $2.16 Preferred Stock and $2.20 Preferred Stock of
record at the close of business on December 15, 1993 are entitled to notice of
and to vote at the Annual Meeting.
128
<PAGE>
On December 15, 1993, there were issued and outstanding 14,069,236 shares of
Common Stock, 1,319,563 shares of $2.16 Preferred Stock and 2,875,000 shares of
$2.20 Preferred Stock.
No dissenters' rights of appraisal exist with respect to approval of the
Reclassification or with respect to any other facet of the Recapitalization.
VOTING RIGHTS
Each share of Common Stock, $2.16 Preferred Stock and $2.20 Preferred Stock
is entitled to one vote with respect to each matter brought before the Annual
Meeting. Proposal No. 1 requires the approval of the holders of a majority of
the outstanding shares of Common Stock, $2.16 Preferred Stock and $2.20
Preferred Stock, voting together as a single class, and the approval of the
holders of two-thirds of the outstanding shares of $2.16 Preferred Stock, voting
as a separate class. Proposal No. 2 requires the approval of the holders of 80%
of the shares of Common Stock, $2.16 Preferred Stock and $2.20 Preferred Stock,
voting together as a single class. The election of directors and each other
matter brought before the Annual Meeting requires the approval of the holders of
a plurality of the shares of Common Stock, $2.16 Preferred Stock and $2.20
Preferred Stock present or represented at the Annual Meeting, voting together as
a single class.
MetLife Louisiana, which owns all the outstanding shares of $2.20 Preferred
Stock and 2,184,085 shares of Common Stock, which together constitute
approximately 28% of the outstanding shares of capital stock entitled to vote at
the Annual Meeting, has indicated to the Company that it intends to vote all of
its shares in favor of Proposal No. 1 and Proposal No. 2. MetLife's willingness
to vote in favor of Proposal No. 1 is subject to certain conditions. See 'The
Recapitalization -- MetLife Louisiana Conditions.'
Shares represented by proxies that reflect abstentions will be treated as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum. An abstention has no effect with respect to the election
of directors, since a plurality is required for the election of directors.
However, with respect to any proposal for which at least a majority vote is
required, an abstention has the same effect as a vote against the proposal.
Broker non-votes will be included in the determination of the number of shares
present and entitled to vote for purposes of determining the presence of a
quorum. However, broker non-votes are not counted for purposes of determining
whether a proposal has been approved.
REVOCATION OF PROXY
A stockholder who has executed and returned a proxy may revoke it at any
time before it is voted by executing and returning a proxy bearing a later date,
by giving written notice of revocation to the Secretary of the Company or by
attending the Annual Meeting and voting in person.
PROPOSALS OF STOCKHOLDERS
Proposals of stockholders to be presented at the 1994 annual meeting of
stockholders of the Company must be received for inclusion in the Company's
proxy statement and form of proxy by February 7, 1994.
THE ANNUAL MEETING
PROPOSAL NO. 3 -- ELECTION OF DIRECTORS
Under the Certificate of Incorporation, the Board of Directors is currently
divided into three classes as nearly equal in number as possible, with the term
of office in one class expiring each year. Currently there are 13 directors of
the Company. Therefore, at the Annual Meeting, four directors are to be elected
for three-year terms. The Nominating Committee of the Board of Directors has
nominated John J. McKetta, Jr., Charles F. Luce, Stewart G. Nagler and Arthur
Spitzer for reelection to another three-year term. Unless otherwise specified,
all duly executed proxies will be voted for the election of the four nominees
set forth above. Each of such nominees has indicated his willingness to
129
<PAGE>
serve as a director, if elected, and the Company has no reason to believe that
any nominee will be unable to serve. The persons designated as proxies, however,
reserve full discretion to cast votes for other persons in the event that any
one or more of the nominees are unable to serve.
Pursuant to a condition imposed by MetLife Louisiana, the Board of
Directors has proposed an amendment to the Company's Certificate of
Incorporation to eliminate staggered terms of directors. See 'The
Recapitalization -- MetLife Louisiana Conditions.' Each incumbent director whose
term is scheduled to extend beyond the 1994 annual meeting has agreed to resign
upon adoption of such amendment. Such directors will then be reappointed by the
remaining directors for one-year terms. As a result, the term of all directors,
including those elected at the Annual Meeting, would thereafter be extended only
until the next annual meeting of stockholders of the Company or until their
respective successors are duly elected and qualified. The 1994 annual meeting of
stockholders is currently intended to be held in June 1994. In addition, upon
adoption of such amendments, the provisions of the Delaware Law which permit the
removal of a director elected to a staggered term to be made only for cause
would no longer apply and a director could be removed without cause by a
majority vote of the stockholders.
INFORMATION CONCERNING DIRECTORS, NOMINEES AND COMMITTEES OF THE BOARD OF
DIRECTORS
Certain information as to each nominee for director and each other person
whose term of office as director will continue after the Annual Meeting is set
forth in the table below and in the following paragraphs. The information
appearing in the table and the notes thereto regarding beneficial ownership of
securities has been furnished to the Company by the respective directors and
nominees.
<TABLE>
<CAPTION>
COMMON STOCK
OTHER COMMON STOCK OWNED BENEFICIALLY
SERVED AS POSITIONS OWNED BENEFICIALLY ON AFTER THE
DIRECTOR OF AND DECEMBER 15, 1993(1) RECLASSIFICATION
AGE AT THE COMPANY OFFICES --------------------- ---------------------
DECEMBER 15, OR PREDECESSOR WITH THE NUMBER PERCENT NUMBER PERCENT
NAME 1993 COMPANIES FROM COMPANY OF SHARES OF CLASS OF SHARES OF CLASS
- ----------------------------- ------------ -------------- ------------ --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Nominees For Terms Expiring
in 1996:
Charles F. Luce-------------- 76 1988 (2)(3) -- -- -- --
John J. McKetta, Jr.--------- 77 1980 (4)(5) 1,565 .011% 1,565 .007%
Stewart G. Nagler(6)--------- 50 1991 (5) -- -- -- --
Arthur Spitzer--------------- 81 1992(7) (2)(5) 207,630 1.476% 207,630 .920%
Directors Whose Terms Expire
in 1995:
Robert J. Caverly------------ 74 1992 (3)(4) 3,000 .021% 3,000 .013%
Steven H. Grapstein---------- 35 1992 (2)(3) 1,769,100(8) 12.574% 1,769,100(8) 7.839%
Raymond K. Mason, Sr.-------- 66 1983 (4) 3,528 .025% 3,528 .016%
Murray L. Weidenbaum--------- 66 1992 (4)(5) 100 .001% 100 --
Directors Whose Terms Expire
in 1994:
Ray C. Adam(9)--------------- 73 1992 (3)(4) -- -- -- --
Michael D. Burke------------- 49 1992 (2)(3)(10) 293,000(11) 2.056% 293,000(11) 1.300%
Peter M. Detwiler------------ 65 1967 (2)(4)(5) 8,715 .062% 8,715 .039%
M. Richard Stewart----------- 50 1989 (5) 26,100(12) .186% 26,100(12) .116%
Charles Wohlstetter---------- 83 1978(13) (2)(3)(14) 3,106 .022% 3,106 .013%
- ------------
(1) Unless otherwise indicated below, each director and nominee possesses sole
voting and investment power with respect to the shares shown to be owned by
him.
(2) Member of the Nominating Committee (Mr. Wohlstetter, Chairman).
(3) Member of the Executive Committee (Mr. Burke, Chairman).
(4) Member of the Compensation, Stock Award and Retirement Committee (Mr.
Detwiler, Chairman).
(5) Member of the Audit Committee (Mr. Nagler, Chairman).
(Footnotes continued on following page)
130
<PAGE>
(6) Elected by the Board in May 1991 pursuant to the Stockholders Agreement
between the Company and MetLife Louisiana. See 'Security Ownership of
Certain Beneficial Owners' for information regarding the securities of the
Company owned by MetLife Louisiana.
(7) Mr. Spitzer previously served as a director of the Company from 1978 to
1984.
(8) Mr. Grapstein is an officer of Oakville N.V., which owns 1,769,100 shares
of the Company's Common Stock. Mr. Grapstein, as an officer, shares voting
and investment power with respect to such shares.
(9) Elected by the Board of Directors in August 1992 after the request (later
withdrawn) of MetLife Louisiana for a special meeting of the preferred
stockholders to elect Mr. Adam and one other director. See 'Security
Ownership of Certain Beneficial Owners' for information regarding the
securities of the Company owned by MetLife Louisiana.
(10) Mr. Burke was elected by the Board of Directors as President and Chief
Executive Officer effective July 27, 1992.
(11) Includes 80,000 shares of Common Stock which Mr. Burke has the right to
purchase pursuant to a stock award, 60,000 of which shares are subject to
substantial restrictions and conditions of forfeiture over a remaining
three-year period. In addition, the shares shown include 100,000 shares of
Common Stock which Mr. Burke had the right to acquire through the exercise
of options which were exercisable on December 15, 1993, or within 60 days
thereafter.
(12) The shares shown include 2,226 shares of Common Stock credited to the
account of Mr. Stewart under the Company's Thrift Plan.
(13) Mr. Wohlstetter previously served as a director of the Company from 1968 to
1975.
(14) Chairman of the Board of Directors.
</TABLE>
Ray C. Adam was Chairman of the Board of Directors and Chief Executive
Officer of NL Industries, Inc., from 1974 until his retirement in 1983. Mr. Adam
is also a director of Mueller Industries, Inc., and is a member of the Business
Council.
Michael D. Burke was elected President and Chief Executive Officer of the
Company effective July 27, 1992. Prior to joining the Company, Mr. Burke was
Group Vice President of Texas Eastern Corporation from 1986 to 1992. Mr. Burke
was President and Chief Executive Officer of T. E. Products Pipeline Company,
L.P., an affiliate of Texas Eastern Corporation, from 1990 to 1992, and he was
President of Texas Eastern Products Pipeline Company from 1986 to 1990.
Robert J. Caverly is a consultant and investor. For the last five years he
has performed interim management assignments for various real estate development
projects and has been a consultant on real estate matters to financial
institutions and law firms. Mr. Caverly was a director of Contel Corporation
from 1975 to March 1991. Mr. Caverly was a director from 1970 through 1992 of
three investment funds which are owned and managed by Home Life Insurance
Company, and he is Chairman of the Board of Directors of Moscom Business Centers
Inc., a subsidiary of Americom International Corporation.
Peter M. Detwiler is Chairman of the Board of Detwiler & Company, Inc., a
consulting company. He is the former Vice Chairman of the Board of Directors of
E.F. Hutton & Company Inc. and the E.F. Hutton Group, New York, New York, a
major financial firm, with which he had been associated since 1961.
Steven H. Grapstein has been a Vice President of Kuo Investment Company and
subsidiaries, an international investment group, since September 1985. He is a
director of several of the Kuo companies and a board member of several unrelated
real estate development companies. Mr. Grapstein has been a Vice President of
Oakville N.V. since 1989. See 'Security Ownership of Certain Beneficial Owners'
for information regarding the securities of the Company owned by Oakville N.V.
Charles F. Luce has been Special Counsel to MetLife since March 1987.
MetLife Louisiana is a wholly owned subsidiary of MetLife. See 'Security
Ownership of Certain Beneficial Owners' for information regarding the securities
of the Company owned by MetLife Louisiana. Mr. Luce has been a consultant to
Consolidated Edison Company of New York, Inc. since September 1, 1982.
Raymond K. Mason, Sr., has been Chairman of the Board of Directors of
American Banks of Florida, Inc., since 1978. Mr. Mason has served as Chairman of
the Board of Directors of American
131
<PAGE>
Security Life Assurance Company of North Carolina ('ASLNC') and its parent,
American Security Life Assurance Company of Florida ('ASLF'). During December
1990, ASLNC and ASLF voluntarily consented to administrative rehabilitation.
Pursuant to rehabilitation, Mr. Mason's authority as Chairman of the Board of
Directors of ASLNC and ASLF was automatically suspended. Both of these companies
are presently in liquidation.
Dr. John J. McKetta, Jr., is Professor Emeritus of Chemical Engineering at
The University of Texas at Austin. Dr. McKetta has been associated with The
University of Texas since 1946. Dr. McKetta is a director of Howell Corporation.
Stewart G. Nagler has been Senior Executive Vice-President of MetLife since
1986 and Chief Financial Officer of MetLife since April 1, 1993. MetLife
Louisiana is a wholly-owned subsidiary of MetLife. See 'Security Ownership of
Certain Beneficial Owners' for information regarding the securities of the
Company owned by MetLife Louisiana.
Arthur Spitzer is engaged in personal investments and has been the owner of
Spitzer Investments since 1984. He is on the board of the Pepperdine University
and the Founders of the Music Center in Los Angeles, and he is a founder and
trustee of the Caribbean Central American Action Group.
M. Richard Stewart is President, Chief Executive Officer and a director of
Sanchez Venture Capital Company. Mr. Stewart was the President and Chief
Operating Officer of the Company from April 1989 until July 27, 1992, and was
acting Chief Executive Officer of the Company from January 2, 1992, until July
27, 1992. Mr. Stewart was a partner in the law firm of Martin & Drought from
August 1988 to April 1989, during which time Martin & Drought provided certain
legal services to the Company. Mr. Stewart was Senior Vice President, General
Counsel and Secretary of the Company from January 1981 to August 1988.
Dr. Murray L. Weidenbaum is an economist and educator and holds the
Mallinckrodt Distinguished University Professorship at Washington University in
St. Louis, Missouri, where he also serves as Director of the University Center
for the Study of American Business. He has been a faculty member at Washington
University since 1964. Dr. Weidenbaum is a director of May Department Stores
Company, Medicine Shoppe International and Harbour Group, Ltd.
Charles Wohlstetter was elected Chairman of the Board of Directors of the
Company effective July 1, 1992. Mr. Wohlstetter has been Vice Chairman of the
Board of Directors of GTE Corporation since March 14, 1991, the date on which
Contel Corporation merged into GTE Corporation. Mr. Wohlstetter was Chairman of
the Board of Directors of Contel Corporation from 1961 to March 14, 1991. Mr.
Wohlstetter is also a director of Contel Cellular Corporation and Fifth
Dimension, Inc.
No director of the Company has a family relationship with any other
director or executive officer of the Company.
In connection with the acquisition of securities of the Company by two life
insurance subsidiaries of The Charter Company (the 'Charter Subsidiaries'), a
Stockholders Agreement was entered into among the Company, The Charter Company
and the Charter Subsidiaries. The Stockholders Agreement provided, among other
things, that the Company would use its best efforts to elect two persons
designated by the Charter Subsidiaries to the Board of Directors. The
Stockholders Agreement also contained restrictions concerning the right of the
Charter Subsidiaries to vote, acquire, sell, and take certain other action with
respect to securities of the Company. The Stockholders Agreement was for a term
of ten years, commencing January 26, 1983, subject to early termination in
certain circumstances. In 1985, The Charter Company sold the Charter
Subsidiaries to MetLife. On December 31, 1990, one of the former Charter
Subsidiaries transferred all of the securities of the Company held by it to
MetLife Louisiana. See 'Security Ownership of Certain Beneficial Owners' for
information regarding the securities of the Company owned by MetLife Louisiana.
The Stockholders Agreement with MetLife Louisiana terminated on November
15, 1991.
132
<PAGE>
Messrs. Charles F. Luce and Stewart G. Nagler were initially elected to the
Board of Directors pursuant to the right of MetLife Louisiana under the
Stockholders Agreement to designate persons as nominees for the Board of
Directors.
On July 27, 1992, Mr. Stewart resigned as acting Chief Executive Officer,
President and Chief Operating Officer of the Company. Effective August 9, 1992,
Mr. Stewart entered into an agreement with the Company under which he will serve
as a consultant to the Company. In consideration for his consultative and
advisory services, Mr. Stewart received a payment of $300,000 on September 1,
1992, and receives equal monthly payments of $50,000 which began on October 1,
1992 and will continue through December 31, 1993. In the event of his death, the
Company will continue to pay the monthly fee to his estate throughout the term
of the agreement. At the time of his resignation, Mr. Stewart also received
$1,259,307, including previously advanced tax payments, in exchange for his
interests in the Company's Executive Security Plans.
The Board of Directors met nine times during fiscal year 1992. Each member
of the Board of Directors attended at least 75% of the meetings of the Board of
Directors and committees on which such directors served during fiscal year 1992.
The Board of Directors has an Executive Committee and the following standing
committees: Audit Committee; Compensation, Stock Award and Retirement Committee;
and Nominating Committee.
The Executive Committee's primary functions are (i) to consider and make
recommendations to the Board of Directors regarding management proposals on
long-term strategies, major asset sales and acquisitions, profit plans and
capital budgets, finance, dividend policies, and related matters; (ii) to
provide communication, as necessary, between the Board of Directors and
management; and (iii) to act on behalf of the Board of Directors, subject to
certain limitations, in the event circumstances exist which require immediate
action by the Board of Directors and a quorum of its members cannot be readily
assembled in person or by telephone. The Executive Committee met four times
during fiscal year 1992.
The Audit Committee's primary functions are (i) to aid the individual
directors of the Board of Directors as a whole in performing and fulfilling
their oversight responsibilities for financial reporting to the public; (ii) to
aid in maintaining the corporate image and credibility as it relates to
financial reporting; (iii) to recommend and support, with management and/or the
Board of Directors as appropriate, efforts to improve and maintain standards and
procedures for financial control and quality financial reporting; (iv) to
provide communication, as necessary, between the Board of Directors and control
and accounting, legal, internal auditing and the external auditors; and (v) to
recommend and support, with management and/or the Board of Directors, as
appropriate, efforts to assure the Company's compliance with the requirements of
the Foreign Corrupt Practices Act of 1977, as amended. The Audit Committee met
three times during fiscal year 1992.
The functions of the Compensation, Stock Award and Retirement Committee
(the 'Compensation Committee') are (i) to review the compensation of the
officers of the Company and to recommend to the Board of Directors reasonable
compensation therefor; and (ii) to review management proposals concerning
retirement matters, to consider amendments to the Company's retirement plans,
and to make recommendations to the Board of Directors in respect to such
amendments and proposals. The Compensation Committee met four times during
fiscal year 1992.
The Nominating Committee considers and recommends to the Board of Directors
from time to time suitable candidates for membership on the Board of Directors.
The Nominating Committee will consider nominees recommended by stockholders.
Stockholders wishing to submit a recommendation should write to the Nominating
Committee. The Nominating Committee met two times during fiscal year 1992.
133
<PAGE>
The following table shows the beneficial ownership, reported to the Company
as of December 15, 1993, of Common Stock, including shares as to which a right
to acquire ownership exists (for example, through the exercise of stock options
or through the conversion of securities) within the meaning of Rule 13d-3(d)(1)
under the Exchange Act for the Chief Executive Officer and the named executive
officers and all directors and executive officers as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
BENEFICIAL OWNERSHIP AFTER THE
ON DECEMBER 15, 1993 RECLASSIFICATION
------------------------- -------------------------
COMMON STOCK COMMON STOCK
------------------------- -------------------------
PERCENT PERCENT
NAME SHARES OF CLASS SHARES OF CLASS
- --------------------------------------------------------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Michael D. Burke----------------------------------------- 293,000(1) 2.056% 293,000(1) 1.300%
James E. Duncan------------------------------------------ 4,415(2) .031% 4,415(2) .020%
James W. Queen------------------------------------------- 16,923(3) .120% 16,923(3) .075%
William W. Sims------------------------------------------ 5,502(4) .039% 5,502(4) .024%
Perry W. Woofter----------------------------------------- 13,690(5) .097% 13,690(5) .061%
All directors and executive officers as a group
(22 individuals)--------------------------------------- 2,424,633(6) 16.912% 2,424,633(6) 10.618%
- ------------
(1) Includes 80,000 shares which Mr. Burke has the right to purchase, all of
which shares are subject to substantial restrictions and conditions of
forfeiture over a remaining four-year period. In addition, the shares shown
include 100,000 shares of Common Stock which Mr. Burke had the right to
acquire through the exercise of options which were exercisable on December
15, 1993, or within 60 days thereafter.
(2) The shares shown include 2,099 and 88 shares of Common Stock credited to the
account of Mr. Duncan under the Company's Thrift Plan and Employee Stock
Ownership Plan, respectively. In addition, the shares shown include 2,017
shares of Common Stock which Mr. Duncan had the right to acquire through the
exercise of options which were exercisable on December 15, 1993, or within
60 days thereafter.
(3) The shares shown include 88 shares of Common Stock credited to the account
of Mr. Queen under the Company's Employee Stock Ownership Plan and 15,060
shares of Common Stock which Mr. Queen had the right to acquire through the
exercise of options which were exercisable on December 15, 1993, or within
60 days thereafter.
(4) The shares shown include 60 shares of Common Stock credited to the account
of Mr. Sims under the Company's Employee Stock Ownership Plan and 5,442
shares of Common Stock which Mr. Sims had the right to acquire through the
exercise of options which were exercisable on December 15, 1993, or within
60 days thereafter.
(5) The shares shown include 88 shares of Common Stock credited to the account
of Mr. Woofter under the Company's Employee Stock Ownership Plan and 12,070
shares of Common Stock which Mr. Woofter had the right to acquire through
the exercise of options which were exercisable on December 15, 1993, or
within 60 days thereafter. Mr. Woofter retired from the Company in September
1993.
(6) The shares shown include 5,207 and 500 shares of Common Stock credited to
the accounts of directors and officers under the Company's Thrift Plan and
Employee Stock Ownership Plan, respectively, and 267,508 shares of Common
Stock which directors and executive officers have the right to acquire
through the exercise of options or awards which were exercisable on December
15, 1993, or within 60 days thereafter. The shares shown also include 3,000
shares of Common Stock acquired in the name of an executive officer's mother
with respect to which such executive officer has voting and investment
power.
</TABLE>
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and holders of more than 10% of the Company's voting stock to
file with the Commission initial reports of ownership and reports of changes in
ownership of Common Stock or other equity securities of the Company. The Company
believes that during the fiscal years ended December 31, 1992 and September 30,
1991, its directors, executive officers and holders of more than 10% of the
Company's voting stock complied with all Section 16(a) filing requirements with
the following exceptions: Ray C. Adam, Robert J. Caverly, Steven H. Grapstein,
Arthur Spitzer and Murray L. Weidenbaum, each was late in filing Form 3,
'Initial Statement of Beneficial Ownership of Securities,' following his
election as a director of the Company. Steven N. Janzen, who served as Vice
President of the Company until
134
<PAGE>
February 13, 1992, had one late report covering one transaction, which was
subsequently reported on a Form 5.
PROPOSAL NO. 4 -- APPROVAL OF EXECUTIVE LONG-TERM INCENTIVE PLAN
The Company has maintained various incentive stock option plans for the
purpose of attracting and retaining qualified employees and encouraging stock
ownership by those employees. The Board of Directors believes there is a need
for greater flexibility in fashioning appropriate incentives for employees
serving in various capacities with the Company. Many other companies have
addressed this issue in recent years by replacing separate single purpose plans
with a single 'omnibus' type of plan.
The Board of Directors has adopted the Tesoro Petroleum Corporation
Executive Long-Term Incentive Plan (the '1993 Plan'), subject to the approval of
the stockholders. The 1993 Plan will replace the Amended Incentive Stock Plan of
1982 (the '1982 Plan'). No future grants will be made under the 1982 Plan after
the 1993 Plan becomes effective, although grants made before such date that have
not been fully exercised will remain outstanding pursuant to their terms. The
following description summarizes the material provisions of the 1993 Plan but is
qualified in its entirety by reference to the full text of the 1993 Plan, which
is set forth in Appendix F to this Proxy Statement -- Prospectus. Since the
target goals specified in the 1993 Plan, and upon which benefit calculations
will be based, have not yet been established, the benefits to be paid pursuant
to the 1993 Plan are not determinable.
General
Persons eligible to participate in the 1993 Plan include all full-time,
active employees of the Company, including directors who are also employees of
the Company. The 1993 Plan will be administered by the Long-Term Executive
Compensation Committee, an ad hoc committee comprised entirely of independent
directors, or any other committee appointed by the Board of Directors consisting
of directors who are not employees of the Company (the 'Committee'). Subject to
the provisions of the 1993 Plan, the Committee may, from time to time, select
from all eligible employees, those to whom awards will be granted. The Committee
is currently considering approximately 30 employees for grants under the 1993
Plan. No member of the Committee will be eligible to receive any award, nor may
any member of the Committee receive an award under any other similar plan during
the year prior to service on the Committee.
The 1993 Plan is a flexible plan that will give the Committee broad
discretion to fashion the terms of awards in order to provide eligible
participants with stock-based incentives as the Committee deems appropriate. It
will permit the issuance of awards in a variety of forms, including (i)
restricted stock, (ii) incentive stock options, (iii) nonqualified stock options
(incentive and nonqualified stock options are referred to collectively as
'options'), (iv) stock appreciation rights and (v) performance share and
performance unit awards.
The 1993 Plan provides for the grant of up to 1,250,000 shares of the
Common Stock of the Company. The closing price per share of the Company's Common
Stock as traded on the New York Stock Exchange on December 27, 1993, was $5.625.
If any award granted under the 1993 Plan is canceled, terminates, expires or
lapses for any reason, subject to certain limited exceptions, any shares subject
to such award will become available for additional awards under the 1993 Plan.
However, in the event that prior to the award's cancellation, termination,
expiration or lapse, the holder of the award at any time received one or more
'benefits of ownership' pursuant to such award (as defined by the Commission,
pursuant to any rule or interpretation promulgated under Section 16 of the
Exchange Act), the shares subject to such award will not be made available for
regrant under the 1993 Plan. In the event of a stock dividend, stock split,
recapitalization or similar event, the Committee will equitably adjust the
aggregate number of shares subject to the 1993 Plan, the number of shares
subject to each outstanding award and the exercise prices of outstanding
options.
The 1993 Plan may be amended, modified or terminated by the Board of
Directors. However, without stockholder approval, no such amendment,
modification or termination may: (a) with limited exceptions, materially
increase the total number of shares which may be issued, (b) materially modify
the eligibility requirements for participation or (c) materially increase the
benefits accruing to
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participants. Unless earlier terminated by the Board of Directors or
stockholders, the issuance of awards under the 1993 Plan will cease as of
September 15, 2003.
AWARDS UNDER THE 1993 PLAN
Stock Options
Stock options granted under the 1993 Plan will provide for purchase of
shares of Common Stock at prices determined by the Committee; provided that the
option price shall not be less than the fair market value thereof on the date
the option is granted unless such option is granted in connection with a
deferral election under the 1993 Plan.
Options granted under the 1993 Plan shall be exercisable at such times and
subject to such restrictions and conditions as the Committee shall approve, but
in no event may any option be exercisable prior to six months following its
grant. Options may only be transferred under the laws of descent and
distribution and shall be exercisable only by the participant during the
participant's lifetime. The option exercise price is payable in cash or in
shares of Common Stock having a fair market value equal to the exercise price or
in a combination of cash and such shares. The Committee may also allow, along
with other means of exercise, cashless exercise as permitted under the Federal
Reserve Board's Regulation T, subject to applicable securities laws. Upon the
death, disability or retirement of a participant, all outstanding options shall
immediately vest and shall be exercisable for the shorter of their remaining
term or one year after termination of employment in the case of death or
disability, and three years after termination of employment in the case of
retirement. Upon termination of employment of a participant for any reason other
than set forth in the preceding sentence, all options held by the participant
which are not vested as of the effective date of termination shall be forfeited
and options which are vested as of the effective date of termination may be
exercised for three months following the effective date of termination of
employment; provided, however, the Committee, in its sole discretion, may
immediately vest all or any portion of the options of a participant not vested
as of such date. If employment of a participant is terminated by the Company for
cause, all outstanding options held by the participant are forfeited immediately
to the Company and no additional exercise period is allowed, regardless of
whether any of the options are vested.
Stock Appreciation Rights
Stock Appreciation Rights ('SARs') granted under the 1993 Plan may take the
form of Affiliated SARs, Freestanding SARs, Tandem SARs, or any combination of
these forms of SARs. Affiliated SARs may be granted in connection with related
stock options and may be automatically exercised upon exercise of the related
stock option, with the grant price being equal to the option price of the
related stock option. Freestanding SARs may be granted independent of the grant
of any stock option with a grant price at least equal to the fair market value
of a share of Common Stock on the date of grant. Tandem SARs are granted in
conjunction with a related stock option at a grant price equal to the option
price of the related stock option. Either the stock option or the Tandem SAR
will be adjusted for exercise of the other since the exercise of a stock option
or the Tandem SAR requires the surrender of the right to exercise the equivalent
portion of the stock option or the Tandem SAR, as applicable. The term of any
SAR granted under the 1993 Plan may not exceed ten years.
Upon exercise of an SAR, the participant will receive the difference
between the fair market value of one share of Common Stock on the date of
exercise and the grant price, multiplied by the number of shares with respect to
which the SAR is exercised. Payment due upon exercise of an SAR may be in cash,
in shares of Common Stock having a fair market value equal to the value of the
SAR being exercised, or partly in cash and partly in shares of Common Stock, as
determined by the Committee in its discretion. The Committee may impose
restrictions on the exercise of SARs, including the imposition of window periods
for exercise of an SAR for persons required to file reports pursuant to the
provisions of Section 16 of the Exchange Act. Upon the death, disability or
retirement of a participant, all outstanding SARs which are exercisable on the
termination date shall remain exercisable for the shorter of their remaining
term or one year after termination of employment in the case of death or
disability and three years after termination of employment in the case of
retirement. Upon the death, disability or retirement of a participant, all
outstanding SARs which are not
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exercisable on the termination date shall be forfeited regardless of whether
termination is due to death, disability or retirement. Upon termination of
employment of a participant for any reason other than set forth in the preceding
sentence, all SARs held by the participant which are not vested as of the
effective date of termination shall be forfeited and SARs which are vested as of
the effective date of termination may be exercised for three months following
the effective date of termination of employment; provided, however, that the
Committee, in its sole discretion, may immediately vest all or any portion of
the SARs of a participant not vested as of such date. If employment of a
participant is terminated by the Company for cause, all outstanding SARs held by
the participant are forfeited immediately to the Company and no additional
exercise period is allowed, regardless of whether any of the SARs are vested.
SARs may only be transferred under the laws of descent and distribution and
shall be exercisable during his or her lifetime only by the participant.
Restricted Stock
The Committee may grant restricted shares of Common Stock to eligible
employees, in such amounts, and subject to such terms and conditions (which may
depend upon or be related to performance goals and other conditions) as the
Committee shall determine in its discretion. Certificates for the shares of
Common Stock covered by the award shall have appropriate restrictive legends
placed on them with respect to such restrictions. Subject to the applicable
restrictions, the grantee shall have the rights of a stockholder with respect to
such shares. The shares of restricted stock may not be sold, transferred,
pledged, assigned, or otherwise alienated or hypothecated until the end of the
applicable restriction period established by the Committee or upon earlier
satisfaction of any other conditions specified by the Committee in its sole
discretion. In addition, no restricted stock granted under the 1993 Plan may
become vested in a participant sooner than six months following the date of its
grant. In the event employment of a participant is terminated by reason of
death, disability or retirement, all unvested shares of restricted stock shall
immediately be forfeited; provided, however, that the Committee, in its sole
discretion, shall have the right to provide for accelerated vesting of some or
all unvested shares of restricted stock. In the event employment of a
participant shall terminate for any other reason, all shares of restricted stock
held by the participant which are not vested as of the effective date of the
termination of employment shall be immediately forfeited and returned to the
Company; provided, however, that the Committee, in its sole discretion, shall
have the right, except in the case of termination of employment for cause, to
provide for the lapse of restrictions on the restricted stock following
employment termination, upon such terms and provisions as it deems proper.
Performance Shares and Performance Units
The Committee may grant Performance Shares and Performance Units awards to
eligible employees, in such amounts, and subject to such terms and conditions as
the Committee shall in its discretion determine. The grantee of such awards
shall receive payment of the value of Performance Shares and Performance Units
earned in cash or shares of Common Stock, or in a combination of cash and shares
of Common Stock, which have an aggregate fair market value equal to the value of
the earned Performance Shares at the close of the applicable performance period,
in such combination as the Committee shall, in its sole discretion, determine.
In the event the employment of a participant is terminated by reason of death,
disability, retirement or involuntary termination without cause during the
performance period, the participant shall receive a prorated payout of the
Performance Units and Performance Shares earned, which shall be determined by
the Committee, in its sole discretion, and shall be based upon the length of
time the participant held the award during the performance period and shall be
further adjusted based upon the achievement of the preestablished performance
goals. Such payment in the event of termination shall be made at the same time
as payments are made to participants who did not terminate employment during the
applicable performance period; provided, however, that the Committee, in its
sole discretion, shall have the power to accelerate the payment of the
Performance Units and Performance Shares to participants whose employment has
terminated. In the event that a participant's employment terminates for any
reason other than the foregoing reasons, all Performance Units and Performance
Shares shall be forfeited by the participant to the Company. Performance Units
and Performance Shares may not be sold, transferred, pledged, assigned or
otherwise alienated or hypothecated, other than by will or by
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the laws of descent and distribution. During the participant's lifetime, the
participant's rights under the 1993 Plan shall be exercisable only by the
participant or the participant's legal representative.
CHANGE-IN-CONTROL
In the event that (i) any 'person,' as that term is defined under the
Exchange Act (other than a trustee or other fiduciary holding securities under
an employee benefit plan of the Company, or a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company), acquires beneficial
ownership of more than 50% of the outstanding voting securities, (ii) a majority
of the individuals who constitute the Board of Directors at any time shall cease
to be made up of 'Qualified Directors,' and (iii) the stockholders of the
Company approve a merger or consolidation with or involving any other
corporation, other than in a transaction that would result in the voting
securities of the Company outstanding immediately prior to such transaction
continuing to represent at least 50% of the outstanding voting securities of the
Company immediately after such transaction, then any stock option or SAR
outstanding shall become fully vested and fully exercisable, any restriction
periods and restrictions imposed on restricted stock shall lapse, the target
value obtainable under all Performance Units and Performance Shares shall be
deemed to have been fully earned for the entire performance period and the
Committee may, in its discretion, make any other modifications to any awards as
determined by the Committee to be deemed appropriate before the effective date
of such transaction.
A 'Qualified Director' is a director who meets any of the following
criteria: (1) was a director immediately after the effective date of the
Reclassification, including the three new directors elected in connection
therewith; (2) was a director immediately after the Company's 1994 Annual
Meeting of Stockholders; or (3) any director nominated for election as a
director or elected to the Board of Directors by the directors to fill a vacancy
by a vote of directors, and at the time of such nomination or election at least
a majority of the directors were Qualified Directors.
ACCOUNTING TREATMENT OF 1993 PLAN AWARDS
Under current accounting rules, the grant of a stock option does not
require a charge to net income reported by the Company, except when the stock
option exercise price is below the fair market value at grant. However, the
grant of a stock option may have a dilutive effect on earnings per share. If an
SAR is granted, there will be a charge to income that will be adjusted (up or
down) during subsequent accounting periods to reflect the amount by which the
value of the shares subject to the award has changed since grant. The exercise
of a stock option does not require a charge to net income, except in the case of
an exercise through the delivery of previously acquired shares that have been
held by the optionee for less than six months. If the Committee grants
compensation in substitution for exercise of a stock option, the Company will
count the amount as a compensation expense; also, such settlement may have a
dilutive effect on earnings per share if payment is made in Common Stock. Upon
the grant of a restricted stock award or a Performance Share award, a charge to
income will be reported by the Company equal to the excess of the fair market
value of a share of Common Stock over the purchase price (if any) multiplied by
the number of shares a participant is entitled to receive pursuant to such
grant. This charge is generally accrued over the restriction or performance
period; in the case of a Performance Share award, the charge is subject to
subsequent adjustment as described above. If a restricted stock or performance
award expires due to the participant's failure to satisfy the applicable
conditions, the accrual of the award would be reversed. Shares subject to a
restricted stock award are considered to be issued and outstanding; under
certain circumstances shares that may be awarded pursuant to a Performance Share
award may also be considered issued and outstanding.
On June 30, 1993 the Financial Accounting Standards Board issued a proposed
Statement of Financial Accounting Standards, titled 'Accounting for Stock-based
Compensation,' that will significantly change employers' accounting for employee
stock option and other employee stock-based compensation plans. If the proposed
statement is adopted, it will require that employers recognize as compenstion
expense the fair value of stock-based compensation awarded to employees. The
fair value is to be determined on the date of grant based on the stock
price/option value on that date and the best estimate of the outcome of service-
and performance-related conditions (including vesting,
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performance targets and the expected option life). Compensation expense would be
adjusted in future periods only to reflect the outcome of performance criteria
and service-related factors, not for fluctuations in the stock price subsequent
to granting the award to the employee.
FEDERAL INCOME TAX CONSEQUENCES OF 1993 PLAN AWARDS
The following brief description of the tax consequences of awards under the
1993 Plan is based upon present federal tax laws and does not purport to be a
complete description of the federal tax consequences of the 1993 Plan.
There are generally no federal tax consequences either to the optionee or
to the Company upon the grant of a stock option. On exercise of an incentive
stock option, the optionee will not recognize any income and the Company will
not be entitled to a deduction for tax purposes, although such exercise may give
rise to liability for the optionee under the alternative minimum tax provisions
of the Code. Generally, if the optionee disposes of shares acquired upon
exercise of an incentive stock option within two years of the date of grant or
one year of the date of exercise, the optionee will recognize compensation
income and the Company will be entitled to a deduction for tax purposes in the
amount of the excess of the fair market value of the shares of Common Stock on
the date of exercise over the stock option exercise price (or the gain on sale,
if less). Otherwise, the Company will not be entitled to any deduction for tax
purposes upon disposition of such shares, and the entire gain for the optionee
will be treated as a capital gain. On exercise of a nonqualified stock option,
the amount by which the fair market value of the Common Stock on the date of
exercise exceeds the stock option exercise price will generally be taxable to
the optionee as compensation income and will generally be deductible for tax
purposes by the Company. The disposition of shares of Common Stock acquired upon
exercise of a nonqualified stock option will generally result in a capital gain
or loss for the optionee but will have no tax consequences for the Company.
The grant of an SAR or Performance Share award will not result in taxable
income for the grantee or in a tax deduction for the Company. Upon the
settlement of such a right or award, the grantee will recognize ordinary income
equal to the fair market value of any shares of Common Stock and/or any cash
received and the Company will be entitled to a tax deduction in the same amount.
An award of restricted shares of Common Stock will not result in income for the
grantee or in a tax deduction for the Company until such time as the shares are
no longer subject to forfeiture, unless the grantee elects otherwise. At that
time, the grantee generally will recognize ordinary income equal to the fair
market value of the shares less any amount paid for them, and the Company will
be entitled to a tax deduction in the same amount. Dividends paid on forfeitable
restricted shares are treated as compensation for federal tax purposes.
VOTING ON PROPOSAL NO. 4
The Board of Directors recommends a vote FOR the adoption of the 1993 Plan.
PROPOSAL NO. 5 -- APPOINTMENT OF AUDITORS
The Board of Directors considers it desirable that its appointment of the
firm of Deloitte & Touche as independent auditors for the Company and its
subsidiaries for 1993 be ratified by the stockholders. Representatives of
Deloitte & Touche are expected to be present at the Annual Meeting and to be
available to respond to appropriate questions. Such representatives will have
the opportunity to make a statement at the Annual Meeting if they desire to do
so.
VOTING ON PROPOSAL NO. 5
The Board of Directors recommends a vote FOR the appointment of the firm of
Deloitte & Touche as independent auditors for the Company and its subsidiaries
for 1993.
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EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION
The following table contains information concerning the annual and
long-term compensation for services in all capacities to the Company for the
fiscal years ended December 31, 1992, September 30, 1991, and September 30,
1990, and the three months ended December 31,1991, of those persons who were on
December 31, 1992, (i) the chief executive officer and (ii) the other four most
highly compensated executive officers of the Company (the 'named executive
officers').
SUMMARY COMPENSATION TABLE(1)
[CAPTION]
<TABLE>
ALL OTHER
LONG-TERM COMPENSA-
ANNUAL COMPENSATION COMPENSATION AWARDS TION($)(2)
-------------------------------------- ---------------------- -----------
OTHER RESTRICTED
NAME AND ANNUAL STOCK STOCK
PRINCIPAL SALARY BONUS COMPENSA- AWARD(S) OPTIONS
POSITION YEAR ($) ($) TION($)(3) ($)(4) (SHARES)
- ------------- ------------------- -------- ------- --------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael D.
Burke, 1990 -- -- -- -- -- --
President 1991 -- -- -- -- -- --
and Chief Three Months Ended
Executive December 31, 1991 -- -- -- -- -- --
Officer 1992 188,655 -- 6,666 458,333 500,000 15,000
James W.
Queen, 1990 160,000 -- -- -- -- --
Senior 1991 160,000 12,800 -- -- -- --
Vice Three Months Ended
President December 31, 1991 36,923 -- -- -- -- --
1992 166,154 -- -- -- -- 28,090
Perry W.
Woofter, 1990 160,000 -- -- -- --
Senior 1991 160,000 12,800 -- -- -- --
Vice Three Months Ended
President December 31, 1991 36,923 -- -- -- -- --
1992 166,154 -- -- -- -- 56,582
James E.
Duncan, 1990 99,996 -- -- -- -- --
Vice 1991 110,242 8,000 -- -- -- --
President Three Months Ended
December 31, 1991 26,543 -- -- -- -- --
1992 119,444 -- -- -- -- 46,197
William M.
Sims, 1990 117,000 -- -- -- --
Vice 1991 124,000 16,380 -- -- -- --
President Three Months Ended
December 31, 1991 30,000 -- -- -- -- --
1992 135,000 -- -- -- -- 43,481
- ------------
(1) The amounts shown in the Summary Compensation Table do not include any
compensation paid to Mr. Bruce A. Smith, employed by the Company on
September 14, 1992, as Vice President and Chief Financial Officer, or to Mr.
Gaylon H. Simmons, employed by the Company on January 4, 1993, as Senior
Vice President, Refining, Marketing and Crude Supply. See '-- Employment
Contracts and Change-In-Control Arrangements' for information related to
employment agreements with Mr. Smith and Mr. Simmons.
(2) In accordance with the transitional provisions applicable to the revised
rules on executive compensation disclosure adopted by the Commission,
amounts of All Other Compensation are excluded for fiscal years 1991 and
1990 and the three months ended December 31, 1991. All Other Compensation
includes relocation expenses of $15,000 for Mr. Burke; amounts contributed
to the Company's Thrift Plan of $2,954, $4,985 and $3,583 for Mr. Queen, Mr.
Woofter and Mr. Duncan, respectively; and amounts contributed by the Company
and earnings on the respective executive officer's account in the Funded
Executive Security Plan of $25,136, $51,597, $42,614 and $43,481 for Mr.
Queen, Mr. Woofter, Mr. Duncan and Mr. Sims, respectively.
(3) In accordance with the transitional provisions applicable to the revised
rules on executive compensation disclosure adopted by the Commission,
amounts of Other Annual Compensation are excluded for fiscal years 1991 and
1990 and the three months ended December 31, 1991. Other Annual Compensation
for Mr. Burke represents income tax reimbursements during fiscal year 1992.
The aggregate amount of perquisites and other personal benefits was less
than either
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$50,000 or 10% of the total annual salary and bonus reported for each of the
named executive officers.
(4) At December 31, 1992, Mr. Burke had not yet received certificates
representing 80,000 shares of Common Stock under the terms of a stock award
dated July 27, 1992, pending payment by Mr. Burke of the par value thereof.
Mr. Burke's right to sell these shares accrues in four equal installments of
20,000 shares each on the first, second, third and fourth anniversaries of
the date of grant, July 27, 1992. At December 31, 1992, the value of
restricted stock which the named executive officers owned or had the right
to purchase was $226,666, $6,222 and $6,664 for Mr. Burke, Mr. Queen and Mr.
Woofter, respectively, representing the difference between the closing stock
price on December 31, 1992, and the purchase price of the shares to the
named executive officers. Mr. Burke, Mr. Queen and Mr. Woofter are entitled
to receive dividends declared and paid on restricted shares which they own.
No dividends have been paid on the Common Stock since 1986.
</TABLE>
OPTION GRANTS AND EXERCISES
The following table sets forth information concerning individual grants of
stock options pursuant to the 1982 Plan during the fiscal year ended December
31, 1992, to the named executive officers. No stock appreciation rights were
granted under the 1992 Plan during fiscal year 1992.
OPTION GRANTS IN 1992
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
----------------------------------------------------------- AT ASSUMED ANNUAL RATES OF
% OF TOTAL STOCK PRICE APPRECIATION
OPTIONS GRANTED EXERCISE OR FOR OPTION TERM
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION --------------------------
NAME GRANTED(#) IN 1992 ($/SHARE) DATE 5%($) 10%($)
- --------------------------- ---------- --------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Burke----------- 500,000(1) 83% $ 4.84(2) July 26, 2002 1,521,922 3,856,854
James W. Queen------------- -- -- -- -- -- --
Perry W. Woofter(3)-------- -- -- -- -- -- --
James E. Duncan------------ -- -- -- -- -- --
William M. Sims------------ -- -- -- -- -- --
- ------------
(1) The option granted to Mr. Burke is exercisable on the eighth anniversary of
the date of grant; however, the right to exercise the option may be
accelerated to no fewer than five equal installments of 100,000 shares each
beginning one year from the date of grant. Such acceleration is based on
the passage of time and on the Company's achievement of specified share
price objectives (except for the first such installment for which no
minimum share price is required). The per share price objectives for the
second, third, fourth and fifth anniversaries are $7.00, $9.00, $11.00 and
$13.00, respectively, based on the average closing price of the Common
Stock at the end of each of the 30 days immediately preceding the
respective anniversary date. If any installment fails to become exercisable
because the per share price objective was not achieved, such installment
will become exercisable if the targeted average per share price for such
installment is achieved on any subsequent anniversary date of the date of
grant.
(2) The exercise price per share of this option is the average of the closing
price of the Common Stock for the ten trading days immediately preceding the
date of grant.
(3) Mr. Woofter retired from the Company in September 1993.
</TABLE>
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AGGREGATED OPTION/SAR EXERCISES IN 1992 AND OPTION/SAR VALUES AT DECEMBER 31,
1992
The following table reflects unexercised options to purchase shares of the
Common Stock and unexercised SARs granted to the named executive officers during
fiscal year 1992 and prior years under the 1982 Plan. None of the named
executive officers exercised any stock options or SARs during 1992.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
DECEMBER 31, 1992(#) DECEMBER 31, 1992($)(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Burke-------------- -- -- -- 500,000 -- --
James W. Queen---------------- -- -- 29,915 3,956 -- --
Perry W. Woofter(2)----------- -- -- 22,467 4,238 -- --
James E. Duncan--------------- -- -- 6,222 -- -- --
William M. Sims--------------- -- -- 11,956 2,180 -- --
- ------------
(1) Based on the closing price of the Common Stock on December 31, 1992, no
exercisable or unexercisable stock options or SARs were 'in-the-money.'
(2) Mr. Woofter retired from the Company in September 1993.
</TABLE>
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Act, or the Exchange Act that might incorporate
future filings, including this Proxy Statement -- Prospectus, in whole or in
part, the following report and the Performance Graph shall not be incorporated
by reference into any such filing.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee is composed entirely of non-employee directors
and is chaired by Peter M. Detwiler. The other members of the Compensation
Committee are Ray C. Adam, Robert J. Caverly, Raymond K. Mason, Sr., John J.
McKetta, Jr., and Murray L. Weidenbaum. The Compensation Committee is
responsible for reviewing all elements of executive compensation. The
Compensation Committee makes recommendations to the Board of Directors, which
ultimately is responsible for aligning the Company's compensation programs to
achieve the near-term goals of resolving the significant operational and
financial issues of the Company and to develop a new business strategy.
Ultimately the Compensation Committee has the responsibility for assuring
stockholders that total compensation programs are effective, responsible and
competitive when compared to other energy companies. This Committee Report
documents the basis on which 1992 compensation determinations were made and
further describes the components of officer compensation programs for the
Company, particularly the President and Chief Executive Officer and the other
officers named in the Summary Compensation Table.
Compensation Philosophy and Objectives of Executive Compensation Programs
It is the philosophy of the Company and the Compensation Committee that the
executive compensation program be directly linked to performance. In particular,
the Compensation Committee encourages officers to acquire and retain appropriate
levels of stock ownership so that the executives are focused on managing the
Company from the perspective of a stockholder. From time to time, the
Compensation Committee works with executive compensation consultants who assist
with the design, implementation and communication of various compensation plans.
With the objective of returning the Company to profitability, the Board of
Directors recently hired three key executives: Michael D. Burke as President and
Chief Executive Officer; Gaylon H. Simmons as Senior Vice President, Refining,
Marketing and Crude Supply; and Bruce A. Smith as Vice President and Chief
Financial Officer. The Board of Directors and the Compensation Committee believe
it is paramount to have an executive incentive program that motivates and
rewards these executives and the management team of the Company to restore
profitability and increase stockholder value. As a result, the Compensation
Committee, with the assistance of its compensation
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consultants, has extensively reviewed the Company's executive compensation
program and established criteria to reward performance.
The Compensation Committee has developed the following compensation
guidelines as the principles upon which compensation decisions are made.
* Provide a competitive total compensation package that enables the
Company to attract and retain key executives.
* Integrate all compensation components with the Company's annual and
long-term business objectives and strategy and motivate executives to
perform in a manner consistent with those objectives.
* Provide variable (at-risk) compensation opportunities that are linked
with the financial performance of the Company or strategic objectives
judged to be critical to achieving increased shareholder value.
* Provide incentives to improve corporate performance and stockholder
value.
Executive Compensation Program Components
The Company's executive compensation program components for executive
officers is comprised of base salary, annual performance-related incentives,
performance-based stock options, other stock options and restricted stock
awards. The compensation program components, which are overseen by the
Compensation Committee, are further explained below.
Base Salaries
A competitive base salary is vital to support the philosophy of management
development and career orientation of executives and, therefore, base salaries
for the executive officers are reviewed on an annual basis. The Compensation
Committee examines independent survey data reflecting the compensation of
executives at peer group companies who hold positions of similar responsibility.
The companies referenced in the Performance Graph are reflective of the
energy-related companies represented in these survey data sources.
