<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-01209
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 7, 1996)
12,000,000 PREFERRED SECURITIES [LOGO]
PHILLIPS 66 CAPITAL I
8.24% TRUST ORIGINATED PREFERRED SECURITIES(SM) ("TOPRS(SM)")
(LIQUIDATION AMOUNT $25 PER PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED BY
PHILLIPS PETROLEUM COMPANY
---------------------
The 8.24% Trust Originated Preferred Securities (the "Preferred Securities")
offered hereby represent preferred undivided beneficial interests in the assets
of Phillips 66 Capital I, a statutory business trust formed under the laws of
the State of Delaware ("Phillips Capital Trust" or the "Trust"). Phillips
Petroleum Company, a Delaware corporation ("Phillips" or the "Company"), will
own all the common securities (the "Common Securities" and, together with the
Preferred Securities, the "Trust Securities") representing undivided beneficial
interests in the assets of Phillips Capital Trust. Phillips Capital Trust exists
for the sole purpose of issuing the Trust Securities and investing the proceeds
thereof in an equivalent amount of 8.24% Junior Subordinated Deferrable Interest
Debentures due 2036 (the "Subordinated Debt Securities") of Phillips. The
Subordinated Debt Securities and the Preferred Securities in respect of which
this Prospectus Supplement is being delivered shall be referred to herein as the
"Offered Securities." The Subordinated Debt Securities when issued will be
unsecured obligations of Phillips and will be subordinate and junior in right of
payment to certain other indebtedness of the Company, as described herein. Upon
an event of default under the Declaration (as defined herein), the holders of
Preferred Securities will have a preference over the holders of the Common
Securities with respect to payments in respect of distributions and payments
upon redemption, liquidation and otherwise.
(continued on next page)
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-5 OF THIS PROSPECTUS SUPPLEMENT FOR
CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE PREFERRED SECURITIES,
INCLUDING THE PERIOD AND CIRCUMSTANCES DURING AND UNDER WHICH PAYMENTS OF
DISTRIBUTIONS ON THE PREFERRED SECURITIES MAY BE DEFERRED AND THE RELATED UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF SUCH DEFERRAL.
The Preferred Securities have been approved for listing on the New York
Stock Exchange, Inc. (the "New York Stock Exchange"). Trading of the Preferred
Securities on the New York Stock Exchange is expected to commence within a
30-day period after the initial delivery of the Preferred Securities. See
"Underwriting."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH
IT RELATES. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) COMMISSION(2) TRUST(3)(4)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Preferred Security............................ $25.00 (3) $25.00
- -------------------------------------------------------------------------------------------------------
Total............................................. $300,000,000 (3) $300,000,000
=======================================================================================================
</TABLE>
(1) Plus accrued distributions, if any, from May 29, 1996.
(2) Phillips Capital Trust and Phillips have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(3) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Subordinated Debt Securities, Phillips
has agreed to pay to the Underwriters as compensation (the "Underwriters'
Compensation") for their arranging the investment therein of such proceeds
$.7875 per Preferred Security (or $9,450,000 in the aggregate); provided,
that such compensation for sales of 10,000 or more Preferred Securities to a
single purchaser will be $.50 per Preferred Security. Therefore, to the
extent of such sales, the actual amount of Underwriters' Compensation will
be less than the aggregate amount specified in the preceding sentence. See
"Underwriting."
(4) Expenses of the offering which are payable by Phillips are estimated to be
$250,000.
The Preferred Securities offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that delivery of the Preferred Securities will be made only in book-entry form
through the facilities of The Depository Trust Company, on or about May 29,
1996.
---------------------
MERRILL LYNCH & CO. GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO.
INCORPORATED
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
---------------------
The date of this Prospectus Supplement is May 23, 1996.
(SM) "Trust Originated Preferred Securities" and "TOPrS" are service marks of
Merrill Lynch & Co., Inc.
<PAGE> 2
(continued from previous page)
Holders of the Preferred Securities are entitled to receive cumulative cash
distributions at an annual rate of 8.24 percent of the liquidation amount of $25
per Preferred Security, accruing from the date of original issuance and payable
quarterly in arrears on March 31, June 30, September 30 and December 31 of each
year, commencing June 30, 1996 ("distributions"). The payment of distributions
out of moneys held by Phillips Capital Trust and payments on liquidation of
Phillips Capital Trust or the redemption of Preferred Securities, as set forth
below, are guaranteed by Phillips (the "Guarantee") to the extent described
herein and under "Description of Preferred Securities Guarantees" in the
accompanying Prospectus. The Guarantee covers payments of distributions and
other payments on the Preferred Securities only if and to the extent that
Phillips Capital Trust has funds available therefor which will not be the case
unless Phillips has made a payment of interest or principal or other payments on
the Subordinated Debt Securities held by Phillips Capital Trust as its sole
asset. The Guarantee, when taken together with Phillips' obligations under the
Subordinated Debt Securities and the Indenture (as defined below) and its
obligations under the Declaration (as defined below), including its liabilities
to pay costs, expenses, debts and obligations of Phillips Capital Trust (other
than with respect to the Trust Securities), provide a full and unconditional
guarantee of amounts due on the Preferred Securities. See "Risk
Factors -- Rights Under the Guarantee" herein. The obligations of Phillips under
the Guarantee are subordinate and junior in right of payment to all other
liabilities of Phillips and rank pari passu with the most senior preferred stock
issued, from time to time, if any, by Phillips. The obligations of Phillips
under the Subordinated Debt Securities are subordinate and junior in right of
payment to all present and future Senior Indebtedness (as defined herein) of
Phillips, which aggregated approximately $3.1 billion at April 30, 1996, and
rank pari passu with Phillips' other general unsecured creditors. The
Subordinated Debt Securities purchased by the Trust may be subsequently
distributed pro rata to holders of the Preferred Securities and Common
Securities in connection with the dissolution of the Trust, upon the occurrence
of certain events.
The distribution rate and the distribution payment date and other payment
dates for the Preferred Securities will correspond to the interest rate and
interest payment date and other payment dates on the Subordinated Debt
Securities, which will be the sole assets of the Trust. As a result, if
principal or interest is not paid on the Subordinated Debt Securities, no
amounts will be paid on the Preferred Securities. If Phillips does not make
principal or interest payments on the Subordinated Debt Securities, the Trust
will not have sufficient funds to make distributions on the Preferred
Securities, in which event, the Guarantee will not apply to such distributions
until the Trust has sufficient funds available therefor.
So long as Phillips shall not be in default in the payment of interest on
the Subordinated Debt Securities, Phillips has the right to defer payments of
interest on the Subordinated Debt Securities by extending the interest payment
period on the Subordinated Debt Securities at any time for up to 20 consecutive
quarters (each, an "Extension Period"). If interest payments are so deferred,
distributions will also be deferred. During such Extension Period, distributions
will continue to accrue with interest thereon (to the extent permitted by
applicable law) at an annual rate of 8.24 percent per annum compounded
quarterly, and during any Extension Period, holders of Preferred Securities will
be required to include deferred interest income in their gross income for United
States federal income tax purposes in advance of receipt of the cash
distributions with respect to such deferred interest payments. There could be
multiple Extension Periods of varying lengths throughout the term of the
Subordinated Debt Securities. See "Description of the Subordinated Debt
Securities -- Option to Extend Interest Payment Period;" "Risk Factors -- Option
to Extend Interest Payment Period" and "United States Federal Income
Taxation -- Original Issue Discount."
The Subordinated Debt Securities are redeemable by Phillips, in whole or in
part, from time to time, on or after May 29, 2001, or at any time in certain
circumstances upon the occurrence of a Tax Event (as defined herein). If
Phillips redeems Subordinated Debt Securities, the Trust must redeem Trust
Securities on a pro rata basis having an aggregate liquidation amount equal to
the aggregate principal amount of the Subordinated Debt Securities so redeemed
at $25 per Preferred Security plus accrued and unpaid distributions thereon (the
"Redemption Price") to the date fixed for redemption. See "Description of the
Preferred Securities -- Mandatory Redemption." The Preferred Securities will be
redeemed upon maturity of the Subordinated Debt Securities. In addition, upon
the occurrence of a Tax Event arising from a change in law or a change in legal
interpretation regarding tax matters, unless the Subordinated Debt Securities
are redeemed in the limited
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<PAGE> 3
circumstances described herein, the Trust shall be dissolved, with the result
that the Subordinated Debt Securities will be distributed to the holders of the
Preferred Securities, on a pro rata basis, in lieu of any cash distribution. See
"Description of the Preferred Securities -- Tax Event Redemption or
Distribution." In certain circumstances, Phillips will have the right to redeem
the Subordinated Debt Securities, which would result in the redemption by the
Trust of Trust Securities in the same amount on a pro rata basis. If the
Subordinated Debt Securities are distributed to the holders of the Preferred
Securities, Phillips will use its best efforts to have the Subordinated Debt
Securities listed on the New York Stock Exchange or on such other exchange as
the Preferred Securities are then listed. See "Description of the Preferred
Securities -- Tax Event Redemption or Distribution" and "Description of the
Subordinated Debt Securities."
In the event of the involuntary or voluntary dissolution, winding up or
termination of the Trust, the holders of the Preferred Securities will be
entitled to receive for each Preferred Security a liquidation amount of $25 plus
accrued and unpaid distributions thereon (including interest thereon) to the
date of payment, unless, in connection with such dissolution, the Subordinated
Debt Securities are distributed to the holders of the Preferred Securities. See
"Description of the Preferred Securities -- Liquidation Distribution Upon
Dissolution."
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING TRANSACTIONS, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-3
<PAGE> 4
PHILLIPS PETROLEUM COMPANY
SUMMARY HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected historical financial information
with respect to the Company for the periods indicated. This information should
be read in conjunction with the Company's consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, and Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, which are incorporated by reference into this Prospectus
Supplement. See "Incorporation of Certain Documents by Reference" in the
accompanying Prospectus. The selected historical financial information for each
of the five years in the period ended December 31, 1995, has been derived from
the audited consolidated financial statements of the Company.
<TABLE>
<CAPTION>
MILLIONS OF DOLLARS EXCEPT AS INDICATED
---------------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31 YEARS ENDED
------------------ -----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA
Sales and other operating
revenues........................ $ 3,595 3,087 13,368 12,211 12,309 11,933 12,604
Total revenues.................... $ 3,602 3,124 13,521 12,367 12,545 12,140 13,259
Income before income taxes,
extraordinary items and
cumulative effect of accounting
changes......................... $ 881 283 1,064 852 538 511 451
Net income........................ $ 695 111 469 484 243 180 258
Properties, plants and equipment
(net)........................... $ 8,539 8,177 8,493 8,042 7,961 8,489 8,298
Total assets...................... $12,236 11,562 11,978 11,453 11,035 11,468 11,473
Long-term debt.................... $ 2,910 3,076 3,097 3,106 3,208 3,718 3,876
Stockholders' equity.............. $ 3,823 3,029 3,188 2,953 2,688 2,698 2,757
Net cash provided by operating
activities...................... $ 707 352 1,596 1,203 1,308 908 1,030
Capital expenditures and
investments..................... $ 316 248 1,456 1,154 1,226 1,172 1,581
Per average common share
outstanding
Income before extraordinary
items and cumulative effect
of accounting changes........ $ 2.65 .43 1.79 1.85 .94 1.04 .38
Net income...................... $ 2.65 .43 1.79 1.85 .93 .69 .99
OTHER DATA
Shareholder return (share-price
appreciation plus reinvested
dividends)...................... 16.7% 12.8 7.9 17.0 19.8 9.5 (4.1)
Common shares outstanding at
period end (in millions)........ 262.7 261.8 262.1 261.6 261.5 260.2 259.8
Common stockholders at period end
(in thousands).................. 64.8 68.7 65.8 69.9 74.3 82.0 86.6
Employees at period end (in
thousands)...................... 17.2 18.0 17.4 18.4 19.4 21.4 22.7
</TABLE>
S-4
<PAGE> 5
RECENT DEVELOPMENTS
On May 14, 1996, the Company announced that it has entered into exclusive
discussions with Conoco Inc. ("Conoco"), a subsidiary of E.I. du Pont de Nemours
and Company, regarding the possibility of combining the Company's and Conoco's
United States refining, marketing and transportation operations through the
formation of a 50/50 joint venture to be owned equally by the Company and
Conoco. While the Company and Conoco have reached agreement on the framework for
exclusive discussions about a possible combination of these portions of their
respective businesses, there are substantial issues to be resolved before any
agreement in principle to proceed with such a combination could be reached, and
no assurance can be given, nor should any inference be drawn, that any such
agreement to proceed will in fact be reached.
RISK FACTORS
Prospective purchasers of Preferred Securities should carefully review the
information contained elsewhere in this Prospectus Supplement and in the
accompanying Prospectus and should particularly consider the following matters.
ABSENCE OF PRIOR PUBLIC MARKET
Prior to this offering, there has been no public market for the Preferred
Securities. Although the Preferred Securities have been approved for listing on
the New York Stock Exchange, there can be no assurance that an active public
market will develop for the Preferred Securities or that, if such market
develops, the market price will equal or exceed the public offering price set
forth on the cover page of this Prospectus Supplement. The public offering price
for the Preferred Securities has been determined through negotiations between
the Company and the Underwriters. Prices for the Preferred Securities will be
determined in the marketplace and may be influenced by many factors, including
the liquidity of the market for the Preferred Securities, investor perceptions
of the Company and general industry and economic conditions.
RANKING OF SUBORDINATE OBLIGATIONS UNDER THE GUARANTEE AND SUBORDINATED DEBT
SECURITIES
Phillips' obligations under the Guarantee are subordinate and junior in
right of payment to all liabilities of Phillips and rank pari passu with the
most senior preferred stock issued, if any, from time to time by Phillips. The
obligations of Phillips under the Subordinated Debt Securities are subordinate
and junior in right of payment to all present and future Senior Indebtedness of
Phillips and rank pari passu with obligations to or rights of Phillips' other
general unsecured creditors. No payment of principal of (including redemption
payments, if any), premium, if any, or interest on the Subordinated Debt
Securities may be made if (i) any Senior Indebtedness of Phillips is not paid
when due and any applicable grace period with respect to such default has ended
with such default not having been cured or waived or ceasing to exist, or (ii)
the maturity of any Senior Indebtedness has been accelerated because of a
default. As of April 30, 1996, Senior Indebtedness aggregated approximately $3.1
billion. There are no terms in the Preferred Securities, the Subordinated Debt
Securities or the Guarantee that limit Phillips' ability to incur additional
indebtedness, including indebtedness that ranks senior to the Subordinated Debt
Securities and the Guarantee. See "Description of the Preferred Securities
Guarantees -- Status of the Preferred Securities Guarantees" and "Description of
the Subordinated Debt Securities" in the accompanying Prospectus, and
"Description of the Subordinated Debt Securities -- Subordination" herein.
RIGHTS UNDER THE GUARANTEE
The Guarantee will be qualified as an indenture under the Trust Indenture
Act. The Bank of New York will act as indenture trustee under the Guarantee for
the purposes of compliance with the provisions of the Trust Indenture Act (the
"Guarantee Trustee"). The Guarantee Trustee will hold the Guarantee for the
benefit of the holders of the Preferred Securities.
S-5
<PAGE> 6
The Guarantee guarantees to the holders of the Preferred Securities the
payment of (i) any accrued and unpaid distributions that are required to be paid
on the Preferred Securities, to the extent the Trust has funds available
therefor, (ii) the Redemption Price, including all accrued and unpaid
distributions with respect to Preferred Securities called for redemption by the
Trust, to the extent the Trust has funds available therefor, and (iii) upon a
voluntary or involuntary dissolution, winding-up or termination of the Trust
(other than in connection with the distribution of Subordinated Debt Securities
to the holders of Preferred Securities or a redemption of all the Preferred
Securities), the lesser of (a) the aggregate of the liquidation amount and all
accrued and unpaid distributions on the Preferred Securities to the date of the
payment to the extent the Trust has funds available therefor or (b) the amount
of assets of the Trust remaining available for distribution to holders of the
Preferred Securities in liquidation of the Trust. The holders of a majority in
liquidation amount of the Preferred Securities have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Guarantee Trustee or to direct the exercise of any trust or power conferred
upon the Guarantee Trustee under the Guarantee. Notwithstanding the foregoing,
any holder of Preferred Securities may institute a legal proceeding directly
against Phillips to enforce such holders' rights to receive payment under the
Guarantee without first instituting a legal proceeding against the Trust, the
Guarantee Trustee or any other person or entity. If Phillips were to default on
its obligation to pay amounts payable on the Subordinated Debt Securities or
otherwise, the Trust would lack available funds for the payment of distributions
or amounts payable on redemption of the Preferred Securities or otherwise, and,
in such event, holders of the Preferred Securities would not be able to rely
upon the Guarantee for payment of such amounts. Instead, holders of the
Preferred Securities would rely on the enforcement (1) by the Institutional
Trustee of its rights as registered holder of the Subordinated Debt Securities
against Phillips pursuant to the terms of the Subordinated Debt Securities or
(2) by such holder of its right against Phillips to enforce payments on the
Subordinated Debt Securities. See "Description of the Preferred Securities
Guarantees" and "Description of the Subordinated Debt Securities" in the
accompanying Prospectus. The Declaration provides that each holder of Preferred
Securities, by acceptance thereof, agrees to the provisions of the Guarantee,
including the subordination provisions thereof, and the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Declaration Event of Default (as defined herein) occurs and is
continuing, then the holders of Preferred Securities would rely on the
enforcement by the Institutional Trustee of its rights as a holder of the
Subordinated Debt Securities against Phillips. In addition, the holders of a
majority in liquidation amount of the Preferred Securities will have the right
to direct the time, method, and place of conducting any proceeding for any
remedy available to the Institutional Trustee or to direct the exercise of any
trust or power conferred upon the Institutional Trustee under the Declaration,
including the right to direct the Institutional Trustee to exercise the remedies
available to it as a holder of the Subordinated Debt Securities. If the
Institutional Trustee fails to enforce its rights under the Subordinated Debt
Securities, a holder of Preferred Securities may institute a legal proceeding
directly against Phillips to enforce the Institutional Trustee's rights under
the Subordinated Debt Securities without first instituting any legal proceeding
against the Institutional Trustee or any other person or entity. Notwithstanding
the foregoing, if a Declaration Event of Default has occurred and is continuing
and such event is attributable to the failure of Phillips to pay interest or
principal on the Subordinated Debt Securities on the date such interest or
principal is otherwise payable (or in the case of redemption, on the redemption
date), then a holder of Preferred Securities may directly institute a proceeding
for enforcement of payment to such holder of the principal of or interest on the
Subordinated Debt Securities having a principal amount equal to the aggregate
liquidation amount of the Preferred Securities of such holder (a "Direct
Action") on or after the respective due date specified in the Subordinated Debt
Securities. In connection with such Direct Action, Phillips will be subrogated
to the rights of such holder of Preferred Securities under the Declaration to
the extent of any payment made by Phillips to such holder of Preferred
Securities in such Direct Action. The holders of Preferred Securities will not
be able to exercise directly any other remedy available to the holders of the
Subordinated Debt Securities. See "Description of the Preferred
Securities -- Declaration Events of Default."
S-6
<PAGE> 7
OPTION TO EXTEND INTEREST PAYMENT PERIOD
Phillips has the right under the Indenture (as such term is defined in
"Description of the Subordinated Debt Securities" herein) to defer payments of
interest on the Subordinated Debt Securities by extending the interest payment
period at any time, and from time to time, on the Subordinated Debt Securities.
As a consequence of such an extension, quarterly distributions on the Preferred
Securities would be deferred (but would continue to accrue, despite such
deferral, with interest thereon compounded quarterly) by the Trust during any
such extended interest payment period. Such right to extend the interest payment
period for the Subordinated Debt Securities is limited to a period not exceeding
20 consecutive quarters. In the event that Phillips exercises this right to
defer interest payments, then (a) Phillips shall not declare or pay dividends
on, or make a distribution with respect to, or redeem, purchase or acquire, or
make a liquidation payment with respect to, any of its capital stock (other than
(i) purchases or acquisitions of shares of Phillips Common Stock in connection
with the satisfaction by Phillips of its obligations under any employee benefit
plans, (ii) as a result of a reclassification of Phillips capital stock or the
exchange or conversion of one class or series of Phillips' capital stock for
another class or series of Phillips capital stock or (iii) the purchase of
fractional interests in shares of Phillips' capital stock pursuant to the
conversion or exchange provisions of such Phillips capital stock or the security
being converted or exchanged), (b) Phillips shall not make any payment of
interest, principal or premium, if any, on or repay, repurchase or redeem any
debt securities issued by Phillips that rank pari passu with or junior to the
Subordinated Debt Securities and (c) Phillips shall not make any guarantee
payments with respect to the foregoing (other than pursuant to the Guarantee).
Prior to the termination of any such extension period, Phillips may further
extend the interest payment period; provided, that such Extension Period,
together with all such previous and further extensions thereof, may not exceed
20 consecutive quarters or extend beyond the maturity of the Subordinated Debt
Securities. Upon the termination of any Extension Period and the payment of all
amounts then due, Phillips may commence a new Extension Period, subject to the
above requirements. See "Description of the Preferred Securities --
Distributions" and "Description of the Subordinated Debt Securities -- Option to
Extend Interest Payment Period."
