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PROSPECTUS SUPPLEMENT
(To Prospectus Dated October 17, 1997)
U.S. $750,000,000
BLOCK FINANCIAL CORPORATION [LOGO]
MEDIUM-TERM NOTES, SERIES 1
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE
FULLY AND UNCONDITIONALLY GUARANTEED BY
H&R BLOCK, INC.
Block Financial Corporation (the 'Company') may offer from time to time pursuant
to this Prospectus Supplement up to $750,000,000 aggregate initial offering
price (or the equivalent thereof in one or more foreign or composite currencies)
of its Medium-Term Notes, Series 1 (the 'Notes'), subject to reduction as a
result of the sale of other Debt Securities under the Prospectus to which this
Prospectus Supplement relates. Each Note will mature on a Business Day more than
nine months from its date of issue (the 'Stated Maturity'), as specified in a
pricing supplement hereto (each, a 'Pricing Supplement') and such maturity date
may be subject to extension at the Company's option. Each Note may also be
subject to redemption at the Company's option or to repayment at the Holder's
option, in each case, in whole or in part, prior to its Stated Maturity, as
specified in the applicable Pricing Supplement.
The Notes may bear interest at a fixed rate (a 'Fixed Rate Note'), which may be
zero in the case of certain Discount Notes (as defined herein), or at a floating
rate (a 'Floating Rate Note') determined by reference to one or more of LIBOR,
the CD Rate, the Commercial Paper Rate, the Federal Funds Rate, the Treasury
Rate, the Prime Rate, the CMT Rate, the Eleventh District Cost of Funds Rate or
any other interest rate basis or formula (each as defined herein and each, a
'Base Rate'), as selected by the purchaser and agreed to by the Company,
adjusted by the Spread or Spread Multiplier (each as defined herein), if any,
applicable to such Note.
Unless otherwise specified in the applicable Pricing Supplement, interest on
each Fixed Rate Note will accrue from its date of issue and will be payable
semiannually in arrears on January 1 and July 1 of each year (each, an 'Interest
Payment Date') and at Stated Maturity. Interest on each Floating Rate Note will
accrue from its date of issue and will be payable monthly, quarterly,
semiannually or annually, as specified in the applicable Pricing Supplement, and
at Stated Maturity. A Note may be issued as an amortizing note (an 'Amortizing
Note') on which a portion or all of the interest and principal amount is payable
over the life of the Note in accordance with a schedule, by application of a
formula, or by reference to an index. A Note may be issued as an indexed note
(an 'Indexed Note'), the principal amount payable at Stated Maturity of which,
or premium or interest on which, will be determined by reference to the level of
a designated stock index or designated currency, commodity or other prices or
indices or will otherwise be determined by the application of a formula. The
interest rate or interest rate formula, reset provisions, issue price, Stated
Maturity, Interest Payment Dates, redemption, repayment and extension provisions
and certain other terms with respect to each Note will be established at the
time of issuance and set forth in a Pricing Supplement. The Notes will be fully
and unconditionally guaranteed (the 'Guarantees') on a senior unsecured basis by
H&R Block, Inc. (the 'Guarantor' or 'Block'), the indirect parent of the
Company. The Guarantees will rank equally in right of payment, on a pari passu
basis, with all the Guarantor's existing and future unsecured and unsubordinated
indebtedness and guarantees. See 'Description of the Notes.'
The Notes will be issued only in fully registered form in denominations of
$1,000 or integral multiples thereof, unless otherwise specified in the
applicable Pricing Supplement. Each Note will be represented by either a global
security (a 'Book-Entry Note') registered in the name of a nominee of The
Depository Trust Company, as Depositary (the 'Depositary'), or a certificate
issued in temporary or definitive registered form (a 'Certificated Note'), as
set forth in the applicable Pricing Supplement. Beneficial interests in
Book-Entry Notes will be shown on, and the transfers thereof will be effected
only through, records maintained by the Depositary and its direct and indirect
participants. Book-Entry Notes will not be issuable as Certificated Notes except
under the circumstances described herein. See 'Description of the Notes.'
SEE 'RISK FACTORS' BEGINNING ON PAGE 7 OF THE ACCOMPANYING PROSPECTUS FOR A
DISCUSSION OF CERTAIN MATERIAL FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE NOTES OFFERED HEREBY.
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, ANY PRICING SUPPLEMENT OR
THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO AGENTS' PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(2)(3)
<S> <C> <C> <C>
Per Note....... 100% .125%-.750% 99.250%-99.875%
Total(4)....... $750,000,000 $937,500-$5,625,000 $744,375,000-$749,062,500
</TABLE>
(1) Unless otherwise specified in a Pricing Supplement, the price to the public
of each Note will be 100% of its principal amount.
(2) The Company will pay to Salomon Brothers Inc, Merrill Lynch, Pierce, Fenner
& Smith Incorporated and Morgan Stanley & Co. Incorporated (each an 'Agent'
and collectively, the 'Agents'), a commission ranging from .125% to .750% of
the principal amount of any Note, depending upon its Stated Maturity through
thirty years, sold through the Agent. Commissions on Notes with a Stated
Maturity in excess of 30 years will be negotiated at the time of sale.
(3) Before deducting expenses payable by the Company estimated at $250,000,
including reimbursement of certain expenses of the Agents.
(4) Or the equivalent thereof in one or more foreign or composite currencies.
The Notes are being offered on a continuing basis by the Company through the
Agents, which have agreed to use their reasonable efforts to solicit orders to
purchase the Notes. The Company may also sell Notes at a discount to an Agent
for its own account or for resale to one or more purchasers at varying prices
related to prevailing market prices at the time of resale or, if set forth in
the applicable Pricing Supplement, at a fixed public offering price, as
determined by the Agents. In addition, the Agents may offer Notes purchased by
them as principal to other dealers. Unless otherwise indicated in the applicable
Pricing Supplement, any Note purchased by an Agent as principal will be
purchased at 100% of the principal amount thereof less a percentage equal to the
commission applicable to an agency sale of a Note of identical maturity. Unless
otherwise indicated in the applicable Pricing Supplement, the Notes will not be
listed on any securities exchange, and there can be no assurance that the
maximum amount of Notes offered by this Prospectus Supplement will be sold or
that there will be a secondary market for the Notes. The Company reserves the
right to withdraw, cancel or modify the offer or solicitation of offers made
hereby without notice. The Company or any Agent may reject any order to purchase
Notes, whether or not solicited, in whole or in part. See 'Plan of
Distribution.'
SALOMON SMITH BARNEY
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
The date of this Prospectus Supplement is January 9, 1998.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES,
AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE OFFERING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE 'PLAN OF DISTRIBUTION'.
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PRICING SUPPLEMENT
Provisions of each transaction will be more fully described in a Pricing
Supplement to this Prospectus Supplement and the accompanying Prospectus. In the
event of any inconsistency between a Pricing Supplement and this Prospectus
Supplement, the description contained in such Pricing Supplement supercedes and
replaces any inconsistent provision in this Prospectus Supplement.
DESCRIPTION OF THE NOTES
The following description of the particular terms of the Notes offered
hereby supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Debt Securities set forth
in the Prospectus, to which description reference is hereby made. Capitalized
terms not defined herein have the meanings assigned to such terms in the
Prospectus.
GENERAL
The Notes are a series of Debt Securities issued under an Indenture dated
as of October 20, 1997 among the Company, Block and Bankers Trust Company, as
trustee (the 'Trustee'). All Debt Securities, including the Notes, issued and to
be issued under the Indenture will be unsecured general obligations of the
Company and will rank pari passu with all other unsecured and unsubordinated
indebtedness of the Company from time to time outstanding. The Indenture does
not limit the aggregate principal amount of Debt Securities that may be issued
thereunder and Debt Securities may be issued thereunder from time to time in one
or more series up to the aggregate principal amount from time to time authorized
by the Company for each series. At the date of this Prospectus Supplement, the
Notes offered pursuant to this Prospectus Supplement are limited to an aggregate
initial public offering price or purchase price of up to $750,000,000 or the
equivalent thereof in one or more foreign or composite currencies (a 'Specified
Currency'), which amount is subject to reduction as a result of the sale of
other Debt Securities under the Prospectus to which this Prospectus Supplement
relates. The U.S. dollar equivalent of the public offering price or purchase
price of a Note having a Specified Currency other than U.S. dollars will be
determined on the basis of the noon buying rate in New York City for cable
transfers in foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York (the 'Market Exchange Rate') for such Specified
Currency on the applicable issue date. Such determination will be made by the
Company or its agent, as exchange rate agent for any series of Notes (the
'Exchange Rate Agent').
The Notes will be issued in fully registered form only, without coupons.
Each Note will be issued initially as either a Book-Entry Note or, if specified
in the applicable Pricing Supplement, a Certificated Note. Except as set forth
in the Prospectus under 'Description of Debt Securities--Global Securities',
Book-Entry Notes will not be issuable as Certificated Notes. See 'Book-Entry
Notes' below.
Unless otherwise specified in the applicable Pricing Supplement, the
authorized denominations of Notes denominated in U.S. dollars will be $1,000 and
any larger amount that is an integral multiple of $1,000, and the authorized
denominations of Notes having a Specified Currency other than U.S. dollars will
be the approximate equivalents thereof in the Specified Currency. Unless
otherwise specified in the applicable Pricing Supplement, each Note will mature
on a Business Day more than nine months from its date of issue, as selected by
the purchaser and agreed to by the Company (the 'Stated Maturity'), which
maturity date may be subject to extension at the option of the Company. Each
Note may also be subject to redemption at the option of the Company, or
repayment at the option of the Holder, prior to its Stated Maturity. Each
Floating Rate Note will mature on an Interest Payment Date for such Note.
The Pricing Supplement relating to a Note will describe the following
terms: (i) the Specified Currency for such Note; (ii) whether such Note is a
Fixed Rate Note, a Floating Rate Note, an Amortizing Note and/or an Indexed
Note; (iii) the price (expressed as a percentage of the aggregate principal
amount or face amount thereof) at which such Note will be issued (the 'Issue
Price'); (iv) the
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date on which such Note will be issued (the 'Original Issue Date'); (v) the date
of the Stated Maturity; (vi) if such Note is a Fixed Rate Note, the rate per
annum at which such Note will bear interest, if any, and whether and the manner
in which such rate may be changed prior to its Stated Maturity; (vii) if such
Note is a Floating Rate Note, the Base Rate, the Initial Interest Rate, the
Interest Reset Period or the Interest Reset Dates, the Interest Payment Dates,
and, if applicable, the Index Maturity, the Maximum Interest Rate, the Minimum
Interest Rate, the Spread or Spread Multiplier (all as defined below), and any
other terms relating to the particular method of calculating the interest rate
for such Note and whether and the manner in which such Spread or Spread
Multiplier may be changed prior to Stated Maturity; (viii) whether such Note is
an Original Issue Discount Note (as defined below); (ix) if such Note is an
Amortizing Note, the terms for repayment prior to Stated Maturity; (x) if such
Note is an Indexed Note, in the case of an Indexed Rate Note, the manner in
which the amount of any interest payment will be determined or, in the case of
an Indexed Principal Note, its Face Amount and the manner in which the principal
amount payable at Stated Maturity will be determined; (xi) whether such Note may
be redeemed at the option of the Company, or repaid at the option of the Holder,
prior to Stated Maturity as described under 'Optional Redemption, Repayment and
Repurchase' below and, if so, the provisions relating to such redemption or
repayment, including, in the case of an Original Issue Discount Note or Indexed
Note, the information necessary to determine the amount due upon redemption or
repayment; (xii) whether such Note is subject to an optional extension beyond
its Stated Maturity as described under 'Extension of Maturity' below; and (xiii)
any other terms of such Note not inconsistent with the provisions of the
Indenture under which such Note will be issued.
As used herein:
'Business Day' with respect to any Note means any day, other than a
Saturday or Sunday, that is (i) not a legal holiday or a day on which banking
institutions are authorized or required by law, regulation or executive order to
be closed in (a) The City of New York, or (b) if the Specified Currency for such
Note is other than U.S. dollars, the financial center of the country issuing
such Specified Currency (which, in the case of ECU, shall be Brussels, Belgium),
and (ii) if such Note is a LIBOR Note (as defined below), a London Banking Day.
'London Banking Day' with respect to any Note means any day on which dealings in
deposits in the Specified Currency of such Note are transacted in the London
interbank market.
'Interest Payment Date' with respect to any Note means a date (other than
the Maturity Date) on which, under the terms of such Note, regularly scheduled
interest shall be payable.
'Original Issue Discount Note' means (i) a Note, including any such Note
whose interest rate is zero, that has a stated redemption price at Stated
Maturity that exceeds its Issue Price by at least 0.25% of its stated redemption
price at Stated Maturity, multiplied by the number of full years from the
Original Issue Date to the Stated Maturity for such Note and (ii) any other Note
designated by the Company as issued with original issue discount for United
States Federal income tax purposes.
A 'basis point' or 'bp' equals one one-hundredth of a percentage point.
RANKING
The Notes will be general unsecured obligations and will rank equal in
right of payment, on a pari passu basis, with all other existing and future
unsecured and unsubordinated senior indebtedness of the Company. The Notes will
be fully and unconditionally guaranteed on a senior unsecured basis by the
Guarantor. The Guarantees will rank equal in right of payment, on a pari passu
basis, with all existing and future unsecured and unsubordinated senior
indebtedness and guarantees of the Guarantor.
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PAYMENT OF PRINCIPAL AND INTEREST
GENERAL
The principal of and any premium and interest on each Note are payable by
the Company in the Specified Currency for such Note. If the Specified Currency
for a Note is other than U.S. dollars, the Company will (unless otherwise
specified in the applicable Pricing Supplement) arrange to convert all payments
in respect of such Note into U.S. dollars in the manner described in the
following paragraph. The Holder of a Note having a Specified Currency other than
U.S. dollars may (if the applicable Pricing Supplement and such Note so
indicate) elect to receive all payments in respect of such Note in the Specified
Currency by delivery of a written notice to the Trustee for such Note not later
than 15 calendar days prior to the applicable payment date, except under the
circumstances described under 'Currency Risks--Payment Currency' below. Such
election will remain in effect until revoked by written notice to such Trustee
received not later than fifteen calendar days prior to the applicable payment
date.
In the case of a Note having a Specified Currency other than U.S. dollars,
the amount of any U.S. dollar payment in respect of such Note will be determined
by the Exchange Rate Agent based on the highest firm bid quotation expressed in
U.S. dollars received by the Exchange Rate Agent at approximately 11:00 a.m.,
New York City time, on the second Business Day preceding the applicable payment
date (or, if no such rate is quoted on such date, the last date on which such
rate was quoted), from three (or, if three are not available, then two)
recognized foreign exchange dealers in The City of New York (one of which may be
an Agent and another of which may be the Exchange Rate Agent) selected by the
Exchange Rate Agent, for the purchase by the quoting dealer, for settlement on
such payment date, of the aggregate amount of such Specified Currency payable on
such payment date in respect of all Notes denominated in such Specified
Currency. All currency exchange costs will be borne by the Holders of such Notes
by deductions from such payments. If no such bid quotations are available, such
payments will be made in such Specified Currency, unless such Specified Currency
is unavailable due to the imposition of exchange controls or to other
circumstances beyond the Company's control, in which case such payments will be
made as described under 'Currency Risks-- Payment Currency' below.
Unless otherwise specified in the applicable Pricing Supplement, U.S.
dollar payments of interest on Notes (other than interest payable at Stated
Maturity) will be made, except as provided below, by check mailed to the
Registered Holders of such Notes (which, in the case of Global Securities
representing Book-Entry Notes, will be a nominee of the Depositary); provided,
however, that, in the case of a Note issued between a Regular Record Date and
the related Interest Payment Date, unless otherwise specified in the related
Pricing Supplement, interest for the period beginning on the Original Issue Date
for such Note and ending on such Interest Payment Date shall be paid on the next
succeeding Interest Payment Date to the Registered Holder of such Note on the
related Regular Record Date. A Holder of $10,000,000 (or the equivalent thereof
in a Specified Currency other than U.S. dollars) or more in aggregate principal
amount of Notes of like tenor and term shall be entitled to receive such U.S.
dollar payments by wire transfer of immediately available funds, but only if
appropriate wire transfer instructions have been received in writing by the
Trustee for such Notes not later than 15 calendar days prior to the applicable
Interest Payment Date. Simultaneously with the election by any Holder to receive
payments in a Specified Currency other than U.S. dollars (as provided above),
such Holder shall provide appropriate wire transfer instructions to the Trustee
for such Notes. Unless otherwise specified in the applicable Pricing Supplement,
principal and any premium and interest payable at the Stated Maturity or upon
the redemption or repayment of a Note will be paid in immediately available
funds upon surrender of such Note at the corporate trust office or agency of the
Trustee for such Note in The City of New York.