Energy-related surveys are used because the scope of the Company's business
activities support this specific industry comparison adjusted to reflect the
Company's revenue size. While there is no specific weighting of these factors,
competitive positioning is the primary consideration in setting the executives'
salaries. Base salaries for the Company's executive officers, including the
named executive officers, are generally at or near the average of the surveyed
data given the Company's size and complexity relative to the surveyed companies.
The named executive officers, excluding Mr. Burke, received an increase in base
salary effective January 1, 1993. With the exception of certain salary increases
associated with office promotions, the last salary increase for these officers
occurred in December 1990.
Annual Incentive Compensation
Pursuant to their employment contracts, Messrs. Burke, Smith and Simmons
have a significant portion of their total compensation at risk through annual
incentive opportunities that are linked to key financial and operational
objectives for the Company on a consolidated basis. This part of the overall
compensation policy is designed to deliver competitive levels of compensation to
attain the short-term objectives which the Compensation Committee believes are
essential to achieving increased stockholder value over time. The Compensation
Committee from time to time uses an independent compensation consultant to
assist in determining target annual bonus levels that are competitive among the
petroleum industry. Bonuses are recommended by the Compensation Committee to the
Board of Directors at the end of the year and are generally paid in cash. The
amounts of such bonuses are determined by the Board of Directors and are paid
upon the achievement of performance objectives established by the Board of
Directors during each year pursuant to discussions conducted in good faith with
the executives. The employment contract target award of 40% for the President
and Chief Executive Officer is somewhat below the industry norm of 50%. No
awards
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were paid in fiscal year 1992; however, Messrs. Burke and Smith were each paid a
discretionary cash bonus in 1993 for their performance during 1992.
Long-Term Incentive Compensation
The Compensation Committee supports increased stock ownership by key
executives and believes that stock-based long-term incentives retain executive
management and focus the attention of participants on managing the Company from
a long-term investor's perspective. Therefore, executives are eligible to
receive stock options, performance options and awards of restricted stock from
time to time, giving them the right to purchase shares of stock or to receive
shares at specified future dates and/or when performance goals have been met.
The size of awards under this plan is based on competitive practices, with the
value of any stock options estimated using the Black-Scholes option valuation
model. During 1992, no stock options were granted as part of the ongoing
executive compensation. Grants to Mr. Burke and Mr. Smith were awarded in 1992
and to Mr. Simmons in 1993 in conjunction with their initial employment as
follows:
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------
NAME STOCK OPTIONS RESTRICTED STOCK AWARD
- -------------------------------------------------------------------- ------------- ----------------------
<S> <C> <C>
Michael D. Burke---------------------------------------------------- 500,000 100,000
Gaylon H. Simmons--------------------------------------------------- 150,000 --
Bruce A. Smith------------------------------------------------------ 100,000 --
</TABLE>
The Compensation Committee believes that a long-term incentive plan is
important as a means of retaining senior management over the long term. The plan
is reviewed annually to ensure an appropriate mix of base salary, annual bonus
and long-term rewards within the philosophy of providing competitive total
direct compensation opportunities.
Other Executive Programs
The Company also provides certain executive benefits and perquisites that
are considered necessary to offer fully competitive opportunities to its
officers. These include, but are not limited to, supplemental retirement
arrangements, employment agreements and change-in-control contracts.
Summary
The Compensation Committee, in making its recommendations to the Board of
Directors, has the responsibility for ensuring that the Company's compensation
program is in the best interest of its stockholders. The Compensation Committee
believes the program is competitive when compared to other companies in its
industry. Targeted awards under the annual incentive bonus and stock-based
long-term incentives are based on energy industry competitive (average)
practices. Actual payouts, if any, under these two components are contingent
upon the attainment of performance goals and/or stock appreciation. In addition,
the Compensation Committee believes the executive compensation programs
emphasize compensation that is sensitive to operational, financial and stock
performance, industry standards and comparisons, and that decisions made by the
Compensation Committee in 1992 are consistent with its stated compensation
philosophy.
Discussion of 1992 Compensation for the President and Chief Executive Officer
For fiscal year 1992, the Compensation Committee made the following
determinations regarding the compensation for Mr. Burke:
Base salary. Base salary was set at $450,000 on Mr. Burke's
employment date of July 27, 1992. The Committee determined that his base
salary was competitive relative to industry standards and necessary in
attracting Mr. Burke to become President and Chief Executive Officer.
Annual incentive award. No annual incentive payments were made to Mr.
Burke during 1992 under the provisions of the plan. Under terms of his
employment agreement and the Board of Directors' opinion that Mr. Burke is
guiding the Company in a positive direction toward
144
<PAGE>
profitability, a discretionary bonus of $77,706 has been paid in 1993 to
Mr. Burke for his performance during 1992.
Restricted stock awards. A restricted stock award of 100,000 shares,
exercisable at par value, was made in July 1992 to Mr. Burke as part of his
employment agreement. Restrictions on Mr. Burke's right to sell his
restricted stock will lapse in five equal annual installments of 20,000
shares each, with the first installment effective July 27, 1992.
Stock options. A stock option grant of 500,000 shares with an
exercise price of $4.84 per share was made on July 27, 1992, that is
exercisable on the eighth anniversary of the date of grant; however, the
right to exercise the option may be accelerated to not fewer than five
equal installments of 100,000 shares each beginning one year from the date
of grant. Such acceleration is based on the passage of time and, except for
the first installment for which no minimum share price is required, on the
achievement of specified per share share price objectives for the second,
third, fourth and fifth anniversaries of $7.00, $9.00, $11.00 and $13.00,
respectively.
COMPENSATION, STOCK AWARD AND RETIREMENT COMMITTEE
OF THE BOARD OF DIRECTORS
Peter M. Detwiler, Chairman
Ray C. Adam
Robert J. Caverly
Raymond K. Mason, Sr.
John J. McKetta, Jr.
Murray L. Weidenbaum
145
<PAGE>
PERFORMANCE GRAPH
The Stock Price Performance Graph below compares the cumulative total
return of the Common Stock to the cumulative total return of the S&P 500
Composite Index and a composite Peer Group which the Company considers
representative of companies with operations comparable to the Company. Companies
in this Peer Group are as follows: Ashland Oil, Inc.; Diamond Shamrock
Corporation; Getty Petroleum Corporation; Holly Corporation; Kerr-McGee
Corporation; Maxus Energy Corporation; Murphy Oil Corporation; Oryx Energy;
Pennzoil Company; Quaker State Corporation; Sun Company, Inc.; Tosco
Corporation; Total Petroleum (North America) Ltd.; Union Texas Petroleum
Holdings, Inc.; and Valero Energy Corporation. (This line graph is for the
period of five fiscal years commencing September 30, 1987 and ended December 31,
1992 and includes the transitional period from October 1, 1991 through December
31, 1991.)
LINE GRAPH OF DATA IN TABLE BELOW
<TABLE>
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG THE COMPANY, S&P 500 INDEX AND A COMPOSITE PEER GROUP
<CAPTION>
YEAR END (Sept. start date) 1987 1988 1989 1990 1991 Dec. 1991 Dec. 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Tesoro Petro. Corp. 100.00 84.9 67.2 52.9 46.2 30.3 20.2
S&P 500 Index 100.00 87.6 116.4 105.6 138.4 149.9 161.3
Industry Peer Group 100.00 94.3 108.1 108.2 96.1 95.1 89.3
- ------------
* Assumes that the value of the investment in Common Stock and each index was
$100 on September 30, 1987, and that all dividends were reinvested. Investment
is weighted on the basis of market capitalization.
</TABLE>
- ------------
NOTE: The stock price performance shown on the graph is not necessarily
indicative of future price performance.
146
<PAGE>
OTHER BENEFITS
The Company maintains a noncontributory qualified Retirement Plan which
covers officers and other salaried employees. Benefits under the plan are
payable on a straight life annuity basis and are based on the average monthly
earnings and years of service of participating employees. Average monthly
earnings used in calculating retirement benefits are primarily salary and bonus
received by the participating employee during the 36 consecutive months of the
last 120 months of service which produces the highest average monthly rate of
earnings.
In addition, the Company maintains an unfunded Executive Security Plan
('Amended Executive Security Plan') for executive officers and other key
personnel selected by the Chief Executive Officer. The Amended Executive
Security Plan provides for a monthly retirement income payment during retirement
equal to a percentage of a participant's Earnings. Earnings is defined under the
Amended Executive Security Plan to mean a participant's average monthly rate of
total compensation, primarily salary and bonus earned, for the 36 consecutive
calendar months which produce the highest average monthly rate of compensation
for the participant. The monthly retirement benefit percentage is defined as the
sum of 4% of Earnings for each of the first ten years of employment, plus 2% of
Earnings for each of the next ten years of employment, plus 1% of Earnings for
each of the next ten years of employment. The maximum percentage is 70%. The
Amended Executive Security Plan provides for the payment of the difference, if
any, between (a) the total retirement income payment calculated above and (b)
the sum of retirement income payments from the Company's Retirement Plan and
Social Security benefits.
The Company also maintains a Funded Executive Security Plan ('Funded Plan')
which covers only persons who participate in the Amended Executive Security Plan
and provides participants with substantially the same after-tax benefits as the
Amended Executive Security Plan. Advance payments are made to the extent a
participant is expected to incur a pre-retirement tax liability as a result of
his participation in the Funded Plan. The Funded Plan is funded separately for
each participant on an actuarially determined basis through a bank trust whose
primary asset is an insurance contract providing for a guaranteed rate of return
for certain periods. Amounts payable to participants from the Funded Plan reduce
amounts otherwise payable under the Amended Executive Security Plan.
The following table shows the estimated annual benefits payable upon
retirement under the Company's Retirement Plan, Amended Executive Security Plan
and the Funded Plan for employees in specified compensation and years of benefit
service classifications without reference to any amount payable upon retirement
under the Social Security law or any amount advanced before retirement. The
estimated annual benefits shown are based upon the assumption that the plans
continue in effect and that the participant receives payment for life. As of
January 1, 1993, the federal tax law generally limits maximum annual retirement
benefits payable by the Retirement Plan to any employee to $115,641, as adjusted
annually to reflect increases in the cost of living and adjusted actuarially for
retirement age. However, since the Amended Executive Security Plan and the
Funded Plan are not qualified under Section 401 of the Internal Revenue Code, it
is possible for certain retirees to receive annual benefits in excess of this
tax limitation.
<TABLE>
<CAPTION>
HIGHEST AVERAGE NUMBER OF YEARS OF BENEFIT SERVICE
ANNUAL RATE -----------------------------------------------------
OF COMPENSATION 10 15 20 25 30
------------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 50,000--------------------------------------------------- $ 20,000 25,000 30,000 32,500 35,000
$100,000--------------------------------------------------- $ 40,000 50,000 60,000 65,000 70,000
$150,000--------------------------------------------------- $ 60,000 75,000 90,000 97,500 105,000
$200,000--------------------------------------------------- $ 80,000 100,000 120,000 130,000 140,000
$250,000--------------------------------------------------- $ 100,000 125,000 150,000 162,500 175,000
$300,000--------------------------------------------------- $ 120,000 150,000 180,000 195,000 210,000
$350,000--------------------------------------------------- $ 140,000 175,000 210,000 227,500 245,000
$400,000--------------------------------------------------- $ 160,000 200,000 240,000 260,000 280,000
$450,000--------------------------------------------------- $ 180,000 225,000 270,000 292,500 315,000
$500,000--------------------------------------------------- $ 200,000 250,000 300,000 325,000 350,000
$550,000--------------------------------------------------- $ 220,000 275,000 330,000 357,500 385,000
</TABLE>
147
<PAGE>
The years of benefit service as of December 31, 1992, for the named
executive officers were as follows: Mr. Burke, none; Mr. Queen, 24 years; Mr.
Woofter, 11 years; Mr. Duncan, 20 years; and Mr. Sims, 9 years.
In addition to the retirement benefits described above, the Amended
Executive Security Plan provides for a pre-retirement death benefit payable over
eight years of four times a participant's annual base pay as of December 1
preceding a participant's date of death, less the amount payable from the Funded
Plan at the date of death. The amount payable from the Funded Plan at death is
based on the actuarial value of the participant's vested accrued benefit,
payable in 96 monthly installments or as a life annuity if a surviving spouse is
the designated beneficiary.
COMPENSATION OF DIRECTORS
Each member of the Board of Directors who is not an officer of the Company
receives compensation at the rate of $18,000 per year, and an additional $2,000
for each meeting of the Board of Directors or any committee thereof attended in
person, and $1,000 for each telephone meeting, including committee meetings held
on the same day as a meeting of the Board of Directors. Mr. Wohlstetter also
receives $100,000 per year for his services as Chairman of the Board of
Directors. In addition, the Chairman of the Audit Committee and the Chairman of
the Compensation Committee each receive $5,000 per year for their service in
such positions. The Company provides group life insurance benefits in the amount
of $100,000 and accidental death and dismemberment insurance up to a maximum of
$100,000 for each of the members of the Board of Directors who are not employees
of the Company. The premium for such insurance ranged from $136 to $4,260 for
each of these directors during fiscal year 1992. The Company currently provides
health insurance to non-employee members of the Board of Directors, who are not
otherwise eligible for employer-provided health benefit insurance, on the same
basis as for active employees, with the director paying his pro rata share of
health insurance premiums. Mr. Detwiler is the only non-employee director
provided health insurance by the Company. During the fiscal year 1992, the
Company paid $32,401 to Mr. Detwiler or to the providers of medical services as
reimbursement for medical expenses for Mr. Detwiler and his spouse.
EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS
Under an employment agreement dated July 27, 1992, Mr. Burke is employed
until July 27, 1995, at an annual base salary of not less than $450,000. In
addition to his annual base salary, the agreement provides that Mr. Burke shall
have the opportunity to earn an annual cash bonus of up to 40% of his base
salary earned during the year. The amount of such bonus is to be based on Mr.
Burke's performance as determined by the Board of Directors according to
objectives established by the Board of Directors each year pursuant to
discussions conducted in good faith with Mr. Burke.
Under an employment agreement dated September 14, 1992, Mr. Bruce A. Smith
is employed by the Company as Vice President and Chief Financial Officer. Mr.
Smith is employed until September 24, 1995, at an annual base salary of not less
than $200,000. In addition to his annual base salary, the agreement provides
that Mr. Smith shall have the opportunity to earn an annual cash bonus of up to
35% of his base salary earned during the year. The amount of such bonus is to be
based on Mr. Smith's performance as determined by the Board of Directors
according to objectives established by the Board of Directors each year pursuant
to discussions conducted in good faith with Mr. Smith. Mr. Smith was promoted to
Executive Vice President and Chief Financial Officer in September 1993.
Under an employment agreement dated January 4, 1993, Mr. Gaylon H. Simmons
is employed by the Company as the Senior Vice President, Refining, Marketing and
Crude Supply. Mr. Simmons is employed until January 4, 1996, at an annual base
salary of not less than $250,000. In addition to his annual base salary, the
agreement provides that Mr. Simmons shall have the opportunity to earn an annual
cash bonus of up to 37.5% of his base salary earned during the year. The amount
of such bonus is to be based on Mr. Simmons' performance as determined by the
Board of Directors
148
<PAGE>
according to objectives established by the Board of Directors each year pursuant
to discussions conducted in good faith with Mr. Simmons. Mr. Simmons was
promoted to Executive Vice President in September 1993.
The employment agreements with Mr. Burke, Mr. Smith and Mr. Simmons provide
that in the event the Company should terminate their employment without cause or
if they should resign their employment for 'good reason' (as 'good reason' is
defined in the employment agreement), they will be paid the greater of (i) a
lump sum payment equal to his base salary at the then-current rate for the
remaining months under the original term of the employment agreement and (ii) a
lump sum equal to one year of base salary under the employment agreement at the
then-current base salary rate. The employment agreements further provide that in
the event their employment is terminated within two years of a
change-of-control, they shall be paid within ten days of such termination a lump
sum equal to three years base salary at the then-current rate. A change of
control shall be deemed to have occurred if (i)(a) more than 30% of the combined
voting power of the Company's then outstanding securities is acquired, directly
or indirectly, and (b) at any time during the 24-month period thereafter, at
least a majority of the Board of Directors shall cease to consist of directors
of the Company who either were directors at the beginning of such 24-month
period or who subsequently became directors and whose election, or nomination
for election by the Company's stockholders, was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period, or (ii) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation, other than a
merger or consolidation that would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
Company or such surviving entity) at least 60% of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the company approve a plan of complete liquidation of the Company or an
agreement for sale or disposition by the Company of all or substantially all of
the company assets. Base salary for purposes of this payment is defined to
include the greatest annual amount paid to such executive officer during each of
the two years prior to the date of such termination under all bonus and
incentive compensation plans of the Company. The agreements further provide that
should such termination payments to such executive officer exceed the permitted
'parachute' payment limits described in Section 280G of the Code, so that an
excise tax is imposed on such executive officer under Section 4999 of the Code,
then such termination payments to such executive officer shall also include a
'gross-up' payment to make such executive officer whole for the tax liability
resulting from such termination and other payments.
149
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information, to the best of the Company's
knowledge, as to each person or group who on December 15, 1993, beneficially
owned more than 5% of the outstanding shares of any class of the voting
securities of the Company, and as adjusted to reflect ownership of such shares
after the Reclassification.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE THE AFTER THE
RECLASSIFICATION(1) RECLASSIFICATION(1)
------------------------ ----------------------
NAME AND ADDRESS NUMBER OF PERCENT NUMBER OF PERCENT
TITLE OF CLASS OF BENEFICIAL OWNER SHARES OF CLASS SHARES OF CLASS
- ----------------------------- ----------------------------------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Common Stock----------------- MetLife Security Insurance 2,184,085 15.5% 4,084,160 18.1%
Company of Louisiana
72 Eagle Rock Avenue
East Hanover, NJ 07936
Common Stock----------------- United Partners(2) 1,685,112(3) 11.9% 1,818,500 8.1%
c/o Pan Am Equities, Inc.
3 New York Plaza, 19th Floor
New York, New York 10004
Common Stock----------------- Oakville N.V.(4) 1,769,100 12.6% 1,769,100 7.8%
c/o Kuo Investment Company
805 Third Avenue, 14th Floor
New York, New York 10022
$2.20 Preferred Stock(5)----- MetLife Security Insurance 2,875,000 100.0% 2,875,000 100%
Company of Louisiana
72 Eagle Rock Avenue
East Hanover, NJ 07936
- ------------
(1) To the best of the Company's knowledge, the beneficial owners indicated
above possess sole voting and investment power with respect to the shares
shown to be owned by them.
(2) According to Schedule 13Ds on file with the Commission, 'United Partners' is
comprised of a number of individuals who agreed to act as a 'group' as
defined in Rule 13d-3 and Rule 13d-5(b)(1) under the Exchange Act. The
reported basis for the group is that such persons intend to act together in
order to attempt to protect and enhance the value of the shares of Common
Stock. The following persons together comprise United Partners: Fraydun
Manocherian, Atlantic Energy (U.S.A.) Corp., Amir Manocherian, Fame Equities
Company, Eskandar Manocherian, Berdar Equities Company, Parviz Yari, Alan
Kaufman, M.D., Louis Caiola, Kevin Flannery, Jed Manocherian, Greg
Manocherian, Caroline Manocherian, and Kimberly Strelov. The Schedule 13Ds
indicate that the individuals comprising 'United Partners' act independently
with respect to the voting and disposition of their shares and there is no
agreement or understanding among such persons in this respect.
(3) United Partners owns 42,000 shares of $2.16 Preferred Stock at December 15,
1993. The shares of Common Stock shown as beneficially owned by United
Partners before the Reclassification include 72,412 shares of Common Stock
which would be issuable upon the conversion of the 42,000 shares of $2.16
Preferred Stock into Common Stock at a conversion rate of 1.7241 shares of
Common Stock for each share of $2.16 Preferred Stock.
(4) According to Schedule 13Ds on file with the Commission, Oakville N.V., a
Netherlands Antilles corporation ('Oakville'), is a wholly-owned subsidiary
of Kuo Investment Limited, a Cayman Islands corporation ('Kuo'). According
to a Schedule 13D filed by Oakville in 1987, the following persons are its
directors and executive officers: (a) Peter Yun Siak Fu, President and
Director of Oakville; Director and officer of Kuo, (b) Peter Chong Cheng Fu,
Director and Secretary of Oakville; Director and officer of Kuo, (c) Ong
Beng Seng, Vice President and Director of Oakville; Director and officer of
Kuo, (d) David Song Long Ban, Treasurer and Director of Oakville; Director
and officer of Kuo and (e) Holland Intertrust (Curacao) N.V., a Netherlands
Antilles corporation, a Director of Oakville. Oakville N.V. reports that it
has sole voting and dispositive power over its voting securities.
(5) Each share of $2.20 Preferred Stock is convertible into .8696 shares of
Common Stock and votes with the Common Stock on all matters on which the
Common Stock is eligible to vote. Pursuant to the Amended MetLife
Memorandum, MetLife Louisiana will agree not to convert the $2.20 Preferred
Stock into Common Stock.
</TABLE>
150
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS -- TESORO PETROLEUM CORPORATION
Independent Auditors' Report-------------------------------------------------------------------------- F-2
Statements of Consolidated Operations -- Years Ended September 30, 1990,
September 30, 1991 and December 31, 1992, Three Months Ended December 31, 1991 and Nine Months Ended
September 30, 1992 and September 30, 1993 (unaudited)------------------------------------------------ F-3
Consolidated Balance Sheets -- September 30, 1991, December 31, 1992 and September 30, 1993
(unaudited)------------------------------------------------------------------------------------------ F-4
Statements of Consolidated Common Stock and Other Stockholders' Equity -- Years Ended September 30,
1990, September 30, 1991 and December 31, 1992, Three Months Ended December 31, 1991 and Nine Months
Ended September 30, 1992 and September 30, 1993 (unaudited)------------------------------------------ F-6
Statements of Consolidated Cash Flows -- Years Ended September 30, 1990,
September 30, 1991 and December 31, 1992, Three Months Ended December 31, 1991 and Nine Months Ended
September 30, 1992 and September 30, 1993 (unaudited)------------------------------------------------ F-7
Notes to Consolidated Financial Statements------------------------------------------------------------ F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Tesoro Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Tesoro
Petroleum Corporation and subsidiaries as of December 31, 1992 and September 30,
1991, and the related consolidated statements of operations, common stock and
other stockholders' equity and cash flows for the years ended December 31, 1992,
September 30, 1991 and September 30, 1990 and for the three-month period ended
December 31, 1991. These financial statements are the responsibility of the
Company'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.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Tesoro Petroleum Corporation
and subsidiaries at December 31, 1992 and September 30, 1991, and the results of
their operations and their cash flows for the years ended December 31, 1992,
September 30, 1991 and September 30, 1990 and for the three-month period ended
December 31, 1991, in conformity with generally accepted accounting principles.
As discussed in Note A of Notes to the Consolidated Financial Statements,
in 1992 the Company changed its methods of accounting for postretirement
benefits other than pensions and accounting for income taxes.
DELOITTE & TOUCHE
San Antonio, Texas
February 19, 1993
(March 24, 1993 as to Notes H and J)
F-2
<PAGE>
<TABLE>
TESORO PETROLEUM CORPORATION
STATEMENTS OF CONSOLIDATED OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
NINE MONTHS
YEARS ENDED THREE MONTHS YEAR ENDED
SEPTEMBER 30, ENDED ENDED SEPTEMBER 30,
---------------------- DECEMBER 31, DECEMBER 31, --------------------
1990 1991 1991 1992 1992 1993
----------- --------- ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Gross operating revenues (Note
I)------------------------------ $ 996,554 1,084,954 240,586 946,446 710,859 624,581
Interest income------------------- 5,840 4,209 682 3,170 2,528 1,406
Gain on sales of assets (Note
D)------------------------------ 1,669 119 9 4,024 4,825 64
Other----------------------------- 2,456 1,734 2,596 732 630 1,797
----------- --------- ------------ ------------ --------- ---------
Total Revenues---------------- 1,006,519 1,091,016 243,873 954,372 718,842 627,848
----------- --------- ------------ ------------ --------- ---------
Costs and Expenses:
Costs of sales and operating
expenses (Notes C and H)-------- 920,548 1,015,859 228,569 926,082 688,391 581,536
General and administrative-------- 20,226 17,003 2,849 25,849 14,985 10,946
Depreciation, depletion and
amortization-------------------- 12,761 15,005 4,225 16,552 12,402 15,350
Interest expense------------------ 20,797 18,804 4,966 21,115 15,919 12,801
Other----------------------------- 5,883 5,312 722 4,636 3,391 4,441
----------- --------- ------------ ------------ --------- ---------
Total Costs and Expenses------ 980,215 1,071,983 241,331 994,234 735,088 625,074
----------- --------- ------------ ------------ --------- ---------
Earnings (Loss) Before Income Taxes
and the Cumulative Effect of
Accounting Changes------------------ 26,304 19,033 2,542 (39,862) (16,246) 2,774
Income Tax Provision (Note G)--------- 3,602 15,094 2,958 5,383 4,129 2,435
----------- --------- ------------ ------------ --------- ---------
Earnings (Loss) Before the Cumulative
Effect of Accounting Changes-------- 22,702 3,939 (416) (45,245) (20,375) 339
Cumulative Effect of Accounting
Changes (Note A)-------------------- -- -- -- (20,630) (20,630) --
----------- --------- ------------ ------------ --------- ---------
Net Earnings (Loss)------------------- $ 22,702 3,939 (416) (65,875) (41,005) 339
----------- --------- ------------ ------------ --------- ---------
----------- --------- ------------ ------------ --------- ---------
Net Earnings (Loss) Applicable to
Common Stock------------------------ $ 13,495 (5,268) (2,717) (75,082) (47,911) (6,567)
----------- --------- ------------ ------------ --------- ---------
----------- --------- ------------ ------------ --------- ---------
Earnings (Loss) Per Primary and Fully
Diluted* Share:
Earnings (Loss) Before the
Cumulative Effect of Accounting
Changes------------------------- $ .96 (.37) (.19) (3.87) (1.94) (.47)
Cumulative Effect of Accounting
Changes (Note A)---------------- -- -- -- (1.47) (1.47) --
----------- --------- ------------ ------------ --------- ---------
Net Earnings (Loss)--------------- $ .96 (.37) (.19) (5.34) (3.41) (.47)
----------- --------- ------------ ------------ --------- ---------
----------- --------- ------------ ------------ --------- ---------
- ------------
* Anti-dilutive
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
<TABLE>
TESORO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1991 1992 1993
------------- ------------ -------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current Assets (Note H):
Cash and cash equivalents (includes restricted cash of $22,425
at September 30, 1993 as collateral for letters of
credit)----------------------------------------------------- $ 62,710 46,869 56,834
Short-term investments---------------------------------------- -- 20,021 1,477
Receivables, less allowance for doubtful
accounts of $6,069; $2,587 and $2,279,
respectively------------------------------------------------ 104,172 77,173 66,385
Inventories (Note C):
Crude oil, refined products and merchandise-------------- 69,614 70,875 49,104
Materials and supplies----------------------------------- 4,761 3,636 3,168
Prepaid expenses and other------------------------------------ 5,935 9,803 8,589
------------- ------------ -------------
Total Current Assets------------------------------------- 247,192 228,377 185,557
------------- ------------ -------------
Property, Plant and Equipment (Notes D and H):
Refining and marketing---------------------------------------- 271,363 275,213 279,251
Exploration and production, full-cost method
of accounting:
Properties being amortized------------------------------- 37,611 45,182 65,381
Properties not yet evaluated----------------------------- 8,242 1,482 3,366
Oil field supply and distribution----------------------------- 16,115 16,365 15,395
Corporate----------------------------------------------------- 16,027 10,431 11,026
------------- ------------ -------------
349,358 348,673 374,419
Less accumulated depreciation, depletion and
amortization------------------------------------------------ 141,857 150,191 165,146
------------- ------------ -------------
Net Property, Plant and Equipment------------------------ 207,501 198,482 209,273
------------- ------------ -------------
Other Assets:
Investment in Tesoro Bolivia Petroleum Company
(Note E)---------------------------------------------------- 15,450 2,786 4,191
Other--------------------------------------------------------- 26,683 17,077 15,630
------------- ------------ -------------
Total Other Assets--------------------------------------- 42,133 19,863 19,821
------------- ------------ -------------
$ 496,826 446,722 414,651
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
TESORO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1991 1992 1993
------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable---------------------------------------------- $ 68,640 49,120 42,946
Accrued interest---------------------------------------------- 7,748 14,401 6,389
Income taxes (Note G)----------------------------------------- 1,854 213 730
Other accrued liabilities------------------------------------- 15,724 15,773 18,044
Accrued dividends on preferred stocks and current portion of
redeemable preferred
stock (Notes J and K)--------------------------------------- -- -- 31,240
Current portion of long-term debt and other
obligations (Note H)---------------------------------------- 57,778 26,287 16,035
------------- ------------ -------------
Total Current Liabilities-------------------------------- 151,744 105,794 115,384
------------- ------------ -------------
Other Liabilities:
Accrued postretirement benefits (Note F)---------------------- -- 21,939 23,745
Deferred income taxes (Note G)-------------------------------- 8,771 7,402 5,925
Other (Note K)------------------------------------------------ 14,554 13,766 7,306
------------- ------------ -------------
Total Other Liabilities---------------------------------- 23,325 43,107 36,976
------------- ------------ -------------
Long-Term Debt and Other Obligations,
Less Current Portion (Note H)------------------------------------ 126,960 175,461 164,463
------------- ------------ -------------
Commitments and Contingencies (Note I)
$2.20 Redeemable Cumulative Convertible Preferred
Stock, Less Current Portion; $1 stated value; 2,875,000 shares
issued and outstanding; redemption and liquidation value of
$63,825; $71,731 and $76,475, respectively (Note J)-------------- 57,424 71,695 53,653
------------- ------------ -------------
Common Stock and Other Stockholders' Equity
(Notes H and K):
Preferred stock, no par value; authorized
5,000,000 shares including redeemable
preferred shares:
$2.16 Cumulative convertible preferred
stock; $1 stated value; 1,319,576; 1,319,563
and 1,319,563 shares issued and outstanding,
respectively; liquidation value of $35,721;
$39,283 and $41,421, respectively--------------------------- 1,320 1,320 1,320
Common stock, par value $.16 2/3; authorized
50,000,000 shares; 14,068,165; 14,071,040 and
14,069,799 shares issued and outstanding,
respectively------------------------------------------------ 2,345 2,345 2,345
Additional paid-in capital------------------------------------ 86,664 86,992 86,987
Retained earnings (deficit)----------------------------------- 47,209 (39,647) (46,214)
------------- ------------ -------------
137,538 51,010 44,438
Less deferred compensation------------------------------------ 165 345 263
------------- ------------ -------------
137,373 50,665 44,175
------------- ------------ -------------
$ 496,826 446,722 414,651
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
<TABLE>
TESORO PETROLEUM CORPORATION
STATEMENTS OF CONSOLIDATED COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(INFORMATION FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1993 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
$2.16 CUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED
-------------------- ---------------------- PAID-IN EARNINGS DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION
--------- ------- ----------- ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30, 1989----- 1,319,576 $1,320 14,061,839 $2,343 $ 86,630 $ 35,542 $ (433)
Net earnings------------------- -- -- -- -- -- 22,702 --
Cash dividends on preferred
stocks----------------------- -- -- -- -- -- (6,882) --
Exercise of stock options------ -- -- 2,507 1 19 -- --
Restricted common stock
awards----------------------- -- -- (4,394) (1) (41) -- 217
Other-------------------------- -- -- -- -- -- (32) --
--------- ------- ----------- ------- ---------- ---------- ------
Balances at September 30, 1990----- 1,319,576 1,320 14,059,952 2,343 86,608 51,330 (216)
Net earnings------------------- -- -- -- -- -- 3,939 --
Cash dividends on preferred
stocks----------------------- -- -- -- -- -- (8,028) --
Restricted common stock
awards----------------------- -- -- 8,213 2 56 -- 51
Other-------------------------- -- -- -- -- -- (32) --
--------- ------- ----------- ------- ---------- ---------- ------
Balances at September 30, 1991----- 1,319,576 1,320 14,068,165 2,345 86,664 47,209 (165)
Net loss----------------------- -- -- -- -- -- (416) --
Restricted common stock
awards----------------------- -- -- (1,120) (1) (6) -- 29
Other-------------------------- -- -- -- -- -- (8) --
--------- ------- ----------- ------- ---------- ---------- ------
Balances at December 31, 1991------ 1,319,576 1,320 14,067,045 2,344 86,658 46,785 (136)
Net loss----------------------- -- -- -- -- -- (65,875 ) --
Accrued dividends on preferred
stocks, currently not
declared or paid------------- -- -- -- -- -- (20,525 ) --
Conversion of preferred stock
to common stock-------------- (13) -- 22 -- -- -- --
Restricted common stock
awards----------------------- -- -- 4,095 1 334 -- (209)
Other-------------------------- -- -- (122) -- -- (32 ) --
--------- ------- ----------- ------- ---------- ---------- ------
Balances at December 31, 1992------ 1,319,563 1,320 14,071,040 2,345 86,992 (39,647 ) (345)
Net earnings------------------- -- -- -- -- -- 339 --
Accrued dividends on preferred
stocks, currently not
declared or paid------------- -- -- -- -- -- (6,882 ) --
Restricted common stock
awards----------------------- -- -- (1,241) -- (5) -- 82
Other-------------------------- -- -- -- -- -- (24 ) --
--------- ------- ----------- ------- ---------- ---------- ------
Balances at September 30, 1993----- 1,319,563 $1,320 14,069,799 $2,345 $ 86,987 $ (46,214 ) $ (263)
--------- ------- ----------- ------- ---------- ---------- ------
--------- ------- ----------- ------- ---------- ---------- ------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
<TABLE>
TESORO PETROLEUM CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
(DOLLARS IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED THREE MONTHS YEAR
SEPTEMBER 30, ENDED ENDED SEPTEMBER 30,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1990 1991 1991 1992 1992 1993
--------- --------- ------------ ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash Flows From (Used In) Operating
Activities:
Net earnings (loss)-------------------- $ 22,702 3,939 (416) (65,875) (41,005) 339
Adjustments to reconcile net earnings
(loss) to net cash from (used in)
operating activities:
Cumulative effect of accounting
changes---------------------------- -- -- -- 20,630 20,630 --
Depreciation, depletion and
amortization----------------------- 12,761 15,005 4,225 16,552 12,402 15,350
Gain on sales of assets-------------- (1,669) (119) (9) (4,024) (4,825) (64)
Other-------------------------------- 2,209 2,704 599 4,231 3,474 703
Changes in assets and liabilities:
Receivables------------------------ (53,930) 33,531 6,524 12,320 17,353 10,795
Inventories------------------------ (526) (20,663) (10,620) 7,986 6,540 22,237
Investment in Tesoro Bolivia
Petroleum Company---------------- (7,920) (5,991) 8,756 3,908 3,607 (1,405)
Other assets----------------------- 1,322 2,899 (4,748) 3,484 4,867 2,257
Accounts payable and other current
liabilities---------------------- 48,886 (11,253) (3,877) (5,282) 4,414 (10,961)
Payments of liability to State of
Alaska--------------------------- -- -- -- -- -- (12,264)
Other liabilities and
obligations---------------------- (6,072) (2,107) (774) 17,458 (2,617) 1,585
--------- --------- ------------ ------------ --------- ---------
Net cash from (used in) operating
activities--------------------- 17,763 17,945 (340) 11,388 24,840 28,572
--------- --------- ------------ ------------ --------- ---------
Cash Flows From (Used In) Investing
Activities:
Capital expenditures------------------- (23,082) (24,484) (3,858) (15,446) (10,292) (26,286)
Proceeds from sales of assets, net of
expenses----------------------------- 19,771 2,087 35 12,905 12,089 141
Purchases of short-term investments---- -- -- -- (23,976) (23,976) (20,293)
Sales of short-term investments-------- -- -- -- 3,955 -- 38,837
Other---------------------------------- 334 (2,298) 1 1,478 (306) (250)
--------- --------- ------------ ------------ --------- ---------
Net cash used in investing
activities--------------------- (2,977) (24,695) (3,822) (21,084) (22,485) (7,851)
--------- --------- ------------ ------------ --------- ---------
Cash Flows From (Used In) Financing
Activities:
Repurchase of debentures--------------- -- -- -- -- -- (9,675)
Payments of other long-term debt------- (1,052) (1,272) (512) (6,468) (2,342) (1,076)
Issuance of long-term debt------------- -- -- 3,000 2,024 2,024 --
Dividends on preferred stocks---------- (6,882) (8,028) -- -- -- --
Other---------------------------------- (8) (25) (7) (20) (20) (5)
--------- --------- ------------ ------------ --------- ---------
Net cash from (used in) financing
activities--------------------- (7,942) (9,325) 2,481 (4,464) (338) (10,756)
--------- --------- ------------ ------------ --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents---------------------------- 6,844 (16,075) (1,681) (14,160) 2,017 9,965
Cash and Cash Equivalents at Beginning of
Period--------------------------------- 71,941 78,785 62,710 61,029 61,029 46,869
--------- --------- ------------ ------------ --------- ---------
Cash and Cash Equivalents at End of
Period--------------------------------- $ 78,785 62,710 61,029 46,869 63,046 56,834
--------- --------- ------------ ------------ --------- ---------
--------- --------- ------------ ------------ --------- ---------
Supplemental Cash Flow Disclosures:
Interest paid-------------------------- $ 17,800 17,839 234 17,805 17,538 17,543
Income taxes paid---------------------- $ 5,015 13,694 3,425 6,446 5,601 3,448
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
TESORO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1992 AND 1993 IS
UNAUDITED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Tesoro Petroleum Corporation and its subsidiaries (collectively the 'Company' or
'Tesoro'). Certain accounts were consolidated during 1991 as a result of the
Company's acquisition of the remaining interest in a convenience store
operation.
All material intercompany accounts and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform to
the current presentation of financial information.
Interim Reporting
The interim consolidated financial statements are unaudited but, in the
opinion of management, incorporate all adjustments necessary for a fair
presentation of the Company's financial position and results of operations for
such interim periods. Such adjustments are of a normal recurring nature. For
information regarding an inventory liquidation charge, see Note C. The results
of operations for any interim period are not necessarily indicative of results
for the full year.
Accounting Changes
In January 1993, the Company announced its decision to adopt Statements of
Financial Accounting Standards ('SFAS') No. 106, 'Employers' Accounting for
Postretirement Benefits Other Than Pensions,' and No. 109, 'Accounting for
Income Taxes,' both effective as of January 1, 1992. Previous interim periods of
1992 were restated as a result of the adoption of these accounting standards.
SFAS No. 106 requires that the projected future cost of providing
postretirement benefits other than pensions, such as health care and life
insurance, be recognized as an expense as employees render service instead of
when benefits are paid. The Company had historically expensed these benefits on
a pay-as-you-go basis. The adoption of SFAS No. 106 resulted in a net charge of
$21.6 million, or $1.54 per share, for the cumulative effect of the change in
accounting principle for periods prior to 1992, which were not restated. In
addition, the adoption of SFAS No. 106 resulted in an increase of $1.2 million,
or $.09 per share, in the net loss before the cumulative effect of accounting
changes for 1992.
Pursuant to SFAS No. 109, deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. The cumulative effect of the change in the method of accounting for income
taxes from SFAS No. 96 for periods prior to 1992 was a net benefit of $1.0
million, or $.07 per share. Periods prior to 1992 were not restated. The
adoption of SFAS No. 109 did not have a significant effect on the 1992 net loss
before the cumulative effect of accounting changes.
F-8
<PAGE>
Cash and Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. During 1992, the
Company began investing in short-term debt securities with original maturities
in excess of 90 days. These investments are classified as short-term investments
on the Company's Consolidated Balance Sheets. Cash equivalents and short-term
investments are stated at cost, which approximates market value. For information
regarding restricted cash, see Note H.
In 1992, the Company adopted a policy to classify outstanding checks as
reductions of cash rather than accounts payable. Prior period amounts have been
reclassified to conform to the current policy.
Inventories
The Company follows the lower of cost (last-in, first-out basis -- LIFO) or
market method for valuing inventories of wholesale refined products and crude
oil. All other inventories are valued principally at the lower of cost
(generally on a first-in, first-out or weighted average basis) or market.
Futures and Options Hedge Contracts
The Company uses commodity futures and options contracts primarily to hedge
the impact of price fluctuations on anticipated purchases of crude oil. Gains
and losses on commodity futures and options hedge contracts are deferred until
recognized in income when the related crude oil is charged to costs of sales.
Property, Plant and Equipment
The Company uses the full-cost method of accounting for oil and gas
properties. Under this method, all costs associated with property acquisition
and exploration and development activities are capitalized into cost centers
that are established on a country-by-country basis. For each cost center, the
capitalized costs are subject to a limitation so as not to exceed the present
value of future net revenues from estimated production of proved oil and gas
reserves net of income tax effect plus the lower of cost or estimated fair value
of unproved properties included in the cost center. Capitalized costs within a
cost center, together with estimates of costs for future development,
dismantlement and abandonment, are amortized on a unit-of-production method
using the proved oil and gas reserves for each cost center. The Company's
investment in certain oil and gas properties is excluded from the amortization
base until the properties are evaluated. No gain or loss is recognized on the
sale of oil and gas properties except in the case of the sale of properties
involving significant remaining reserves. Proceeds from the sale of
insignificant reserves and undeveloped properties are applied to reduce the
costs in the cost centers.
Assets recorded under capital leases have been capitalized in accordance
with promulgations from the Financial Accounting Standards Board. Amortization
of such assets is recorded over the shorter of lease terms or useful lives under
methods which are consistent with the Company's depreciation policy for owned
assets.
Depreciation of other property is provided using primarily the
straight-line method with rates based on the estimated useful lives of the
properties and with an estimated salvage value of 20% for refinery assets and
generally 10% for other assets. Amortization of leasehold improvements is
provided using the straight-line method over the term of the respective lease or
the useful life of the asset, whichever period is less.
Environmental Expenditures
Environmental expenditures 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
F-9
<PAGE>
environmental assessments and/or remedial efforts are probable, and the cost can
be reasonably estimated. Generally, the timing of these accruals coincides with
completion of a feasibility study or the Company's commitment to a formal plan
of action.
Deferred Compensation
Deferred compensation represents the excess of market value over the sales
price of restricted common stock awarded to certain officers of the Company. The
deferred compensation is being amortized over the period from the date of award
to the dates the shares become unrestricted (the period for which the payment
for services is being made).
Earnings (Loss) Per Share
Primary earnings (loss) per share is calculated on net earnings (loss)
after deducting dividend requirements on preferred stocks and is based on the
weighted average number of common and common equivalent shares outstanding
during the period. Fully diluted earnings (loss) per share is the same as
primary earnings (loss) per share, since the assumed conversion of preferred
stocks to common shares would be anti-dilutive.
NOTE B -- CHANGE IN FISCAL YEAR-END
The Company changed its fiscal year-end from September 30 to December 31,
effective January 1, 1992. The Statement of Consolidated Operations and the
Statement of Consolidated Cash Flows for the three months ended December 31,
1991 are presented in the accompanying Consolidated Financial Statements.
Comparative financial information is presented below:
<TABLE>
STATEMENTS OF CONSOLIDATED OPERATIONS
($000)
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31,
-------------------------
1990 1991
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Gross operating revenues------------------------------------------------------- $ 334,098 240,586
Interest income---------------------------------------------------------------- 1,410 682
Gain on sales of assets-------------------------------------------------------- 177 9
Other-------------------------------------------------------------------------- 499 2,596
----------- -----------
Total Revenues------------------------------------------------------------ 336,184 243,873
----------- -----------
Costs and Expenses:
Costs of sales and operating expenses------------------------------------------ 312,047 228,569
General and administrative----------------------------------------------------- 4,033 2,849
Depreciation, depletion and amortization--------------------------------------- 3,058 4,225
Interest expense--------------------------------------------------------------- 4,639 4,966
Other-------------------------------------------------------------------------- 761 722
----------- -----------
Total Costs and Expenses-------------------------------------------------- 324,538 241,331
----------- -----------
Earnings Before Income Taxes-------------------------------------------------------- 11,646 2,542
Income Tax Provision---------------------------------------------------------------- 6,793 2,958
----------- -----------
Net Earnings (Loss)----------------------------------------------------------------- $ 4,853 (416)
----------- -----------
----------- -----------
Net Earnings (Loss) Applicable to Common Stock-------------------------------------- $ 2,552 (2,717)
----------- -----------
----------- -----------
Earnings (Loss) Per Primary and Fully Diluted* Share-------------------------------- $ .18 (.19)
----------- -----------
----------- -----------
- ------------
* Anti-dilutive
</TABLE>
F-10
<PAGE>
<TABLE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
($000)
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31,
------------------------
1990 1991
----------- ----------
(UNAUDITED)
<S> <C> <C>
Cash Flows From (Used In) Operating Activities:
Net earnings (loss)-------------------------------------------------------------- $ 4,853 (416)
Adjustments to reconcile net earnings (loss) to net cash used in operating
activities:
Depreciation, depletion and amortization------------------------------------ 3,058 4,225
Gain on sales of assets----------------------------------------------------- (177) (9)
Other----------------------------------------------------------------------- 836 599
Changes in assets and liabilities:
Receivables------------------------------------------------------------ 14,313 6,524
Inventories------------------------------------------------------------ (24,687) (10,620)
Investment in Tesoro Bolivia Petroleum Company------------------------- (4,383) 8,756
Other assets----------------------------------------------------------- (3,325) (4,748)
Accounts payable and other current liabilities------------------------- (8,307) (3,877)
Other liabilities and obligations-------------------------------------- 1,105 (774)
----------- ----------
Net cash used in operating activities---------------------------------- (16,714) (340)
----------- ----------
Cash Flows From (Used In) Investing Activities:
Capital expenditures------------------------------------------------------------- (6,136) (3,858)
Proceeds from sales of assets, net of expenses----------------------------------- 692 35
Other---------------------------------------------------------------------------- (829) 1
----------- ----------
Net cash used in investing activities---------------------------------- (6,273) (3,822)
----------- ----------
Cash Flows From (Used In) Financing Activities:
Payments of long-term debt------------------------------------------------------- (409) (512)
Issuance of long-term debt------------------------------------------------------- -- 3,000
Dividends on preferred stocks---------------------------------------------------- (2,294) --
Other---------------------------------------------------------------------------- 2 (7)
----------- ----------
Net cash from (used in) financing activities--------------------------- (2,701) 2,481
----------- ----------
Decrease in Cash and Cash Equivalents------------------------------------------------- (25,688) (1,681)
Cash and Cash Equivalents at Beginning of Period-------------------------------------- 78,785 62,710
----------- ----------
Cash and Cash Equivalents at End of Period-------------------------------------------- $ 53,097 61,029
----------- ----------
----------- ----------
Supplemental Cash Flows Disclosures:
Interest paid-------------------------------------------------------------------- $ 218 234
Income taxes paid---------------------------------------------------------------- $ 2,663 3,425
</TABLE>
NOTE C -- INVENTORIES
In 1993, implementation of a market-driven strategy by the Company's
refining and marketing operations resulted in a reduction in inventory levels at
the Company's refinery. The Company has determined that the inventories will
remain at reduced levels and will not be replaced at the 1993 year-end.
Accordingly, in September 1993, the Company recorded a non-cash LIFO charge of
$5.0 million for this inventory reduction.
Inventories valued by the LIFO method amounted to approximately $42.2
million, $63.7 million and $61.3 million at September 30, 1993, December 31,
1992 and September 30, 1991, respectively. At September 30, 1993, December 31,
1992 and September 30, 1991, inventories valued using LIFO
F-11
<PAGE>
were lower than replacement cost by approximately $15.4 million, $9.6 million
and $3.5 million, respectively.
NOTE D -- PROPERTY, PLANT AND EQUIPMENT
Effective May 1, 1992, the Company's subsidiaries, Tesoro Indonesia
Petroleum Company and Tesoro Tarakan Petroleum Company (collectively 'Tesoro
Indonesia'), sold their 100% interest in two separate contracts of operations
with Pertamina, the state-owned petroleum company of Indonesia. The sales
included all of Tesoro Indonesia's interests in fixtures, wells, pipelines,
tanks, compressors, rigs and other equipment in the contract areas, and
inventories of crude oil and materials and supplies. The consideration received
by Tesoro Indonesia totaled $6.6 million in cash and the assumption by the
purchaser of liabilities of approximately $6.3 million and all remaining
expenditure commitments. During 1992, these sales transactions resulted in
pretax net gains to the Company of approximately $5.8 million after related
expenses.
In 1992, the Company sold its corporate airplane and related assets for
$3.3 million in cash with no significant pretax gain to the Company. The Company
also sold certain oil and gas properties in South Texas for $2.1 million in
cash, which proceeds reduced the carrying value of the Company's oil and gas
properties and no gain or loss was recognized. In addition, the Company sold its
remaining drilling rigs resulting in cash proceeds of $1.6 million and a pretax
loss of $1.1 million during 1992.
During May 1991, the Company acquired the remaining interest in a
convenience store operation in Alaska. Prior to this time, the Company had a 50%
interest in the joint venture that owned these convenience store operations. For
further information regarding the impact of the acquisition, see Notes H and I.
During 1990, the Company completed the sale of substantially all of its oil
field tool rental assets and business for approximately $16.1 million with no
significant pretax gain to the Company.
NOTE E -- INVESTMENT IN TESORO BOLIVIA PETROLEUM COMPANY
The Company's subsidiary, Tesoro Bolivia Petroleum Company ('Tesoro
Bolivia'), holds an interest in a joint venture agreement to explore for and
produce hydrocarbons in Bolivia. Effective October 1, 1990, Tesoro Bolivia
increased its ownership interest in this joint venture. The joint venture has an
agreement with the Bolivian Government and YPFB, the Bolivian state-owned oil
company, for collection of receivables for sales of natural gas and condensate
to YPFB, which in turn sells the natural gas to the Republic of Argentina. The
agreement allowed the joint venture to receive countertrade in the form of
Argentine commodities as payment by Bolivia and YPFB for approximately $83.1
million of receivables due as of December 31, 1987. Of the $83.1 million, $38.0
million was received free of restrictions and $45.1 million was deposited into a
restricted bank account ('Restricted Account') from which only payments for
investments and expenses in Bolivia could be made. The agreement provides for
direct receipts free of restrictions for sales of condensate.