Should Phillips exercise its right to defer payments of interest by
extending the interest payment period, each holder of Preferred Securities will
continue to accrue income (as original issue discount ("OID")) in respect of the
deferred interest allocable to its Preferred Securities for United States
federal income tax purposes, which will be allocated but not distributed, to
holders of record of Preferred Securities. As a result, each such holder of
Preferred Securities will recognize income for United States federal income tax
purposes in advance of the receipt of cash and will not receive the cash from
Phillips Capital Trust related to such income if such holder disposes of its
Preferred Securities prior to the record date for the date on which
distributions of such amounts are made. Phillips has no current intention of
exercising its right to defer payments of interest by extending the interest
payment period on the Subordinated Debt Securities. However, should Phillips
determine to exercise such right in the future, the market price of the
Preferred Securities is likely to be affected. A holder that disposes of its
Preferred Securities during an Extension Period, therefore, might not receive
the same return on its investment as a holder that continues to hold its
Preferred Securities. In addition, as a result of the existence of Phillips'
right to defer interest payments, the market price of the Preferred Securities
(which represent an undivided beneficial interest in the Subordinated Debt
Securities) may be more volatile than other securities on which OID accrues that
do not have such rights. See "United States Federal Income Taxation -- Original
Issue Discount."
PROPOSED TAX LEGISLATION
On March 19, 1996, President Clinton proposed certain tax law changes that
would, among other things, generally deny corporate issuers a deduction for
interest in respect of certain debt obligations issued on or after December 7,
1995 (the "Proposed Legislation") if such debt obligations have a maximum term
in excess of twenty years and are not shown as indebtedness on the issuer's
applicable consolidated balance sheet. On March 29, 1996, Senate Finance
Committee Chairman William V. Roth, Jr. and House Ways and Means Committee
Chairman Bill Archer issued a joint statement (the "Joint Statement") indicating
their intent that certain legislative proposals initiated by the Clinton
administration, including the Proposed Legislation, that
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<PAGE> 8
may be adopted by either of the tax-writing committees of Congress would have an
effective date that is no earlier than the date of "appropriate Congressional
action." Based upon the Joint Statement, it is expected that if the Proposed
Legislation were to be enacted, such legislation would not apply to the
Subordinated Debt Securities. There can be no assurances, however, that the
effective date guidance contained in the Joint Statement will be incorporated
into the Proposed Legislation, if enacted, or that other legislation enacted
after the date hereof will not otherwise adversely affect the ability of the
Company to deduct the interest payable on the Subordinated Debt Securities.
Accordingly, there can be no assurance that a Tax Event will not occur. See
"Description of the Preferred Securities -- Tax Event Redemption or
Distribution."
TAX EVENT REDEMPTION OR DISTRIBUTION
Upon the occurrence of a Tax Event, Phillips Capital Trust shall be
dissolved, except in the limited circumstance described below, with the result
that the Subordinated Debt Securities would be distributed to the holders of the
Trust Securities in connection with the liquidation of the Trust. In certain
circumstances, Phillips shall have the right to redeem the Subordinated Debt
Securities, in whole or in part, in lieu of a distribution of the Subordinated
Debt Securities by the Trust; in which event the Trust will redeem the Trust
Securities on a pro rata basis to the same extent as the Subordinated Debt
Securities are redeemed by Phillips. See "Description of the Preferred
Securities -- Tax Event Redemption or Distribution."
Under current United States federal income tax law, a distribution of
Subordinated Debt Securities upon the dissolution of Phillips Capital Trust
would not be a taxable event to holders of the Preferred Securities. Upon
occurrence of a Tax Event, however, a dissolution of Phillips Capital Trust in
which holders of the Preferred Securities receive cash would be a taxable event
to such holders. See "United States Federal Income Taxation -- Receipt of
Subordinated Debt Securities or Cash Upon Liquidation of Phillips Capital
Trust."
There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debt Securities that may be distributed in
exchange for Preferred Securities if a dissolution or liquidation of the Trust
were to occur. Accordingly, the Preferred Securities that an investor may
purchase, whether pursuant to the offer made hereby or in the secondary market,
or the Subordinated Debt Securities that a holder of Preferred Securities may
receive on dissolution and liquidation of the Trust, may trade at a discount to
the price that the investor paid to purchase the Preferred Securities offered
hereby. Because holders of Preferred Securities may receive Subordinated Debt
Securities upon the occurrence of a Tax Event, prospective purchasers of
Preferred Securities are also making an investment decision with regard to the
Subordinated Debt Securities and should carefully review all the information
regarding the Subordinated Debt Securities contained herein and in the
accompanying Prospectus. See "Description of the Preferred Securities -- Tax
Event Redemption or Distribution" and "Description of the Subordinated Debt
Securities -- General."
CONSEQUENCES OF HIGHLY LEVERAGED TRANSACTION
The Indenture does not contain provisions that afford holders of the
Subordinated Debt Securities protection in the event of a highly leveraged
transaction, including a change of control, or other similar transactions
involving Phillips that may adversely affect such holders. See "Description of
the Subordinated Debt Securities -- General."
LIMITED VOTING RIGHTS
Holders of Preferred Securities will have limited voting rights and will
not be entitled to vote to appoint, remove or replace, or to increase or
decrease the number of, Phillips Trustees, which voting rights are vested
exclusively in the holder of the Common Securities. See "Description of
Preferred Securities -- Voting Rights."
TRADING PRICE
The Preferred Securities may trade at a price that does not fully reflect
the value of accrued but unpaid interest with respect to the underlying
Subordinated Debt Securities. A holder who disposes of his Preferred
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<PAGE> 9
Securities between record dates for payments of distributions thereon will be
required to include accrued but unpaid interest on the Subordinated Debt
Securities through the date of disposition in income as ordinary income (i.e.,
OID), and to add such amount to his adjusted tax basis in his pro rata share of
the underlying Subordinated Debt Securities deemed disposed of. To the extent
the selling price is less than the holder's adjusted tax basis (which will
include, in the form of OID, all accrued but unpaid interest), a holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income tax
purposes. See "United States Federal Income Taxation -- Original Issue Discount"
and "-- Sales of Preferred Securities."
THE COMPANY
The Company, incorporated in Delaware in 1917, is a fully integrated oil
company engaged in petroleum exploration and production on a worldwide basis,
petroleum refining and marketing, and natural gas gathering and processing,
principally in the United States. Phillips also produces and distributes
chemicals worldwide. Its principal executive offices are located in the Phillips
Building, Bartlesville, Oklahoma 74004 (telephone (918) 661-6600).
PHILLIPS CAPITAL TRUST
Phillips Capital Trust is a statutory business trust formed under Delaware
law pursuant to (i) a declaration of trust, dated as of February 23, 1996,
executed by Phillips, as sponsor (the "Sponsor"), and the trustees of Phillips
Capital Trust (the "Phillips Trustees") and (ii) the filing of a certificate of
trust with the Secretary of State of the State of Delaware on February 23, 1996.
Such declaration will be amended and restated in its entirety (as so amended and
restated, the "Declaration") substantially in the form filed as an exhibit to
the Registration Statement of which this Prospectus Supplement and the
accompanying Prospectus form a part. The Declaration will be qualified as an
indenture under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). Upon issuance of the Preferred Securities, the purchasers
thereof will own all of the Preferred Securities. See "Description of the
Preferred Securities -- Book-Entry Only Issuance -- The Depository Trust
Company." Phillips will directly or indirectly acquire Common Securities in an
aggregate liquidation amount equal to 3 percent of the total capital of Phillips
Capital Trust. Phillips Capital Trust exists for the exclusive purposes of (i)
issuing the Trust Securities representing undivided beneficial interests in the
assets of the Trust, (ii) investing the gross proceeds of the Trust Securities
in the Subordinated Debt Securities and (iii) engaging in only those other
activities necessary or incidental thereto.
Pursuant to the Declaration, the number of Phillips Trustees will initially
be five. Three of the Phillips Trustees (the "Regular Trustees") will be persons
who are employees or officers of, or who are affiliated with, Phillips. The
fourth trustee will be a financial institution that is unaffiliated with
Phillips, which trustee will serve as institutional trustee under the
Declaration and as indenture trustee for the purposes of compliance with the
provisions of the Trust Indenture Act (the "Institutional Trustee"). Initially,
The Bank of New York, a New York banking corporation, will be the Institutional
Trustee until removed or replaced by the holder of the Common Securities. For
purposes of compliance with the provisions of the Trust Indenture Act, The Bank
of New York will act as trustee (the "Guarantee Trustee") under the Guarantee
and as Debt Trustee (as defined herein) under the Indenture. The fifth trustee
will be an entity that maintains its principal place of business in the state of
Delaware (the "Delaware Trustee"). Initially, The Bank of New York (Delaware),
an affiliate of the Institutional Trustee, will act as Delaware Trustee. See
"Description of the Preferred Securities Guarantees" in the accompanying
Prospectus and "Description of the Preferred Securities -- Voting Rights"
herein.
The Institutional Trustee will hold title to the Subordinated Debt
Securities for the benefit of the holders of the Trust Securities and the
Institutional Trustee will have the power to exercise all rights, powers and
privileges under the Indenture (as defined herein) as the holder of the
Subordinated Debt Securities. In addition, the Institutional Trustee will
maintain exclusive control of a segregated non-interest bearing bank account
(the "Property Account") to hold all payments made in respect of the
Subordinated Debt Securities for the benefit of the holders of the Trust
Securities. The Institutional Trustee will make payments of
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distributions and payments on liquidation, redemption and otherwise to the
holders of the Trust Securities out of funds from the Property Account. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Preferred Securities. Phillips, as the direct or indirect holder of all the
Common Securities, will have the right to appoint, remove or replace any
Phillips Trustee and to increase or decrease the number of Phillips Trustees.
Phillips will pay all fees and expenses related to Phillips Capital Trust and
the offering of the Trust Securities. See "Description of the Subordinated Debt
Securities -- Miscellaneous."
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the
Declaration, the Delaware Business Trust Act (the "Trust Act") and the Trust
Indenture Act. See "Description of the Preferred Securities."
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<PAGE> 11
CAPITALIZATION
The following table sets forth the actual capitalization of Phillips at
March 31, 1996, and the "As Adjusted" column reflects the application of the
estimated net proceeds from the sale of the Preferred Securities. See "Use of
Proceeds." The table should be read in conjunction with Phillips' consolidated
financial statements and notes thereto included in the documents incorporated by
reference herein. See "Incorporation of Certain Documents by Reference" in the
accompanying Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
(DOLLARS IN MILLIONS)
Long-Term Debt.......................................................... $2,910 $ 2,910
------ -------
Preferred stock of subsidiary........................................... 345 345
------ -------
Company-Obligated Mandatorily Redeemable Preferred Securities of
Phillips 66 Capital I (1)............................................. -- 300
------ -------
Common stock -- 500,000,000 shares authorized at $1.25 par value
Issued (306,380,511 shares)
Par value.......................................................... 383 383
Capital in excess of par........................................... 1,982 1,982
Treasury stock (at cost: 14,440,881 shares)........................... (791) (791)
Compensation and Benefits Trust (at cost: 29,200,000 shares)............ (989) (989)
Foreign currency translation adjustments................................ 30 30
Unearned employee compensation -- Long-Term Stock Savings Plan
(LTSSP)............................................................... (405) (405)
Retained earnings....................................................... 3,613 3,613
------ -------
Total stockholders' equity.............................................. 3,823 3,823
------ -------
Total......................................................... $7,078 $ 7,378
====== =======
</TABLE>
(1) As described herein, the sole assets of the Trust will be the 8.24% Junior
Subordinated Deferrable Interest Debentures due 2036 of Phillips with a
principal amount of approximately $309,278,350, and upon redemption of such
debt, the Preferred Securities will be mandatorily redeemable.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the periods indicated:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH 31 YEARS ENDED DECEMBER 31
----------- ----------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges... 10.8 3.5 3.4 3.2 2.3 2.1 2.0
</TABLE>
For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income before income taxes, extraordinary items and
cumulative effect of changes in accounting principle, plus fixed charges
(excluding capitalized interest and the portion of the preferred dividend
requirements of a subsidiary not previously deducted from pretax income, but
including amortization of amounts previously capitalized), less equity in
undistributed earnings of companies owned less than 50 percent. Fixed charges
consist of interest (including capitalized interest) on all indebtedness,
amortization of debt discount and expense, that portion of rental expense which
the Company believes to be representative of interest and the amounts accrued to
cover the preferred stock dividend requirements of a subsidiary. A statement
setting forth the computation of the unaudited ratios of earnings to fixed
charges is filed as an exhibit to the Registration Statement of which this
Prospectus Supplement is a part.
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<PAGE> 12
ACCOUNTING TREATMENT
The financial statements of Phillips Capital Trust will be consolidated
into Phillips' consolidated financial statements, with the $300,000,000
Preferred Securities shown in Phillips' balance sheet as Company-Obligated
Mandatorily Redeemable Preferred Securities of Phillips Capital Trust. The
financial statement footnotes of Phillips will reflect that the sole asset of
the Trust will be $309,278,350 principal amount of 8.24% Junior Subordinated
Deferrable Interest Debentures due May 29, 2036 of Phillips. See
"Capitalization."
USE OF PROCEEDS
The Trust will use all proceeds received from the sale of the Preferred
Securities to purchase Subordinated Debt Securities from Phillips. Phillips
intends to add the net proceeds from the sale of the Subordinated Debt
Securities to its general funds, to be used for general corporate purposes,
including capital expenditures, repurchases of outstanding long-term debt
securities, investments in subsidiaries, working capital, repayment of
short-term commercial paper notes and other business opportunities.
DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the
Declaration. The Declaration will be qualified as an indenture under the Trust
Indenture Act. The Institutional Trustee, The Bank of New York, will act as
indenture trustee for the Preferred Securities under the Declaration for
purposes of compliance with the provisions of the Trust Indenture Act. The terms
of the Preferred Securities will include those stated in the Declaration and
those made part of the Declaration by the Trust Indenture Act. The following
summary of the material terms and provisions of the Preferred Securities does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, the Declaration, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus Supplement is a part, the Trust
Act and the Trust Indenture Act.
GENERAL
The Declaration authorizes the Regular Trustees to issue on behalf of the
Trust the Trust Securities, which represent undivided beneficial interests in
the assets of the Trust. All of the Common Securities will be owned, directly or
indirectly, by Phillips. The Common Securities rank pari passu, and payments
will be made thereon on a pro rata basis, with the Preferred Securities, except
that upon the occurrence and during the continuance of a Declaration Event of
Default, the rights of the holders of the Common Securities to receive payment
of periodic distributions and payments upon liquidation, redemption and
otherwise will be subordinated to the rights of the holders of the Preferred
Securities. The Declaration does not permit the issuance by the Trust of any
securities other than the Trust Securities or the incurrence of any indebtedness
by the Trust. Pursuant to the Declaration, the Institutional Trustee will own
the Subordinated Debt Securities purchased by the Trust for the benefit of the
holders of the Trust Securities. The payment of distributions out of money held
by the Trust, and payments upon redemption of the Preferred Securities or
liquidation of the Trust, are guaranteed by Phillips to the extent described
under "Description of the Preferred Securities Guarantees" in the accompanying
Prospectus. The Guarantee will be held by The Bank of New York, the Guarantee
Trustee, for the benefit of the holders of the Preferred Securities. The
Guarantee does not cover payment of distributions when the Trust does not have
sufficient available funds to pay such distributions. In such event, the remedy
of a holder of Preferred Securities is to vote to direct the Institutional
Trustee to enforce the Institutional Trustee's rights under the Subordinated
Debt Securities except in the limited circumstances in which the holder may take
Direct Action. See "-- Voting Rights" and "-- Declaration Events of Default."
DISTRIBUTIONS
Distributions on the Preferred Securities will be fixed at a rate per annum
of 8.24 percent of the stated liquidation amount of $25 per Preferred Security.
Distributions in arrears for more than one quarter will bear interest thereon at
the rate per annum of 8.24 percent thereof compounded quarterly. The term
"distribution"
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as used herein includes any such interest payable unless otherwise stated. The
amount of distributions payable for any period will be computed on the basis of
a 360-day year of twelve 30-day months.
Distributions on the Preferred Securities will be cumulative, will accrue
from May 29, 1996 and will be payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year, commencing June 30, 1996, when, as
and if available for payment, distributions will be made by the Institutional
Trustee, except as otherwise described below.
Phillips has the right under the Indenture to defer payments of interest on
the Subordinated Debt Securities by extending the interest payment period from
time to time on the Subordinated Debt Securities, which, if exercised, would
defer quarterly distributions on the Preferred Securities (though such
distributions would continue to accrue with interest since interest would
continue to accrue on the Subordinated Debt Securities) during any such extended
interest payment period. Such right to extend the interest payment period for
the Subordinated Debt Securities is limited to a period not exceeding 20
consecutive quarters and such period may not extend beyond the maturity of the
Subordinated Debt Securities. In the event that Phillips exercises this right,
then (a) Phillips shall not declare or pay dividends on, make distributions with
respect to, or redeem, purchase or acquire, or make a liquidation payment with
respect to, any of its capital stock (other than (i) purchases or acquisitions
of shares of Phillips Common Stock in connection with the satisfaction by
Phillips of its obligations under any employee benefit plans, (ii) as a result
of a reclassification of Phillips capital stock or the exchange or conversion of
one class or series of Phillips' capital stock for another class or series of
Phillips capital stock or (iii) the purchase of fractional interests in shares
of Phillips' capital stock pursuant to the conversion or exchange provisions of
such Phillips capital stock or the security being converted or exchanged), (b)
Phillips shall not make any payment of interest, principal or premium, if any,
on or repay, repurchase or redeem any debt securities issued by Phillips that
rank pari passu with or junior to such Subordinated Debt Securities and (c)
Phillips shall not make any guarantee payments with respect to the foregoing
(other than pursuant to the Guarantee). Prior to the termination of any such
Extension Period, Phillips may further extend the interest payment period;
provided, that such Extension Period, together with all such previous and
further extensions thereof, may not exceed 20 consecutive quarters or extend
beyond the maturity of the Subordinated Debt Securities. Upon the termination of
any Extension Period and the payment of all amounts then due, Phillips may
select a new Extension Period, subject to the above requirements. See
"Description of the Subordinated Debt Securities -- Interest" and "-- Option to
Extend Interest Payment Period." If distributions are deferred, the deferred
distributions and accrued interest thereon shall be paid to holders of record of
the Preferred Securities as they appear on the books and records of the Trust on
the record date next following the termination of such deferral period.
Distributions on the Preferred Securities must be paid on the dates payable
to the extent that the Trust has funds available for the payment of such
distributions in the Property Account. The Trust's funds available for
distribution to the holders of the Preferred Securities will be limited to
payments received from Phillips on the Subordinated Debt Securities. See
"Description of the Subordinated Debt Securities." The payment of distributions
out of moneys held by the Trust is guaranteed by Phillips to the extent set
forth under "Description of the Preferred Securities Guarantees" in the
accompanying Prospectus.
Distributions on the Preferred Securities will be payable to the holders
thereof as they appear on the books and records of the Trust on the relevant
record dates, which, as long as the Preferred Securities remain in book-entry
only form, will be one Business Day (as defined below) prior to the relevant
payment dates. Such distributions will be paid through the Institutional Trustee
who will hold amounts received in respect of the Subordinated Debt Securities in
the Property Account for the benefit of the holders of the Trust Securities.
Subject to any applicable laws and regulations and the provisions of the
Declaration, each such payment will be made as described under "-- Book-Entry
Only Issuance -- The Depository Trust Company" below. In the event that the
Preferred Securities do not continue to remain in book-entry only form, the
Regular Trustee shall have the right to select relevant record dates, which
shall be more than one Business Day prior to the relevant payment dates. In the
event that any date on which distributions are to be made on the Preferred
Securities is not a Business Day, then payment of the distributions payable on
such date will be made on the next succeeding day which is a Business Day (and
without any interest or other payment in respect of any such delay), except
that, if such Business Day is in the next succeeding calendar year, such
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<PAGE> 14
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such record date. A "Business Day"
shall mean any day other than Saturday, Sunday or any other day on which banking
institutions in New York City (in the State of New York) are permitted or
required by any applicable law to close.
MANDATORY REDEMPTION
The Subordinated Debt Securities will mature on May 29, 2036 and may be
redeemed, in whole or in part, at any time on or after May 29, 2001, or at any
time in certain circumstances upon the occurrence of a Tax Event. See
"Description of the Subordinated Debt Securities." Upon the repayment of the
Subordinated Debt Securities, whether at maturity or upon redemption, the
proceeds from such repayment or payment shall simultaneously be applied to
redeem Trust Securities having an aggregate liquidation amount equal to the
aggregate principal amount of the Subordinated Debt Securities so repaid or
redeemed at the Redemption Price; provided, that holders of Trust Securities
shall be given not less than 30 nor more than 60 days notice of such redemption.