Unless otherwise specified in the applicable Pricing Supplement, if the
principal of any Original Issue Discount Note is declared to be due and payable
immediately as described under 'Description of Debt Securities--Events of
Default and Remedies' in the Prospectus, the amount of principal due and
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payable with respect to such Note shall be limited to the aggregate principal
amount (or face amount, in the case of an Indexed Principal Note) of such Note
multiplied by the sum of its Issue Price (expressed as a percentage of the
aggregate principal amount) plus the original issue discount amortized from the
date of issue to the date of declaration, which amortization shall be calculated
using the 'interest method' (computed in accordance with generally accepted
accounting principles in effect on the date of declaration).
The Regular Record Date with respect to any Interest Payment Date for a
Floating Rate Note or for an Indexed Rate Note shall be the date (whether or not
a Business Day) 15 calendar days immediately preceding such Interest Payment
Date, and for a Fixed Rate Note (unless otherwise specified in the applicable
Pricing Supplement) shall be the December 15 or June 15 (whether or not a
Business Day) immediately preceding such Interest Payment Date.
FIXED RATE NOTES
Each Fixed Rate Note will bear interest from its Original Issue Date, or
from the last Interest Payment Date to which interest has been paid or duly
provided for, at the rate per annum stated in the applicable Pricing Supplement
until the principal amount thereof is paid or made available for payment, except
as described below under 'Subsequent Interest Periods' and 'Extension of
Maturity', and except that if so specified in the applicable Pricing Supplement,
the rate of interest payable on certain Fixed Rate Notes may be subject to
adjustment from time to time as described in such Pricing Supplement. Unless
otherwise set forth in the applicable Pricing Supplement, interest on each Fixed
Rate Note will be payable semiannually in arrears on each Interest Payment Date
and at Stated Maturity. If an Interest Payment Date with respect to any Fixed
Rate Note would otherwise be a day that is not a Business Day, such Interest
Payment Date shall not be postponed; provided, however, that any payment
required to be made in respect of such Note on a date (including the day of
Stated Maturity) that is not a Business Day for such Note need not be made on
such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on such date, and no additional interest shall
accrue as a result of such delayed payment. Each payment of interest in respect
of an Interest Payment Date shall include interest accrued through the day
before such Interest Payment Date. Interest on Fixed Rate Notes will be computed
on the basis of a 360-day year of twelve 30-day months.
FLOATING RATE NOTES
Unless otherwise specified in the applicable Pricing Supplement, each
Floating Rate Note will bear interest from its Original Issue Date to the first
Interest Reset Date (such period, the 'Initial Interest Period') for such Note
at the Initial Interest Rate set forth on the face thereof and in the applicable
Pricing Supplement. The interest rate on such Note for each Interest Reset
Period (as defined below) (and for the Initial Interest Period if so specified
in the applicable Pricing Supplement) will be determined by reference to an
interest rate basis (the 'Base Rate'), plus or minus the Spread, if any, or
multiplied by the Spread Multiplier, if any. The 'Spread' is the number of basis
points that may be specified in the applicable Pricing Supplement as being
applicable to such Note, and the 'Spread Multiplier' is the percentage that may
be specified in the applicable Pricing Supplement as being applicable to such
Note, except in each case as described below under 'Subsequent Interest Periods'
and 'Extension of Maturity,' and except that if so specified in the applicable
Pricing Supplement, the Spread or Spread Multiplier on certain Floating Rate
Notes may be subject to adjustment from time to time as described in such
Pricing Supplement. The applicable Pricing Supplement will designate one of the
following Base Rates as applicable to a Floating Rate Note: (i) LIBOR (a 'LIBOR
Note'), (ii) the Commercial Paper Rate (a 'Commercial Paper Rate Note'), (iii)
the Treasury Rate (a 'Treasury Rate Note'), (iv) the Prime Rate (a 'Prime Rate
Note'), (v) the CMT Rate (a 'CMT Rate Note'), (vi) the Federal Funds Rate (a
'Federal Funds Rate Note'), (vii) the CD Rate (a 'CD Rate Note'), (viii) the
Eleventh District Cost of Funds Rate (an 'Eleventh District Cost of Funds Rate
Note') or (ix) such other Base Rate as is set forth
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in such Pricing Supplement and in such Note. The 'Index Maturity' for any
Floating Rate Note is the period of maturity of the instrument or obligation
from which the Base Rate is calculated. 'H.15(519)' means the publication
entitled 'Statistical Release H.15(519), 'Selected Interest Rates' ', or any
successor publication, published by the Board of Governors of the Federal
Reserve System. 'Composite Quotations' means the daily statistical release
entitled 'Composite 3:30 p.m. Quotations for U.S. Government Securities'
published by the Federal Reserve Bank of New York.
As specified in the applicable Pricing Supplement, a Floating Rate Note may
also have either or both of the following (in each case expressed as a rate per
annum on a simple interest basis): (i) a maximum limitation, or ceiling, on the
rate at which interest may accrue during any interest period ('Maximum Interest
Rate') and (ii) a minimum limitation, or floor, on the rate at which interest
may accrue during any interest period ('Minimum Interest Rate'). In addition to
any Maximum Interest Rate that may be applicable to any Floating Rate Note, the
interest rate on a Floating Rate Note will in no event be higher than the
maximum rate permitted by applicable law, as the same may be modified by United
States law of general application. The Notes will be governed by the law of the
State of New York and, under such law as of the date of this Prospectus
Supplement, the maximum rate of interest under provisions of the penal law, with
certain exceptions, is 25% per annum on a simple interest basis. Such maximum
rate of interest only applies to obligations that are less than $2,500,000.
Unless otherwise specified in the Pricing Supplement, the Trustee will be
the 'Calculation Agent'. Upon request of the holder of any Floating Rate Note,
the Calculation Agent will provide the interest rate then in effect and, if
determined, the interest rate will become effective as a result of a
determination for the next Interest Reset Date with respect to such Floating
Rate Note. Unless otherwise specified in the applicable Pricing Supplement, the
'Calculation Date', if applicable, pertaining to any Interest Determination Date
will be the earlier of (i) the tenth calendar day after such Interest
Determination Date, or, if such day is not a Business Day, the next succeeding
Business Day, or (ii) the Business Day immediately preceding the applicable
Interest Payment Date or Stated Maturity, as the case may be.
The interest rate on each Floating Rate Note will be reset daily, weekly,
monthly, quarterly, semiannually or annually (such period being the 'Interest
Reset Period' for such Note, and the first day of each Interest Reset Period
being an 'Interest Reset Date'), as specified in the applicable Pricing
Supplement. Unless otherwise specified in the applicable Pricing Supplement, the
Interest Reset Dates will be, in the case of Floating Rate Notes that reset
daily, each Business Day; in the case of Floating Rate Notes (other than
Treasury Rate Notes) that reset weekly, Wednesday of each week; in the case of
Treasury Rate Notes that reset weekly, Tuesday of each week (except as provided
below under 'Treasury Rate Notes'); in the case of Floating Rate Notes that
reset monthly, the third Wednesday of each month; in the case of Floating Rate
Notes that reset quarterly, the third Wednesday of March, June, September and
December of each year; in the case of Floating Rate Notes that reset
semiannually, the third Wednesday of each of two months of each year specified
in the applicable Pricing Supplement; and, in the case of Floating Rate Notes
that reset annually, the third Wednesday of one month of each year specified in
the applicable Pricing Supplement. If an Interest Reset Date for any Floating
Rate Note would otherwise be a day that is not a Business Day, such Interest
Reset Date shall be postponed to the next succeeding Business Day, except that,
in the case of a LIBOR Note, if such Business Day is in the next succeeding
calendar month, such Interest Reset Date shall be the immediately preceding
Business Day.
Unless otherwise specified in the applicable Pricing Supplement, the rate
of interest that goes into effect on any Interest Reset Date shall be determined
on a date (the 'Interest Determination Date') preceding such Interest Reset
Date, as further described below. Unless otherwise specified in the applicable
Pricing Supplement, the Interest Determination Date pertaining to an Interest
Reset Date for a CD Rate Note or any Floating Rate Note for which the interest
rate is determined with reference to the CD Rate (the 'CD Rate Interest
Determination Date'), for a Commercial Paper Rate Note or any Floating Rate Note
for which the interest rate is determined with reference to the Commercial Paper
Rate (the 'Commercial Paper Rate Interest Determination Date'), for a Federal
Funds Rate Note or any
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Floating Rate Note for which the interest rate is determined with reference to
the Federal Funds Rate (the 'Federal Funds Rate Interest Determination Date'),
or for a Prime Rate Note or any Floating Rate Note for which the interest rate
is determined with reference to the Prime Rate (the 'Prime Rate Interest
Determination Date'), or for a CMT Rate Note or any Floating Rate Note for which
the interest rate is determined with reference to the CMT Rate (the 'CMT Rate
Interest Determination Date'), will be the second Business Day preceding the
Interest Reset Date. The Interest Determination Date pertaining to an Interest
Reset Date for a LIBOR Note or any Floating Rate Note for which the interest
rate is determined with reference to LIBOR (the 'LIBOR Rate Interest
Determination Date') will be the second London Banking Day immediately preceding
the Interest Reset Date with respect to such Note. The Interest Determination
Date pertaining to an Interest Reset Date for an Eleventh District Cost of Funds
Rate Note or any Floating Rate Note for which the interest rate is determined
with reference to the Eleventh District Cost of Funds Rate (the 'Eleventh
District Cost of Funds Rate Interest Determination Date') will be the last
working day of the month immediately preceding the applicable Interest Reset
Date on which the Federal Home Loan Bank of San Francisco (the 'FHLB of San
Francisco') publishes the Eleventh District Index (as defined below). The
Interest Determination Date pertaining to an Interest Reset Date for a Treasury
Rate Note or any Floating Rate Note for which the interest rate is determined
with reference to the Treasury Rate (the 'Treasury Rate Interest Determination
Date') will be the day of the week on which Treasury bills (as defined below)
would normally be auctioned in the week in which such Interest Reset Date falls.
Treasury bills are usually sold at auction on Monday of each week, unless that
day is a legal holiday, in which case the auction is usually held on the
following Tuesday, except that such auction may be held on the preceding Friday.
If, as the result of a legal holiday, an auction is so held on the preceding
Friday, such Friday will be the Treasury Rate Interest Determination Date
pertaining to an Interest Reset Date occurring in the next succeeding week. If
an auction date shall fall on a day which would otherwise be an Interest Reset
Date for a Treasury Rate Note, then such Interest Reset Date shall instead be
the first Business Day immediately following such auction date. The Interest
Determination Date pertaining to a Floating Rate Note the interest rate of which
is determined by reference to two or more Interest Rate Bases will be the most
recent Business Day which is at least two Business Days prior to the applicable
Interest Reset Date for such Floating Rate Note on which each Interest Rate
Basis is determinable. Each Interest Rate Basis will be determined on such date,
and the applicable interest rate will take effect on the applicable Interest
Reset Date.
Unless otherwise specified in the applicable Pricing Supplement, interest
payable in respect of Floating Rate Notes shall be the accrued interest from and
including the Original Issue Date or the last date to which interest has been
paid, as the case may be, to but excluding the applicable Interest Payment Date.
With respect to a Floating Rate Note, accrued interest shall be calculated
by multiplying the principal amount of such Note (or, in the case of a Floating
Rate Note that is an Indexed Principal Note, its Face Amount) by an accrued
interest factor. Such accrued interest factor will be computed by adding the
interest factors calculated for each day in the period for which accrued
interest is being calculated. Unless otherwise specified in the applicable
Pricing Supplement the interest factor (expressed as a decimal calculated to
seven decimal places without rounding) for each such day is computed by dividing
the interest rate in effect on such day by 360, in the case of LIBOR Notes,
Prime Rate Notes, Commercial Paper Rate Notes, Federal Funds Rate Notes,
Eleventh District Cost of Funds Rate Notes, and CD Rate Notes, or by the actual
number of days in the year, in the case of CMT Rate Notes or Treasury Rate
Notes. For purposes of making the foregoing calculation, the interest rate in
effect on any Interest Reset Date will be the applicable rate as reset on such
date.
Unless otherwise specified in the applicable Pricing Supplement, all
percentages resulting from any calculation of the rate of interest on a Floating
Rate Note will be rounded, if necessary, to the nearest 1/100,000 of 1%
(.0000001), with five one-millionths of a percentage point rounded upward, and
all currency amounts used in or resulting from such calculation on Floating Rate
Notes will be rounded to the nearest one-hundredth of a unit (with .005 of a
unit being rounded upward).
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Unless otherwise indicated in the applicable Pricing Supplement and except
as provided below, interest will be payable, in the case of Floating Rate Notes
that reset daily, weekly or monthly, on the third Wednesday of each month or on
the third Wednesday of March, June, September and December of each year, as
specified in the applicable Pricing Supplement; in the case of Floating Rate
Notes that reset quarterly, on the third Wednesday of March, June, September,
and December of each year; in the case of Floating Rate Notes that reset
semiannually, on the third Wednesday of each of two months of each year
specified in the applicable Pricing Supplement; and, in the case of Floating
Rate Notes that reset annually, on the third Wednesday of one month of each year
specified in the applicable Pricing Supplement (each such day being an 'Interest
Payment Date'). If an Interest Payment Date with respect to any Floating Rate
Note would otherwise be a day that is not a Business Day, such Interest Payment
Date shall be postponed to the next succeeding Business Day, except that, in the
case of a LIBOR Note, if such Business Day is in the next succeeding calendar
month, such Interest Payment Date shall be the immediately preceding Business
Day.
CD RATE NOTES
Each CD Rate Note will bear interest for each Interest Reset Period at the
interest rate calculated with reference to the CD Rate and the Spread or Spread
Multiplier, if any, specified in such CD Rate Note and in the applicable Pricing
Supplement.
Unless otherwise specified in the applicable Pricing Supplement, the 'CD
Rate' for each Interest Reset Period shall be the rate on the CD Rate Interest
Determination Date for negotiable certificates of deposit having the Index
Maturity designated in the applicable Pricing Supplement as published in
H.15(519) under the heading 'CDs (Secondary Market)'. In the event that such
rate is not published prior to 3:00 p.m., New York City time, on the Calculation
Date pertaining to such Interest Determination Date, then the 'CD Rate' for such
Interest Reset Period will be the rate on such Interest Rate Determination Date
for negotiable certificates of deposit of the Index Maturity designated in the
applicable Pricing Supplement as published in Composite Quotations under the
heading 'Certificates of Deposit'. If by 3:00 p.m., New York City time, on such
Calculation Date such rate is not yet published in either H.15(519) or Composite
Quotations, then the 'CD Rate' for such Interest Reset Period will be calculated
by the Calculation Agent for such CD Rate Note and will be the arithmetic mean
of the secondary market offered rates as of 10:00 a.m., New York City time, on
such Interest Determination Date of three leading nonbank dealers in negotiable
U.S. dollar certificates of deposit in The City of New York selected by the
Calculation Agent for such CD Rate Note for negotiable certificates of deposit
of major United States money center banks of the highest credit standing (in the
market for negotiable certificates of deposit) with a remaining maturity closest
to the Index Maturity designated in the Pricing Supplement in a denomination of
$5,000,000; provided, however, that if the dealers selected as aforesaid by such
Calculation Agent are not quoting offered rates as mentioned in this sentence,
the 'CD Rate' for such Interest Reset Period will be the same as the CD Rate for
the immediately preceding Interest Reset Period (or, if there was no such
Interest Reset Period, the Initial Interest Rate).