The agreement further provided that receipts from natural gas sales
subsequent to December 31, 1987 would also be placed in the Restricted Account
until April 1992, or until cumulative deposits to the Restricted Account equal
$90.0 million. Cumulative deposits to the Restricted Account have totaled $90.0
million and receipts for natural gas sales are now free of restrictions to the
joint venture. The decrease in the book value of this investment during 1992
represented the excess of net cash received free of restrictions over net
earnings of Tesoro Bolivia.
NOTE F -- EMPLOYEE BENEFIT PLANS
Retirement Plan
For all eligible employees, the Company provides a qualified
noncontributory retirement plan. Plan benefits are based on years of service and
compensation. It is the Company's policy to fund costs accrued to the extent
such costs are tax deductible.
F-12
<PAGE>
The components of net pension expense (income) for the Company's retirement
plan are presented below:
1990 1991 1992
--------- --------- ---------
($000)
Service Costs------------------------------ $ 714 762 717
Interest Cost------------------------------ 3,316 3,482 3,492
Actual (Return) Loss on Plan Assets-------- 1,400 (7,646) (1,763)
Net Amortization and Deferral-------------- (6,294) 3,167 (2,231)
--------- --------- ---------
Net Pension Expense (Income)---------- $ (864) (235) 215
--------- --------- ---------
--------- --------- ---------
For the nine months ended September 30, 1993 and September 30, 1992 and the
three months ended December 31, 1991, net pension expense for the Company's
retirement plan totaled $207,000, $305,000 and $90,000, respectively.
In addition to the retirement plan pension expense (income) above, during
the nine months ended September 30, 1992, the Company recognized a curtailment
gain of $1.0 million for employee terminations in conjunction with a cost
reduction program. During 1990, the Company incurred costs of $1.4 million for
special termination benefits offered to early retirees and recognized a
curtailment gain of $.8 million for employee terminations in conjunction with
sales of assets.
The funded status of the Company's retirement plan and amounts included in
the Company's Consolidated Balance Sheets are set forth in the following table:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------- DECEMBER 31,
1990 1991 1992
---------- --------- ------------
($000)
<S> <C> <C> <C>
Actuarial Present Value of Benefit Obligation:
Vested benefit obligation---------------------------------------- $ 33,450 33,959 34,806
---------- --------- ------------
---------- --------- ------------
Accumulated benefit obligation----------------------------------- $ 34,927 35,556 36,460
---------- --------- ------------
---------- --------- ------------
Plan Assets at Fair Value--------------------------------------------- $ 36,255 39,772 39,326
Projected Benefit Obligation------------------------------------------ 39,108 40,305 40,989
---------- --------- ------------
Plan Assets Less Than Projected Benefit Obligation-------------------- (2,853) (533) (1,663)
Unrecognized Net Loss------------------------------------------------- 9,282 5,889 7,222
Unrecognized Prior Service Costs-------------------------------------- (850) (779) (588)
Unrecognized Net Transition Asset------------------------------------- (10,900) (9,664) (8,120)
---------- --------- ------------
Accrued Pension Expense Liability-------------------------------- $ (5,321) (5,087) (3,149)
---------- --------- ------------
---------- --------- ------------
</TABLE>
Retirement plan assets are primarily comprised of common stock and bond
funds. The actuarial assumptions used in determining net pension costs for the
Company's retirement plan in each of the periods presented above included a
discount rate and expected long-term return on plan assets of 9% per annum and
an increase in compensation levels of 6% per annum. The Company anticipates that
the discount rate at December 31, 1993 may be lower than 9%; therefore, the
benefit obligation at that date could be materially higher than presented above.
Executive Security Plan
The Company's executive security plan ('ESP') provides executive officers
and other key personnel with supplemental death or retirement benefits in
addition to those benefits available under the Company's group life insurance
and retirement plans. These supplemental retirement benefits are
F-13
<PAGE>
provided by a nonqualified, noncontributory plan and are based on years of
service and compensation. Funding is provided based upon the estimated
requirements of the plan. The components of net pension expense for the ESP are
presented below:
<TABLE>
<CAPTION>
1990 1991 1992
--------- --------- ---------
($000)
<S> <C> <C> <C>
Service Costs----------------------------------------------------------------- $ 341 581 293
Interest Cost----------------------------------------------------------------- 509 546 353
Actual Return on Plan Assets-------------------------------------------------- (643) (628) (1,004)
Net Amortization and Deferral------------------------------------------------- 474 590 994
--------- --------- ---------
Net Pension Expense------------------------------------------------------ $ 681 1,089 636
--------- --------- ---------
--------- --------- ---------
</TABLE>
For the nine months ended September 30, 1993 and September 30, 1992 and the
three months ended December 31, 1991, net pension expense for the ESP totaled
$556,000, $476,000 and $242,000, respectively.
During the nine months ended September 30, 1993 and September 30, 1992, and
the year ended December 31, 1992, the Company incurred additional ESP expense of
$.5 million, $3.3 million and $3.5 million, respectively, for settlement losses
and other benefits resulting from the cost reduction program, other employee
terminations and sales of assets. Additional ESP expense incurred during 1990
amounted to $1.0 million in settlement losses and special termination benefits,
of which $.4 million related to expenses associated with sales of assets.
The funded status of the ESP and amounts included in the Company's
Consolidated Balance Sheets are set forth in the following table:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- DECEMBER 31,
1990 1991 1992
--------- --------- ------------
($000)
<S> <C> <C> <C>
Actuarial Present Value of Benefit Obligation:
Vested benefit obligation---------------------------------------------- $ 5,240 6,368 2,410
--------- --------- ------------
--------- --------- ------------
Accumulated benefit obligation----------------------------------------- $ 5,240 6,420 2,464
--------- --------- ------------
--------- --------- ------------
Plan Assets at Fair Value--------------------------------------------------- $ 6,503 6,658 2,924
Projected Benefit Obligation------------------------------------------------ 5,240 6,420 2,738
--------- --------- ------------
Plan Assets in Excess of Projected Benefit Obligation----------------------- 1,263 238 186
Unrecognized Net Loss------------------------------------------------------- 1,741 2,147 1,409
Unrecognized Prior Service Costs-------------------------------------------- 1,421 1,287 679
Unrecognized Net Transition Obligation-------------------------------------- 2,653 2,412 1,254
--------- --------- ------------
Prepaid Pension Expense------------------------------------------------ $ 7,078 6,084 3,528
--------- --------- ------------
--------- --------- ------------
</TABLE>
Assets of the ESP consist of a group annuity contract. The actuarial
assumptions used in determining net pension costs for the ESP in each of the
periods presented above included a discount rate and expected long-term return
on plan assets of 9% per annum and an increase in compensation levels of 5% per
annum. The Company anticipates that the discount rate at December 31, 1993 may
be lower than 9%; therefore, the benefit obligation at that date could be
materially higher than presented above.
Postretirement Benefits Other than Pensions
In addition to providing pension benefits, the Company provides health care
and life insurance benefits to retirees and eligible dependents who were
participating in the Company's group insurance program at retirement. These
benefits are provided through unfunded defined benefit plans. The health care
plans are contributory, with retiree contributions adjusted periodically, and
contain other cost-sharing features such as deductibles and coinsurance. The
life insurance plan is noncontributory.
F-14
<PAGE>
As discussed in Note A, the Company adopted SFAS No. 106 effective January
1, 1992 and incurred a net charge of $21.6 million ($16.1 million for health
care benefits and $5.5 million for life insurance benefits) for the cumulative
effect of the change in accounting principle. Net periodic postretirement
benefits expense, other than pensions, for 1992 included the following
components:
<TABLE>
<CAPTION>
HEALTH LIFE
CARE INSURANCE TOTAL
------- --------- -------
($000)
<S> <C> <C> <C>
Service Costs-------------------------------------------------------------- $ 400 100 500
Interest Costs------------------------------------------------------------- 1,332 457 1,789
------- --------- -------
Net Periodic Postretirement Expense----------------------------------- $ 1,732 557 2,289
------- --------- -------
------- --------- -------
</TABLE>
For the nine-month periods ended September 30, 1993 and 1992,
postretirement health care benefits amounted to $1,362,000 and $1,299,000,
respectively, and postretirement life insurance benefits amounted to $444,000
and $418,000, respectively. Prior to 1992, the costs of providing health care
and life insurance benefits to retired employees were expensed as claims were
paid. In 1991 and 1990, the costs of providing retirees with health care
benefits amounted to $751,000 and $621,000, respectively, and life insurance
benefits amounted to $299,000 and $288,000, respectively. For the three months
ended December 31, 1991, retiree health care and life insurance benefits totaled
$191,000 and $59,000, respectively.
The Company continues to fund the cost of postretirement health care and
life insurance benefits on a pay-as-you-go basis. The following table shows the
combined status of the plans reconciled with the amounts recognized in the
Company's Consolidated Balance Sheet at December 31, 1992:
<TABLE>
<CAPTION>
HEALTH LIFE
CARE INSURANCE TOTAL
-------- --------- --------
($000)
<S> <C> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees------------------------------------------------------------ $ 12,183 4,038 16,221
Active participants eligible to retire------------------------------ 625 615 1,240
Other active participants------------------------------------------- 4,144 1,154 5,298
-------- --------- --------
16,952 5,807 22,759
Unrecognized Net Loss---------------------------------------------------- (820) -- (820)
-------- --------- --------
Accrued Postretirement Benefit Costs-------------------------------- $ 16,132 5,807 21,939
-------- --------- --------
-------- --------- --------
</TABLE>
The weighted average annual assumed rate of increase in the per capita cost
of covered health care benefits was assumed to be 12% for 1993, decreasing
gradually to 7% by the year 2010 and remaining at that level thereafter. This
health care cost trend rate assumption has a significant effect on the amount of
the obligation and periodic cost reported. For example, an increase in the
assumed health care cost trend rates by one percentage point in each year would
increase the accumulated postretirement obligation as of December 31, 1992 by
$3.0 million and the aggregate of service cost and interest cost components of
net periodic postretirement benefits for the year then ended by $.3 million.
The weighted average discount rate and the compensation increase rate used
in determining the accumulated postretirement benefit obligation as of December
31, 1992 and 1991 were 8.5% per annum and 6% per annum, respectively.
Thrift Plan
The Company's employee thrift plan provides for contributions by eligible
employees into designated investment funds, with a matching contribution by the
Company of 50% of the employee's basic contribution. The Company's contributions
amounted to $474,000, $439,000 and $410,000 during 1992, 1991 and 1990,
respectively. For the nine months ended September 30, 1993 and September 30,
1992 and the three months ended December 31, 1991, the Company's contributions
amounted to $326,000, $342,000 and $107,000, respectively.
F-15
<PAGE>
Cost Reduction Program and Other Employee Terminations
In addition to the ESP settlement losses and other benefits and the
retirement plan curtailment gain discussed above, during the year ended December
31, 1992 and the nine months ended September 30, 1992, the Company incurred
charges of $6.6 million and $1.1 million, respectively, for expenses to
implement a cost reduction program and for other employee terminations.
NOTE G -- INCOME TAXES
The income tax provision includes the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED THREE MONTHS ENDED
SEPTEMBER 30, ENDED YEAR ENDED SEPTEMBER 30,
-------------------- DECEMBER 31, DECEMBER 31, ------------------
1990 1991 1991 1992 1992 1993
-------- -------- ------------- ------------ ------- -------
(UNAUDITED)
($000)
<S> <C> <C> <C> <C> <C> <C>
Federal:
Current------------------------- $ (447) 455 -- 418 -- --
Deferred------------------------ (1,051) (201) 80 (454) (585) --
Foreign -- Current------------------- 5,057 14,661 2,826 5,104 4,258 2,449
State -- Current--------------------- 43 179 52 315 456 (14)
-------- -------- ------------- ------------ ------- -------
$ 3,602 15,094 2,958 5,383 4,129 2,435
-------- -------- ------------- ------------ ------- -------
-------- -------- ------------- ------------ ------- -------
</TABLE>
Deferred income taxes and benefits under SFAS No. 109 are provided for
differences between financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Temporary differences and the
resulting deferred tax assets and liabilities at December 31, 1992 and September
30, 1993 are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1992 1993
------------ --------------
(UNAUDITED)
($000)
<S> <C> <C>
Deferred Tax Assets:
Net operating losses available for utilization through the year 2007------ $ 21,501 27,080
Settlement with the State of Alaska--------------------------------------- 24,476 20,967
Accrued postretirement benefits------------------------------------------- 6,947 6,947
Settlement with Department of Energy-------------------------------------- 4,616 4,616
Other--------------------------------------------------------------------- 12,137 8,107
------------ --------------
Total Deferred Tax Assets-------------------------------------------- 69,677 67,717
Deferred Tax Liabilities:
Accelerated depreciation and property-related items----------------------- (42,475) (40,738)
------------ --------------
Deferred Tax Assets Before Valuation Allowance--------------------------------- 27,202 26,979
Valuation Allowance------------------------------------------------------------ (27,202) (26,979)
State Income and Alternative Minimum Taxes------------------------------------- (742) (742)
Other-------------------------------------------------------------------------- (6,660) (5,183)
------------ --------------
Net Deferred Tax Liability------------------------------------------------ $ (7,402) (5,925)
------------ --------------
------------ --------------
</TABLE>
F-16
<PAGE>
The following table sets forth the components of the Company's results of
operations and a reconciliation of the normal statutory federal income tax with
the provision for income taxes:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED THREE MONTHS ENDED
SEPTEMBER 30, ENDED YEAR ENDED SEPTEMBER 30,
-------------------- DECEMBER 31, DECEMBER 31, -------------------
1990 1991 1991 1992 1992 1993
-------- -------- ------------- ------------ -------- -------
(UNAUDITED)
($000)
<S> <C> <C> <C> <C> <C> <C>
Earnings (Loss) Before Income Taxes
and the Cumulative Effect of
Accounting Changes:
United States----------------- $ 11,121 (15,581) (4,493) (60,117) (35,082) (2,325)
Foreign----------------------- 15,183 34,614 7,035 20,255 18,836 5,099
-------- -------- ------------- ------------ -------- -------
$ 26,304 19,033 2,542 (39,862) (16,246) 2,774
-------- -------- ------------- ------------ -------- -------
-------- -------- ------------- ------------ -------- -------
Income Taxes at Statutory U.S.
Corporate Tax Rate--------------- $ 8,943 6,471 864 (13,553) (5,524) 943
Effect of:
Foreign income taxes, net of
U.S. tax benefit------------ 5,057 14,661 2,826 5,104 4,258 2,449
State income taxes, net of
U.S. tax benefit------------ 43 179 52 315 456 (14)
Accounting limitation on
operating loss tax
benefit--------------------- -- -- -- 13,553 5,524 (943)
Utilization of net operating
loss carryforwards---------- (8,943) (6,471) (864) -- -- --
Alternative minimum tax------- (571) 455 -- -- -- --
Other------------------------- (927) (201) 80 (36) (585) --
-------- -------- ------------- ------------ -------- -------
Income Tax Provision---------- $ 3,602 15,094 2,958 5,383 4,129 2,435
-------- -------- ------------- ------------ -------- -------
-------- -------- ------------- ------------ -------- -------
</TABLE>
At December 31, 1992, the Company's net operating loss carryforwards were
approximately $63.2 million for regular tax and approximately $46.2 million for
alternative minimum tax. These tax loss carryforwards are available for future
years and, if not used, will begin to expire in the year 2004. Also at December
31, 1992, the Company had approximately $8.2 million of investment tax credits
and employee stock ownership credits available for carryover to subsequent
years. These credits, if not used, will begin to expire in the year 2001.
NOTE H -- LONG-TERM DEBT AND OTHER OBLIGATIONS
Long-term debt and other obligations consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1991 1992 1993
------------- ------------ -------------
($000)
<S> <C> <C> <C>
12 3/4% Subordinated Debentures due 2001--------------------- $ 105,138 107,510 97,656
Liability to State of Alaska--------------------------------- 51,166 71,989 61,633
Liability to Department of Energy---------------------------- 17,898 13,194 13,194
Industrial Revenue Bonds------------------------------------- 4,579 3,483 3,118
Capital Lease Obligations (interest at 11%)------------------ 4,909 4,368 4,053
Other (interest from 7% to 11%)------------------------------ 1,048 1,204 844
------------- ------------ -------------
184,738 201,748 180,498
Less Current Portion----------------------------------------- 57,778 26,287 16,035
------------- ------------ -------------
$ 126,960 175,461 164,463
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
F-17
<PAGE>
Based on the closing market price, the Company estimated that the fair
value of the 12 3/4% Subordinated Debentures, exclusive of accrued interest, was
approximately $99.3 million at December 31, 1992. The carrying value of the
other long-term debt and obligations approximated the Company's estimate of the
fair value of such items.
Aggregate maturities and sinking fund requirements for long-term debt
issues and obligations for each of the five years following December 31, 1992
are as follows:
<TABLE>
<CAPTION>
($000)
<S> <C>
1993---------------------------------------------------------------------------------------- $ 26,287
1994---------------------------------------------------------------------------------------- $ 16,012
1995---------------------------------------------------------------------------------------- $ 16,963
1996---------------------------------------------------------------------------------------- $ 18,511
1997---------------------------------------------------------------------------------------- $ 18,696
</TABLE>
Letter of Credit Requirements
On October 29, 1993, in order to avoid a $700,000 facility fee, the Company
elected to terminate its secured Letter of Credit Facility Agreement ('Credit
Facility') dated July 27, 1989, between the Company, two of its wholly-owned
subsidiaries, The Chase Manhattan Bank, N.A., as Agent, and a consortium of
other banks. The facility, which was scheduled to expire in March 1994, was
secured by the Company's refinery, a second lien on the Company's Bob West Field
gas reserves and a security interest in substantially all of the current assets
of the Company, including cash, accounts receivable and inventory. The Company
had previously amended the Credit Facility on September 30, 1993 to reduce the
commitment under the facility from $80 million to $40 million and to permit the
Company to issue up to $30 million of letters of credit with other banks. The
early termination of the Agreement by the Company eliminated a $700,000 facility
fee which would have been incurred to keep the facility outstanding through
March 10, 1994.
Under the terms of the previous Credit Facility, which was amended from
time to time, the Company was required to maintain a minimum $30.0 million cash
balance and specified levels of equity and working capital. At December 31,
1992, the Company's equity was approximately $9.7 million above the required
level. The previous Credit Facility did not include direct borrowing capability.
Among other matters, the previous Credit Facility limited, with certain
exceptions, the ability of the Company to (i) encumber its assets; (ii) incur
additional indebtedness, except that the Company could incur additional
indebtedness not to exceed $25.0 million to provide temporary working capital,
up to $50.0 million in aggregate amount at any time outstanding and as to which
recourse was limited to liens against domestic oil and gas properties and up to
$25.0 million for capital asset purchases and acquisitions under certain
conditions; (iii) make investments, advances or loans to other persons; (iv)
sell assets or sell and leaseback real or personal property; (v) pay dividends
on or purchase common stock; and (vi) make redemptions of preferred stocks. The
previous Credit Facility contained other covenants customary in letter of credit
agreements of this kind. Although the Credit Facility did not contain a
restriction on preferred dividend payments, the requirement to maintain a
specified level of equity limited the Company's ability to pay preferred
dividends. At December 31, 1992, under the terms of the previous Credit
Facility, the Company had outstanding letters of credit of $63 million and a
remaining unused credit line of $17 million.
During September 1993 and subsequent, the Company negotiated several
interim credit arrangements collateralized by either cash or inventory to permit
it to secure the purchases of crude oil feedstocks and to meet other operating
and corporate credit requirements. With respect to these interim credit
arrangements, the Company has entered into several uncommitted letter of credit
facilities which provide for the issuance of letters of credit on a cash-secured
basis. Total availability pursuant to the uncommitted letter of credit
arrangements is in excess of $65 million. As of September 30, 1993, the Company
had arranged for the issuance of $45 million of outstanding letters
F-18
<PAGE>
of credit. Cash restricted for use as collateral for outstanding letters of
credit amounted to $22.4 million at September 30, 1993.
In addition, effective September 30, 1993, the Company entered into a
waiver and substitution of collateral agreement ('Substitution Agreement') with
the State of Alaska, the Company's largest supplier of crude oil. Under the
Substitution Agreement, the Company has pledged the stock of Tesoro Alaska
Petroleum Company ('Tesoro Alaska'), a wholly-owned subsidiary of the Company,
and substantially all of its crude oil and refined product inventory in Alaska
to secure its purchases of royalty crude oil. The Substitution Agreement has
allowed the Company to reduce its letter of credit requirements to $28 million
as of November 1, 1993. This agreement extends through 1994 and contains various
covenants and restrictions customary to inventory financing transactions.
Exploration and Production Financing
Effective October 29, 1993, Tesoro Exploration and Production Company
('Tesoro E&P'), a wholly-owned subsidiary of the Company, entered into a $30
million reducing revolving credit facility ('E&P Facility') secured by the
capital stock of Tesoro E&P and its natural gas properties in the Bob West Field
in South Texas. Proceeds from the E&P Facility may be used for capital
requirements associated with the development of the Company's South Texas
natural gas properties, the acquisition and development of other oil and gas
properties and, subject to certain limitations, the repayment of outstanding
borrowings or advances to the Company.
The E&P Facility is subject to a quarterly borrowing base determination
which was initially determined to be $20 million. The facility, which expires
December 31, 1996, is guaranteed by the Company, contains certain financial
covenants that must be maintained by Tesoro E&P and bears interest at prime plus
1% or, at Tesoro E&P's option, Libor plus 2.5%. The E&P Facility contains
restrictions that prohibit borrowings under the facility to be used by Tesoro
E&P or the Company for debt service, including interest and principal on the
Company's 12 3/4% Subordinated Debentures, or for payment of common or preferred
dividends.
Subordinated Debt
In 1983, the Company issued $120,000,000 of 12 3/4% Subordinated Debentures
at a price of 84.559% of the principal amount, due March 15, 2001. The
debentures are redeemable at the option of the Company at 100% of principal
amount plus accrued interest. Sinking fund payments sufficient to retire
$11,250,000 principal amount of debentures annually are required beginning March
15, 1993. The Company has satisfied the 1993 requirement by purchasing
$11,250,000 principal amount of debentures at market value on January 26, 1993.
At September 30, 1993, December 31, 1992 and September 30, 1991, subordinated
debt amounted to $97,656,000 (net of discount of $11,094,000), $107,510,000 (net
of discount of $12,490,000) and $105,138,000 (net of discount of $14,862,000),
respectively. The indenture governing the subordinated debentures contains
restrictions on payment of dividends on the Company's common stock and purchases
or redemptions of common or preferred stocks. Due to losses which have been
incurred, the Company must generate approximately $148 million of future net
earnings applicable to common stock or from the issuance of capital stock before
future dividends can be paid on common stock or before purchases or redemptions
can be made of common or preferred stocks.
State of Alaska
On January 19, 1993, the Company and its subsidiary, Tesoro Alaska, entered
into an agreement ('Agreement') with the State of Alaska ('State') that settled
Tesoro Alaska's contractual dispute with the State. In addition to $62 million
accrued through September 30, 1992, a charge of $10.5 million for the settlement
was included in the Company's operations during the fourth quarter of 1992.
Under the provisions of the Agreement, Tesoro Alaska paid the State $10.3
million in January 1993. In addition, Tesoro Alaska will make variable monthly
payments to the State over the next nine years based on a per barrel charge that
increases over the nine-year period from 16 cents to 33 cents on the
F-19
<PAGE>
volume of feedstock processed at the Company's Alaska refinery. At the end of
the nine-year period, Tesoro Alaska is obligated to pay the State $60 million;
provided, however, that such payment may be deferred indefinitely by continuing
the variable monthly payments to the State beginning at 34 per barrel in 2002
and increasing one cent per barrel annually thereafter. Variable monthly
payments made after the nine-year period will not reduce the $60 million
obligation to the State. The imputed rate of interest used by the Company on the
$60 million obligation was 13%. The $60 million obligation is evidenced by a
security bond, and the bond and the throughput barrel obligations are secured by
a second mortgage on the Company's Alaska refinery. Tesoro Alaska's obligations
under the Agreement and the mortgage may be subordinated to current and future
senior debt obligations (including without limitation, principal, interest and
related expenses) of up to $175 million plus any indebtedness incurred in the
future to improve the Company's Alaska refinery.
The State's claim against Tesoro Alaska arose out of certain provisions in
present and past contracts with the State that required Tesoro Alaska to pay the
State additional retroactive amounts if the State prevailed in its ANS Royalty
Litigation against the producers of North Slope crude oil ('Producers'). As a
result of settlements between the State and the Producers, the State claimed
that the royalty oil it sold Tesoro Alaska and others was undervalued to the
extent that the Producers undervalued their oil.
Department of Energy
A Consent Order entered into by the Company with the Department of Energy
('DOE') settled all issues relating to the Company's compliance with federal
petroleum price and allocation regulations from 1973 through decontrol in 1981.
Under the provisions of the Consent Order, the Company has paid $40.5 million to
the DOE since 1989. The Company's remaining obligation is to pay $13.2 million,
plus interest at 6% per annum, over the next nine years.
Industrial Revenue Bonds and Other
The industrial revenue bonds mature in 1998 and require semiannual payments
of approximately $365,000. The bonds bear interest at a variable rate (4 1/2% at
December 31, 1992) which is equal to 75% of the National Bank of Alaska's prime
rate. The bonds are collateralized by the sulphur recovery unit at the Company's
Alaska refinery. The sulphur recovery unit had a carrying value of approximately
$7.3 million at December 31, 1992.
Capital Lease Obligations
The Company is the lessee of certain buildings and equipment under capital
leases with remaining lease terms of 4 to 25 years. These buildings and
equipment are used in the Company's convenience store operation in Alaska. The
assets and liabilities under capital leases are recorded at the present value of
the minimum lease payments. Property, plant and equipment at December 31, 1992
included assets held under capital leases of $6.1 million with a net book value
of $3.7 million.
F-20
<PAGE>
NOTE I -- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has various noncancellable operating leases related to
convenience stores, vessels, equipment, property and other facilities. Lease
terms range from one year to 40 years and generally contain multiple renewal
options. Future minimum annual payments for operating leases, as of December 31,
1992, are as follows:
<TABLE>
<CAPTION>
($000)
<S> <C>
1993---------------------------------------------------------------------------------------- $ 20,525
1994---------------------------------------------------------------------------------------- 15,750
1995---------------------------------------------------------------------------------------- 3,471
1996---------------------------------------------------------------------------------------- 2,678
1997---------------------------------------------------------------------------------------- 2,441
Thereafter---------------------------------------------------------------------------------- 15,897
----------
Total---------------------------------------------------------------------------------- $ 60,762
----------
----------
</TABLE>
Total rental expense for the years ended September 30, 1990, September 30,
1991 and December 31, 1992, the three months ended December 31, 1991, and the
nine months ended September 30, 1992 and September 30, 1993 was $10.0 million,
$19.9 million, $24.3 million, $6.0 million, $18.2 million and $24.5 million,
respectively. Rental expense for the years ended September 30, 1991 and December
31, 1992, the three months ended December 31, 1991 and the nine months ended
September 30, 1992 and September 30, 1993 included $9.9 million, $12.0 million,
$2.9 million, $8.8 million and $17.2 million, respectively, for the lease of two
vessels used to transport crude oil to or refined products from the Company's
Alaska refinery. The lease for one of these vessels extends through October 1994
with a renewal option available through October 1996. The lease for the second
vessel extends through July 1994 with a renewal option available through January
1995.
Gas Purchase and Sales Contract
The Company is selling gas from its Bob West Field to Tennessee Gas under a
1979 Gas Purchase and Sales Agreement (the 'Gas Contract') which expires in
January 1999. The Gas Contract provides that the price of gas shall be the
maximum price as calculated in accordance with the then effective Section
102(b)(2) (the 'Contract Price') of the Natural Gas Policy Act of 1978 ('NGPA').
In August 1990, Tennessee Gas filed a civil action in the District Court of
Bexar County, Texas against the Company and several other companies, seeking a
Declaratory Judgment that the Gas Contract is not applicable to the Company's
properties. Tennessee Gas claimed, among other things, that certain leases
covered by the Gas Contract terminated and therefore were automatically released
from the Gas Contract, eliminating the obligation of Tennessee Gas to purchase
gas from the Company. Tennessee Gas also challenged the quantity of gas which
can be sold under the Gas Contract and contended that the gas sales price was to
be calculated under the provisions of Section 101 of the NGPA rather than the
Contract Price. At September 30, 1993, the Section 101 price of $4.45 per Mcf
was $3.16 per Mcf less than the Contract Price, but $2.14 per Mcf above spot
market prices.
On June 24, 1992, the District Court trial judge returned a verdict in
favor of the Company. The District Court's judgment, entered on July 8, 1992,
ruled that Tennessee Gas must honor the Gas Contract pursuant to its terms.
Tennessee Gas filed a motion for reconsideration in the District Court on the
issue of the price to be paid for the gas under the Gas Contract, which was
denied by the court. On September 11, 1992, Tennessee Gas appealed the judgment
to the Court of Appeals for the Fourth Supreme Judicial District of Texas. On
August 25, 1993, the Court of Appeals affirmed the validity of the Gas Contract
as to the Company's properties and held that the price payable by Tennessee Gas
F-21
<PAGE>
for the gas was the Contract Price. The Court of Appeals determined, however,
(i) that the trial court erred in its summary judgment ruling that the Gas
Contract was not an output contract under the Texas Business and Commerce Code
('TBCA') and (ii) that a fact issue exists as to whether the increases in the
volumes of gas tendered to Tennessee Gas under the Gas Contract were made in bad
faith or were unreasonably disproportionate to prior tenders in contravention of
the provisions of Section 2.306 of the TBCA. Accordingly, the Court of Appeals
directed that this issue be remanded back to the trial court in Bexar County,
Texas. The Company has filed a motion for rehearing with the appellate court
regarding its decision that the Gas Contract creates an output contract governed
by the TBCA. Tennessee Gas has also filed a motion for rehearing with the
appellate court regarding the portions of its decision upholding the judgment of
the trial court. If Tennessee Gas should prevail in an appeal of the Court of
Appeals decision, the case could be sent back to the trial court for further
proceedings or the Company could be required to return to Tennessee Gas the
difference between the spot price for gas and the Contract Price. The Company
continues to receive payment from Tennessee Gas based on the Contract Price. If
the decision of the Court of Appeals is affirmed, the only issue for trial will
be whether the increases in the volumes of gas tendered to Tennessee Gas from
the Company's properties may have been made in bad faith or were unreasonably
disproportionate. Management of the Company believes its tenders were reasonable
under the Gas Contract and the market conditions at the time and will vigorously
defend on this issue if put to trial.
Although the outcome of any litigation is uncertain, management believes
that the Tennessee Gas claims are without merit and, based upon advice from
outside legal counsel, is confident that the decision of the trial court will
ultimately be upheld as to the validity of the Gas Contract and the Contract
Price; and that with respect to the output contract issue, the Company believes
that, if this issue is tried, the development of its gas properties and the
resulting increases in volumes tendered to Tennessee Gas will be found to have
been reasonable and in good faith. Accordingly, the Company has recognized
revenues, net of production taxes and marketing charges, for natural gas sales
through September 30, 1993, under the Gas Contract based on the Contract Price,
which net revenues aggregated $12.1 million more than the Section 101 prices and
$22.3 million in excess of the spot market prices. For further information
concerning the effect of the Gas Contract on certain of the Company's revenues
and cash flows, see Note N.
Other
On March 23, 1992, the Company received a Notice of Violation and
Compliance Order dated March 16, 1992 from the U.S. Environmental Protection
Agency ('EPA') alleging possible violations by the Company of the New Source
Performance Standards under the Clean Air Act at its Alaska refinery. The
Company continues to discuss the alleged violations with the EPA, and no final
resolution has been reached.
The Company is subject to extensive federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. The Company is currently
involved with two waste disposal sites in Louisiana at which it has been named a
potentially responsible party under the Federal Superfund law. Although this law
might impose joint and several liability upon each party at any site, the extent
of the Company's allocated financial contribution to the cleanup of these sites
is expected to be limited based on the number of companies and the volumes of
waste involved. At each site, a number of large companies have also been named
as potentially responsible parties and are expected to cooperate in the cleanup.
The Company is also involved in remedial response and has incurred cleanup
expenditures associated with environmental matters at a number of other sites
including certain of its own properties.
At September 30, 1993, the Company had $3.7 million of environmental
accruals included in other accrued liabilities. Based on currently available
information, including the participation of other parties or former owners in
remediation actions, the Company believes these accruals are adequate.
Conditions which require additional expenditures may exist for various Company
sites, including, but not limited to, the Company's refinery, services stations
(current and closed locations)
F-22
<PAGE>
and petroleum product terminals, and compliance with the Clean Air Act. The
amount of such future expenditures cannot presently be determined by the
Company.
NOTE J -- REDEEMABLE PREFERRED STOCK (MANDATORY)
In March 1983, the Company sold 2,875,000 shares of a series of redeemable
preferred stock at $20 per share. The stock is held by a life insurance company
('MetLife Louisiana') which is a subsidiary of Metropolitan Life Insurance
Company. The class of stock, of which there were 2,875,000 shares authorized,
issued and outstanding at September 30, 1991, December 31, 1992 and September
30, 1993, has been designated the $2.20 Cumulative Convertible Preferred Stock
('$2.20 Preferred Stock'). This series has one vote per share, is convertible
into .8696 shares of common stock for each share of preferred stock, has a
stated value of $1 per share and a liquidation price and a mandatory redemption
price of $20 per share and is redeemable at the option of the Company at $20 per
share plus accrued dividends. The redeemable preferred stock ranks in parity
with the $2.16 Cumulative Convertible Preferred Stock as to liquidation and
dividends. Beginning February 15, 1994, and each year following as long as
shares are outstanding, the Company is required to set aside an amount
sufficient to annually redeem 6 2/3% of the shares outstanding on February 15,
1994. However, the Company is currently prohibited from redeeming this stock
under provisions of the indenture for the 12 3/4% Subordinated Debentures.
The redeemable preferred stock was recorded at fair value on the date of
issuance less issue costs. The excess of the redemption value over the carrying
value is being accreted by periodic charges to retained earnings over the life
of the issue.
During the three months ended December 31, 1991, the year ended December
31, 1992 and the nine months ended September 30, 1993, the Company continued to
omit the regular quarterly dividends on its preferred stocks. As of September
30, 1993, preferred stock dividends in arrears amounted to approximately $18.2
million, or $6.32 1/2 per share, on the $2.20 Preferred Stock. During the nine
months ended September 30, 1993 and the year ended December 31, 1992, the
carrying value of the redeemable preferred stock was increased for mandatorily
redeemable accumulated dividends, currently not declared or paid, resulting in a
charge to retained earnings. For information regarding restrictions on dividend
payments, see Note H.
Pursuant to the terms and conditions of the $2.20 Preferred Stock, MetLife
Louisiana has the option to require the Company to redeem the stock (including
accrued dividends) from funds legally available if the Company is in arrears in
the payment of 12 or more quarterly dividends or fails to make three annual
mandatory redemptions which are scheduled to commence February 15, 1994. Upon
any such redemption, the Company would also be required to pay the accrued and
unpaid dividends on the Company's $2.16 Cumulative Convertible Preferred Stock.
Since the Company has continued to defer the payment of dividends, 12 1/2
quarterly dividends on the $2.20 Preferred Stock are in arrears as of November
15, 1993. In March 1993, the Company entered into a Forbearance Agreement with
MetLife Louisiana, which was subsequently amended in November 1993, which defers
the initial redemption of the $2.20 Preferred Stock scheduled for February 1994
and MetLife Louisiana's right to accelerate redemption of the $2.20 Preferred
Stock upon the occurrence of a default in the payment of dividends, as described
above, to the earlier of March 10, 1994 or the day following an occurrence of
either (i) an event of default under the E&P Facility or the Substitution
Agreement or (ii) any event which has resulted in or is likely to result in a
material adverse effect on the assets, business, operations, financial condition
or cash flow of the Company and its subsidiaries taken as a whole. Pursuant to
the terms and conditions of the $2.20 Preferred Stock, and the aforementioned
Forbearance Agreement, the Company is required to annually redeem 6 2/3% of such
shares outstanding commencing in March 1994, and all dividends in arrears on
both preferred stocks are required to be paid prior to such redemption.
Accordingly, the preferred shares redeemable in March 1994 and all accrued
dividends are classified as current liabilities at September 30, 1993. MetLife
Louisiana currently owns redeemable preferred stock and common stock
representing about 28% of the Company's voting securities.
F-23
<PAGE>
NOTE K -- COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
Preferred Stock
The Company has designated a class of preferred stock, of which there were
1,319,563 shares outstanding at September 30, 1993 and December 31, 1992 and
1,319,576 shares outstanding at September 30, 1991, and 200,000 shares reserved
for the granting of options under a stock option plan of the Company. This
class, designated the $2.16 Cumulative Convertible Preferred Stock ('$2.16
Preferred Stock'), has voting rights, is convertible into common stock at the
rate of 1.7241 shares of common stock for each share of preferred stock, has a
stated value of $1 per share and a liquidation value of $25 per share, and is
repurchasable at the option of the Company at liquidation value plus accrued
dividends. The $2.16 Preferred Stock ranks in parity with the redeemable
preferred stock as to liquidation and dividends.
During the three months ended December 31, 1991, the year ended December
31, 1992 and the nine months ended September 30, 1993, the Company continued to
omit the regular quarterly dividends on its preferred stock. As of September 30,
1993, preferred dividends in arrears amounted to approximately $8.2 million, or
$6.21 per share, on the $2.16 Preferred Stock. During the nine months ended
September 30, 1993 and the year ended December 31, 1992, the liability for
accumulated dividends, currently not declared or paid, on the $2.16 Preferred
Stock was accrued by a charge to retained earnings. For information regarding
restrictions on dividend payments, see Note H.
Preferred Stock Purchase Rights
In November 1985, the Company's Board of Directors declared a distribution
of one preferred stock purchase right for each share of the Company's common
stock. Each right will entitle the holder to buy 1/100 of a share of a newly
authorized Series A Participating Preferred Stock at an exercise price of $35
per right. The rights become exercisable on the tenth day after public
announcement that a person or group has acquired 20% or more of the Company's
common stock. The rights may be redeemed by the Company prior to becoming
exercisable by action of the Board of Directors at a redemption price of $.05
per right. If the Company is acquired by any person after the rights become
exercisable, each right will entitle its holder to purchase stock of the
acquiring company having a market value of twice the exercise price of each
right. At September 30, 1993 and December 31, 1992, there were 14,069,799 and
14,071,040 rights outstanding, respectively, which will expire in December 1995,
unless extended.
Incentive Stock Plans
The Company has an incentive stock plan providing for the granting of stock
incentives in the form of stock options, stock appreciation rights and stock
awards to officers and key employees. The stock options are exercisable in
accordance with the option plans and expire no later than ten years from the
date of grant.
Stock appreciation rights are exercisable in three to five annual
installments, normally beginning with the first anniversary date of the grant,
and expire ten years from the date of grant. The stock appreciation rights
entitle the employee to receive, without payment to the Company, the incremental
increase in market value of the related stock from date of grant to date of
exercise, payable in cash. Compensation expense related to stock appreciation
rights is charged to earnings over periods earned and amounted to a credit of
$30,000 in 1990 due to a decrease in the market value of the Company's common
stock. During the nine months ended September 30, 1993 and 1992, the years ended
December 31, 1992 and September 30, 1991 and the three months ended December 31,
1991, the market value of the Company's common stock remained below the exercise
price resulting in no impact on results of operations.
Restricted common stock awards totaling 100,000 shares and 12,000 shares
were granted at par value to certain officers of the Company in 1992 and 1991,
respectively. Compensation expense of $367,000 and $83,000 was deferred in 1992
and 1991, respectively, in conjunction with these stock awards.
F-24
<PAGE>
At September 30, 1993, December 31, 1992 and September 30, 1991 and 1990,
the Company had 260,065, 392,566, 852,381 and 853,098 unoptioned shares,
respectively, available for granting of options, rights and awards under the
incentive stock plan and 6,004,809, 6,004,809, 6,093,231 and 6,130,438 shares of
unissued common stock, respectively, reserved for conversion of preferred stock
and the incentive stock plan. During 1988, an amendment to the incentive stock
plan was approved which increased the number of shares of common stock which may
be granted or transferred from 1,500,000 to 2,000,000. The additional shares
have not been registered with the Securities and Exchange Commission. The
incentive stock plan expires as to issuance of options, rights and awards on
February 24, 1994.
A summary of activity in the incentive stock plans is set forth below:
<TABLE>
<CAPTION>
STOCK OPTIONS STOCK APPRECIATION RIGHTS
TOTAL ---------------------------- ----------------------------
RESERVED OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1989------------- 1,369,488 279,407 100,948 345,212 165,802
Becoming exercisable------------------ -- -- 50,985 -- 51,398
Exercised----------------------------- (7,434) (6,676) (6,676) (758) (758)
Cancelled or expired------------------ (8,011) (46,435) (20,827) (68,591) (42,993)
Stock awards-------------------------- 1,214 -- -- -- --
--------- ------------ ------------ ------------ ------------
Balances at September 30, 1990------------- 1,355,257 226,296 124,430 275,863 173,449
Becoming exercisable------------------ -- -- 39,684 -- 40,230
Cancelled or expired------------------ (25,207) (4,491) (4,491) (31,999) (31,999)
Stock awards-------------------------- (12,000) -- -- -- --
--------- ------------ ------------ ------------ ------------
Balances at September 30, 1991------------- 1,318,050 221,805 159,623 243,864 181,680
Granted at $4.837 to $4.840----------- -- 600,000 -- -- --
Becoming exercisable------------------ -- -- 34,243 -- 34,248
Cancelled or expired------------------ -- (109,171) (90,786) (119,414) (101,030)
Stock awards-------------------------- (88,400) -- -- -- --
--------- ------------ ------------ ------------ ------------
Balances at December 31, 1992-------------- 1,229,650 712,634 103,080 124,450 114,898
Granted at $2.925--------------------- -- 150,000 -- -- --
Becoming exercisable------------------ -- -- 125,954 -- 5,952
Cancelled or expired------------------ -- (6,007) (4,841) (11,492) (10,326)
--------- ------------ ------------ ------------ ------------
Balances at September 30, 1993------------- 1,229,650 856,627 224,193 112,958 110,524
--------- ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------
Price per share or right------------------- $2.925 to $12.625 $8.375 to $18.250
</TABLE>
F-25
<PAGE>
NOTE L -- BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED THREE MONTHS ENDED
SEPTEMBER 30, ENDED YEAR ENDED SEPTEMBER 30,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1990 1991(1) 1991 1992 1992 1993
--------- --------- ------------ ------------ --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Gross Operating Revenues:
Refining and Marketing(2)------------- $ 860.5 898.6 196.8 810.7 612.5 525.0
Exploration and Production------------ 32.4 59.2 12.5 42.7(3) 29.3 40.1(3)
Oil Field Supply and Distribution----- 103.7 134.3 36.5 93.5 69.4 59.5
Intersegment Eliminations(4)---------- -- (7.1) (5.2) (.4) (.3) --
--------- --------- ------------ ------------ --------- ---------
Total---------------------------- $ 996.6 1,085.0 240.6 946.5 710.9 624.6
--------- --------- ------------ ------------ --------- ---------
--------- --------- ------------ ------------ --------- ---------
Operating Profit (Loss), Including
Gain on Sales of Assets(5):
Refining and Marketing---------------- $ 48.2 19.3 1.7 (14.9) (1.4) 5.4
Exploration and Production------------ 16.8 35.6 7.4 29.1(3) 20.1 24.5
Oil Field Supply and Distribution----- 2.9 (.5) (1.2) (4.7) (2.8) (1.9)
--------- --------- ------------ ------------ --------- ---------
Total Operating Profit----------- 67.9 54.4 7.9 9.5 15.9 28.0
Corporate and Unallocated Costs------------ (41.6) (35.4) (5.4) (49.4) (32.2) (25.3)
--------- --------- ------------ ------------ --------- ---------
Earnings (Loss) Before Income Taxes and the
Cumulative Effect of Accounting
Changes---------------------------------- $ 26.3 19.0 2.5 (39.9) (16.3) 2.7
--------- --------- ------------ ------------ --------- ---------
--------- --------- ------------ ------------ --------- ---------
Total Assets:
Refining and Marketing(6)------------- $ 331.5 322.7 328.5 308.0 306.4 258.8
Exploration and Production------------ 37.1 59.7 50.5 37.3 38.5 63.0
Oil Field Supply and Distribution----- 35.0 32.2 27.6 23.2 27.5 21.1
Corporate----------------------------- 101.3 82.2 88.1 78.2 97.4 71.8
--------- --------- ------------ ------------ --------- ---------
Total Assets--------------------- $ 504.9 496.8 494.7 446.7 469.8 414.7
--------- --------- ------------ ------------ --------- ---------
--------- --------- ------------ ------------ --------- ---------
Depreciation, Depletion and
Amortization:
Refining and Marketing---------------- $ 8.4 9.0 2.4 10.2 7.6 7.6
Exploration and Production------------ 1.5 4.6 1.5 5.2 3.9 6.9
Oil Field Supply and Distribution----- 2.0 .5 .1 .5 .4 .3
Corporate----------------------------- .9 .9 .2 .7 .5 .5
--------- --------- ------------ ------------ --------- ---------
Total---------------------------- $ 12.8 15.0 4.2 16.6 12.4 15.3
--------- --------- ------------ ------------ --------- ---------
--------- --------- ------------ ------------ --------- ---------
Capital Expenditures:
Refining and Marketing---------------- $ 6.9 4.4 .8 3.7 2.9 4.0
Exploration and Production------------ 13.2 19.3 3.0 9.3 6.4 21.4
Oil Field Supply and Distribution----- 2.5 .4 -- 1.1 -- .2
Corporate----------------------------- .5 .4 .1 1.3 1.0 .7
--------- --------- ------------ ------------ --------- ---------
Total---------------------------- $ 23.1 24.5 3.9 15.4 10.3 26.3
--------- --------- ------------ ------------ --------- ---------
--------- --------- ------------ ------------ --------- ---------
(Notes on following page)
F-26
<PAGE>
- ------------
(1) Effective October 1, 1990, the Company acquired an additional 25% interest
in one of the Company's Contracts of Operation in Bolivia.
(2) Includes revenues of $165.9 million and $101.0 million for fiscal years 1991
and 1992, respectively, and $72.1 million and $16.6 million for the nine
months ended September 30, 1992 and 1993, respectively, derived from export
sales to customers in Far Eastern markets.
(3) Includes revenues and operating profit of $5.4 million and $6.8 million for
the year ended December 31, 1992 and the nine months ended September 30,
1993, respectively, resulting from a change in estimate of the Company's
revenues from natural gas production in South Texas (see Note I).
(4) Represents intersegment eliminations, primarily sales from Refining and
Marketing to Oil Field Supply and Distribution, at prices which approximate
market.
(5) Operating profit represents pretax earnings (loss) before certain corporate
expenses, interest income and interest expense. Total operating profit has
been reconciled to earnings (loss) before income taxes and the cumulative
effect of accounting changes. As discussed in Note D, operating profit from
the Exploration and Production segment in 1992 included a $5.8 million gain
from the sales of the Company's Indonesian operations.
(6) In May 1991, the Company acquired the remaining interest in a convenience
store operation in Alaska. For 1993, 1992 and 1991, the Refining and
Marketing segment included total assets of $12.6 million, $14.2 million and
$13.9 million, respectively, for these operations.
</TABLE>
F-27
<PAGE>
NOTE M -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents quarterly financial information and per share
data for the Company's common stock. Certain information has been restated for
the adoption of Statement of Financial Accounting Standards No. 106, 'Employers'
Accounting for Postretirement Benefits Other Than Pensions,' and No. 109,
'Accounting for Income Taxes,' both effective January 1, 1992 (see Note A).
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------------
SEPTEM- DECEM- SEPTEM- DECEM-
MARCH 31, JUNE 30, BER 30, BER 31, MARCH 31, JUNE 30, BER 30, BER 31, MARCH 31,
1991 1991 1991 1991 1992 1992 1992 1992 1993
--------- -------- ------- ------ --------- -------- ------- ------ ---------
(IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenues--------------- $ 252.2 248.4 254.2 243.9 223.2 251.2 244.5 235.5 226.5
--------- -------- ------- ------ --------- -------- ------- ------ ---------
--------- -------- ------- ------ --------- -------- ------- ------ ---------
Operating Profit (Loss):
As originally reported----- $ 19.6 5.4 9.7 7.9 3.1 5.9 7.9 (6.4) 6.0
Accounting changes--------- -- -- -- -- (.4) (.3) (.3) -- --
--------- -------- ------- ------ --------- -------- ------- ------ ---------
As restated---------------- $ 19.6 5.4 9.7 7.9 2.7 5.6 7.6 (6.4) 6.0
--------- -------- ------- ------ --------- -------- ------- ------ ---------
--------- -------- ------- ------ --------- -------- ------- ------ ---------
Net Earnings (Loss):
As originally reported----- $ 7.0 (4.9) (3.1) (.4) (11.0) (5.2) (3.2) (24.9) (2.9)
Accounting changes--------- -- -- -- -- (21.0) (.3) (.3) -- --
--------- -------- ------- ------ --------- -------- ------- ------ ---------
As restated---------------- $ 7.0 (4.9) (3.1) (.4) (32.0) (5.5) (3.5) (24.9) (2.9)
--------- -------- ------- ------ --------- -------- ------- ------ ---------
--------- -------- ------- ------ --------- -------- ------- ------ ---------
Earnings (Loss) Per Share:
As originally reported----- $ .33 (.51) (.37) (.19) (.95) (.53) (.39) (1.93) (.37)
Accounting changes--------- -- -- -- -- (1.49) (.03) (.02) -- --
--------- -------- ------- ------ --------- -------- ------- ------ ---------
As restated---------------- .33 (.51) (.37) (.19) (2.44) (.56) (.41) (1.93) (.37)
--------- -------- ------- ------ --------- -------- ------- ------ ---------
--------- -------- ------- ------ --------- -------- ------- ------ ---------
Market Price Per Common
Share:
High----------------------- $ 8 1/4 9 3/8 7 7/8 6 7/8 6 5/8 5 3/8 5 1/2 3 5/8 5 5/8
Low------------------------ 5 3/4 7 3/8 6 1/4 4 3/8 4 5/8 4 1/4 3 2 1/2 3
<CAPTION>
QUARTERS ENDED
-------------------
SEPTEM-
JUNE 30, BER 30,
1993 1993
-------- -------
(IN MILLIONS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Total Revenues--------------- 186.2 215.2
-------- -------
-------- -------
Operating Profit (Loss):
As originally reported----- 8.9 13.1
Accounting changes--------- -- --
-------- -------
As restated---------------- 8.9 13.1
-------- -------
-------- -------
Net Earnings (Loss):
As originally reported----- 1.5 1.7
Accounting changes--------- -- --
-------- -------
As restated---------------- 1.5 1.7
-------- -------
-------- -------
Earnings (Loss) Per Share:
As originally reported----- (.06) (.04)
Accounting changes--------- -- --
-------- -------
As restated---------------- (.06) (.04)
-------- -------
-------- -------
Market Price Per Common
Share:
High----------------------- 6 5/8 7 3/4
Low------------------------ 5 5 1/8
</TABLE>
The quarter ended March 31, 1992 included charges of $20.6 million for the
cumulative effect of accounting changes, $2.4 million for a cost reduction
program and $1.0 million for asset write-downs. The quarter ended June 30, 1992
included a $5.8 million gain from the sales of the Company's Indonesian
operations. The quarter ended December 31, 1992 included revenues and operating
profit of $5.4 million ($.38 per share) resulting from a change in estimate of
the Company's revenues from natural gas production in the South Texas field (see
Note I). The December 1992 quarter also included additional charges of $10.5
million for the settlement with the State of Alaska and $5.6 million for the
cost reduction program and other employee terminations. During the quarter ended
September 30, 1993, the Company recorded a non-cash charge of $5.0 million for
an inventory liquidation (see Note C).