See "Description of the Subordinated Debt Securities -- Optional Redemption." In
the event that fewer than all of the outstanding Preferred Securities are to be
redeemed, the Preferred Securities will be redeemed pro rata as described under
"-- Book-Entry Only Issuance -- The Depository Trust Company" below.
TAX EVENT REDEMPTION OR DISTRIBUTION
"Tax Event" means that the Regular Trustees shall have received an opinion
of a nationally recognized independent tax counsel experienced in such matters
(a "Dissolution Tax Opinion") to the effect that, as a result of (a) any
amendment to, or change (including any announced prospective change) in, the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein or (b) any amendment to or
change in an interpretation or application of such laws or regulations by any
legislative body, court, governmental agency or regulatory authority (including
the enactment of any legislation and the publication of any judicial decision or
regulatory determination on or after such date), there is more than an
insubstantial risk that (i) the Trust would be subject to United States federal
income tax with respect to income accrued or received on the Subordinated Debt
Securities, (ii) interest payable to the Trust on the Subordinated Debt
Securities would not be deductible by Phillips for United States federal income
tax purposes or (iii) the Trust would be subject to more than a de minimis
amount of other taxes, duties or other governmental charges, which change or
amendment becomes effective on or after the date of this Prospectus Supplement.
If, at any time, a Tax Event shall occur and be continuing, the Trust
shall, except in the limited circumstances described below, be dissolved with
the result that the Subordinated Debt Securities with an aggregate principal
amount equal to the aggregate stated liquidation amount of, with an interest
rate identical to the distribution rate of, and accrued and unpaid interest
equal to accrued and unpaid distributions on, the Trust Securities, would be
distributed to the holders of the Trust Securities in liquidation of such
holders' interests in the Trust on a pro rata basis within 90 days following the
occurrence of such Tax Event; provided, that such dissolution and distribution
shall be conditioned on (i) the Regular Trustees' receipt of an opinion of
nationally recognized independent tax counsel experienced in such matters (a "No
Recognition Opinion"), which opinion may rely on published revenue rulings of
the Internal Revenue Service, to the effect that the holders of the Trust
Securities will not recognize any gain or loss for United States federal income
tax purposes as a result of such dissolution and distribution of Subordinated
Debt Securities and (ii) Phillips being unable to avoid such Tax Event within
such 90-day period by taking some ministerial action or pursuing some other
reasonable measure that will have no adverse effect on the Trust, Phillips or
the holders of the Trust Securities. Furthermore, if after receipt of a
Dissolution Tax Opinion by the Regular Trustees (i) Phillips has received an
opinion (a "Redemption Tax Opinion") of nationally recognized independent tax
counsel experienced in such matters that, as a result of a Tax Event, there is
more than an insubstantial risk that Phillips would be precluded from deducting
the interest on the Subordinated Debt Securities for United States federal
income tax purposes, even after the Subordinated Debt Securities were
distributed to the holders of Trust Securities in liquidation of such holders'
interests in the Trust as described above, or (ii) the
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<PAGE> 15
Regular Trustees shall have been informed by such tax counsel that it cannot
deliver a No Recognition Opinion to the Trust, Phillips shall have the right,
upon not less than 30 nor more than 60 days notice, to redeem the Subordinated
Debt Securities, in whole or in part, for cash within 90 days following the
occurrence of such Tax Event, and, following such redemption, Trust Securities
with an aggregate liquidation amount equal to the aggregate principal amount of
the Subordinated Debt Securities so redeemed shall be redeemed by the Trust at
the Redemption Price on a pro rata basis; provided, however, that if at the time
there is available to Phillips or the Trust the opportunity to eliminate, within
such 90-day period, the Tax Event by taking some ministerial action, such as
filing a form or making an election or pursuing some other similar reasonable
measure that has no adverse effect on the Trust, Phillips or the holders of the
Trust Securities, Phillips or the Trust will pursue such measure in lieu of
redemption.
If the Subordinated Debt Securities are distributed to the holders of the
Preferred Securities, Phillips will use its best efforts to cause the
Subordinated Debt Securities to be listed on the New York Stock Exchange or on
such other exchange as the Preferred Securities are then listed.
After the date for any distribution of Subordinated Debt Securities upon
dissolution of the Trust, (i) the Preferred Securities will no longer be deemed
to be outstanding, (ii) the Depositary (as defined herein) or its nominee, as
the record holder of the Preferred Securities, will receive a registered global
certificate or certificates representing the Subordinated Debt Securities to be
delivered upon such distribution, and (iii) any certificates representing
Preferred Securities not held by the Depositary or its nominee will be deemed to
represent Subordinated Debt Securities having an aggregate principal amount
equal to the aggregate stated liquidation amount of, with an interest rate
identical to the distribution rate of, and accrued and unpaid interest equal to
accrued and unpaid distributions on such Preferred Securities until such
certificates are presented to Phillips or its agent for transfer or reissuance.
There can be no assurance as to the market prices for either the Preferred
Securities or the Subordinated Debt Securities that may be distributed in
exchange for the Preferred Securities if a dissolution and liquidation of the
Trust were to occur. Accordingly, the Preferred Securities that an investor may
purchase, whether pursuant to the offer made hereby or in the secondary market,
or the Subordinated Debt Securities that an investor may receive if a
dissolution and liquidation of the Trust were to occur, may trade at a discount
to the price that the investor paid to purchase the Preferred Securities offered
hereby.
REDEMPTION PROCEDURES
The Trust may not redeem fewer than all of the outstanding Preferred
Securities unless all accrued and unpaid distributions have been paid on all
Preferred Securities for all quarterly distribution periods terminating on or
prior to the date of redemption.
If the Trust gives a notice of redemption in respect of Preferred
Securities (which notice will be irrevocable), then, by 12:00 noon, New York
City time, on the redemption date, provided that Phillips has paid to the
Institutional Trustee a sufficient amount of cash in connection with the related
redemption or maturity of the Subordinated Debt Securities, the Trust will
irrevocably deposit with the Depositary funds sufficient to pay the applicable
Redemption Price and will give the Depositary irrevocable instructions and
authority to pay the Redemption Price to the holders of the Preferred
Securities. See "-- Book-Entry Only Issuance -- The Depository Trust Company."
If notice of redemption shall have been given and funds deposited as required,
then, immediately prior to the close of business on the date of such deposit,
distributions will cease to accrue and all rights of holders of such Preferred
Securities so called for redemption will cease, except the right of the holders
of such Preferred Securities to receive the Redemption Price but without
interest on such Redemption Price. In the event that any date fixed for
redemption of Preferred Securities is not a Business Day, then payment of the
Redemption Price payable on such date will be made on the next succeeding day
that is a Business Day (without any interest or other payment in respect of any
such delay), except that, if such Business Day falls in the next calendar year,
such payment will be made on the immediately preceding Business Day. In the
event that payment of the Redemption Price in respect of Preferred Securities is
improperly withheld or refused and not paid either by the Trust, or by Phillips
pursuant to the Guarantee, distributions on such Preferred Securities will
continue to accrue at the then applicable rate
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<PAGE> 16
from the original redemption date to the date of payment, in which case the
actual payment date will be considered the date fixed for redemption for
purposes of calculating the Redemption Price.
In the event that fewer than all of the outstanding Preferred Securities
are to be redeemed, the Preferred Securities will be redeemed pro rata as
described below under "-- Book-Entry Only Issuance -- The Depository Trust
Company."
Subject to the foregoing and applicable law (including, without limitation,
United States federal securities laws), Phillips or its subsidiaries may at any
time, and from time to time, purchase outstanding Preferred Securities by
tender, in the open market or by private agreement.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary liquidation, dissolution,
winding-up or termination of the Trust (each a "Liquidation"), the then holders
of the Preferred Securities will be entitled to receive out of the assets of the
Trust, after satisfaction of liabilities to creditors, distributions in an
amount equal to the aggregate of the stated liquidation amount of $25 per
Preferred Security plus accrued and unpaid distributions thereon to the date of
payment (the "Liquidation Distribution"), unless, in connection with such
Liquidation, Subordinated Debt Securities in an aggregate stated principal
amount equal to the aggregate stated liquidation amount of, with an interest
rate identical to the distribution rate of, and accrued and unpaid interest
equal to accrued and unpaid distributions on, the Preferred Securities have been
distributed on a pro rata basis to the holders of the Preferred Securities.
If, upon any such Liquidation, the Liquidation Distribution can be paid
only in part because the Trust has insufficient assets available to pay in full
the aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Preferred Securities shall be paid on a pro rata basis. The holders
of the Common Securities will be entitled to receive distributions upon any such
dissolution pro rata with the holders of the Preferred Securities, except that
if a Declaration Event of Default has occurred and is continuing, the Preferred
Securities shall have a preference over the Common Securities with regard to
such distributions.
Pursuant to the Declaration, the Trust shall terminate (i) on February 23,
2051, the expiration of the term of the Trust, (ii) upon the bankruptcy of
Phillips, (iii) upon the filing of a certificate of dissolution or its
equivalent with respect to Phillips, the filing of a certificate of cancellation
with respect to the Trust after obtaining the consent of the holders of at least
a majority in liquidation amount of the Trust Securities affected thereby voting
together as a single class to file such certificate of cancellation or the
revocation of the charter of Phillips and the expiration of 90 days after the
date of revocation without a reinstatement thereof, (iv) upon the distribution
of Subordinated Debt Securities upon the occurrence of a Tax Event, (v) upon the
entry of a decree of a judicial dissolution of Phillips or the Trust, or (vi)
upon the redemption of all the Trust Securities.
DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Indenture Event of Default")
constitutes an event of default under the Declaration with respect to the Trust
Securities (a "Declaration Event of Default"); provided, that pursuant to the
Declaration, the holder of the Common Securities will be deemed to have waived
any Declaration Event of Default with respect to the Common Securities until all
Declaration Events of Default with respect to the Preferred Securities have been
cured, waived or otherwise eliminated. Until such Declaration Events of Default
with respect to the Preferred Securities have been so cured, waived, or
otherwise eliminated, the Institutional Trustee will be deemed to be acting
solely on behalf of the holders of the Preferred Securities and only the holders
of the Preferred Securities will have the right to direct the Institutional
Trustee with respect to certain matters under the Declaration, and therefore the
Indenture. If the Institutional Trustee fails to enforce its rights under the
Subordinated Debt Securities after a holder of Preferred Securities has made a
written request, such holder of record of Preferred Securities may institute a
legal proceeding against Phillips to enforce the Institutional Trustee's rights
under the Subordinated Debt Securities without first instituting any legal
proceeding against the Institutional Trustee or any other person or entity.
Notwithstanding the foregoing, if a Declaration Event of Default has occurred
and is continuing and such event is attributable to the failure of Phillips to
pay interest or principal on the Subordinated Debt
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<PAGE> 17
Securities on the date such interest or principal is otherwise payable (or in
the case of redemption, the redemption date), then a holder of Preferred
Securities may directly institute a proceeding for enforcement of payment to
such holder directly of the principal of or interest on the Subordinated Debt
Securities having a principal amount equal to the aggregate liquidation amount
of the Preferred Securities of such holder on or after the respective due date
specified in the Subordinated Debt Securities. In connection with such Direct
Action, Phillips will be subrogated to the rights of such holder of Preferred
Securities under the Declaration to the extent of any payment made by Phillips
to such holder of Preferred Securities in such Direct Action. The holders of
Preferred Securities will not be able to exercise directly any other remedy
available to the holders of the Subordinated Debt Securities.
Upon the occurrence of a Declaration Event of Default, the Institutional
Trustee as the sole holder of the Subordinated Debt Securities will have the
right under the Indenture to declare the principal of and interest on the
Subordinated Debt Securities to be immediately due and payable. Phillips and the
Trust are each required to file annually with the Institutional Trustee an
officer's certificate as to its compliance with all conditions and covenants
under the Declaration.
VOTING RIGHTS
Except as described herein, under the Trust Act, the Trust Indenture Act
and under "Description of the Preferred Securities Guarantees -- Modification of
the Preferred Securities Guarantees; Assignment" in the accompanying Prospectus,
and as otherwise required by law and the Declaration, the holders of the
Preferred Securities will have no voting rights.
Subject to the requirement of the Institutional Trustee obtaining a tax
opinion in certain circumstances set forth in the last sentence of this
paragraph, the holders of a majority in aggregate liquidation amount of the
Preferred Securities, have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Institutional Trustee,
or direct the exercise of any trust or power conferred upon the Institutional
Trustee under the Declaration including the right to direct the Institutional
Trustee, as holder of the Subordinated Debt Securities, to (i) exercise the
remedies available to it under the Indenture as a holder of the Subordinated
Debt Securities, (ii) waive any past Indenture Event of Default that is waivable
under the Base Indenture (as defined herein), (iii) exercise any right to
rescind or annul a declaration that the principal of all the Subordinated Debt
Securities shall be due and payable or (iv) consent to any amendment,
modification or termination of the Indenture or the Subordinated Debt Securities
where such consent shall be required; provided, however, that, where a consent
or action under the Indenture would require the consent or act of holders of
more than a majority in principal amount of the Subordinated Debt Securities (a
"Super-Majority") affected thereby, only the holders of at least such
Super-Majority in aggregate liquidation amount of the Preferred Securities may
direct the Institutional Trustee to give such consent or take such action. If
the Institutional Trustee fails to enforce its rights under the Subordinated
Debt Securities after a holder of record of Preferred Securities has made a
written request, such holder of record of Preferred Securities may institute a
legal proceeding directly against Phillips to enforce the Institutional
Trustee's rights under the Subordinated Debt Securities without first
instituting any legal proceeding against the Institutional Trustee or any other
person or entity. Notwithstanding the foregoing, if a Declaration Event of
Default has occurred and is continuing and such event is attributable to the
failure of Phillips to pay interest or principal on the Subordinated Debt
Securities on the date such interest or principal is otherwise payable (or in
the case of redemption on the redemption date), then a holder of Preferred
Securities may directly institute a proceeding for enforcement of payment to
such holder of the principal of or interest on the Subordinated Debt Securities
having a principal amount equal to the aggregate liquidation amount of the
Preferred Securities of such holder on or after the respective due date
specified in the Subordinated Debt Securities. The Institutional Trustee shall
notify all holders of the Preferred Securities of any notice of default received
from the Debt Trustee with respect to the Subordinated Debt Securities. Such
notice shall state that such Indenture Event of Default also constitutes a
Declaration Event of Default. Except with respect to directing the time, method
and place of conducting a proceeding for a remedy, the Institutional Trustee
shall not take any of the actions described in clauses (i), (ii) or (iii) above
unless the Institutional Trustee has obtained an opinion of tax counsel to the
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effect that, as a result of such action, the Trust will not fail to be
classified as a grantor trust for United States federal income tax purposes.
In the event the consent of the Institutional Trustee, as the holder of the
Subordinated Debt Securities, is required under the Indenture with respect to
any amendment, modification or termination of the Indenture, the Institutional
Trustee shall request the direction of the holders of the Trust Securities with
respect to such amendment, modification or termination and shall vote with
respect to such amendment, modification or termination as directed by a majority
in liquidation amount of the Trust Securities voting together as a single class;
provided, however, that where a consent under the Indenture would require the
consent of a Super-Majority, the Institutional Trustee may only give such
consent at the direction of the holders of at least the proportion in
liquidation amount of the Trust Securities which the relevant Super-Majority
represents of the aggregate principal amount of the Subordinated Debt Securities
outstanding. The Institutional Trustee shall not take any such action in
accordance with the directions of the holders of the Trust Securities unless the
Institutional Trustee has obtained an opinion of tax counsel to the effect that
for the purposes of United States federal income tax the Trust will not be
classified as other than a grantor trust.
A waiver of an Indenture Event of Default will constitute a waiver of the
corresponding Declaration Event of Default.
Any required approval or direction of holders of Preferred Securities may
be given at a separate meeting of holders of Preferred Securities convened for
such purpose, at a meeting of all of the holders of Trust Securities or pursuant
to written consent. The Regular Trustees will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be
mailed to each holder of record of Preferred Securities. Each such notice will
include a statement setting forth the following information: (i) the date of
such meeting or the date by which such action is to be taken; (ii) a description
of any resolution proposed for adoption at such meeting on which such holders
are entitled to vote or of such matter upon which written consent is sought; and
(iii) instructions for the delivery of proxies or consents. No vote or consent
of the holders of Preferred Securities will be required for the Trust to redeem
and cancel Preferred Securities or distribute Subordinated Debt Securities in
accordance with the Declaration.
Notwithstanding that holders of Preferred Securities are entitled to vote
or consent under any of the circumstances described above, any of the Preferred
Securities that are owned at such time by Phillips or any entity directly or
indirectly controlling or controlled by, or under direct or indirect common
control with, Phillips, shall not be entitled to vote or consent and shall, for
purposes of such vote or consent, be treated as if such Preferred Securities
were not outstanding.
The procedures by which holders of Preferred Securities may exercise their
voting rights are described below. See "-- Book-Entry Only Issuance -- The
Depository Trust Company" below.
Holders of the Preferred Securities will have no rights to appoint or
remove the Phillips Trustees, who may be appointed, removed or replaced solely
by Phillips as the indirect or direct holder of all of the Common Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended if approved by the Regular
Trustees (and in certain circumstances the Institutional Trustee), provided
that, if any proposed amendment provides for, or the Regular Trustees otherwise
propose to effect, (i) any action that would adversely affect the powers,
preferences or special rights of the Trust Securities, whether by way of
amendment to the Declaration or otherwise or (ii) the dissolution, winding-up or
termination of the Trust other than pursuant to the terms of the Declaration,
then the holders of the Trust Securities voting together as a single class will
be entitled to vote on such amendment or proposal and such amendment or proposal
shall not be effective except with the approval of at least a majority in
liquidation amount of the Trust Securities affected thereby; provided, that, if
any amendment or proposal referred to in clause (i) above would adversely affect
only the Preferred Securities or the Common Securities, then only the affected
class will be entitled to vote on such amendment or proposal
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and such amendment or proposal shall not be effective except with the approval
of a majority in liquidation amount of such class of Securities.
Notwithstanding the foregoing, no amendment or modification may be made to
the Declaration if such amendment or modification would (i) cause the Trust to
be classified for purposes of United States federal income taxation as other
than a grantor trust, (ii) reduce or otherwise adversely affect the powers of
the Institutional Trustee or (iii) cause the Trust to be deemed an "investment
company" which is required to be registered under the Investment Company Act of
1940, as amended (the "1940 Act").
MERGERS, CONSOLIDATIONS OR AMALGAMATIONS
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety, to any corporation or other body, except as
described below. The Trust may, with the consent of the Regular Trustees and
without the consent of the holders of the Trust Securities, the Institutional
Trustee or the Delaware Trustee consolidate, amalgamate, merge with or into, or
be replaced by a trust organized as such under the laws of any State of the
United States; provided, that (i) if the Trust is not the survivor such
successor entity either (x) expressly assumes all of the obligations of the
Trust under the Trust Securities or (y) substitutes for the Preferred Securities
other securities having substantially the same terms as the Trust Securities
(the "Successor Securities"), so long as the Successor Securities rank the same
as the Trust Securities rank with respect to distributions and payments upon
liquidation, redemption and otherwise, (ii) Phillips expressly acknowledges a
trustee of such successor entity possessing the same powers and duties as the
Institutional Trustee as the holder of the Subordinated Debt Securities, (iii)
the Preferred Securities or any Successor Securities are listed, or any
Successor Securities will be listed upon notification of issuance, on any
national securities exchange or with another organization on which the Preferred
Securities are then listed or quoted, (iv) such merger, consolidation,
amalgamation or replacement does not cause the Preferred Securities (including
any Successor Securities) to be downgraded by any nationally recognized
statistical rating organization, (v) such merger, consolidation, amalgamation or
replacement does not adversely affect the rights, preferences and privileges of
the holders of the Trust Securities (including any Successor Securities) in any
material respect (other than with respect to any dilution of the holders'
interest in the new entity), (vi) such successor entity has a purpose identical
to that of the Trust, (vii) prior to such merger, consolidation, amalgamation or
replacement, Phillips has received an opinion of a nationally recognized
independent counsel to the Trust experienced in such matters to the effect that,
(A) such merger, consolidation, amalgamation or replacement does not adversely
affect the rights, preferences and privileges of the holders of the Trust
Securities (including any Successor Securities) in any material respect (other
than with respect to any dilution of the holders' interest in the new entity),
and (B) following such merger, consolidation, amalgamation or replacement,
neither the Trust nor such successor entity will be required to register as an
investment company under the 1940 Act and (viii) Phillips guarantees the
obligations of such successor entity under the Successor Securities at least to
the extent provided by the Guarantee and the Common Securities Guarantee (as
described in the accompanying Prospectus). Notwithstanding the foregoing, the
Trust shall not, except with the consent of holders of 100 percent in
liquidation amount of the Trust Securities, consolidate, amalgamate, merge with
or into, or be replaced by any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it, if such
consolidation, amalgamation, merger or replacement would cause the Trust or the
Successor Entity to be classified as other than a grantor trust for United
States federal income tax purposes.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The Depository Trust Company ("DTC") will act as securities depositary (the
"Depositary") for the Preferred Securities. The Preferred Securities will be
issued only as fully-registered securities registered in the name of Cede & Co.