COMMERCIAL PAPER RATE NOTES
Each Commercial Paper Rate Note will bear interest for each Interest Reset
Period at the interest rate calculated with reference to the Commercial Paper
Rate and the Spread or Spread Multiplier, if any, specified in such Commercial
Paper Rate Note and in the applicable Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, the
'Commercial Paper Rate' for each Interest Reset Period will be determined by the
Calculation Agent for such Commercial Paper Rate Note as of the Commercial Paper
Rate Interest Determination Date and shall be the Money Market Yield (as defined
below) on such Interest Determination Date of the rate for commercial paper
having the Index Maturity specified in the applicable Pricing Supplement, as
such rate shall be published in H.15(519) under the heading 'Commercial
Paper--Nonfinancial'. In the event that such rate is not published prior to 3:00
p.m., New York City time, on the Calculation Date (as defined below) pertaining
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to such Interest Determination Date, then the 'Commercial Paper Rate' for such
Interest Reset Period shall be the Money Market Yield on such Interest
Determination Date of the rate for commercial paper of the specified Index
Maturity as published in Composite Quotations under the heading 'Commercial
Paper'. If by 3:00 p.m., New York City time, on such Calculation Date such rate
is not yet published in either H.15(519) or Composite Quotations, then the
'Commercial Paper Rate' for such Interest Reset Period shall be the Money Market
Yield of the arithmetic mean of the offered rates, as of 11:00 a.m., New York
City time, on such Interest Determination Date of three leading dealers of
commercial paper in The City of New York selected by the Calculation Agent for
such Commercial Paper Rate Note for commercial paper of the specified Index
Maturity placed for an industrial issuer whose bonds are rated 'AA' or the
equivalent by a nationally recognized rating agency; provided, however, that if
the dealers selected as aforesaid by such Calculation Agent are not quoting
offered rates as mentioned in this sentence, the 'Commercial Paper Rate' for
such Interest Reset Period will be the same as the Commercial Paper Rate for the
immediately preceding Interest Reset Period (or, if there was no such Interest
Reset Period, the Initial Interest Rate).
'Money Market Yield' shall be a yield (expressed as a percentage)
calculated in accordance with the following formula:
Money Market Yield = D x 360 x 100
-------------------------
360 - (D x M)
where 'D' refers to the applicable per annum rate for commercial paper quoted on
a bank discount basis and expressed as a decimal, and 'M' refers to the actual
number of days in the interest period for which interest is being calculated.
FEDERAL FUNDS RATE NOTES
Each Federal Funds Rate Note will bear interest for each Interest Reset
Period at the interest rate calculated with reference to the Federal Funds Rate
and the Spread or Spread Multiplier, if any, specified in such Federal Funds
Rate Note and in the applicable Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, the
'Federal Funds Rate' for each Interest Reset Period shall be the effective rate
on the Federal Funds Rate Interest Determination Date for Federal Funds as
published in H.15(519) under the heading 'Federal Funds (Effective)'. In the
event that such rate is not published prior to 3:00 p.m., New York City time, on
the Calculation Date pertaining to such Interest Determination Date, the
'Federal Funds Rate' for such Interest Reset Period shall be the rate on such
Interest Determination Date as published in Composite Quotations under the
heading 'Federal Funds/Effective Rate'. If by 3:00 p.m., New York City time, on
such Calculation Date such rate is not yet published in either H.15(519) or
Composite Quotations, then the 'Federal Funds Rate' for such Interest Reset
Period shall be the rate on such Interest Determination Date made publicly
available by the Federal Reserve Bank of New York which is equivalent to the
rate which appears in H.15(519) under the heading 'Federal Funds (Effective)';
provided, however, that if such rate is not made publicly available by the
Federal Reserve Bank of New York by 3:00 p.m., New York City time, on such
Calculation Date, the 'Federal Funds Rate' for such Interest Reset Period will
be the same as the Federal Funds Rate in effect for the immediately preceding
Interest Reset Period (or, if there was no such Interest Reset Period, the
Initial Interest Rate). In the case of a Federal Funds Rate Note that resets
daily, the interest rate on such Note for the period from and including a Monday
to but excluding the succeeding Monday will be reset by the Calculation Agent
for such Note on such second Monday (or, if not a Business Day, on the next
succeeding Business Day) to a rate equal to the average of the Federal Funds
Rates in effect with respect to each such day in such week.
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LIBOR NOTES
Each LIBOR Note will bear interest for each Interest Reset Period at the
interest rate calculated with reference to LIBOR and the Spread or Spread
Multiplier, if any, specified in such LIBOR Note and in the applicable Pricing
Supplement.
'LIBOR' for each Interest Reset Period will be determined by the
Calculation Agent for such LIBOR Notes as follows:
(i) With respect to any LIBOR Interest Determination Date, LIBOR will
be either: (a) if 'LIBOR Reuters' is specified in the applicable Pricing
Supplement, the arithmetic mean of the offered rates (unless the Designated
LIBOR Page by its terms provides only for a single rate, in which case such
single rate shall be used) for deposits in the Index Currency having the
Index Maturity specified in such Pricing Supplement, commencing on the
applicable Interest Reset Date, that appear (or, if only a single rate is
required as aforesaid, appears) on the Designated LIBOR Page as of 11:00
a.m., London time, on such LIBOR Interest Determination Date, or (b) if
'LIBOR Telerate' is specified in the applicable Pricing Supplement or if
neither 'LIBOR Reuters' nor 'LIBOR Telerate' is specified in the applicable
Pricing Supplement as the method for calculating LIBOR, the rate for
deposits in the Index Currency having the Index Maturity specified in such
Pricing Supplement, commencing on such Interest Reset Date, that appears on
the Designated LIBOR Page as of 11:00 a.m., London time, on such LIBOR
Interest Determination Date. If fewer than two such offered rates so
appear, or if no such rate so appears, as applicable, LIBOR on such LIBOR
Interest Determination Date will be determined in accordance with the
provisions described in clause (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on which
fewer than two offered rates appear, or no rate appears, as the case may
be, on the Designated LIBOR Page as specified in clause (i) above, the
Calculation Agent will request the principal London offices of each of four
major reference banks in the London interbank market, as selected by the
Calculation Agent, to provide the Calculation Agent with its offered
quotation for deposits in the Index Currency for the period of the Index
Maturity specified in the applicable Pricing Supplement, commencing on the
applicable Interest Reset Date, to prime banks in the London interbank
market at approximately 11:00 a.m., London time, on such LIBOR Interest
Determination Date and in a principal amount that is representative for a
single transaction in such Index Currency in such market at such time. If
at least two such quotations are so provided, then LIBOR on such LIBOR
Interest Determination Date will be the arithmetic mean of such quotations.
If fewer than two such quotations are so provided, then LIBOR on such LIBOR
Interest Determination Date will be the arithmetic mean of the rates quoted
at approximately 11:00 a.m., in the applicable Principal Financial Center,
on such LIBOR Interest Determination Date by three major banks in such
Principal Financial Center selected by the Calculation Agent for loans in
the Index Currency to leading European banks, having the Index Maturity
specified in the applicable Pricing Supplement and in a principal amount
that is representative for a single transaction in such Index Currency in
such market at such time; provided, however, that if the banks so selected
by the Calculation Agent are not quoting as mentioned in this sentence,
LIBOR determined as of such LIBOR Interest Determination Date will be LIBOR
in effect on such LIBOR Interest Determination Date.
'Index Currency' means the currency or composite currency specified in the
applicable Pricing Supplement as to which LIBOR shall be calculated. If no such
currency or composite currency is specified in the applicable Pricing
Supplement, the Index Currency shall be U.S. dollars.
'Designated LIBOR Page' means (a) if 'LIBOR Reuters' is specified in the
applicable Pricing Supplement, the display on the Reuters Monitor Money Rates
Service (or any successor service) on the page specified in such Pricing
Supplement (or any other page as may replace such page on such service) for the
purpose of displaying the London interbank rates of major banks for the
applicable Index Currency, or (b) if 'LIBOR Telerate' is specified in the
applicable Pricing Supplement or neither 'LIBOR
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Reuters' nor 'LIBOR Telerate' is specified in the applicable Pricing Supplement
as the method for calculating LIBOR, the display on the Dow Jones Telerate
Service (or any successor service) on the page specified in such Pricing
Supplement (or any other page as may replace such page on such service) for the
purpose of displaying the London interbank rates of major banks for the
applicable Index Currency.
'Principal Financial Center' means the capital city of the country issuing
the currency or composite currency in which any payment in respect of the
relevant Notes is to be made or, solely with respect to the calculation of
LIBOR, the Index Currency, except that with respect to U.S. dollars, deutsche
marks, Italian lira, Swiss francs, Dutch guilders and ECUs, the Principal
Financial Center shall be the City of New York, Frankfurt, Milan, Zurich,
Amsterdam and Brussels, respectively.
TREASURY RATE NOTES
Each Treasury Rate Note will bear interest for each Interest Reset Period
at the interest rate calculated with reference to the Treasury Rate and the
Spread or Spread Multiplier, if any, specified in such Treasury Rate Note and in
the applicable Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, the
'Treasury Rate' for each Interest Reset Period will be the rate for the auction
held on the Treasury Rate Interest Determination Date for such Interest Reset
Period of direct obligations of the United States ('Treasury Securities') having
the Index Maturity specified in the applicable Pricing Supplement, as such rate
shall be published in H.15(519) under the heading 'U.S. Government
Securities--Treasury bills--auction average (investment)' or, in the event that
such rate is not published prior to 3:00 p.m., New York City time, on the
Calculation Date pertaining to such Interest Determination Date, the auction
average rate (expressed as a bond equivalent on the basis of a year of 365 or
366 days, as applicable, and applied on a daily basis) on such Interest
Determination Date as otherwise announced by the United States Department of the
Treasury. In the event that the results of the auction of Treasury Securities
having the specified Index Maturity are not published or reported as provided
above by 3:00 p.m., New York City time, on such Calculation Date, or if no such
auction is held on such Interest Determination Date, then the 'Treasury Rate'
for such Interest Reset Period shall be calculated by the Calculation Agent for
such Treasury Rate Note and shall be a yield to maturity (expressed as a bond
equivalent on the basis of a year of 365 or 366 days, as applicable, and applied
on a daily basis) of the arithmetic mean of the secondary market bid rates, as
of approximately 3:30 p.m., New York City time, on such Interest Determination
Date, of three leading primary United States government securities dealers
selected by such Calculation Agent for the issue of Treasury Securities with a
remaining maturity closest to the specified Index Maturity; provided, however,
that if the dealers selected as aforesaid by such Calculation Agent are not
quoting bid rates as mentioned in this sentence, then the 'Treasury Rate' for
such Interest Reset Period will be the same as the Treasury Rate for the
immediately preceding Interest Reset Period (or, if there was no such Interest
Reset Period, the Initial Interest Rate).
PRIME RATE NOTES
Each Prime Rate Note will bear interest at the interest rate calculated
with reference to the Prime Rate and the Spread or Spread Multiplier, if any,
specified in such Prime Rate Note and in the applicable Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, the 'Prime
Rate' means, with respect to any Prime Rate Interest Determination Date, the
rate on such date as published in H.15(519) under the heading 'Bank Prime Loan.'
In the event that such rate is not published by 9:00 a.m., New York City time,
on the Calculation Date pertaining to such Interest Determination Date, then the
Prime Rate will be determined by the Calculation Agent and will be the
arithmetic mean of the rates of interest publicly announced by each bank that
appears on the Reuters Screen USPRIME1 Page (as defined below) as such bank's
prime rate or base lending rate as in effect for that Interest Determination
Date. 'Reuters Screen USPRIME1 Page' means the display designated as page
'USPRIME1' on the Reuters Monitor Money Rates Service (or such other page as may
replace the USPRIME1 page on that
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service for the purpose of displaying prime rates or base lending rates of major
United States banks). If fewer than four such rates but more than one such rate
appear on the Reuters Screen USPRIME1 Page for such Interest Determination Date,
the Prime Rate shall be determined by the Calculation Agent and will be the
arithmetic mean of the prime rates quoted on the basis of actual number of days
in the year divided by 360 as of the close of business on such Interest
Determination Date by at least two major money center banks in New York City
selected by the Calculation Agent (after consulting with the Company). If fewer
than two such rates appear on the Reuters Screen USPRIME1 Page, the Prime Rate
will be determined by the Calculation Agent and will be the arithmetic mean of
the prime rates furnished in New York City by three substitute banks or trust
companies organized and doing business under the laws of the United States, or
any State thereof, in each case having total equity capital of at least U.S.
$500,000,000 and being subject to supervision or examination by Federal or State
authority, selected by the Calculation Agent (after consulting with the Company)
to provide such rate or rates; provided, however, that if the banks selected as
aforesaid are not quoting as mentioned in this sentence, the Prime Rate will
remain the Prime Rate in effect on such Interest Determination Date.
CMT RATE NOTES
Each CMT Rate Note will bear interest at the rate calculated with reference
to the CMT Rate and the Spread and/or Spread Multiplier, if any, specified in
such CMT Rate Note and in any applicable Pricing Supplement.
Unless otherwise specified in the applicable Pricing Supplement, 'CMT Rate'
means, with respect to any CMT Rate Interest Determination Date, the rate
displayed on the Designated CMT Telerate Page under the caption 'Treasury
Constant Maturities--Federal Reserve Board release H.15--Mondays approximately
3:45 P.M.,' under the column for the Designated CMT Maturity Index (as defined
below) for (i) if the Designated Telerate Page is 7055, the rate on such
Interest Determination Date, and (ii) if the Designated CMT Telerate Page is
7052, the week, or the month, as applicable, ended immediately preceding the
week in which the related Interest Determination Date occurs. If such rate is no
longer displayed on the relevant page, or if not displayed by 3:00 p.m., New
York City time, on the related Calculation Date, then the CMT Rate for such
Interest Determination Date will be such Treasury constant maturity rate for the
Designated CMT Maturity Index as published in H.15(519). If such rate is no
longer published, or if not published by 3:00 p.m., New York City time, on the
related Calculation Date, then the CMT Rate for such Interest Determination Date
will be such Treasury constant maturity rate for the designated CMT Maturity
Index (or other United States Treasury rate for the Designated CMT Maturity
Index) for the Interest Determination Date with respect to such Interest Reset
Date as may then be published by either the Board of Governors of the Federal
Reserve System or the United States Department of the Treasury that the
Calculation Agent determines to be comparable to the rate formerly displayed on
the Designated CMT Telerate Page and published in the relevant H.15(519). If
such information is not provided by 3:00 p.m., New York City time, on the
related Calculation Date, then the CMT Rate for such Interest Determination Date
will be calculated by the Calculation Agent and will be a yield to maturity,
based on the arithmetic mean of the secondary market closing side offer prices
as of approximately 3:30 p.m., New York City time, on the Interest Determination
Date reported, according to their written records, by three leading primary
United States government securities dealers (each, a 'Reference Dealer') in the
City of New York selected by the Calculation Agent (from five such Reference
Dealers selected by the Calculation Agent and eliminating the highest quotation
(or, in the event of equality, one of the highest) and the lowest quotation (or,
in the event of equality, one of the lowest)), for the most recently issued
direct noncallable fixed rate obligations of the United States ('Treasury
Notes') with an original maturity of approximately the Designated CMT Maturity
Index and a remaining term to maturity of not less than such Designated CMT
Maturity Index minus one year. If the Calculation Agent cannot obtain three such
Treasury Note quotations, the CMT Rate for such Interest Determination Date will
be calculated by the Calculation Agent and will be a yield to maturity based on
the arithmetic mean of the secondary market offer side prices as of
approximately 3:30 p.m., New York City time, on the Interest Determination Date
of three Reference Dealers in the City of New York (from
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five such Reference Dealers selected by the Calculation Agent and eliminating
the highest quotation (or, in the event of equality, one of the highest) and the
lowest quotation (or, in the event of equality, one of the lowest)), for such
Treasury Notes with an original maturity of the number of years that is the next
highest to the Designated CMT Maturity Index and a remaining term to maturity
closest to the Designated CMT Maturity Index in an amount of at least U.S. $100
million. If three or four (and not five) of such Reference Dealers are quoting
as described above, then the CMT Rate will be based on the arithmetic mean of
the offer prices obtained and neither the highest nor the lowest of such quotes
will be eliminated; provided however, that if fewer than three Reference Dealers
selected by the Calculation Agent are quoting as described herein, the CMT Rate
will be the CMT Rate in effect on such Interest Determination Date. If two
Treasury Notes with an original maturity as described in the third preceding
sentence have remaining terms to maturity equally close to the Designated CMT
Maturity Index, the quotes for the CMT Rate Note with the shorter remaining term
to maturity will be used.
