EXECUTION COPY
COMPANY STOCK OPTION AGREEMENT dated
as of January 19, 1999 between AVONDALE
INDUSTRIES, INC., a Louisiana corporation
("Issuer"), and NEWPORT NEWS SHIPBUILDING
INC., a Delaware corporation ("Grantee").
WHEREAS Issuer and Grantee are parties to an Agreement and Plan
of Merger, dated as of the date hereof (the "Merger Agreement"; defined
terms used but not defined herein have the meanings set forth in the Merger
Agreement), providing for, among other things, the merger of a wholly owned
subsidiary of Grantee with and into Issuer;
WHEREAS as a condition and inducement to Grantee's willingness to
enter into the Merger Agreement, Grantee has requested that Issuer agree,
and Issuer has agreed, to grant Grantee the Option (as defined below); and
WHEREAS as a condition and inducement to Issuer's willingness to
enter into the Merger Agreement and this Agreement, Issuer has requested
that Grantee agree, and Grantee has agreed, to grant Issuer an option to
purchase shares of Grantee's common stock on substantially the same terms
as the Option.
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Grant of Option. Issuer hereby grants to Grantee an
irrevocable option (the "Option") to purchase up to 1,312,000 (as adjusted
as set forth herein) shares (the "Option Shares") of common stock, par
value $1.00 per share ("Issuer Common Stock"), of Issuer at a purchase
price of $35.50 (as adjusted as set forth herein) per Option Share (the
"Purchase Price"); provided, however, that in no event shall the number of
shares of Issuer Common Stock for which this Option is exercisable exceed
9.9% of the issued and outstanding shares of Issuer Common Stock, without
giving effect to any shares subject to or issued pursuant to the Option.
SECTION 2. Exercise of Option. (a) Grantee may exercise the
Option, with respect to any of or all the Option Shares at any one time,
after any termination of the Merger Agreement in connection with which
Grantee is or may be entitled to receive a termination fee pursuant to
Section 6.07(b) of the Merger Agreement (a "Purchase Event"); provided,
however, that (i) except as provided in the last sentence of this Section
2(a), the Option shall terminate and be of no further force and effect upon
the
earlier to occur of (A) the Effective Time and (B) 12 months after the
first occurrence of a Purchase Event, and (ii) any purchase of Option
Shares upon exercise of the Option shall be subject to there being (A) no
preliminary or permanent or other order issued by any federal or state
court of competent jurisdiction in the United States prohibiting the
delivery of the Option Shares then in effect, (B) compliance with the HSR
Act and (C) the obtaining or making of any consents, approvals, orders,
notifications or authorizations, the failure of which to have obtained or
made would have the effect of making the issuance of Option Shares illegal.
Notwithstanding the termination of the Option, Grantee shall be entitled to
purchase the Option Shares if it has exercised the Option in accordance
with the terms hereof prior to the termination of the Option and the
termination of the Option shall not affect any rights hereunder that by
their terms do not terminate or expire prior to or as of such termination.
(b) The exercise of the Option shall be effected by Grantee
sending to Issuer a written notice (an "Exercise Notice"; the date of which
being herein referred to as the "Notice Date") to that effect. An Exercise
Notice shall specify the number of Option Shares, if any, Grantee wishes to
purchase pursuant to the Option, the number of Option Shares, if any, with
respect to which Grantee wishes to exercise its Cash-Out Right (as defined
in Section 6(c)), the denominations of the certificate or certificates
evidencing the Option Shares that Grantee wishes to purchase pursuant to
the Option and a date (subject to compliance with the HSR Act) not earlier
than three business days nor later than 20 business days from the Notice
Date for the closing (the "Option Closing") of such purchase (the "Option
Closing Date"). Any Option Closing will be at an agreed location and time
in New York, New York on the applicable Option Closing Date or at such
later date as may be necessary so as to comply with Section 2(a).
SECTION 3. Payment and Delivery of Certificates. (a) At any
Option Closing, Grantee shall pay to Issuer in immediately available funds
by wire transfer to a bank account designated in writing by Issuer an
amount equal to the Purchase Price multiplied by the number of Option
Shares to be purchased at such Option Closing.
(b) At any Option Closing, simultaneously with the delivery of
immediately available funds as provided in Section 3(a), Issuer shall
deliver to Grantee a certificate or certificates representing the Option
Shares to be purchased at such Option Closing, which Option Shares shall be
free and clear of all Liens.