(DTC's nominee). One or more fully-registered global Preferred Securities
certificates, representing the total aggregate number of Preferred Securities,
will be issued and will be deposited with DTC.
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The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global Preferred
Securities as represented by a global certificate.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). DTC holds securities that its
participants ("Participants") deposit with DTC. DTC also facilitates the
settlement among Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Participants in DTC include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. DTC is owned by a number of its Participants and by the New
York Stock Exchange, the American Stock Exchange, Inc., and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others, such as securities brokers and dealers, banks and trust
companies that clear transactions through or maintain a direct or indirect
custodial relationship with a Direct Participant either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants are
on file with the Securities and Exchange Commission.
Purchases of Preferred Securities within the DTC system must be made by or
through Participants, which will receive a credit for the Preferred Securities
on DTC's records. The ownership interest of each actual purchaser of each
Preferred Security ("Beneficial Owner") is in turn to be recorded on the
Participants' and Indirect Participants' records. Beneficial Owners will not
receive written confirmation from DTC of their purchases, but Beneficial Owners
are expected to receive written confirmations providing details of the
transactions, as well as periodic statements of their holdings, from the Direct
or Indirect Participants through which the Beneficial Owners purchased Preferred
Securities. Transfers of ownership interests in the Preferred Securities are to
be accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in the Preferred Securities, except in the event that
use of the book-entry system for the Preferred Securities is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Preferred
Securities. DTC's records reflect only the identity of the Direct Participants
to whose accounts such Preferred Securities are credited, which may or may not
be the Beneficial Owners. The Participants and Indirect Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Certificate, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the Preferred Securities represented thereby for all
purposes under the Declaration and the Preferred Securities. No beneficial owner
of an interest in a Global Certificate will be able to transfer that interest
except in accordance with DTC's applicable procedures, in addition to those
provided for under the Declaration.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Preferred Securities (including the presentation of
Preferred Securities for exchange as described below) only at the direction of
one or more Participants to whose account the DTC interests in the Global
Certificates are credited and only in respect of such portion of the aggregate
liquidation amount of Preferred Securities as to which such Participant or
Participants has or have given such direction. However, if there is an Event of
Default under the Preferred Securities, DTC will exchange the Global
Certificates for Certificated Securities, which it will distribute to its
Participants and which will be legended as set forth under the heading "Notices
to Investors."
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
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Redemption notices in respect of the Preferred Securities held in
book-entry form will be sent to Cede & Co. If less than all of the Preferred
Securities are being redeemed, DTC will determine the amount of the interest of
each Participant to be redeemed in accordance with its procedures.
Although voting with respect to the Preferred Securities is limited, in
those cases where a vote is required, neither DTC nor Cede & Co. will itself
consent or vote with respect to Preferred Securities. Under its usual
procedures, DTC would mail an Omnibus Proxy to the Trust as soon as possible
after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Participants to whose accounts the Preferred Securities
are credited on the record date (identified in a listing attached to the Omnibus
Proxy).
Distributions on the Preferred Securities held in book-entry form will be
made to DTC in immediately available funds. DTC's practice is to credit
Participants' accounts on the relevant payment date in accordance with their
respective holdings shown on DTC's records unless DTC has reason to believe that
it will not receive payments on such payment date. Payments by Participants and
Indirect Participants to Beneficial Owners will be governed by standing
instructions and customary practices and will be the responsibility of such
Participants and Indirect Participants and not of DTC, the Trust or the Company,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of distributions to DTC is the responsibility of the
Trust, disbursement of such payments to Participants is the responsibility of
DTC, and disbursement of such payments to the Beneficial Owners is the
responsibility of Participants and Indirect Participants.
Except as provided herein, a Beneficial Owner of an interest in a Global
Certificate will not be entitled to receive physical delivery of Preferred
Securities. Accordingly, each Beneficial Owner must rely on the procedures of
DTC to exercise any rights under the Preferred Securities.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Certificates among Participants of DTC, DTC
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company, the Issuer
nor the Trustee will have any responsibility for the performance by DTC or its
Participants or Indirect Participants under the rules and procedures governing
DTC. DTC may discontinue providing its services as securities depositary with
respect to the Preferred Securities at any time by giving notice to the Trust.
Under such circumstances, in the event that a successor securities depositary is
not obtained, Preferred Security certificates are required to be printed and
delivered. Additionally, the Trust (with the consent of the Company) may decide
to discontinue use of the system of book-entry transfers through DTC (or a
successor depositary). In that event, certificates for the Preferred Securities
will be printed and delivered. In each of the above circumstances, the Company
will appoint a paying agent with respect to the Preferred Securities.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global Preferred
Securities as represented by a Global Certificate.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities represented by the Global
Certificates shall be made to DTC, which shall credit the relevant accounts at
DTC on the applicable distribution dates or, in the case of Certificated
Securities, such payments shall be made by check mailed to the address of the
holder entitled thereto as such address shall appear on the Register. The Paying
Agent shall initially be The Bank of New York. The Paying Agent shall be
permitted to resign as Paying Agent upon 30 days' written notice to the Issuer
Trustees. In the event that The Bank of New York shall no longer be the Paying
Agent, the Trustee shall appoint a successor to act as Paying Agent (which shall
be a bank or trust company).
REGISTRAR, TRANSFER AGENT AND PAYING AGENT
The Institutional Trustee will act as registrar, transfer agent and paying
agent for the Preferred Securities.
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Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of the Trust, but upon payment (with the giving of such
indemnity as the Trust or the Company may require) in respect of any tax or
other government charges which may be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of Preferred Securities after such Preferred Securities have been
called for redemption.
INFORMATION CONCERNING THE INSTITUTIONAL TRUSTEE
The Institutional Trustee, prior to the occurrence of a default with
respect to the Trust Securities and after the curing of any defaults that may
have occurred, undertakes to perform only such duties as are specifically set
forth in the Declaration and, after default, shall exercise the same degree of
care as a prudent individual would exercise in the conduct of his or her own
affairs. Subject to such provisions, the Institutional Trustee is under no
obligation to exercise any of the powers vested in it by the Declaration at the
request of any holder of Preferred Securities, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which might
be incurred thereby. The holders of Preferred Securities will not be required to
offer such indemnity in the event such holders, by exercising their voting
rights, direct the Institutional Trustee to take any action it is empowered to
take under the Declaration following a Declaration Event of Default. The
Institutional Trustee also serves as trustee under the Guarantee and the
Indenture. The Company and certain of its subsidiaries conduct certain banking
transactions with the Institutional Trustee in the ordinary course of their
business.
GOVERNING LAW
The Declaration and the Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to operate the Trust in
such a way so that the Trust will not be required to register as an "investment
company" under the 1940 Act or characterized as other than a grantor trust for
United States federal income tax purposes. Phillips is authorized and directed
to conduct its affairs so that the Subordinated Debt Securities will be treated
as indebtedness of Phillips for United States federal income tax purposes. In
this connection, Phillips and the Regular Trustees are authorized to take any
action, not inconsistent with applicable law, the certificate of trust of the
Trust or the certificate of incorporation of Phillips, that each of Phillips and
the Regular Trustees determine in their discretion to be necessary or desirable
to achieve such end, as long as such action does not adversely affect the
interests of the holders of the Preferred Securities or vary the terms thereof.
Holders of the Preferred Securities have no preemptive rights.
DESCRIPTION OF THE GUARANTEE
Pursuant to the Guarantee, Phillips will irrevocably and unconditionally
agree, to the extent set forth therein, to pay in full to the holders of the
Preferred Securities issued by the Trust, the Guarantee Payments (as defined in
the accompanying Prospectus) (except to the extent paid by the Trust), as and
when due, regardless of any defense, right of set-off or counterclaim which the
Trust may have or assert. The Company's obligation to make a Guarantee Payment
may be satisfied by direct payment of the required amounts by the Company to the
holders of Preferred Securities or by causing the Trust to pay such amounts to
such holders. The Guarantee will be qualified as an indenture under the Trust
Indenture Act. The Bank of New York will act as indenture trustee under the
Guarantee (the "Guarantee Trustee"). The terms of the Guarantee will be those
set forth in such Guarantee and those made part of such Guarantee by the Trust
Indenture Act. The Guarantee will be held by the Guarantee Trustee for the
benefit of the holders of the Preferred Securities. A summary description of the
Guarantee appears in the accompanying Prospectus under the caption "Description
of the Preferred Securities Guarantees."
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DESCRIPTION OF THE SUBORDINATED DEBT SECURITIES
Set forth below is a description of the specific terms of the Subordinated
Debt Securities in which the Trust will invest the proceeds from the issuance
and sale of the Trust Securities. This description supplements the description
of the general terms and provisions of the Subordinated Debt Securities set
forth in the accompanying Prospectus under the caption "Description of the
Subordinated Debt Securities." The following description does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the description in the accompanying Prospectus and the Indenture, dated as of
May 23, 1996 (the "Base Indenture"), between Phillips and The Bank of New York,
as Trustee (the "Debt Trustee"), as supplemented by a First Supplemental
Indenture, dated as of May 23, 1996 (the Base Indenture, as so supplemented, is
hereinafter referred to as the "Indenture"), the forms of which are filed as
Exhibits to the Registration Statement of which this Prospectus Supplement and
the accompanying Prospectus form a part. Certain capitalized terms used herein
are defined in the Indenture.
Under certain circumstances involving the dissolution of the Trust
following the occurrence of a Tax Event, Subordinated Debt Securities may be
distributed to the holders of the Trust Securities in liquidation of the Trust.
See "Description of the Preferred Securities -- Tax Event Redemption or
Distribution."
If the Subordinated Debt Securities are distributed to the holders of the
Preferred Securities, Phillips will use its best efforts to have the
Subordinated Debt Securities listed on the New York Stock Exchange or on such
other national securities exchange or similar organization on which the
Preferred Securities are then listed or quoted.
GENERAL
The Subordinated Debt Securities will be issued as unsecured debt under the
Indenture. The Subordinated Debt Securities will be limited in aggregate
principal amount to approximately $309,278,350, such amount being the sum of the
aggregate stated liquidation of the Preferred Securities and the Common
Securities.
The Subordinated Debt Securities are not subject to a sinking fund
provision. The entire principal amount of the Subordinated Debt Securities will
mature and become due and payable, together with any accrued and unpaid interest
thereon including Compound Interest (as defined herein) and Additional Interest
(as defined herein), if any, on May 29, 2036.
If Subordinated Debt Securities are distributed to holders of Preferred
Securities in liquidation of such holders' interests in the Trust, such
Subordinated Debt Securities will initially be issued as a Global Security (as
defined herein). As described herein, under certain limited circumstances,
Subordinated Debt Securities may be issued in certificated form in exchange for
a Global Security. See "-- Book-Entry and Settlement" below. In the event that
Subordinated Debt Securities are issued in certificated form, such Subordinated
Debt Securities will be in denominations of $25 and integral multiples thereof
and may be transferred or exchanged at the offices described below. Payments on
Subordinated Debt Securities issued as a Global Security will be made to DTC, a
successor depositary or, in the event that no depositary is used, to a Paying
Agent for the Subordinated Debt Securities. In the event Subordinated Debt
Securities are issued in certificated form, principal and interest will be
payable, the transfer of the Subordinated Debt Securities will be registrable
and Subordinated Debt Securities will be exchangeable for Subordinated Debt
Securities of other denominations of a like aggregate principal amount at the
corporate trust office of the Institutional Trustee in New York, New York;
provided, that payment of interest may be made at the option of Phillips by
check mailed to the address of the holder entitled thereto or by wire transfer
to an account appropriately designated by the holder entitled thereto.
Notwithstanding the foregoing, so long as the holder of any Subordinated Debt
Securities is the Institutional Trustee, the payment of principal and interest
on the Subordinated Debt Securities held by the Institutional Trustee will be
made at such place and to such account as may be designated by the Institutional
Trustee.
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The Indenture does not contain provisions that afford holders of the
Subordinated Debt Securities protection in the event of a highly leveraged
transaction or other similar transaction involving Phillips that may adversely
affect such holders.
SUBORDINATION
The Indenture provides that the Subordinated Debt Securities are
subordinated and junior in right of payment to all Senior Indebtedness of
Phillips. No payment of principal (including redemption and sinking fund
payments), premium, if any, or interest on the Subordinated Debt Securities may
be made (i) if any Senior Indebtedness of Phillips is not paid when due, (ii)
any applicable grace period with respect to such default has ended and such
default has not been cured or waived or ceased to exist or (iii) if the maturity
of any Senior Indebtedness of Phillips has been accelerated because of a
default. Upon any distribution of assets of Phillips to creditors upon any
dissolution, winding-up, liquidation or reorganization, whether voluntary or
involuntary, or in bankruptcy, insolvency, receivership or other proceedings,
all principal, premium, if any, and interest due or to become due on all Senior
Indebtedness of Phillips must be paid in full before the holders of Subordinated
Debt Securities are entitled to receive or retain any payment. Upon satisfaction
of all claims of all Senior Indebtedness then outstanding, the rights of the
holders of the Subordinated Debt Securities will be subrogated to the rights of
the holders of Indebtedness of Phillips to receive payments or distributions
applicable to Senior Indebtedness until all amounts owing on the Subordinated
Debt Securities are paid in full.
The term "Senior Indebtedness" means, with respect to Phillips, (i) the
principal, premium, if any, and interest in respect of (A) indebtedness of such
obligor, for money borrowed including production payments, proceeds production
payments and similar obligations and (B) indebtedness evidenced by securities,
debentures, bonds or other similar instruments issued by such obligor, (ii) all
capital lease obligations of such obligor, (iii) all obligations of such obligor
issued or assumed as the deferred purchase price of property, all conditional
sale obligations of such obligor and all obligations of such obligor under any
title retention agreement (but excluding trade accounts payable arising in the
ordinary course of business), (iv) all obligations of such obligor for the
reimbursement on any letter of credit, banker's acceptance, security purchase
facility or similar credit transaction, (v) all obligations of the type referred
to in clauses (i) through (iv) above of other persons for the payment of which
such obligor is responsible or liable as obligor, guarantor or otherwise and
(vi) all obligations of the type referred to in clauses (i) through (v) above of
other persons secured by any lien on any property or asset of such obligor
(whether or not such obligation is assumed by such obligor), except for (1) any
such indebtedness that is by its terms subordinated to or ranks pari passu with
the Subordinated Debt Securities and (2) any indebtedness between or among such
obligor or its affiliates, including all other debt securities and guarantees in
respect of those debt securities, issued to (a) any other Phillips Trust or a
trustee of such trust and (b) any other trust, or a trustee of such trust,
partnership or other entity affiliated with Phillips that is a financing vehicle
of Phillips (a "financing entity") in connection with the issuance by such
financial entity of Preferred Securities or other securities that rank pari
passu with, or junior to, the Preferred Securities. Such Senior Indebtedness
shall continue to be Senior Indebtedness and be entitled to the benefits of the
subordination provisions irrespective of any amendment, modification or waiver
of any term of such Senior Indebtedness.
The Indenture does not limit the aggregate amount of Senior Indebtedness
that may be issued by Phillips. As of April 30, 1996, Senior Indebtedness of
Phillips aggregated approximately $3.1 billion.
OPTIONAL REDEMPTION
Phillips shall have the right to redeem the Subordinated Debt Securities,
in whole or in part, from time to time, on or after May 29, 2001, or at any time
in certain circumstances upon the occurrence of a Tax Event as described under
"Description of the Preferred Securities -- Tax Event Redemption or
Distribution," upon not less than 30 nor more than 60 days notice, at a
redemption price equal to 100 percent of the principal amount to be redeemed
plus any accrued and unpaid interest, including Additional Interest, if any, to
the redemption date. If a partial redemption of the Preferred Securities
resulting from a partial redemption of the Subordinated Debt Securities would
result in the delisting of the Preferred Securities, Phillips may only redeem
the Subordinated Debt Securities in whole.
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INTEREST
Each Subordinated Debt Securities shall bear interest at the rate of 8.24
percent per annum from the original date of issuance, payable quarterly in
arrears on March 31, June 30, September 30 and December 31 of each year (each an
"Interest Payment Date"), commencing June 30, 1996, to the person in whose name
such Subordinated Debt Securities is registered, subject to certain exceptions,
at the close of business on the Business Day next preceding such Interest
Payment Date. In the event the Subordinated Debt Securities shall not continue
to remain in book-entry only form, Phillips shall have the right to select
record dates, which shall be more than one Business Day prior to the Interest
Payment Date.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. The amount of interest payable for
any period shorter than a full quarterly period for which interest is computed,
will be computed on the basis of the actual number of days elapsed per 30-day
month. In the event that any date on which interest is payable on the
Subordinated Debt Securities is not a Business Day, then payment of the interest
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such Business Day is in the next succeeding calendar year, then
such payment shall be made on the immediately preceding Business Day, in each
case with the same force and effect as if made on such date.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
Phillips shall have the right at any time, and from time to time, during
the term of the Subordinated Debt Securities to defer payments of interest by
extending the interest payment period for a period not exceeding 20 consecutive
quarters, at the end of which Extension Period, Phillips shall pay all interest
then accrued and unpaid (including any Additional Interest, as herein defined)
together with interest thereon compounded quarterly at the rate specified for
the Subordinated Debt Securities to the extent permitted by applicable law
("Compound Interest"); provided, that during any such Extension Period, (a)
Phillips shall not declare or pay dividends on, make any distribution with
respect to, or redeem, purchase, acquire or make a liquidation payment with
respect to any of its capital stock (other than (i) purchases or acquisitions of
shares of Phillips Common Stock in connection with the satisfaction by Phillips
of its obligations under any employee benefit plans, (ii) as a result of a
reclassification of Phillips capital stock or the exchange or conversion of one
class or series of Phillips' capital stock for another class or series of
Phillips capital stock or (iii) the purchase of fractional interests in shares
of Phillips' capital stock pursuant to the conversion or exchange provisions of
such Phillips capital stock or the security being converted or exchanged), (b)
Phillips shall not make any payment of interest, principal or premium, if any,
on or repay, repurchase or redeem any debt securities issued by Phillips that
rank pari passu with or junior to the Subordinated Debt Securities and (c)
Phillips shall not make any guarantee payments with respect to the foregoing
(other than pursuant to the Guarantee). Prior to the termination of any such
Extension Period, Phillips may further defer payments of interest by extending
the interest payment period; provided, however, that, such Extension Period,
including all such previous and further extensions, may not exceed 20
consecutive quarters or beyond the maturity of the Subordinated Debt Securities.
Upon the termination of any Extension Period and the payment of all amounts then
due, Phillips may commence a new Extension Period, subject to the terms set
forth in this section. No interest during an Extension Period, except at the end
thereof, shall be due and payable. Phillips has no present intention of
exercising its right to defer payments of interest by extending the interest
payment period on the Subordinated Debt Securities. If the Institutional Trustee
shall be the sole holder of the Subordinated Debt Securities, Phillips shall
give the Regular Trustees and the Institutional Trustee notice of its selection
of such Extension Period one Business Day prior to the earlier of (i) the date
distributions on the Preferred Securities are payable or (ii) the date the
Regular Trustees are required to give notice to the New York Stock Exchange (or
other applicable self-regulatory organization) or to holders of the Preferred
Securities of the record date or the date such distribution is payable. The
Regular Trustees shall give notice of Phillips' selection of such Extension
Period to the holders of the Preferred Securities. If the Institutional Trustee
shall not be the sole holder of the Subordinated Debt Securities, Phillips shall
give the holders of the Subordinated Debt Securities notice of its selection of
such Extension Period 10 Business Days prior to the earlier of (i) the Interest
Payment Date or (ii) the date upon which Phillips is required to give notice to
the New York Stock Exchange
S-25
<PAGE> 26
(or other applicable self-regulatory organization) or to holders of the
Subordinated Debt Securities of the record or payment date of such related
interest payment.
ADDITIONAL INTEREST
If at any time the Trust shall be required to pay any taxes, duties,
assessments or governmental charges of whatever nature (other than withholding
taxes) imposed by the United States, or any other taxing authority, then, in any
such case, Phillips will pay as additional interest ("Additional Interest") such
additional amounts as shall be required so that the net amounts received and
retained by the Trust after paying any such taxes, duties, assessments or other
governmental charges will be not less than the amounts the Trust would have
received had no such taxes, duties, assessments or other governmental charges
been imposed.
PROPOSED TAX LEGISLATION
On March 19, 1996, President Clinton proposed the Proposed Legislation
which, among other things, would generally deny corporate issuers a deduction
for interest in respect of certain debt obligations issued on or after December
7, 1995, if such debt obligations have a maximum term in excess of twenty years
and are not shown as indebtedness on the issuer's applicable consolidated
balance sheet. On March 29, 1996, Senate Finance Committee Chairman William V.