'Designated CMT Telerate Page' means the display on the Dow Jones Telerate
Service designated in the applicable Pricing Supplement for the purpose of
displaying Treasury Constant Maturities as reported in H.15(519) (or any other
page as may replace such page on that service for the purpose of displaying
Treasury Constant Maturities as reported in H.15(519)). If no such page is
specified in the applicable Pricing Supplement, the Designated CMT Telerate Page
shall be 7052 for the most recent week.
'Designated CMT Maturity Index' means the original period to maturity of
the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years)
specified in the applicable Pricing Supplement with respect to which the CMT
Rate will be calculated. If no such maturity is specified in the applicable
Pricing Supplement, the Designated CMT Maturity Index shall be 2 years.
ELEVENTH DISTRICT COST OF FUNDS RATE NOTES
Each Eleventh District Cost of Funds Rate Note will bear interest at
interest rates calculated with reference to the Eleventh District Cost of Funds
Rate and the Spread or Spread Multiplier, if any, specified in such Eleventh
District Cost of Funds Note and in the applicable Pricing Supplement
Unless otherwise specified in the applicable Pricing Supplement, 'Eleventh
District Cost of Funds Rate' means, with respect to an Eleventh District Cost of
Funds Interest Determination Date, the rate equal to the monthly weighted
average cost of funds for the calendar month immediately preceding the month in
which such Interest Determination Date falls, as set forth under the caption
'11th district' on Telerate Page 7058 (as defined below) as of 11:00 a.m., San
Francisco time, on such Interest Determination Date. If such rate does not
appear on Telerate Page 7058 on such Interest Determination Date, then the
Eleventh District Cost of Funds Rate on such Interest Determination Date will be
the monthly weighted average cost of funds paid by member institutions of the
Eleventh Federal Home Loan Bank District that was most recently announced (the
'Eleventh District Index') by the FHLB of San Francisco as such cost of funds
for the calendar month immediately preceding the date of such announcement. If
the FHLB of San Francisco fails to announce such rate for the calendar month
immediately preceding such Interest Determination Date, then the Eleventh
District Cost of Funds Rate determined as of such Interest Determination Date
will be the Eleventh District Cost of Funds Rate in effect on such Interest
Determination Date.
'Telerate Page 7058' means the display designated as page '7058' on the Dow
Jones Telerate Service (or such other page as may replace the 7058 page on that
service for the purpose of displaying the monthly weighted average cost of funds
paid by member institutions of the Eleventh Federal Home Loan Bank district).
SUBSEQUENT INTEREST PERIODS
The Pricing Supplement relating to each Note will indicate whether the
Company has the option to reset the interest rate (in the case of a Fixed Rate
Note) with respect to such Note or the Spread or Spread Multiplier (in the case
of a Floating Rate Note) with respect to such Note and, if so, the date or
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dates on which such interest rate or such Spread or Spread Multiplier, as the
case may be, may be reset (each an 'Optional Reset Date').
The Company shall notify the Trustee for a Note whether or not it intends
to exercise such option with respect to such Note at least 45 but not more than
60 calendar days prior to an Optional Reset Date for such Note. Not later than
40 calendar days prior to such Optional Reset Date, the Trustee for such Note
will mail to the Holder of such Note a notice (the 'Reset Notice'), first class,
postage prepaid, indicating whether the Company has elected to reset the
interest rate (in the case of a Fixed Rate Note) or the Spread or Spread
Multiplier (in the case of a Floating Rate Note) and if so, (i) such new
interest rate or such new Spread or Spread Multiplier, as the case may be; and
(ii) the provisions, if any, for redemption during the period from such Optional
Reset Date to the next Optional Reset Date or, if there is no such next Optional
Reset Date, to the Stated Maturity of such Note (each such period a 'Subsequent
Interest Period'), including the date or dates on which or the period or periods
during which and the price or prices at which such redemption may occur during
such Subsequent Interest Period.
Notwithstanding the foregoing, not later than 20 calendar days prior to an
Optional Reset Date for a Note, the Company may, at its option, revoke the
interest rate (in the case of a Fixed Rate Note) or the Spread or Spread
Multiplier (in the case of a Floating Rate Note) provided for in the Reset
Notice with respect to such Optional Reset Date and establish a higher interest
rate (in the case of a Fixed Rate Note) or a higher Spread or Spread Multiplier
(in the case of a Floating Rate Note) for the Subsequent Interest Period
commencing on such Optional Reset Date by causing the Trustee for such Note to
mail notice of such higher interest rate or higher Spread or Spread Multiplier,
as the case may be, first class, postage prepaid, to the Holder of such Note.
Such notice shall be irrevocable. All Notes with respect to which the interest
rate or Spread or Spread Multiplier is reset on an Optional Reset Date will bear
such higher interest rate (in the case of Fixed Rate Notes) or higher Spread or
Spread Multiplier (in the case of Floating Rate Notes), whether or not tendered
for repayment.
The Holder of a Note will have the option to elect repayment of such Note
by the Company on each Optional Reset Date at a price equal to the principal
amount thereof, plus interest accrued to such Optional Reset Date. In order for
a Note to be repaid on an Optional Reset Date, the Holder thereof must follow
the procedures set forth below under 'Optional Redemption, Repayment and
Repurchase' for optional repayment, except that the period for delivery of such
Note or notification to the Trustee for such Note shall be at least 25 but not
more than 35 calendar days prior to such Optional Reset Date, and except that a
Holder who has tendered a Note for repayment pursuant to a Reset Notice may, by
written notice to the Trustee for such Note, revoke any such tender for
repayment until the close of business on the tenth day prior to such Optional
Reset Date.
AMORTIZING NOTES
The Company may from time to time offer Notes ('Amortizing Notes') on which
a portion or all the principal amount is payable prior to Stated Maturity in
accordance with a schedule, by application of a formula, or by reference to an
Index (as defined below). Unless otherwise specified in the applicable Pricing
Supplement, payments with respect to Amortizing Notes will be applied first to
interest due and payable thereon and then to the reduction of the unpaid
principal amount thereof. Further information concerning additional terms and
conditions of any Amortizing Notes, including terms for repayment thereof, will
be set forth in the applicable Pricing Supplement.
INDEXED NOTES
The Company may from time to time offer Notes ('Indexed Notes') on which
certain or all interest payments (in the case of an 'Indexed Rate Note'), and/or
the principal amount payable at Stated Maturity or earlier redemption or
retirement (in the case of an 'Indexed Principal Note'), is determined by
reference to the principal amount of such Notes (or, in the case of an Indexed
Principal Note, to the amount designated in the applicable Pricing Supplement as
the 'Face Amount' of such Indexed Note) and by reference to prices, changes in
prices, or differences between prices, of securities, currencies,
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intangibles, goods, articles or commodities or by such other objective price,
economic or other measures as are described in the applicable Pricing Supplement
(the 'Index'). A description of the Index used in any determination of an
interest or principal payment, and the method or formula by which interest or
principal payments will be determined by reference to such Index, will be set
forth in the applicable Pricing Supplement.
In the case of a Fixed Rate Note, Floating Rate Note or Indexed Rate Note
that is also an Indexed Principal Note, the amount of any interest payment will
be determined by reference to the Face Amount of such Indexed Note unless
specified otherwise in the applicable Pricing Supplement. In the case of an
Indexed Principal Note, the principal amount payable at Stated Maturity or any
earlier redemption or repayment of the Indexed Note may be different from the
Face Amount.
If the determination of the Index on which any interest payment or the
principal amount of an Indexed Note is calculated or announced by a third party,
and such third party either suspends the calculation or announcement of such
Index or changes the basis upon which such Index is calculated (other than
changes consistent with policies in effect at the time such Indexed Note was
issued and permitted changes described in the applicable Pricing Supplement),
then such Index shall be calculated for purposes of such Indexed Note by another
third party selected by the Company, subject to the same conditions and controls
as applied to the original third party. If for any reason such Index cannot be
calculated on the same basis and subject to the same conditions and controls as
applied to the original third party, then the indexed interest payments, if any,
or any indexed principal amount of such Indexed Note shall be calculated in the
manner set forth in the applicable Pricing Supplement. Any determination of such
third party shall in the absence of manifest error be binding on all parties.
EXTENSION OF MATURITY
The Pricing Supplement relating to each Note will indicate whether the
Company has the option to extend the Stated Maturity of such Note for one or
more periods of whole years from one to five (each an 'Extension Period') up to
but not beyond the date (the 'Final Maturity') set forth in such Pricing
Supplement.
The Company may exercise such option with respect to a Note by notifying
the Trustee for such Note at least 45 but not more than 60 calendar days prior
to the old Stated Maturity of such Note. Not later than 40 calendar days prior
to the old Stated Maturity of such Note, the Trustee for such Note will mail to
the Holder of such Note a notice (the 'Extension Notice'), first class, postage
prepaid. The Extension Notice will set forth (i) the election of the Company to
extend the Stated Maturity of such Note; (ii) the new Stated Maturity; (iii) in
the case of a Fixed Rate Note, the interest rate applicable to the Extension
Period or, in the case of a Floating Rate Note, the Spread or Spread Multiplier
applicable to the Extension Period; and (iv) the provisions, if any, for
redemption during the Extension Period, including the date or dates on which or
the period or periods during which and the price or prices at which such
redemption may occur during the Extension Period. Upon the mailing by such
Trustee of an Extension Notice to the Holder of a Note, the Stated Maturity of
such Note shall be extended automatically, and, except as modified by the
Extension Notice and as described in the next paragraph, such Note will have the
same terms as prior to the mailing of such Extension Notice.
Notwithstanding the foregoing, not later than 20 calendar days prior to the
old Stated Maturity of such Note, the Company may, at its option, revoke the
interest rate (in the case of a Fixed Rate Note) or the Spread or Spread
Multiplier (in the case of a Floating Rate Note) provided for in the Extension
Notice for such Note and establish a higher interest rate (in the case of a
Fixed Rate Note) or a higher Spread or Spread Multiplier (in the case of a
Floating Rate Note) for the Extension Period, by causing the Trustee for such
Note to mail notice of such higher interest rate or higher Spread or Spread
Multiplier, as the case may be, first class, postage prepaid, to the Holder of
such Note. Such notice shall be irrevocable. All Notes with respect to which the
Stated Maturity is extended will bear such higher interest rate (in the case of
Fixed Rate Notes) or higher Spread or Spread Multiplier (in the case of Floating
Rate Notes) for the Extension Period, whether or not tendered for repayment.
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If the Company extends the Stated Maturity of a Note, the Holder of such
Note will have the option to elect repayment of such Note by the Company on the
old Stated Maturity at a price equal to the principal amount thereof, plus
interest accrued to such date. In order for a Note to be repaid on the old
Stated Maturity once the Company has extended the Stated Maturity thereof, the
Holder thereof must follow the procedures set forth below under 'Optional
Redemption, Repayment and Repurchase' for optional repayment, except that the
period for delivery of such Note or notification to the Trustee for such Note
shall be at least 25 but not more than 35 days prior to the old Stated Maturity
and except that a Holder who has tendered a Note for repayment pursuant to an
Extension Notice may, by written notice to the Trustee for such Note, revoke any
such tender for repayment until the close of business on the tenth day before
the old Stated Maturity.
OPTIONAL REDEMPTION, REPAYMENT AND REPURCHASE
The Pricing Supplement relating to each Note will indicate either that such
Note cannot be redeemed prior to its Stated Maturity or that such Note will be
redeemable at the option of the Company, in whole or in part, and the date or
dates (each an 'Optional Redemption Date') on which such Note may be redeemed
and the price (the 'Redemption Price') at which (together with accrued interest
to such Optional Redemption Date) such Note may be redeemed on each such
Optional Redemption Date. The Company may exercise such option with respect to a
Note by notifying the Trustee for such Note at least 45 days prior to any
Optional Redemption Date. Unless otherwise specified in the applicable Pricing
Supplement, at least 30 but not more than 60 days prior to the date of
redemption, such Trustee shall mail notice of such redemption, first class,
postage prepaid, to the Holder of such Note. In the event of redemption of a
Note in part only, a new Note or Notes for the unredeemed portion thereof shall
be issued to the Holder thereof upon the cancellation thereof. The Notes will
not be subject to any sinking fund.
The Pricing Supplement relating to each Note will also indicate whether the
Holder of such Note will have the option to elect repayment of such Note by the
Company prior to its Stated Maturity, and, if so, such Pricing Supplement will
specify the date or dates on which such Note may be repaid (each an 'Optional
Repayment Date') and the price (the 'Optional Repayment Price') at which,
together with accrued interest to such Optional Repayment Date, such Note may be
repaid on each such Optional Repayment Date.
In order for a Note to be repaid, the Trustee for such Note must receive,
at least 30 but not more than 45 days prior to an Optional Repayment Date (i)
such Note with the form entitled 'Option to Elect Repayment' on the reverse
thereof duly completed, or (ii) a telegram, telex, facsimile transmission or
letter from a member of a national securities exchange or the National
Association of Securities Dealers, Inc. or a commercial bank or trust company in
the United States setting forth the name of the Holder of such Note, the
principal amount of such Note to be repaid, the certificate number or a
description of the tenor and terms of such Note, a statement that the option to
elect repayment is being exercised thereby and a guarantee that the Note to be
repaid with the form entitled 'Option to Elect Repayment' on the reverse of the
Note duly completed will be received by such Trustee not later than five
Business Days after the date of such telegram, telex, facsimile transmission or
letter. If the procedure described in clause (ii) of the preceding sentence is
followed, then such Note and form duly completed must be received by such
Trustee by such fifth Business Day. Any tender of a Note by the Holder for
repayment (except pursuant to a Reset Notice or an Extension Notice) shall be
irrevocable. The repayment option may be exercised by the Holder of a Note for
less than the entire principal amount of such Note provided that the principal
amount of such Note remaining outstanding after repayment is an authorized
denomination. Upon such partial repayment, such Note shall be canceled and a new
Note or Notes for the remaining principal amount thereof shall be issued in the
name of the Holder of such repaid Note.
If a Note is represented by a Global Security, the Depositary's nominee
will be the Holder of such Note and therefore will be the only entity that can
exercise a right to repayment. In order to ensure that the Depositary's nominee
will timely exercise a right to repayment with respect to a particular Note, the
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beneficial owner of such Note must instruct the broker or other direct or
indirect participant through which it holds an interest in such Note to notify
the Depositary of its desire to exercise a right to repayment. Different firms
have different cut-off times for accepting instructions from their customers
and, accordingly, each beneficial owner should consult the broker or other
direct or indirect participant through which it holds an interest in a Note in
order to ascertain the cut-off time by which such an instruction must be given
in order for timely notice to be delivered to the Depositary.
Notwithstanding anything in this Prospectus Supplement to the contrary, if
a Note is an Original Issue Discount Note (other than an Indexed Note), the
amount payable on such Note in the event of redemption or repayment prior to its
Stated Maturity shall be the Amortized Face Amount of such Note as of the date
of redemption or the date of repayment, as the case may be. The 'Amortized Face
Amount' of a Discount Note shall be the amount equal to (i) the Issue Price set
forth in the applicable Pricing Supplement plus (ii) that portion of the
difference between the Issue Price and the principal amount of such Note that
has accrued at the Yield to Maturity set forth in the Pricing Supplement
(computed in accordance with generally accepted United States bond yield
computation principles) by such date of redemption or repayment, but in no event
shall the Amortized Face Amount of a Discount Note exceed its principal amount.
The Company may at any time purchase Notes at any price in the open market
or otherwise. Notes so purchased by the Company may, at the discretion of the
Company, be held or resold or surrendered to the Trustee for cancellation.
BOOK-ENTRY NOTES
Upon issuance, and subject to the rules of the Depositary, all Book-Entry
Notes up to $200,000,000 in aggregate principal amount having the same Original
Issue Date and otherwise identical terms will be represented by a single Global
Security. Each Global Security representing Book-Entry Notes will be deposited
with, or on behalf of, The Depository Trust Company, New York, New York (the
'Depositary'), and registered in the name of a nominee of the Depositary.
Book-Entry Notes will not be exchangeable for Certificated Notes and, except
under the circumstances described in the Prospectus under 'Description of Debt
Securities--Global Securities', will not otherwise be issuable as Certificated
Notes.