(c) Certificates for the Option Shares delivered at an Option
Closing shall have typed or printed thereon a restrictive legend, which
will read substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE
REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE."
It is understood and agreed that the reference to restrictions arising
under the Securities Act in the above legend will be removed by delivery of
substitute certificate(s) without such reference if such Option Shares have
been registered pursuant to the Securities Act, such Option Shares have
been sold in reliance on and in accordance with Rule 144 under the
Securities Act or Grantee has delivered to Issuer a copy of a letter from
the staff of the SEC, or an opinion of counsel in form and substance
reasonably satisfactory to Issuer and its counsel, to the effect that such
legend is not required for purposes of the Securities Act.
SECTION 4. Representations and Warranties of Issuer. Issuer
hereby represents and warrants to Grantee as follows:
(a) Authorized Stock. Issuer has taken all necessary corporate
and other action to authorize and reserve and, subject to the
expiration or termination of any required waiting period under the HSR
Act, to permit it to issue, and, at all times from the date hereof
until the obligation to deliver Option Shares upon the exercise of the
Option terminates, shall have reserved for issuance, upon exercise of
the Option, shares of Issuer Common Stock sufficient for Grantee to
exercise the Option in full, and Issuer shall take all necessary
corporate action to authorize and reserve for issuance all additional
shares of Issuer Common Stock or other securities which may be issued
pursuant to Section 6 upon exercise of the Option. The shares of
Issuer Common Stock to be issued upon due exercise of the Option,
including all additional shares of Issuer Common Stock or other
securities which may be issuable upon exercise of the Option or any
other securities which may be issued pursuant to Section 6, upon
issuance pursuant hereto, will be duly and validly issued, fully paid
and nonassessable, and will be delivered free and clear of all Liens,
including any preemptive rights of any shareholder of Issuer.
(b) Authorization. The execution, delivery and performance by
Issuer of this Agreement and the consummation of the transactions
contemplated hereby (i) are within Issuer's corporate powers and (ii)
have been duly authorized by all necessary corporate action. This
Agreement has been duly executed and delivered by Issuer and
constitutes a valid and binding obligation of Issuer.
SECTION 5. Representations and Warranties of Grantee. Grantee
hereby represents and warrants to Issuer as follows:
(a) Disposition of Shares. Any Option Shares or other securities
acquired by Grantee upon exercise of the Option will not be
transferred or otherwise disposed of except in a transaction
registered, or exempt from registration, under the Securities Act.
(b) Authorization. The execution, delivery and performance by
Grantee of this Agreement and the consummation of the transaction
contemplated hereby (i) are within Grantee's corporate powers and (ii)
have been duly authorized by all necessary corporate action. This
Agreement has been duly executed and delivered by Grantee and
constitutes a valid and binding obligation of Grantee.
SECTION 6. Adjustment upon Changes in Capitalization, Etc. (a) In
the event of any change in Issuer Common Stock by reason of a stock
dividend, split-up, merger, recapitalization, combination, exchange of
shares, or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase Price thereof, shall be adjusted
appropriately, and proper provision will be made in the agreements
governing such transaction, so that Grantee shall receive upon exercise of
the Option the number and class of shares or other securities or property
that Grantee would have received in respect of Issuer Common Stock if the
Option had been exercised immediately prior to such event or the record
date therefor, as applicable. Subject to Section 1, and without limiting
the parties' relative rights and obligations under the Merger Agreement, if
any additional shares of Issuer Common Stock are issued after the date of
this Agreement (other than pursuant to an event described in the first
sentence of this Section 6(a)), the number of shares of Issuer Common Stock
subject to the Option shall be adjusted so that, after such issuance, it
equals 9.9% of the number of shares of Issuer Common Stock then issued and
outstanding, without giving effect to any shares subject to or issued
pursuant to the Option.