Roth, Jr. and House Ways and Means Committee Chairman Bill Archer issued the
Joint Statement indicating their intent that certain legislative proposals
initiated by the Clinton administration, including the Proposed Legislation,
that may be adopted by either of the tax-writing committees of Congress would
have an effective date that is no earlier than the date of "appropriate
Congressional action." Based upon the Joint Statement, it is expected that if
the Proposed Legislation were to be enacted, such legislation would not apply to
the Subordinated Debt Securities. There can be no assurances, however, that the
effective date guidance contained in the Joint Statement will be incorporated
into the Proposed Legislation, if enacted, or that other legislation enacted
after the date hereof will not otherwise adversely affect the ability of the
Company to deduct the interest payable on the Subordinated Debt Securities.
Accordingly, there can be no assurance that a Tax Event will not occur. See
"Description of the Preferred Securities -- Tax Event Redemption or
Distribution."
INDENTURE EVENTS OF DEFAULT
If any Indenture Event of Default shall occur and be continuing, the
Institutional Trustee, as the holder of the Subordinated Debt Securities, will
have the right to declare the principal of and the interest on the Subordinated
Debt Securities (including any Compound Interest and Additional Interest, if
any) and any other amounts payable under the Indenture to be forthwith due and
payable and to enforce its other rights as a creditor with respect to the
Subordinated Debt Securities. See "Description of Subordinated Debt Securities
- -- Events of Default" in the accompanying Prospectus for a description of the
Events of Default. An Indenture Event of Default also constitutes a Declaration
Event of Default. The holders of Preferred Securities in certain circumstances
have the right to direct the Institutional Trustee to exercise its rights as the
holder of the Subordinated Debt Securities. See "Description of the Preferred
Securities -- Declaration Events of Default" and "-- Voting Rights."
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing and such event is attributable to the failure of Phillips to pay
interest or principal on the Subordinated Debt Securities on the date such
interest or principal is otherwise payable, Phillips acknowledges that a holder
of Preferred Securities may then institute a Direct Action for payment on or
after the respective due date specified in the Subordinated Debt Securities.
Notwithstanding any payments made to such holder of Preferred Securities by
Phillips in connection with a Direct Action, Phillips shall remain obligated to
pay the principal of or interest on the Subordinated Debt Securities held by the
Trust or the Institutional Trustee of the Trust, and Phillips shall be
subrogated to the rights of the holder of such Preferred Securities with respect
to payments on the Preferred Securities to the extent of any payments made by
the Company to such holder in any Direct Action. The holders of Preferred
Securities will not be able to exercise directly any other remedy available to
the holders of the Subordinated Debt Securities.
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<PAGE> 27
BOOK-ENTRY AND SETTLEMENT
If distributed to holders of Preferred Securities in connection with the
involuntary or voluntary dissolution, winding-up or liquidation of the Trust as
a result of the occurrence of a Tax Event, the Subordinated Debt Securities will
be issued in the form of one or more global certificates (each a "Global
Security") registered in the name of the depositary or its nominee. Except under
the limited circumstances described below, Subordinated Debt Securities
represented by the Global Security will not be exchangeable for, and will not
otherwise be issuable as, Subordinated Debt Securities in definitive form. The
Global Securities described above may not be transferred except by the
depositary to a nominee of the depositary or by a nominee of the depositary to
the depositary or another nominee of the depositary or to a successor depositary
or its nominee.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
laws may impair the ability to transfer beneficial interests in such a Global
Security.
Except as provided below, owners of beneficial interests in such a Global
Security will not be entitled to receive physical delivery of Subordinated Debt
Securities in definitive form and will not be considered the holders (as defined
in the Indenture) thereof for any purpose under the Indenture, and no Global
Security representing Subordinated Debt Securities shall be exchangeable, except
for another Global Security of like denomination and tenor to be registered in
the name of the Depositary or its nominee or to a successor Depositary or its
nominee. Accordingly, each Beneficial Owner must rely on the procedures of the
Depositary or if such person is not a Participant, on the procedures of the
Participant through which such person owns its interest to exercise any rights
of a holder under the Indenture.
THE DEPOSITARY
If Subordinated Debt Securities are distributed to holders of Preferred
Securities in liquidation of such holders' interests in the Trust, DTC will act
as securities depositary for the Subordinated Debt Securities. For a description
of DTC and the specific terms of the depositary arrangements, see "Description
of the Preferred Securities -- Book-Entry Only Issuance -- The Depository Trust
Company." As of the date of this Prospectus Supplement, the description therein
of DTC's book-entry system and DTC's practices as they relate to purchases,
transfers, notices and payments with respect to the Preferred Securities apply
in all material respects to any debt obligations represented by one or more
Global Securities held by Phillips. Phillips may appoint a successor to DTC or
any successor depositary in the event DTC or such successor depositary is unable
or unwilling to continue as a depositary for the Global Securities.
None of Phillips, the Trust, the Institutional Trustee, any paying agent
and any other agent of Phillips, or the Debt Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Security
for such Subordinated Debt Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
DISCONTINUANCE OF THE DEPOSITARY'S SERVICES
A Global Security shall be exchangeable for Subordinated Debt Securities
registered in the names of persons other than the Depositary or its nominee only
if (i) the Depositary notifies Phillips that it is unwilling or unable to
continue as a depositary for such Global Security and no successor depositary
shall have been appointed, (ii) the Depositary, at any time, ceases to be a
clearing agency registered under the Exchange Act at which time the Depositary
is required to be so registered to act as such depositary and no successor
depositary shall have been appointed, (iii) Phillips, in its sole discretion,
determines that such Global Security shall be so exchangeable or (iv) there
shall have occurred an Event of Default with respect to such Subordinated Debt
Securities. Any Global Security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for Subordinated Debt Securities registered in
such names as the Depositary shall direct. It is expected that such instructions
will be based upon directions received by the Depositary from its Participants
with respect to ownership of beneficial interests in such Global Security.
S-27
<PAGE> 28
GOVERNING LAW
The Indenture and the Subordinated Debt Securities will be governed by, and
construed in accordance with, the internal laws of the State of New York.
MISCELLANEOUS
The Indenture will provide that Phillips will pay all fees and expenses
related to (i) the offering of the Trust Securities and the Subordinated Debt
Securities, (ii) the organization, maintenance and dissolution of the Trust,
(iii) the retention of the Phillips Trustees and (iv) the enforcement by the
Institutional Trustee of the rights of the holders of the Preferred Securities.
The payment of such fees and expenses will be fully and unconditionally
guaranteed by Phillips.
Phillips will have the right at all times to assign any of its respective
rights or obligations under the Indenture to a direct or indirect wholly-owned
subsidiary of Phillips; provided that, in the event of any such assignment,
Phillips will remain liable for all of their respective obligations. Subject to
the foregoing, the Indenture will be binding upon and inure to the benefit of
the parties thereto and their respective successors and assigns. The Indenture
provides that it may not otherwise be assigned by the parties thereto.
EFFECT OF OBLIGATIONS UNDER THE
SUBORDINATED DEBT SECURITIES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of the Trust is to issue
the Trust Securities evidencing undivided beneficial interests in the assets of
the Trust, and to invest the proceeds from such issuance and sale in the
Subordinated Debt Securities.
As long as payments of interest and other payments are made when due on the
Subordinated Debt Securities, such payments will be sufficient to cover
distributions and payments due on the Trust Securities because of the following
factors: (i) the aggregate principal amount of Subordinated Debt Securities will
be equal to the sum of the aggregate stated liquidation amount of the Trust
Securities; (ii) the interest rate and the interest and other payment dates on
the Subordinated Debt Securities will match the distribution rate and
distribution and other payment dates for the Preferred Securities; (iii)
Phillips shall pay all, and the Trust shall not be obligated to pay, directly or
indirectly, all costs, expenses, debt, and obligations of the Trust (other than
with respect to the Trust Securities); and (iv) the Declaration further provides
that the Phillips Trustees shall not take or cause or permit the Trust to, among
other things, engage in any activity that is not consistent with the purposes of
the Trust.
Payments of distributions (to the extent funds therefor are available) and
other payments due on the Preferred Securities (to the extent funds therefor are
available) are guaranteed by Phillips as and to the extent set forth under
"Description of the Preferred Securities Guarantees" in the accompanying
Prospectus. If Phillips does not make interest payments on the Subordinated Debt
Securities purchased by the Trust, it is expected that the Trust will not have
sufficient funds to pay distributions on the Preferred Securities. The Guarantee
does not apply to any payment of distributions unless and until the Trust has
sufficient funds for the payment of such distributions. The Guarantee covers the
payment of distributions and other payments on the Preferred Securities only if
and to the extent that Phillips has made a payment of interest or principal on
the Subordinated Debt Securities held by the Trust as its sole asset. The
Guarantee, when taken together with Phillips' obligations under the Subordinated
Debt Securities and the Indenture and its obligations under the Declaration,
including its obligations to pay costs, expenses, debts and liabilities of the
Trust (other than with respect to the Trust Securities), provide a full and
unconditional guarantee of amounts on the Preferred Securities.
If Phillips fails to make interest or other payments on the Subordinated
Debt Securities when due (taking account of any Extension Period), the
Declaration provides a mechanism whereby the holders of the Preferred
Securities, using the procedures described in "Description of the Preferred
Securities -- Book-Entry Only Issuance -- The Depository Trust Company" and
"-- Voting Rights," may direct the Institutional Trustee to enforce its rights
under the Subordinated Debt Securities. If the Institutional Trustee fails to
enforce its rights
S-28
<PAGE> 29
under the Subordinated Debt Securities, a holder of Preferred Securities may
institute a legal proceeding against Phillips to enforce the Institutional
Trustee's rights under the Subordinated Debt Securities without first
instituting any legal proceeding against the Institutional Trustee or any other
person or entity. Notwithstanding the foregoing, if a Declaration Event of
Default has occurred and is continuing and such event is attributable to the
failure of Phillips to pay interest or principal on the Subordinated Debt
Securities on the date such interest or principal is otherwise payable (or in
the case of redemption on the redemption date), then a holder of Preferred
Securities may institute a Direct Action for payment on or after the respective
due date specified in the Subordinated Debt Securities. In connection with such
Direct Action, Phillips will be subrogated to the rights of such holder of
Preferred Securities under the Declaration to the extent of any payment made by
Phillips to such holder of Preferred Securities in such Direct Action. Phillips,
under the Guarantee, acknowledges that the Guarantee Trustee shall enforce the
Guarantee on behalf of the holders of the Preferred Securities. If Phillips
fails to make payments under the Guarantee, the Guarantee provides a mechanism
whereby the holders of the Preferred Securities may direct the Guarantee Trustee
to enforce its rights thereunder. Any holder of Preferred Securities may
institute a legal proceeding directly against Phillips to enforce the Guarantee
Trustee's rights under the Guarantee without first instituting a legal
proceeding against the Trust, the Guarantee Trustee, or any other person or
entity.
Phillips and the Trust believe that the above mechanisms and obligations,
taken together, provide a full and unconditional guarantee by Phillips of
payments due on the Preferred Securities. See "Description of the Preferred
Securities Guarantees -- General" in the accompanying Prospectus.
UNITED STATES FEDERAL INCOME TAXATION
GENERAL
In the opinion of Skadden, Arps, Slate, Meagher & Flom, special tax counsel
to Phillips and the Trust, the following is a summary of certain of the material
United States federal income tax consequences of the purchase, ownership and
disposition of Preferred Securities. Unless otherwise stated, this summary deals
only with Preferred Securities held as capital assets by holders who purchase
the Preferred Securities upon original issuance ("Initial Holders"). It does not
deal with special classes of holders such as banks, thrifts, real estate
investment trusts, regulated investment companies, insurance companies, dealers
in securities or currencies, tax-exempt investors, or persons that will hold the
Preferred Securities as a position in a "straddle," as part of a "synthetic
security" or "hedge," as part of a "conversion transaction" or other integrated
investment, or as other than a capital asset. This summary also does not address
the tax consequences to persons that have a functional currency other than the
U.S. Dollar or the tax consequences to shareholders, partners or beneficiaries
of a holder of Preferred Securities. Further, it does not include any
description of any alternative minimum tax consequences or the tax laws of any
state or local government or of any foreign government that may be applicable to
the Preferred Securities. This summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change, possibly on a retroactive basis.
CLASSIFICATION OF THE SUBORDINATED DEBT SECURITIES
In connection with the issuance of the Subordinated Debt Securities,
Skadden, Arps, Slate, Meagher & Flom, special tax counsel to Phillips and the
Trust, will render its opinion generally to the effect that under then current
law and assuming full compliance with the terms of the Indenture (and certain
other documents), and based on certain facts and assumptions contained in such
opinion, the Subordinated Debt Securities will be classified for United States
federal income tax purposes as indebtedness of Phillips.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Preferred Securities, Skadden, Arps,
Slate, Meagher & Flom, special tax counsel to Phillips and the Trust, will
render its opinion generally to the effect that, under then current law and
assuming full compliance with the terms of the Declaration and the Indenture
(and certain
S-29
<PAGE> 30
other documents), and based on certain facts and assumptions contained in such
opinion, the Trust will be classified for United States federal income tax
purposes as a grantor trust and not as an association taxable as a corporation.
Accordingly, for United States federal income tax purposes, each holder of
Preferred Securities generally will be considered the owner of an undivided
interest in the Subordinated Debt Securities, and each holder will be required
to include in its gross income any OID accrued with respect to its allocable
share of those Subordinated Debt Securities.
ORIGINAL ISSUE DISCOUNT
Because Phillips has the option, under the terms of the Subordinated Debt
Securities, to defer payments of interest by extending interest payment periods
for up to 20 quarters, all of the stated interest payments on the Subordinated
Debt Securities will be treated as "original issue discount." Holders of debt
instruments issued with OID must include that discount in income on an economic
accrual basis before the receipt of cash attributable to the interest,
regardless of their method of tax accounting. Generally, all of a holder's
taxable interest income with respect to the Subordinated Debt Securities will be
accounted for as OID, and actual distributions of stated interest will not be
separately reported as taxable income. The amount of OID that accrues in any
month will approximately equal the amount of the interest that accrues on the
Subordinated Debt Securities in that month at the stated interest rate. In the
event that the interest payment period is extended, holders will continue to
accrue OID approximately equal to the amount of the interest payment due at the
end of the extended interest payment period on an economic accrual basis over
the length of the extended interest period.
Because income on the Preferred Securities will constitute OID, corporate
holders of Preferred Securities will not be entitled to a dividends-received
deduction with respect to any income recognized with respect to the Preferred
Securities.
MARKET DISCOUNT AND BOND PREMIUM
Holders of Preferred Securities other than Initial Holders may be
considered to have acquired their undivided interests in the Subordinated Debt
Securities with market discount or acquisition premium as such phrases are
defined for United States federal income tax purposes. Such holders are advised
to consult their tax advisors as to the income tax consequences of the
acquisition, ownership and disposition of the Preferred Securities.
RECEIPT OF SUBORDINATED DEBT SECURITIES OR CASH UPON LIQUIDATION OF PHILLIPS
CAPITAL TRUST
Under certain circumstances, as described under the caption "Description of
the Preferred Securities -- Tax Event Redemption or Distribution," Subordinated
Debt Securities may be distributed to holders in exchange for the Preferred
Securities and in liquidation of the Trust. Under current law, such a
distribution, for United States federal income tax purposes, would be treated as
a non-taxable event to each holder, and each holder would receive an aggregate
tax basis in the Subordinated Debt Securities equal to such holder's aggregate
tax basis in its Preferred Securities. A holder's holding period in the
Subordinated Debt Securities so received in liquidation of the Trust would
include the period during which the Preferred Securities were held by such
holder. If, however, the related special event is a Tax Event which results in
the Trust being treated as an association taxable as a corporation, the
distribution would likely constitute a taxable event to holders of the Preferred
Securities.
Under certain circumstances described herein (see "Description of the
Preferred Securities"), the Subordinated Debt Securities may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their Preferred Securities. Under current law, such a redemption would, for
United States federal income tax purposes, constitute a taxable disposition of
the redeemed Preferred Securities, and a holder could recognize gain or loss as
if it sold such redeemed Preferred Securities for cash. See "United States
Federal Income Taxation -- Sales of Preferred Securities."
S-30
<PAGE> 31
SALES OF PREFERRED SECURITIES
A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between its adjusted tax basis in the Preferred Securities and
the amount realized on the sale of such Preferred Securities. A holder's
adjusted tax basis in the Preferred Securities generally will be its initial
purchase price increased by OID previously includable in such holder's gross
income to the date of disposition and decreased by payments received on the
Preferred Securities. Such gain or loss generally will be a capital gain or loss
and generally will be a long-term capital gain or loss if the Preferred
Securities have been held for more than one year.
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
Subordinated Debt Securities. A holder who disposes of his Preferred Securities
between record dates for payments of distributions thereon will be required to
include accrued but unpaid interest on the Subordinated Debt Securities through
the date of disposition in income as ordinary income, and to add such amount to
his adjusted tax basis in his pro rata share of the underlying Subordinated Debt
Securities deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis (which will include, in the form of OID, all accrued
but unpaid interest) a holder will recognize a capital loss. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a non-resident alien individual, a foreign
partnership, or a non-resident fiduciary of a foreign estate or trust.
Under present United States federal income tax law: (i) payments by the
Trust or any of its paying agents to any holder of a Preferred Security who or
which is a United States Alien Holder will not be subject to United States
federal withholding tax; provided that, (a) the beneficial owner of the
Preferred Security does not actually or constructively own 10 percent or more of
the total combined voting power of all classes of stock of Phillips entitled to
vote, (b) the beneficial owner of the Preferred Security is not a controlled
foreign corporation that is related to Phillips through stock ownership, and (c)
either (A) the beneficial owner of the Preferred Security certifies to the Trust
or its agent, under penalties of perjury, that it is not a United States holder
and provides its name and address or (B) a securities clearing organization,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business (a "Financial Institution"), and holds
the Preferred Security in such capacity, that certifies to the Trust or its
agent, under penalties of perjury, that such statement has been received from
the beneficial owner by it or by a Financial Institution between it and the
beneficial owner and furnishes the Trust or its agent with a copy thereof; and
(ii) a United States Alien Holder of a Preferred Security will not be subject to
United States federal withholding tax on any gain realized upon the sale or
other disposition of a Preferred Security.
PROPOSED TAX LEGISLATION
On March 19, 1996, President Clinton proposed the Proposed Legislation
which, among other things, would generally deny corporate issuers a deduction
for interest in respect of certain debt obligations issued on or after December
7, 1995, if such debt obligations have a maximum term in excess of twenty years
and are not shown as indebtedness on the issuer's applicable consolidated
balance sheet. On March 29, 1996, Senate Finance Committee Chairman William V.
Roth, Jr. and House Ways and Means Committee Chairman Bill Archer issued the
Joint Statement indicating their intent that certain legislative proposals
initiated by the Clinton administration, including the Proposed Legislation,
that may be adopted by either of the tax-writing committees of Congress would
have an effective date that is no earlier than the date of "appropriate
Congressional action." Based upon the Joint Statement, it is expected that if
the Proposed Legislation were to be enacted, such legislation would not apply to
the Subordinated Debt Securities. There can be no assurances, however, that the
effective date guidance contained in the Joint Statement will be incorporated
into the Proposed Legislation, if enacted, or that other legislation enacted
after the date hereof will not otherwise adversely affect the ability of the
Company to deduct the interest payable on the Subordinated Debt
S-31
<PAGE> 32
Securities. Accordingly, there can be no assurance that a Tax Event will not
occur. See "Description of the Preferred Securities -- Tax Event Redemption or
Distribution."
INFORMATION REPORTING TO HOLDERS
Generally, income on the Preferred Securities will be reported to holders
on Forms 1099, which forms should be mailed to holders of Preferred Securities
by January 31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Preferred Securities
may be subject to a "backup" withholding tax of 31 percent unless the holder
complies with certain identification requirements. Any withheld amounts will be
allowed as a credit against the holder's United States federal income tax,
provided the required information is provided to the Service.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO
THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL
OR OTHER TAX LAWS.
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), Phillips Capital Trust has agreed to sell to
each of the Underwriters named below, and each of the Underwriters, for whom
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Goldman, Sachs & Co. are
acting as representatives (the "Representatives"), has severally agreed to
purchase the number of Preferred Securities set forth opposite its name below.