The Depositary has advised the Company and the Agents as follows: the
Depositary is a limited-purpose trust company organized under the laws of the
State of New York, 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. The Depositary was created to hold securities
of its participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the need
for physical movement of securities certificates. The Depositary's participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations, some of whom (and/or their
representatives) own the Depositary. Access to the Depositary's book-entry
system is also available to others, such as banks, brokers, dealers and trust
companies, that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
A further description of the Depositary's procedures with respect to Global
Securities representing Book-Entry Notes is set forth in the Prospectus under
'Description of Debt Securities--Global Securities'. The Depositary has
confirmed to the Company, the Agents and the Trustees that it intends to follow
such procedures.
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CURRENCY RISKS
EXCHANGE RATES AND EXCHANGE CONTROLS
An investment in a Note having a Specified Currency other than U.S. dollars
entails significant risks that are not associated with a similar investment in a
security denominated in U.S. dollars. Such risks include, without limitation,
the possibility of significant changes in rates of exchange between the U.S.
dollar and such Specified Currency and the possibility of the imposition or
modification of foreign exchange controls with respect to such Specified
Currency. Such risks generally depend on factors over which the Company has no
control and which cannot be readily foreseen, such as economic and political
events and the supply of and demand for the relevant currencies. In recent
years, rates of exchange between the U.S. dollar and certain currencies have
been highly volatile, and such volatility may be expected in the future.
Fluctuations in any particular exchange rate that have occurred in the past are
not necessarily indicative, however, of fluctuations in the rate that may occur
during the term of any Note. Depreciation of the Specified Currency for a Note
against the U.S. dollar would result in a decrease in the effective yield of
such Note below its coupon rate and, in certain circumstances, could result in a
substantial loss to the investor on a U.S. dollar basis.
Governments have from time to time imposed, and may in the future impose,
exchange controls that could affect exchange rates as well as the availability
of a Specified Currency for making payments in respect of Notes denominated in
such currency. At present, the Company has identified the following currencies
in which payments of principal, premium and interest on Notes may be made:
Australian dollars, Canadian dollars, Danish kroner, English pounds sterling,
French francs, German deutsche marks, Italian lira, Japanese yen, New Zealand
dollars, U.S. dollars and ECU. However, the Company may determine at any time to
issue Notes with Specified Currencies other than those listed. There can be no
assurances that exchange controls will not restrict or prohibit payments of
principal, premium or interest in any Specified Currency. Even if there are no
actual exchange controls, it is possible that, on a payment date with respect to
any particular Note, the currency in which amounts then due in respect of such
Note are payable would not be available to the Company. In that event, the
Company will make such payments in the manner set forth under 'Currency
Risks--Payment Currency' below.
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT DESCRIBE
ALL THE RISKS OF AN INVESTMENT IN NOTES DENOMINATED IN A CURRENCY OTHER THAN
U.S. DOLLARS. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN FINANCIAL AND
LEGAL ADVISORS AS TO THE RISKS ENTAILED BY AN INVESTMENT IN NOTES DENOMINATED IN
A CURRENCY OTHER THAN U.S. DOLLARS. SUCH NOTES ARE NOT AN APPROPRIATE INVESTMENT
FOR PERSONS WHO ARE UNSOPHISTICATED WITH RESPECT TO FOREIGN CURRENCY
TRANSACTIONS.
The information set forth in this Prospectus Supplement is directed to
prospective purchasers of Notes who are United States residents, and the Company
disclaims any responsibility to advise prospective purchasers who are residents
of countries other than the United States with respect to any matters that may
affect the purchase or holding of, or receipt of payments of principal, premium
or interest in respect of, Notes. Such persons should consult their own advisors
with regard to such matters.
Any Pricing Supplement relating to Notes having a Specified Currency other
than U.S. dollars will contain a description of any material exchange controls
affecting such currency and any other required information concerning such
currency.
PAYMENT CURRENCY
Except as set forth below, if the principal of, premium if any, or interest
on, any Note is payable in a Specified Currency other than U.S. dollars and such
Specified Currency is not available to the Company for making payments thereof
due to the imposition of exchange controls or other circumstances beyond
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the control of the Company or is no longer used by the government of the country
issuing such currency or for the settlement of transactions by public
institutions within the international banking community, then the Company will
be entitled to satisfy its obligations to Holders of the Notes by making such
payments in U.S. dollars on the basis of the Market Exchange Rate (as defined
below) on the date of such payment or, if the Market Exchange Rate is not
available on such date, as of the most recent practicable date; provided,
however, that if such Specified Currency is replaced by the Euro (as described
under 'Special Provisions Relating to Notes Denominated in ECU' below), the
payment of principal of, premium, if any, or interest on any Note denominated in
such currency shall be effected in Euro in conformity with legally applicable
measures taken pursuant to, or by virtue of, the treaty establishing the
European Community (the 'EC'), as amended by the treaty on European Union (as so
amended, the 'Treaty'). Any payment made under such circumstances in U.S.
dollars (or, if applicable, Euro) where the required payment is in a Specified
Currency other than U.S. dollars will not constitute an Event of Default.
'Market Exchange Rate' means the noon U.S. dollar buying rate in The City of New
York for wire transfers of the relevant currency or composite currency as
certified for customs purposes by the Federal Reserve Bank of New York.
All determinations referred to above made by the Trustee for the Notes or
the Exchange Rate Agent, as the case may be, shall be at its sole discretion and
shall, in the absence of manifest error, be conclusive for all purposes and
binding on holders of Notes.
SPECIAL PROVISIONS RELATING TO NOTES DENOMINATED IN ECU
VALUATION OF THE ECU
Subject to the provisions under 'Payment in a Component Currency' below,
the value of the ECU, in which the Notes may be denominated or may be payable,
is equal to the value of the ECU that is from time to time used as the unit of
account of the EC and which is at the date hereof, valued on the basis of
specified amounts of the currencies of 12 of the 15 member states of the EC.
Under Article 109G of the Treaty, the currency composition of the ECU may not be
changed. Other changes to the ECU may be made by the EC in conformity with EC
law, in which event the ECU will change accordingly. From the start of the third
stage of European monetary union, the value of the ECU as against the currencies
of member states participating in the third stage will be irrevocably fixed and
the ECU will become a currency in its own right, replacing all or some of the
currencies of the 15 member states of the EC (as of the date of this Prospectus
Supplement, such currencies include the Austrian shilling, Belgian franc, Danish
krone, Dutch guilder, Finnish markka, French franc, German mark, Greek drachma,
Irish pound, Italian lira, Luxembourg franc, Portuguese escudo, Spanish peseta,
Swedish krona and English pound sterling). In contemplation of the third stage,
the European Council meeting in Madrid on December 16, 1995 decided that the
name of the new currency will be the Euro and that, in accordance with the
Treaty, substitution of the Euro for the ECU will be at the rate of one Euro for
one ECU. From the start of the third stage of European monetary union, all
payments in respect of the Notes denominated or payable in ECU will be payable
in Euro at the rate then established in accordance with the Treaty.
PAYMENT IN A COMPONENT CURRENCY
With respect to each due date for the payment of principal of, or interest
on, the Notes on or after the first business day in Brussels on which the ECU
ceases to be used as the unit of account of the EC and has not become a currency
in its own right replacing all or some of the currencies of the member states of
the EC, the Company shall choose a substitute currency (the 'Chosen Currency'),
which may be any currency which was, on the last day on which the ECU was used
as the unit of account of the EC, a component currency of the ECU or U.S.
dollars, in which all payments due on or after that date with respect to the
Notes and coupons shall be made. The amount of each payment in such Chosen
Currency shall be computed on the basis of the equivalent of the ECU in that
currency, determined as
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described below, as of the fourth business day in Brussels prior to the date on
which such payment is due.
On the first business day in Brussels on which the ECU ceases to be used as
the unit of account of the EC and has not become a currency in its own right
replacing all or some of the currencies of the member states of the EC, the
Company shall select a Chosen Currency in which all payments with respect to
Notes and coupons having a due date prior thereto but not yet presented for
payment are to be made. The amount of each payment in such Chosen Currency shall
be computed on the basis of the equivalent of the ECU in that currency,
determined as defined below, as of such first business day.
The equivalent of the ECU in the relevant Chosen Currency as of any date
(the 'Day of Valuation') shall be determined by, or on behalf of, the Exchange
Rate Agent on the following basis. The amounts and components composing the ECU
for this purpose (the 'Components') shall be the amounts and components that
composed the ECU as of the last date on which the ECU was used as the unit of
account of the EC. The equivalent of the ECU in the Chosen Currency shall be
calculated by, first aggregating the U.S. dollar equivalents of the Components;
and then, in the case of a Chosen Currency other than U.S. dollars, using the
rate used for determining the U.S. dollar equivalent of the Components in the
Chosen Currency as set forth below, calculating the equivalent in the Chosen
Currency of such aggregate amount in U.S. dollars.
The U.S. dollar equivalent of each of the Components shall be determined
by, or on behalf of, the Exchange Rate Agent on the basis of the middle spot
delivery quotations prevailing at 2:30 P.M., Brussels time, on the Day of
Valuation, as obtained by, or on behalf of, the Exchange Rate Agent from one or
more major banks, as selected by the Company, in the country of issue of the
component currency in question.
If for any reason no direct quotations are available for a Component as of
a Day of Valuation from any of the banks selected for this purpose, in computing
the U.S. dollar equivalent of such Component, the Exchange Rate Agent shall
(except as provided below) use the most recent direct quotations for such
Component obtained by it or on its behalf, provided that such quotations were
prevailing in the country of issue not more than two Business Days before such
Day of Valuation. If such most recent quotations were so prevailing in the
country of issue more than two Business Days before such Day of Valuation, the
Exchange Rate Agent shall determine the U.S. dollar equivalent of such Component
on the basis of cross rates derived from the middle spot delivery quotations for
such component currency and for the U.S. dollar prevailing at 2:30 P.M.,
Brussels time, on such Day of Valuation, as obtained by, or on behalf of, the
Exchange Rate Agent from one or more major banks, as selected by the Company, in
a country other than the country of issue of such component currency.
Notwithstanding the foregoing, the Exchange Rate Agent shall determine the U.S.
dollar equivalent of such Component on the basis of such cross rates if the
Company or such agent judges that the equivalent so calculated is more
representative than the U.S. dollar equivalent calculated as provided in the
first sentence of this paragraph. Unless otherwise specified by the Company, if
there is more than one market for dealing in any component currency by reason of
foreign exchange regulations or for any other reason, the market to be referred
to in respect of such currency shall be that upon which a nonresident issuer of
securities denominated in such currency would purchase such currency in order to
make payments in respect of such securities.
Payments in the Chosen Currency will be made at the specified office of a
paying agent in the country of the Chosen Currency, or, if none, or at the
option of the holder, at the specified office of any Paying Agent either by a
check drawn on, or by transfer to an account maintained by the holder with, a
bank in the principal financial center of the country of the Chosen Currency.
All determinations referred to above made by, or on behalf of, the Company
or by, or on behalf of, the Exchange Rate Agent shall be at such entity's sole
discretion and shall, in the absence of manifest error, be conclusive for all
purposes and binding on holders of Notes and coupons.
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NOTES DENOMINATED IN THE CURRENCIES OF EC MEMBER STATES
If, pursuant to the treaty, all or some of the currencies of the member
countries of the EC are replaced by the Euro, the payment of principal of,
premium, if any, or interest on, the Notes denominated in such currencies shall
be effected in Euro in conformity with legally applicable measures taken
pursuant to, or by virtue of, the Treaty.
FOREIGN CURRENCY JUDGMENTS
The Notes will be governed by and construed in accordance with the law of
the State of New York. Courts in the United States customarily have not rendered
judgments for money damages denominated in any currency other than the U.S.
dollar. A 1987 amendment to the Judiciary Law of the State of New York provides,
however, that an action based upon an obligation denominated in a currency other
than U.S. dollars will be rendered in the foreign currency of the underlying
obligation and converted into U.S. dollars at the rate of exchange prevailing on
the date of the entry of the judgment or decree.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the principal U.S. Federal income tax
consequences resulting from the beneficial ownership of Notes by certain
persons. This summary does not purport to consider all the possible U.S. Federal
tax consequences of the purchase, ownership or disposition of the Notes and is
not intended to reflect the individual tax position of any beneficial owner. It
deals only with Notes and currencies or composite currencies other than U.S.
dollars ('Foreign Currency') held as capital assets. Moreover, except as
expressly indicated, it addresses initial purchasers and does not address
beneficial owners that may be subject to special tax rules, such as banks,
insurance companies, dealers in securities or currencies, Notes (or Foreign
Currency) held as a hedge against currency risks or as part of a straddle with
other investments or as part of a 'synthetic security' or other integrated
investment (including a 'conversion transaction') comprised of a Note and one or
more other investments, or situations in which the 'functional currency' of the
beneficial owner is not the U.S. dollar. Except to the extent discussed below
under 'Non-U.S. Holders', this summary applies only to U.S. Holders (as defined
below). This summary is based upon the U.S. Federal tax laws and regulations as
now in effect and as currently interpreted and does not take into account
possible changes in such tax laws or such interpretations, any of which may be
applied retroactively. It does not include any description of the tax laws of
any state, local or foreign governments that may be applicable to the Notes or
holders thereof. Persons considering the purchase of Notes should consult their
own tax advisors concerning the application of the U.S. Federal tax laws to
their particular situations as well as any consequences to them under the laws
of any other taxing jurisdiction.
As used herein, the term 'U.S. Holder' means a beneficial owner of a Note
that is for United States Federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation created or organized under the laws of
the United States or of any political subdivision thereof, (iii) an estate or
trust described in Section 7701(a)(30) of the Internal Revenue Code of 1986, as
amended (the 'Code') or (iv) a person otherwise subject to United States Federal
income taxation on its worldwide income regardless of its source. As used
herein, the term 'Non-U.S. Holder' means a beneficial owner of a Note that is
not a U.S. Holder.
U.S. HOLDERS
PAYMENTS OF INTEREST
In general, interest on a Note, whether payable in U.S. dollars or a
Foreign Currency (other than certain payments on a Discount Note, as defined and
described below under 'Original Issue Discount'), will be taxable to a U.S.
Holder as ordinary income at the time it is received or accrued, depending on
the U.S. Holder's method of accounting for tax purposes. If an interest payment
is denominated on or
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determined by reference to a Foreign Currency, then special rules, described
below under 'Foreign Currency Notes', apply.
ORIGINAL ISSUE DISCOUNT
The following discussion summarizes the U.S. Federal income tax
consequences to U.S. Holders of Notes issued with original issue discount for
Federal income tax purposes ('OID'). The basic rules for reporting OID are
contained in the Code and the Treasury regulations thereunder (the 'OID
Regulations').
Special rules apply to OID on a Discount Note that is denominated in
Foreign Currency. See 'Foreign Currency Notes-Foreign Currency Discount Notes'.
GENERAL. A Note will be treated as issued with OID (a 'Discount Note') if
the excess of the Note's 'stated redemption price at maturity' over its issue
price is greater than a de minimis amount (set forth in the Code and the OID
Regulations). Generally, the issue price of a Note (or any Note that is part of
an issue of Notes) will be the first price at which a substantial amount of
Notes that are part of such issue of Notes is sold to the public (other than to
underwriters, placement agents or wholesalers). Under the OID Regulations, the
'stated redemption price at maturity' of a Note is the sum of all payments
provided by the Note that are not payments of 'qualified stated interest'. A
'qualified stated interest' payment includes any stated interest payment on a
Note that is unconditionally payable in cash or property (other than debt
instruments of the Company) at least annually at a single fixed rate (or at
certain floating rates) that appropriately takes into account the length of the
interval between stated interest payments. The applicable Pricing Supplement
will state whether a particular issue of Notes will constitute an issue of
Discount Notes.
In general, if the excess of a Note's stated redemption price at maturity
over its issue price is de minimis, then such excess constitutes 'de minimis
OID'. Under the OID Regulations, unless the election described below under
'Election to Treat All Interest as Original Issue Discount' is made, such a Note
will not be treated as issued with OID (in which case the following paragraphs
under 'Original Issue Discount' will not apply) and a U.S. Holder of such a Note
will recognize capital gain with respect to such de minimis OID as stated
principal payments on the Note are made. The amount of such gain with respect to
each such payment will equal the product of the total amount of the Note's de
minimis OID and a fraction, the numerator of which is the amount of the
principal payment made and the denominator of which is the stated principal
amount of the Note.