(b) Without limiting the parties' relative rights and obligations
under the Merger Agreement, in the event that Issuer enters into an
agreement (i) to consolidate with or merge into any person, other than
Grantee or one of its subsidiaries, and Issuer will not be the continuing
or surviving corporation in such consolidation or merger, (ii) to permit
any person, other than Grantee or one of its subsidiaries, to merge into
Issuer and Issuer will be the continuing or surviving corporation, but in
connection with such merger, the shares of Issuer Common Stock outstanding
immediately prior to the consummation of such merger will be changed into
or exchanged for stock or other securities of Issuer or any other person or
cash or any other property, or the shares of Issuer Common Stock
outstanding immediately prior to the consummation of such merger will,
after such merger, represent less than 50% of the outstanding voting
securities of the merged company, or (iii) to sell or otherwise transfer
all or substantially all its assets to any person, other than Grantee or
one of its subsidiaries, then, in each such case, the agreement governing
such transaction will make proper provision so that the Option will, upon
the consummation of any such transaction and upon the terms and conditions
set forth herein, be converted into, or exchanged for, an option with
identical terms appropriately adjusted to acquire the number and class of
stock or other securities or cash or other property that Grantee would have
received in respect of Issuer Common Stock if the Option had been exercised
immediately prior to such consolidation, merger, sale, or transfer, or the
record date therefor, as applicable and make any other necessary
adjustments. Issuer shall take such steps in connection with such
consolidation, merger, liquidation or other such transaction as may be
reasonably necessary to assure that the provisions hereof shall thereafter
apply as nearly as possible to any securities or property thereafter
deliverable upon exercise of the Option.
(c) If, at any time during the period commencing on a Purchase
Event and ending on the termination of the Option in accordance with
Section 2, Grantee sends to Issuer an Exercise Notice indicating Grantee's
election to exercise its right (the "Cash-Out Right") pursuant to this
Section 6(c), then Issuer shall (subject to Section 7) pay to Grantee, on
the Option Closing Date, in exchange for the cancelation of the Option with
respect to such number of Option Shares as Grantee specifies in the
Exercise Notice, an amount in cash equal to the greater of (i) $2.00 per
Option Share the subject of such Exercise Notice and
(ii) the Spread (as hereinafter defined) multiplied by such number of
Option Shares specified in the Exercise Notice. As used herein, "Spread"
shall mean the excess, if any, over the Purchase Price of the higher of (x)
if applicable, the highest price per share of Issuer Common Stock paid or
proposed to be paid by any Person pursuant to any Company Takeover Proposal
(the "Alternative Purchase Price") and (y) the average closing price, for
the ten trading days commencing on the 12th trading day immediately
preceding the Notice Date, per share of Issuer Common Stock as reported on
the Nasdaq Stock Market, as reported in The Wall Street Journal (Northeast
edition), or, if not reported thereby, any other authoritative source (the
"Closing Price"). If the Alternative Purchase Price includes any property
other than cash, the Alternative Purchase Price shall be the sum of (i) the
fixed cash amount, if any, included in the Alternative Purchase Price plus
(ii) the fair market value (as hereinafter defined) of such other property.
Any cash payment made by Issuer pursuant to this Section 6(c) shall be
referred to herein as a "Cash-Out Closing Payment." Upon exercise of its
right pursuant to this Section 6(c) and the receipt by Grantee of the
applicable Cash-Out Closing Payment, the obligations of Issuer to deliver
Option Shares pursuant to Section 3(b) shall be terminated with respect to
the number of Option Shares for which Grantee shall have elected to be paid
pursuant to its Cash-Out Right. The Spread shall be appropriately adjusted,
if applicable, to give effect to Section 6(a). Notwithstanding the
termination of the Option, Grantee shall be entitled to exercise its rights
under this Section 6(c) if it has exercised such rights in accordance with
the terms hereof prior to the termination of the Option.
SECTION 7. Profit Limitations. (a) Notwithstanding any other
provision of this Agreement, this Option may not be exercised for a number
of shares of Issuer Common Stock (including any exercise of the Cash-Out
Right pursuant to Section 6(c)) that would, as of the applicable Notice
Date, result in the Notional Total Option Profit (as hereinafter defined)
that would exceed in the aggregate $14,000,000 (the "Profit Limit") and, if
it otherwise would exceed such amount, Grantee, at its sole election, shall
on or prior to the applicable Option Closing Date (i) reduce the number of
shares of Issuer Common Stock subject to such exercise, (ii) deliver to
Issuer for cancellation Option Shares previously purchased by Grantee,
(iii) pay cash to Issuer, (iv) reduce the size of any Cash-Out Closing
Payment, (v) revoke in whole or in part any exercise of the Option or (vi)
any combination thereof, so that the Notional Total Option Profit as of the
Notice Date shall not exceed the Profit Limit after taking into account
the foregoing actions. If, on any Notice Date, the Option cannot be
exercised in full because of this Section 7(a), then (notwithstanding
anything in this Agreement to the contrary) the Option may be exercised in
part on such Notice Date and from time to time in part on later dates
(subject, in the case of any subsequent exercise, to the proviso to the
first sentence of Section 2(a) and to this Section 7(a)). This Section 7(a)
shall not restrict any exercise of the Option that is not prohibited hereby
on any subsequent date.