In the Underwriting Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the Preferred
Securities offered hereby if any of the Preferred Securities are purchased. In
the event of default by an Underwriter, the Underwriting Agreement provides
that, in certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS PREFERRED SECURITIES
------------ --------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................... 1,620,000
Goldman, Sachs & Co................................................. 1,620,000
Morgan Stanley & Co. Incorporated................................... 1,550,000
PaineWebber Incorporated............................................ 1,550,000
Prudential Securities Incorporated.................................. 1,550,000
Smith Barney Inc.................................................... 1,550,000
Bear, Stearns & Co. Inc............................................. 90,000
Alex. Brown & Sons Incorporated..................................... 90,000
Commerzbank Capital Markets Corporation............................. 90,000
Cowen & Company..................................................... 90,000
Dain Bosworth Incorporated.......................................... 90,000
Dillon, Read & Co. Inc.............................................. 90,000
Donaldson, Lufkin & Jenrette Securities Corporation................. 90,000
A.G. Edwards & Sons, Inc............................................ 90,000
EVEREN Securities, Inc.............................................. 90,000
NatWest Securities Limited.......................................... 90,000
The Ohio Company.................................................... 90,000
</TABLE>
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<PAGE> 33
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS PREFERRED SECURITIES
------------ --------------------
<S> <C>
Oppenheimer & Co., Inc.............................................. 90,000
Piper Jaffray Inc................................................... 90,000
Raymond James & Associates, Inc..................................... 90,000
Tucker Anthony Incorporated......................................... 90,000
Wheat, First Securities, Inc........................................ 90,000
Advest, Inc......................................................... 40,000
Robert W. Baird & Co. Incorporated.................................. 40,000
J.C. Bradford & Co.................................................. 40,000
JW Charles Securities, Inc.......................................... 40,000
Craigie Incorporated................................................ 40,000
Crowell, Weedon & Co................................................ 40,000
Davenport & Co. of Virginia, Inc.................................... 40,000
Fahnestock & Co. Inc................................................ 40,000
Gruntal & Co., Incorporated......................................... 40,000
J.J.B. Hilliard, W. L. Lyons, Inc................................... 40,000
Interstate/Johnson Lane Corporation................................. 40,000
Janney Montgomery Scott Inc......................................... 40,000
Josephthal Lyon & Ross Incorporated................................. 40,000
Legg Mason Wood Walker, Incorporated................................ 40,000
McDonald & Company Securities, Inc.................................. 40,000
McGinn, Smith & Co., Inc............................................ 40,000
Mesirow Financial, Inc.............................................. 40,000
Morgan Keegan & Company, Inc........................................ 40,000
Olde Discount Corporation........................................... 40,000
Rauscher Pierce Refsnes, Inc........................................ 40,000
The Robinson-Humphrey Company, Inc.................................. 40,000
Roney & Co., LLC.................................................... 40,000
Scott & Stringfellow, Inc........................................... 40,000
Stifel, Nicolaus & Company, Incorporated............................ 40,000
Sutro & Co. Incorporated............................................ 40,000
US Clearing Corp.................................................... 40,000
Utendahl Capital Partners, L.P...................................... 40,000
Yamaichi International (America), Inc............................... 40,000
----------
Total.................................................. 12,000,000
==========
</TABLE>
The Underwriters propose to offer the Preferred Securities, in part,
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus Supplement, and, in part, to certain securities
dealers at such price less a concession of $.50 per Preferred Security. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $.35 per Preferred Security to certain brokers and dealers. After the
Preferred Securities are released for sale to the public, the offering price and
other selling terms may from time to time be varied by the Representative.
In view of the fact that the proceeds of the sale of the Preferred
Securities will ultimately be used to purchase the Subordinated Debt Securities
of Phillips, the Underwriting Agreement provides that Phillips will pay as
compensation ("Underwriters' Compensation") to the Underwriters arranging the
investment therein of such proceeds, an amount in immediately available funds of
$.7875 per Preferred Security (or $9,450,000 in the aggregate) for the accounts
of the several Underwriters; provided that, such compensation for sales of
10,000 or more Preferred Securities to any single purchaser will be $.50 per
Preferred Security. Therefore, to the extent of such sales, the actual amount of
Underwriters' Compensation will be less than the aggregate amount specified in
the preceding sentence.
S-33
<PAGE> 34
During a period of 30 days from the date of the Prospectus Supplement,
neither Phillips Capital Trust nor Phillips will, without the prior written
consent of the Underwriters, directly or indirectly, sell, offer to sell, grant
any option for sale of, or otherwise dispose of, any Preferred Securities, any
security convertible into or exchangeable into or exercisable for Preferred
Securities or Subordinated Debt Securities or any debt securities substantially
similar to the Subordinated Debt Securities or equity securities substantially
similar to the Preferred Securities (except for the Subordinated Debt Securities
and the Preferred Securities offered hereby).
The Preferred Securities have been approved for listing on the New York
Stock Exchange. Trading of the Preferred Securities on the New York Stock
Exchange is expected to commence within a 30-day period after the initial
delivery of the Preferred Securities. The Representatives have advised Phillips
Capital Trust that they intend to make a market in the Preferred Securities
prior to the commencement of trading on the New York Stock Exchange. The
Representatives will have no obligation to make a market in the Preferred
Securities, however, and may cease market making activities, if commenced, at
any time.
Prior to this offering there has been no public market for the Preferred
Securities. In order to meet one of the requirements for listing the Preferred
Securities on the New York Stock Exchange, the Underwriters will undertake to
sell lots of 100 or more Preferred Securities to a minimum of 400 beneficial
holders.
Phillips Capital Trust and Phillips have agreed to indemnify the
Underwriters against, or contribute to payments that the Underwriters may be
required to make in respect of, certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
Certain of the Underwriters engage in transactions with, and, from time to
time, have performed services for, Phillips and its subsidiaries in the ordinary
course of business.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Preferred
Securities will be passed upon on behalf of the Trust by Skadden, Arps, Slate,
Meagher & Flom, special Delaware counsel to the Trust. The validity of the
Subordinated Debt Securities and the Guarantee and certain matters relating
thereto will be passed upon for Phillips by Dale J. Billam, Senior Counsel of
Phillips. Certain United States federal income taxation matters will be passed
upon for Phillips and the Trust by Skadden, Arps, Slate, Meagher & Flom. Certain
legal matters will be passed upon for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom, New York, New York.
S-34
<PAGE> 35
PROSPECTUS
$750,000,000
PHILLIPS PETROLEUM COMPANY
SUBORDINATED DEBT SECURITIES
---------------------
PHILLIPS 66 CAPITAL I
PHILLIPS 66 CAPITAL II
PHILLIPS 66 CAPITAL III
PHILLIPS 66 CAPITAL IV
PREFERRED SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED BY
PHILLIPS PETROLEUM COMPANY
---------------------
Phillips Petroleum Company ("Phillips" or the "Company"), a Delaware
corporation, may from time to time offer its subordinated debentures, notes or
other evidence of indebtedness (the "Subordinated Debt Securities") in one or
more series and in amounts, at prices and on terms to be determined at the time
of the offering. The Subordinated Debt Securities when issued will be unsecured
obligations of the Company. The Company's obligations under the Subordinated
Debt Securities will be subordinate and junior in right of payment to certain
other indebtedness, as may be described in an accompanying Prospectus Supplement
(the "Prospectus Supplement") and in an aggregate amount to be set forth as of
the most recent practicable date in such Prospectus Supplement.
Phillips 66 Capital I, Phillips 66 Capital II, Phillips 66 Capital III and
Phillips 66 Capital IV (each, a "Phillips Capital Trust"), each a statutory
business trust formed under the laws of the State of Delaware, may offer, from
time to time, preferred securities, representing undivided beneficial interests
in the assets of the respective Phillips Capital Trust ("Preferred Securities").
The payment of periodic cash distributions ("distributions") with respect to
Preferred Securities of each of the Phillips Capital Trusts out of moneys held
by each of the Phillips Capital Trusts, and payment on liquidation, redemption
or otherwise with respect to such Preferred Securities, will be guaranteed by
Phillips to the extent described herein (each a "Preferred Securities
Guarantee"). See "Description of the Preferred Securities Guarantees" below.
Phillips' obligations under the Preferred Securities Guarantees are subordinate
and junior in right of payment to all other liabilities of Phillips and rank
pari passu with the most senior preferred stock, if any, issued from time to
time by Phillips. Subordinated Debt Securities may be issued and sold from time
to time in one or more series to a Phillips Capital Trust, or a trustee of such
Phillips Capital Trust, in connection with the investment of the proceeds from
the offering of Preferred Securities and Common Securities (as defined herein,
together the "Trust Securities") of such Phillips Capital Trust. The
Subordinated Debt Securities purchased by a Phillips Capital Trust may be
subsequently distributed pro rata to holders of Preferred Securities and Common
Securities in connection with the dissolution of such Phillips Capital Trust
upon the occurrence of certain events as may be described in an accompanying
Prospectus Supplement. The Subordinated Debt Securities and the Preferred
Securities and the related Preferred Securities Guarantees are sometimes
collectively referred to hereafter as the "Offered Securities."
Specific terms of the Subordinated Debt Securities of any series or the
Preferred Securities of any Phillips Capital Trust, the terms of which will
mirror the terms of the Subordinated Debt Securities held by any Phillips
Capital Trust, in respect of which this prospectus (the "Prospectus") is being
delivered will be set forth in a Prospectus Supplement with respect to such
securities, which will describe, without limitation and where applicable, the
following: (i) in the case of Subordinated Debt Securities, the specific
designation, aggregate principal amount, denomination, maturity, premium, if
any, any exchange, conversion, redemption or sinking fund provisions, if any,
interest rate (which may be fixed or variable), if any, the time and method of
calculating interest payments, if any, dates on which premium, if any, and
interest, if any, will be payable, the right of Phillips, if any, to defer
payment of interest on the Subordinated Debt Securities and the maximum length
of such deferral period, the initial public offering price, subordination terms,
and any listing on a securities exchange and other specific terms of the
offering; and (ii) in the case of Preferred Securities, the designation, number
of securities, liquidation preference per security, initial public offering
price, any listing on a securities exchange, distribution rate (or method of
calculation thereof), dates on which distributions shall be payable and dates
from which distributions shall accrue, any voting rights, terms for any
conversion or exchange into other securities, any redemption, exchange or
sinking fund provisions, any other rights, preferences, privileges, limitations
or restrictions relating to the Preferred Securities and the terms upon which
the proceeds of the sale of the Preferred Securities shall be used to purchase a
specific series of Subordinated Debt Securities of Phillips.
The Offered Securities may be offered in amounts, at prices and on terms to
be determined at the time of offering; provided, however, that the aggregate
initial public offering price of all Offered Securities shall not exceed
$750,000,000. The Prospectus Supplement relating to any series of Offered
Securities will contain information concerning certain United States federal
income tax considerations, if applicable to the Offered Securities.
Phillips and/or each of the Phillips Capital Trusts may sell the Offered
Securities directly, through agents designated from time to time, or through
underwriters or dealers. See "Plan of Distribution" below. If any agents of
Phillips and/or any Phillips Capital Trust or any underwriters or dealers are
involved in the sale of the Offered Securities, the names of such agents,
underwriters or dealers and any applicable commissions and discounts will be set
forth in any related Prospectus Supplement.
This Prospectus may not be used to consummate sales of securities unless
accompanied by a Prospectus Supplement.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is May 7, 1996
<PAGE> 36
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS
SUPPLEMENT IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS OR ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PHILLIPS
PETROLEUM COMPANY, PHILLIPS 66 CAPITAL I OR THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS SUPPLEMENT NOR ANY
SALE MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF PHILLIPS PETROLEUM
COMPANY OR PHILLIPS 66 CAPITAL I SINCE THE DATE HEREOF. THIS PROSPECTUS OR ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
AVAILABLE INFORMATION
This Prospectus constitutes a part of a combined Registration Statement on
Form S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") filed by Phillips and the Phillips Capital Trusts with the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the Offered Securities. This
Prospectus does not contain all of the information set forth in such
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the SEC, although it does include a summary of the
material terms of the Indenture and the Declaration of Trust. Reference is made
to such Registration Statement and to the exhibits relating thereto for further
information with respect to the Company, the Phillips Capital Trusts and the
Offered Securities. Any statements contained herein concerning the provisions of
any document filed as an exhibit to the Registration Statement or otherwise
filed with the SEC or incorporated by reference herein are not necessarily
complete, and, in each instance, reference is made to the copy of such document
so filed for a more complete description of the matter involved. Each such
statement is qualified in its entirety by such reference.
Phillips is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the SEC.
Reports, proxy statements and other information concerning Phillips can be
inspected and copied at prescribed rates at the SEC's Public Reference Room,
Judiciary Plaza, 450 Fifth Street, Northwest, Washington, D.C. 20549, as well as
the following Regional Offices of the SEC: 7 World Trade Center, New York, New
York 10048; and Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661. Such reports, proxy statements and other information may also be
inspected at the offices of the following stock exchanges on which certain of
the Company's securities are listed: the New York Stock Exchange, 20 Broad
Street, New York, New York 10005; the Pacific Stock Exchange, 301 Pine Street,
San Francisco, California 94104; and The Toronto Stock Exchange, The Exchange
Tower, 2 First Canadian Place, Toronto, Ontario, Canada M5X 1J2.
No separate financial statements of any of the Phillips Capital Trusts have
been included herein. Phillips does not consider that such financial statements
would be material to holders of the Preferred Securities because (i) all of the
voting securities of each of the Phillips Capital Trusts will be owned, directly
or indirectly, by Phillips, a reporting company under the Exchange Act, (ii)
each of the Phillips Capital Trusts has no independent operations but exists for
the sole purpose of issuing securities representing undivided beneficial
interests in the assets of such Phillips Capital Trust and investing the
proceeds thereof in Subordinated Debt Securities issued by Phillips, and (iii)
Phillips' obligations described herein and in any accompanying Prospectus
Supplement to provide certain indemnities in respect of and be responsible for
certain costs, expenses, debts and liabilities of each of Phillips 66 Capital I,
II, III and IV under the Indenture and any supplemental indenture thereto and
pursuant to the Declarations of each Trust, the guarantee issued
2
<PAGE> 37
with respect to Preferred Securities issued by that Trust, the Subordinated Debt
Securities purchased by that Trust and the related Indenture, taken together,
constitute a full and unconditional guarantee of payments due on the Preferred
Securities. See "Description of the Subordinated Debt Securities" and
"Description of the Preferred Securities Guarantees."
The Phillips Capital Trusts are not currently subject to the information
reporting requirements of the Exchange Act. The Phillips Capital Trusts will
become subject to such requirements upon the effectiveness of the Registration
Statement, although they intend to seek and expect to receive exemptions
therefrom.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are incorporated by reference in this Prospectus:
(a) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, filed with the Securities and Exchange Commission on
February 23, 1996;
(b) the Company's Proxy Statement for the Annual Meeting of
Stockholders on May 13, 1996, filed with the Securities and Exchange
Commission on March 29, 1996; and
(c) the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996, filed with the Securities and Exchange Commission on May
14, 1996.
All documents filed by Phillips pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus and prior to the termination of the offering of the Offered
Securities shall be deemed to be incorporated by reference in this Prospectus
and to be a part hereof from the date of filing of such documents. Any statement
contained in this Prospectus or in a document incorporated or deemed to be
incorporated by reference herein or in any Prospectus Supplement shall be deemed
to be modified or superseded for purposes of this Prospectus or any Prospectus
Supplement to the extent that a statement contained herein or therein (or in any
subsequently filed document that also is or is deemed to be incorporated by
reference herein or therein) modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus or any Prospectus
Supplement.
Phillips will provide without charge to each person to whom a copy of this
Prospectus has been delivered, upon the written or oral request of such person,
a copy of any or all of the documents referred to above which have been or may
be incorporated by reference herein (other than exhibits to such documents
unless such exhibits are specifically incorporated by reference in such
documents). Requests for such copies should be directed to Dale J. Billam,
Secretary, Phillips Petroleum Company, 1234 Adams Building, Bartlesville,
Oklahoma 74004 (telephone (918) 661-5638).
PHILLIPS PETROLEUM COMPANY
Phillips Petroleum Company, incorporated in Delaware in 1917, is a fully
integrated oil company engaged in petroleum exploration and production on a
worldwide basis, petroleum refining and marketing, and natural gas gathering and
processing, principally in the United States. Phillips also produces and
distributes chemicals worldwide. Its principal executive offices are located in
the Phillips Building, Bartlesville, Oklahoma 74004 (telephone (918) 661-6600).
THE TRUSTS
Each of Phillips 66 Capital I, Phillips 66 Capital II, Phillips 66 Capital
III and Phillips 66 Capital IV is a statutory business trust formed under
Delaware law pursuant to (i) a separate declaration of trust (each a
"Declaration") executed by the Company, as sponsor for such trust (the
"Sponsor") and the Phillips Capital Trustees (as defined herein) for such trust
and (ii) the filing of a certificate of trust with the Delaware Secretary of
State on February 23, 1996. Each Phillips Capital Trust exists for the exclusive
purposes of (i) issuing the Preferred Securities and common securities
representing undivided beneficial interests in the assets of such Trust (the
"Common Securities" and, together with the Preferred Securities, the "Trust
Securities"), (ii) investing the gross proceeds of the Trust Securities in the
Subordinated Debt Securities, and (iii) engaging in only those other activities
necessary or incidental thereto. All of the Common Securities will be directly
or indirectly owned by the Company. The Common Securities will rank pari passu,
and payments
3
<PAGE> 38
will be made thereon pro rata, with the Preferred Securities except that upon an
event of default under the Declaration, the rights of the holders of the Common
Securities to payment in respect of distributions and payments upon liquidation,
redemption and otherwise will be subordinated to the rights of the holders of
the Preferred Securities. The Company will, directly or indirectly, acquire
Common Securities in an aggregate liquidation amount equal to 3 percent of the
total capital of each Phillips Capital Trust. Each Phillips Capital Trust has a
term of approximately 55 years, but may earlier terminate as provided in the
Declaration. Each Phillips Capital Trust's business and affairs will be
conducted by the trustees (the "Phillips Capital Trustees") appointed by the
Company, as the direct or indirect holder of all the Common Securities. The
holder of the Common Securities will be entitled to appoint, remove or replace
any of, or increase or reduce the number of, the Phillips Capital Trustees of a
Phillips Capital Trust. The duties and obligations of the Phillips Capital
Trustees shall be governed by the Declaration of such Phillips Capital Trust. A
majority of the Phillips Capital Trustees (the "Regular Trustees") of each
Phillips Capital Trust will be persons who are employees or officers of or
affiliated with the Company. One Phillips Capital Trustee of each Phillips
Capital Trust will be a financial institution which will be unaffiliated with
the Company and which shall act as property trustee and as indenture trustee for
purposes of the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"), pursuant to the terms set forth in a Prospectus Supplement (the "Property
Trustee"). In addition, unless the Property Trustee maintains a principal place
of business in the State of Delaware, and otherwise meets the requirements of
applicable law, one Phillips Capital Trustee of each Phillips Capital Trust will
have its principal place of business or reside in the State of Delaware (the
"Delaware Trustee"). The Company will pay all fees and expenses related to the
Phillips Capital Trusts and the offering of Trust Securities, the payment of
which will be guaranteed by the Company. The office of the Delaware Trustee for
each Phillips Capital Trust in the State of Delaware is The Bank of New York
(Delaware), White Clay Center, Route 273, Newark, Delaware 19711. The principal
place of business of each Phillips Capital Trust shall be c/o Phillips Petroleum
Company, 3 Phillips Building, Bartlesville, Oklahoma 74004.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31 YEARS ENDED DECEMBER 31
------------ ------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges....... 10.8 3.5 3.4 3.2 2.3 2.1 2.0
</TABLE>
For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income before income taxes, extraordinary items and
cumulative effect of changes in accounting principle, plus fixed charges
(excluding capitalized interest and the portion of the preferred dividend
requirements of a subsidiary not previously deducted from pretax income, but
including amortization of amounts previously capitalized), less equity in
undistributed earnings of companies owned less than 50 percent. Fixed charges
consist of interest (including capitalized interest) on all indebtedness,
amortization of debt discount and expense, that portion of rental expense which
the Company believes to be representative of interest and the amounts accrued to
cover the preferred stock dividend requirements of a subsidiary. A statement
setting forth the computation of the unaudited ratios of earnings to fixed
charges is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
USE OF PROCEEDS
Each Phillips Capital Trust will use all proceeds received from the sale of
the Preferred Securities to purchase Subordinated Debt Securities from Phillips.
Phillips intends to add the net proceeds from the sale of the Subordinated Debt
Securities to its general funds, to be used for general corporate purposes,
including capital expenditures, repayment or repurchases of outstanding
long-term debt securities, investments in subsidiaries, working capital,
repayment of short-term commercial paper notes and/or other business
opportunities.
4
<PAGE> 39
DESCRIPTION OF THE SUBORDINATED DEBT SECURITIES
Subordinated Debt Securities may be issued from time to time in one or more
series under an Indenture (the "Indenture"), between the Company and The Bank of
New York, as Trustee (the "Debt Trustee"). The terms of the Subordinated Debt
Securities will include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act. The following summary of the
material terms does not purport to be complete and is subject in all respects to
the provisions of, and is qualified in its entirety by reference to, the
Indenture, which is filed as an exhibit to the Registration Statement of which
this Prospectus forms a part, and the Trust Indenture Act. Whenever particular
provisions or defined terms in the Indenture are referred to herein, such
provisions or defined terms are incorporated by reference herein. Section and
Article references used herein are references to provisions of the Indenture
unless otherwise noted.