In certain cases, Notes that bear stated interest and are issued at par may
be deemed to bear OID for Federal income tax purposes, with the result that the
inclusion of interest in income for Federal income tax purposes may vary from
the actual cash payments of interest made on such Notes, generally accelerating
income for cash method taxpayers. Under the OID Regulations, a Note may be a
Discount Note where, among other things, (i) a Floating Rate Note provides for a
maximum interest rate or a minimum interest rate that is reasonably expected as
of the issue date to cause the yield on the debt instrument to be significantly
less, in the case of a maximum rate, or more, in the case of a minimum rate,
than the expected yield determined without the maximum or minimum rate, as the
case may be; (ii) a Floating Rate Note provides for significant front-loading or
back-loading of interest; or (iii) a Note bears interest at a floating rate in
combination with one or more other floating or fixed rates. Notice will be given
in the applicable Pricing Supplement when the Company determines that a
particular Note will be a Discount Note. Unless specified in the applicable
Pricing Supplement, Floating Rate Notes will not be Discount Notes.
The Code and the OID Regulations provide rules that require a U.S. Holder
of a Discount Note having a maturity of more than one year from its date of
issue to include OID in gross income before the receipt of cash attributable to
such income, without regard to the holder's method of accounting for tax
purposes. The amount of OID includible in gross income by a U.S. Holder of a
Discount Note is the sum of the 'daily portions' of OID with respect to the
Discount Note for each day during the taxable year or
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portion of the taxable year in which the U.S. Holder holds such Discount Note
('accrued OID'). The daily portion is determined by allocating to each day in
any 'accrual period' a pro rata portion of the OID allocable to that accrual
period. Under the OID Regulations, accrual periods with respect to a Note may be
any set of periods (which may be of varying lengths) selected by the U.S. Holder
as long as (i) no accrual period is longer than one year and (ii) each scheduled
payment of interest or principal on the Note occurs on the first day or final
day of an accrual period.
The amount of OID allocable to an accrual period equals the excess of (a)
the product of the Discount Note's adjusted issue price at the beginning of the
accrual period and the Discount Note's yield to maturity (determined on the
basis of compounding at the close of each accrual period and properly adjusted
for the length of the accrual period) over (b) the sum of any payments of
qualified stated interest on the Discount Note allocable to the accrual period.
The 'adjusted issue price' of a Discount Note at the beginning of the first
accrual period is the issue price and at the beginning of any accrual period
thereafter is (x) the sum of the issue price of such Discount Note, the accrued
OID for each prior accrual period (determined without regard to the amortization
of any acquisition premium or bond premium, which are discussed below), and the
amount of any qualified stated interest on the Note that has accrued prior to
the beginning of the accrual period but is not payable until a later date, less
(y) any prior payments on the Discount Note that were not qualified stated
interest payments. If a payment (other than a payment of qualified stated
interest) is made on the first day of an accrual period, then the adjusted issue
price at the beginning of such accrual period is reduced by the amount of the
payment. If a portion of the initial purchase price of a Note is attributable to
interest that accrued prior to the Note's issue date, the first stated interest
payment on the Note is to be made within one year of the Note's issue date and
such payment will equal or exceed the amount of pre-issuance accrued interest,
then the issue price will be decreased by the amount of pre-issuance accrued
interest, in which case a portion of the first stated interest payment will be
treated as a return of the excluded pre-issuance accrued interest and not as an
amount payable on the Note.
The OID Regulations contain certain special rules that generally allow any
reasonable method to be used in determining the amount of OID allocable to a
short initial accrual period (if all other accrual periods are of equal length)
and require that the amount of OID allocable to the final accrual period equal
the excess of the amount payable at the maturity of the Discount Note (other
than any payment of qualified stated interest) over the Discount Note's adjusted
issue price as of the beginning of such final accrual period. In addition, if an
interval between payments of qualified stated interest on a Discount Note
contains more than one accrual period, then the amount of qualified stated
interest payable at the end of such interval is allocated pro rata (on the basis
of their relative lengths) between the accrual periods contained in the
interval.
U.S. Holders of Discount Notes generally will have to include in income
increasingly greater amounts of OID over the life of the Notes.
ACQUISITION PREMIUM. A U.S. Holder that purchases a Discount Note at its
original issuance for an amount in excess of its issue price but less than its
stated redemption price at maturity (any such excess being 'acquisition
premium'), and that does not make the election described below under 'Original
Issue Discount--Election To Treat All Interest as Original Issue Discount', is
permitted to reduce the daily portions of OID by a fraction, the numerator of
which is the excess of the U.S. Holder's purchase price for the Note over the
adjusted issue price, and the denominator of which is the excess of the sum of
all amounts payable on the Note after the purchase date, other than payments of
qualified stated interest, over the Note's adjusted issue price. Alternatively,
a U.S. Holder may elect to compute OID accruals as described under 'Original
Issue Discount--General' above, treating the U.S. Holder's purchase price as the
issue price.
OPTIONAL REDEMPTION. If the Company has an option to redeem a Discount
Note, or the holder has an option to cause a Discount Note to be repurchased,
prior to the Discount Note's stated maturity, such option will be presumed to be
exercised if, by utilizing any date on which such Discount Note may
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be redeemed or repurchased as the maturity date and the amount payable on such
date in accordance with the terms of such Discount Note (the 'redemption price')
as the stated redemption price at maturity, the yield on the Discount Note would
be (i) in the case of an option of the Company, lower than its yield to stated
maturity, or (ii) in the case of an option of the holder, higher than its yield
to stated maturity. If such option is not in fact exercised when presumed to be
exercised, the Note would be treated solely for OID purposes as if it were
redeemed or repurchased, and a new Note were issued, on the presumed exercise
date for an amount equal to the Discount Note's adjusted issue price on that
date.
SHORT-TERM NOTES. Under the Code, special rules apply with respect to OID
on Notes that mature one year or less from the date of issuance ('Short-Term
Notes'). In general, a cash basis U.S. Holder of a Short-Term Note is not
required to include OID in income as it accrues for U.S. Federal income tax
purposes unless it elects to do so. Accrual basis U.S. Holders and certain other
U.S. Holders, including banks, regulated investment companies, dealers in
securities and cash basis U.S. Holders who so elect, are required to include OID
in income as it accrues on Short-Term Notes on a straight-line basis or, at the
election of the U.S. Holder, under the constant yield method (based on daily
compounding). In the case of U.S. Holders not required and not electing to
include OID in income currently, any gain realized on the sale or retirement of
Short-Term Notes will be ordinary income to the extent of the OID accrued on a
straight-line basis (unless an election is made to accrue the original issue
discount under the constant yield method) through the date of sale or
retirement. U.S. Holders who are not required and do not elect to include OID on
Short-Term Notes in income as it accrues will be required to defer deductions
for interest on borrowings allocable to Short-Term Notes in an amount not
exceeding the deferred income until the deferred income is realized.
Any U.S. Holder of a Short-Term Note can elect to apply the rules in the
preceding paragraph taking into account the amount of 'acquisition discount', if
any, with respect to the Note (rather than the OID with respect to such Note).
Acquisition discount is the excess of the stated redemption price at maturity of
the Short-Term Note over the U.S. Holder's purchase price therefor. Acquisition
discount will be treated as accruing on a ratable basis or, at the election of
the U.S. Holder, on a constant-yield basis.
For purposes of determining the amount of OID subject to these rules, the
OID Regulations provide that no interest payments on a Short-Term Note are
qualified stated interest, but instead such interest payments are included in
the Short-Term Note's stated redemption price at maturity. Actual receipt of
stated interest will be taxable to the extent of accrued OID at the time of
receipt.
NOTES PURCHASED AT A PREMIUM
Under the Code, a U.S. Holder that purchases a Note for an amount in excess
of its principal amount will not be subject to the OID rules and may elect to
treat such excess as 'amortizable bond premium', in which case the amount of
qualified stated interest required to be included in the U.S. Holder's income
each year with respect to interest on the Note will be reduced by the amount of
amortizable bond premium allocable (based on the Note's yield to maturity) to
such year. Any election to amortize bond premium is applicable to all bonds
(other than bonds the interest on which is excludable from gross income) held by
the U.S. Holder at the beginning of the first taxable year to which the election
applies or thereafter acquired by the U.S. Holder, and may not be revoked
without the consent of the Internal Revenue Service ('IRS'). A U.S. Holder that
does not elect to amortize bond premium will generally be entitled to treat the
premium as capital loss when the Note matures. See also 'Election to Treat All
Interest as Original Issue Discount'.
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NOTES PURCHASED AT A MARKET DISCOUNT
A Note, other than a Short-Term Note, will be treated as issued at a market
discount (a 'Market Discount Note') if the amount for which a U.S. Holder
purchased the Note is less than the Note's issue price, subject to a de minimis
rule similar to the rule relating to de minimis OID described under 'Original
Issue Discount--General'.
In general, any partial payment of principal on, or gain recognized on the
maturity or disposition of a Market Discount Note will be treated as ordinary
income to the extent that such gain does not exceed the accrued market discount
on such Note. Alternatively, a U.S. Holder of a Market Discount Note may elect
to include market discount in income currently over the life of the Market
Discount Note. Such an election applies to all debt instruments with market
discount acquired by the electing U.S. Holder on or after the first day of the
first taxable year to which the election applies and may not be revoked without
the consent of the IRS.
Market discount accrues on a straight-line basis unless the U.S. Holder
elects to accrue such discount on a constant yield to maturity basis. Such an
election is applicable only to the Market Discount Note with respect to which it
is made and is irrevocable. A U.S. Holder of a Market Discount Note that does
not elect to include market discount in income currently generally will be
required to defer deductions for interest on borrowings allocable to such Note
in an amount not exceeding the accrued market discount on such Note until the
maturity or disposition of such Note.
The market discount rules do not apply to a Short-Term Note.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT
Any U.S. Holder may elect to include in gross income all interest that
accrues on a Note using the constant yield method described above under the
heading 'Original Issue Discount--General,' with the modifications described
below. For purposes of this election, interest includes stated interest, OID, de
minimis OID, market discount, acquisition discount, de minimis market discount
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium.
In applying the constant yield method to a Note with respect to which this
election has been made, the issue price of the Note will equal the electing U.S.
Holder's adjusted basis in the Note immediately after its acquisition, the issue
date of the Note will be the date of its acquisition by the electing U.S.
Holder, and no payments on the Note will be treated as payments of qualified
stated interest. This election is generally applicable only to the Note with
respect to which it is made and may not be revoked without the consent of the
IRS. If this election is made with respect to a Note with amortizable bond
premium, the electing U.S. Holder will be deemed to have elected to apply
amortizable bond premium against interest with respect to all debt instruments
with amortizable bond premium (other than debt instruments the interest on which
is excludable from gross income) held by such electing U.S. Holder as of the
beginning of the taxable year in which the Note with respect to which the
election is made is acquired or thereafter acquired. The deemed election with
respect to amortizable bond premium may not be revoked without the consent of
the IRS.
If the election described above to apply the constant yield method to all
interest on a Note is made with respect to a Market Discount Note, as defined
above, then the electing U.S. Holder will be treated as having made the election
discussed above under 'Notes Purchased at a Market Discount' to include market
discount in income currently over the life of all debt instruments held or
thereafter acquired by such U.S. Holder.
PURCHASE, SALE AND RETIREMENT OF THE NOTES
A U.S. Holder's tax basis in a Note generally will equal its U.S. dollar
cost (which, in the case of a Note purchased with a Foreign Currency, will be
the U.S. dollar value of the purchase price on the date of purchase), increased
by the amount of any OID or market discount (or acquisition discount, in the
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case of a Short-Term Note) included in the U.S. Holder's income with respect to
the Note and the amount, if any, of income attributable to de minimis OID
included in the U.S. Holder's income with respect to the Note, and reduced by
the sum of (i) the amount of any payments that are not qualified stated interest
payments, and (ii) the amount of any amortizable bond premium applied to reduce
interest on the Note. A U.S. Holder generally will recognize gain or loss on the
sale or retirement of a Note equal to the difference between the amount realized
on the sale or retirement and the U.S. Holder's tax basis in the Note. The
amount realized on a sale or retirement for an amount in Foreign Currency will
be the U.S. dollar value of such amount on the date of sale or retirement.
Except to the extent described above under 'Original Issue Discount--Short Term
Notes' or 'Market Discount' or below under 'Foreign Currency Notes--Exchange
Gain or Loss', and except to the extent attributable to accrued but unpaid
interest, gain or loss recognized on the sale or retirement of a Note will be
capital gain or loss and will be long-term capital gain or loss.
FOREIGN CURRENCY NOTES
INTEREST PAYMENTS. If an interest payment is denominated in or determined
by reference to a Foreign Currency, the amount of income recognized by a cash
basis U.S. Holder will be the U.S. dollar value of the interest payment, based
on the exchange rate in effect on the date of receipt, regardless of whether the
payment is in fact converted into U.S. dollars. Accrual basis U.S. Holders may
determine the amount of income recognized with respect to such interest payment
in accordance with either of two methods. Under the first method, the amount of
income recognized will be based on the average exchange rate in effect during
the interest accrual period (or, with respect to an accrual period that spans
two taxable years, the partial period within the taxable year). Upon receipt of
an interest payment (including a payment attributable to accrued but unpaid
interest upon the sale or retirement of a Note) determined by reference to a
Foreign Currency, an accrual basis U.S. Holder will recognize ordinary income or
loss measured by the difference between such average exchange rate and the
exchange rate in effect on the date of receipt, regardless of whether the
payment is in fact converted into U.S. dollars. Under the second method, an
accrual basis U.S. Holder may elect to translate interest income into U.S.
dollars at the spot exchange rate in effect on the last day of the accrual
period or, in the case of an accrual period that spans two taxable years, at the
exchange rate in effect on the last day of the partial period within the taxable
year. Additionally, if a payment of interest is actually received within five
business days of the last day of the accrual period or taxable year, an accrual
basis U.S. Holder applying the second method may instead translate such accrued
interest into U.S. dollars at the spot exchange rate in effect on the day of
actual receipt (in which case no exchange gain or loss will result). Any
election to apply the second method will apply to all debt instruments held by
the U.S. Holder at the beginning of the first taxable year to which the election
applies or thereafter acquired by the U.S. Holder and may not be revoked without
the consent of the IRS.
EXCHANGE OF AMOUNTS IN OTHER THAN U.S. DOLLARS. Foreign Currency received
as interest on a Note or on the sale or retirement of a Note will have a tax
basis equal to its U.S. dollar value at the time such interest is received or at
the time of such sale or retirement, as the case may be. Foreign Currency that
is purchased will generally have a tax basis equal to the U.S. dollar value of
the Foreign Currency on the date of purchase. Any gain or loss recognized on a
sale or other disposition of a Foreign Currency (including its use to purchase
Notes or upon exchange for U.S. dollars) will be ordinary income or loss.
FOREIGN CURRENCY DISCOUNT NOTES. OID for any accrual period on a Discount
Note that is denominated in a Foreign Currency will be determined in the Foreign
Currency and then translated into U.S. dollars in the same manner as stated
interest accrued by an accrual basis U.S. Holder. Upon receipt of an amount
attributable to OID (whether in connection with a payment of interest or the
sale or retirement of a Note), a U.S. Holder may recognize ordinary income or
loss.
AMORTIZABLE BOND PREMIUM. In the case of a Note that is denominated in a
Foreign Currency, bond premium will be computed in units of Foreign Currency,
and amortizable bond premium will reduce
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interest income in units of the Foreign Currency. At the time amortized bond
premium offsets interest income, a U.S. Holder may realize ordinary income or
loss, measured by the difference between exchange rates at that time and at the
time of the acquisition of the Notes.
MARKET DISCOUNT. Market discount is determined in units of the Foreign
Currency. Accrued market discount that is required to be taken into account on
the maturity or upon disposition of a Note is translated into U.S. dollars at
the exchange rate on the maturity or the disposition date, as the case may be
(and no part is treated as exchange gain or loss). Accrued market discount
currently includible in income by an electing U.S. Holder is translated into
U.S. dollars at the average exchange rate for the accrual period (or the partial
accrual period during which the U.S. Holder held the Note), and exchange gain or
loss is determined on maturity or disposition of the Note (as the case may be)
in the manner described above under 'Foreign Currency Notes--Interest Payments'
with respect to the computation of exchange gain or loss on the receipt of
accrued interest by an accrual method holder.