(b) As used herein, the term "Notional Total Option Profit" as of
any Notice Date (including any Notice Date arising out of the exercise of
the Cash-Out Right pursuant to Section 6(c)) shall be the aggregate of (i)
the Total Option Profit as of such Notice Date, (ii) the Cash-Out Closing
Payment, if any, due in connection with any exercise of the Cash-Out Right
on such Notice Date and (iii) the product of (A) the number of Option
Shares for which the Option is being exercised on such Notice Date (other
than any exercise pursuant to Section 6(c)) plus all other Option Shares
held by Grantee and its affiliates as of such date and (B) the excess, if
any, over the Purchase Price of the closing price for Issuer Common Stock
as of the close of business on the preceding trading day (less customary
brokerage commissions or underwriting discounts).
(c) As used herein, the term "Total Option Profit" as of any
Notice Date shall mean the aggregate amount (before taxes) of the
following: (i) any amount previously received by Grantee pursuant to the
Cash-Out Right and (ii) (x) the net consideration, if any, previously
received by Grantee pursuant to the sale of Option Shares (or any other
securities into which such Option Shares are converted or exchanged) to any
unaffiliated party, valuing any non-cash consideration at its fair market
value, less (y) the aggregate Purchase Price for such shares and any cash
previously paid by Grantee to Issuer pursuant to Section 7(a)(iii).
(d) As used herein, the "fair market value" of any non-cash
consideration consisting of:
(i) securities listed on a national securities exchange or traded
on NASDAQ shall be equal to the average closing price per share of
such security as reported on such exchange or NASDAQ for the five
trading days after the date of determination; and
(ii) consideration which is other than cash or securities of the
form specified in clause (i) above
shall be determined by a nationally recognized independent investment
banking firm mutually agreed upon by the parties within five business
days of the event requiring selection of such banking firm, provided
that if the parties are unable to agree within two business days after
the date of such event as to the investment banking firm, then the
parties shall each select one firm, and those firms shall select a
third nationally recognized independent investment banking firm, which
third firm shall make such determination.
SECTION 8. Registration Rights. Issuer shall, if requested by
Grantee at any time and from time to time within three years of the
exercise of the Option, as expeditiously as possible prepare and file up to
three registration statements under the Securities Act if such registration
is necessary in order to permit the sale or other disposition of any or all
shares of securities that have been acquired by or are issuable to Grantee
upon exercise of the Option in accordance with the intended method of sale
or other disposition stated by Grantee, including a "shelf" registration
statement under Rule 415 under the Securities Act or any successor
provision, and Issuer shall use its best efforts to qualify such shares or
other securities under any applicable state securities laws; provided,
however, that Issuer shall not be required to qualify to do business in, or
consent to general service of process in, any jurisdiction. Issuer shall
use reasonable efforts to cause each such registration statement to become
effective, to obtain all consents or waivers of other parties which are
required therefor, and to keep such registration statement effective for
such period not in excess of 180 calendar days from the day such
registration statement first becomes effective as may be reasonably
necessary to effect such sale or other disposition. The obligations of
Issuer hereunder to file a registration statement and to maintain its
effectiveness may be suspended for up to 60 calendar days in the aggregate
if the Board of Directors of Issuer shall have determined that the filing
of such registration statement or the maintenance of its effectiveness
would require premature disclosure of material nonpublic information that
would materially and adversely affect Issuer or otherwise interfere with or
adversely affect any pending or proposed offering of securities of Issuer
or any other material transaction involving Issuer. All expenses relating
to or in connection with any registration statement prepared and filed
under this Section 8, and any sale covered thereby, shall be at Issuer's
expense except for underwriting discounts or commissions, brokers' fees and
the fees and disbursements of
Grantee's counsel related thereto. Grantee will provide all information
reasonably requested by Issuer for inclusion in any registration statement
to be filed hereunder. If, during the time periods referred to in the first
sentence of this Section 8, Issuer effects a registration under the
Securities Act of Issuer Common Stock for its own account or for any other
shareholders of Issuer (other than on Form S-4 or Form S-8, or any
successor form), it shall notify Grantee in writing not less than 10 days
prior to filing such registration statement and shall allow Grantee the
right to participate in such registration, and such participation shall not
affect the obligation of Issuer to effect demand registration statements
for Grantee under this Section 8; provided, however, that, if the managing
underwriters of such offering advise Issuer in writing that in their
opinion the number of shares of Issuer Common Stock requested to be
included in such registration exceeds the number which can be sold in such
offering, Issuer shall include the shares requested to be included therein
by Grantee pro rata with the shares intended to be included therein by
Issuer. If Grantee wishes to have any portion of its Option Shares included
in such registration statement, it shall advise Issuer to that effect
within two business days following receipt of Issuer's notice. In
connection with any registration pursuant to this Section 8, Issuer and
Grantee shall enter into a customary underwriting agreement and shall
provide each other and any underwriter of the offering with customary
representations, warranties, covenants, indemnification, and contribution
in connection with such registration.