GENERAL
The Subordinated Debt Securities will be unsecured, subordinated
obligations of the Company. The Indenture does not limit the aggregate principal
amount of Subordinated Debt Securities which may be issued thereunder and
provides that the Subordinated Debt Securities may be issued from time to time
in one or more series. The Subordinated Debt Securities are issuable in one or
more series pursuant to an indenture supplemental to the Indenture or a
resolution of the Company's Board of Directors or a special committee appointed
thereby (each, a "Supplemental Indenture"). (Section 2.03)
In the event Subordinated Debt Securities are issued to a Phillips Capital
Trust or a trustee of such trust in connection with the issuance of Trust
Securities by such Phillips Capital Trust, such Subordinated Debt Securities
subsequently may be distributed pro rata to the holders of such Trust Securities
in connection with the dissolution of such Phillips Capital Trust upon the
occurrence of certain events described in the Prospectus Supplement relating to
such Trust Securities. Only one series of Subordinated Debt Securities will be
issued to a Phillips Capital Trust or a trustee of such trust in connection with
the issuance of Trust Securities by such Phillips Capital Trust.
Reference is made to the Prospectus Supplement relating to the particular
Subordinated Debt Securities being offered thereby for the following terms: (1)
the designation of such Subordinated Debt Securities; (2) the aggregate
principal amount of such Subordinated Debt Securities; (3) the percentage of
their principal amount at which such Subordinated Debt Securities will be
issued; (4) the date or dates on which such Subordinated Debt Securities will
mature and the right, if any, to extend such date or dates; (5) the rate or
rates, if any, per annum, at which such Subordinated Debt Securities will bear
interest, or the method of determination of such rate or rates; (6) the date or
dates from which such interest shall accrue, the interest payment dates on which
such interest will be payable or the manner of determination of such interest
payment dates and the record dates for the determination of holders to whom
interest is payable on any such interest payment dates; (7) the right, if any,
to extend the interest payment periods and the duration of such extension; (8)
provisions for a sinking purchase or other analogous fund, if any; (9) the
period or periods, if any, within which, the price or prices of which, and the
terms and conditions upon which such Subordinated Debt Securities may be
redeemed, in whole or in part, at the option of the Company or the holder; (10)
the form of such Subordinated Debt Securities; and (11) any other specific terms
of the Subordinated Debt Securities. Principal, premium, if any, and interest,
if any, will be payable, and the Subordinated Debt Securities offered hereby
will be transferable, at the corporate trust office of the Debt Trustee in New
York, New York, provided that payment of interest, if any, may be made at the
option of the Company by check mailed to the address of the person entitled
thereto as it appears in the Security Register. (Sections 3.01 and 3.02)
If a Prospectus Supplement specifies that a series of Subordinated Debt
Securities is denominated in a currency or currency unit other than United
States dollars, such Prospectus Supplement shall also specify the denomination
in which such Subordinated Debt Securities will be issued and the coin or
currency in which the principal, premium, if any, and interest, if any, on such
Subordinated Debt Securities will be payable, which may be United States dollars
based upon the exchange rate for such other currency or currency unit existing
on or about the time a payment is due.
5
<PAGE> 40
The Indenture contains no covenants or other provisions to afford
protection to holders of the Subordinated Debt Securities in the event of a
highly leveraged transaction or a change in control of the Company, except to
the limited extent described under "Limitation on Mergers and Sales of Assets"
below.
FORM, EXCHANGE, REGISTRATION, TRANSFER AND PAYMENT
Unless otherwise specified in the applicable Prospectus Supplement, the
Subordinated Debt Securities will be issued in fully registered form without
coupons and in denominations of $1,000 and multiples of $1,000. No service
charge will be made for any transfer or exchange of the Subordinated Debt
Securities, but the Company or the Debt Trustee may require payment of a sum
sufficient to cover any tax or other government charge payable in connection
therewith. Where Subordinated Debt Securities of any series are issued in bearer
form, the special restrictions and considerations, including special offering
restrictions and special United States federal income tax considerations,
applicable to any such Subordinated Debt Securities and to payment on and
transfer and exchange of such Subordinated Debt Securities will be described in
the applicable Prospectus Supplement. Bearer Subordinated Debt Securities will
be transferrable by delivery.
Unless otherwise provided in the applicable Prospectus Supplement,
principal and premium, if any, or interest, if any, will be payable and the
Subordinated Debt Securities may be surrendered for payment or transferred at
the offices of the Debt Trustee as paying and authenticating agent, provided
that payment of interest on registered securities may be made at the option of
the Company by check mailed to the address of the person entitled thereto as it
appears in the Security Register. Payment of Subordinated Debt Securities in
bearer form will be made at such paying agencies outside of the United States as
the Company may appoint.
BOOK-ENTRY SUBORDINATED DEBT SECURITIES
The Subordinated Debt Securities of a series may be issued in whole or in
part in the form of one or more Global Securities that will be deposited with,
or on behalf of, a depositary (the "Global Depositary"), or its nominee,
identified in the Prospectus Supplement relating to such series. In such a case,
one or more Global Securities will be issued in a denomination or aggregate
denomination equal to the portion of the aggregate principal amount of
Outstanding Subordinated Debt Securities of the series to be represented by such
Global Security or Securities. Unless and until it is exchanged in whole or in
part for Subordinated Debt Securities in definitive registered form, a Global
Security may not be registered for transfer or exchange except as a whole by the
Global Depositary for such Global Security to a nominee for such Global
Depositary and except in the circumstances described in the applicable
Prospectus Supplement.
The specific terms of the depositary arrangement with respect to any
portion of a series of Subordinated Debt Securities to be represented by a
Global Security and a description of the Global Depositary will be provided in
the applicable Prospectus Supplement.
SUBORDINATION
The Subordinated Debt Securities will be subordinated and junior in right
of payment to certain other indebtedness of the Company to the extent set forth
in the applicable Prospectus Supplement.
CERTAIN COVENANTS OF THE COMPANY
Securities Issued to a Phillips Capital Trust. If Subordinated Debt
Securities are issued to a Phillips Capital Trust or a trustee of such trust in
connection with the issuance of Trust Securities by such Phillips Capital Trust
and (i) there shall have occurred any event that would constitute an Event of
Default (as defined herein) or (ii) the Company shall be in default with respect
to its payment of any obligations under the related Preferred Securities
Guarantee or Common Securities Guarantee, then (a) the Company shall not declare
or pay any dividend on, make any distributions with respect to, or redeem,
purchase or make a liquidation payment with respect to, any of its capital stock
(other than (i) purchases or acquisitions of shares of Phillips Common Stock in
connection with the satisfaction by Phillips of its obligations under any
employee benefit plans, (ii) as a result of a reclassification of Phillips
capital stock or the exchange or conversion of one class or series of Phillips
capital stock for another class or series of Phillips capital stock or (iii) the
purchase
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of fractional interests in shares of Phillips capital stock pursuant to the
conversion or exchange provisions of such Phillips capital stock or the security
being converted or exchanged) or make any guarantee payments with respect to the
foregoing, and (b) the Company shall not make any payment of interest, principal
or premium, if any, on or repay, repurchase or redeem any debt securities
(including guarantees) issued by the Company which rank pari passu with or
junior to such Subordinated Debt Securities.
If Subordinated Debt Securities are issued to a Phillips Capital Trust or a
trustee of such trust in connection with the issuance of Trust Securities by
such Phillips Capital Trust and the Company shall have given notice of its
election to defer payments of interest on such Subordinated Debt Securities by
extending the interest payment period as provided in the Indenture and such
period, or any extension thereof, shall be continuing, then (a) the Company
shall not declare or pay any dividend on, make any distributions with respect
to, or redeem, purchase or make a liquidation payment with respect to, any of
its capital stock, and (b) the Company shall not make any payment of interest,
principal or premium, if any, on or repay, repurchase or redeem any debt
securities (including guarantees) issued by the Company which rank pari passu
with or junior to such Subordinated Debt Securities.
In the event Subordinated Debt Securities are issued to a Phillips Capital
Trust or a trustee of such trust in connection with the issuance of Trust
Securities of such Phillips Capital Trust, for so long as such Trust Securities
remain outstanding, the Company will covenant (i) to directly or indirectly
maintain 100 percent ownership of the Common Securities of such Phillips Capital
Trust; provided, however, that any permitted successor of the Company under the
Indenture may succeed to the Company's ownership of such Common Securities, (ii)
to use its reasonable efforts to cause such Phillips Capital Trust (a) to remain
a statutory business trust, except in connection with the distribution of
Subordinated Debt Securities to the holders of Trust Securities in liquidation
of such Phillips Capital Trust, the redemption of all of the Trust Securities of
such Phillips Capital Trust, or certain mergers, consolidations or
amalgamations, each as permitted by the Declaration of such Phillips Capital
Trust, and (b) to otherwise continue not to be classified as an association
taxable as a corporation or partnership for United States federal income tax
purposes and (iii) to use its reasonable efforts to cause each holder of Trust
Securities to be treated as owning an undivided beneficial interest in the
Subordinated Debt Securities. (Section 3.09)
LIMITATION ON MERGERS AND SALES OF ASSETS
The Company shall not consolidate with, or merge into, any corporation or
convey or transfer its properties and assets substantially as an entirety to any
Person unless the successor entity shall be a corporation organized under the
laws of the United States or any State or the District of Columbia and shall
expressly assume the obligations of the Company under the Indenture. (Section
10.01)
EVENTS OF DEFAULT, WAIVER AND NOTICE
The Indenture provides than any one or more of the following described
events which has occurred and is continuing constitutes an "Event of Default"
with respect to each series of Subordinated Debt Securities:
(a) default for 30 days in payment of any interest on the Subordinated
Debt Securities of that series, including any Additional Interest in
respect thereof, when due; provided, however, that a valid extension of the
interest payment period by the Company shall not constitute a default in
the payment of interest for this purpose; or
(b) default in payment of principal and premium, if any, on the
Subordinated Debt Securities of that series when due either at maturity,
upon redemption, by declaration or otherwise; provided, however, that a
valid extension of the maturity of such Subordinated Debt Securities shall
not constitute a default for this purpose; or
(c) default by the Company in the performance of any other of the
covenants or agreements in the Indenture which shall not have been remedied
for a period of 90 days after notice; or
(d) certain events of bankruptcy, insolvency or reorganization of the
Company; or
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(e) in the event Subordinated Debt Securities are issued to a Phillips
Capital Trust or a trustee of such trust in connection with the issuance of
Trust Securities by such Phillips Capital Trust, the voluntary or
involuntary dissolution, winding-up or termination of such Phillips Capital
Trust, except in connection with the distribution of Subordinated Debt
Securities to the holders of Trust Securities in liquidation of such
Phillips Capital Trust, the redemption of all of the Trust Securities of
such Phillips Capital Trust, or certain mergers, consolidations or
amalgamations, each as permitted by the Declaration of such Phillips
Capital Trust. (Section 5.01)
The Indenture provides that the Debt Trustee may withhold notice to the holders
of a series of Subordinated Debt Securities (except in payment of principal or
of interest or premium on the Subordinated Debt Securities) if the Trustee
considers it in the interest of such holders to do so. (Section 5.08)
The Indenture provides that, (a) if an Event of Default due to the default
in the payment of principal, interest or premium, if any, on any series of
Subordinated Debt Securities shall have occurred and be continuing, either the
Debt Trustee or the holders of 25 percent in principal amount of the
Subordinated Debt Securities of all series affected thereby then outstanding may
declare the principal of all such Subordinated Debt Securities to be due and
payable immediately, and (b) if an Event of Default resulting from default in
the performance of any other of the covenants or agreements in the Indenture or
certain events of bankruptcy, insolvency and reorganization of the Company shall
have occurred and be continuing, either the Debt Trustee or the holders of 25
percent in principal amount of all Subordinated Debt Securities then outstanding
(treated as one class) may declare the principal of all Subordinated Debt
Securities to be due and payable immediately, but upon certain conditions such
declarations may be annulled and past defaults may be waived (except defaults in
payment of principal of or interest or premium on the Subordinated Debt
Securities) by the holders of a majority in principal amount of the Subordinated
Debt Securities of such series (or of all series, as the case may be) then
outstanding. (Section 5.01)
The holders of a majority in principal amount of the Subordinated Debt
Securities of any and all series affected and then outstanding shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Debt Trustee under the Indenture, provided that the
holders of the Subordinated Debt Securities shall have offered to the Debt
Trustee reasonable indemnity against expenses and liabilities. (Sections 5.07
and 5.04) The Indenture requires the annual filing by the Company with the Debt
Trustee of a certificate as to the absence of certain defaults under the
Indenture. (Section 3.07)
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Debt
Trustee, with the consent of the holders of not less than a majority in
principal amount of the Subordinated Debt Securities of all series affected by
such modification at the time outstanding, to modify the Indenture or any
supplemental indenture or the rights of the holders of the Subordinated Debt
Securities; provided that no such modification shall (i) extend the fixed
maturity of any Security, or reduce the principal amount thereof (including in
the case of a discounted Security the amount payable thereon in the event of
acceleration or the amount provable in bankruptcy) or any redemption premium
thereon, or reduce the rate or extend the time of payment of interest thereon,
or make the principal of, or interest or premium on, the Subordinated Debt
Securities payable in any coin or currency other than that provided in the
Subordinated Debt Securities, or impair or affect the right of any holder of
Subordinated Debt Securities to institute suit for the payment thereof or the
right of prepayment, if any, at the option of the holder, without the consent of
the holder of each Security so affected, or (ii) reduce the aforesaid percentage
of Subordinated Debt Securities the consent of the holders of which is required
for any such modification without the consent of the holders of each Security
affected. (Section 9.02)
DEFEASANCE AND DISCHARGE
The Indenture provides that the Company, at the Company's option: (a) will
be Discharged from any and all obligations in respect of the Subordinated Debt
Securities of a series (except for certain obligations to register the transfer
or exchange of Subordinated Debt Securities, replace stolen, lost or mutilated
Subordinated Debt Securities, maintain paying agencies and hold moneys for
payment in trust) or (b) need not
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comply with certain restrictive covenants of the Indenture (including those
described under "Certain Covenants of the Company"), in each case if the Company
deposits, in trust with the Debt Trustee or the Defeasance Agent, money or U.S.
Government Obligations which through the payment of interest thereon and
principal thereof in accordance with their terms will provide money, in an
amount sufficient to pay all the principal (including any mandatory sinking fund
payments) of, and interest and premium, if any, on, the Subordinated Debt
Securities of such series on the dates such payments are due in accordance with
the terms of such Subordinated Debt Securities. To exercise any such option, the
Company is required to deliver to the Debt Trustee and the Defeasance Agent, if
any, an opinion of counsel to the effect that (i) the deposit and related
defeasance would not cause the holders of the Subordinated Debt Securities of
such series to recognize income, gain or loss for federal income tax purposes
and, in the case of a Discharge pursuant to clause (a), such opinion shall be
accompanied by a private letter ruling to the effect received from the United
States Internal Revenue Service or a revenue ruling pertaining to a comparable
form of transaction to the effect published by the United States Internal
Revenue Service, and (ii) if listed on any national securities exchange, such
Subordinated Debt Securities would not be delisted from such exchange as a
result of the exercise of such option. (Section 11.05)
GOVERNING LAW
The Indenture and the Subordinated Debt Securities will be governed by, and
construed in accordance with, the internal laws of the State of New York.
(Section 13.05)
THE DEBT TRUSTEE
The Company may have normal banking relationships with the Debt Trustee in
the ordinary course of business.
DESCRIPTION OF THE PREFERRED SECURITIES
Each Phillips Capital Trust may issue, from time to time, only one series
of Preferred Securities having terms described in the Prospectus Supplement
relating thereto. The Declaration of each Phillips Capital Trust authorizes the
Regular Trustees of such Phillips Capital Trust to issue on behalf of such
Phillips Capital Trust one series of Preferred Securities. The Declaration will
be qualified as an indenture under the Trust Indenture Act. The Preferred
Securities will have such terms, including distributions, redemption, voting,
liquidation rights and such other preferred, deferred or other special rights or
such restrictions as shall be set forth in the Declaration or made part of the
Declaration by the Trust Indenture Act and which will mirror the terms of the
Subordinated Debt Securities held by the Phillips Capital Trust and described in
the Prospectus Supplement relating thereto. Reference is made to the Prospectus
Supplement relating to the Preferred Securities of the Phillips Capital Trust
for specific terms, including (i) the distinctive designation of such Preferred
Securities; (ii) the number of Preferred Securities issued by such Phillips
Capital Trust; (iii) the annual distribution rate (or method of determining such
rate) for Preferred Securities issued by such Phillips Capital Trust and the
date or dates upon which such distributions shall be payable; provided, however,
that distributions on such Preferred Securities shall be payable on a quarterly
basis to holders of such Preferred Securities as of a record date in each
quarter during which such Preferred Securities are outstanding; (iv) whether
distributions on Preferred Securities issued by such Phillips Capital Trust
shall be cumulative, and, in the case of Preferred Securities having such
cumulative distribution rights, the date or dates or method of determining the
date or dates from which distributions on Preferred Securities issued by such
Phillips Capital Trust shall be cumulative; (v) the amount or amounts which
shall be paid out of the assets of such Phillips Capital Trust to the holders of
Preferred Securities of such Phillips Capital Trust upon voluntary or
involuntary dissolution, winding-up or termination of such Phillips Capital
Trust; (vi) the obligation, if any, of such Phillips Capital Trust to purchase
or redeem Preferred Securities issued by such Phillips Capital Trust and the
price or prices at which, the period or periods within which, and the terms and
conditions upon which, Preferred Securities issued by such Phillips Capital
Trust shall be purchased or redeemed, in whole or in part, pursuant to such
obligation; (vii) the voting rights, if any, of Preferred Securities issued by
such Phillips Capital Trust in
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addition to those required by law, including the number of votes per Preferred
Security and any requirement for the approval by the holders of Preferred
Securities, or of Preferred Securities issued by one or more Phillips Capital
Trusts, or of both, as a condition to specified action or amendments to the
Declaration of such Phillips Capital Trust; (viii) the terms and conditions, if
any, upon which the Subordinated Debt Securities may be distributed to holders
of Preferred Securities; (ix) if applicable, any securities exchange upon which
the Preferred Securities shall be listed; and (x) any other relevant rights,
preferences, privileges, limitations or restrictions of Preferred Securities
issued by such Phillips Capital Trust not inconsistent with the Declaration of
such Phillips Capital Trust or with applicable law. All Preferred Securities
offered hereby will be guaranteed by the Company to the extent set forth below
under "Description of the Preferred Securities Guarantees." Certain United
States federal income tax considerations applicable to any offering of Preferred
Securities will be described in the Prospectus Supplement relating thereto.
In connection with the issuance of Preferred Securities, each Phillips
Capital Trust will issue one series of Common Securities. The Declaration of
each Phillips Capital Trust authorizes the Regular Trustees of such trust to
issue on behalf of such Phillips Capital Trust one series of Common Securities
having such terms including distributions, redemption, voting, liquidation
rights or such restrictions as shall be set forth therein. The terms of the
Common Securities issued by a Phillips Capital Trust will be substantially
identical to the terms of the Preferred Securities issued by such trust and the
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Preferred Securities except that, upon an event of default under
the Declaration, the rights of the holders of the Common Securities to payment
in respect of distributions and payments upon liquidation, redemption and
otherwise will be subordinated to the rights of the holders of the Preferred
Securities. Except in certain limited circumstances, the Common Securities will
also carry the right to vote to appoint, remove or replace any of the Phillips
Capital Trustees of a Phillips Capital Trust. All of the Common Securities of
each Phillips Capital Trust will be directly or indirectly owned by the Company.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If an Event of Default under the Declaration of a Phillips Capital Trust
occurs and is continuing, then the holders of Preferred Securities of such
Phillips Capital Trust would rely on the enforcement by the Institutional
Trustee of its rights as a holder of the applicable series of Subordinated Debt
Securities against the Company. In addition, the holders of a majority in
liquidation amount of the Preferred Securities of such Phillips Capital Trust
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Institutional Trustee or to direct
the exercise of any trust or power conferred upon the Institutional Trustee
under the applicable Declaration, including the right to direct the
Institutional Trustee to exercise the remedies available to it as a holder of
the Subordinated Debt Securities. If the Institutional Trustee fails to enforce
its rights under the applicable series of Subordinated Debt Securities, a holder
of Preferred Securities of such Phillips Capital Trust may institute a legal
proceeding directly against the Company to enforce the Institutional Trustee's
rights under the applicable series of Subordinated Debt Securities without first
instituting any legal proceeding against the Institutional Trustee or any other
person or entity. Notwithstanding the foregoing, if an Event of Default under
the applicable Declaration has occurred and is continuing and such event is
attributable to the failure of the Company to pay interest or principal on the
applicable series of Subordinated Debt Securities on the date such interest or
principal is otherwise payable (or in the case of redemption, on the redemption
date), then a holder of Preferred Securities of such Phillips Capital Trust may
directly institute a proceeding for enforcement of payment to such holder of the
principal of or interest on the applicable series of Subordinated Debt
Securities having a principal amount equal to the aggregate liquidation amount
of the Preferred Securities of such holder (a "Direct Action") on or after the
respective due date specified in the applicable series of Subordinated Debt
Securities. In connection with such Direct Action, the Company will be
subrogated to the rights of such holder of Preferred Securities under the
applicable Declaration to the extent of any payment made by the Company to such
holder of Preferred Securities in such Direct Action.