F-28
<PAGE>
NOTE N -- EXPLORATION AND PRODUCTION ACTIVITIES
The following tables summarize the Company's exploration and production
activities. As discussed in Note D, in 1992 the Company sold its Indonesian
operations and certain oil and gas properties in South Texas. Effective October
1, 1990, the Company acquired an additional 25% interest in one of the Company's
Contracts of Operation in Bolivia (see Note E).
Capitalized Costs and Costs Incurred Relating to Oil and Gas Producing
Activities
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, --------------------
1992 1991 1990
------------ --------- ---------
($000)
<S> <C> <C> <C>
Capitalized Costs:
Proved properties-------------------------------------------------- $ 34,050 29,100 13,953
Unproved properties:
Properties being amortized------------------------------------ 11,132 8,511 5,675
Properties not being amortized-------------------------------- 1,482 8,242 6,945
------------ --------- ---------
46,664 45,853 26,573
Accumulated depreciation, depletion
and amortization------------------------------------------------- 15,006 15,713 11,081
------------ --------- ---------
Net Capitalized Costs----------------------------------------- $ 31,658 30,140 15,492
------------ --------- ---------
------------ --------- ---------
</TABLE>
<TABLE>
<CAPTION>
UNITED
STATES BOLIVIA INDONESIA TOTAL
-------- -------- ---------- ---------
($000)
<S> <C> <C> <C> <C>
Costs Incurred:
Year Ended December 31, 1992:
Property acquisition, unproved----------------------------------- $ 9 -- -- 9
Exploration------------------------------------------------------ 977 6 333 1,316
Development------------------------------------------------------ 7,922 -- 109 8,031
-------- -------- ---------- ---------
$ 8,908 6 442 9,356
-------- -------- ---------- ---------
-------- -------- ---------- ---------
Three Months Ended December 31, 1991:
Property acquisition, unproved----------------------------------- $ (7) -- -- (7)
Exploration------------------------------------------------------ 1,037 15 24 1,076
Development------------------------------------------------------ 1,881 -- 60 1,941
-------- -------- ---------- ---------
$ 2,911 15 84 3,010
-------- -------- ---------- ---------
-------- -------- ---------- ---------
Year Ended September 30, 1991:
Property acquisition, unproved----------------------------------- $ 582 -- 3 585
Exploration------------------------------------------------------ 9,975 45 9 10,029
Development------------------------------------------------------ 7,226 -- 1,476 8,702
-------- -------- ---------- ---------
$ 17,783 45 1,488 19,316
-------- -------- ---------- ---------
-------- -------- ---------- ---------
Year Ended September 30, 1990:
Property acquisition, unproved----------------------------------- $ 285 -- -- 285
Exploration------------------------------------------------------ 7,208 85 16 7,309
Development------------------------------------------------------ 2,956 -- 2,671 5,627
-------- -------- ---------- ---------
$ 10,449 85 2,687 13,221
-------- -------- ---------- ---------
-------- -------- ---------- ---------
</TABLE>
The Company's investment in oil and gas properties included $1.5 million in
unevaluated properties which have been excluded from the amortization base as of
December 31, 1992. The Company anticipates that the majority of these costs will
be included in the amortization base during 1993. The following table sets forth
the costs excluded from the amortization base as of December 31, 1992, by the
period such costs were incurred.
F-29
<PAGE>
<TABLE>
<CAPTION>
PERIODS INCURRED
------------------------------------------------------
THREE MONTHS YEARS ENDED
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -------------
TOTAL 1992 1991 1991 1990 PRIOR
------- ------------ ------------ ---- ----- -----
($000)
<S> <C> <C> <C> <C> <C> <C>
Costs Excluded from Amortization as of December
31, 1992:
Property acquisition----------------------- $ 306 34 -- 17 78 177
Exploration-------------------------------- 338 191 15 45 85 2
Development-------------------------------- 838 838 -- -- -- --
------- ------------ ------------ ---- ----- -----
$ 1,482 1,063 15 62 163 179
------- ------------ ------------ ---- ----- -----
------- ------------ ------------ ---- ----- -----
</TABLE>
Results of Operations from Oil and Gas Producing Activities
The following table sets forth the results of operations for oil and gas
producing activities, in the aggregate by geographic area, with income tax
expense computed using the statutory tax rate for the period adjusted for
permanent differences, tax credits and allowances.
<TABLE>
<CAPTION>
UNITED
STATES(1) BOLIVIA INDONESIA TOTAL
-------- ------- --------- -------
($000)
<S> <C> <C> <C> <C>
Results of Operations from Oil and Gas Producing Activities:
Year Ended December 31, 1992:
Gross revenues -- sales to unaffiliates------------------------- $ 18,850 17,898 5,975 42,723
Production (lifting) costs-------------------------------------- 3,796 688 3,698 8,182
Administrative support and other-------------------------------- 1,216 4,635 107 5,958
Gain (loss) on sales of assets---------------------------------- (3) -- 5,750(3) 5,747
Depreciation, depletion and amortization------------------------ 4,862 -- 336 5,198
-------- ------- --------- -------
Pretax results of operations------------------------------------ 8,973 12,575 7,584 29,132
Income tax expense---------------------------------------------- 305 7,108 3,066 10,479
-------- ------- --------- -------
Results of operations from producing activities(2)-------------- $ 8,668 5,467 4,518 18,653
-------- ------- --------- -------
-------- ------- --------- -------
Depletion rates per net equivalent Mcf-------------------------- $ .95 -- .15
-------- ------- ---------
-------- ------- ---------
Three Months Ended December 31, 1991:
Gross revenues -- sales to unaffiliates------------------------- $ 2,426 4,634 5,474 12,534
Production (lifting) costs-------------------------------------- 1,071 122 2,915 4,108
Administrative support and other-------------------------------- 242 (765)(5) 107 (416)
Depreciation, depletion and amortization------------------------ 848 -- 606 1,454
-------- ------- --------- -------
Pretax results of operations------------------------------------ 265 5,277 1,846 7,388
Income tax expense---------------------------------------------- 9 2,744 1,413 4,166
-------- ------- --------- -------
Results of operations from producing activities(2)-------------- $ 256 2,533 433 3,222
-------- ------- --------- -------
-------- ------- --------- -------
Depletion rates per net equivalent Mcf-------------------------- $ .94 -- .31
-------- ------- ---------
-------- ------- ---------
</TABLE>
(Table continued on following page)
F-30
<PAGE>
<TABLE>
<CAPTION>
UNITED
STATES(1) BOLIVIA INDONESIA TOTAL
-------- ------- --------- -------
($000)
<S> <C> <C> <C> <C>
Year Ended September 30, 1991:
Gross revenues -- sales to unaffiliates------------------------- $ 5,179 24,557 29,507 59,243
Production (lifting) costs-------------------------------------- 1,218 650 9,467 11,335
Administrative support and other-------------------------------- 424 2,710 4,497(4) 7,631
Depreciation, depletion and amortization------------------------ 2,920 -- 1,712 4,632
-------- ------- --------- -------
Pretax results of operations------------------------------------ 617 21,197 13,831 35,645
Income tax expense---------------------------------------------- 12 12,015 8,766 20,793
-------- ------- --------- -------
Results of operations from producing activities(2)-------------- $ 605 9,182 5,065 14,852
-------- ------- --------- -------
-------- ------- --------- -------
Depletion rates per net equivalent Mcf-------------------------- $ 1.06 -- .22
-------- ------- ---------
-------- ------- ---------
Year Ended September 30, 1990:
Gross revenues -- sales to unaffiliates------------------------- $ 387 15,191 16,804 32,382
Production (lifting) costs-------------------------------------- 111 732 8,986 9,829
Administrative support and other-------------------------------- (527) 2,123 2,709 4,305
Depreciation, depletion and amortization------------------------ 226 -- 1,219 1,445
-------- ------- --------- -------
Pretax results of operations------------------------------------ 577 12,336 3,890 16,803
Income tax expense---------------------------------------------- 23 4,210 1,060 5,293
-------- ------- --------- -------
Results of operations from producing activities(2)-------------- $ 554 8,126 2,830 11,510
-------- ------- --------- -------
-------- ------- --------- -------
Depletion rates per net equivalent Mcf-------------------------- $ .81 -- .19
-------- ------- ---------
-------- ------- ---------
- ------------
(1) See Note I regarding a natural gas sales contract dispute.
(2) Excludes corporate general and administrative and financing costs.
(3) Represents gain from the sales of the Company's Indonesian operations
effective May 1, 1992.
(4) Includes a $2.0 million charge for an arbitration award involving a royalty
dispute on Indonesian crude oil production.
(5) Includes a $1.3 million credit for Bolivian transaction taxes.
</TABLE>
Standard Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves (Unaudited)
The following tables sets forth the computation of the standardized measure
of discounted future net cash flows relating to proved reserves and the changes
in such cash flows in accordance with Statement of Financial Accounting
Standards No. 69 ('SFAS No. 69'). The standardized measure is the estimated
future cash inflows from proved reserves less estimated future production and
development costs, estimated future income taxes and a discount factor. Future
cash inflows represent expected revenues from production of year-end quantities
of proved reserves based on year-end prices and any fixed and determinable
future escalation provided by contractual arrangements in existence at year-end.
Escalation based on inflation, federal regulatory changes and supply and demand
are not considered. Estimated future production costs related to year-end
reserves are based on year-end costs. Such costs include, but are not limited
to, production taxes and direct operating costs. Inflation and other
anticipatory costs are not considered until the actual cost change takes effect.
Estimated future income tax expenses are computed using the appropriate year-end
statutory tax rates. Consideration is given for the effects of permanent
differences, tax credits and allowances. A discount rate of 10% is applied to
the annual future net cash flows after income taxes.
The methodology and assumptions used in calculating the standardized
measure are those required by SFAS No. 69. It is not intended to be
representative of the fair market value of the Company's proved reserves. The
valuations of revenues and costs do not necessarily reflect the amounts to be
received or expended by the Company.
F-31
<PAGE>
As indicated in Note I, certain of the Company's South Texas production
activities are involved in a natural gas sales contract dispute with Tennessee
Gas. Although the outcome of any litigation is uncertain, based upon advice from
outside legal counsel, management believes that the Company will ultimately
prevail in this dispute. Accordingly, the Company has based its calculation of
the standardized measure of discounted future net cash flows on the Contract
Price which it is currently receiving. However, if Tennessee Gas were to
prevail, the impact on the Company's future revenues and cash flows would be
significant. Based on the Contract Price, the standardized measure of discounted
future net cash flows relating to proved reserves in the United States at
December 31, 1992 was $87 million, compared to $65 million at Section 101 prices
and $46 million at spot market prices.
<TABLE>
<CAPTION>
UNITED
STATES(1) BOLIVIA INDONESIA TOTAL
--------- --------- --------- ---------
($000)
<S> <C> <C> <C> <C>
Year Ended December 31, 1992:
Future cash inflows------------------------------------- $ 215,172 146,555 -- 361,727
Future production costs--------------------------------- (33,162) (40,374) -- (73,536)
Future development costs-------------------------------- (30,294) (9,248) -- (39,542)
--------- --------- --------- ---------
Future net cash flows before income tax expense--------- 151,716 96,933 -- 248,649
Future income tax expense------------------------------- (42,884) (56,682) -- (99,566)
--------- --------- --------- ---------
Future net cash flows----------------------------------- 108,832 40,251 -- 149,083
10% annual discount to reflect timing of net cash
flows------------------------------------------------- (21,744) (16,628) -- (38,372)
--------- --------- --------- ---------
Standardized measure of discounted future net cash flows
relating to proved reserves--------------------------- $ 87,088 23,623 -- 110,711
--------- --------- --------- ---------
--------- --------- --------- ---------
Three Months Ended December 31, 1991:
Future cash inflows------------------------------------- $ 69,405 289,143 113,877 472,425
Future production costs--------------------------------- (10,167) (52,667) (87,913) (150,747)
Future development costs-------------------------------- (13,334) (11,760) (8,545) (33,639)
--------- --------- --------- ---------
Future net cash flows before income tax expense--------- 45,904 224,716 17,419 288,039
Future income tax expense------------------------------- (4,179) (127,824) (12,178) (144,181)
--------- --------- --------- ---------
Future net cash flows----------------------------------- 41,725 96,892 5,241 143,858
10% annual discount to reflect timing of net cash
flows------------------------------------------------- (10,853) (46,023) -- (56,876)
--------- --------- --------- ---------
Standardized measure of discounted future net cash flows
relating to proved reserves--------------------------- $ 30,872 50,869 5,241 86,982
--------- --------- --------- ---------
--------- --------- --------- ---------
Year Ended September 30, 1991:
Future cash inflows------------------------------------- $ 67,514 302,022 88,234 457,770
Future production costs--------------------------------- (11,184) (53,482) (68,400) (133,066)
Future development costs-------------------------------- (13,370) (11,760) (8,260) (33,390)
--------- --------- --------- ---------
Future net cash flows before
income tax expense------------------------------------ 42,960 236,780 11,574 291,314
Future income tax expense------------------------------- (5,457) (136,543) (6,352) (148,352)
--------- --------- --------- ---------
Future net cash flows----------------------------------- 37,503 100,237 5,222 142,962
10% annual discount to reflect timing of net cash
flows------------------------------------------------- (7,147) (45,955) (814) (53,916)
--------- --------- --------- ---------
Standardized measure of discounted future net cash flows
relating to proved reserves--------------------------- $ 30,356 54,282 4,408 89,046
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
(Table continued on following page)
F-32
<PAGE>
<TABLE>
<CAPTION>
UNITED
STATES BOLIVIA INDONESIA TOTAL
--------- --------- --------- ---------
($000)
<S> <C> <C> <C> <C>
Year Ended September 30, 1990:
Future cash inflows------------------------------------- $ 16,727 231,167 315,795 563,689
Future production costs--------------------------------- (4,601) (49,561) (155,061) (209,223)
Future development costs-------------------------------- (2,832) (10,260) (6,620) (19,712)
--------- --------- --------- ---------
Future net cash flows before income tax expense--------- 9,294 171,346 154,114 334,754
Future income tax expense------------------------------- -- (101,066) (75,203) (176,269)
--------- --------- --------- ---------
Future net cash flows----------------------------------- 9,294 70,280 78,911 158,485
10% annual discount to reflect timing of net cash
flows------------------------------------------------- (2,788) (33,235) (19,966) (55,989)
--------- --------- --------- ---------
Standardized measure of discounted future net cash flows
relating to proved reserves--------------------------- $ 6,506 37,045 58,945 102,496
--------- --------- --------- ---------
--------- --------- --------- ---------
- ------------
(1) See Note I regarding a natural gas sales contract dispute.
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ----------------------
1992 1991 1991 1990
------------ ------------ ---------- ----------
($000)
<S> <C> <C> <C> <C>
Sales and transfers of oil and gas produced, net of
production costs----------------------------------------- $ (31,208) (8,713) (45,005) (19,006)
Net changes in prices and production costs relating to
future production---------------------------------------- (32,397) 222 (29,828) 26,901
Extensions, discoveries and improved recovery-------------- 104,219 1,802 19,998 6,030
Development costs incurred during the period--------------- 10,012 2,289 9,544 5,627
Changes in estimated future development costs-------------- (18,666) (2,316) (12,633) (5,688)
Revisions in previous quantity estimates------------------- (15,384) 4,565 (37,392) 130,752
Net changes due to purchases and sales of minerals
in-place------------------------------------------------- (5,884) -- 47,418 --
Accretion of discount-------------------------------------- 8,174 2,226 10,251 681
Net changes in income taxes-------------------------------- 4,863 (2,139) 24,197 (49,613)
------------ ------------ ---------- ----------
Net increase (decrease)------------------------------------ 23,729 (2,064) (13,450) 95,684
Beginning of period---------------------------------------- 86,982 89,046 102,496 6,812
------------ ------------ ---------- ----------
End of period---------------------------------------------- $ 110,711 86,982 89,046 102,496
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
</TABLE>
F-33
<PAGE>
Reserve Quantities (Unaudited)
<TABLE>
<CAPTION>
GAS OIL
(MILLIONS OF CUBIC FEET) (THOUSANDS OF BARRELS)
--------------------------------- --------------------------------------------
UNITED UNITED
STATES BOLIVIA TOTAL STATES BOLIVIA INDONESIA TOTAL
------- -------- --------- ------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Proved reserves(1):
At September 30, 1989----------------- 568 -- 568 -- -- 3,815 3,815
Revision of previous estimates-------- (92) 89,664 89,572 -- 2,216 8,347 10,563
Extensions, discoveries and other
additions--------------------------- 10,899 -- 10,899 5 -- -- 5
Production---------------------------- (257) (4,624) (4,881) (1) (158) (936) (1,095)
------- -------- --------- ------- ------- ---------- ---------
At September 30, 1990----------------- 11,118 85,040 96,158 4 2,058 11,226 13,288
Revision of previous estimates-------- (1,217) 696 (521) 2 59 (5,513) (5,452)
Purchase of minerals in-place--------- -- 36,545 36,545 -- 953 -- 953
Extensions, discoveries and other
additions--------------------------- 25,950 -- 25,950 3 -- -- 3
Production---------------------------- (2,710) (7,052) (9,762) (4) (242) (1,209) (1,455)
------- -------- --------- ------- ------- ---------- ---------
At September 30, 1991----------------- 33,141 115,229 148,370 5 2,828 4,504 7,337
Revision of previous estimates-------- 1,054 (35) 1,019 -- 1 1,333 1,334
Extensions, discoveries and other
additions--------------------------- 3,585 -- 3,585 -- -- -- --
Production---------------------------- (896) (1,729) (2,625) (1) (58) (266) (325)
------- -------- --------- ------- ------- ---------- ---------
At December 31, 1991------------------ 36,884 113,465 150,349 4 2,771 5,571 8,346
Revisions of previous estimates------- (9,601) 651 (8,950) 1 (266) -- (265)
Extensions, discoveries and other
additions--------------------------- 53,952 -- 53,952 -- -- -- --
Production---------------------------- (5,110) (7,108) (12,218) (1) (242) (328) (571)
Sales of minerals in-place------------ (2,372) -- (2,372) (4) -- (5,243) (5,247)
------- -------- --------- ------- ------- ---------- ---------
At December 31, 1992(2)--------------- 73,753 (3) 107,008 180,761 -- 2,263 -- 2,263
------- -------- --------- ------- ------- ---------- ---------
------- -------- --------- ------- ------- ---------- ---------
Proved developed reserves included above:
At September 30, 1989----------------- 568 -- 568 -- -- 3,815 3,815
At September 30, 1990----------------- 5,046 79,623 84,669 4 1,987 11,226 13,217
At September 30, 1991----------------- 18,011 107,765 125,776 5 2,738 4,504 7,247
At December 31, 1991------------------ 21,187 106,036 127,223 4 2,680 5,571 8,255
At December 31, 1992(2)--------------- 34,160 (3) 91,376 125,536 -- 2,098 -- 2,098
- ------------
(1) The Company was not required to file reserve estimates with federal
authorities or agencies during the periods presented.
(2) No adverse event has occurred since December 31, 1992 that would cause a
significant reduction in proved reserves.
(3) See Note I regarding a natural gas sales contract dispute.
</TABLE>
F-34
<PAGE>
APPENDIX A
GLOSSARY
The following defined terms are used frequently in this Proxy
Statement -- Prospectus.
<TABLE>
<S> <C>
$2.16 Preferred Stock--------------------------------- $2.16 Cumulative Convertible Preferred Stock, no par
value, of the Company.
$2.20 Preferred Stock--------------------------------- $2.20 Cumulative Convertible Preferred Stock, no par
value, of the Company.
$2.20 Preferred Stock Put Option---------------------- MetLife Louisiana's option to require the Company to
redeem all of the outstanding $2.20 Preferred Stock at
$20 per share (an aggregate of $57.5 million), plus
accrued and unpaid dividends, if the Company is in
default in the payment of 12 full quarterly dividends.
Act--------------------------------------------------- Securities Act of 1933, as amended.
ADEC-------------------------------------------------- Alaska Department of Environmental Conservation.
Alyeska----------------------------------------------- Alyeska Pipeline Service Company.
Amended MetLife Memorandum---------------------------- The Amended Memorandum of Understanding between the
Company and MetLife Louisiana pertaining to various
aspects of the Recapitalization. See 'The
Recapitalization -- Background -- The Recapitalization.'
Annual Meeting---------------------------------------- The Annual Meeting of Stockholders of Tesoro Petroleum
Corporation to be held on February 9, 1994.
ANS Agreement----------------------------------------- Settlement Agreement, dated effective January 19, 1993,
with the State of Alaska in connection with the ANS
contractual dispute.
ANS Debt---------------------------------------------- The Company's obligation to make payments pursuant to the
ANS Agreement.
APUC-------------------------------------------------- Alaska Public Utilities Commission.
Board of Directors------------------------------------ The Board of Directors of the Company.
Bob West Field---------------------------------------- The Company's South Texas natural gas field.
By-Laws----------------------------------------------- The By-Laws of the Company.
Charter Amendments------------------------------------ The amendments to the Restated Certificate of
Incorporation described in the Proxy Statement --
Prospectus. See 'Proposal No. 1' and 'Proposal No. 2.'
Commission-------------------------------------------- Securities and Exchange Commission.
Common Stock------------------------------------------ Common Stock, $.16 2/3 par value, of the Company.
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
Company----------------------------------------------- Tesoro Petroleum Corporation, a Delaware corporation
(collectively with its consolidated subsidiaries, unless
the context otherwise requires).
Company's MetLife Option------------------------------ A three-year option to be granted by MetLife Louisiana to
the Company to acquire all shares of $2.20 Preferred
Stock and Common Stock held by MetLife Louisiana at an
initial aggregate base option price of $51.5 million,
subject to certain conditions. See 'The
Recapitalization -- Background.'
Debenture Trustee------------------------------------- NBD Bank, N.A., formerly National Bank of Detroit.
Debentureholders-------------------------------------- The holders of record of Subordinated Debentures.
DER--------------------------------------------------- Department of Environmental Resources of Stanislaus
County, California.
EBITDA------------------------------------------------ Earnings before interest, income taxes and depreciation,
depletion and amortization.
E&P Facility------------------------------------------ The Company's $30 million reducing revolving credit
facility as more specifically described in the Proxy
Statement -- Prospectus. See 'The Recapitalization -- The
Company's Financial Requirements.'
EPA--------------------------------------------------- United States Environmental Protection Agency.
Exchange Act------------------------------------------ Securities Exchange Act of 1934, as amended.
Exchange Notes---------------------------------------- Exchange Notes due December 1, 2000, to be issued by the
Company.
Exchange Agent---------------------------------------- Bankers Trust Company
Exchange Offer---------------------------------------- Under the terms and subject to the conditions set forth
in the Proxy Statement -- Prospectus and Consent and
Letter of Transmittal, the offer by the Company to
exchange $1,000 principal amount of Exchange Notes for
each $1,000 principal amount of Subordinated Debentures.
Existing Indenture------------------------------------ The Indenture dated as of March 15, 1983 between the
Company and the Debenture Trustee, under which the
Subordinated Debentures were issued.
Existing Preferred Stock------------------------------ The $2.16 Preferred Stock and $2.20 Preferred Stock
issued by the Company.
Expiration Date--------------------------------------- 5:00 p.m., New York City time, on February 8,
1994, or latest time and date to which the Exchange Offer
is extended by the Company.
Future Preferred Stock-------------------------------- The new series of $2.20 Cumulative Preferred Stock, no
par value, to be issued to MetLife Louisiana upon
request, if the Company's MetLife Option expires without
having been exercised in full.
</TABLE>
A-2
<PAGE>
<TABLE>
<S> <C>
Gulf Coast-------------------------------------------- Gulf Coast Vacuum Services.
Indenture Amendments---------------------------------- The amendment to the Existing Indenture described in the
Proxy Statement -- Prospectus. See 'Proposed Amendments
to Existing Indenture.'
Information Agent------------------------------------- Georgeson & Company Inc.
IRS--------------------------------------------------- Internal Revenue Service.
Jefferies--------------------------------------------- Jefferies & Company, Inc.
Mcf--------------------------------------------------- One thousand cubic feet of gas, a standard unit of volume
measurement for natural gas.
MetLife----------------------------------------------- Metropolitan Life Insurance Company, the parent of MetLife Louisiana.
MetLife Louisiana------------------------------------- MetLife Security Insurance Company of Louisiana, a subsidiary
of MetLife (together with its affiliates).
MetLife Forbearance Agreement------------------------- Agreement between the Company and MetLife Louisiana
pursuant to which MetLife Louisiana agreed not to
exercise the $2.20 Preferred Stock Put Option and to take
no action to enforce the February 1994 mandatory partial
redemption of the $2.20 Preferred Stock before May 10,
1994, or earlier under certain circumstances. See 'The
Recapitalization -- Background -- The Recapitalization.'
MetLife Memorandum------------------------------------ Memorandum of Understanding between the Company and
MetLife Louisiana pertaining to various aspects of the
Recapitalization. See 'The
Recapitalization -- Background -- The Recapitalization.'
MTBE-------------------------------------------------- Methyl tertiary butyl ether.
Mud--------------------------------------------------- D.L. Mud, Inc.
New Indenture----------------------------------------- Indenture among the Obligors and the Note Trustee, under
which the Exchange Notes will be issued.
NGPA-------------------------------------------------- Natural Gas Policy Act of 1978.
Note Trustee------------------------------------------ Bankers Trust Company.
PES--------------------------------------------------- Petroleum Environmental Services, Inc.
Producers--------------------------------------------- Producers of Alaska North Slope crude oil.
Proxy Statement -- Prospectus------------------------- This Proxy Statement, Prospectus and Consent
Solicitation.
PRP--------------------------------------------------- Potentially Responsible Party.
Purchase Obligation----------------------------------- The requirement of the Company to offer to purchase
Future Preferred Stock on dates and in amounts specified
in the Restated Certificate of Incorporation. See
'Description of Future Preferred Stock -- Purchase
Obligation.'
RCRA-------------------------------------------------- Resource Conservation and Recovery Act of 1976.
</TABLE>
A-3
<PAGE>
<TABLE>
<S> <C>
Recapitalization-------------------------------------- The Reclassification, the Exchange Offer, the Charter
Amendments and the Indenture Amendments, together.
Reclassification-------------------------------------- Under the terms and subject to the conditions set forth
in the Proxy Statement -- Prospectus and Consent and
Letter of Transmittal, the proposed reclassification of
the $2.16 Preferred Stock into Common Stock.
Registration Statement-------------------------------- The Registration Statement on Form S-4 (Registration No.
33-68282) of the Company initially filed with the
Commission on September 2, 1993, together with all
amendments and exhibits thereto, of which this Proxy
Statement -- Prospectus is a part.
Section 101 Price------------------------------------- The price of gas calculated in accordance with the then
effective Section 101 of the Natural Gas Policy Act of
1978.
Small Lot Holders------------------------------------- Debentureholders who beneficially own $10,000 or less
aggregate principal amount of Subordinated Debentures and
satisfy other requirements more particularly described in
the Proxy Statement -- Prospectus.
Smith Barney------------------------------------------ Smith Barney Shearson Inc.
State------------------------------------------------- The State of Alaska.
Subordinated Debentures------------------------------- 12 3/4% Subordinated Debentures due March 15, 2001,
issued by the Company.
Substitution Agreement-------------------------------- Agreement with the State to secure the Company's purchase
from this supplier. See 'The Recapitalization -- The
Company's Financial Requirements.'
TAPS-------------------------------------------------- Trans Alaska Pipeline System.
Tennessee Gas----------------------------------------- Tennessee Gas Pipeline Company.
Tesoro Alaska----------------------------------------- Tesoro Alaska Petroleum Company, a Delaware corporation
and a wholly owned subsidiary of the Company.
Tesoro-Leevac----------------------------------------- Tesoro-Leevac Petroleum Company, a joint venture formed
in 1990.
YPFB-------------------------------------------------- Yacimientos Petroliferos Fiscales Bolivianos, the
Bolivian state-owned oil and gas company.
</TABLE>
A-4
<PAGE>
APPENDIX B
(Jefferies LOGO)
11100 Santa Monica Boulevard, 10th Floor
Los Angeles, California 90025
Telephone (310) 575-5200 (800) 933-6656
Fax (310) 575-5165
December 30, 1993
The Special Committee of
the Board of Directors, and
the Board of Directors of
TESORO PETROLEUM CORPORATION
8700 Tesoro Drive
San Antonio, TX 78217
Gentlemen:
You have asked us to advise you on the fairness to the existing common
stockholders and the holders of the $2.16 Convertible Preferred Stock (the
'$2.16 Preferred') of Tesoro Petroleum Corporation (the 'Company'), from a
financial point of view, on the proposed recapitalization (the
'Recapitalization'). The Recapitalization contemplates the exchange of up to
$54.5 million principal amount of the existing $108.8 million principal amount
of 12 3/4% Subordinated Debentures due 2001 (the 'Subordinated Debentures') for
up to $54.5 million principal amount of new 13% Exchange Notes due 2000 and the
exchange of the Company's existing $42.1 million liquidation value of $2.16
Preferred for up to approximately 6,465,859 shares of Common Stock. In
connection with the Recapitalization, the holder of the Company's existing $78.1
million liquidation value of $2.20 Redeemable Cumulative Convertible Preferred
Stock (the '$2.20 Preferred') will enter into an agreement with the Company
pursuant to which, among other things, such holder will waive certain redemption
rights, will consider accrued and unpaid dividends to have been paid, will agree
to accept future payment of dividends on preferred stock in any combination of
cash or, subject to certain conditions, shares of Common Stock and will give the
Company an option to acquire the capital stock of the Company held by such
holder.
Jefferies & Company, Inc. ('Jefferies'), as part of its investment banking
activities, is continually engaged in the valuation of business and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bidding, secondary distributions of listed and
unlisted securities, private placements, financial restructurings and other
financial services. Jefferies also conducts extensive trading operations in
listed and unlisted securities. Accordingly, Jefferies may at any time hold a
long or a short position in any of the securities of the Company either for our
own account or for the account of our customers. As you are aware, Jefferies is
receiving a fee for providing this opinion.
In the course of our review we have:
1. Analyzed certain public and non-public operating data of the
Company prepared by the Company, which data has been made
available to us in our roles as financial advisor to the Company;
2. Discussed the historical operating results and the future
prospects of the business with the management of the Company;
3. Analyzed published information regarding the financial and market
performance of a limited group of companies which we
deemed comparable to the Company;
B-1
<PAGE>
The Special Committee of
the Board of Directors, and
the Board of Directors of
TESORO PETROLEUM CORPORATION
December 30, 1993
Page 2
4. Reviewed the recent performance, liquidity and volatility of the
Company's existing equity securities;
5. Considered the value of certain intangible benefits which will
accrue to the Company as a result of the Recapitalization;
6. Reviewed the terms of the Recapitalization;
7. Taken into account our general experience in similar transactions;
and
8. Undertaken such additional reviews, analysis and inquiries as we
deemed relevant under the circumstances including a review of the
terms of the agreement with the holder of the $2.20 Preferred.
In rendering our opinions, we have relied without independent verification
upon the accuracy, completeness and fair presentation of all financial and other
information that was provided to us by the Company or that we otherwise reviewed
for the purpose of this opinion, and this opinion is conditioned upon such
information being complete and accurate in all material respects. We have not
made or obtained any independent appraisals of the assets, including oil and
natural gas reserve information, of the Company, nor have we been furnished with
any such appraisals. Additionally, we note that we have not been requested to,
nor did we, evaluate the fairness of the Recapitalization to the $2.20 Preferred
holder or to the holders of the Subordinated Debentures. Our opinion is
necessarily based on economic, monetary and market conditions as they exist and
can be evaluated as of the date of this opinion.
It is understood that this letter is solely for the information of the
Special Committee of the Board of Directors and the Board of Directors of the
Company and may not be used for any other purpose, or otherwise referred to or
circulated in whole or in part, without our prior written consent.
Based upon and subject to the foregoing and subject to the various
assumptions and limitations set forth herein, it is our opinion that, as of the
date hereof, the terms of the Recapitalization are fair, from a financial point
of view, to the existing common stockholders and the existing $2.16 Preferred
stockholders of the Company.
Very truly yours
/s/JOSEPH J. RADECKI, JR.
Joseph J. Radecki, Jr.
Executive Vice President
B-2
<PAGE>
APPENDIX C
RESTATED CERTIFICATE OF INCORPORATION
OF
TESORO PETROLEUM CORPORATION
The undersigned, having filed its original Certificate of Incorporation
under the name of TSO Corp., with the Secretary of State of the State of
Delaware on December 26, 1968, thereby forming a corporation under and
pursuant to the provisions of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
1. The name of the corporation is Tesoro Petroleum Corporation (the
"Corporation").
2. This Restated Certificate of Incorporation (this "Restated
Certificate"), which was duly adopted in accordance with Sections 242 and 245
of the General Corporation Law of the State of Delaware, amends and restates
the provisions of the present Restated Certificate of Incorporation of the
Corporation.
3. Immediately upon filing this Restated Certificate, the text of the
present Restated Certificate of Incorporation is hereby amended and restated
to read in full as set forth herein:
ARTICLE I
The name of the Corporation is Tesoro Petroleum Corporation (hereinafter
called the "Corporation").
ARTICLE II
The registered office of the Corporation in the State of Delaware is
located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name and address of the Corporation's
registered agent is The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, Delaware.
ARTICLE III
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 Delaware.
ARTICLE IV
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is Fifty-Five Million (55,000,000) shares,
consisting of:
Fifty Million (50,000,000) shares of par value $.16-2/3 per share; and
Five Million (5,000,000) shares with no par value.
(A) DESIGNATION OF EACH CLASS OF SHARES.
(1) The Fifty Million (50,000,000) authorized shares of a par
value of $.16-2/3 per share and an aggregate par value of $8,333,333.33
shall be designated Common Stock; and
C-1
<PAGE>
(2) The Five Million (5,000,000) authorized shares with no par
value shall be designated Preferred Stock.
(B) STATEMENT OF PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS IN RESPECT OF
SHARES OF PREFERRED STOCK AND AUTHORITY OF BOARD OF DIRECTORS TO FIX
DESIGNATIONS, POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS AND
RESTRICTIONS THEREOF NOT FIXED HEREBY.
Shares of Preferred Stock may be issued from time to time in one or more
series, as may be determined from time to time by the Board of Directors, each
of said series to be distinctly designated. All shares of any one series of
Preferred Stock shall be alike in every particular. The Board of Directors is
hereby authorized to fix or alter the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, and the liquidation
preferences of any wholly unissued series of preferred shares, and the number
of shares constituting any such series and the designation thereof, or any of
them; and to increase or decrease the number of shares of any series
subsequent to the issue of shares of that series, but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
SERIES OF PREFERRED STOCK DESIGNATED
"$2.20 CUMULATIVE PREFERRED STOCK"
1. DESIGNATION OF SERIES AND NUMBER OF SHARES.
This series of Preferred Stock is designated "$2.20 Cumulative
Convertible Preferred Stock" (hereinafter referred to as $2.20 Preferred
Stock"), and the number of shares which shall constitute such series shall be
2,875,000 shares of a stated value of $1.00 per share, which number may not be
increased but may be decreased (but not below the number thereof then
outstanding) from time to time by the Board of Directors.
2. DIVIDENDS.
The holders of $2.20 Preferred Stock shall be entitled to receive, as
and when declared by the Board of Directors and out of assets of the
Corporation which are by law available for payment of dividends, cumulative
preferential cash dividends, at, but not exceeding, the rate of $2.20 per
share per annum, payable quarterly on May 15, August 15, November 15, and
February 15, in each year, accruing from the date on which respective shares
of $2.20 Preferred Stock shall be issued. So long as any $2.20 Preferred
Stock shall remain outstanding, no dividend whatsoever shall be declared or
paid upon or set apart for any class of stock or series thereof ranking junior
to $2.20 Preferred Stock in the payment of dividends nor shall any shares of
any class of stock or series thereof ranking junior to or on a parity with
$2.20 Preferred Stock in payment of dividends be redeemed or purchased by the
Corporation or any subsidiary thereof nor shall any moneys be paid to or made
available for a sinking fund for redemption or purchase of any shares of any
class of stock or series thereof ranking junior to or on a parity with $2.20
Preferred Stock in payment of dividends, unless in each instance full
dividends on all outstanding shares of $2.20 Preferred Stock for all past
dividend periods shall have been paid at the rate fixed therefor and the
dividends on all outstanding shares of $2.20 Preferred Stock for the then
current quarterly dividend period shall have been paid or declared and
sufficient funds set aside for payment thereof. Accumulations of dividends on
any shares of $2.20 Preferred Stock shall not bear interest.
No dividend shall be paid upon or declared or set apart for (a) any
share of $2.20 Preferred Stock for any dividend period unless at the same time
(i) a like proportionate dividend for the same dividend period shall be paid
upon or declared or set apart for all shares of $2.20 Preferred Stock then
outstanding and entitled to receive such dividend and (ii) there shall have
been paid upon or declared or set aside for all shares of Preferred Stock of
all other series or of any other class of stock or series thereof, if any ,
then outstanding and ranking on a parity with $2.20 Preferred Stock in respect
of payment of dividends, for the same dividend period as the dividend period
of the $2.20 Preferred Stock, or for the respective dividend periods of said
parity stock terminating within the dividend period of the $2.20 Preferred
Stock,
C-2
<PAGE>
dividends in proportion to the respective dividend rates fixed for said parity
stock; and (b) any shares of any other series of Preferred Stock or other
class of stock or series thereof, if any, ranking on a parity with $2.20
Preferred Stock in respect of payment of dividends for any dividend period
unless there shall have been paid upon or declared or set apart for all shares
then outstanding of $2.20 Preferred Stock, for the same dividend period, or
for the dividend period of the $2.20 Preferred Stock terminating within the
dividend period of said parity stock, dividends in proportion to the
respective dividend rates fixed for $2.20 Preferred Stock and said parity
stock.
3. LIQUIDATION.
In the event of any such liquidation, dissolution or winding up of the
affairs of the Corporation, after payment or provision for payment of the
debts and other liabilities of the Corporation, the holders of $2.20 Preferred
Stock shall be entitled to receive, out of the net assets of the Corporation,
(i) if such liquidation, dissolution or winding up is voluntary, the
applicable redemption price per share determined as provided in paragraph 4
below, or (ii) if such liquidation, dissolution or winding up is involuntary,
$20 per share plus, in either case, an amount equal to all dividends accrued
and unpaid on each share of $2.20 Preferred Stock to the date fixed for
distribution, and no more, before any distribution of assets shall be made to
the holders of Common Stock or any other class of stock or series thereof
ranking junior to $2.20 Preferred Stock with respect to the distribution of
assets; provided, however, that no distribution as aforesaid shall be made to
the holders of $2.20 Preferred Stock unless at the same time a like
proportionate distribution shall be made, ratably in proportion to the
respective amount payable upon liquidation, dissolution or winding up of the
affairs of the Corporation, to the holders of all other series or any other
class of stock or series thereof, if any, then outstanding and ranking as to
distribution of assets on a parity with $2.20 Preferred Stock.
Nothing herein contained shall be deemed to prevent redemption of $2.20
Preferred Stock by the Corporation in the manner provided in paragraph 4
below. Neither the merger or consolidation of the Corporation into or with
any other corporation, nor the merger or consolidation of any other
corporation into or with the Corporation, nor a sale, transfer or lease of all
or any part of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the affairs of the Corporation
within the meaning of this paragraph 3.
No payment on account of such liquidation, dissolution or winding up of
the affairs of the Corporation shall be made to the holders of any other class
or series of stock ranking on a parity with $2.20 Preferred Stock with respect
to preferential distribution of assets unless a payment on account of such
liquidation, dissolution or winding up shall be made at the same time to the
holders of $2.20 Preferred Stock in proportion to the full distributive
amounts to which they and the holders of such parity stock are respectively
entitled.
Written notice of any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation, stating the payment date and
the place where the distributable amounts shall be payable and containing a
statement of or reference to the conversion right set forth in paragraph 5
below, shall be given by mail, postage prepaid, not less than 30 days prior to
the payment date stated therein, to the holders of record of $2.20 Preferred
Stock at their respective addresses as the same shall appear on the books of
the Corporation.
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4. REDEMPTION.
The Corporation at its option may, at any time or from time to time, on
or after February 15, 1988, redeem the whole or any part of this issue of
$2.20 Preferred Stock at the applicable redemption price plus in each case
accrued and unpaid dividends thereon to the date fixed for redemption.
The applicable redemption prices for the $2.20 Preferred Stock shall be
as follows:
IF REDEEMED DURING REDEMPTION PRICE
12 MONTHS BEGINNING PER SHARE
1988 $21.00
1989 20.80
1990 20.60
1991 20.40
1992 20.20
and thereafter at $20 per share.
The Corporation shall on each February 15, beginning with February 15, 1994,
so long as any shares of $2.20 Preferred Stock are outstanding, set aside, out
of funds legally available therefor, an amount sufficient to effect the
redemption, at the applicable redemption price provided above, plus accrued
and unpaid dividends thereon, if any, of the number of shares of $2.20
Preferred Stock equal to 6-2/3% of the total number of shares of $2.20
Preferred Stock outstanding on February 15, 1994, less the number of shares
for which the Corporation may receive credit, as hereinafter provided, and the
Corporation shall call for redemption such number of shares on such date. The
Corporation may credit against any redemption required by this paragraph 4 the
number of shares of $2.20 Preferred Stock which have been redeemed by the
Corporation after February 15, 1994 (including shares called for redemption if
the redemption price thereof has been deposited with a bond or trust company
as hereinafter provided in this paragraph 4) or which have been presented for
conversion to the Corporation after February 15, 1994, and which have not been
theretofore (i) used to satisfy the Corporation's obligation to redeem shares
of $2.20 Preferred Stock pursuant to this paragraph 4 or (ii) used as a basis
for a reduction in the number of shares of $2.20 Preferred Stock to be
redeemed pursuant to this paragraph 4. The redemptions required of the
Corporation by this paragraph 4 shall be cumulative, so that if the
Corporation shall fail, for any reason whatsoever, to set aside funds and call
for redemption shares of $2.20 Preferred Stock on the date set forth above, as
required by this paragraph 4, the obligation to redeem such shares shall
continue, and shall, until satisfied, increase the obligation of the
Corporation to redeem shares in each subsequent year. If, at any time, the
Corporation shall have failed to set aside funds and call for redemption
shares of $2.20 Preferred Stock on the date set forth above, no dividend
whatsoever shall be declared or paid upon or set apart and no asset shall be
distributed for any class of stock or series thereof ranking junior to or on a
parity with $2.20 Preferred Stock in the payment of dividends nor shall any
shares of any class of stock or series thereof ranking junior to or on a
parity with $2.20 Preferred Stock in payment of dividends be redeemed or
purchased by the Corporation or any subsidiary thereof.
If at any time the Corporation shall be in default in the payment of
dividends on the $2.20 Preferred Stock of an amount equivalent to or exceeding
twelve full quarterly dividends (whether or not consecutive) or shall have
failed to make the mandatory redemptions of $2.20 Preferred Stock required by
the preceding paragraph of a number of shares equivalent to or exceeding the
number of shares to be redeemed pursuant to such paragraph in any three year
period, and all of the outstanding shares of $2.20 Preferred Stock are held by
the person to which such shares were originally issued or by any affiliate or
affiliates of such person, the Corporation shall redeem, at the option of such
original holder or any such affiliates, out of funds legally available
therefor, within 60 days of the occurrence thereof, each outstanding share of
$2.20 Preferred Stock, at the applicable redemption price hereinabove set
forth plus accrued and unpaid dividends to the date fixed for redemption.
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At or prior to the time of each redemption pursuant to this paragraph 4,
the Corporation shall pay or make provision for payment of all accrued and
unpaid dividends on all shares of $2.20 Preferred Stock and all shares of
Preferred Stock of all other series or of any other class of stock or series
thereof, if any, then outstanding and ranking on a parity with or prior to the
$2.20 Preferred Stock in respect of payment of dividends.
In the event the Corporation shall determine or shall be required to
redeem less than the entire issue of $2.20 Preferred Stock then outstanding,
(i) the shares to be redeemed shall be selected pro rata (as nearly as may be)
so that the number of shares redeemed from each holder shall be the same
proportion of all the shares to be redeemed that the total number of shares
then held by such holder bears to the total number of shares then outstanding
or (ii) if the number of holders of $2.20 Preferred Stock exceeds 250, and the
Board of Directors so determines, the shares shall be selected by lot.
Notice of every such redemption shall be mailed, first class postage
prepaid, not less than 30 nor more than 45 days prior to the date fixed for
redemption ("redemption date"), to each holder of record of shares to be
redeemed, at his address as it appears on the books of the Corporation. Each
such notice shall state the redemption date; the number of shares of $2.20
Preferred Stock to be redeemed, and, if less than all shares of $2.20
Preferred Stock held by such holder are to be redeemed, the number of such
shares to be redeemed from him; the redemption price applicable to the shares
to be redeemed; the place or places where such shares are to be surrendered;
that dividends on shares to be redeemed will cease to accrue on the redemption
date; and that shares to be redeemed may be converted at any time prior to the
close of business on the business day next preceding the redemption date in
accordance with paragraph 5 below.
Notice having been mailed, from and after the redemption date (unless
the Corporation defaults in providing money for the payment of the redemption
price) the right to receive dividends on shares called for redemption shall
cease to accrue, said shares shall no longer be deemed to be outstanding, all
rights of holders thereof as shareholders of the Corporation (except the right
to receive the redemption price thereof, but without interest) shall
terminate, and, upon surrender, in accordance with said notice, of the
certificates for any such shares (properly endorsed or assigned for transfer,
if the Board of Directors of the Corporation shall so require), such shares
shall be redeemed by the Corporation at the applicable redemption price; pro-
vided, however, that the Corporation may include in such notice a statement
that the money required for the payment of the redemption price, plus accrued
and unpaid dividends, if any, will be deposited on a specified date, prior to
the redemption date, with a specified bank or trust company (which shall have
an office in The City of New York and which shall have a combined capital and
surplus of not less than $50,000,000) in trust for the benefit of holders of
shares called for redemption, and, notice having been given, from and after
such deposit shares called for redemption shall no longer be deemed to be
outstanding, all rights with respect to shares of $2.20 Preferred Stock shall
forthwith upon such deposit cease and terminate, except only the right of the
holders thereof to convert such shares in accordance with the provisions of
paragraph 5 below at any time prior to the close of business on the business
day next preceding the redemption date, and holders of such shares shall look
for payment of the redemption price only to funds so deposited and in no event
to the Corporation unless said funds shall be repaid to the Corporation as
hereinafter provided. Holders of such shares shall not be entitled to any
interest allowed by such depositary on money so deposited but any such
interest shall be paid to the Corporation. Any moneys deposited as aforesaid
for redemption of any shares and remaining unclaimed for four years after the
date of such deposit shall then be repaid to the Corporation upon its request,
and the holders of such shares shall thereafter look only to the Corporation
for payment of the redemption price thereof, but without interest.
Any provision of this paragraph 4 to the contrary notwithstanding, in
the event that any quarterly dividend due on $2.20 Preferred Stock shall be in
default, and until all such defaults shall have been cured, the Corporation
shall not redeem any shares of $2.20 Preferred Stock unless all outstanding
shares of $2.20 Preferred Stock are simultaneously redeemed and shall not
purchase or otherwise acquire any shares of $2.20 Preferred Stock except in
accordance with a purchase offer made by the Corporation on the same terms to
all holders of record of $2.20 Preferred Stock.
Any shares of $2.20 Preferred Stock redeemed or otherwise purchased or
acquired by the Corporation shall be retired, shall no longer be deemed
outstanding, and shall assume the status of
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authorized but unissued Preferred Stock, with no par value, undesignated as to
series, subject to reissuance of the Corporation as shares of Preferred Stock
of any one or more series, as may be determined from time to time by the Board
of Directors, except that such shares may not be reissued as additional shares
of $2.20 Preferred Stock.