SECTION 9. Loss or Mutilation. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation
of this Agreement, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancelation
of this Agreement, if mutilated, Issuer will execute and deliver a new
Agreement of like tenor and date. Any such new Agreement executed and
delivered will constitute an additional contractual obligation on the part
of Issuer, whether or not the Agreement so lost, stolen, destroyed, or
mutilated shall at any time be enforceable by anyone.
SECTION 10. Miscellaneous. (a) Expenses. Except as otherwise
provided in the Merger Agreement, each of the parties hereto will bear and
pay all costs and expenses incurred by it or on its behalf in connection
with the transactions contemplated hereunder, including fees and expenses
of its own financial consultants, investment bankers, accountants and
counsel.
(b) Amendment. This Agreement may not be amended, except by an
instrument in writing signed on behalf of each of the parties. This
Agreement, together with the Merger Agreement (including any exhibits and
schedules thereto), contains the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all prior
and contemporaneous agreements and understandings, oral or written, with
respect to such transactions.
(c) Extension; Waiver. Any agreement on the part of a party to
waive any provision of this Agreement, or to extend the time for
performance, will be valid only if set forth in an instrument in writing
signed on behalf of such party. The failure of any party to this Agreement
to assert any of its rights under this Agreement or otherwise will not
constitute a waiver of such rights.
(d) No Third-Party Beneficiaries. This Agreement is not intended
to confer upon any person other than the parties and their successors and
permitted assigns any rights or remedies.
(e) Governing Law. This Agreement will be governed by, and
construed in accordance with, the laws of the State of New York, regardless
of the laws that might otherwise govern under applicable principles of
conflict of laws thereof.
(f) Notices. All notices, requests, claims, demands, and other
communications under this Agreement shall be given in accordance with
Section 9.02 of the Merger Agreement.
(g) Assignment. Neither this Agreement, the Option nor any of the
rights, interests, or obligations under this Agreement may be assigned or
delegated, in whole or in part, by operation of law or otherwise, by Issuer
or Grantee without the prior written consent of the other, except that
Grantee may assign all its rights under Section 8 to any person who
acquires from Grantee any Option Shares. Any assignment or delegation in
violation of the preceding sentence shall be void. Subject to the first and
second sentences of this Section 10(g), this Agreement shall be binding
upon, inure to the benefit of, and be enforceable by, the parties and their
respective successors and permitted assigns.
(h) Further Assurances. In the event of any exercise of the
Option by Grantee, Issuer and Grantee shall execute and deliver all other
documents and instruments and take all other actions that may be reasonably
necessary in order to consummate the transactions provided for by such
exercise.
IN WITNESS WHEREOF, Issuer and Grantee have duly executed this
Agreement, all as of the day and year first written above.
NEWPORT NEWS SHIPBUILDING INC.,
by /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
--------------------------------
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇
Title: Senior Vice President and
Chief Financial Officer
AVONDALE INDUSTRIES, INC.,
by /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, ▇▇.
--------------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, ▇▇.
Title: Chairman of the Board,
President and Chief
Executive Officer