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PROPOSED TAX LEGISLATION
On March 19, 1996, President Clinton proposed certain tax law changes as
part of his fiscal 1997 budget that would, among other things, generally deny
corporate issuers a deduction for interest in respect of certain debt
obligations issued on or after December 7, 1995 (the "Proposed Legislation") if
such debt obligations have a maximum term in excess of twenty years and are not
shown as indebtedness on the issuer's applicable consolidated balance sheet. In
addition, the Proposed Legislation would deny issuers an interest deduction on
any debt instruments with a weighted average maturity of greater than 40 years.
On March 29, 1996, Senate Finance Committee Chairman William V. Roth, Jr. and
House Ways and Means Committee Chairman Bill Archer issued a joint statement
(the "Joint Statement") indicating their intent that certain legislative
proposals initiated by the Clinton administration, including the Proposed
Legislation, that may be adopted by either of the tax-writing committees of
Congress would have an effective date that is no earlier than the date of
"appropriate Congressional action." Based upon the Joint Statement, it is
expected that if the Proposed Legislation were to be enacted, such Legislation
would not apply to a series of Subordinated Debt Securities if the series (i)
was issued prior to the date of "appropriate Congressional action" or (ii) had a
maximum term that did not exceed 20 years. The Company intends that any series
of Subordinated Debt Securities will either be issued prior to the date of
"appropriate Congressional action" or will have a maximum term that does not
exceed 20 years. Accordingly, the Company does not expect the Proposed
Legislation to apply to any series of Subordinated Debt Securities. There can be
no assurances, however, that the effective date guidance contained in the Joint
Statement will be incorporated into the Proposed Legislation, if enacted, or
that other legislation enacted after the date hereof will not otherwise
adversely affect the ability of the Company to deduct the interest payable on
any series of Subordinated Debt Securities. Accordingly, there can be no
assurance that a Tax Event will not occur.
DESCRIPTION OF THE PREFERRED SECURITIES GUARANTEES
Set forth below is a summary of information concerning the Preferred
Securities Guarantees which will be executed and delivered by Phillips for the
benefit of the holders from time to time of Preferred Securities. Each Preferred
Securities Guarantee will be qualified as an indenture under the Trust Indenture
Act. The Bank of New York will act as indenture trustee under each Preferred
Securities Guarantee for purposes of the Trust Indenture Act (the "Preferred
Guarantee Trustee"). The terms of each Preferred Securities Guarantee will be
those set forth in such Preferred Securities Guarantee and those made part of
such Preferred Securities Guarantee by the Trust Indenture Act. The summary of
the material terms of the Preferred Securities Guarantees does not purport to be
complete and is subject in all respects to the provisions of, and is qualified
in its entirety by reference to, the form of Preferred Securities Guarantee,
which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part, and the Trust Indenture Act. Each Preferred Securities
Guarantee will be held by the Preferred Guarantee Trustee for the benefit of the
holders of the Preferred Securities of the applicable Phillips Capital Trust.
GENERAL
Pursuant to each Preferred Securities Guarantee, the Company will
irrevocably and unconditionally agree, to the extent set forth therein, to pay
in full, to the holders of the Preferred Securities issued by a Phillips Capital
Trust, the Guarantee Payments (as defined herein) (except to the extent paid by
such Phillips Capital Trust), as and when due, regardless of any defense, right
of set-off or counterclaim which such Phillips Capital Trust may have or assert.
The following payments with respect to Preferred Securities issued by a Phillips
Capital Trust to the extent not paid by such Phillips Capital Trust (the
"Guarantee Payments"), will be subject to the Preferred Securities Guarantee
thereon (without duplication): (i) any accrued and unpaid distributions which
are required to be paid on such Preferred Securities, to the extent such
Phillips Capital Trust shall have funds available therefor; (ii) the redemption
price, including all accrued and unpaid distributions (the "Redemption Price"),
to the extent such Phillips Capital Trust has funds available therefor with
respect to any Preferred Securities called for redemption by such Phillips
Capital Trust and (iii) upon a voluntary or involuntary dissolution, winding-up
or termination of such Phillips Capital Trust (other than in connection with the
distribution of Subordinated Debt Securities to the holders of Preferred
Securities or the
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<PAGE> 46
redemption of all of the Preferred Securities), the lesser of (a) the aggregate
of the liquidation amount and all accrued and unpaid distributions on such
Preferred Securities to the date of payment, to the extent such Phillips Capital
Trust has funds available therefor and (b) the amount of assets of such Phillips
Capital Trust remaining available for distribution to holders of such Preferred
Securities in liquidation of such Phillips Capital Trust. The redemption price
and liquidation amount will be fixed at the time the Preferred Securities are
issued. The Company's obligation to make a Guarantee Payment may be satisfied by
direct payment of the required amounts by the Company to the holders of
Preferred Securities or by causing the applicable Phillips Capital Trust to pay
such amounts to such holders.
Each Preferred Securities Guarantee will not apply to any payment of
distributions except to the extent such Phillips Capital Trust shall have funds
available therefor. If the Company does not make interest payments on the
Subordinated Debt Securities purchased by a Phillips Capital Trust, such
Phillips Capital Trust will not pay distributions on the Preferred Securities
issued by such Phillips Capital Trust and will not have funds available
therefor. See "Description of the Subordinated Debt Securities -- Certain
Covenants of the Company." The Preferred Securities Guarantee, when taken
together with the Company's obligations under the Subordinated Debt Securities,
the Indenture and the Declaration, including its obligations to pay costs,
expenses, debts and liabilities of such Phillips Capital Trust (other than with
respect to the Trust Securities), will provide a full and unconditional
guarantee on a subordinated basis by the Company of payments due on the
Preferred Securities.
The Company has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Phillips Capital Trusts with respect to the
Common Securities (the "Common Securities Guarantees") to the same extent as the
Preferred Securities Guarantees, except that upon an event of default under the
Indenture, holders of Preferred Securities shall have priority over holders of
Common Securities with respect to distributions and payments on liquidation,
redemption or otherwise.
CERTAIN COVENANTS OF THE COMPANY
In each Preferred Securities Guarantee, the Company will covenant that, so
long as any Preferred Securities issued by the applicable Phillips Capital Trust
remain outstanding, if there shall have occurred any event that would constitute
an event of default under such Preferred Securities Guarantee or the Declaration
of such Phillips Capital Trust, then (a) the Company shall not declare or pay
any dividend on, make any distributions with respect to, or redeem, purchase or
make liquidation payment with respect to, any of its capital stock (other than
(i) purchases or acquisitions of shares of Phillips Common Stock in connection
with the satisfaction by Phillips of its obligations under any employee benefit
plans or the satisfaction by Phillips of its obligations pursuant to any
contract or security requiring Phillips to purchase shares of Phillips Common
Stock, (ii) as a result of a reclassification of Phillips capital stock or the
exchange or conversion of one class or series of Phillips capital stock for
another class or series of Phillips capital stock or, (iii) the purchase of
fractional interests in shares of Phillips capital stock pursuant to the
conversion or exchange provisions of such Phillips capital stock or the security
being converted or exchanged) or make any guarantee payments with respect to the
foregoing and (b) the Company shall not make any payment of interest, principal
or premium, if any, on or repay, repurchase or redeem any debt securities
(including guarantees) issued by the Company which rank pari passu with or
junior to such Subordinated Debt Securities.
MODIFICATION OF THE PREFERRED SECURITIES GUARANTEES; ASSIGNMENT
Except with respect to any changes which do not adversely affect the rights
of holders of Preferred Securities (in which case no vote will be required),
each Preferred Securities Guarantee may be amended only with the prior approval
of the holders of not less than a majority in liquidation amount of the
outstanding Preferred Securities issued by the applicable Phillips Capital
Trust. The manner of obtaining any such approval of holders of such Preferred
Securities will be as set forth in an accompanying Prospectus Supplement. All
guarantees and agreements contained in a Preferred Securities Guarantee shall
bind the successors, assigns, receivers, trustees and representatives of the
Company and shall inure to the benefit of the holders of the Preferred
Securities of the applicable Phillips Capital Trust then outstanding.
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TERMINATION
Each Preferred Securities Guarantee will terminate as to the Preferred
Securities issued by the applicable Phillips Capital Trust (a) upon full payment
of the Redemption Price of all Preferred Securities of such Phillips Capital
Trust, (b) upon distribution of the Subordinated Debt Securities held by such
Phillips Capital Trust to the holders of the Preferred Securities of such
Phillips Capital Trust or (c) upon full payment of the amounts payable in
accordance with the Declaration of such Phillips Capital Trust upon liquidation
of such Phillips Capital Trust. Each Preferred Securities Guarantee will
continue to be effective or will be reinstated, as the case may be, if at any
time any holder of Preferred Securities issued by the applicable Phillips
Capital Trust must restore payment of any sums paid under such Preferred
Securities or such Preferred Securities Guarantee.
EVENTS OF DEFAULT
An event of default under a Preferred Securities Guarantee will occur upon
the failure of the Company to perform any of its payment or other obligations
thereunder.
The holders of a majority in liquidation amount of the Preferred Securities
relating to such Preferred Securities Guarantee have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Preferred Guarantee Trustee in respect of the Preferred Securities Guarantee
or to direct the exercise of any trust or power conferred upon the Preferred
Guarantee Trustee under such Preferred Securities. If the Preferred Guarantee
Trustee fails to enforce such Preferred Securities Guarantee, any holder of
Preferred Securities relating to such Preferred Securities Guarantee may
institute a legal proceeding directly against the Company to enforce the
Preferred Guarantee Trustee's rights under such Preferred Securities Guarantee,
without first instituting a legal proceeding against the relevant Phillips
Capital Trust, the Preferred Guarantee Trustee or any other person or entity.
Notwithstanding the foregoing, if the Company has failed to make a guarantee
payment, a holder of Preferred Securities may directly institute a proceeding
against the Company for enforcement of the Preferred Securities Guarantee for
such payment. The Company waives any right or remedy to require that any action
be brought first against such Phillips Capital Trust or any other person or
entity before proceeding directly against the Company.
STATUS OF THE PREFERRED SECURITIES GUARANTEES
The Preferred Securities Guarantees will constitute unsecured obligations
of the Company and will rank (i) subordinate and junior in right of payment to
all other liabilities of the Company, (ii) pari passu with the most senior
preferred or preference stock now or hereafter issued by the Company and with
any guarantee now or hereafter entered into by Phillips in respect of any
preferred or preference stock of any affiliate of the Company, and (iii) senior
to the Company's common stock. The terms of the Preferred Securities provide
that each holder of Preferred Securities issued by the applicable Phillips
Capital Trust by acceptance thereof agrees to the subordination provisions and
other terms of the Preferred Securities Guarantee relating thereto.
The Preferred Securities Guarantees will constitute a guarantee of payment
and not of collection (that is, the guaranteed party may institute a legal
proceeding directly against the guarantor to enforce its rights under the
Preferred Securities Guarantee without instituting a legal proceeding against
any other person or entity).
INFORMATION CONCERNING THE PREFERRED GUARANTEE TRUSTEE
The Preferred Guarantee Trustee, prior to the occurrence of a default with
respect to a Preferred Securities Guarantee, undertakes to perform only such
duties as are specifically set forth in such Preferred Securities Guarantee and,
after default, shall exercise the same degree of care as a prudent individual
would exercise in the conduct of his or her own affairs. Subject to such
provisions, the Preferred Guarantee Trustee is under no obligation to exercise
any of the powers vested in it by a Preferred Securities Guarantee at the
request of any holder of Preferred Securities, unless offered reasonable
indemnity against the costs, expenses and liabilities which might be incurred
thereby.
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The Company and certain of its affiliates maintain a banking relationship
with the Preferred Guarantee Trustee.
GOVERNING LAW
The Preferred Securities Guarantees will be governed by and construed in
accordance with the internal laws of the State of New York.
EFFECT OF OBLIGATIONS UNDER THE
SUBORDINATED DEBT SECURITIES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of each of the Phillips
Capital Trusts is to issue the Trust Securities evidencing undivided beneficial
interests in the assets of each of the Phillips Capital Trusts, and to invest
the proceeds from such issuance and sale in the Subordinated Debt Securities.
As long as payments of interest and other payments are made when due on the
Subordinated Debt Securities, such payments will be sufficient to cover
distributions and payments due on the Trust Securities because of the following
factors: (i) the aggregate principal amount of Subordinated Debt Securities will
be equal to the sum of the aggregate stated liquidation amount of the Trust
Securities; (ii) the interest rate and the interest and other payment dates on
the Subordinated Debt Securities will match the distribution rate and
distribution and other payment dates for the Preferred Securities; (iii)
Phillips shall pay all, and the applicable Phillips Capital Trust shall not be
obligated to pay, directly or indirectly, all costs, expenses, debt, and
obligations of the applicable Phillips Capital Trust (other than with respect to
the Trust Securities); and (iv) the Declaration further provides that the
Phillips Trustees shall not take or cause or permit the applicable Phillips
Capital Trust to, among other things, engage in any activity that is not
consistent with the purposes of the applicable Phillips Capital Trust.
Payments of distributions (to the extent funds therefor are available) and
other payments due on the Preferred Securities (to the extent funds therefor are
available) are guaranteed by Phillips as and to the extent set forth under
"Description of the Preferred Securities Guarantees." If Phillips does not make
interest payments on the Subordinated Debt Securities purchased by the
applicable Phillips Capital Trust, it is expected that the applicable Phillips
Capital Trust will not have sufficient funds to pay distributions on the
Preferred Securities. The Guarantee does not apply to any payment of
distributions unless and until the applicable Phillips Capital Trust has
sufficient funds for the payment of such distributions. The Guarantee covers the
payment of distributions and other payments on the Preferred Securities only if
and to the extent that Phillips has made a payment of interest or principal on
the Subordinated Debt Securities held by the applicable Phillips Capital Trust
as its sole asset. The Guarantee, when taken together with Phillips' obligations
under the Subordinated Debt Securities and the Indenture and its obligations
under the Declaration, including its obligations to pay costs, expenses, debts
and liabilities of the applicable Phillips Capital Trust (other than with
respect to the Trust Securities), provide a full and unconditional guarantee of
amounts on the Preferred Securities.
If Phillips fails to make interest or other payments on the Subordinated
Debt Securities when due (taking account of any Extension Period), the
Declaration provides a mechanism whereby the holders of the Preferred
Securities, using the procedures described in "Description of the Preferred
Securities -- Book-Entry Only Issuance -- The Depository Trust Company" and
"-- Voting Rights" in any accompanying Prospectus Supplement, may direct the
Institutional Trustee to enforce its rights under the Subordinated Debt
Securities. If the Institutional Trustee fails to enforce its rights under the
Subordinated Debt Securities, a holder of Preferred Securities may institute a
legal proceeding against Phillips to enforce the Institutional Trustee's rights
under the Subordinated Debt Securities without first instituting any legal
proceeding against the Institutional Trustee or any other person or entity.
Notwithstanding the foregoing, if a Declaration Event of Default has occurred
and is continuing and such event is attributable to the failure of Phillips to
pay interest or principal on the Subordinated Debt Securities on the date such
interest or principal is otherwise payable (or in the case of redemption on the
redemption date), then a holder of Preferred Securities may institute a Direct
Action for payment on or after the respective due date specified in the
Subordinated Debt Securities. In connection with such Direct Action, Phillips
will be subrogated to the rights of such holder of Preferred
14
<PAGE> 49
Securities under the Declaration to the extent of any payment made by Phillips
to such holder of Preferred Securities in such Direct Action. Phillips, under
the Guarantee, acknowledges that the Guarantee Trustee shall enforce the
Guarantee on behalf of the holders of the Preferred Securities. If Phillips
fails to make payments under the Guarantee, the Guarantee provides a mechanism
whereby the holders of the Preferred Securities may direct the Guarantee Trustee
to enforce its rights thereunder. Any holder of Preferred Securities may
institute a legal proceeding directly against Phillips to enforce the Guarantee
Trustee's rights under the Guarantee without first instituting a legal
proceeding against the applicable Phillips Capital Trust, the Guarantee Trustee,
or any other person or entity.
Phillips and each of the Phillips Capital Trusts believe that the above
mechanisms and obligations, taken together, provide a full and unconditional
guarantee by Phillips of payments due on the Preferred Securities. See
"Description of the Preferred Securities Guarantees -- General."
PLAN OF DISTRIBUTION
Phillips may sell the Subordinated Debt Securities and any Phillips Capital
Trust may sell Preferred Securities in any of, or any combination of, the
following ways: (i) directly to purchasers, (ii) through agents, (iii) through
underwriters, and (iv) through dealers.
Offers to purchase Offered Securities may be solicited directly by Phillips
and/or any Phillips Capital Trust, as the case may be, or by agents designated
by Phillips and/or any Phillips Capital Trust, as the case may be, from time to
time. Any such agent, who may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, involved in the offer or sale of the
Offered Securities in respect of which this Prospectus is delivered will be
named, and any commissions payable by Phillips to such agent will be set forth,
in the Prospectus Supplement. Unless otherwise indicated in the Prospectus
Supplement, any such agency will be acting in a best efforts basis for the
period of its appointment (ordinarily five business days or less). Agents,
dealers and underwriters may be customers of, engage in transactions with, or
perform services for the Company in the ordinary course of business.
If an underwriter or underwriters are utilized in the sale, Phillips will
execute an underwriting agreement with such underwriters at the time of sale to
them and the names of the underwriters and the terms of the transaction will be
set forth in the Prospectus Supplement, which will be used by the underwriters
to make releases of the Offered Securities in respect of which this Prospectus
is delivered to the public.
If a dealer is utilized in the sale of the Offered Securities in respect of
which this Prospectus is delivered, Phillips and/or any Phillips Capital Trust,
as the case may be, will sell such Offered Securities to the dealer, as
principal. The dealer may then resell such Offered Securities to the public at
varying prices to be determined by such dealer at the time of resale. The name
of the dealer and the terms of the transaction will be set forth in the
Prospectus Supplement.
Agents, underwriters, and dealers may be entitled under the relevant
agreements to indemnification by Phillips and/or any Phillips Capital Trust, as
the case may be, against certain liabilities, including liabilities under the
Securities Act of 1933.
The place and time of delivery for the Offered Securities in respect of
which this Prospectus is delivered are set forth in the accompanying Prospectus
Supplement.
15
<PAGE> 50
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Preferred
Securities will be passed upon on behalf of the Phillips Capital Trusts by
Skadden, Arps, Slate, Meagher & Flom, special Delaware counsel to the Phillips
Capital Trusts. The validity of the Subordinated Debt Securities and the
Guarantee and certain matters relating thereto will be passed upon for Phillips
by Dale J. Billam, Senior Counsel of Phillips. Certain United States federal
income taxation matters will be passed upon for Phillips and the Phillips
Capital Trusts by Skadden, Arps, Slate, Meagher & Flom, special tax counsel to
Phillips and the Phillips Capital Trusts.
EXPERTS
The consolidated financial statements and schedule of Phillips Petroleum
Company appearing in its Annual Report on Form 10-K for the year ended December
31, 1995, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements and schedule are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
16
<PAGE> 51
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY PHILLIPS PETROLEUM COMPANY, PHILLIPS 66
CAPITAL I OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER AND THEREUNDER SHALL
UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF PHILLIPS PETROLEUM COMPANY OR PHILLIPS 66 CAPITAL I SINCE THE
DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.
---------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Phillips Petroleum Company Summary Historical
Financial Information.......................... S-4
Recent Developments.............................. S-5
Risk Factors..................................... S-5
The Company...................................... S-9
Phillips Capital Trust........................... S-9
Capitalization................................... S-11
Ratio of Earnings to Fixed Charges............... S-11
Accounting Treatment............................. S-12
Use of Proceeds.................................. S-12
Description of the Preferred Securities.......... S-12
Description of the Guarantee..................... S-22
Description of the Subordinated Debt
Securities..................................... S-23
Effect of Obligations Under the Subordinated Debt
Securities and the Guarantee................... S-28
United States Federal Income Taxation............ S-29
Underwriting..................................... S-32
Legal Matters.................................... S-34
PROSPECTUS
Available Information............................ 2
Incorporation of Documents by Reference.......... 3
Phillips Petroleum Company....................... 3
The Trusts....................................... 3
Ratio of Earnings to Fixed Charges............... 4
Use of Proceeds.................................. 4
Description of the Subordinated Debt
Securities..................................... 5
Description of the Preferred Securities.......... 9
Description of the Preferred Securities
Guarantees..................................... 11
Effect of Obligations Under the Subordinated Debt
Securities and the Guarantee................... 14
Plan of Distribution............................. 15
Legal Matters.................................... 16
Experts.......................................... 16
</TABLE>
================================================================================
================================================================================
12,000,000
PREFERRED SECURITIES
[LOGO]
PHILLIPS 66 CAPITAL I
8.24% TRUST ORIGINATED
PREFERRED SECURITIES(SM)
("TOPRS(SM)")
FULLY AND UNCONDITIONALLY
GUARANTEED BY
PHILLIPS PETROLEUM
COMPANY
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO.
INCORPORATED
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
MAY 23, 1996
================================================================================