EXCHANGE GAIN OR LOSS. Gain or loss recognized by a U.S. Holder on the
sale or retirement of a Note that is attributable to changes in exchange rates
will be treated as ordinary income or loss. However, exchange gain or loss is
taken into account only to the extent of total gain or loss realized on the
transaction.
INDEXED NOTES
The applicable Pricing Supplement will contain a discussion of any special
U.S. Federal income tax rules with respect to Indexed Notes.
NON-U.S. HOLDERS
Subject to the discussion of backup withholding below, payments of
principal (and premium, if any) and interest (including OID) by the Company or
any agent of the Company (acting in its capacity as such) to any Non-U.S. Holder
will not be subject to U.S. Federal withholding tax, provided, in the case of
interest (including OID), that (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote, (ii) the Non-U.S. Holder is not a
controlled foreign corporation for U.S. tax purposes that is related to the
Company (directly or indirectly) through stock ownership, and (iii) either (A)
the Non-U.S. Holder certifies to the Company or its agent under penalties of
perjury that it is not a United States person 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 Note certifies to the Company or its
agent under penalties of perjury that such statement has been received from the
Non-U.S. Holder by it or by another financial institution and furnishes the
payor with a copy thereof. A Non-U.S. Holder of a Note providing for payments of
contingent interest within the meaning of Section 871(h) of the Code, will not,
however, be exempt from U.S. Federal withholding tax with respect to payments of
such contingent interest. The applicable Pricing Supplement will contain a
description of U.S. Federal withholding tax consequences to Non-U.S. Holders of
a purchase of a Note providing for payments of such contingent interest.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest (including OID) on the Note is effectively connected with the
conduct of such trade or business, the Non-U.S. Holder, although exempt from the
withholding tax discussed in the preceding paragraph (provided that such holder
furnishes a properly executed IRS Form 4224 on or before any payment date to
claim such exemption), may be subject to U.S. Federal income tax on such
interest (or OID) in the same manner as if it were a U.S. Holder. In addition,
if the Non-U.S. Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its effectively connected earnings and profits for
the taxable year, subject to certain adjustments. For purposes of the branch
profits tax, interest (including OID) on a Note will be included in the earnings
and profits of such holder if such interest (or OID) is effectively connected
with the conduct by such holder of a trade or business in the United States. In
lieu of the
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certificate described in the preceding paragraph, such a holder must provide the
payor with a properly executed IRS Form 4224 to claim an exemption from U.S.
Federal withholding tax.
Any capital gain, market discount or exchange gain realized on the sale,
exchange, retirement or other disposition of a Note by a Non-U.S. Holder will
not be subject to U.S. Federal income or withholding taxes if (i) such gain is
not effectively connected with a U.S. trade or business of the Non-U.S. Holder
and (ii) in the case of an individual, such Non-U.S. Holder (A) is not present
in the United States for 183 days or more in the taxable year of the sale,
exchange, retirement or other disposition or (B) does not have a tax home (as
defined in Section 911(d)(3) of the Code) in the United States in the taxable
year of the sale, exchange, retirement or other disposition and the gain is not
attributable to an office or other fixed place of business maintained by such
individual in the United States.
Notes held by an individual who is neither a citizen nor a resident of the
United States for U.S. Federal tax purposes at the time of such individual's
death will not be subject to U.S. Federal estate tax, provided that the income
from such Notes was not or would not have been effectively connected with a U.S.
trade or business of such individual and that such individual qualified for the
exemption from U.S. Federal withholding tax (without regard to the certification
requirements) described above.
PURCHASERS OF NOTES THAT ARE NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE POSSIBLE APPLICABILITY OF UNITED STATES WITHHOLDING
AND OTHER TAXES UPON INCOME REALIZED IN RESPECT OF THE NOTES.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year in which the Notes are outstanding, the Company is
required to provide the IRS with certain information, including the holder's
name, address and taxpayer identification number (either the holder's Social
Security number or its employer identification number, as the case may be), the
aggregate amount of principal and interest paid (including OID, if any) to that
holder during the calendar year and the amount of tax withheld, if any. This
obligation, however, does not apply with respect to certain U.S. Holders,
including corporations, tax-exempt organizations, qualified pension and profit
sharing trusts and individual retirement accounts.
In the event that a U.S. Holder subject to the reporting requirements
described above fails to supply its correct taxpayer identification number in
the manner required by applicable law or underreports its tax liability, the
Company, its agents or paying agents or a broker may be required to 'backup'
withhold a tax equal to 31% of each payment of interest (including OID) and
principal (and premium, if any) on the Notes. This backup withholding is not an
additional tax and may be credited against the U.S. Holder's U.S. Federal income
tax liability, provided that the required information is furnished to the IRS.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Non-U.S. Holder of a Note if such holder has
provided the required certification that it is not a United States person as set
forth in clause (iii) in the first paragraph under 'Non-U.S. Holders' above, or
has otherwise established an exemption (provided that neither the Company nor
its agent has actual knowledge that the holder is a United States person or that
the conditions of any exemption are not in fact satisfied). Recently adopted
Treasury regulations may effect the method of certification as to non-U.S.
status for payments made to Non-U.S. Holders after December 31, 1998. A Non-U.S.
Holder should discuss with its tax advisor the effect on it, if any, of such
regulations.
Payment of the proceeds from the sale of a Note to or through a foreign
office of a broker will not be subject to information reporting or backup
withholding, except that if the broker is a United States person, a controlled
foreign corporation for United States tax purposes or a foreign person 50
percent or more of whose gross income from all sources for the three-year period
ending with the close of its taxable year preceding the payment was effectively
connected with a U.S. trade or business, information reporting may apply to such
payments. Payment of the proceeds from a sale of a Note to or
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through the U.S. Office of a broker is subject to information reporting and
backup withholding unless the holder or beneficial owner certifies as to its
taxpayer identification number or otherwise establishes an exemption from
information reporting and backup withholding.
PLAN OF DISTRIBUTION
The Notes are being offered on a continuous basis by the Company through
the Agents, who have agreed to use their reasonable efforts to solicit orders to
purchase Notes. The Company may also offer and sell Notes directly to purchasers
on its own behalf from time to time. The Company will have the sole right to
accept orders to purchase Notes and may reject any proposed purchase of Notes in
whole or in part. Each Agent will have the right, in its sole discretion
reasonably exercised and without notice to the Company, to reject any proposed
purchase of Notes through it in whole or in part. The Company will pay each
Agent a commission of .125% to .750% of the principal amount of the Notes sold
through such Agent, depending upon the maturity of the Notes sold. Commissions
on Notes with a maturity of more than 30 years will be negotiated at the time of
sale. No commission will be payable on any sales made directly by the Company.
The Company may also sell Notes at a discount to any Agent for its own
account or for resale to one or more purchasers at varying prices related to
prevailing market prices at the time of resale or, if set forth in the
applicable Pricing Supplement, at a fixed public offering price, as determined
by such Agent. After any initial public offering of Notes to be resold to
purchasers at a fixed public offering price, the public offering price and any
concession or discount may be changed. In addition, an Agent may offer Notes
purchased by it as principal to other dealers. Notes sold by an Agent to a
dealer may be resold at a discount and, unless otherwise specified in the
applicable Pricing Supplement, such discount allowed will not be in excess of
the discount received by such Agent from the Company. Unless otherwise specified
in the applicable Pricing Supplement, any Note purchased by an Agent as
principal will be purchased at 100% of the principal amount or face amount
thereof less a percentage equal to the commission applicable to an agency sale
of a Note of identical maturity.
In connection with an offering, the Agents may purchase and sell the Notes
in the open market. These transactions may include overallotment and stabilizing
transactions and purchases to cover short positions created by the Agents in
connection with such offering. Stabilizing transactions consist of certain bids
or purchases for the purpose of preventing or retarding a decline in the price
of the Notes; and short positions created by the Agents involve the sale by the
Agents of a greater aggregate principal amount of Notes than they are required
to purchase from the Company in an offering. The Agents also may impose a
penalty bid, whereby selling concessions allowed to broker-dealers in respect of
the securities sold in an offering may be reclaimed by the Agents if such Notes
are repurchased by the Agents in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Notes, which may be higher than the price that might otherwise prevail in the
open market; and these activities, if commenced, may be discontinued at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
Concurrently with the offering of the Notes through the Agents or otherwise
as described herein, the Company may issue other Debt Securities as described in
the accompanying Prospectus. Any such Debt Securities so offered and sold will
reduce correspondingly the maximum aggregate principal amount of Notes that may
be offered by this Prospectus Supplement.
Each Agent, whether acting as agent or principal, may be deemed to be an
'underwriter' within the meaning of the Securities Act of 1933 (the 'Securities
Act'). The Company has agreed to indemnify each Agent against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Agent may be required to make in respect thereof. The Company has
also agreed to reimburse the Agents for certain other expenses.
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Unless otherwise specified in the applicable Pricing Supplement, the Notes
will not be listed on any securities exchange and will not have an established
trading market when issued. An Agent may make a market in the Notes, but such
Agent is not obligated to do so and may discontinue market-making at any time
without notice. There can be no assurance of a secondary market for any Notes or
that the Notes will be sold.
Each Agent and certain of its affiliates may from time to time engage in
transactions with, and perform investment banking and commercial lending
services for, the Company and certain of its affiliates in the ordinary course
of business.
If holders of Notes purchased directly from the Company encounter
difficulties in disposing of their Notes at then current market rates, the
Company will give consideration to offers to sell such Notes to the Company on
terms reflecting current market conditions at the time of repurchase. However,
any such repurchases will be made in the Company's sole discretion, and the
Company makes no commitment to repurchase Notes from any purchaser at any time.
The Company will agree to reimburse the Agents for certain expenses. The Company
may replace the Agents or appoint additional agents in connection with the
offering of the Notes from time to time. Payment of the purchase price of Notes
will be required to be made in funds immediately available in The City of New
York.
LEGAL OPINIONS
The validity of the Notes offered hereby will be passed upon for the
Company by Bryan Cave, L.L.P., Kansas City, Missouri, and for the Agents by
Cravath, Swaine & Moore, New York, New York.
S-31
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PROSPECTUS
BLOCK FINANCIAL CORPORATION
DEBT SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED BY H&R BLOCK, INC.
Block Financial Corporation (the 'Company' or 'BFC') may offer from time to
time, in one or more series, debentures, notes, bonds or other obligations
('Debt Securities'), which may be senior ('Senior Debt Securities') or
subordinated ('Subordinated Debt Securities') to other indebtedness of the
Company, all having an aggregate initial public offering price not to exceed
$1,000,000,000 or the equivalent thereof in one or more foreign currencies,
foreign currency units or composite currencies, including European Currency
Units. The Debt Securities may be offered in separate series in amounts, at
prices and on terms to be determined at or prior to the time of sale. The Debt
Securities will be direct unsecured obligations of the Company. The payment of
principal, premium, if any, and interest with respect to the Debt Securities
will be fully and unconditionally guaranteed by H&R Block, Inc. (the 'Guarantor'
or 'Block'), the indirect parent company of BFC.
The specific terms of the Debt Securities with respect to which this Prospectus
is being delivered will be set forth in one or more supplements to this
Prospectus (each a 'Prospectus Supplement'), together with the terms of the
offering and sale of the Debt Securities, the initial offering price and the net
proceeds to the Company from the sale thereof. Each Prospectus Supplement will
include, among other things, the specific designation, aggregate principal
amount, ranking, authorized denomination, maturity, rate or method of
calculation of interest and dates for payment thereof, any index or formula for
determining the amount of any principal, premium, or interest payment, any
exchange, redemption, prepayment or sinking fund provisions, the currency or
currency unit in which principal, premium, or interest is payable, whether the
securities are issuable in registered form or in the form of global securities,
and the designation of the trustee acting under the indenture. Each Prospectus
Supplement will also contain information, where applicable, about material
United States federal income tax considerations relating to, and any listings on
a securities exchange of, the Debt Securities covered by such Prospectus
Supplement.
The Company may sell the Debt Securities directly to purchasers, through agents
designated from time to time or through underwriters or dealers on terms
determined by market conditions at the time of sale. If any agents,
underwriters, or dealers are involved in the sale of the Debt Securities, the
names of such agents, underwriters or dealers and any applicable commissions or
discounts and the net proceeds to the Company from such sale will be set forth
in the applicable Prospectus Supplement.
SEE 'RISK FACTORS' BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN ANY DEBT
SECURITIES.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF DEBT 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.
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 AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE GUARANTOR, OR ANY
UNDERWRITER, AGENT OR DEALER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY
PROSPECTUS SUPPLEMENT NOR ANY SALE MADE THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THE GUARANTOR SINCE THE DATE HEREOF OR THEREOF. THIS
PROSPECTUS AND ANY RELATED PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
The date of this Prospectus is October 17, 1997.
<PAGE>
AVAILABLE INFORMATION
The Company and the Guarantor have filed with the Securities and Exchange
Commission (the 'Commission') a Registration Statement on Form S-3 (together
with all amendments and exhibits thereto, the 'Registration Statement') under
the Securities Act of 1933, as amended (the 'Securities Act'), for the
registration of the Debt Securities offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement, certain items of which are
contained in exhibits and schedules to, or incorporated by reference in, the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company, the Guarantor
and the Debt Securities offered hereby, reference is made to the Registration
Statement, including the exhibits thereto, and financial statements and notes
filed as a part thereof or incorporated by reference therein. Statements made in
this Prospectus and in the accompanying Prospectus Supplement concerning the
contents of any document referred to herein are not necessarily complete. With
respect to each such document filed with the Commission as an exhibit to, or
incorporated by reference in, the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Guarantor is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the 'Exchange Act'), and in
accordance therewith the Guarantor files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other information
filed by the Guarantor may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington D.C. 20549. The Commission maintains an
Internet Web site at http://www.sec.gov that contains reports, proxy statements
and other information regarding registrants that file electronically with the
Commission. In addition, such material filed by the Guarantor may also be
inspected and copied at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005, and the Pacific Stock Exchange
Incorporated, 301 Pine Street, San Francisco, California 94104, on which
exchanges the Common Stock of the Guarantor is listed.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Guarantor with the Commission pursuant
to the Exchange Act under File No. 1-6089 are incorporated herein by reference
and shall be deemed to be a part hereof:
1. the Guarantor's Annual Report on Form 10-K for the fiscal year
ended April 30, 1997 (as amended on Forms 10-K/A for such fiscal year);
2. the Guarantor's Current Reports on Form 8-K dated July 2, 1997 (as
amended on Form 8-K/A filed August 14, 1997), September 7, 1997 and
September 25, 1997;
3. the Guarantor's Quarterly Report on Form 10-Q for the three months
ended July 31, 1997 (as amended on Form 10-Q/A filed October 2, 1997).
All documents filed by the Company or the Guarantor pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of the offering of the Debt Securities made hereby
shall be deemed to be incorporated by reference into this Prospectus and to be a
part hereof from the date of filing such documents. See 'Available Information.'
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein or in any Prospectus Supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
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This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith, as indicated above. The Company will provide
without charge to each person, including any beneficial owner, to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any or all of the documents which are incorporated herein by reference
(other than exhibits to such documents unless they are specifically incorporated
by reference into such documents). Requests for such copies should be directed
to Block Financial Corporation, 4435 Main Street, Suite 500, Kansas City,
Missouri 64111, Attention: John R. Cox, telephone (816) 751-6019.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the 'Reform Act')
provides a 'safe harbor' for certain forward-looking statements contained in
this Prospectus, but such safe harbor does not protect any such statements made
by or regarding the Company. Certain statements contained in the sections
entitled 'The Company' and 'The Guarantor,' and certain statements incorporated
by reference from documents filed with the Commission by the Company, are or may
constitute forward-looking statements as defined in the Reform Act. However, the
safe harbor does not apply to forward-looking statements made in connection with
an initial public offering. Since the offering of Debt Securities is an initial
public offering by the Company, the safe harbor would not apply to any such
forward-looking statements concerning the Company. Because such statements are
subject to risks and uncertainties, actual results may differ from those
expressed or implied by such forward-looking statements.