5. CONVERSION.
Shares of $2.20 Preferred Stock may be converted at the option of the
holder thereof, at any time prior to the close of business on the business day
next preceding the date fixed for redemption of such shares pursuant to
paragraph 4 above, into fully paid and non-assessable shares of Common Stock
of the Corporation at the rate of 0.8696 shares of Common Stock as now
constituted for each share of $2.20 Preferred Stock surrendered for conversion
(the "conversion rate"), subject to the following provisions:
(A) The conversion rate shall be subject to adjustment from time to
time as follows:
(1) In case the Corporation shall (i) pay a dividend, or make a
distribution, to all holders of its Common Stock in shares of its
capital stock (whether shares of Common Stock or of capital stock of any
other class), (ii) subdivide its outstanding shares of Common Stock into
a greater number of shares, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares, or (iv) issue by
reclassification of its shares of Common Stock any shares of capital
stock of the Corporation, the conversion rate in effect immediately
prior to such action shall be adjusted so that the holder of any share
of $2.20 Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number of shares of capital stock of the
Corporation which he would have owned immediately following such action
had such share of $2.20 Preferred Stock been converted immediately prior
thereto. An adjustment made pursuant to this subparagraph (1) shall
become effective immediately after the record date in the case of a
dividend and shall become effective immediately after the effective date
in the case of a subdivision, combination or reclassification. If, as a
result of any adjustment made pursuant to this subparagraph (1), the
holder of any shares of $2.20 Preferred Stock thereafter surrendered for
conversion shall become entitled to receive shares of two or more
classes of capital stock of the Corporation, the Board of Directors
(whose determination shall be conclusive) shall determine, in good
faith, the allocation of the conversion price of the $2.20 Preferred
Stock (determined by dividing the adjusted conversion rate into $20)
between or among shares of such classes of capital stock.
(2) In case the Corporation shall hereafter issue rights or
warrants to all holders of its Common Stock entitling them (for a period
expiring within 45 days after the record date mentioned below) to
subscribe for or purchase shares of Common Stock at a price per share
less than the current market price per share of Common Stock (as
determined pursuant to subparagraph (4) below) on the record date
mentioned below, the conversion rate shall be adjusted effective
immediately after the expiration date of such rights or warrants so that
the same shall equal the rate determined by multiplying the conversion
rate in effect immediately prior to the date of issuance of such rights
or warrants by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding (excluding treasury shares) on the
date of issuance of such rights or warrants plus the number of
additional shares of Common Stock purchased pursuant to such offer for
subscription or purchase and of which the denominator shall be the
number of shares of Common Stock outstanding (excluding treasury shares)
on the date of issuance of such rights or warrants plus the number of
shares of Common Stock which the aggregate subscription or purchase
price of the total number of shares so purchased would purchase at such
current market price (determined as provided in subparagraph (4) below).
(3) In case the Corporation shall distribute to all holders of
its Common Stock evidences of its indebtedness or assets (excluding cash
distributions made out of current or retained earnings) or rights to
subscribe (excluding those referred to in subparagraph (2) above), then
in each such case the conversion rate shall be adjusted so that the same
shall equal the rate determined by multiplying the conversion rate in
effect immediately prior to the date of such distribution by a fraction
of which the numerator shall be the current market price per share of
Common Stock (determined as provided in subparagraph (4) below) at the
record date mentioned
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below, and the denominator of which shall be such current market price
per share of the Common Stock, less the then fair market value (as
determined, in good faith, by the Board of Directors of the Corporation,
whose determination shall be conclusive) of the portion of the assets or
evidences of indebtedness so distributed or of such subscription rights
applicable to one share of Common Stock. Such adjustment shall become
effective immediately after the record date for determination of
stockholders entitled to receive such distribution.
(4) For the purpose of any computation under subparagraphs (2)
and (3) above, the current market price per share of Common Stock on any
date shall be deemed to be the average of the daily closing prices for
30 consecutive business days commencing 45 business days before the day
in question. The closing price for each day shall be the last reported
sale price regular way or, in case no such reported sale takes place on
such day, the average of the reported closing bid and asked prices
regular way, in either case on the New York Stock Exchange 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 or, if not listed or admitted to trading
on any national securities exchange, the average of the closing bid and
asked prices as furnished by any New York Stock Exchange member firm
selected from time to time by the Corporation for that purpose.
(5) In any case in which this paragraph 5 shall require that an
adjustment be made immediately following a record date, the Corporation
may elect to defer (but only until five business days following the
filing by the Corporation of the statement required by subparagraph (7)
below) issuing to the holder of any share of $2.20 Preferred Stock
converted after such record date shares of Common Stock and other
capital stock of the Corporation issuable upon such conversion over and
above the number of shares of Common Stock and other capital stock of
the Corporation issuable upon such conversion as computed on the basis
of the conversion rate prior to adjustment.
(6) All calculations under this paragraph 5 shall be made to
the nearest cent or to the nearest one-hundredth of a share, as the case
may be.
(7) Whenever the conversion rate is adjusted as herein
provided, the Corporation shall (i) file at the office or agency in the
Borough of Manhattan in the City of New York maintained by the
Corporation pursuant to subparagraph (D) of this paragraph 5 and with
each transfer agent for its Common Stock a statement, signed by the
Chairman of the Board of Directors, the President or one of the Vice
Presidents of the Corporation and by its Treasurer or one of its
Assistant Treasurers, stating the adjusted conversion rate determined as
provided herein and setting forth the method of calculation and the
facts requiring such adjustment and upon which such calculation is
based, and (ii) mail or cause to be mailed a copy of such statement
setting forth the adjusted conversion rate to each person who is a
registered holder of $2.20 Preferred Stock at such person's last address
as the same appears on the books of the Corporation. Each adjustment
shall remain in effect until a subsequent adjustment is required here-
under.
(B) In case of a merger or consolidation of the Corporation with or
into another corporation, or the sale of the Corporation's property or assets
as, or substantially as, an entirety, to another corporation, or the re-
classification of the Corporation's Common Stock (other than through a
subdivision or combination thereof, or change in par value), holders of shares
of $2.20 Preferred Stock shall thereafter have the right to convert each of
such shares into the kind and amount of shares of stock and other securities
and property receivable upon such merger, consolidation, sale or
reclassification by a holder of the number of shares of Common Stock (whether
whole or fractional) of the Corporation into which shares of $2.20 Preferred
Stock might have been converted immediately prior to such a merger,
consolidation, sale or reclassification, and shall have no other conversion
rights under these provisions; and effective provision shall be made in the
charter of the resulting or surviving Corporation or otherwise, so that the
provisions set forth herein for the protection of conversion rights of $2.20
Preferred Stock shall thereafter be applicable, as nearly as reasonably may
be, to any such other shares of stock and other securities and property
deliverable upon conversion of $2.20 Preferred Stock remaining outstanding or
other convertible preferred stock received by the holders in place thereof. Any
such resulting or surviving
C-7
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corporation shall expressly assume the obligation to deliver, upon the
exercise of the conversion right, such shares, securities or property as
holders of $2.20 Preferred Stock remaining outstanding, or other convertible
preferred stock received by such holders in place thereof, shall be entitled
to receive pursuant to the provisions hereof, and to make provision for
protection of conversion rights as above provided.
(C) If, at any time while shares of $2.20 Preferred Stock are
outstanding, the Corporation shall (i) declare a dividend (or any other
distribution) on its Common Stock, other than in cash out of current or
retained earnings; or (ii) authorize the issuance to all holders of its Common
Stock of rights or warrants to subscribe for or purchase shares of its Common
Stock or of any other subscription rights or warrants; or (iii) reclassify its
Common Stock (other than through a subdivision or combination thereof) or
become a party to any consolidation or merger for which approval of the
holders of its Common Stock is required, or sell or transfer all or
substantially all of the assets of the Corporation; then the Corporation shall
cause to be mailed to registered holders of $2.20 Preferred Stock, at their
last addresses as they shall appear upon the Corporation's stock transfer
record, at least ten days prior to the applicable record date hereinafter
specified, a notice stating (i) the date on which a record is to be taken for
the purpose of such dividend, distribution, rights or warrants, or, if a
record is not to be taken, the date as of which holders of Common Stock of
record to be entitled to such dividend, distribution, rights or warrants are
to be determined, or (ii) the date on which any such reclassification,
consolidation, merger, sale or transfer is expected to become effective, and
the date as of which it is expected that holders of Common Stock of record
shall be entitled to exchange their Common Stock for securities or other
property, if any, deliverable upon such reclassification, consolidation,
merger, sale or transfer. Failure to give or receive the notice required by
this subparagraph (C) or any defect therein shall not affect the legality or
validity of any such dividend, distribution, right or warrant or other action.
(D) The holder of any shares of $2.20 Preferred Stock may exercise his
option to convert such shares into shares of Common Stock only by surrendering
for such purpose to the Corporation at the office or agency in the Borough of
Manhattan in The City of New York maintained by the Corporation for that
purpose certificates representing the shares to be converted, accompanied by
written notice that such holder elects to convert such shares in accordance
with the provisions of this paragraph 5. Said notice shall also state the name
or names (with addresses) in which the certificate or certificates for shares
of Common Stock which shall be issuable on such conversion shall be issued.
Each certificate or certificates surrendered for conversion shall, unless the
shares issuable on conversion are to be issued in the same name as that in
which such certificate or certificates are registered, be accompanied by
instruments of transfer, in form satisfactory to the Corporation, duly
executed by the holder or by his duly authorized attorney. Each conversion
shall be deemed to have been effected on the date on which such certificate or
certificates shall have been surrendered and such notice received by the
Corporation as aforesaid, and the person or persons in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become on said date the holder or
holders of record of the shares represented thereby notwithstanding that the
transfer books of the Corporation may then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered
to such person.
(E) Upon any such conversion of shares of $2.20 Preferred Stock, no
allowance, adjustment or payment shall be made with respect to dividends upon
either the shares of $2.20 Preferred Stock surrendered for conversion or the
shares of Common Stock issuable upon conversion.
(F) In connection with the conversion of shares of $2.20 Preferred
Stock into Common Stock, no fractions of shares of $2.20 Preferred Stock or of
Common Stock shall be issued, but the Corporation shall pay a cash adjustment
in respect of such fractional interest in an amount equal to the market value
of such fractional interest. In such event, the market value of a share of
Common Stock shall be the last recorded sale price of such a share on the New
York Stock Exchange on the business day immediately preceding the date upon
which such shares of $2.20 Preferred Stock are deemed to have been converted,
or, if there be no such recorded sale price on such day, the last quoted bid
price per share of Common Stock on such exchange at the close of trading on
such business day. If the Common Stock shall not at the time be listed or
admitted to trading on the New York Stock Exchange, such market value shall be
the average of the reported closing bid and asked prices regular way on such
day on the principal national securities exchange on which the Common Stock is
listed or admitted to trading or, if not listed or admitted to trading on any
national securities exchange, the average of the closing bid and asked prices
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on such day as furnished by any New York Stock Exchange member firm selected
from time to time by the Corporation for that purpose. The issue of stock
certificates on conversions of shares of $2.20 Preferred Stock shall be made
without charge to converting holders of shares of $2.20 Preferred Stock for
any tax in respect of the issue thereof. The Corporation shall not, however,
be required to pay any tax which may be payable in respect of any registration
of transfer involved in the issue and delivery of stock in any name other than
that of the holder of any shares of $2.20 Preferred Stock converted, and the
Corporation shall not be required to so issue or deliver any stock certificate
unless and until the person or persons requesting the registration of transfer
shall have paid to the Corporation the amount of such tax or shall have
established to the satisfaction of the Corporation that such tax has been
paid.
(G) The Corporation shall at all times reserve and keep available out
of its authorized Common Stock the full number of shares of Common Stock
deliverable upon the conversion of all outstanding shares of $2.20 Preferred
Stock.
(H) Any shares of $2.20 Preferred Stock converted shall no longer be
deemed outstanding and shall assume the status of authorized but unissued
shares of Preferred Stock, with no par value, undesignated as to series,
subject to reissuance by the Corporation as shares of Preferred Stock of any
one or more series, as may be determined from time to time by the Board of
Directors, except that such shares may not be reissued as additional shares of
$2.20 Preferred Stock.
(I) For purposes of this paragraph (5):
(1) "business day" shall mean a day on which the New York
Stock Exchange (or a successor or an equivalent or substitute
organization or facility) is open for the trading of securities in
the Borough of Manhattan in The City of New York; and
(2) "Common Stock" shall mean (a) the Corporation's
Common Stock, $.16-2/3 par value per share, or (b) any other class
of stock resulting from successive changes or reclassifications of
such Common Stock consisting solely of changes in par value, or
from par value to no par value, or from no par value to par value;
provided, however, that in the event that at any time as a result
of an adjustment made pursuant to subparagraph (A)(1) above, the
holder of any share of $2.20 Preferred Stock thereafter
surrendered for conversion would become entitled to receive any
stock of the Corporation other than shares of its Common Stock,
thereafter the conversion rate with respect to such other shares
so receivable upon conversion of any share of $2.20 Preferred
Stock shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions
with respect to Common Stock contained in this paragraph 5.
6. VOTING RIGHTS.
(A) The holders of $2.20 Preferred Stock shall be entitled to one vote
per share, voting together as one class with the holders of Common Stock and
any other series of Preferred Stock entitled to vote, on all matters to be
voted by stockholders of the Corporation, in addition to their rights set
forth in subparagraphs (B), (C) and (D) below and otherwise provided by law.
(B) If at any time the Corporation shall have failed to make the
mandatory redemptions of $2.20 Preferred Stock required by the third
subparagraph of paragraph 4 of a number of shares equivalent to or exceeding
the number of shares to be redeemed pursuant to such paragraph on any two
redemption dates as specified in such paragraph, and if the default in
dividends specified in subparagraph (C) of this paragraph 6 (the "Dividend
Default") is not then in effect, the number of directors constituting the
Board of Directors of the Corporation shall be increased by two, and the hold-
ers of $2.20 Preferred Stock, voting as a separate series shall be entitled at
the next annual meeting of stockholders or the next special meeting of
stockholders, or at a special meeting of holders of $2.20 Preferred Stock
called as hereinafter provided, to elect two directors to fill such newly
created directorships, and in addition thereto, such holders shall be entitled
to participate with holders of Common Stock and holders, if any, of any other
capital stock of the Corporation entitled to vote for the election of
directors in the election of any other directors; provided, however, that when
all arrears in such redemptions of the $2.20
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Preferred Stock shall have been made or if a Dividend Default shall occur,
then (i) the right of holders of $2.20 Preferred Stock to participate in the
election of two directors shall cease but subject always to the same
provisions for vesting of such voting rights in the case of any similar future
arrearages in redemptions at a time when a Dividend Default is not in effect;
(ii) the term of the directors then in office elected by holders of $2.20
Preferred Stock as a class shall terminate; and (iii) the number of directors
constituting the Board of Directors shall be reduced by two (except that upon
a Default in Dividends the number of directors shall then be increased in
accordance with subparagraph (C) of this paragraph 6).
Whenever such voting right shall vest, it may be exercised initially
either at a special meeting of holders of $2.20 Preferred Stock or at any
annual or special stockholders' meeting, but thereafter it shall be exercised
only at annual stockholders' meetings. A special meeting for the exercise of
such right shall be called by the Secretary of the Corporation within ten days
after receipt of a written request therefor, signed by the holders of record
of at least 10% of the votes of the then outstanding shares of $2.20 Preferred
Stock; however, no such special meeting shall be held during the 90-day period
preceding the date fixed for the annual meeting of stockholders.
Any director who shall have been elected by holders of $2.20 Preferred
Stock as a series pursuant to this subparagraph (B) shall hold office for a
term expiring (subject to the earlier termination of the default in redemp-
tions or the occurrence of a Dividend Default) at the next annual meeting of
stockholders, and during such term may be removed at any time, either for or
without cause, only by the affirmative votes of holders of record of a
majority of the votes of the then outstanding shares of $2.20 Preferred Stock
given at a special meeting of such stockholders called for the purpose. Any
vacancy created by such removal may also be filled at such meeting. A meeting
for the removal of a director elected by holders of $2.20 Preferred Stock as a
series and the filling of the vacancy created thereby shall be called by the
Secretary of the Corporation within ten days after receipt of a written
request therefor, signed by the holders of not less than 25% of the votes of
the then outstanding shares of $2.20 Preferred Stock. Such meeting shall be
held at the earliest practicable date thereafter.
Any vacancy caused by the death, resignation, or expiration of term
(except upon a termination of the default in redemptions or the occurrence of
a Dividend Default) of a director who shall have been elected by the holders
of $2.20 Preferred Stock as a series pursuant to this subparagraph (B) may be
filled only by the holders of $2.20 Preferred Stock at a meeting called for
such purpose. Such meeting of the holders of $2.20 Preferred Stock shall be
called by the Secretary of the Corporation at the earliest practicable date
after any such death or resignation and in any event within ten days after
receipt of a written request therefor, signed by the holders of record of at
least 10% of the votes of the then outstanding shares of $2.20 Preferred
Stock.
If any meeting of the holders of $2.20 Preferred Stock required by this
subparagraph (B) to be called shall not have been called within ten days after
personal service of a written request therefor upon the Secretary of the
Corporation or within 15 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, then holders of record of at least 10% of the votes of
the then outstanding shares of $2.20 Preferred Stock may designate in writing
one of their number to call such a meeting at the expense of the Corporation
and such meeting may be called by such person so designated upon the notice
required for annual meetings of stockholders. Any holder of $2.20 Preferred
Stock so designated shall have access to the stock books of the Corporation
for the purpose of causing meetings of stockholders to be called pursuant to
these provisions.
Any meeting of holders of $2.20 Preferred Stock to vote as a series for
the election or removal of directors shall be held at the place for the
holding of the annual meeting of stockholders of the Corporation. At such
meeting, the presence in person or by proxy of holders of a majority of the
votes of the then outstanding shares of $2.20 Preferred Stock shall be
required to constitute a quorum; in the absence of a quorum, a majority of the
holders present in person or by proxy shall have power to adjourn the meeting
from time to time without notice, other than announcement at the meeting,
until a quorum shall be present.
(C) If at any time the Corporation shall be in default in the payment
of dividends on the $2.20 Preferred Stock of an amount equivalent to or
exceeding six full quarterly dividends (whether or
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not consecutive), the number of directors constituting the Board of Directors
of the Corporation shall be increased by two, and the holders of $2.20 Pre-
ferred Stock, voting as a separate class together with the holders of all
other series of Preferred Stock outstanding having similar voting rights (such
other series of Preferred Stock and the $2.20 Preferred Stock being
hereinafter collectively referred to as "Special Preferred Stock"), whether or
not the payment of quarterly dividends shall be in default on all Special Pre-
ferred Stock outstanding shall be entitled at the next annual meeting of
stockholders, or at a special meeting of holders of Special Preferred Stock
called as hereinafter provided, to elect two directors to fill such newly
created directorships, and in addition thereto, such holders shall be entitled
to participate with holders of Common Stock and holders, if any, of any other
capital stock of the Corporation entitled to vote for the election of
directors in the election of any other directors; provided, however, that when
all arrears in dividends on Special Preferred Stock then outstanding shall
have been paid and dividends thereon for the current quarterly period shall
have been paid or declared and a sum sufficient for the payment thereof set
aside, then (i) the right of holders of Special Preferred Stock to participate
in the election of two directors shall cease but subject always to the same
provisions for vesting of such voting rights in the case of any similar future
arrearages in dividends; (ii) the term of the directors then in office elected
by holders of Special Preferred Stock as a class shall terminate; and (iii)
the number of directors constituting the Board of Directors shall be reduced
by two.
Whenever such voting right shall vest, it may be exercised initially
either at a special meeting of holders of Special Preferred Stock or at any
annual or special stockholders' meeting, but thereafter it shall be exercised
only at annual stockholders' meetings. A special meeting for the exercise of
such right shall be called by the secretary of the Corporation within ten days
after receipt of a written request therefor, signed by the holders of record
of at least 10% of the votes of the then outstanding shares of Special
Preferred Stock; however, no such special meeting shall be held during the 90-
day period preceding the date fixed for the annual meeting of stockholders.
Any director who shall have been elected by holders of Special Preferred
Stock as a class pursuant to this subparagraph (C) shall hold office for a
term expiring (subject to the earlier termination of the default in dividends)
at the next annual meeting of stockholders, and during such term may be
removed at any time, either for or without cause, only by the affirmative
votes of holders of record of a majority of the votes of the then outstanding
shares of Special Preferred Stock given at a special meeting of such
stockholders called for the purpose. Any vacancy created by such removal may
also be filled at such meeting. A meeting for the removal of a director
elected by holders of Special Preferred Stock as a class and the filling of
the vacancy created thereby shall be called by the Secretary of the
Corporation within ten days after receipt of a written request therefor,
signed by the holders of not less than 25% of the votes of the then
outstanding shares of Special Preferred Stock. Such meeting shall be held at
the earliest practicable date thereafter.
Any vacancy caused by the death, resignation, or expiration of term
(except upon a termination of the default in dividends) of a director who
shall have been elected by the holders of Special Preferred Stock as a class
pursuant to this subparagraph (C) may be filled only by the holders of Special
Preferred Stock at a meeting called for such purpose. Such meeting of the
holders of Special Preferred Stock shall be called by the Secretary of the
Corporation at the earliest practicable date after any such death or
resignation and in any event within ten days after receipt of a written
request therefor, signed by the holders of record of at least 10% of the votes
of the then outstanding shares of Special Preferred Stock.
If any meeting of the holders of Special Preferred Stock required by
this subparagraph (C) to be called shall not have been called within ten days
after personal service of a written request therefor upon the Secretary of the
Corporation or within 15 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, then holders of record of at least 10% of the votes of
the then outstanding shares of Special Preferred Stock may designate in
writing one of their number to call such a meeting at the expense of the
Corporation and such meeting may be called by such person so designated upon
the notice required for annual meetings of stockholders. Any holder of
Special Preferred Stock so designated shall have access to the stock books of
the Corporation for the purpose of causing meetings of stockholders to be
called pursuant to these provisions.
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Any meeting of holders of Special Preferred Stock to vote as a class for
the election or removal of directors shall be held at the place for the
holding of the annual meeting of stockholders of the Corporation. At such
meeting, the presence in person or by proxy of holders of a majority of the
votes of the then outstanding shares of Special Preferred Stock shall be
required to constitute a quorum; in the absence of a quorum, a majority of the
holders present in person or by proxy shall have power to adjourn the meeting
from time to time without notice, other than announcement at the meeting,
until a quorum shall be present.
(D) So long as any shares of $2.20 Preferred Stock are outstanding,
the Corporation shall not, in any manner, whether by amendment to the
Certificate of InCorporation or By-Laws of the Corporation, by merger (whether
or not the Corporation is a surviving Corporation in such merger), by
consolidation, or otherwise:
(1) without the written consent or the affirmative vote
at a meeting called for that purpose of the holders of at least
two-thirds of the votes of the shares of $2.20 Preferred Stock
then outstanding, voting separately as a class, (a) amend, alter
or repeal any of the provisions of Article IV of the Certificate
of Incorporation of the Corporation, or of any resolution or
resolutions establishing the $2.20 Preferred Stock, so as to
affect adversely the powers, preferences or special rights of the
$2.20 Preferred Stock; or (b) authorize or increase the authorized
amount of, or authorize any obligation or security convertible
into or evidencing the right to purchase shares of, any additional
class or series of stock ranking prior to the $2.20 Preferred
Stock in the payment of dividends or the preferential distribution
of assets; or (c) authorize or increase the authorized amount of,
or authorize any obligation or security convertible into or
evidencing the right to purchase shares of, any shares of
Preferred Stock of any series having more than one vote per share
of such Preferred Stock or amend, alter or repeal any of the pro-
visions of Article IV of the Certificate of InCorporation of the
Corporation, or of any resolution or resolutions establishing any
series of the Preferred Stock, so as to provide any share of
Preferred Stock with more than one vote per share of Preferred
Stock; or
(2) without the written consent or the affirmative vote
at a meeting called for that purpose of the holders of at least a
majority of the aggregate number of the votes of the shares of
Preferred Stock of all series (including $2.20 Preferred Stock)
then outstanding, voting separately as a class, (a) increase the
number of shares of Preferred Stock authorized by the provisions
of Article IV of the Certificate of Incorporation; or (b)
authorize or increase the authorized amount of, or authorize any
obligation or security convertible into or evidencing the right to
purchase shares of, any additional class of stock ranking on a
parity with the $2.20 Preferred Stock in the payment of dividends
or the preferential distribution of assets;
PROVIDED, HOWEVER, that the foregoing provisions of this subparagraph (D)
shall not require the consent or vote of the holders of $2.20 Preferred Stock
or any Preferred Stock for the authorization or an increase in the authorized
amount of any class or series of stock, or for the authorization of any
obligation or security convertible into or evidencing the right to purchase
shares of any class or series of stock, except to the extent specifically
provided in sections (1)(b), (2)(a) and (2)(b) of this subparagraph (D); and
PROVIDED further, that, except as otherwise required by law, no such consent
or vote shall be required for any merger or consolidation:
(i) in which (x) the Corporation is the surviving corporation;
(y) no adverse change is made in the powers, preferences or special
rights of the $2.20 Preferred Stock; and (z) no additional class or
series of stock is authorized or the authorized amount thereof
increased, and no obligation or security convertible into or evidencing
the right to purchase shares of any additional class or series of stock
is authorized, if no such consent or vote would have been required for
any such authorization, or increase in authorized amount, immediately
prior to such merger or consolidation; or
(ii) in which (x) the Corporation is a party but is not the
surviving corporation; (y) the surviving corporation shall, in
connection with and at the same time as such merger or
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consolidation, issue in exchange for each share of $2.20 Preferred Stock
then outstanding a share of preferred stock of the surviving corporation
with the same powers, preferences and special rights as the $2.20
Preferred Stock; and (z) immediately after such merger or consolidation
only classes or series of stock of the surviving corporation and
obligations or securities convertible into or evidencing the right to
purchase shares of a class or series of stock of the surviving
corporation shall be authorized or outstanding, for which no such
consent or vote would have been required if such classes or series of
stock and obligations or securities had been authorized by the
Corporation immediately prior to such merger or consolidation, or which
have, or are convertible into or evidence the right to purchase shares
of a class or series of stock of the surviving corporation which have,
the same powers, preferences and special rights and authorized amount as
a class or series of stock of the Corporation which was authorized (with
such consent or vote) prior to such merger or consolidation and is
continuing as an authorized class or series of stock at the time
thereof.
(C) PROVISIONS NECESSARY TO EFFECT THE RECLASSIFICATION OF $2.16 CUMULATIVE
CONVERTIBLE PREFERRED STOCK.
(1) On the Effective Date, each share of $2.16 Cumulative
Convertible Preferred Stock, no par value ("$2.16 Preferred Stock"),
issued and outstanding immediately prior to the Effective Date shall
automatically and without any action on the part of the holder thereof
be reclassified and changed into 4.9 shares of Common Stock of the
Corporation, and all powers, preferences, privileges, voting and other
special or relative rights and qualifications of $2.16 Preferred Stock,
including priorities with respect to dividends and liquidation and
rights in respect of accumulated dividends existing on the Effective
Date, shall terminate and be of no further force and effect.
(2) Each holder of a certificate or certificates which
immediately prior to the Effective Date represented outstanding shares
of $2.16 Preferred Stock (the "Old Certificates", whether one or more)
shall be entitled to receive upon surrender of the Old Certificates to
the Corporation's transfer agent for cancellation, a certificate or
certificates (the "New Certificates", whether one or more) representing
the number of shares of Common Stock into which the shares of $2.16
Preferred Stock, formerly represented by the Old Certificates so
surrendered, are reclassified and converted under the terms hereof.
(3) No certificates or scrip representing fractional share
interests in Common Stock will be issued, and no such fractional share
interest will entitle the holder thereof to vote or to any rights of a
stockholder of the Corporation. A holder of Old Certificates shall
receive, in lieu of any fractions of a share of Common Stock to which
the holder would otherwise be entitled, such number of shares rounded to
the next higher whole number.
(4) From and after the Effective Date, certificates representing
shares of $2.16 Preferred Stock shall be deemed to represent only the
right to receive shares of Common Stock.
ARTICLE V
Election of directors need not be by ballot unless the By-Laws of the
Corporation shall so provide.
ARTICLE VI
In furtherance and not in limitation of the power conferred upon the
Board of Directors by law, the Board of Directors shall have the power to
make, adopt, alter, amend and repeal from time to time the By-Laws of the
Corporation, subject and the right of stockholders entitled to vote with
respect thereto to alter and repeal By-Laws made by the Board of Directors.
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ARTICLE VII
(A) Except as set forth in paragraph (B) of this Article, the
affirmative vote or consent of the holders of not less than four-fifths of the
outstanding shares of stock of the Corporation entitled to vote in elections
of directors, voting for purposes of this Article as one class, shall be
required:
(1) to adopt any agreement for the merger or consolidation of the
Corporation or any subsidiary (as hereinafter defined) with or into any
other person (as hereinafter defined),
(2) to authorize any sale, lease, transfer, exchange, mortgage,
pledge or other disposition to any other person of all or substantially
all of the assets of the Corporation or any subsidiary, or any part of
such assets having a then fair market value equal to or greater than 50%
of the then fair market value of the total assets of the Corporation or
such subsidiary, or
(3) to authorize the issuance or transfer by the Corporation or
any subsidiary of any voting securities of the Corporation or any
subsidiary in exchange or payment for the securities or assets of any
other person,
if, in any such case, as of the record date for the determination of
stockholders entitled to notice thereof and to vote thereon or consent
thereto, such other person is, or at any time within the preceding twelve
months has been, the beneficial owner (as hereinafter defined) of 10% or more
of the outstanding shares of stock of the Corporation entitled to vote in
elections of directors.
(B) The provisions of paragraph (A) of this Article shall not apply to
any transaction described therein if the Board of Directors by resolution
shall have approved a memorandum of understanding with such other person
setting forth the principal terms of such transaction and such transaction is
substantially consistent therewith, provided that a majority of those members
of the Board of Directors voting in favor of such resolution were duly elected
and acting members of the Board of Directors prior to the time such other
person became the beneficial owner of 10% or more of the outstanding shares of
stock of the Corporation entitled to vote in elections of directors.
(C) The affirmative vote or consent of the holders of not less than 80%
of the outstanding shares of stock of the Corporation entitled to vote in
elections of directors, voting for purposes of this Article as one class,
shall be required for the adoption of any plan for the dissolution of the
Corporation if the Board of Directors shall not have, by resolution,
recommended to the stockholders the adoption of such plan for dissolution of
the Corporation.
(D) For purposes of this Article,
(1) any specified person shall be deemed to be the "beneficial
owner" of shares of stock of the Corporation (a) which such specified
person or any of its affiliates or associates (as such terms are
hereinafter defined) owns, directly or indirectly, whether of record or
not, (b) which such specified person or any of its affiliates or
associates has the right to acquire pursuant to any agreement, upon
exercise of conversion rights, warrants or options, or otherwise, or
(c) which are beneficially owned, directly or indirectly (including
shares deemed owned through application of clauses (a) and (b) above),
by any other person with which such specified person or any of its
affiliates or associates has any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of stock of
the Corporation;
(2) a "subsidiary" is any corporation more than 49% of the voting
securities of which are owned, directly or indirectly, by the
Corporation;
(3) a "person" is any individual, corporation or other entity;
(4) an "affiliate" of a specified person is any person that
directly, or indirectly through one or more intermediaries, controls, or
is controlled by, or is under common control with, the specified person;
and
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(5) an "associate" of a specified person is (a) any person of
which such specified person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities, (b) any trust or other estate in which such specified person
has a substantial beneficial interest or as to which such specified
person serves as trustee or in a similar fiduciary capacity, or (c) any
relative or spouse of such specified person, or any relative of such
spouse, who has the same home as such specified person or who is a
director or officer of such specified person or any corporation which
controls or is controlled by such specified person.
(E) For purposes of determining whether a person owns beneficially 10%
or more of the outstanding shares of stock of the Corporation entitled to vote
in elections of directors, the outstanding shares of stock of the Corporation
shall include shares deemed owned through application of clause (a), (b) or
(c) of paragraph (D)(1) above but shall not include any other shares which may
be issuable pursuant to any agreement or upon exercise of conversion rights,
warrants or options, or otherwise.
(F) The Board of Directors shall have the power and duty to determine,
for purposes of this Article, on the basis of information known to such Board,
(1) the fair market value of any assets of the Corporation or any
subsidiary proposed to be disposed of in a transaction of the character
referred to in paragraph (A)(2) of this Article, and the fair market
value of the total assets of the Corporation or such subsidiary;
(2) whether any person referred to in paragraph (A) of this
Article owns beneficially 10% or more of the outstanding shares of stock
of the Corporation entitled to vote in elections of directors; and
(3) whether a proposed transaction is substantially consistent
with any memorandum of understanding of the character referred to in
paragraph (B) of this Article.
Any such determination shall be conclusive and binding for all purposes of
this Article.
(G) No amendment to this Restated Certificate or to the By-Laws shall
amend, modify or repeal any or all of the provisions of this Article VII
unless adopted by the affirmative vote or consent of the holders of not less
than 80% of the outstanding shares of stock of the Corporation entitled to
vote in elections of directors, voting for the purposes of this Article as a
single class; provided, however, that in the event the Board of Directors of
the Corporation shall by resolution unanimously recommend to the stockholders
the adoption of any such amendment, the stockholders of record holding a
majority of the outstanding shares of stock of the Corporation entitled to
vote in elections of directors may amend, modify or repeal any or all of such
provisions.
(H) Notwithstanding the foregoing provisions of this Article, this
Article shall become null, void and of no further force or effect upon the
expiration of the option granted by MetLife Security Insurance Company of
Louisiana ("MetLife Louisiana") to the Corporation to acquire shares of
capital stock of the Corporation held by MetLife Louisiana as set forth in the
Option Agreement dated February __, 1994, between MetLife Louisiana and the
Corporation, other than upon the expiration thereof on account of such option
having been exercised in full.
ARTICLE VIII
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 (i) for any breach of the director's
duty of loyalty to the Corporation 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 General Corporation
Law of the State of Delaware or (iv) for any transaction from which the
director derived an improper personal benefit.
If the General Corporation Law of the State of Delaware is amended
hereafter to authorize the further elimination or limitation of the liability
of directors, then the liability of a director of the
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Corporation shall be eliminated or limited to the fullest extent authorized by
the General Corporation Law of the State of Delaware, as so amended.
Any repeal or modification of this Article shall not adversely affect
any right or protection of a director of the Corporation existing hereunder
with respect to any act or omission occurring prior to or at the time of such
repeal or modification.
ARTICLE IX
Notwithstanding the provisions of this Restated Certificate and any
provision of the By-Laws of the Corporation, in the absence of approval by
66 2/3% of the independent directors of the Corporation, voting at a meeting
duly called for such purpose, of an amendment to the Amended and Restated
Memorandum of Understanding dated December 14, 1993 or the Option Agreement
dated February __, 1994, each between MetLife Louisiana and the Corporation,
which would be adverse to the Corporation, no such amendment shall be approved,
agreed to or executed by the Corporation unless approved by the affirmative vote
or consent of the holders of not less than 80% of the outstanding shares of
capital stock of the Corporation entitled to vote in elections of directors,
voting for the purposes of this Article as a single class. For purposes hereof,
an independent director shall be any director other than Ray C. Adams, Charles
F. Luce, Stewart G. Nagler, James Q. Riordan, William S. Sneath or any person
who is an affiliate (within the meaning set forth in Article VII hereof) of
MetLife Louisiana.
IN WITNESS WHEREOF, Tesoro Petroleum Corporation has caused this
Restated Certificate of Incorporation to be signed in its corporate name by
its President and Chief Executive Officer and its corporate seal to be affixed
hereto and attested by its Secretary this ___ day of ________________, 1994.
TESORO PETROLEUM CORPORATION
By: /s/ MICHAEL D. BURKE
ATTEST: Michael D. Burke, President and
Chief Executive Officer
By:/s/ JAMES C. REED, JR.
James C. Reed, Jr., Secretary
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APPENDIX D
RESTATED CERTIFICATE OF INCORPORATION
OF
TESORO PETROLEUM CORPORATION
The undersigned, having filed its original Certificate of Incorporation,
under the name of TSO Corp., with the Secretary of State of the State of
Delaware on December 26, 1968, thereby forming a corporation under and pursuant
to the provisions of the General Corporation Law of the State of Delaware, does
hereby restate its Certificate of Incorporation and certify as follows:
ARTICLE I
The name of the Corporation is Tesoro Petroleum Corporation (hereinafter
called the 'Corporation').
ARTICLE II
The registered office of the Corporation in the State of Delaware is
located at No. 100 West 10th Street, in the City of Wilmington, County of New
Castle. The name and address of the Corporation's registered agent is The
Corporation Trust Company, No. 100 West 10th Street, Wilmington, Delaware.
ARTICLE III
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
Delaware.
ARTICLE IV
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is Fifty-Five Million (55,000,000) shares,
consisting of
Fifty Million (50,000,000) shares of the par value of $.16 2/3 per share;
and
Five Million (5,000,000) shares with no par value.
(A) DESIGNATION OF EACH CLASS OF SHARES.
(1) The Fifty Million (50,000,000) authorized shares of a par value
of $.16 2/3 per share and an aggregate par value of $8,333,333.33 shall be
designated Common Stock; and
(2) The Five Million (5,000,000) authorized shares with no par value
shall be designated Preferred Stock.
(B) STATEMENT OF PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS IN RESPECT OF
SHARES OF PREFERRED STOCK AND AUTHORITY OF BOARD OF DIRECTORS TO FIX
DESIGNATIONS, POWERS, PREFERENCES, RIGHTS, QUALIFICATIONS, LIMITATIONS AND
RESTRICTIONS THEREOF NOT FIXED HEREBY.
Shares of Preferred Stock may be issued from time to time in one or
more series, as may be determined from time to time by the Board of
Directors, each of said series to be distinctly designated. All shares of
any one series of Preferred Stock shall be alike in every particular. The
Board of Directors is hereby authorized to fix or alter the dividend
rights, dividend rate, conversion rights, voting rights, rights and terms
of redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences of any wholly unissued series of
preferred shares, and the number of shares constituting any such series and
the designation thereof, or any of them; and to increase or decrease the
number of shares of any series subsequent to the issue of shares of that
series, but not below the number of shares of such series then outsanding.
In case the number of shares of any series shall be so decreased, the
shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of
shares of such series.
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INITIAL SERIES OF PREFERRED STOCK DESIGNATED
'8% CONVERTIBLE PREFERRED STOCK'
1. Designation of Series and Number of Shares.
The initial series of preferred stock is designated '8% Convertible
Preferred Stock' (hereinafter referred to as '8% Preferred Stock'), and the
number of shares which shall constitute such series shall be 40,000 shares of a
stated value of $100 per share, which number may be increased or decreased (but
not below the number thereof then outstanding) from time to time by the Board of
Directors.
2. Dividends.
Holders of 8% Preferred Stock shall be entitled to receive, as and when
declared by the Board of Directors and out of assets of the Corporation which
are by law available for payment of dividends, cash dividends at, but not
exceeding, the rate of $8.00 per share per annum, payable quarterly on April 1,
July 1, October 1 and January 1 in each year, accruing from the date on which
respective shares of 8% Preferred Stock shall be issued. Dividends upon 8%
Preferred Stock shall be cumulative quarterly, so that no dividend whatsoever
shall be declared or paid upon or set apart for any class of stock or series
thereof ranking junior to 8% Preferred Stock in the payment of dividends nor
shall any shares of any class of stock or series thereof ranking junior to 8%
Preferred Stock in payment of dividends be redeemed or purchased by the
Corporation or any subsidiary thereof nor shall any moneys be paid to or made
available for a sinking fund for redemption or purchase of any shares of any
class of stock or series thereof ranking junior to 8% Preferred Stock in payment
of dividends, unless in each instance dividends on all outstanding shares of 8%
Preferred Stock for all past dividend periods shall have been paid and the
dividend on all outstanding shares of 8% Preferred Stock for the then current
quarterly dividend period shall have been paid or declared and sufficient funds
set aside for payment thereof. Accumulations of dividends on any shares of 8%
Preferred Stock shall not bear interest.
No dividend shall be declared on any shares of any other class of stock or
series thereof ranking on a parity with 8% Preferred Stock in respect of payment
of dividends for any dividend period unless there shall have been declared on
all shares then outstanding of 8% Preferred Stock, for the same dividend period,
or for the dividend period of 8% Preferred Stock terminating within the dividend
period of said parity stock, dividends in proportion to the respective dividend
rates fixed for 8% Preferred Stock and said parity stock.
3. Liquidation.
In the event of voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, holders of 8% Preferred Stock shall be entitled
to receive $100 per share, together with accrued and unpaid dividends thereon,
before any distribution of assets shall be made to holders of common stock or
any other class of stock or series thereof ranking junior to 8% Preferred Stock
with respect to distribution of assets. Holders of 8% Preferred Stock shall be
entitled to no further participation in any such distribution. If, upon any such
liquidation, dissolution or winding up of the Corporation, assets of the
Corporation available for distribution to holders of 8% Preferred Stock shall be
insufficient to permit payment in full to such holders of the preferential
amounts aforesaid, then all such assets of the Corporation shall be distributed
ratably among holders of 8% Preferred Stock and any other ranking on a parity
therewith then outstanding, in proportion to the full preferential amounts to
which they shall be entitled respectively. Neither merger nor consolidation of
the Corporation into or with any other corporation, nor the merger or
consolidation of any other corporation into or with the Corporation, nor a sale,
transfer or lease of all or any part of the assets of the Corporation, shall be
deemed to be a liquidation, dissolution or winding up of the Corporation within
the meaning of this paragraph 3.
No payment on account of such dissolution, liquidation or winding up of the
Corporation shall be made to holders of any other class or series of stock
ranking on a parity with 8% Preferred Stock with respect to preferential
distribution of assets unless a payment on account of such dissolution,
liquidation or winding up shall be made at the same time to holders of 8%
Preferred Stock in proportion to the full distributive amounts to which they and
holders of such parity stock are respectively entitled.
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Written notice of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, stating the payment date and the
place where the distributable amounts shall be payable and containing a
reference to the conversion right set forth in paragraph 5 below, shall be given
by mail, postage prepaid, not less than 30 days prior to the payment date stated
therein, to the holders of record of 8% Preferred Stock at their respective
addresses as the same shall appear on the books of the Corporation.
4. Redemption.
The Corporation at its option may, at any time or from time to time, after
February 1, 1978, redeem the whole or any part of this issue of 8% Preferred
Stock at the applicable redemption price plus in each case accrued and unpaid
dividends thereon to the date fixed for redemption.
The applicable redemption prices for the 8% Preferred Stock shall be as
follows:
IF REDEEMED DURING
12 MONTHS BEGINNING REDEMPTION
FEBRUARY 1 PRICE PER SHARE
-------------------------- ---------------
1978---------------------------------------------------- $ 108.00
1979---------------------------------------------------- 106.40
1980---------------------------------------------------- 104.80
1981---------------------------------------------------- 103.20
1982---------------------------------------------------- 101.60
and thereafter at $100 per share.
In the event the Corporation shall determine to redeem less than the entire
issue of 8% Preferred Stock then outstanding, (i) the shares to be redeemed
shall be selected pro rata (as nearly as may be) so that the number of shares
redeemed from each holder shall be the same proportion of all the shares to be
redeemed that the total number of shares then held by such holder bears to the
total number of shares then outstanding or (ii) the shares shall be selected by
lot, as the Board of Directors of the Corporation may determine.
Notice of every such redemption shall be mailed, first class postage
prepaid, not less than 30 nor more than 50 days prior to the date fixed for
redemption ('redemption date'), to each holder of record of shares to be
redeemed, at his address as it appears on the books of the Corporation. Each
such notice shall state the redemption date; the number of shares of 8%
Preferred Stock to be redeemed, and, if less than all shares of 8% Preferred
Stock held by such holder are to be redeemed, the number of such shares to be
redeemed from him; the redemption price applicable to the shares to be redeemed;
the place or places where such shares are to be surrendered; that dividends on
shares to be redeemed will cease to accrue on the redemption date; and that
shares to be redeemed may be converted on or before the redemption date in
accordance with paragraph 5 below.
Notice having been mailed, from and after the redemption date (unless the
Corporation defaults in providing money for the payment of the redemption price)
the right to receive dividends on shares called for redemption shall cease to
accrue, said shares shall no longer be deemed to be outstanding, all rights of
holders thereof as shareholders of the Corporation (except the right to receive
the redemption price) shall terminate, and, upon surrender in accordance with
said notice of the certificates for any such shares (properly endorsed or
assigned for transfer, if the Board of Directors of the Corporation shall so
require) such shares shall be redeemed by the Corporation at the applicable
redemption price; provided, however, that the Corporation may include in such
notice a statement that the money required for the payment of the redemption
price will be deposited on a specified date, prior to the redemption date, with
a specified bank or trust company (which shall have an office in the City of New
York) in trust for the benefit of holders of shares called for redemption, and,
notice having been given, from and after such deposit shares called for
redemption shall no longer be deemed to be outstanding, all rights with respect
to shares of 8% Preferred Stock shall forthwith upon such deposit cease and
terminate, except only the right of the holders thereof to convert such shares
in accordance with the provisions of paragraph 5 below at any time prior to the
close of business on the redemption date, and holders of such shares shall look
for payment of the redemption price only to funds so deposited and in no event
to the Corporation unless said funds shall be repaid to the Corporation as
hereinafter provided. Holders of such shares shall not be entitled to any
interest
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allowed by such depositary on money so deposited, but any such interest shall be
paid to the Corporation. Any moneys deposited as aforesaid for redemption of any
shares and remaining unclaimed for four years after the date of such deposit
shall then be repaid to the Corporation upon its request, and holders of such
shares shall thereafter look only to the Corporation for payment.
Any shares of 8% Preferred Stock so redeemed or purchased shall be
permanently retired, shall no longer be deemed outstanding, and shall not under
any circumstances be reissued and the Corporation may from time to time take
such appropriate corporate action as may be necessary to reduce the number of
authorized 8% Preferred Stock accordingly.
5. Conversion.
Shares of 8% Preferred Stock shall be deemed to have a conversion value of
$100 per share and may be converted at the option of the holder thereof at any
time prior to the close of business on the date fixed for redemption of such
shares pursuant to paragraph 4 above into shares of fully paid and
non-assessable common stock of the Corporation at a price equivalent to $25.00*
(the 'conversion price') for one whole share of common stock as now constituted,
subject to the following provisions:
(A) The conversion price shall be subject to adjustment from time to
time as follows:
(1) In case the Corporation shall (i) pay a dividend or make a
distribution in shares of its capital stock (whether shares of common
stock or of capital stock of any other class), (ii) subdivide its
outstanding shares of common stock, (iii) combine its outstanding shares
of common stock into a smaller number of shares, or (iv) issue by
reclassification of its shares of common stock any shares of capital
stock of the Corporation, the conversion privilege and the conversion
price in effect immediately prior to such action shall be adjusted so
that the holder of any share of 8% Preferred Stock thereafter
surrendered for conversion shall be entitled to receive the number of
shares of capital stock of the Corporation which he would have owned
immediately following such action had such share of 8% Preferred Stock
been converted immediately prior thereto. An adjustment made pursuant to
this subparagraph (1) shall become effective immediately after the
record date in the case of a dividend and shall become effective
immediately after the effective date in the case of a subdivision,
combination or reclassification. If, as a result of an adjustment made
pursuant to this subparagraph (1), the holder of any shares of 8%
Preferred Stock thereafter surrendered for conversion shall become
entitled to receive shares of two or more classes of capital stock of
the Corporation, the Board of Directors (whose determination shall be
conclusive) shall determine the allocation of the adjusted conversion
price between or among shares of such classes of capital stock.
(2) In case the Corporation shall hereafter issue rights or
warrants to all holders of its common stock entitling them (for a period
expiring within forty-five days after the record date mentioned below)
to subscribe for or purchase shares of common stock at a price per share
less than the current market price per share (as determined pursuant to
subparagraph (4) below) on the record date mentioned below, the
conversion price of the common stock shall be adjusted so that the same
shall equal the price determined by multiplying the conversion price in
effect immediately prior to the date of issuance of such rights or
warrants by a fraction of which the numerator shall be the number of
shares of common stock outstanding (excluding treasury shares) on the
date of issuance of such rights or warrants plus the number of shares
which the aggregate offering price of the total number of shares
purchased pursuant to such offer would purchase at such current market
price, and of which the denominator shall be the number of shares of
common stock outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of common stock so
purchased pursuant to such offer for subscription or purchase.
(3) In case the Corporation shall distribute to all holders of its
common stock evidences of its indebtedness or assets (excluding any cash
dividend) or rights to subscribe (excluding those referred to in
subparagraph (2) above), then in each such case the conversion price
- ------------
* Effective immediately after the Corporation's two-for-one common stock split
on February 22, 1974, the conversion price of the 8% Preferred Stock was
adjusted from $25.00 to $12.50.
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shall be adjusted so that the same shall equal the price determined by
multiplying the conversion price in effect immediately prior to the date
of such distribution by a fraction of which the numerator shall be the
current market price per share (determined as provided in subparagraph
(4) below) of the common stock on the record date mentioned below less
the then fair market value (as determined by the Board of Directors,
whose determination shall be conclusive) of the portion of the assets or
evidences of indebtedness so distributed or of such subscription rights
applicable to one share of common stock, and the denominator shall be
such current market price per share of common stock. Such adjustment
shall become effective immediately after the record date for
determination of stockholders entitled to receive such distribution.
(4) For the purpose of any computation under subparagraphs (2) and
(3) above, the current market price per share of common stock on any
date shall be deemed to be the average of daily closing prices for
thirty consecutive business days commencing forty-five business days
before the day in question. The closing price for each day shall be the
last reported sale price regular way or, in case no such reported sale
takes place on such day, the average of the reported closing bid and
asked prices regular way, in either case on the American Stock Exchange
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 or, if not listed or
admitted to trading on any national securities exchange, the average of
the closing bid and asked prices as furnished by any New York Stock
Exchange firm selected from time to time by the Corporation for that
purpose.
(5) In any case in which this paragraph 5 shall require that an
adjustment be made immediately following a record date, the Corporation
may elect to defer (but only until five business days following the
filing by the Corporation of the statement required by subparagraph (7)
below) issuing to the holder of any share of 8% Preferred Stock
converted after such record date shares of common stock and other
capital stock of the Corporation issuable upon such conversion over and
above the number of shares of common stock and other capital stock of
the Corporation issuable upon such conversion as computed on the basis
of the conversion price prior to adjustment.
(6) No adjustment in the conversion price shall be required unless
such adjustment would require an increase or decrease of at least one
percent in such price; provided, however, that any adjustments which by
reason of this subparagraph are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All
calculations under this paragraph 5 shall be made to the nearest cent or
to the nearest one-hundredth of a share, as the case may be.
(7) Whenever the conversion price is adjusted as herein provided,
the Corporation shall (i) file at its principal office and with each
conversion agent for 8% Preferred Stock and each transfer agent for such
common stock a statement, signed by the President or one of the
Vice-Presidents of the Corporation and by its Treasurer or one of its
Assistant Treasurers, stating the adjusted conversion price and the
resulting number of shares of common stock purchasable on conversion of
one share of 8% Preferred Stock and setting forth the method of
calculation and the facts requiring such adjustment and upon which such
calculation is based, and (ii) mail or cause to be mailed a copy of such
statement setting forth the adjusted conversion price to each person who
is a registered holder of 8% Preferred Stock at such person's last
address as the same appears on the books of the Corporation. Each
adjustment shall remain in effect until a subsequent adjustment is
required hereunder.
(8) For the purposes of this paragraph 5, the term 'common stock'
shall mean (i) the Corporation's common stock, $.16 2/3 par value per
share, or (ii) any other class of stock resulting from successive
changes or reclassifications of such common stock consisting solely of
changes in par value, or from par value to no par value, or from no par
value to par value. In the event that at any time as a result of an
adjustment made pursuant to subparagraph (1) above, the holder of any
share of 8% Preferred Stock thereafter surrendered for conversion shall
become entitled to receive any stock of the Corporation other than
shares of its
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common stock, thereafter the conversion price of such other shares so
receivable upon conversion of any share of 8% Preferred Stock shall be
subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to
common stock contained in this paragraph 5.
(B) In case of a merger or consolidation of the Corporation with or
into another corporation, or the sale of the Corporation's property or
assets as, or substantially as, an entirety, to another corporation, or the
reclassification of the Corporation's common stock (other than through a
subdivision or combination thereof, or change in par value), holders of
shares of 8% Preferred Stock shall thereafter have the right to convert
each of such shares into the kind and amount of shares of stock and other
securities and property receivable upon such merger, consolidation, sale or
reclassification by a holder of the number of shares of common stock
(whether whole or fractional) of the Corporation into which such shares of
8% Preferred Stock might have been converted immediately prior to such a
merger, consolidation, sale or reclassification, and shall have no other
conversion rights under these provisions; and effective provision shall be
made in the charter of the resulting or surviving corporation or otherwise,
so that the provisions set forth herein for the protection of conversion
rights of 8% Preferred Stock shall thereafter be applicable, as nearly as
reasonably may be, to any such other shares of stock and other securities
and property deliverable upon conversion of 8% Preferred Stock remaining
outstanding or other convertible preferred stock received by the holders in
place thereof. Any such resulting or surviving corporation shall expressly
assume the obligation to deliver, upon the exercise of the conversion
privilege, such shares, securities or property as holders of 8% Preferred
Stock remaining outstanding, or other convertible preferred stock received
by such holders in place thereof, shall be entitled to receive pursuant to
the provisions hereof, and to make provision for protection of conversion
rights as above provided.
(C) If, at any time while shares of 8% Preferred Stock are
outstanding, the Corporation shall (i) declare a dividend (or any other
distribution) on its common stock, other than in cash out of earned
surplus; or (ii) authorize the issuance to all holders of its common stock
of rights or warrants to subscribe for or purchase shares of its common
stock or of any other subscription rights or warrants; or (iii) reclassify
its common stock (other than through a subdivision or combination thereof)
or become a party to any consolidation or merger for which approval of any
stockholders of the Corporation is required, or sell or transfer all or
substantially all of the assets of the Corporation; then the Corporation
shall cause to be mailed to registered holders of 8% Preferred Stock, at
their last addresses as they shall appear upon the Corporation's stock
transfer record, at least ten days prior to the applicable record date
hereinafter specified, a notice stating (i) the date on which a record is
to be taken for the purpose of such dividend, distribution, rights or
warrants, or, if a record is not to be taken, the date as of which holders
of common stock of record to be entitled to such dividend, distribution,
rights or warrants are to be determined, or (ii) the date on which any such
reclassification, consolidation, merger, sale or transfer is expected to
become effective, and the date as of which it is expected that holders of
common stock of record shall be entitled to exchange their common stock for
securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, sale or transfer. Failure to give
or receive the notice required by this subparagraph (C) or any defect
therein shall not affect the legality or validity of any such dividend,
distribution, right or warrant or other action.
(D) The holder of any shares of 8% Preferred Stock may exercise his
option to convert such shares into shares of common stock only by
surrendering for such purpose to the Corporation at the principal office of
the Corporation certificates representing the shares to be converted,
accompanied by written notice that such holder elects to convert such
shares in accordance with this paragraph 5. Said notice shall also state
the name or names (with addresses) in which the certificate or certificates
for shares of common stock which shall be issuable on such conversion shall
be issued. Each certificate or certificates surrendered for conversion
shall, unless the shares issuable on conversion are to be issued in the
same name as that in which such certificate or certificates are registered,
be accompanied by instruments of transfer, in form satisfactory to the
Corporation, duly executed by the holder or his duly authorized attorney.
Each conversion shall
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<PAGE>
be deemed to have been effected on the date on which such certificate or
certificates shall have been surrendered and such notice received by the
Corporation as aforesaid, and the person or persons in whose name or names
any certificate or certificates for shares of common stock shall be
issuable upon such conversion shall be deemed to have become on said date
the holder or holders of record of the shares represented thereby
notwithstanding that the transfer books of the Corporation may then be
closed or that certificates representing such shares of common stock shall
not then be actually delivered to such person.
(E) Upon any such conversion of shares of 8% Preferred Stock, no
allowance, adjustment or payment shall be made with respect to dividends
upon either class of stock.
(F) In connection with the conversion of shares of 8% Preferred Stock
into common stock, no fractions of shares of 8% Preferred Stock or of
common stock shall be issued, but the Corporation shall pay a cash
adjustment in respect of such fractional interest in an amount equal to the
market value of such fractional interest. In such event, the market value
of a share of common stock shall be the last recorded sale price of such a
share on the American Stock Exchange on the business day immediately
preceding the date upon which such shares of 8% Preferred Stock are deemed
to have been converted, or, if there be no such recorded sale price on such
day, the last quoted bid price per share of common stock on such exchange
at the close of trading on such business day. If the common stock shall not
at the time be listed or admitted to trading on the American Stock
Exchange, such market value shall be the average of the reported closing
bid-and-asked prices regular way on such day on the principal national
securities exchange on which the common stock is listed or admitted to
trading or, if not listed or admitted to trading on any national securities
exchange, the average of the closing bid-and-asked prices on such day as
furnished by any New York Stock Exchange firm selected from time to time by
the Corporation for that purpose. The issue of stock certificates on
conversions of shares of 8% Preferred Stock shall be made without charge to
converting holders of shares of 8% Preferred Stock for any tax in respect
of the issue thereof. The Corporation shall not, however, be required to
pay any tax which may be payable in respect of any registration of transfer
involved in the issue and delivery of stock in any name other than that of
the holder of any shares of 8% Preferred Stock converted, and the
Corporation shall not be required to so issue or deliver any stock
certificate unless and until the person or persons requesting the
registration of transfer shall have paid to the Corporation the amount of
such tax or shall have established to the satisfaction of the Corporation
that such tax has been paid.
(G) The Corporation shall at all times reserve and keep available out
of its authorized common stock the full number of shares of common stock
deliverable upon the conversion of all outstanding shares of 8% Preferred
Stock.
(H) Shares of 8% Preferred Stock converted shall be cancelled and
shall not be reissued.
6. Voting Rights.
(A) Holders of 8% Preferred Stock shall be entitled to two votes per
share, voting with the holders of any other class of stock entitled to vote,
without regard to class, on all matters to be voted on by stockholders of the
Corporation, in addition to their rights set forth in subparagraphs (B) and (C)
below and otherwise provided by law. Every provision in the Certificate of
Incorporation and By-Laws of the Corporation which requires the affirmative
vote, consent, presence, request or other action of a majority or other
proportion of the stock of the Corporation, or any class of such stock or series
thereof, or which refers to a majority or other proportion of such stock, class
or series, shall be deemed to require or refer to such majority or other
proportion of the votes of such stock, class or series.
(B) If the Corporation shall be in default in the payment of dividends on
8% Preferred Stock of an amount equivalent to or exceeding eight full quarterly
dividends (whether or not consecutive), the number of directors constituting the
Board of Directors shall be increased by one and holders of 8% Preferred Stock,
voting separately as one class, shall be entitled at the next annual meeting of
stockholders or the next special meeting of stockholders, or at a special
meeting of holders of 8% Preferred Stock called as hereinafter provided, to fill
such newly created directorship, and in addition
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<PAGE>
thereto, such holders shall be entitled to participate with holders of common
stock and holders, if any, of any other capital stock of the Corporation
entitled to vote for the election of directors in the election of any other
directors; provided, however, that when all arrears in dividends on 8% Preferred
Stock then outstanding shall have been paid and dividends thereon for the
current quarterly period shall have been paid or declared and a sum sufficient
for the payment thereof set aside, then (i) the right of holders of 8% Preferred
Stock to participate in the election of one director shall cease but subject
always to the same provisions for vesting of such voting rights in the case of
any similar future arrearages in dividends; (ii) the term of the director then
in office elected by holders of 8% Preferred Stock as a class shall terminate;
and (iii) the number of directors constituting the Board of Directors shall be
reduced by one.
Whenever such voting right shall vest, it may be exercised initially either
at a special meeting of holders of 8% Preferred Stock or at any annual or
special stockholders' meeting, but thereafter it shall be exercised only at
annual stockholders' meetings. A special meeting for the exercise of such right
shall be called by the Secretary of the Corporation within ten days after
receipt of a written request signed by the holders of record of at least 10% of
the outstanding shares of 8% Preferred Stock; however, no such special meeting
shall be held during the 90-day period preceding the date fixed for the annual
meeting of stockholders.
Any director who shall have been elected by holders of 8% Preferred Stock
as a class shall hold office for a term expiring (subject to the earlier payment
of arrears in dividends) at the next annual meeting of stockholders, and during
such term may be removed at any time, either for or without cause only by the
affirmative votes of holders of record of a majority of the outstanding shares
of 8% Preferred Stock given at a special meeting of such stockholders called for
the purpose. Any vacancy created by such removal may also be filled at such
meeting. A meeting for the removal of a director elected by holders of 8%
Preferred Stock as a class and the filling of the vacancy created thereby shall
be called by the Secretary of the Corporation within ten days after receipt of a
request therefor, signed by holders of not less than 25% of the then outstanding
shares of 8% Preferred Stock. Such meeting shall be held at the earliest
practicable date thereafter.
Any vacancy caused by the death or resignation of a director who shall have
been elected by holders of 8% Preferred Stock as a class may be filled only by
holders of 8% Preferred Stock at a meeting called for such purpose. Such meeting
of holders of 8% Preferred Stock shall be called by the Secretary of the
Corporation at the earliest practicable date after any such death or resignation
and in any event within ten days after receipt of a written request signed by
the holders of record of at least 10% of the outstanding shares of 8% Preferred
Stock.
If any meeting of holders of 8% Preferred Stock required by this
subparagraph (B) to be called shall not have been called within ten days after
personal service of a written request therefor upon the Secretary of the
Corporation or within 15 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, then holders of record of at least 10% of the outstanding
shares of 8% Preferred Stock may designate in writing one of their number to
call such a meeting at the expense of the Corporation and such meeting may be
called by such person so designated upon the notice required for annual meetings
of stockholders. Any holder of 8% Preferred Stock so designated shall have
access to the stock books of the Corporation for the purpose of causing meetings
of stockholders to be called pursuant to these provisions.
Any meeting of holders of 8% Preferred Stock to vote as a class for the
election or removal of directors shall be held at the place for the holding of
the annual meeting of stockholders of the Corporation. At such meeting, the
presence in person or by proxy of holders of a majority of the outstanding
shares of 8% Preferred Stock shall be required to constitute a quorum; in the
absence of a quorum, a majority of the holders present in person or by proxy
shall have power to adjourn the meeting from time to time without notice, other
than announcement at the meeting, until a quorum shall be present.
(C) So long as any shares of 8% Preferred Stock are outstanding, the
Corporation shall not, without the written consent or the affirmative vote at a
meeting called for that purpose of holders of at least two-thirds of the total
number of shares of 8% Preferred Stock then outstanding, in any manner,
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<PAGE>
whether by amendment to the Certificate of Incorporation or By-Laws of the
Corporation, by merger (whether or not the Corporation is a surviving
corporation in such merger), by consolidation, or otherwise:
(1) change or abolish the relative rights, preferences or limitations
of the 8% Preferred Stock; or
(2) authorize, or increase the authorized amount of, any class or
series of stock ranking prior to the 8% Preferred Stock in the payment of
dividends or the preferential distribution of assets;
and so long as any shares of 8% Preferred Stock are outstanding, the Corporation
shall not, without the written consent or the affirmative vote at a meeting
called for that purpose of holders of at least a majority of the total number of
shares of 8% Preferred Stock then outstanding in any such manner as aforesaid:
(3) increase the amount of the Preferred Stock authorized by the
provisions of Article IV of the Certificate of Incorporation of the
Corporation; or
(4) authorize, or increase the authorized amount of, any class or
series of stock ranking on a parity with 8% Preferred Stock in the payment
of dividends or the preferential distribution of assets other than any
series of Preferred Stock which may be issued from time to time pursuant to
the authorization contained in Article IV of the Certificate of
Incorporation of the Corporation;
provided, however, that the foregoing shall not require the consent or vote of
holders of 8% Preferred Stock for the authorization, or an increase in the
authorized amount of, any class or series of stock except to the extent
specifically provided in sections (2), (3) and (4) of this subparagraph (C); and
provided further, that, except as otherwise required by law, no such consent or
vote shall be required for any merger or consolidation:
(5) in which (i) the Corporation is the surviving corporation; (ii) no
change is made in the rights, preferences or limitations of 8% Preferred
Stock; and (iii) no authorization is granted for any class or series of
stock, or any increase in the authorized amount of any class or series of
stock, if such consent or vote would have been required for such
authorization, or increase in authorized amount, immediately prior to such
merger or consolidation; or
(6) in which (i) the Corporation is a party but is not the surviving
corporation; (ii) the surviving corporation shall, in connection with and
at the same time as such merger or consolidation, issue in exchange for
each share of 8% Preferred Stock then outstanding a share of preferred
stock of the surviving corporation with the same rights, preferences and
limitations as the 8% Preferred Stock; and (iii) the authorized capital
stock of the surviving corporation immediately after such merger or
consolidation shall include only classes or series of stock for which no
such consent or vote would have been required if such class or series had
been authorized by the Corporation immediately prior to such merger or
consolidation or which have the same rights, preferences and limitations
and authorized amount as a class or series of stock of the Corporation
authorized (with such consent or vote) prior to such merger or
consolidation and continuing as an authorized class or series at the time
thereof.
SECOND SERIES OF PREFERRED STOCK DESIGNATED
'$2.16 CUMULATIVE CONVERTIBLE PREFERRED STOCK'
1. Designation of Series and Number of Shares.
The series of Preferred Stock is designated '$2.16 Cumulative Convertible
Preferred Stock' (hereinafter referred to as '$2.16 Preferred Stock'), and the
number of shares which shall constitute such series shall be 4,600,000 shares of
a stated value of $1.00 per share, which number may be increased or decreased
(but not below the number thereof then outstanding) from time to time by the
Board of Directors.
2. Dividends.
Shares of $2.16 Preferred Stock shall rank on a parity as to dividends with
shares of 8% Convertible Preferred Stock of the Corporation (hereinafter
referred to as '8% Preferred Stock'). The holders of $2.16 Preferred Stock shall
be entitled to receive, as and when declared by the Board of Directors and out
of assets of the Corporation which are by law available for payment of
dividends,
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cumulative preferential cash dividends, at, but not exceeding, the rate of $2.16
per share per annum, payable quarterly on March 15, June 15, September 15 and
December 15 in each year, accruing from the date on which respective shares of
$2.16 Preferred Stock shall be issued. So long as any $2.16 Preferred Stock
shall remain outstanding, no dividend whatsoever shall be declared or paid upon
or set apart for any class of stock or series thereof ranking junior to $2.16
Preferred Stock in the payment of dividends nor shall any shares of any class of
stock or series thereof ranking junior to or on a parity with $2.16 Preferred
Stock in payment of dividends be redeemed or purchased by the Corporation or any
subsidiary thereof nor shall any moneys be paid to or made available for a
sinking fund for redemption or purchase of any shares of any class of stock or
series thereof ranking junior to or on a parity with $2.16 Preferred Stock in
payment of dividends, unless in each instance full dividends on all outstanding
shares of $2.16 Preferred Stock for all past dividend periods shall have been
paid at the rate fixed therefor and the dividends on all outstanding shares of
$2.16 Preferred Stock for the then current quarterly dividend period shall have
been paid or declared and sufficient funds set aside for payment thereof.
Accumulations of dividends on any shares of $2.16 Preferred Stock shall not bear
interest.
No dividend shall be paid upon or declared or set apart for (a) any share
of $2.16 Preferred Stock for any dividend period unless at the same time (i) a
like proportionate dividend for the same dividend period shall be paid upon or
declared or set apart for all shares of $2.16 Preferred Stock then outstanding
and entitled to receive such dividend and (ii) there shall have been paid upon
or declared or set aside for all shares of 8% Preferred Stock and for all shares
of Preferred Stock of all other series or of any other class of stock or series
thereof, if any, then outstanding and ranking on a parity with $2.16 Preferred
Stock in respect of payment of dividends, for the same dividend period as the
dividend period of the $2.16 Preferred Stock, or for the respective dividend
periods of the 8% Preferred Stock and said parity stock terminating within the
dividend period of the $2.16 Preferred Stock, dividends in proportion to the
respective dividend rates fixed for the 8% Preferred Stock and said parity
stock; and (b) any shares of 8% Preferred Stock or other series of Preferred
Stock or other class of stock or series thereof, if any, ranking on a parity
with $2.16 Preferred Stock in respect of payment of dividends for any dividend
period unless there shall have been paid upon or declared or set apart for all
shares then outstanding of $2.16 Preferred Stock, for the same dividend period,
or for the dividend period of the $2.16 Preferred Stock terminating within the
dividend period of said parity stock, dividends in proportion to the respective
dividend rates fixed for $2.16 Preferred Stock and said parity stock.
3. Liquidation.
Shares of $2.16 Preferred Stock shall rank on a parity with shares of 8%
Preferred Stock as to distribution of assets in the event of any liquidation,
dissolution or winding up of the affairs of the Corporation. In the event of any
such liquidation, dissolution or winding up, after payment or provision for
payment of the debts and other liabilities of the Corporation, the holders of
$2.16 Preferred Stock shall be entitled to receive, out of the net assets of the
Corporation, (i) if such liquidation, dissolution or winding up is voluntary,
the applicable redemption price per share determined as provided in paragraph 4
below, or (ii) if such liquidation, dissolution or winding up is involuntary,
$25 per share plus, in either case, an amount equal to all dividends accrued and
unpaid on each share of $2.16 Preferred Stock to the date fixed for
distribution, and no more, before any distribution of assets shall be made to
the holders of Common Stock or any other class of stock or series thereof
ranking junior to $2.16 Preferred Stock with respect to the distribution of
assets; provided, however, that no distribution as aforesaid shall be made to
the holders of $2.16 Preferred Stock unless at the same time a like
proportionate distribution shall be made, ratably in proportion to the
respective amounts payable upon liquidation, dissolution or winding up of the
affairs of the Corporation, to the holders of all shares of 8% Preferred Stock
and Preferred Stock of all other series or of any other class of stock or series
thereof, if any, then outstanding and ranking as to distribution of assets on a
parity with $2.16 Preferred Stock.
Nothing herein contained shall be deemed to prevent redemption of $2.16
Preferred Stock by the Corporation in the manner provided in paragraph 4 below.
Neither the merger or consolidation of the Corporation into or with any other
corporation, nor the merger or consolidation of any other
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corporation into or with the Corporation, nor a sale, transfer or lease of all
or any part of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the affairs of the Corporation within
the meaning of this paragraph 3.
No payment on account of such liquidation, dissolution or winding up of the
affairs of the Corporation shall be made to the holders of any other class or
series of stock ranking on a parity with $2.16 Preferred Stock with respect to
preferential distribution of assets unless a payment on account of such
liquidation, dissolution or winding up shall be made at the same time to the
holders of $2.16 Preferred Stock in proportion to the full distributive amounts
to which they and the holders of such parity stock are respectively entitled.
Written notice of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, stating the payment date and the
place where the distributable amounts shall be payable and containing a
statement of or reference to the conversion right set forth in paragraph 5
below, shall be given by mail, postage prepaid, not less than 30 days prior to
the payment date stated therein, to the holders of record of $2.16 Preferred
Stock at their respective addresses as the same shall appear on the books of the
Corporation.
4. Redemption.
The Corporation at its option may, at any time or from time to time, on or
after January 1, 1980, redeem the whole or any part of this issue of $2.16
Preferred Stock at the applicable redemption price plus in each case accrued and
unpaid dividends thereon to the date fixed for redemption.
The applicable redemption prices for the $2.16 Preferred Stock shall be as
follows:
IF REDEEMED DURING 12 MONTHS REDEMPTION PRICE
BEGINNING JANUARY 1 PER SHARE
- ----------------------------------------------------------------------------
1980------------------------------------------------ $ 27.50
1981------------------------------------------------ 27.00
1982------------------------------------------------ 26.50
1983------------------------------------------------ 26.00
1984------------------------------------------------ 25.50
and thereafter at $25 per share.
In the event the Corporation shall determine to redeem less than the entire
issue of $2.16 Preferred Stock then outstanding, (i) the shares to be redeemed
shall be selected pro rata (as nearly as may be) so that the number of shares
redeemed from each holder shall be the same proportion of all the shares to be
redeemed that the total number of shares then held by such holder bears to the
total number of shares then outstanding or (ii) the shares shall be selected by
lot, as the Board of Directors of the Corporation may determine.
Notice of every such redemption shall be mailed, first class postage
prepaid, not less than 45 nor more than 60 days prior to the date fixed for
redemption ('redemption date'), to each holder of record of shares to be
redeemed, at his address as it appears on the books of the Corporation. Each
such notice shall state the redemption date; the number of shares of $2.16
Preferred Stock to be redeemed, and, if less than all shares of $2.16 Preferred
Stock held by such holder are to be redeemed, the number of such shares to be
redeemed from him; the redemption price applicable to the shares to be redeemed;
the place or places where such shares are to be surrendered; that dividends on
shares to be redeemed will cease to accrue on the redemption date; and that
shares to be redeemed may be converted at any time prior to the close of
business on the business day next preceding the redemption date in accordance
with paragraph 5 below.
Notice having been mailed, from and after the redemption date (unless the
Corporation defaults in providing money for the payment of the redemption price)
the right to receive dividends on shares called for redemption shall cease to
accrue, said shares shall no longer be deemed to be outstanding, all rights of
holders thereof as shareholders of the Corporation (except the right to receive
the redemption price thereof, but without interest) shall terminate, and, upon
surrender, in accordance with said notice, of the certificates for any such
shares (properly endorsed or assigned for transfer, if the Board of Directors of
the Corporation shall so require), such shares shall be redeemed by the
Corporation at the applicable redemption price; provided, however, that the
Corporation may
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include in such notice a statement that the money required for the payment of
the redemption price will be deposited on a specified date, prior to the
redemption date, with a specified bank or trust company (which shall have an
office in The City of New York) in trust for the benefit of holders of shares
called for redemption, and, notice having been given, from and after such
deposit shares called for redemption shall no longer be deemed to be
outstanding, all rights with respect to shares of $2.16 Preferred Stock shall
forthwith upon such deposit cease and terminate, except only the right of the
holders thereof to convert such shares in accordance with the provisions of
paragraph 5 below at any time prior to the close of business on the business day
next preceding the redemption date, and holders of such shares shall look for
payment of the redemption price only to funds so deposited and in no event to
the Corporation unless said funds shall be repaid to the Corporation as
hereinafter provided. Holders of such shares shall not be entitled to any
interest allowed by such depositary on money so deposited but any such interest
shall be paid to the Corporation. Any moneys deposited as aforesaid for
redemption of any shares and remaining unclaimed for four years after the date
of such deposit shall then be repaid to the Corporation upon its request, and
the holders of such shares shall thereafter look only to the Corporation for
payment of the redemption price thereof, but without interest.
Any provision of this paragraph 4 to the contrary notwithstanding, in the
event that any quarterly dividend due on $2.16 Preferred Stock shall be in
default, and until all such defaults shall have been cured, the Corporation
shall not redeem any shares of $2.16 Preferred Stock unless all outstanding
shares of $2.16 Preferred Stock are simultaneously redeemed and shall not
purchase or otherwise acquire any shares of $2.16 Preferred Stock except in
accordance with a purchase offer made by the Corporation on the same terms to
all holders of record of $2.16 Preferred Stock.
Any shares of $2.16 Preferred Stock redeemed or otherwise purchased or
acquired by the Corporation shall be retired, shall no longer be deemed
outstanding, and shall assume the status of authorized but unissued Preferred
Stock, with no par value, undesignated as to series, subject to reissuance by
the Corporation as shares of Preferred Stock of any one or more series, as may
be determined from time to time by the Board of Directors.
5. Conversion.
Shares of $2.16 Preferred Stock may be converted at the option of the
holder thereof, at any time prior to the close of business on the date fixed for
redemption of such shares pursuant to paragraph 4 above, into shares of fully
paid and non-assessable shares of Common Stock of the Corporation at the rate of
1.7241 shares of Common Stock as now constituted for each share of $2.16
Preferred Stock surrendered for conversion (the 'conversion rate'), subject to
the following provisions.
(A) The conversion rate shall be subject to adjustment from time to
time as follows:
(1) In case the Corporation shall (i) pay a dividend, or make a
distribution, to all holders of its Common Stock in shares of its
capital stock (whether shares of Common Stock or of capital stock of any
other class), (ii) subdivide its outstanding shares of Common Stock into
a greater number of shares, (iii) combine its outstanding shares of
Common Stock into a smaller number of shares, or (iv) issue by
reclassification of its shares of Common Stock any shares of capital
stock of the Corporation, the conversion rate in effect immediately
prior to such action shall be adjusted so that the holder of any share
of $2.16 Preferred Stock thereafter surrendered for conversion shall be
entitled to receive the number of shares of capital stock of the
Corporation which he would have owned immediately following such action
had such share of $2.16 Preferred Stock been converted immediately prior
thereto. An adjustement made pursuant to this subparagraph (1) shall
become effective immediately after the record date in the case of a
dividend and shall become effective immediately after the effective date
in the case of a subdivision, combination or reclassification. If, as a
result of an adjustment made pursuant to this subparagraph (1), the
holder of any shares of $2.16 Preferred Stock thereafter surrendered for
conversion shall become entitled to receive shares of two or more
classes of capital stock of the Corporation, the Board of Directors
(whose determination shall be conclusive) shall determine the allocation
of the conversion price of the $2.16 Preferred Stock (determined by
dividing the adjustment conversion rate into $25) between or among
shares of such classes of capital stock.
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(2) In case the Corporation shall hereafter issue rights or
warrants to all holders of its Common Stock entitling them (for a period
expiring within 45 days after the record date mentioned below) to
subscribe for or purchase shares of Common Stock at a price per share
less than the current market price per share of Common Stock (as
determined pursuant to subparagraph (4) below) on the record date
mentioned below, the conversion rate shall be adjusted effective
immediately after the expiration date of such rights or warrants so that
the same shall equal the rate determined by multiplying the conversion
rate in effect immediately prior to the date of issuance of such rights
or warrants by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding (excluding treasury shares) on the
date of issuance of such rights or warrants plus the number of
additional shares of Common Stock purchased pursuant to such offer for
subscription or purchase and of which the denominator shall be the
number of shares of Common Stock outstanding (excluding treasury shares)
on the date of issuance of such rights or warrants plus the number of
shares of Common Stock which the aggregate subscription or purchase
price of the total number of shares so purchased would purchase at such
current market price (determined as provided in subparagraph (4) below).
(3) In case the Corporation shall distribute to all holders of its
Common Stock evidences of its indebtedness or assets (excluding cash
distributions made out of current or retained earnings) or rights to
subscribe (excluding those referred to in subparagraph (2) above), then
in each such case the conversion rate shall be adjusted so that the same
shall equal the rate determined by multiplying the conversion rate in
effect immediately prior to the date of such distribution by a fraction
of which the numerator shall be the current market price per share of
Common Stock (determined as provided in subparagraph (4) below) at the
record date mentioned below, and the denominator of which shall be such
current market price per share of the Common Stock, less the then fair
market value (as determined by the Board of Directors of the
Corporation, whose determination shall be conclusive) of the portion of
the assets or evidences of indebtedness so distributed or of such
subscription rights applicable to one share of Common Stock. Such
adjustment shall become effective immediately after the record date for
determination of stockholders entitled to receive such distribution.
(4) For the purpose of any computation under subparagraphs (2) and
(3) above, the current market price per share of Common Stock on any
date shall be deemed to be the average of the daily closing prices for
30 consecutive business days commencing 45 business days before the day
in question. The closing price for each day shall be the last reported
sale price regular way or, in case no such reported sale takes place on
such day, the average of the reported closing bid and asked prices
regular way, in either case on the New York Stock Exchange 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 or, if not listed or admitted to trading
on any national securities exchange, the average of the closing bid and
asked prices as furnished by any New York Stock Exchange member firm
selected from time to time by the Corporation for that purpose.
(5) In any case in which this paragraph 5 shall require that an
adjustment be made immediately following a record date, the Corporation
may elect to defer (but only until five business days following the
filing by the Corporation of the statement required by subparagraph (7)
below) issuing to the holder of any share of $2.16 Preferred Stock
converted after such record date shares of Common Stock and other
capital stock of the Corporation issuable upon such conversion over and
above the number of shares of Common Stock and other capital stock of
the Corporation issuable upon such conversion as computed on the basis
of the conversion rate prior to adjustment.
(6) All calculations under this paragraph 5 shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may
be.
(7) Whenever the conversion rate is adjusted as herein provided,
the Corporation shall (i) file at the office or agency in the Borough of
Manhattan in The City of New York
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maintained by the Corporation pursuant to subparagraph (D) of this
paragraph 5 and with each transfer agent for its Common Stock a
statement, signed by the Chairman of the Board of Directors, the
President or one of the Vice Presidents of the Corporation and by its
Treasurer or one of its Assistant Treasurers, stating the adjusted
conversion rate determined as provided herein and setting forth the
method of calculation and the facts requiring such adjustment and upon
which such calculation is based, and (ii) mail or cause to be mailed a
copy of such statement setting forth the adjusted conversion rate to
each person who is a registered holder of $2.16 Preferred Stock at such
person's last address as the same appears on the books of the
Corporation. Each adjustment shall remain in effect until a subsequent
adjustment is required hereunder.
(B) In case of a merger or consolidation of the Corporation with or
into another corporation, or the sale of the Corporation's property or
assets as, or substantially as, an entirety, to another corporation, or the
reclassification of the Corporation's Common Stock (other than through a
subdivision or combination thereof, or change in par value), holders of
shares of $2.16 Preferred Stock shall thereafter have the right to convert
each of such shares into the kind and amount of shares of stock and other
securities and property receivable upon such merger, consolidation, sale or
reclassification by a holder of the number of shares of Common Stock
(whether whole or fractional) of the Corporation into which such shares of
$2.16 Preferred Stock might have been converted immediately prior to such a
merger, consolidation, sale or reclassification, and shall have no other
conversion rights under these provisions; and effective provision shall be
made in the charter of the resulting or surviving corporation or otherwise,
so that the provisions set forth herein for the protection of conversion
rights of $2.16 Preferred Stock shall thereafter be applicable, as nearly
as reasonably may be, to any such other shares of stock and other
securities and property deliverable upon conversion of $2.16 Preferred
Stock remaining outstanding or other convertible preferred stock received
by the holders in place thereof. Any such resulting or surviving
corporation shall expressly assume the obligation to deliver, upon the
exercise of the conversion right, such shares, securities or property as
holders of $2.16 Preferred Stock remaining outstanding, or other
convertible preferred stock received by such holders in place thereof,
shall be entitled to receive pursuant to the provisions hereof, and to make
provision for protection of conversion rights as above provided.
(C) If, at any time while shares of $2.16 Preferred Stock are
outstanding, the Corporation shall (i) declare a dividend (or any other
distribution) on its Common Stock, other than in cash out of current or
retained earnings; or (ii) authorize the issuance to all holders of its
Common Stock of rights or warrants to subscribe for or purchase shares of
its Common Stock or of any other subscription rights or warrants; or (iii)
reclassify its Common Stock (other than through a subdivision or
combination thereof) or become a party to any consolidation or merger for
which approval of the holders of its Common Stock is required, or sell or
transfer all or substantially all of the assets of the Corporation; then
the Corporation shall cause to be mailed to registered holders of $2.16
Preferred Stock, at their last addresses as they shall appear upon the
Corporation's stock transfer record, at least ten days prior to the
applicable record date hereinafter specified, a notice stating (i) the date
on which a record is to be taken for the purpose of such dividend,
distribution, rights or warrants, or, if a record is not to be taken, the
date as of which holders of Common Stock of record to be entitled to such
dividend, distribution, rights or warrants are to be determined, or (ii)
the date on which any such reclassification, consolidation, merger, sale or
transfer is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to
exchange their Common Stock for securities or other property, if any,
deliverable upon such reclassification, consolidation, merger, sale or
transfer. Failure to give or receive the notice required by this
subparagraph (C) or any defect therein shall not affect the legality or
validity of any such dividend, distribution, right or warrant or other
action.
(D) The holder of any shares of $2.16 Preferred Stock may exercise
his option to convert such shares into shares of Common Stock only by
surrendering for such purpose to the Corporation at the office or agency in
the Borough of Manhattan in The City of New York maintained by
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<PAGE>
the Corporation for that purpose certificates representing the shares to be
converted, accompanied by written notice that such holder elects to convert
such shares in accordance with the provisions of this paragraph 5. Said
notice shall also state the name or names (with addresses) in which the
certificate or certificates for shares of Common Stock which shall be
issuable on such conversion shall be issued. Each certificate or
certificates surrendered for conversion shall, unless the shares issuable
on conversion are to be issued in the same name as that in which such
certificate or certificates are registered, be accompanied by instruments
of transfer, in form satisfactory to the Corporation, duly executed by the
holder or his duly authorized attorney. Each conversion shall be deemed to
have been effected on the date on which such certificate or certificates
shall have been surrendered and such notice received by the Corporation as
aforesaid, and the person or persons in whose name or names any certificate
or certificates for shares of Common Stock shall be issuable upon such
conversion shall be deemed to have become on said date the holder or
holders of record of the shares represented thereby notwithstanding that
the transfer books of the Corporation may then be closed or that
certificates representing such shares of Common Stock shall not then be
actually delivered to such person.
(E) Upon any such conversion of shares of $2.16 Preferred Stock, no
allowance, adjustment or payment shall be made with respect to dividends
upon either class of stock.
(F) In connection with the conversion of shares of $2.16 Preferred
Stock into Common Stock, no fractions of shares of $2.16 Preferred Stock or
of Common Stock shall be issued, but the Corporation shall pay a cash
adjustment in respect of such fractional interest in an amount equal to the
market value of such fractional interest. In such event, the market value
of a share of Common Stock shall be the last recorded sale price of such a
share on the New York Stock Exchange on the business day immediately
preceding the date upon which such shares of $2.16 Preferred Stock are
deemed to have been converted, or, if there be no such recorded sale price
on such day, the last quoted bid price per share of Common Stock on such
exchange at the close of trading on such business day. If the Common Stock
shall not at the time be listed or admitted to trading on the New York
Stock Exchange, such market value shall be the average of the reported
closing bid and asked prices regular way on such day on the principal
national securities exchange on which the Common Stock is listed or
admitted to trading or, if not listed or admitted to trading on any
national securities exchange, the average of the closing bid and asked
prices on such day as furnished by any New York Stock Exchange member firm
selected from time to time by the Corporation for that purpose. The issue
of stock certificates on conversions of shares of $2.16 Preferred Stock
shall be made without charge to converting holders of shares of $2.16
Preferred Stock for any tax in respect of the issue thereof. The
Corporation shall not, however, be required to pay any tax which may be
payable in respect of any registration of transfer involved in the issue
and delivery of stock in any name other than that of the holder of any
shares of $2.16 Preferred Stock converted, and the Corporation shall not be
required to so issue or deliver any stock certificate unless and until the
person or persons requesting the registration of transfer shall have paid
to the Corporation the amount of such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid.
(G) The Corporation shall at all times reserve and keep available out
of its authorized Common Stock the full number of shares of Common Stock
deliverable upon the conversion of all outstanding shares of $2.16
Preferred Stock.
(H) Any shares of $2.16 Preferred Stock converted shall no longer be
deemed outstanding and shall assume the status of authorized but unissued
shares of Preferred Stock, with no par value, undesignated as to series,
subject to reissuance by the Corporation as shares of Preferred Stock of
any one or more series, as may be determined from time to time by the Board
of Directors.
(I) For purposes of this paragraph (5):
(1) 'business day' shall mean a day on which the New York Stock
Exchange (or a successor or an equivalent or substitute organization or
facility) is open for the trading of securities in the Borough of
Manhattan in The City of New York; and
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<PAGE>
(2) 'Common Stock' shall mean (a) the Corporation's Common Stock,
$.16 2/3 par value per share, or (b) any other class of stock resulting
from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value; provided, however, that in the
event that at any time as a result of an adjustment made pursuant to
subparagraph (A)(1) above, the holder of any share of $2.16 Preferred
Stock thereafter surrendered for conversion would become entitled to
receive any stock of the Corporation other than shares of its Common
Stock, thereafter the conversion rate with respect to such other shares
so receivable upon conversion of any share of $2.16 Preferred Stock
shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect
to Common Stock contained in this paragraph 5.
6. Voting Rights.
(A) The holders of $2.16 Preferred Stock shall be entitled to one vote per
share, voting together as one class with the holders of Common Stock and 8%
Preferred Stock and any other series of Preferred Stock entitled to vote, on all
matters to be voted by stockholders of the Corporation, in addition to their
rights set forth in subparagraphs (B) and (C) below and otherwise provided by
law.
(B) If at any time the Corporation shall be in default in the payment
of dividends on the $2.16 Preferred Stock of an amount equivalent to or
exceeding six full quarterly dividends (whether or not consecutive), the
number of directors constituting the Board of Directors of the Corporation
shall be increased by two, and the holders of $2.16 Preferred Stock, voting
as a separate class together with the holders of all other series of
Preferred Stock outstanding (other than 8% Preferred Stock) having similar
voting rights (such other series of Preferred Stock and the $2.16 Preferred
Stock being hereinafter collectively referred to as 'Special Preferred
Stock'), whether or not the payment of quarterly dividends shall be in
default on all Special Preferred Stock outstanding, shall be entitled at
the next annual meeting of stockholders or the next special meeting of
stockholders, or at a special meeting of holders of Special Preferred Stock
called as hereinafter provided, to elect two directors to fill such newly
created directorships, and in addition thereto, such holders shall be
entitled to participate with holders of Common Stock and holders, if any,
of any other capital stock of the Corporation entitled to vote for the
election of directors in the election of any other directors; provided,
however, that when all arrears in dividends on Special Preferred Stock then
outstanding shall have been paid and dividends thereon for the current
quarterly period shall have been paid or declared and a sum sufficient for
the payment thereof set aside, then (i) the right of holders of Special
Preferred Stock to participate in the election of two directors shall cease
but subject always to the same provisions for vesting of such voting rights
in the case of any similar future arrearages in dividends; (ii) the term of
the directors then in office elected by holders of Special Preferred Stock
as a class shall terminate; and (iii) the number of directors constituting
the Board of Directors shall be reduced by two.
Whenever such voting right shall vest, it may be exercised initially
either at a special meeting of holders of Special Preferred Stock or at any
annual or special stockholders' meeting, but thereafter it shall be
exercised only at annual stockholders' meetings. A special meeting for the
exercise of such right shall be called by the Secretary of the Corporation
within ten days after receipt of a written request therefor, signed by the
holders of record of at least 10% of the votes of the then outstanding
shares of Special Preferred Stock; however, no such special meeting shall
be held during the 90-day period preceding the date fixed for the annual
meeting of stockholders.
Any director who shall have been elected by holders of Special
Preferred Stock as a class pursuant to this subparagraph (B) shall hold
office for a term expiring (subject to the earlier termination of the
default in dividends) at the next annual meeting of stokholders, and during
such term may be removed at any time, either for or without cause, only by
the affirmative votes of holders of record of a majority of the votes of
the then outstanding shares of Special Preferred Stock given at a special
meeting of such stockholders called for the purpose. Any vacancy created by
such removal may also be filled at such meeting. A meeting for the removal
of a director elected by holders of Special Preferred Stock as a class and
the filling of the vacancy created
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<PAGE>
thereby shall be called by the Secretary of the Corporation within ten days
after receipt of a written request therefor, signed by the holders of not
less than 25% of the votes of the then outstanding shares of Special
Preferred Stock. Such meeting shall be held at the earliest practicable
date thereafter.
Any vacancy caused by the death or resignation of a director who shall
have been elected by the holders of Special Preferred Stock as a class
pursuant to this subparagraph (B) may be filled only by the holders of
Special Preferred Stock at a meeting called for such purpose. Such meeting
of the holders of Special Preferred Stock shall be called by the Secretary
of the Corporation at the earliest practiable date after any such death or
resignation and in any event within ten days after receipt of a written
request therefor, signed by the holders of record of at least 10% of the
votes of the then outstanding shares of Special Preferred Stock.
If any meeting of the holders of Special Preferred Stock required by
this subparagraph (B) to be called shall not have been called within ten
days after personal service of a written request therefor upon the
Secretary of the Corporation or within 15 days after mailing the same
within the United States of America by registered mail addressed to the
Secretary of the Corporation at its prinicpal office, then holders of
record of at least 10% of the votes of the then outstanding shares of
Special Preferred Stock may designate in writing one of their number to
call such a meeting at the expense of the Corporation and such meeting may
be called by such person so designated upon the notice required for annual
meetings of stockholders. Any holder of Special Preferred Stock so
designated shall have access to the stock books of the Corporation for the
purpose of causing meetings of stockholders to be called pursuant to these
provisions.
Any meeting of holders of Special Preferred Stock to vote as a class
for the election or removal of directors shall be held at the place for the
holding of the annual meeting of stockholders of the Corporation. At such
meeting, the presence in person or by proxy of holders of a majority of the
votes of the then outstanding shares of Special Preferred Stock shall be
required to constitute a quorum; in the absence of a quorum, a majority of
the holders present in person or by proxy shall have power to adjourn the
meeting from time to time without notice, other than announcement at the
meeting, until a quorum shall be present.
(c) So long as any shares of $2.16 Preferred Stock are outstanding,
the Corporation shall not, in any manner, whether by amendment to the
Certificate of Incorporation or By-Laws of the Corporation, by merger
(whether or not the Corporation is a surviving corporation in such merger),
by consolidation, or otherwise:
(1) without the written consent or the affirmative vote at a meeting
called for that purpose of the holders of at least two-thirds of the votes
of the shares of $2.16 Preferred Stock then outstanding, voting separately
as a class, (a) amend, alter or repeal any of the provisions of Article IV
of the Certificate of Incorporation of the Corporation, or of any
resolution or resolutions establishing the $2.16 Preferred Stock, so as to
affect adversely the powers, preferences or special rights of the $2.16
Preferred Stock; or (b) authorize or increase the authorized amount of, or
authorize any obligation or security convertible into or evidencing the
right to purchase shares of, any additional class or series of stock
ranking prior to the $2.16 Preferred Stock in the payment of dividends or
the preferential distribution of assets; or
(2) without the written consent or the affirmative vote at a meeting
called for that purpose of the holders of at least a majority of the
aggregate number of the votes of the shares of Preferred Stock of all
series (including $2.16 Preferred Stock) then outstanding, voting
separately as a class, (a) increase the number of shares of Preferred Stock
authorized by the provisions of Article IV of the Certificate of
Incorporation; or (b) authorize or increase the authorized amount of, or
authorize any obligation or security convertible into or evidencing the
right to purchase shares of, any additional class of stock ranking on a
parity with the $2.16 Preferred Stock in the payment of dividends or the
preferential distribution of assets:
provided, however, that the foregoing provisions of this subparagraph (C) shall
not require the consent or vote of the holders of $2.16 Preferred Stock or
Preferred Stock for the authorization or an increase in the authorized amount of
any class or series of stock, or for the authorization of any obligation or
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security convertible into or evidencing the right to purchase shares of any
class or series of stock, except to the extent specifically provided in sections
(1)(b), (2)(a) and (2)(b) or this subparagraph (C); and provided further, that,
except as otherwise required by law, no such consent or vote shall be required
for any merger or consolidation:
(i) in which (x) the Corporation is the surviving corporation; (y) no
adverse change is made in the powers, preferences or special rights of the
$2.16 Preferred Stock; and (z) no additional class or series of stock is
authorized or the authorized amount thereof increased, and no obligation or
security convertible into or evidencing the right to purchase shares of any
additional class or series of stock is authorized, if such consent or vote
would have been required for any such authorization, or increase in
authorized amount, immediately prior to such merger or consolidation; or
(ii) in which (x) the Corporation is a party but is not the surviving
corporation; (y) the surviving corporation shall, in connection with and at
the same time as such merger or consolidation, issue in exchange for each
share of $2.16 Preferred Stock then outstanding a share of preferred stock
of the surviving corporation with the same powers, preferences and special
rights as the $2.16 Preferred Stock; and (z) immediately after such merger
or consolidation only classes or series of stock of the surviving
corporation and obligations or securities convertible into or evidencing
the right to purchase shares of a class or series of stock of the surviving
corporation shall be authorized or outstanding, for which no such consent
or vote would have been required if such classes or series of stock and
obligations or securities had been authorized by the Corporation
immediately prior to such merger or consolidation, or which have, or are
convertible into or evidence the right to purchase shares of a class or
series of stock of the surviving corporation which have, the same powers,
preferences and special rights and authorized amount as a class or series
of stock of the Corporation which was authorized (with such consent or
vote) prior to such merger or consolidation and is continuing as an
authorized class or series of stock at the time thereof.
(C) STATEMENT OF LIMITATIONS, RELATIVE RIGHTS AND POWERS IN RESPECT TO COMMON
STOCK.
Subject to any rights and privileges granted to the holders of Preferred
Stock by resolution of the Board of Directors pursuant to the provisions of
Section (B) of this Article IV, the holders of Common Stock shall exercise one
vote in respect of each share of stock held by them on all matters voted upon by
the stockholders; shall be entitled to receive such dividends as may be declared
from time to time by the Board of Directors; shall be entitled, upon liquidation
or dissolution, to receive all the remaining assets of the Corporation, tangible
and intangible, of whatever kind available for distribution ratably in
proportion to the number of shares of Common Stock held by them; and shall have
such other rights and privileges as may be allowed to them by the laws of the
state of Delaware.
(D) INCREASE OR DECREASE OF AUTHORIZED STOCK.
The amount of the authorized stock of the Corporation of any class or
classes may be increased or decreased by the affirmative vote of the holders of
a majority of the stock of the Corporation entitled to vote.
ARTICLE V
The Board of Directors shall be divided into three classes as nearly equal
in number as possible, with the term of office of one class expiring each year.
At the annual meeting of stockholders in 1970, directors of the first class
shall be elected to hold office for a term expiring at the next succeeding
annual meeting, directors of the second class shall be elected to hold office
for a term expiring at the second succeeding annual meeting and directors of the
third class shall be elected to hold office for a term expiring at the third
succeeding annual meeting. During the intervals between annual meetings of
stockholders, any vacancy occurring in the Board of Directors caused by
resignations, removal, death or other incapacity and any newly created
directorships resulting from an increase in the number of directors shall be
filled by a majority vote of the directors then in office, whether or not a
quorum. Each director chosen to fill a vacancy shall hold office for the
unexpired term in respect of which such vacancy occurred. Each director chosen
to fill a newly created directorship shall hold office until the next election
of the class for which such director shall have been chosen. When the
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<PAGE>
number of directors is changed, any newly created directorships or any decrease
in directorships shall be so apportioned among the classes as to make all
classes as nearly equal in number as possible.
Any director may be removed from office at any time, for cause, by the
affirmative vote of stockholders of record holding a majority of the outstanding
shares of stock of the Corporation entitled to vote in elections of directors
given at a meeting of the stockholders called for that purpose.
Election of directors need not be by ballot unless by the By-Laws of the
Corporation shall so provide.
ARTICLE VI
In furtherance and not in limitation of the power conferred upon the Board
of Directors by law, the Board of Directors shall have power to make, adopt,
alter, amend and repeal from time to time By-Laws of the Corporation, subject to
the right of the stockholders entitled to vote with respect thereto to alter and
repeal By-Laws made by the Board of Directors.
ARTICLE VII
(A) Except as set forth in paragraph (B) of this Article, the affirmative
vote or consent of the holders of not less than four-fifths of the outstanding
shares of stock of the Corporation entitled to vote in elections of directors,
voting for purposes of this Article as one class, shall be required:
(1) to adopt any agreement for the merger or consolidation of the
Corporation or any subsidiary (as hereinafter defined) with or into any
other person (as hereinafter defined),
(2) to authorize any sale, lease, transfer, exchange, mortgage, pledge
or other disposition to any other person of all or substantially all of the
assets of the Corporation or any subsidiary, or any part of such assets
having a then fair market value equal to or greater than 50 per cent of the
then fair market value of the total assets of the Corporation or such
subsidiary, or
(3) to authorize the issuance or transfer by the Corporation or any
subsidiary of any voting securities of the Corporation or any subsidiary in
exchange or payment for the securities or assets of any other person.
if, in any such case, as of the record date for the determination of
stockholders entitled to notice thereof and to vote thereon or consent thereto,
such other person is, or at any time within the preceding twelve months has
been, the beneficial owner (as hereinafter defined) of 10 per cent or more of
the outstanding shares of stock of the Corporation entitled to vote in elections
of directors.
(B) The provisions of paragraph (A) of this Article shall not apply to any
transaction described therein if the Board of Directors by resolution shall have
approved a memorandum of understanding with such other person <setting forth the
principal terms of such transaction> and such transaction is substantially
consistent therewith, provided that a majority of those members of the Board of
Directors voting in favor of such resolution were duly elected and acting
members of the Board of Directors prior to the time such other person became the
beneficial owner of 10 per cent or more of the outstanding shares of stock of
the Corporation entitled to vote in election of directors.
(C) The affirmative vote or consent of the holders of not less than
four-fifths of the outstanding shares of stock of the Corporation entitled to
vote in elections of directors, voting for purposes of this Article as one
class, shall be required for the adoption of any plan for the dissolution of the
Corporation if the Board of Directors shall not have, by resolution, recommended
to the stockholders the adoption of such plan for dissolution of the Company.
(D) For purposes of this Article,
(1) any specified person shall be deemed to be the 'beneficial owner'
of shares of stock of the Corporation (a) which such specified person or
any of its affiliates or associates (as such terms are hereinafter defined)
owns, directly or indirectly, whether of record or not, (b) which such
specified person or any of its affiliates or associates has the right to
acquire pursuant to any agreement, upon exercise of conversion rights,
warrants or options, or otherwise, or (c) which are beneficially owned,
directly or indirectly (including shares deemed owned through application
of clauses (a) and (b) above), by any other person with which such
specified person or any of its affiliates or associates has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting
or disposing of stock of the Corporation;
D-19
<PAGE>
(2) a 'subsidiary' is any corporation more than 49 per cent of the
voting securities of which are owned, directly or indirectly, by the
Corporation;
(3) a 'person' is any individual, corporation or other entity;
(4) an 'affiliate' of a specified person is any person that directly,
or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the specified person; and
(5) an 'associate' of a specified person is (a) any person of which
such specified person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10 per cent or more of any class of
equity securities, (b) any trust or other estate in which such specified
person has a substantial beneficial interest or as to which such specified
person serves as trustee or in a similar fiduciary capacity, or (c) any
relative or spouse of such specified person, or any relative of such
spouse, who has the same home as such specified person or is a director or
officer of such specified person or any corporation which controls or is
controlled by such specified person.
(E) For purposes of determining whether a person owns beneficially 10 per
cent or more of the outstanding shares of stock of the Corporation entitled to
vote in elections of directors, the outstanding shares of stock of the
Corporation shall include shares deemed owned through application of clause (a),
(b) or (c) of paragraph (D)(1) above but shall not include any other shares
which may be issuable pursuant to any agreement or upon exercise of conversion
rights, warrants or options, or otherwise.
(F) The Board of Directors shall have the power and duty to determine, for
purposes of this Article, on the basis of information known to such Board,
(1) the fair market value of any assets of the Corporation or any
subsidiary proposed to be disposed of in a transaction of the character
referred to in paragraph (A)(2) of this Article, and the fair market value
of the total assets of the Corporation or such subsidiary;
(2) whether any person referred to in paragraph (A) of this Article
owns beneficially 10 per cent or more of the outstanding shares of stock of
the Corporation entitled to vote in elections of directors; and
(3) whether a proposed transaction is substantially consistent with
any memorandum of understanding of the character referred to in paragraph
(B) of this Article.
Any such determination shall be conclusive and binding for all purposes of
this Article.
ARTICLE VIII
Notwithstanding the provisions of Article VI of this Certificate of
Incorporation and any provisions of the By-Laws of the Corporation, no amendment
of this Certificate of Incorporation or to the By-Laws shall amend, modify or
repeal any or all of the provisions of Article V, Article VII or this Article
VIII of this Certificate of Incorporation or Section 2.1 of the By-Laws of the
Corporation unless adopted by the affirmative vote or consent of the holders of
not less than four-fifths of the outstanding shares of stock of the Corporation
entitled to vote in elections of directors, considered for purposes of this
Article as a class; provided, however, that in the event the Board of Directors
of the Corporation shall by resolution unanimously recommend to the stockholders
the adoption of any such amendment, the stockholders of record holding a
majority of the outstanding shares of stock of the Corporation entitled to vote
in elections of directors may amend, modify or repeal any or all of such
provisions.
The restated Certificate of Incorporation was duly adopted by the directors
of the Corporation in accordance with the provisions of Section 245 of the
General Corporation Law of the State of Delaware. It only restates and
integrates and does not further amend the provisions of the Corporation's
Certificate of Incorporation as heretofore amended or supplemented. There is no
discrepancy between those provisions and the provisions of this restated
Certificate of Incorporation.
IN WITNESS WHEREOF, Tesoro Petroleum Corporation has caused this restated
Certificate of Incorporation to be signed in its corporate name by its Chairman
of the Board of Directors and its corporate seal to be affixed hereto and
attested by its Secretary this 23rd day of June, 1978.
D-20
<PAGE>
TESORO PETROLEUM CORPORATION
- --------------------------------------------- By /s/ ROBERT V. WEST, Jr.
TESORO PETROLEUM CORPORATION Robert V. West, Jr.
Incorporated Dec. 26, 1968 CHAIRMAN OF THE
Delaware BOARD OF DIRECTORS
- ---------------------------------------------
ATTEST:
By: /s/ CHARLES R. ROBERTS
Charles R. Roberts
SECRETARY
D-21
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
TESORO PETROLEUM CORPORATION
TESORO PETROLEUM CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware
(hereinafter called the 'Corporation') DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the Corporation, a
resolution was duly adopted declaring it advisable that the Corporation's
Restated Certificate of Incorporation be amended by adding a new Article IX
thereto and directing that the proposed amendment be considered at the next
annual meeting of stockholders of the Corporation. The resolution set forth the
proposed amendment as follows:
'ARTICLE IX
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 (i) for any breach of
the director's duty of loyalty to the Corporation 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
General Corporation Law of the State of Delaware or (iv) for any
transaction from which the director derived an improper personal benefit.
If the General Corporation Law of the State of Delaware is amended
hereafter to authorize the further elimination or limitation of the
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent authorized by the
General Corporation Law of the State of Delaware, as so amended.
Any repeal or modification of this Article shall not adversely affect
any right or protection of a director of the Corporation existing hereunder
with respect to any act or omission occurring prior to or at the time of
such repeal or modification.'
SECOND: That pursuant to the resolutions of its Board of Directors, an
annual meeting of the stockholders of the Corporation was duly called and held,
upon notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware, at which meeting the necessary number of shares as required
by statute were voted in favor of said amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, TESORO PETROLEUM CORPORATION has caused its corporate
seal to be hereunto affixed and this certificate to be signed by Dennis F.
Juren, its President, and attested by James C. Reed, Jr., its Assistant
Secretary, this 31st day of March, 1987.
TESORO PETROLEUM CORPORATION
By: __________________________________
PRESIDENT
TESORO PETROLEUM CORPORATION
INCORPORATED DEC. 26, 1968
DELAWARE
ATTEST:
By: ________________________________
ASSISTANT SECRETARY
D-22
<PAGE>
TESORO PETROLEUM CORPORATION
CERTIFICATE OF DESIGNATION
ESTABLISHING A SERIES OF
$2.20 CUMULATIVE CONVERTIBLE PREFERRED STOCK
Tesoro Petroleum Corporation, a corporation organized and existing under
the General Corporation Law of the State of Delaware, pursuant to the
requirements of Section 151(g) of said General Corporation Law, DOES HEREBY
CERTIFY:
FIRST: That, pursuant to authority conferred upon the Board of Directors
by the Certificate of Incorporation (as amended) of said corporation, and
pursuant to the provisions of Section 151(g) of the General Corporation Law,
said Board of Directors, at a meeting duly held on January 26, 1983, adopted a
resolution providing for the voting powers, designations, preferences and
relative, participating, optional or other special rights of the $2.20
Cumulative Convertible Preferred Stock, which resolution is as follows:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its
Certificate of Incorporation, a series of Preferred Stock of the
Corporation is hereby created, such series of Preferred Stock to be
designated the $2.20 Convertible Preferred Stock, to consist of 2,875,000
shares of the stated value of one dollar ($1.00) each, of which the voting
powers, designations, preferences and relative, participating, optional or
other special rights, and the qualifications, limitations or restrictions
thereof, shall be as follows:
1. Designation of Series and Number of Shares.
This series of Preferred Stock is designated '$2.20 Cumulative
Convertible Preferred Stock' (hereinafter referred to as '$2.20 Preferred
Stock'), and the number of shares which shall constitute such series shall
be 2,875,000 shares of a stated value of $1.00 per share, which number may
not be increased but may be decreased (but not below the number thereof
then outstanding) from time to time by the Board of Directors.
2. Dividends.
Shares of $2.20 Preferred Stock shall rank on a parity as to dividends
with shares of 8% Convertible Preferred Stock of the Corporation
(hereinafter referred to as '8% Preferred Stock') and shares of $2.16
Cumulative Convertible Preferred Stock (hereinafter referred to as '$2.16
Preferred Stock'). The holders of $2.20 Preferred Stock shall be entitled
to receive, as and when declared by the Board of Directors and out of
assets of the Corporation which are by law available for payment of
dividends, cumulative preferential cash dividends, at, but not exceeding,
the rate of $2.20 per share per annum, payable quarterly on May 15, August
15, November 15, and February 15, in each year, accruing from the date on
which respective shares of $2.20 Preferred Stock shall be issued. So long
as any $2.20 Preferred Stock shall remain outstanding, no dividend
whatsoever shall be declared or paid upon or set apart for any class of
stock or series thereof ranking junior to $2.20 Preferred Stock in the
payment of dividends nor shall any shares of any class of stock or series
thereof ranking junior to or on a parity with $2.20 Preferred Stock in
payment of dividends be redeemed or purchased by the Corporation or any
subsidiary thereof nor shall any moneys be paid to or made available for a
sinking fund for redemption or purchase of any shares of any class of stock
or series thereof ranking junior to or on a parity with $2.20 Preferred
Stock in payment of dividends, unless in each instance full dividends on
all outstanding shares of $2.20 Preferred Stock for all past dividend
periods shall have been paid at the rate fixed therefor and the dividends
on all outstanding shares of $2.20 Preferred Stock for the then current
quarterly dividend period shall have been paid or declared and sufficient
funds set aside for payment thereof. Accumulations of dividends on any
shares of $2.20 Preferred Stock shall not bear interest.
D-23
<PAGE>
No dividend shall be paid upon or declared or set apart for (a) any
share of $2.20 Preferred Stock for any dividend period unless at the same
time (i) a like proportionate dividend for the same dividend period shall
be paid upon or declared or set apart for all shares of $2.20 Preferred
Stock then outstanding and entitled to receive such dividend and (ii) there
shall have been paid upon or declared or set aside for all shares of 8%
Preferred Stock, $2.16 Preferred Stock and for all shares of Preferred
Stock of all other series or of any other class of stock or series thereof,
if any, then outstanding and ranking on a parity with $2.20 Preferred Stock
in respect of payment of dividends, for the same dividend period as the
dividend period of the $2.20 Preferred Stock, or for the respective
dividend periods of 8% Preferred Stock, $2.16 Preferred Stock and said
parity stock terminating within the dividend period of the $2.20 Preferred
Stock, dividends in proportion to the respective dividend rates fixed for
the 8% Preferred Stock, $2.16 Preferred Stock and said parity stock; and
(b) any shares of 8% Preferred Stock, $2.16 Preferred Stock or other series
of Preferred Stock or other class of stock or series thereof, if any,
ranking on a parity with $2.20 Preferred Stock in respect of payment of
dividends for any dividend period unless there shall have been paid upon or
declared or set apart for all shares then outstanding of $2.20 Preferred
Stock, for the same dividend period, or for the dividend period of the
$2.20 Preferred Stock terminating within the dividend period of said parity
stock, dividends in proportion to the respective dividend rates fixed for
$2.20 Preferred Stock and said parity stock.
3. Liquidation.
Shares of $2.20 Preferred Stock shall rank on a parity with shares of
8% Preferred Stock and $2.16 Preferred Stock as to distribution of assets
in the event of any liquidation, dissolution or winding up of the affairs
of the Corporation. In the event of any such liquidation, dissolution or
winding up, after payment or provision for payment of the debts and other
liabilities of the Corporation, the holders of $2.20 Preferred Stock shall
be entitled to receive, out of the net assets of the Corporation, (i) if
such liquidation, dissolution of winding up is voluntary, the applicable
redemption price per share determined as provided in paragraph 4 below, or
(ii) if such liquidation, dissolution or winding up is involuntary, $20 per
share plus, in either case, an amount equal to all dividends accrued and
unpaid on each share of $2.20 Preferred Stock to the date fixed for
distribution, and no more, before any distribution of assets shall be made
to the holders of Common Stock or any other other class of stock or series
thereof ranking junior to $2.20 Preferred Stock with respect to the
distribution of assets; provided, however, that no distribution as
aforesaid shall be made to the holders of $2.20 Preferred Stock unless at
the same time a like proportionate distribution shall be made, ratably in
proportion to the respective amounts payable upon liquidation, dissolution
or winding up of the affairs of the Corporation, to the holders of all
shares of 8% Preferred Stock, $2.16 Preferred Stock and Preferred Stock of
all other series or any other class of stock or series thereof, if any,
then outstanding and ranking as to distribution of assets on a parity with
$2.20 Preferred Stock.
Nothing herein contained shall be deemed to prevent redemption of
$2.20 Preferred Stock by the Corporation in the manner provided in
paragraph 4 below. Neither the merger or consolidation of the Corporation
into or with any other corporation, nor the merger or consolidation of any
other corporation, nor the merger or consolidation of any other corporation
into or with the Corporation, nor a sale, transfer or lease of all or any
part of the assets of the Corporation, shall be deemed to be a liquidation,
dissolution or winding up of the affairs of the Corporation within the
meaning of this paragraph 3.
No payment on account of such liquidation, dissolution or winding up
of the affairs of the Corporation shall be made to the holders of any other
class or series of stock ranking on a parity with $2.20 Preferred Stock
with respect to preferential distribution of assets unless a payment on
account of such liquidation, dissolution or winding up shall be made at the
same time to the holders of $2.20 Preferred Stock in proportion to the full
distributive amounts to which they and the holders of such parity stock are
respectively entitled.
D-24
<PAGE>
Written notice of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, stating the
payment date and the place where the distributable amounts shall be payable
and containing a statement of or reference to the conversion right set
forth in paragraph 5 below, shall be given by mail, postage prepaid, not
less than 30 days prior to the payment date stated therein, to the holders
of record of $2.20 Preferred Stock at their respective addresses as the
same shall appear on the books of the Corporation.
4. Redemption.
The Corporation at its option may, at any time or from time to time,
on or after February 15, 1988, redeem the whole or any part of this issue
of $2.20 Preferred Stock at the applicable redemption price plus in each
case accrued and unpaid dividends thereon to the date fixed for redemption.
The applicable redemption prices for the $2.20 Preferred Stock shall
be as follows:
REDEMPTION PRICE
IF REDEEMED DURING 12 MONTHS BEGINNING PER SHARE
- ------------------------------------------------------------ ----------------
1988------------------------------------------------- $ 21.00
1989------------------------------------------------- 20.80
1990------------------------------------------------- 20.60
1991------------------------------------------------- 20.40
1992------------------------------------------------- 20.20
and thereafter at $20 per share.
The Corporation shall on each February 15, beginning with February 15,
1994, so long as any shares of $2.20 Preferred Stock are outstanding, set
aside, out of funds legally available therefor, an amount sufficient to
effect the redemption, at the applicable redemption price provided above,
plus accrued and unpaid dividends thereon, if any, of the number of shares
of $2.20 Preferred Stock equal to 6 2/3% of the total number of shares of
$2.20 Preferred Stock outstanding on February 15, 1994, less the number of
shares for which the Corporation may receive credit, as hereinafter
provided, and the Corporation shall call for redemption such number of
shares on such date. The Corporation may credit against any redemption
required by this paragraph 4 the number of shares of $2.20 Preferred Stock
which have been redeemed by the Corporation after February 15, 1994
(including shares called for redemption if the redemption price thereof has
been deposited with a bond or trust company as hereinafter provided in this
paragraph 4) or which have been presented for conversion to the Corporation
after February 15, 1994, and which have not been theretofor (i) used to
satisfy the Corporation's obligation to redeem shares of $2.20 Preferred
Stock pursuant to this paragraph 4 or (ii) used as a basis for a reduction
in the number of shares of $2.20 Preferred Stock to be redeemed pursuant to
this paragraph 4. The redemptions required of the Corporation by this
paragraph 4 shall be cumulative, so that if the Corporation shall fail, for
any reason whatsoever, to set aside funds and call for redemption shares of
$2.20 Preferred Stock on the date set forth above, as required by this
paragraph 4, the obligation to redeem such shares shall continue, and
shall, until satisfied, increase the obligation of the Corporation to
redeem shares in each subsequent year. If, at any time, the Corporation
shall have failed to set aside funds and call for redemption shares of
$2.20 Preferred Stock on the date set forth above, no dividend whatsoever
shall be declared or paid upon or set apart and no asset shall be
distributed for any class of stock or series thereof ranking junior to or
on a parity with $2.20 Preferred Stock in the payment of dividends (except
the $2.16 Preferred) nor shall any shares of any class of stock or series
thereof ranking junior to or on a parity with $2.20 Preferred Stock in
payment of dividends be redeemed or purchased by the Corportion or any
subsidiary thereof.
If at any time the Corporation shall be in default in the payment of
dividends on the $2.20 Preferred Stock of an amount equivalent to or
exceeding twelve full quarterly dividends (whether
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<PAGE>
or not consecutive) or shall have failed to make the mandatory redemptions
of $2.20 Preferred Stock required by the preceding paragraph of a number of
shares equivalent to or exceeding the number of shares to be redeemed
pursuant to such paragraph in any three year period, and all of the
outstanding shares of $2.20 Preferred Stock are held by the person to which
such shares were originally issued or by any affiliate or affiliates of
such person, the Corporation shall redeem, at the option of such original
holder or any such affiliates, out of funds legally available therefor,
within 60 days of the occurrence thereof, each outstanding share of $2.20
Preferred Stock, at the applicable redemption price hereinabove set forth
plus accrued and unpaid dividends to the date fixed for redemption.
At or prior to the time of each redemption pursuant to this paragraph
4, the Corporation shall pay or make provision for payment of all accrued
and unpaid dividends on all shares of $2.20 Preferred Stock, 8% Preferred
Stock, $2.16 Preferred Stock and all shares of Preferred Stock of all other
series or of any other class of stock or series thereof, if any, then
outstanding and ranking on a parity with or prior to the $2.20 Preferred
Stock in respect of payment of dividends.
In the event the Corporation shall determine or shall be required to
redeem less than the entire issue of $2.20 Preferred Stock then
outstanding, (i) the shares to be redeemed shall be selected pro rata (as
nearly as may be) so that the number of shares redeemed from each holder
shall be the same proportion of all the shares to be redeemed that the
total number of shares then held by such holder bears to the total number
of shares then outstanding or (ii) if the number of holders of $2.20
Preferred Stock exceeds 250, and the Board of Directors so determines, the
shares shall be selected by lot.
Notice of every such redemption shall be mailed, first class postage
prepaid, not less than 30 nor more than 45 days prior to the date fixed for
redemption ('redemption date'), to each holder of record of shares to be
redeemed, at his address as it appears on the books of the Corporation.
Each such notice shall state the redemption date; the number of shares of
$2.20 Preferred Stock to be redeemed, and, if less than all shares of $2.20
Preferred Stock held by such holder are to be redeemed, the number of such
shares to be redeemed from him; the redemption price applicable to the
shares to be redeemed; the place or places where such shares are to be
surrendered; that dividends on shares to be redeemed will cease to accrue
on the redemption date; and that shares to be redeemed may be converted at
any time prior to the close of business on the business day next preceding
the redemption date in accordance with paragraph 5 below.
Notice having been mailed, from and after the redemption date (unless
the Corporation defaults in providing money for the payment of the
redemption price) the right to receive dividends on shares called for
redemption shall cease to accrue, said shares shall no longer be deemed to
be outstanding, all rights of holders thereof as shareholders of the
Corporation (except the right to receive the redemption price thereof, but
without interest) shall terminate, and, upon surrender, in accordance with
said notice, of the certificates for any such shares (properly endorsed or
assigned for transfer, if the Board of Directors of the Corporation shall
so require), such shares shall be redeemed by the Corporation at the
applicable redemption price; provided, however, that the Corporation may
include in such notice a statement that the money required for the payment
of the redemption price, plus accrued and unpaid dividends, if any, will be
deposited on a specified date, prior to the redemption date, with a
specified bank or trust company (which shall have an office in The City of
New York and which shall have a combined capital and surplus of not less
than $50,000,000) in trust for the benefit of holders of shares called for
redemption, and, notice having been given, from and after such deposit
shares called for redemption shall no longer be deemed to be outstanding,
all rights with respect to shares of $2.20 Preferred Stock shall forthwith
upon such deposit cease and terminate, except only the right of the holders
thereof to convert such shares in accordance with the provisions of
paragraph 5 below at any time prior to the close of business on the
business day next preceding the redemption date,
D-26
<PAGE>
and holders of such shares shall look for payment of the redemption price
only to funds so deposited and in no event to the Corporation unless said
funds shall be repaid to the Corporation as hereinafter provided. Holders
of such shares shall not be entitled to any interest allowed by such
depositary on money so deposited but any such interest shall be paid to the
Corporation. Any moneys deposited as aforesaid for redemption of any shares
and remaining unclaimed for four years after the date of such deposit shall
then be repaid to the Corporation upon its request, and the holders of such
shares shall thereafter look only to the Corporation for payment of the
redemption price thereof, but without interest.
Any provision of this paragraph 4 to the contrary notwithstanding, in
the event that any quarterly dividend due on $2.20 Preferred Stock shall be
in default, and until all such defaults shall have been cured, the
Corporation shall not redeem any shares of $2.20 Preferred Stock unless all
outstanding shares of $2.20 Preferred Stock are simultaneously redeemed and
shall not purchase or otherwise acquire any shares of $2.20 Preferred Stock
except in accordance with a purchase offer made by the Corporation on the
same terms to all holders of record of $2.20 Preferred Stock.
Any shares of $2.20 Preferred Stock redeemed or otherwise purchased or
acquired by the Corporation shall be retired, shall no longer be deemed
outstanding, and shall assume the status of authorized but unissued
Preferred Stock, with no par value, undesignated as to series, subject to
reissuance by the Corporation as shares of Preferred Stock of any one or
more series, as may be determined from time to time by the Board of
Directors, except that such shares may not be reissued as additional shares
of $2.20 Preferred Stock.
5. Conversion.
Shares of $2.20 Preferred Stock may be converted at the option of the
holder thereof, at any time prior to the close of business on the business
day next preceding the date fixed for redemption of such shares pursuant to
paragraph 4 above, into fully paid and non-assessable shares of Common
Stock of the Corporation at the rate of 0.8696 shares of Common Stock as
now constituted for each share of $2.20 Preferred Stock surrendered for
conversion (the 'conversion rate'), subject to the following provisions:
(A) The conversion rate shall be subject to adjustment from time
to time as follows:
(1) In case the Corporation shall (i) pay a dividend, or make a
distribution, to all holders of its Common Stock, in shares of its
capital stock (whether shares of Common Stock or of capital stock of
any other class), (ii) subdivide its outstanding shares of Common
Stock into a greater number of shares, (iii) combine its outstanding
shares of Common Stock into a smaller number of shares, or (iv) issue
by reclassification of its shares of Common Stock any shares of
capital stock of the Corporation, the conversion rate in effect
immediately prior to such action shall be adjusted so that the holder
of any share of $2.20 Preferred Stock thereafter surrendered for
conversion shall be entitled to receive the number of shares of
capital stock of the Corporation which he would have owned
immediately following such action had such share of $2.20 Preferred
Stock been converted immediately prior thereto. An adjustment made
pursuant to this subparagraph (1) shall become effective immediately
after the record date in the case of a dividend and shall become
effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of any
adjustment made pursuant to this subparagraph (1), the holder of any
shares of $2.20 Preferred Stock thereafter surrendered for conversion
shall become entitled to receive shares of two or more classes of
capital stock of the Corporation, the Board of Directors (whose
determination shall be conclusive) shall determine, in good faith,
the allocation of the conversion price of the $2.20 Preferred Stock
(determined by dividing the adjusted conversion rate into $20)
between or among shares of such classes of capital stock.
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(2) In case the Corporation shall hereafter issue rights or
warrants to all holders of its Common Stock entitling them (for a
period expiring within 45 days after the record date mentioned below)
to subscribe for or purchase shares of Common Stock at a price per
share less than the current market price per share of Common Stock
(as determined pursuant to subparagraph (4) below) on the record date
mentioned below, the conversion rate shall be adjusted effective
immediately after the expiration date of such rights or warrants so
that the same shall equal the rate determined by multiplying the
conversion rate in effect immediately prior to the date of issuance
of such rights or warrants by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding (excluding
treasury shares) on the date of issuance of such rights or warrants
plus the number of additional shares of Common Stock purchased
pursuant to such offer for subscription or purchase and of which the
denominator shall be the number of shares of Common Stock outstanding
(excluding treasury shares) on the date of issuance of such rights or
warrants plus the number of shares of Common Stock which the
aggregate subscription or purchase price of the total number of
shares so purchased would purchase at such current market price
(determined as provided in subparagraph (4) below).
(3) In case the Corporation shall distribute to all holders of
its Common Stock evidences of its indebtedness or assets (excluding
cash distributions made out of current or retained earnings) or
rights to subscribe (excluding those referred to in subparagraph (2)
above), then in each such case the conversion rate shall be adjusted
so that the same shall equal the rate determined by multiplying the
conversion rate in effect immediately prior to the date of such
distribution by a fraction of which the numerator shall be the
current market price per share of Common Stock (determined as
provided in subparagraph (4) below) at the record date mentioned
below, and the denominator of which shall be such current market
price per share of the Common Stock, less the then fair market value
(as determined, in good faith, by the Board of Directors of the
Corporation, whose determination shall be conclusive) of the portion
of the assets or evidences of indebtedness so distributed or of such
subscription rights applicable to one share of Common Stock. Such
adjustment shall become effective immediately after the record date
for determination of stockholders entitled to receive such
distribution.
(4) For the purpose of any computation under subparagraphs (2)
and (3) above, the current market price per share of Common Stock on
any date shall be deemed to be the average of the daily closing
prices for 30 consecutive business days commencing 45 business days
before the day in question. The closing price for each day shall be
the last reported sale price regular way or, in case no such reported
sale takes place on such day, the average of the reported closing bid
and asked prices regular way, in either case on the New York Stock
Exchange 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 or, if not
listed or admitted to trading on any national securities exchange,
the average of the closing bid and asked prices as furnished by any
New York Stock Exchange member firm selected from time to time by the
Corporation for that purpose.
(5) In any case in which this paragraph 5 shall require that an
adjustment be made immediately following a record date, the
Corporation may elect to defer (but only until five business days
following the filing by the Corporation of the statement required by
subparagraph (7) below) issuing to the holder of any share of $2.20
Preferred Stock converted after such record date shares of Common
Stock and other capital stock of the Corporation issuable upon such
conversion over and above the number of shares of Common Stock and
other capital stock of the Corporation issuable upon such conversion
as computed on the basis of the conversion rate prior to adjustment.
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<PAGE>
(6) All calculations under this paragraph 5 shall be made to
the nearest cent or to the nearest one-hundredth of a share, as the
case may be.
(7) Whenever the conversion rate is adjusted as herein
provided, the Corporation shall (i) file at the office or agency in
the Borough of Manhattan in the City of New York maintained by the
Corporation pursuant to subparagraph (D) of this paragraph 5 and with
each transfer agent for its Common Stock a statement, signed by the
Chairman of the Board of Directors, the President or one of the Vice
Presidents of the Corporation and by its Treasurer or one of its
Assistant Treasurers, stating the adjusted conversion rate determined
as provided herein and setting forth the method of calculation and
the facts requiring such adjustment and upon which such calculation
is based, and (ii) mail or cause to be mailed a copy of such
statement setting forth the adjusted conversion rate to each person
who is a registered holder of $2.20 Preferred Stock at such person's
last address as the same appears on the books of the Corporation.
Each adjustment shall remain in effect until a subsequent adjustment
is required hereunder.
(B) In case of a merger or consolidation of the Corporation with
or into another corporation, or the sale of the Corporation's property
or assets as, or substantially as, an entirety, to another corporation,
or the reclassification of the Corporation's Common Stock (other than
through a subdivision or combination thereof, or change in par value),
holders of shares of $2.20 Preferred Stock shall thereafter have the
right to convert each of such shares into the kind and amount of shares
of stock and other securities and property receivable upon such merger,
consolidation, sale or reclassification by a holder of the number of
shares of Common Stock (whether whole or fractional) of the Corporation
into which shares of $2.20 Preferred Stock might have been converted
immediately prior to such a merger, consolidation, sale or
reclassification, and shall have no other conversion rights under these
provisions; and effective provision shall be made in the charter of the
resulting or surviving corporation or otherwise, so that the provisions
set forth herein for the protection of conversion rights of $2.20
Preferred Stock shall thereafter be applicable, as nearly as reasonably
may be, to any such other shares of stock and other securities and
property deliverable upon conversion of $2.20 Preferred Stock remaining
outstanding or other convertible preferred stock received by the holders
in place thereof. Any such resulting or surviving corporation shall
expressly assume the obligation to deliver, upon the exercise of the
conversion right, such shares, securities or property as holders of
$2.20 Preferred Stock remaining outstanding, or other convertible
preferred stock received by such holders in place thereof, shall be
entitled to receive pursuant to the provisions hereof, and to make
provision for protection of conversion rights as above provided.
(C) If, at any time while shares of $2.20 Preferred Stock are
outstanding, the Corporation shall (i) declare a dividend (or any other
distribution) on its Common Stock, other than in cash out of current or
retained earnings; or (ii) authorize the issuance to all holders of its
Common Stock of rights or warrants to subscribe for or purchase shares
of its Common Stock or of any other subscription rights or warrants; or
(iii) reclassify its Common Stock (other than through a subdivision or
combination thereof) or become a party to any consolidation or merger
for which approval of the holders of its Common Stock is required, or
sell or transfer all or substantially all of the assets of the
Corporation; then the Corporation shall cause to be mailed to registered
holders of $2.20 Preferred Stock, at their last addresses as they shall
appear upon the Corporation's stock transfer record, at least ten days
prior to the applicable record date hereinafter specified, a notice
stating (i) the date on which a record is to be taken for the purpose of
such dividend, distribution, rights or warrants, or, if a record is not
to be taken, the date as of which holders of Common Stock of record to
be entitled to such dividend, distribution, rights or warrants are to be
determined, or (ii) the date on which any such reclassification,
consolidation, merger, sale or transfer is expected to become effective,
and the date as of which it is expected that holders of Common Stock of
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<PAGE>
record shall be entitled to exchange their Common Stock for securities
or other property, if any, deliverable upon such reclassification,
consolidation, merger, sale or transfer. Failure to give or receive the
notice required by this subparagraph (C) or any defect therein shall not
affect the legality or validity of any such dividend, distribution,
right or warrant or other action.
(D) The holder of any shares of $2.20 Preferred Stock may exercise
his option to convert such shares into shares of Common Stock only by
surrendering for such purpose to the Corporation at the office or agency
in the Borough of Manhattan in The City of New York maintained by the
Corporation for that purpose certificates representing the shares to be
converted, accompanied by written notice that such holder elects to
convert such shares in accordance with the provisions of this paragraph
5. Said notice shall also state the name or names (with addresses) in
which the certificate or certificates for shares of Common Stock which
shall be issuable on such conversion shall be issued. Each certificate
or certificates surrendered for conversion shall, unless the shares
issuable on conversion are to be issued in the same name as that in
which such certificate or certificates are registered, be accompanied by
instruments of transfer, in form satisfactory to the Corporation, duly
executed by the holder or by his duly authorized attorney. Each
conversion shall be deemed to have been effected on the date on which
such certificate or certificates shall have been surrendered and such
notice received by the Corporation as aforesaid, and the person or
persons in whose name or names any certificate or certificates for
shares of Common Stock shall be issuable upon such conversion shall be
deemed to have become on said date the holder or holders of record of
the shares represented thereby notwithstanding that the transfer books
of the Corporation may then be closed or that certificates representing
such shares of Common Stock shall not then be actually delivered to such
person.
(E) Upon any such conversion of shares of $2.20 Preferred Stock,
no allowance, adjustment or payment shall be made with respect to
dividends upon either the shares of $2.20 Preferred Stock surrendered
for conversion or the shares of Common Stock issuable upon conversion.
(F) In connection with the conversion of shares of $2.20 Preferred
Stock into Common Stock, no fractions of shares of $2.20 Preferred Stock
or of Common Stock shall be issued, but the Corporation shall pay a cash
adjustment in respect of such fractional interest in an amount equal to
the market value of such fractional interest. In such event, the market
value of a share of Common Stock shall be the last recorded sale price
of such a share on the New York Stock Exchange on the business day
immediately preceding the date upon which such shares of $2.20 Preferred
Stock are deemed to have been converted, or, if there be no such
recorded sale price on such day, the last quoted bid price per share of
Common Stock on such exchange at the close of trading on such business
day. If the Common Stock shall not at the time be listed or admitted to
trading on the New York Stock Exchange, such market value shall be the
average of the reported closing bid and asked prices regular way on such
day on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or, if not listed or admitted to
trading on any national securities exchange, the average of the closing
bid and asked prices on such day as furnished by any New York Stock
Exchange member firm selected from time to time by the Corporation for
that purpose. The issue of stock certificates on conversions of shares
of $2.20 Preferred Stock shall be made without charge to converting
holders of shares of $2.20 Preferred Stock for any tax in respect of the
issue thereof. The Corporation shall not, however, be required to pay
any tax which may be payable in respect of any registration of transfer
involved in the issue and delivery of stock in any name other than that
of the holder of any shares of $2.20 Preferred Stock converted, and the
Corporation shall not be required to so issue or deliver any stock
certificate unless and until the person or persons requesting the
registration of
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<PAGE>
transfer shall have paid to the Corporation the amount of such tax or
shall have established to the satisfaction of the Corporation that such
tax has been paid.
(G) The Corporation shall at all times reserve and keep available
out of its authorized Common Stock the full number of shares of Common
Stock deliverable upon the conversion of all outstanding shares of $2.20
Preferred Stock.
(H) Any shares of $2.20 Preferred Stock converted shall no longer
be deemed outstanding and shall assume the status of authorized but
unissued shares of Preferred Stock, with no par value, undesignated as
to series, subject to reissuance by the Corporation as shares of
Preferred Stock of any one or more series, as may be determined from
time to time by the Board of Directors, except that such shares may not
be reissued as additional shares of $2.20 Preferred Stock.
(I) For purposes of this paragraph (5):
(1) 'business day' shall mean a day on which the New York Stock
Exchange (or a successor or an equivalent or substitute organization
or facility) is open for the trading of securities in the Borough of
Manhattan in The City of New York; and
(2) 'Common Stock' shall mean (a) the Corporation's Common
Stock, $.16 2/3 par value per share, or (b) any other class of stock
resulting from successive changes or reclassifications of such Common
Stock consisting solely of changes in par value, or from par value to
no par value, or from no par value to par value; provided, however,
that in the event that at any time as a result of an adjustment made
pursuant to subparagraph (A) (1) above, the holder of any share of
$2.20 Preferred Stock thereafter surrendered for conversion would
become entitled to receive any stock of the Corporation other than
shares of its Common Stock, thereafter the conversion rate with
respect to such other shares so receivable upon conversion of any
share of $2.20 Preferred Stock shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to Common Stock contained
in this paragraph 5.
6. Voting Rights.
(A) The holders of $2.20 Preferred Stock shall be entitled to one
vote per share, voting together as one class with the holders of Common
Stock, 8% Preferred Stock, and $2.16 Preferred Stock and any other series
of Preferred Stock entitled to vote, on all matters to be voted by
stockholders of the Corporation, in addition to their rights set forth in
subparagraph (B), (C) and (D) below and otherwise provided by law.
(B) If at any time the Corporation shall have failed to make the
mandatory redemptions of $2.20 Preferred Stock required by the third
subparagraph of paragraph 4 of a number of shares equivalent to or
exceeding the number of shares to be redeemed pursuant to such paragraph on
any two redemption dates as specified in such paragraph, and if the default
in dividends specified in subparagraph (C) of this paragraph 6 (the
'Dividend Default') is not then in effect, the number of directors
constituting the Board of Directors of the Corporation shall be increased
by two, and the holders of $2.20 Preferred Stock, voting as a separate
series shall be entitled at the next annual meeting of stockholders or the
next special meeting of stockholders, or at a special meeting of holders of
$2.20 Preferred Stock called as hereinafter provided, to elect two
directors to fill such newly created directorships, and in addition
thereto, such holders shall be entitled to participate with holders of
Common Stock and holders, if any, of any other capital stock of the
Corporation entitled to vote for the election of directors in the election
of any other directors; provided, however, that when all arrears in such
redemptions of the $2.20 Preferred Stock shall have been made or if a
Dividend Default shall occur, then (i) the right of holders of $2.20
Preferred Stock to participate in the election of two directors shall cease
but subject always to the same provisions for vesting of such voting rights
in the case of any similar future arrearages in
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<PAGE>
redemptions at a time when a Dividend Default is not in effect; (ii) the
terms of the directors then in office elected by holders of $2.20 Preferred
Stock as a class shall terminate; and (iii) the number of directors
constituting the Board of Directors shall be reduced by two (except that
upon a Default in Dividends the number of directors shall then be increased
in accordance with subparagraph (C) of this paragraph 6).
Whenever such voting right shall vest, it may be exercised initially
either at a special meeting of holders of $2.20 Preferred Stock or at any
annual or special stockholders' meeting, but thereafter it shall be
exercised only at annual stockholders' meetings. A special meeting for the
exercise of such right shall be called by the Secretary of the Corporation
within ten days after receipt of a written request therefor, signed by the
holders of record of at least 10% of the votes of the then outstanding
shares of $2.20 Preferred Stock; however, no such special meeting shall be
held during the 90-day period preceding the date fixed for the annual
meeting of stockholders.
Any director who shall have been elected by holders of $2.20 Preferred
Stock as a series pursuant to this subparagraph (B) shall hold office for a
term expiring (subject to the earlier termination of the default in
redemptions or the occurrence of a Dividend Default) at the next annual
meeting of stockholders, and during such term may be removed at any time,
either for or without cause, only by the affirmative votes of holders of
record of a majority of the votes of the then outstanding shares of $2.20
Preferred Stock given at a special meeting of such stockholders called for
the purpose. Any vacancy created by such removal may also be filled at such
meeting. A meeting for the removal of a director elected by holders of
$2.20 Preferred Stock as a series and the filling of the vacancy created
thereby shall be called by the Secretary of the Corporation within ten days
after receipt of a written request therefor, signed by the holders of not
less than 25% of the votes of the then outstanding shares of $2.20
Preferred Stock. Such meeting shall be held at the earliest practicable
date thereafter.
Any vacancy caused by the death, resignation, or expiration of term
(except upon a termination of the default in redemptions or the occurrence
of a Dividend Default) of a director who shall have been elected by the
holders of $2.20 Preferred Stock as a series pursuant to this subparagraph
(B) may be filled only by the holders of $2.20 Preferred Stock at a meeting
called for such purpose. Such meeting of the holders of $2.20 Preferred
Stock shall be called by the Secretary of the Corporation at the earliest
practicable date after any such death or resignation and in any event
within ten days after receipt of a written request therefor, signed by the
holders of record of at least 10% of the votes of the then outstanding
shares of $2.20 Preferred Stock.
If any meeting of the holders of $2.20 Preferred Stock required by
this subparagraph (B) to be called shall not have been called within ten
days after personal service of a written request therefor upon the
Secretary of the Corporation or within 15 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, then holders of
record of at least 10% of the votes of the then outstanding shares of $2.20
Preferred Stock may designate in writing one of their number to call such a
meeting at the expense of the Corporation and such meeting may be called by
such person so designated upon the notice required for annual meetings of
stockholders. Any holder of the $2.20 Preferred Stock so designated shall
have access to the stock books of the Corporation for the purpose of
causing meetings of stockholders to be called pursuant to these provisions.
Any meeting of holders of $2.20 Preferred Stock to vote as a series
for the election or removal of directors shall be held at the place for the
holding of the annual meeting of stockholders of the Corporation. At such
meeting, the presence in person or by proxy of holders of a majority of the
votes of the then outstanding shares of $2.20 Preferred Stock shall be
required to constitute a quorum; in the absence of a quorum, a majority of
the holders present in person or by proxy shall have power to adjourn the
meeting from time to time without notice, other than announcement at the
meeting, until a quorum shall be present.
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<PAGE>
(C) If at any time the Corporation shall be in default in the payment
of dividends on the $2.20 Preferred Stock of an amount equivalent to or
exceeding six full quarterly dividends (whether or not consecutive), the
number of directors constituting the Board of Directors of the Corporation
shall be increased by two, and the holders of $2.20 Preferred Stock, voting
as a separate class together with the holders of all other series of
Preferred Stock outstanding (other than 8% Preferred Stock) having similar
voting rights (such other series of Preferred Stock and the $2.20 Preferred
Stock being hereinafter collectively referred to as 'Special Preferred
Stock'), whether or not the payment of quarterly dividends shall be in
default on all Special Preferred Stock outstanding shall be entitled at the
next annual meeting of stockholders, or at a special meeting of holders of
Special Preferred Stock called as hereinafter provided, to elect two
directors to fill such newly created directorships, and in addition
thereto, such holders shall be entitled to participate with holders of
Common Stock and holders, if any, of any other capital stock of the
Corporation entitled to vote for the election of directors in the election
of any other directors; provided, however, that when all arrears in
dividends on Special Preferred Stock then outstanding shall have been paid
and dividends thereon for the current quarterly period shall have been paid
or declared and a sum sufficient for the payment thereof set aside, then
(i) the right of holders of Special Preferred Stock to participate in the
election of two directors shall cease but subject always to the same
provisions for vesting of such voting rights in the case of any similar
future arrearages in dividends; (ii) the term of the directors then in
office elected by holders of Special Preferred Stock as a class shall
terminate; and (iii) the number of directors constituting the Board of
Directors shall be reduced by two.
Whenever such voting right shall vest, it may be exercised initially
either at a special meeting of holders of Special Preferred Stock or at any
annual or special stockholders' meeting, but thereafter it shall be
exercised only at annual stockholders' meetings. A special meeting for the
exercise of such right shall be called by the Secretary of the Corporation
within ten days after receipt of a written request therefor, signed by the
holders of record of at least 10% of the votes of the then outstanding
shares of Special Preferred Stock; however, no such special meeting shall
be held during the 90-day period preceding the date fixed for the annual
meeting of stockholders.
Any director who shall have been elected by holders of Special
Preferred Stock as a class pursuant to this subparagraph (C) shall hold
office for a term expiring (subject to the earlier termination of the
default in dividends) at the next annual meeting of stockholders, and
during such term may be removed at any time, either for or without cause,
only by the affirmative votes of holders of record of a majority of the
votes of the then outstanding shares of Special Preferred Stock given at a
special meeting of such stockholders called for the purpose. Any vacancy
created by such removal may also be filled at such meeting. A meeting for
the removal of a director elected by holders of Special Preferred Stock as
a class and the filling of the vacancy created thereby shall be called by
the Secretary of the Corporation within ten days after receipt of a written
request therefor, signed by the holders of not less than 25% of the votes
of the then outstanding shares of Special Preferred Stock. Such meeting
shall be held at the earliest practicable date thereafter.
Any vacancy caused by the death, resignation, or expiration of term
(except upon a termination of the default in dividends) of a director who
shall have been elected by the holders of Special Preferred Stock as a
class pursuant to this subparagraph (C) may be filled only by the holders
of Special Preferred Stock at a meeting called for such purpose. Such
meeting of the holders of Special Preferred Stock shall be called by the
Secretary of the Corporation at the earliest practicable date after any
such death or resignation and in any event within ten days after receipt of
a written request therefor, signed by the holders of record of at least 10%
of the votes of the then outstanding shares of Special Preferred Stock.
If any meeting of the holders of Special Preferred Stock required by
this subparagraph (C) to be called shall not have been called within ten
days after personal service of a written request
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<PAGE>
therefor upon the Secretary of the Corporation or within 15 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, then
holders of record of at least 10% of the votes of the then outstanding
shares of Special Preferred Stock may designate in writing one of their
number to call such a meeting at the expense of the Corporation and such
meeting may be called by such person so designated upon the notice required
for annual meetings of stockholders. Any holder of Special Preferred Stock
so designated shall have access to the stock books of the Corporation for
the purpose of causing meetings of stockholders to be called pursuant to
these provisions.
Any meeting of holders of Special Preferred Stock to vote as a class
for the election or removal of directors shall be held at the place for the
holding of the annual meeting of stockholders of the Corporation. At such
meeting, the presence in person or by proxy of holders of a majority of the
votes of the then outstanding shares of Special Preferred Stock shall be
required to constitute a quorum; in the absence of a quorum, a majority of
the holders present in person or by proxy shall have power to adjourn the
meeting from time to time without notice, other than announcement at the
meeting, until a quorum shall be present.
(D) So long as any shares of $2.20 Preferred Stock are outstanding,
the Corporation shall not, in any manner, whether by amendment to the
Certificate of Incorporation or By-Laws of the Corporation, by merger
(whether or not the Corporation is a surviving corporation in such merger),
by consolidation, or otherwise:
(1) without the written consent or the affirmative vote at a
meeting called for that purpose of the holders of at least two-thirds
of the votes of the shares of $2.20 Preferred Stock then outstanding,
voting separately as a class, (a) amend, alter or repeal any of the
provisions of Article IV of the Certificate of Incorporation of the
Corporation, or of any resolution or resolutions establishing the
$2.20 Preferred Stock, so as to affect adversely the powers,
preferences or special rights of the $2.20 Preferred Stock; or (b)
authorize or increase the authorized amount of, or authorize any
obligation or security convertible into or evidencing the right to
purchase shares of, any additional class or series of stock ranking
prior to the $2.20 Preferred Stock in the payment of dividends or the
preferential distribution of assets; or (c) authorize or increase the
authorized amount of, or authorize any obligation or security
convertible into or evidencing the right to purchase shares or, any
shares of Preferred Stock of any series having more than one vote per
share of such Preferred Stock or amend, alter or repeal any of the
provisions of Article IV of the Certificate of Incorporation of the
Corporation, or of any resolution or resolutions establishing any
series of the Preferred Stock, so as to provide any share of
Preferred Stock with more than one vote per share of Preferred Stock;
or
(2) without the written consent or the affirmative vote at a
meeting called for that purpose of the holders of at least a majority
of the aggregate number of the votes of the shares of Preferred Stock
of all series (including $2.20 Preferred Stock) then outstanding,
voting separately as a class, (a) increase the number of shares of
Preferred Stock authorized by the provisions of Article IV of the
Certificate of Incorporation; or (b) authorize or increase the
authorized amount of, or authorize any obligation or security
convertible into or evidencing the right to purchase shares of, any
additional class of stock ranking on a parity with the $2.20
Preferred Stock in the payment of dividends or the preferential
distribution of assets;
provided, however, that the foregoing provisions of this subparagraph
(D) shall not require the consent or vote of the holders of $2.20
Preferred Stock or any Preferred Stock for the authorization or an
increase in the authorized amount of any class or series of stock, or
for the authorization of any obligation or security convertible into or
evidencing the right to purchase shares of any class or series of stock,
except to the extent specifically provided in sections (1)(b), (2)(a)
and (2)(b) of this subparagraph (D); and provided further, that, except
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as otherwise required by law, no such consent or vote shall be required
for any merger or consolidation:
(i) in which (x) the Corporation is the surviving corporation;
(y) no adverse change is made in the powers, preferences or special
rights of the $2.20 Preferred Stock; and (z) no additional class or
series of stock is authorized or the authorized amount thereof
increased, and no obligation or security convertible into or
evidencing the right to purchase shares of any additional class or
series of stock is authorized, if no such consent or vote would have
been required for any such authorization, or increase in authorized
amount, immediately prior to such merger or consolidation; or
(ii) in which (x) the Corporation is a party but is not the
surviving corporation; (y) the surviving corporation shall, in
connection with and at the same time as such merger or consolidation,
issue in exchange for each share of $2.20 Preferred Stock then
outstanding a share of preferred stock of the surviving corporation
with the same powers, preferences and special rights as the $2.20
Preferred Stock; and (z) immediately after such merger or
consolidation only classes or series of stock of the surviving
corporation and obligations or securities convertible into or
evidencing the right to purchase shares of a class or series of stock
of the surviving corporation shall be authorized or outstanding, for
which no consent or vote would have been required if such classes or
series of stock and obligations or securities had been authorized by
the Corporation immediately prior to such merger or consolidation, or
which have, or are convertible into or evidence the right to purchase
shares of a class or series of stock of the surviving corporation
which have, the same powers, preferences and special rights and
authorized amount as a class or series of stock of the Corporation
which was authorized (with such consent or vote) prior to such merger
or consolidation and is continuing as an authorized class or series
of stock at the time thereof.
SECOND: That the number of shares of $2.20 Cumulative Convertible
Preferred Stock is 2,875,000.
IN WITNESS WHEREOF, said Tesoro Petroleum Corporation has caused this
certificate to be signed by Robert V. West, Jr., its Chairman of the Board of
Directors, and attested by M. Richard Stewart, its Secretary, this 26th day of
January, 1983.
By /s/ ROBERT V. WEST, JR.
Robert V. West, Jr.
CHAIRMAN OF THE
BOARD OF DIRECTORS
ATTEST:
By /s/ RICHARD STEWART
Richard Stewart
SECRETARY
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APPENDIX E
DESCRIPTION OF SUBORDINATED DEBENTURES
GENERAL
The Subordinated Debentures are issued under an Indenture (the 'Existing
Indenture') dated as of March 15, 1983, between the Company and NBD Bank, N.A.,
formerly National Bank of Detroit, as Trustee. The Subordinated
Debentures bear interest from March 15, 1983, at 12 3/4% per
annum, payable on March 15 and September 15 in each year to holders
of record at the close of business on the first day of the month of such
interest payment date. (Section 2.02) The Subordinated Debentures will be due on
March 15, 2001, are issued only in denominations of $1,000 and integral
multiples of $1,000 and are unsecured obligations of the Company. The Indenture
authorizes an aggregate principal amount of $120,000,000 of the Subordinated
Debentures.
The statements under this caption relating to the Subordinated Debentures
and the Existing Indenture summarize the material provisions of the Subordinated
Debentures but do not purport to be complete. Such summaries make use of terms
defined in the Old Indenture and are qualified in their entirety by express
reference to the Old Indenture and the cited provisions thereof, a copy of which
is filed as an exhibit to the Registration Statement.
REDEMPTION PROVISIONS
The Subordinated Debentures are redeemable, at the option of the Company,
in whole or in part at any time, on not less than 30 days' or more than 60 days'
prior notice, mailed by first-class mail to the holders' last addresses as they
shall appear in the register, at the principal amount thereof together with
interest accrued to the redemption date.
Selection of Subordinated Debentures for redemption will be made by the
Trustee in such manner as it shall deem appropriate and fair in its discretion.
The Old Indenture provides that if any Old Debenture is to be redeemed in part
only, the notice which relates to such Old Debenture shall state the portion of
the principal amount to be redeemed, and shall state that on and after the
redemption date, upon surrender of such Old Debenture, a new Old Debenture or
Subordinated Debentures in principal amount equal to the unredeemed portion
thereof will be issued. If the redemption is for the sinking fund provided for
in Section 5.04 of the Old Indenture, the notice of redemption shall so state.
(Article 5)
The Debentures are redeemable on similar notice through the operation of
the sinking fund described below at the principal amount thereof together with
interest accrued to the redemption date.
SINKING FUND
The Indenture requires the Company to provide for the retirement, by
redemption, of Debentures in the aggregate principal amount of $11,250,000 on
March 15, 1993 and on March 15 of each of the years thereafter up to and
including year 2000, through the operation of the sinking fund. The Company may,
at its option, receive credit against sinking fund payments for the principal
amount of (a) Debentures acquired by the Company and surrendered for
cancellation, and (b) Debentures redeemed or called for redemption, if the
redemption price has been deposited with the Trustee in trust for such purposes,
otherwise than through the operation of the sinking fund. (Section 5.04)
SUBORDINATION OF DEBENTURES
The payment of the principal of and interest on the Debentures is
subordinated, to the extent set forth in the Indenture, in right of payment to
the prior payment in full of all Senior Indebtedness of the Company, as defined
in the Indenture, whether outstanding on the date of the Indenture or thereafter
created, incurred, assumed or guaranteed. Upon (i) the maturity of Senior
Indebtedness by
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lapse of time, acceleration or otherwise or (ii) any distribution of the assets
of the Company upon any dissolution, winding up, liquidation or reorganization
of the Company, the holders of Senior Indebtedness will be entitled to receive
payment in full before the holders of the Debentures are entitled to receive
any payment, provided that the restriction contained in (i) above shall not
prevent the Company from satisfying a sinking fund payment in respect of
Debentures made in Debentures acquired by the Company prior to the occurrence
of any such maturity. If in any of the situations referred to in clause (ii)
above a payment is made to the Trustee or to holders of Debentures before all
Senior Indebtedness has been paid in full or provision has been made for such
payment, the payment to the Trustee or holders of Debentures must be paid over
to the holders of the Senior Indebtedness.
Senior Indebtedness is defined as the principal of, premium, if any, and
interest on indebtedness of the Company (other than the Debentures), whether
outstanding on the date of the Indenture or thereafter created, incurred,
assumed or guaranteed (a) for money borrowed from or guaranteed to others
(including, for this purpose, all obligations of the Company incurred under
capitalized leases or purchase money mortgages) or (b) in connection with the
acquisition by the Company or a subsidiary of the Company of any business or
entity or the assets thereof, and, in each case, all renewals, extensions and
refundings thereof, unless in each case the terms of the instrument creating or
evidencing the indebtedness provide that such indebtedness is not superior in
right of payment to the Debentures. There are no restrictions in the Indenture
upon the creation of Senior Indebtedness.
Upon adoption of the Indenture Amendments, the Exchange Notes will be
Senior Indebtedness. See 'Proposed Amendments to Existing Indenture.'
DIVIDEND RESTRICTION
The Indenture provides that the Company will not (i) declare or pay any
dividend or make any distribution on its capital stock (other than dividends or
distributions of its capital stock) or (ii) purchase, redeem or otherwise
acquire or retire for value any of its capital stock or permit any subsidiary to
do so, if at the time of such action an Event of Default shall have occurred and
be continuing or if upon giving effect thereto the aggregate amount expended for
all such purposes subsequent to September 30, 1982 plus the aggregate amount of
any investment in the capital stock and contribution to the capital of
Trinidad-Tesoro Petroleum Company Limited ('Trinidad-Tesoro') by the Company and
its subsidiaries subsequent to such date shall exceed the sum of (a) the
aggregate consolidated net income of the Company accrued subsequent to September
30, 1982 (excluding any income or loss attributable to or derived from the
Company's interest in Trinidad-Tesoro or any sale or disposition of such
interest), (b) the aggregate net proceeds received by the Company from the issue
or sale after September 30, 1982 of capital stock of the Company (excluding the
$2.20 Preferred), (c) the aggregate net proceeds received by the Company from
the issue or sale after September 30, 1982 of any indebtedness of the Company
which is subsequently converted into capital stock of the Company, (d) the
aggregate amount of dividends or distributions received by the Company, net of
taxes, subsequent to September 30, 1982 in respect of its interest in Trinidad-
Tesoro and the net aftertax proceeds to the Company from any sale or disposition
of such interest, and (e) $30,000,000; provided, however, that such provisions
will not prevent (x) the payment of any dividend within 60 days after the date
of declaration if the payment complied with the foregoing provisions on the date
of declarations or (y) the retirement of any shares of the Company's capital
stock by exchange for, or out of the proceeds of the substantially concurrent
sale of, other shares of its capital stock, or (z) the payment of regular
dividends on preferred stock of the Company outstanding on the date of the
Indenture. (Section 6.06)
This restriction is proposed to be amended. See 'Proposed Amendments to
Existing Indenture.'
THE TRUSTEE
NBD Bank, N.A., formerly National Bank of Detroit is the Trustee under the
Indenture. The Indenture contains limitations on the right of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or
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otherwise. (Section 10.08) If the Trustee acquires any conflicting
interest (as defined), it must eliminate such conflict or resign
within 90 days after ascertaining that it has a conflict of interest.
(Section 10.05)
The holders of a majority in principal amount of all outstanding Debentures
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee under the Indenture. (Section
7.06) The Indenture provides that in case an Event of Default shall occur (which
shall not be cured), the Trustee will be required to use the same degree of care
and skill in the exercise of its power as a person would exercise or use under
the circumstances in the conduct of his own affairs. (Section 10.02) Subject to
such provisions, the Trustee is under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the
Debentureholders, unless certain conditions have been met, including that the
Debentureholders shall have offered to the Trustee security and indemnity
satisfactory to it. (Section 7.07)
EVENTS OF DEFAULT AND NOTICE THEREOF
The term 'Event of Default' when used in the Indenture means any one of the
following: (a) failure to pay (whether or not prohibited by the subordination
provisions) interest for 30 days or principal or any sinking fund installment,
when due; (b) failure to perform any other covenants for 60 days after notice;
(c) the occurrence of any event of default under an instrument evidencing or
securing Senior Indebtedness or any other indebtedness of the Company or any
subsidiary for borrowed money, in either case in excess of $1,000,000, resulting
in the acceleration of such Senior Indebtedness or other indebtedness, which
acceleration is not rescinded or annulled pursuant to the terms of such
instrument; and (d) certain events of bankruptcy, insolvency or reorganization.
(Section 7.01)
The Indenture provides that the Trustee shall, within 90 days after the
occurrence of a default, give to the Debentureholders notice of all uncured
defaults known to it (the term default to include the events specified above
without grace or notice), provided that, except in the case of default in the
payment of principal of or interest on any of the Debentures or in making any
sinking fund payment, the Trustee is protected in withholding such notice if its
Board of Directors (or similar body) in good faith determines that the
withholding of such notice is in the interest of the Debentureholders. (Section
10.03)
In case an Event of Default shall have occurred and be continuing, the
Trustee or the holders of at least 25% in aggregate principal amount of the
Debentures then outstanding, by notice in writing to the Company (and to the
Trustee, if given by Debentureholders), may declare to be due and payable
immediately (i) that portion of the principal amount of the Debentures equal to
the 'issue price' of the Debentures plus accrued amortization of the original
issue discount on the Debentures calculated using the 'interest' method
(computed in accordance with generally accepted accounting principles in effect
on the date of the Indenture) from March 15, 1983 to the date of acceleration
and (ii) interest to the date of acceleration. Such declaration may be annulled
and past defaults (except, unless theretofore cured, a default in payment of
principal of or interest on the Debentures or failure to make any sinking fund
payment) may be waived by the holders of a majority in principal amount of
outstanding Debentures, upon the conditions provided in the Indenture. (Section
7.02)
The Indenture includes a covenant that the Company will file annually with
the Trustee a statement regarding compliance by the Company with the terms
thereof and specifying the occurrence of any defaults of which the signers may
have knowledge. (Sections 6.05 and 15.04)
MODIFICATION OF THE INDENTURE
Under the Indenture, the rights and obligations of the Company and the
rights of Debentureholders may be modified by the Company and the Trustee only
with the consent of the holders of a majority in principal amount of the
Debentures then outstanding; but no extension of the maturity of any Debentures,
or reduction in the interest rate or extension of the time of payment of
interest, or
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any change in the sinking fund requirements, or any other modification
in the terms of payment of the principal of or interest on the
Debentures or reducing the percentage required for modification of the
Indenture will be effective against any Debentureholder without his or her
consent. (Section 14.02)
SUCCESSOR CORPORATION
The Company may not consolidate with, merge into or transfer all or
substantially all of its assets to, another corporation unless such corporation
expressly assumes all of the obligations of the Company under the Debentures and
the Indenture. (Article 13)
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged and cancelled upon payment or redemption
of all the Debentures or may be discharged and cancelled upon the written
request of the Company upon deposit with the Trustee, within not more than six
months prior to the maturity of the Debentures, of funds sufficient for such
payment or redemption. (Sections 11.01 and 11.02)
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APPENDIX F
TESORO PETROLEUM CORPORATION EXECUTIVE LONG-TERM INCENTIVE PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. Tesoro Petroleum Corporation, a Delaware
corporation (hereinafter referred to as the 'Company'), hereby establishes an
incentive compensation plan to be known as the 'Tesoro Petroleum Corporation
Executive Long-Term Incentive Plan' (hereinafter referred to as the 'Plan'), as
set forth in this document. The Plan permits the grant of Nonqualified Stock
Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units, and
Performance Shares.
Subject to ratification by an affirmative vote of a majority of Shares, the
Plan shall become effective as of September 15, 1993 (the 'Effective Date'), and
shall remain in effect as provided in Section 1.3 herein.
1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the
success and enhance the value of the Company by linking the personal interests
of Participants to those of Company shareholders, and by providing Participants
with an incentive for outstanding performance.
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of Participants upon whose
judgment, interest, and special effort the successful conduct of its operation
largely is dependent.
1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date,
as described in Section 1.1 herein, and shall remain in effect, subject to the
right of the Board of Directors to terminate the Plan at any time pursuant to
Article 14 herein, until all Shares subject to it shall have been purchased or
acquired according to the Plan's provisions. However, in no event may an Award
be granted under the Plan on or after September 15, 2003.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below and, when the meaning is intended, the initial letter of the word is
capitalized:
(a) 'Affiliated SAR' means a SAR that is granted in connection with a
related Option, and which will be deemed to automatically be exercised
simultaneous with the exercise of the related Option.
(b) 'Award' means, individually or collectively, a grant under this Plan
of Nonqualified Stock Options, Incentive Stock Options, SARs,
Restricted Stock, Performance Units, or Performance Shares.
(c) 'Award Agreement' means an agreement entered into by each Participant
and the Company, setting forth the terms and provisions applicable to
Awards granted to Participants under this Plan.
(d) 'Beneficial Owner' shall have the meaning ascribed to such term in
Rule 13d-3 of the General Rules and Regulations under the Exchange
Act.
(e) 'Board' or 'Board of Directors' means the Board of Directors of the
Company.
(f) 'Cause' means: (i) willful misconduct on the part of a Participant
that is materially detrimental to the Company; or (ii) the commission
by a Participant of one or more acts which constitute an indictable
crime under United States Federal, state, or local law. 'Cause' under
either (i) or (ii) shall be determined in good faith by the Committee.
(g) 'Change in Control' of the Company shall be deemed to have occured if:
(i) Any Person other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or a
corporation owned, directly or indirectly, by the
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stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company is or
becomes the Beneficial Owner, directly or indirectly, of
securities of the Company representing fifty percent (50%) or
more of the combined voting power of the Company's then
outstanding voting securities;
(ii) A majority of the Board at any time shall cease to be made up of
Qualified Directors. For purposes hereof a Qualified Director is
a director who meets any of the following criteria: (1) Was a
director immediately after the effective date of the
Reclassification (as defined in the Company's Registration
Statement on S-4, relating to the 1993 Annual Meeting of
Stockholders), including the three new directors elected in
connection therewith; (2) Was a director immediately after the
Company's 1994 Annual Meeting of Stockholders; (3) Any director
nominated for election as a director or elected to the Board by
the directors to fill a vacancy by a vote of directors, and at
the time of such nomination or election at least a majority of
the directors were qualified directors.
(iii) The shareholders of the Company approve a merger or
consolidation of the Company, with any other corporation, other
than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity)
at least fifty percent (50%) of the combined voting power of the
voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or
the shareholders of the Company approve a plan of complete
liquidation of the Company, or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets.
However, in no event shall a 'Change in Control' be deemed to
have occurred with respect to a Participant, if the Participant
is part of a purchasing group which consummates the
Change-in-Control transaction. A Participant shall be deemed
'part of a purchasing group' for purposes of the preceding
sentence if the Participant is an equity participant in the
purchasing company or group (except for: (i) passive ownership of
less than three percent (3%) of the stock of the purchasing
company; or (ii) ownership of equity participation in the
purchasing company or group which is otherwise not significant,
as determined prior to the Change in Control by a majority of the
nonemployee continuing Directors).
(h) 'Code' means the Internal Revenue Code of 1986, as amended from time
to time.
(i) 'Committee' means the committee, as specified in Article 3, appointed
by the Board to administer the Plan with respect to grants of Awards.
(j) 'Company' means Tesoro Petroleum Corporation, a Delaware corporation,
or any successor thereto as provided in Article 17 herein.
(k) 'Director' means any individual who is a member of the Board of
Directors of the Company.
(l) 'Disability' means a permanent and total disability, within the
meaning of Code Section 22(e)(3), as determined by the Committee in
good faith, upon receipt of sufficient competent medical advice from
one or more individuals, selected by the Committee, who are qualified
to give professional medical advice.
(m) 'Employee' means any full-time, nonunion employee of the Company or of
the Company's Subsidiaries. Directors who are not otherwise employed
by the Company shall not be considered Employees under this Plan.
(n) 'Exchange Act' means the Securities Exchange Act of 1934, as amended
from time to time, or any successor Act thereto.
(o) 'Fair Market Value' shall mean the average of the highest and lowest
quoted selling prices for Shares on the relevant date, or (if there
were no sales on such date) the weighted average
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of the means between the highest and lowest quoted selling prices on
the nearest day before and the nearest day after the relevant date, as
determined by the Committee.
(p) 'Freestanding SAR' means a SAR that is granted independently of any
Options.
(q) 'Incentive Stock Option' or 'ISO' means an option to purchase Shares,
granted under Article 6 herein, which is designated as an Incentive
Stock Option and is intended to meet the requirements of Section 422
of the Code.
(r) 'Insider' shall mean an Employee who is, on the relevant date, an
officer, director, or ten percent (10%) beneficial owner of the
Company, as defined under Section 16 of the Exchange Act.
(s) 'Nonqualified Stock Option' or 'NQSO' means an option to purchase
Shares, granted under Article 6 herein, which is not intended to be an
Incentive Stock Option.
(t) 'Option' means an Incentive Stock Option or a Nonqualified Stock
Option.
(u) 'Option Price' means the price at which a Share may be purchased by a
Participant pursuant to an Option, as determined by the Committee.
(v) 'Participant' means an Employee of the Company who has outstanding an
Award granted under the Plan.
(w) 'Performance Unit' means an Award granted to an Employee, as described
in Article 9 herein.
(x) 'Performance Share' means an Award granted to an Employee, as
described in Article 9 herein.
(y) 'Period of Restriction' means the period during which the transfer of
Shares of Restricted Stock is limited in some way (based on the
passage of time, the achievement of performance goals, or upon the
occurrence of other events as determined by the Committee, at its
discretion), and the Shares are subject to a substantial risk of
forfeiture, as provided in Article 8 herein.
(z) 'Person' shall have the meaning ascribed to such term in Section
3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a 'group' as defined in Section 13(d).
(aa) 'Restricted Stock' means an Award granted to a Participant pursuant
to Article 8 herein.
(ab) 'Retirement' shall have the meaning ascribed to it in the
tax-qualified pension plan of the Company.
(ac) 'Shares' means the shares of common stock of the Company.
(ad) 'Subsidiary' means any corporation in which the Company owns directly,
or indirectly through subsidiaries, at least fifty percent (50%) of
the total combined voting power of all classes of stock, or any other
entity (including, but not limited to, partnerships and joint
ventures) in which the Company owns at least fifty percent (50%) of
the combined equity thereof.
(ae) 'Stock Appreciation Right' or 'SAR' means an Award, granted alone or
in connection with a related Option, designated as a SAR, pursuant to
the terms of Article 7 herein.
(af) 'Tandem SAR' means a SAR that is granted in connection with a related
Option, the exercise of which shall require forfeiture of the right
to purchase a Share under the related Option (and when a Share is
purchased under the Option, the Tandem SAR shall similarly be
cancelled).
(ag) 'Window Period' means the period beginning on the third business day
following the date of public release of the Company's quarterly sales
and earnings information, and ending on the twelfth business day
following such date.
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ARTICLE 3. ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Executive
Long-Term Compensation Committee of the Board, or by any other Committee
appointed by the Board consisting of all Directors who are not Employees (the
'Committee'). The members of the Committee shall be appointed from time to time
by, and shall serve at the discretion of, the Board of Directors.
The Committee shall be comprised solely of Directors who are eligible to
administer the Plan pursuant to Rule 16b-3(c)(2) under the Exchange Act.
However, if for any reason the Committee does not qualify to administer the
Plan, as contemplated by Rule 16b-3(c)(2) of the Exchange Act, the Board of
Directors may appoint a new Committee so as to comply with Rule 16b-3(c)(2).
3.2 AUTHORITY OF THE COMMITTEE. The Committee shall have full power
except as limited by law or by the Articles of Incorporation or Bylaws of the
Company, and subject to the provisions herein, to determine the size and types
of Awards; to determine the terms and conditions of such Awards in a manner
consistent with the Plan; to construe and interpret the Plan and any agreement
or instrument entered into under the Plan; to establish, amend, or waive rules
and regulations for the Plan's administration; and (subject to the provisions of
Article 14 herein) to amend the terms and conditions of any outstanding Award to
the extent such terms and conditions are within the discretion of the Committee
as provided in the Plan. Further, the Committee shall make all other
determinations which may be necessary or advisable for the administration of the
Plan. As permitted by law, the Committee may delegate its authorities as
identified hereunder.
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders or
resolutions of the Board of Directors shall be final, conclusive, and binding on
all persons, including the Company, its stockholders, Employees, Participants,
and their estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3
herein, the total number of Shares available for grant under the Plan may not
exceed 1,250,000. These Shares may be either authorized but unissued or
reacquired Shares.
The following rules will apply for purposes of the determination of the
number of Shares available for grant under the Plan:
(a) While an Award is outstanding, it shall be counted against the
authorized pool of Shares, regardless of its vested status.
(b) The grant of an Option or Restricted Stock shall reduce the Shares
available for grant under the Plan by the number of Shares subject to
such Award.
(c) The grant of a Tandem SAR shall reduce the number of Shares available
for grant by the number of Shares subject to the related Option (i.e.,
there is no double counting of Options and their related Tandem SARs).
(d) The grant of an Affiliated SAR shall reduce the number of Shares
available for grant by the number of Shares subject to the SAR, in
addition to the number of Shares subject to the related Option.
(e) The grant of a Freestanding SAR shall reduce the number of Shares
available for grant by the number of Freestanding SARs granted.
(f) The Committee shall in each case determine the appropriate number of
Shares to deduct from the authorized pool in connection with the grant
of Performance Units and/or Performance Shares.
4.2 LAPSED AWARDS. If any Award granted under this Plan is cancelled,
terminates, expires, or lapses for any reason (with the exception of the
termination of a Tandem SAR upon exercise of the related Option or the
termination of a related Option upon exercise of the corresponding Tandem
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SAR), any Shares subject to such Award again shall be available for the grant of
an Award under the Plan. However, in the event that prior to the Award's
cancellation, termination, expiration, or lapse, the holder of the Award at any
time received one or more 'benefits of ownership' pursuant to such Award (as
defined by the Securities and Exchange Commission, pursuant to any rule or
interpretation promulgated under Section 16 of the Exchange Act), the Shares
subject to such Award shall not be made available for regrant under the Plan.
4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger,
reorganization, consolidation, recapitalization, separation, liquidation, stock
dividend, split-up, Share combination, or other change in the corporate
structure of the Company affecting the Shares, such adjustment shall be made in
the number and class of Shares which may be delivered under the Plan, and in the
number and class of and/or price of Shares subject to outstanding Awards granted
under the Plan, as may be determined to be appropriate and equitable by the
Committee, in its sole discretion, to prevent dilution or enlargement of rights;
and provided that the number of Shares subject to any Award shall always be a
whole number.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. Persons eligible to participate in this Plan include all
full-time, active Employees of the Company and its Subsidiaries, as determined
by the Committee, including Employees who are members of the Board, but
excluding Directors who are not Employees.
5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all eligible Employees, those to
whom Awards shall be granted and shall determine the nature and amount of each
Award.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to Employees at any time and from time to time as shall
be determined by the Committee. The Committee shall have discretion in
determining the number of Shares subject to Options granted to each Participant.
The Committee may grant ISOs, NQSOs, or a combination thereof.
6.2 AWARD AGREEMENT. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as the
Committee shall determine. The Option Agreement also shall specify whether the
Option is intended to be an ISO within the meaning of Section 422 of the Code,
or a NQSO whose grant is intended not to fall under the Code provisions of
Section 422.
6.3 OPTION PRICE. The Option Price for each grant of an Option shall be
determined by the Committee; provided that the Option Price shall not be less
than the Fair Market Value of a Share on the date the Option is granted unless
such Option is granted in connection with a deferral election pursuant to
Article XI herein.
6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the
Committee shall determine at the time of grant; provided, however, that no
Option shall be exercisable later than the tenth (10th) anniversary date of its
grant.
6.5 EXERCISE OF OPTIONS. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for
each grant or for each Participant. However, in no event may any Option granted
under this Plan become exercisable prior to six (6) months following the date of
its grant.
6.6 PAYMENT. Options shall be exercised by the delivery of a written
notice of exercise to the Company, setting forth the number of Shares with
respect to which the Option is to be exercised, accompanied by full payment for
the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) by tendering
previously acquired Shares having an aggregate Fair
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Market Value at the time of exercise equal to the total Option Price (provided
that the Shares which are tendered must have been held by the Participant for at
least six (6) months prior to their tender to satisfy the Option Price), or (c)
by a combination of (a) and (b).
The Committee also may allow cashless exercise as permitted under Federal
Reserve Board's Regulation T, subject to applicable securities law restrictions,
or by any other means which the Committee determines to be consistent with the
Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).
6.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option under
the Plan as it may deem advisable, including, without limitation, restrictions
under applicable Federal securities laws, under the requirements of any stock
exchange or market upon which such Shares are then listed and/or traded, and
under any blue sky or state securities laws applicable to such Shares.
6.8 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT.
(a) TERMINATION BY DEATH. In the event the employment of a Participant is
terminated by reason of death, all outstanding Options which are
exercisable as of the date of death shall remain exercisable at any
time prior to their expiration date, or for one (1) year after the date
of death, whichever period is shorter, by such person or persons as
shall have been named as the Participant's beneficiary, or by such
persons that have acquired the Participant's rights under the Option by
will or by the laws of descent and distribution.
Options which are not exercisable as of the date of death shall be
forfeited and returned to the Company; provided, however, that the
Committee may, at its sole discretion, provide for accelerated vesting
of unvested Options upon such terms as the Committee deems advisable.
(b) TERMINATION BY DISABILITY. In the event the employment of a
Participant is terminated by reason of Disability, all outstanding
Options which are exercisable as of the date the Committee determines
the definition of Disability to have been satisfied shall remain
exercisable at any time prior to their expiration date, or for one (1)
year after the date that the Committee determines the definition of
Disability to have been satisfied, whichever period is shorter.
Options which are not exercisable as of the date the Committee
determines the definition of Disability to have been satisified
shall be forfeited and returned to the Company; provided, however,
that the Committee may, at its sole discretion, provide for
accelerated vesting of unvested Options upon such terms as the
Committee deems advisable.
(c) TERMINATION BY RETIREMENT. In the event the employment of a
Participant is terminated by reason of Retirement, all outstanding
Options which are exercisable as of the date of Retirement shall remain
exercisable at any time prior to their expiration date, or for three
(3) years after the effective date of Retirement, whichever period is
shorter. Options which are not exercisable as of the date of Retirement
shall be forfeited and return to the Company; provided, however, that
the Committee may, at its sole discretion, provide for accelerated
vesting of unvested Options upon such terms as the Committee deems
advisable.
(d) EMPLOYMENT TERMINATION FOLLOWED BY DEATH. In the event that a
Participant's employment terminates by reason of Disability or
Retirement, and within the exercise period following such termination
the Participant dies, then the remaining exercise period under
outstanding vested Options shall equal the longer of (i) one (1) year
following death; or (ii) the remaining portion of the exercise period
which was triggered by the employment termination. Such Options shall
be exercisable by such person or persons who shall have been named as
the
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Participant's beneficiary, or by such persons who have acquired the
Participant's rights under the Option by will or by the laws of descent
and distribution.
(e) EXERCISE LIMITATIONS ON ISOS. In the case of ISOs, the tax treatment
prescribed under Section 422 of the Internal Revenue Code of 1986, as
amended, may not be available if the Options are not exercised within
the Section 422 prescribed time periods after each of the various types
of employment termination.
6.9 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a
Participant shall terminate for any reason other than the reasons set forth in
Section 6.8 (and other than for Cause), all Options held by the Participant
which are not vested as of the effective date of employment termination
immediately shall be forfeited to the Company (and shall once again become
available for grant under the Plan). However, the Committee, in its sole
discretion, shall have the right to immediately vest all or any portion of such
Options, subject to such terms as the Committee, in its sole discretion, deems
appropriate.
Options which are vested as of the effective date of employment termination
may be exercised by the Participant within the period beginning on the effective
date of employment termination, and ending three (3) months after such date.
If the employment of a Participant shall be terminated by the Company for
Cause, all outstanding Options held by the Participant immediately shall be
forfeited to the Company and no additional exercise period shall be allowed,
regardless of the vested status of the Options.
6.10 NONTRANSFERABILITY OF OPTIONS. No Option granted under the Plan may
be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all
Options granted to a Participant under the Plan shall be exercisable during his
or her lifetime only by such Participant.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1 GRANT OF SARS. Subject to the terms and conditions of the Plan, a SAR
may be granted to an Employee at any time and from time to time as shall be
determined by the Committee. The Committee may grant Affiliated SARs,
Freestanding SARs, Tandem SARs, or any combination of these forms of SARs.
The Committee shall have complete discretion in determining the number of
SARs granted to each Participant (subject to Article 4 herein) and, consistent
with the provisions of the Plan, in determining the terms and conditions
pertaining to such SARs. However, the grant price of a Freestanding SAR shall be
at least equal to the Fair Market Value of a Share on the date of grant of the
SAR. The grant price of Tandem SARs and Affiliated SARs shall equal the Option
Price of the related Option. In no event shall any SAR granted hereunder become
exercisable within the first six (6) months of its grant.
7.2 EXERCISE OF TANDEM SARS. Tandem SARs may be exercised for all or part
of the Shares subject to the related Option upon the surrender of the right to
exercise the equivalent portion of the related Option. A Tandem SAR may be
exercised only with respect to the Shares for which its related Option is then
exercisable.
Notwithstanding any other provision of this Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR
will expire no later than the expiration of the underlying ISO; (ii) the value
of the payout with respect to the Tandem SAR may be for no more than one hundred
percent (100%) of the difference between the Option Price of the underlying ISO
and the Fair Market Value of the Shares subject to the underlying ISO at the
time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only
when the Fair Market Value of the Shares subject to the ISO exceeds the Option
Price of the ISO.
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7.3 EXERCISE OF AFFILIATED SARS. Affiliated SARs shall be deemed to be
exercised upon the exercise of the related Options. The deemed exercise of
Affiliated SARs shall not necessitate a reduction in the number of related
options.
7.4 EXERCISE OF FREESTANDING SARS. Freestanding SARs may be exercised
upon whatever terms and conditions the Committee, in its sole discretion,
imposes upon them.
7.5 SAR AGREEMENT. Each SAR grant shall be evidenced by an Award
Agreement that shall specify the grant price, the term of the SAR, and such
other provisions as the Committee shall determine.
7.6 TERM OF SARS. The term of a SAR granted under the Plan shall be
determined by the Committee, in its sole discretion; provided, however, that
such term shall not exceed ten (10) years.
7.7 PAYMENT OF SAR AMOUNT. Upon exercise of a SAR, a Participant shall be
entitled to receive payment from the Company in an amount determined by
multiplying:
(a) The difference between the Fair Market Value of a Share on the date of
exercise over the grant price; by
(b) The number of Shares with respect to which the SAR is exercised.
At the discretion of the Committee, the payment upon SAR exercise may be in
cash, in Shares of equivalent value, or in some combination thereof.
7.8 RULE 16B-3 REQUIREMENTS. Notwithstanding any other provision of the
Plan, the Committee may impose such conditions on exercise of a SAR (including,
without limitation, the right of the Committee to limit the time of exercise to
specified periods) as may be required to satisfy the requirements of Section 16
(or any successor rule) of the Exchange Act.
For example, if the Participant is an Insider, the ability of the
Participant to exercise SARs for cash will be limited to Window Periods.
However, if the Committee determines that the Participant is not an Insider, or
if the securities laws change to permit greater freedom of exercise of SARs,
then the Committee may permit exercise at any point in time, to the extent the
SARs are otherwise exercisable under the Plan.
7.9 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT.
(a) TERMINATION BY DEATH. In the event the employment of a Participant is
terminated by reason of death, all outstanding SARs which are
exercisable as of the date of death shall remain exercisable at any
time prior to their expiration date, or for one (1) year after the date
of death, whichever period is shorter, by such person or persons as
shall have been named as the Participant's beneficiary, or by such
persons that have acquired the Participant's rights under the SAR by
will or by the laws of descent and distribution.
SARs which are not exercisable as of the date of death shall be
forfeited and returned to the Company; provided, however, that the
Committee may, at its sole discretion, provide for accelerated vesting
of unvested SARs upon such terms as the Committee deems advisable.
(b) TERMINATION BY DISABILITY. In the event the employment of a
Participant is terminated by reason of Disability, all outstanding SARs
which are exercisable as of the date the Committee determines the
definition of Disability to have been satisfied shall remain
exercisable at any time prior to their expiration date, or for one (1)
year after the date that the Committee determines the definition of
Disability to have been satisfied, whichever period is shorter.
SARs which are not exercisable as of the date the Committee determines
the definition of Disability to have been satisfied shall be forfeited
and returned to the Company; provided, however, that the Committee may,
at its sole discretion, provide for accelerated vesting of unvested
SARs upon such terms as the Committee deems advisable.
(c) TERMINATION BY RETIREMENT. In the event the employment of a
Participant is terminated by reason of Retirement, all outstanding SARs
which are exercisable as of the date of Retirement
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shall remain exercisable at any time prior to their expiration date, or
for three (3) years after the effective date of Retirement, whichever
period is shorter.
SARs which are not exercisable as of the date of Retirement shall be
forfeited and returned to the Company; provided, however, that the
Committee may, at its sole discretion, provide for accelerated vesting
of unvested SARs upon such terms as the Committee deems advisable.
(d) EMPLOYMENT TERMINATION FOLLOWED BY DEATH. In the event that a
Participant's employment terminates by reason of Disability or
Retirement, and within the exercise period following such termination
the Participant dies, then the remaining exercise period under
outstanding vested SARs shall equal the longer of: (i) one (1) year
following death; or (ii) the remaining portion of the exercise period
which was triggered by the employment termination. Such SARs shall be
exercisable by such person or persons who shall have been named as the
Participant's beneficiary, or by such persons who have acquired the
Participant's rights under the SAR by will or by the laws of descent
and distribution.
7.10 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a
Participant shall terminate for any reason other than the reasons set forth in
Section 7.9 (and other than for Cause), all SARs held by the Participant which
are not vested as of the effective date of employment termination immediately
shall be forfeited to the Company (and shall once again become available for
grant under the Plan). However, the Committee, in its sole discretion, shall
have the right to immediately vest all or any portion of such SARs, subject to
such terms as the Committee, in its sole discretion, deems appropriate.
SARs which are vested as of the effective date of employment termination
may be exercised by the Participant within the period beginning on the effective
date of employment termination, and ending three (3) months after such date.
If the employment of a Participant shall be terminated by the Company for
Cause, all outstanding SARs held by the Participant immediately shall be
forfeited to the Company and no additional exercise period shall be allowed,
regardless of the vested status of the SARs.
7.11 NONTRANSFERABILITY OF SARS. No SAR granted under the Plan may be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all SARs
granted to a Participant under the Plan shall be exercisable during his or her
lifetime only by such Participant.
ARTICLE 8. RESTRICTED STOCK
8.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Shares of
Restricted Stock to eligible Employees in such amounts as the Committee shall
determine.
8.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be
evidenced by a Restricted Stock Agreement that shall specify the Period of
Restriction, or Periods, the number of Restricted Stock Shares granted, and such
other provisions as the Committee shall determine.
8.3 TRANSFERABILITY. Except as provided in this Article 8, the Shares of
Restricted Stock granted herein may not be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated until the end of the applicable Period of
Restriction established by the Committee and specified in the Restricted Stock
Agreement, or upon earlier satisfaction of any other conditions, as specified by
the Committee in its sole discretion and set forth in the Restricted Stock
Agreement. However, in no event may any Restricted Stock granted under the Plan
become vested in a Participant prior to six (6) months following the date of its
grant. All rights with respect to the Restricted Stock granted to a Participant
under the Plan shall be available during his or her lifetime only to such
Participant.
8.4 OTHER RESTRICTIONS. The Committee shall impose such other conditions
and/or restrictions on any Shares of Restricted Stock granted pursuant to the
Plan as it may deem advisable including, without limitation, a requirement that
Participants pay a stipulated purchase price for each Share of
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<PAGE>
Restricted Stock, restrictions based upon the achievement of specific
performance goals (Company-wide, divisional, and/or individual), and/or
restrictions under applicable Federal or state securities laws; and may legend
the certificates representing Restricted Stock to give appropriate notice of
such restrictions.
8.5 CERTIFICATE LEGEND. In addition to any legends placed on certificates
pursuant to Section 8.4 herein, each certificate representing Shares of
Restricted Stock granted pursuant to the Plan may bear the following legend:
'The sale or other transfer of the Shares of stock represented
by this certificate, whether voluntary, involuntary, or by
operation of law, is subject to certain restrictions on transfer
as set forth in the Tesoro Petroleum Corporation Executive Long-
Term Incentive Plan, and in a Restricted Stock Agreement. A copy
of the Plan and such Restricted Stock Agreement may be obtained
from Tesoro Petroleum Corporation.'
The Company shall have the right to retain the certificates representing
Shares of Restricted Stock in the Company's possession until such time as all
conditions and/or restrictions applicable to such Shares have been satisfied.
8.6 REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Article
8, Shares of Restricted Stock covered by each Restricted Stock grant made under
the Plan shall become freely transferable by the Participant after the last day
of the Period of Restriction. Once the Shares are released from the
restrictions, the Participant shall be entitled to have the legend required by
Section 8.5 removed from his or her share certificate.
8.7 VOTING RIGHTS. During the Period of Restriction, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares.
8.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction,
Participants holding Shares of Restricted Stock granted hereunder shall be
entitled to receive all dividends and other distributions paid with respect to
those Shares while they are so held. If any such dividends or distributions are
paid in Shares, the Shares shall be subject to the same restrictions on
transferability and forfeitability as the Shares of Restricted Stock with
respect to which they were paid.
In the event that any dividend constitutes a 'derivative security' or an
'equity security' pursuant to Rule 16(a) under the Exchange Act, such dividend
shall be subject to a vesting period equal to the longer of: (i) the remaining
vesting period of the Shares of Restricted Stock with respect to which the
dividend is paid; or (ii) six months. The Committee shall establish procedures
for the application of this provision.
8.9 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In
the event the employment of a Participant is terminated by reason of death,
Disability, or Retirement, all unvested Shares of Restricted Stock shall
immediately be forfeited by the Participant; provided, however, that the
Committee, in its sole discretion, shall have the right to provide for
accelerated vesting of some or all unvested Shares of Restricted Stock, upon
such terms as the Committee deems advisable. The holder of the certificates of
Restricted Stock shall be entitled to have any nontransferability legends
required under Sections 8.4 and 8.5 of this Plan removed from the Share
certificates.
8.10 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a
Participant shall terminate for any reason other than those specifically set
forth in Section 8.9 herein, all Shares of Restricted Stock held by the
Participant which are not vested as of the effective date of employment
termination immediately shall be forfeited (and, subject to Section 4.2 herein,
shall once again become available for grant under the Plan.)
With the exception of a termination of employment for Cause, the Committee,
in its sole discretion, shall have the right to provide for lapsing of the
restrictions on Restricted Stock following employment termination, upon such
terms and provisions as it deems appropriate.
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ARTICLE 9. PERFORMANCE UNITS AND PERFORMANCE SHARES
9.1 GRANT OF PERFORMANCE UNITS/SHARES. Subject to the terms of the Plan,
Performance Units and Performance Shares may be granted to eligible Employees at
any time and from time to time, as shall be determined by the Committee. The
Committee shall have complete discretion in determining the number of
Performance Units and Performance Shares granted to each Participant.
9.2 VALUE OF PERFORMANCE UNITS/SHARES. Each Performance Unit shall have
an initial value that is established by the Committee at the time of grant. Each
Performance Share shall have an initial value equal to the Fair Market Value of
a Share on the date of grant. The Committee shall set performance goals in its
discretion which, depending on the extent to which they are met, will determine
the number and/or value of Performance Units/Shares that will be paid out to the
Participants. The time period during which the performance goals must be met
shall be called a 'Performance Period.' Performance Periods shall, in all cases,
exceed six (6) months in length.
9.3 EARNING OF PERFORMANCE UNITS/SHARES. After the applicable Performance
Period has ended, the holder of Performance Units/Shares shall be entitled to
receive payout on the number of Performance Units/Shares earned by the
Participant over the Performance Period, to be determined as a function of the
extent to which the corresponding performance goals have been achieved.
9.4 FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS/SHARES. Payment of
each Performance Units/Shares shall be made in a single lump sum, within
forty-five (45) calendar days following the close of the applicable Performance
Period. The Committee, in its sole discretion, may pay earned Performance
Units/Shares in the form of cash or in Shares (or in a combination thereof),
which have an aggregate Fair Market Value equal to the value of the earned
Performance Units/Shares at the close of the applicable Performance Period.
Prior to the beginning of each Performance Period, Participants may elect
to defer the receipt of Performance Unit/Share payout upon such terms as the
Committee deems appropriate.
9.5 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, RETIREMENT, OR
INVOLUNTARY TERMINATION (WITHOUT CAUSE). In the event the employment of a
Participant is terminated by reason of death, Disability, Retirement, or
involuntary termination without Cause during a Performance Period, the
Participant shall receive a prorated payout of the Performance Units/Shares. The
prorated payout shall be determined by the Committee, in its sole discretion,
and shall be based upon the length of time that the Participant held the
Performance Units/Shares during the Performance Period, and shall further be
adjusted based on the achievement of the preestablished performance goals.
Payment of earned Performance Units/Shares shall be made at the same time
payments are made to Participants who did not terminate employment during the
applicable Performance Period. However, the Committee, in its sole discretion,
shall have the right to accelerate the timing of this payout, upon such terms
and provisions as it deems appropriate.
9.6 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a
Participant's employment terminates for any reason other than those reasons set
forth in Section 9.5 herein, all Performance Units/Shares shall be forfeited by
the Participant to the Company, and shall once again be available for grant
under the Plan. However, the Committee, in its sole discretion, may provide a
payout on any or all Performance Units/Shares, upon such times and provisions as
it deems appropriate.
9.7 NONTRANSFERABILITY. Performance Units/Shares may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further a Participant's
rights under the Plan shall be exercisable during the Participant's lifetime
only by the Participant or the Participant's legal representative.
ARTICLE 10. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in
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case of his or her death before he or she receives any or all of such benefit.
Each such designation shall revoke all prior designations by the same
Participant, shall be in a form prescribed by the Company, and will be effective
only when filed by the Participant in writing with the Company during the
Participant's lifetime. In the absence of any such designation, benefits
remaining unpaid at the Participant's death shall be paid to the Participant's
estate.
ARTICLE 11. DEFERRALS
The Committee may permit a Participant to defer such Participant's receipt
of the payment of cash or the delivery of Shares that would otherwise be due to
such Participant by virtue of the exercise of an Option or SAR, the lapse or
waiver of restrictions with respect to Restricted Stock, or the satisfaction of
any requirements or goals with respect to Performance Units/Shares. If any such
deferral election is required or permitted, the Committee shall, in its sole
discretion, establish rules and procedures for such payment deferrals.
ARTICLE 12. RIGHTS OF EMPLOYEES
12.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment at any
time, nor confer upon any Participant any right to continue in the employ of the
Company.
For purposes of the Plan, transfer of employment of a Participant between
the Company and any one of its Subsidiaries (or between Subsidiaries) shall not
be deemed a termination of employment.
12.2 PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or having been so selected, to be selected to
receive a future Award.
ARTICLE 13. CHANGE IN CONTROL
Upon the occurrence of a Change in Control, unless otherwise specifically
prohibited by the terms of Section 18 herein:
(a) Any and all Options and SARs granted hereunder shall become immediately
exercisable;
(b) Any restriction periods and restrictions imposed on Restricted Shares
shall lapse, and within ten (10) business days after the occurrence of
a Change in Control, the stock certificates representing Shares of
Restricted Stock, without any restrictions or legend thereon, shall be
delivered to the applicable Participants;
(c) The target payout opportunity attainable under all outstanding
Performance Units and Performance Shares shall be deemed to have been
earned for the portion of the Performance Period(s) that passed as of
the effective date of the Change in Control. This pro rata value shall
be paid out in cash to Participants within thirty (30) days following
the effective date of the Change in Control. However, regardless of the
above, Performance Units or Performance Shares that were granted less
than six (6) months prior to the effective date of the Change in
Control shall be forfeited in their entirety, and receive no
accelerated payout.
(d) Subject to Article 14 herein, the Committee shall have the authority to
make any modifications to the Awards as determined by the Committee to
be appropriate before the effective date of the Change in Control.
(e) In the event that following the Change in Control the Shares are no
longer traded over a national public securities exchange, Participants
holding Options shall have the right to require the Company to make a
cash payment to them in exchange for their Options. Such cash payment
shall be contingent upon the Option holder surrendering his or her
Option. The amount of the cash payment shall be determined by adding
the total 'spread' on all outstanding Options. For this purpose, the
total 'spread' shall equal the sum of the differences between: (i) the
Fair Market Value of a Share on the date the Option is surrendered by
the Participant; and (ii) the Option Price applicable to each Share
held under Option.
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ARTICLE 14. AMENDMENT, MODIFICATION, AND TERMINATION
14.1 AMENDMENT, MODIFICATION, AND TERMINATION. At any time and from time
to time, the Board may terminate, amend, or modify the Plan. However, without
the approval of the stockholders of the Company (as may be required by the Code,
by the insider trading rules of Section 16 of the Exchange Act, by any national
securities exchange or system on which the Shares are then listed or reported,
or by a regulatory body having jurisdiction with respect hereto), no such
termination, amendment, or modification may:
(a) Materially increase the total number of Shares which may be issued
under this Plan, except as provided in Section 4.3 herein; or
(b) Materially modify the eligibility requirements; or
(c) Materially increase the benefits accruing under the Plan.
14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant holding such Award.
ARTICLE 15. WITHHOLDING
15.1 TAX WITHHOLDING. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, state, and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising or as a result of this Plan.
15.2 SHARE WITHHOLDING. With respect to withholding required upon the
exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock,
or upon any other taxable event hereunder, Participants may elect, subject to
the approval of the Committee, to satisfy the withholding requirement, in whole
or in part, by having the Company withhold Shares having a Fair Market Value on
the date the tax is to be determined equal to the minimum statutory total tax
which could be imposed on the transaction. All elections shall be irrevocable,
made in writing, signed by the Participant, and elections by Insiders shall
additionally comply with the applicable requirement set forth in (a) or (b) of
this Section 15.2.
(a) AWARDS HAVING EXERCISE TIMING WITHIN PARTICIPANTS' DISCRETION. The
Insider must either:
(i) Deliver written notice of the stock withholding election to the
Committee at least six (6) months prior to the date specified by
the Insider on which the exercise of the Award is to occur; or
(ii) Make the stock withholding election in connection with an
exercise of an Award which occurs during a Window Period.
(b) AWARDS HAVING A FIXED EXERCISE/PAYOUT SCHEDULE WHICH IS OUTSIDE
INSIDER'S CONTROL. The Insider must either:
(i) Deliver written notice of the stock withholding election to the
Committee at least six (6) months prior to the date on which the
taxable event (e.g., exercise or payout) relating to the Award is
scheduled to occur; or
(ii) Make the stock withholding election during a Window Period
which occurs prior to the scheduled taxable event relating to
the Award (for this purpose, an election may be made prior to
such a Window Period, provided that it becomes effective
during a Window Period occurring prior to the applicable
taxable event).
ARTICLE 16. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from
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any claim, action, suit, or proceeding to which he or she may be a party or in
which he or she may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him or her in
settlement thereof, with the Company's approval, or paid by him or her in
satisfaction of any judgment in any such action, suit, or proceeding against him
or her, provided he or she shall give the Company an opportunity, at its own
expense, to handle and defend the same before he or she undertakes to handle and
defend it on his or her own behalf.
The foregoing right of indemnification shall not be exclusive of any other
rights of indemnification to which such persons may be entitled under the
Company's Articles of Incorporation or Bylaws, as a matter of law, or otherwise,
or any power that the Company may have to indemnify them or hold them harmless.
ARTICLE 17. SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business
and/or assets of the Company.
ARTICLE 18. LEGAL CONSTRUCTION
18.1 GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
18.2 SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
18.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
Notwithstanding any other provision set forth in the Plan, if required by
the then-current Section 16 of the Exchange Act, any 'derivative security' or
'equity security' offered pursuant to the Plan to any Insider may not be sold or
transferred for at least six (6) months after the date of grant of such Award.
The terms 'equity security' and 'derivative security' shall have the meanings
ascribed to them in the then-current Rule 16(a) under the Exchange Act.
18.4 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the 1934 Act. To the extent any provision of the
plan or action by the Committee fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.
18.5 GOVERNING LAW. To the extent not preempted by Federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and governed
by the laws of the State of Texas.
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TESORO PETROLEUM CORPORATION
IMPORTANT: TENDERING PROCEDURES
Holders of Subordinated Debentures who wish to accept the Exchange Offer
and Consent to the Indenture Amendments should (i) request their broker, dealer,
commercial bank, trust company or nominee to effect the transaction for them,
(ii) complete and sign the applicable Consent and Letter of Transmittal or a
facsimile thereof, having their applicable signatures thereon guaranteed if
required by the applicable instruction in the applicable Consent and Letter of
Transmittal, and forward the applicable Consent and Letter of Transmittal,
together with the Subordinated Debentures (if not tendered by book-entry
transfer) and all other required documents, to the Exchange Agent or (iii)
comply with the guaranteed delivery procedures.
A holder who purchases $2.16 Preferred Stock, or whose purchase of $2.16
Preferred Stock is recorded on the books of the Company, after the Record Date,
and who wishes to vote on the Reclassification, the Charter Amendments and the
other proposals at the Annual Meeting, must arrange with its seller to receive a
proxy from the holder of record on the Record Date of such $2.16 Preferred
Stock.
THE EXCHANGE AGENT IS:
Bankers Trust Company
By Mail: By Hand/Overnight Courier:
Banker's Trust Company Banker's Trust Company
Corporate Trust & Agency Group Corporate Trust & Agency Group
Reorganization Department Receipt & Delivery Window
P.O. Box 1458 123 Washington St., 1st Floor
Church Street Station New York, NY 1006
New York, NY 10008-1458
By Facsimile Transmission:
(212) 250-6275
(For Eligible Institutions Only)
Confirm by telephone:
(212) 250-6270
Stockholder Inquiries:
1-800-829-5628
ADDITIONAL COPIES AND INFORMATION
Requests for additional copies of this Proxy Statement -- Prospectus or
Consent and Letters of Transmittal should be directed to the Information Agent
at its address and telephone numbers listed below. Requests for information
relating to the Recapitalization should be directed to the Information Agent.
You may also contact your broker, dealer, commercial bank or trust company for
assistance concerning the Recapitalization described herein.
THE INFORMATION AGENT FOR THE RECAPITALIZATION IS:
TOLL FREE (800) 223-2064 GEORGESON BANKS AND BROKERS CALL
& COMPANY INC. (212) 509-6240
WALL STREET PLAZA
NEW YORK, NEW YORK 10005