THE COMPANY
BFC is an indirect wholly owned subsidiary of Block. It was organized in
May 1992 for the purpose of developing and providing tax-related and
technology-related financial services. The principal business activities of BFC
include (i) the origination, purchase, servicing, sale and securitization of
nonconforming residential mortgages, (ii) the purchase of participation
interests in refund anticipation loans ('RALs') made by Beneficial National Bank
('Beneficial') to Block tax customers, (iii) the offering of credit cards for
CompuServe Corporation ('CompuServe') and WebBank Corporation, a Utah Industrial
Loan Company and wholly owned subsidiary of BFC, (iv) the development,
publishing, and marketing of software products designed to assist individuals in
managing their personal finances and preparing tax returns, and (v) the offering
of equity lines of credit to Block's tax preparation franchisees. BFC's
principal executive office is located at 4435 Main Street, Suite 500, Kansas
City, Missouri 64111 and its telephone number is (816) 751-6000.
NONCONFORMING MORTGAGES. BFC operates a nonconforming mortgage origination
and funding business in which fixed and adjustable-rate mortgages, including
purchase money first mortgages, refinance first mortgages and second mortgages,
are offered to the public. Nonconforming mortgages are those that may not be
offered through government-sponsored loan agencies.
In a strategic initiative to develop a retail nonconforming mortgage
business, BFC and Block formed H&R Block Mortgage Company, L.L.C. ('Block
Mortgage') in August 1995 to offer nonconforming mortgages at H&R Block tax
offices. Block Mortgage is a limited liability company in which a subsidiary of
Block owns a 99% membership interest and BFC owns a 1% membership interest.
During the 1997 tax season, Block Mortgage offered nonconforming mortgages
through 31 tax offices in Colorado, Indiana, North Carolina and Virginia. Block
Mortgage plans to continue the test of this business in additional tax offices
during fiscal year 1998.
BFC further increased its commitment to the nonconforming mortgage business
with its purchase of Option One Mortgage Corporation ('Option One') from Fleet
Financial Group, Inc. ('Fleet') in June 1997. Option One engages in the
origination, purchase, securitization, sale and servicing of one-to-four family
residential mortgage loans made primarily to sub-prime borrowers who do not
qualify for loans which conform to FNMA and FHLMC guidelines. Option One is
headquartered in Santa Ana, California, and has a network of more than 5,000
mortgage brokers in 46 states. In calendar 1996, Option One originated more than
$1 billion in mortgage loans. BFC believes that Option One will provide BFC with
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experienced associates in the nonconforming mortgage business and assist BFC and
Block in handling mortgage applications, processing loans and underwriting
mortgages originated through Block Mortgage.
BFC paid $218.1 million in cash for Option One, consisting of $28.1 million
in adjusted stockholder's equity and a premium of $190 million. In addition, BFC
made a cash payment of $456 million to Fleet to eliminate intercompany loans
made by Fleet to Option One to finance Option One's mortgage loan business. The
$456 million payment was recorded as an intercompany loan from BFC to Option One
and was repaid by Option One on June 30, 1997, when Option One sold mortgage
loans to a third party in the ordinary course of business.
BFC completed its first securitization of nonconforming mortgage loans on
January 30, 1997, through a $102 million asset-backed security issue.
Substantially all of the mortgages involved in this securitization were
mortgages offered through independent mortgage brokers. On July 30, 1997, BFC
completed its second securitization of nonconforming mortgages through a $215
million asset-backed security issue. This securitization included $134 million
of mortgages offered through independent mortgage brokers, $81 million of
mortgages offered by Option One and $10 million of mortgages offered by Block
Mortgage.
REFUND ANTICIPATION LOANS. In July 1996, BFC announced an agreement with
Beneficial to purchase a participation interest in RALs provided by Beneficial
to Block tax customers. In the 10-year agreement, BFC agreed to purchase an
initial 40% participation interest in such RALs, which interest would be
increased to nearly 50% in specific circumstances. As a result, BFC initially
has the right to receive 40% of the aggregate payments of principal, interest
and other sums due under the RALs, and bears 40% of the credit risk associated
with the RALs. BFC's purchases of participation interests are financed through
short-term borrowings. BFC bears all of the risks associated with its interests
in the RALs. BFC's total RAL revenue in fiscal 1997 was approximately $54.5
million, which generated approximately $8.1 million in pretax profits.
CREDIT CARDS. BFC offers Gold and Classic versions of two types of
co-branded credit cards: CompuServe Visa and WebCard(Service Mark) Visa. The
credit cards are issued under a co-branding agreement between BFC and Columbus
Bank and Trust Company, Columbus, Georgia. Approximately 110,000 CompuServe Visa
credit cards were issued by the end of fiscal 1997, compared to 113,425 credit
cards at the end of fiscal 1996. The number of WebCard(Service Mark) Visa
accounts at April 30, 1997, was 57,223, compared to approximately 6,000 accounts
at the end of fiscal 1996. The aggregate portfolio for the credit cards issued
by BFC increased from approximately $165 million at the end of fiscal 1996 to
more than $246 million by the end of fiscal 1997.
While the aggregate number of BFC's credit cards increased during fiscal
1997, bad debt expense associated with such accounts also increased
substantially. The increase in bad debt expense resulted from the increase in
the credit card receivables portfolio and a deterioration in the credit quality
arising from the maturation of the credit card portfolio. Measured as a
percentage of the credit card receivables, the bad debt expense increased 40
basis points, from 5.5% to 5.9% during fiscal 1997. Based on the balance of the
portfolio at April 30, 1997, every 10 basis point increase in the ratio of bad
debt expense to credit card receivables would result in additional expenses of
$248,000.
BFC developed the CONDUCTOR(Registered) service, a technology that
facilitates the delivery of financial services online through existing
commercial online services, the Internet or directly through leased networks.
CONDUCTOR(Registered) features a national online electronic credit card
statement that provides the cardholder with access to transaction records and
credit availability and the ability to download transactions from the Internet
into a personal financial software program. A similar service that allows
cardholders access online is offered on CompuServe's information service.
BFC is evaluating the possible sale of its credit card operations,
including its receivables portfolio and the CONDUCTOR(Registered) service.
SOFTWARE PRODUCTS. BFC's software business develops and markets the
Kiplinger TaxCut(Registered) tax preparation software package, and markets the
Kiplinger Home Legal Advisor(Service Mark) and Kiplinger Small
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Business Attorney(Service Mark) software products. As a result of the increase
in sales of the final edition of TaxCut in fiscal 1997, BFC's share in the
income tax return preparation software market is now approximately 30%.
EQUITY LINES OF CREDIT. BFC offers to Block's tax preparation franchisees
lines of credit with reasonable interest rates under a program designed to
better enable the franchisees to refinance existing business debt, expand or
renovate offices or meet off-season cash flow needs. A franchise equity loan is
a revolving line of credit secured by the H&R Block franchise and the underlying
business.
THE GUARANTOR
Block is a diversified services corporation that was organized in 1955
under the laws of Missouri. It is the parent corporation in a two-tier holding
company structure following a 1993 corporate restructuring. The second-tier
holding company is H&R Block Group, Inc., which is the direct owner of (i) all
of the shares of H&R Block Tax Services, Inc. ('Tax Services'), a subsidiary
involved in the business of income tax return preparation, electronic filing of
income tax returns and the performance of other tax related services in the
United States, (ii) approximately 80.1% of the shares of CompuServe, a
corporation that offers worldwide online and Internet access services to
consumers and worldwide network access, management and applications, and
Internet services to businesses, and (iii) all of the shares of BFC. Indirect
subsidiaries of H&R Block Group, Inc. operate income tax return preparation and
related services businesses in Canada, Australia, the United Kingdom and Guam,
and offer H&R Block franchises in other parts of the world as a part of the
operations of H&R Block International. Block's principal executive office is
located at 4400 Main Street, Kansas City, Missouri 64111 and its telephone
number is (816) 753-6900. Block's common stock is listed on the New York Stock
Exchange and Pacific Stock Exchange and is quoted under the symbol 'HRB.'
TAX SERVICES. The income tax return preparation and related services
business is the original core business of Block. These services are provided to
the public through a system of offices operated by Block or by others to whom
Block has granted franchises. Block and its franchisees provide income tax
return preparation services, electronic filing services and other services
relating to income tax return preparation in many parts of the world. For U.S.
returns, Block offers RALs through Beneficial in conjunction with Block's
electronic filing service. Block also markets its income tax preparation
knowledge through its income tax training schools.
Block's tax operations are divided structurally into three areas, each
targeting specific markets and focusing on new products and services and areas
for expansion. Tax Services focuses on tax business operations in the United
States. H&R Block Premium, a division of Tax Services, competes for those
clients who typically have more complex income tax returns and features meetings
by appointment any time of the year, private offices and more experienced tax
return preparers. H&R Block International focuses on strengthening operations in
current foreign markets, such as Canada and Australia, and identifying and
developing new markets.
COMPUSERVE. CompuServe was incorporated in Delaware on February 16, 1996.
CompuServe is the parent corporation in a holding company structure, and holds
all of the outstanding stock of CompuServe Incorporated. CompuServe Incorporated
was founded in 1969 as a computer timesharing service and introduced its first
online service in 1979. Until April 1996, CompuServe was an indirect wholly
owned subsidiary of Block. In April 1996, CompuServe completed an initial public
offering of 18,400,000 shares of its common stock. CompuServe's common stock is
quoted on the Nasdaq quotation system under the symbol 'CSRV.'
CompuServe is a worldwide leader in the market for computer-based
interactive services and data communications and a pioneer in the development of
consumer online and Internet access services. CompuServe was the first online
service provider to establish a major international presence, and continues to
be one of the largest global online and Internet service providers. CompuServe
operates what its management believes is the most extensive network in the world
dedicated solely to data transmission.
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CompuServe Interactive Service(Service Mark) ('CSi'), CompuServe's flagship
product, offers traditional online services and integrated Internet access.
Through SPRYNET(Service Mark), CompuServe also offers a stand-alone
Internet-access-only service. Management believes consumer online services are a
preferred access vehicle to the Internet for the average user due to the ability
of online services to focus and aggregate content and provide centralized
billing and support. Management also believes CompuServe's business networking
experience and infrastructure position it to be a leader in the
commercialization of the Internet.
On September 7, 1997, the Guarantor entered into an Agreement and Plan of
Merger (the 'Merger Agreement') with H&R Block Group, Inc., CompuServe,
WorldCom, Inc., a Georgia corporation ('WorldCom'), and Walnut Acquisition
Company, L.L.C., a Delaware limited liability company which is wholly owned by
WorldCom ('WAC'), pursuant to which WorldCom would acquire CompuServe through a
merger of WAC with and into CompuServe (the 'Merger'). At the Effective Time (as
defined in the Merger Agreement) each of the CompuServe Common Shares (as
defined in the Merger Agreement) outstanding as of the Effective Time will be
converted into the right to receive, and there will be paid and issued as
provided in the Merger Agreement in exchange for each of the CompuServe Common
Shares, 0.40625 of a share of WorldCom Common Stock (as defined in the Merger
Agreement), subject to adjustment as provided in the Merger Agreement. Based on
the closing price of WorldCom Common Stock on September 5, 1997, the aggregate
purchase price for CompuServe is approximately $1.2 billion. Consummation of the
Merger is subject to the satisfaction of certain conditions, including, among
others, the expiration or termination of any applicable waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any
foreign competition law or similar law, the receipt of other required regulatory
approvals, and the absence of certain material adverse changes. Consummation of
the Merger is also subject to the approval and adoption of the Merger Agreement
by the holders of the requisite number of CompuServe Common Shares. The
Guarantor has agreed to vote all of the shares directly or indirectly owned by
it in favor of the Merger Agreement and the Merger, which number of shares is
sufficient to approve the Merger Agreement and the Merger. The closing of the
Merger is expected to occur as soon as practicable after the satisfaction of all
the conditions set forth in the Merger Agreement.
In fiscal 1997, CompuServe's revenues were $841.9 million, compared to
Block's consolidated revenues from continuing operations of $1.097 billion. As
of July 31, 1997, CompuServe's total assets were $787.2 million and Block's
total assets were $1.876 billion. In fiscal 1997, the net loss of CompuServe was
$96 million and the net earnings of Block excluding CompuServe were $143.8
million.
The Guarantor believes it is likely that the conditions to the consummation
of the Merger will be satisfied and that the Merger will be consummated.
However, there can be no assurance that all conditions will be satisfied. If the
Merger is not consummated for any reason, the Guarantor will continue to pursue
alternatives to complete the separation of CompuServe.
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the Debt
Securities for general corporate purposes which may include acquisitions,
capital expenditures, working capital requirements, repayment of certain
indebtedness or for other business purposes. The specific use of proceeds of
each sale of Debt Securities will be set forth in each Prospectus Supplement.
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RISK FACTORS
Prospective investors should carefully consider the following risk factors
in connection with an investment in any Debt Securities.
COMPANY RISK FACTORS
GENERAL LENDING RISKS
BFC operates financial services businesses which are subject to various
business risks, including, but not limited to, the following: the risk that
borrowers will not satisfy their payment obligations; the risk, in the case of a
nonconforming mortgage loan or a franchisee line of credit loan, that the value
of the property securing such loan will not be sufficient to repay the
borrower's obligation to BFC upon foreclosure after default; the risk that
changes in interest rates after the origination of a loan and prior to its sale
may narrow the spread between the cost of BFC's funds and the interest paid by
the borrower; the risk, in the case of nonconforming mortgage loans, that a
decrease in interest rates could cause an increase in the rate at which
outstanding loans are prepaid; and the risk, in the case of credit card loans,
of increased bad debt expense as a result of growth and maturation of BFC's loan
portfolio, consistent with current trends in the credit card industry.
Many of the foregoing business risks become more acute in an economic
slowdown or recession, which may be accompanied by decreased demand for credit
and declining real estate and other asset values. Specifically, in the
nonconforming mortgage business, any material decline in real estate values
reduces the ability of borrowers to use home equity to support borrowings and
increases the loan-to-value ratios of loans previously made by BFC, thereby
weakening collateral coverage and increasing the possibility of a loss in the
event of a default. Delinquencies, foreclosures, repossessions and losses
generally increase during economic slowdowns or recessions. Certain of BFC's
borrowers may have had past credit problems and in the nonconforming mortgage
market the actual rates of delinquencies, foreclosures, repossessions and
losses, as applicable, could be higher under adverse economic conditions than
those experienced in the mortgage market generally. Any sustained period of
increased delinquencies, foreclosures, repossessions, losses or costs could
adversely affect BFC's ability to sell nonconforming mortgage loans through
securitization or whole loan sales and could increase the cost of selling such
loans, which could adversely affect BFC's financial condition or results of
operations.
ADVERSE IMPACT OF MORTGAGE LOAN PREPAYMENTS FOLLOWING SECURITIZATION
BFC sells nonconforming mortgages in both whole loan sales and
securitizations. Although significantly more mortgages are currently sold
through whole loan sales than through securitization, gains on sales of
mortgages through securitization could become a significant component of BFC's
reported revenues. The amount of such gains is based on estimates made by
management at the time loans are sold about prepayment rates and other matters.
The rate of prepayment of loans may be affected by a variety of economic and
other factors, including prevailing interest rates and the availability of
alternative financing. Decreases in interest rates could cause prepayment rates
to increase. The effects of these factors may vary depending on the particular
type of loan. Estimates of prepayment rates are made based on management's
expectations of future prepayment rates, which are based, in part, on the
historic performance of BFC's loans and other considerations. There can be no
assurance as to the accuracy of management's estimates. If actual prepayments
occur more quickly than was projected at the time loans were sold in a
securitization, the carrying value of the residual and servicing assets may have
to be written down through a charge to earnings in the period of adjustment.
NEED FOR ADDITIONAL FUNDS AND DEPENDENCE ON LOAN SALES TO FINANCE LENDING
ACTIVITIES
BFC has a continuing need for capital to finance its lending operations.
Currently, BFC's principal cash requirements are in connection with loan
originations and purchases, purchases of participations in RALs, repayments of
outstanding commercial paper, and payments of operating expenses and interest.
Loan production is funded principally through the issuance of commercial paper.
BFC's
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outstanding commercial paper is in turn repaid with the proceeds received by BFC
from selling nonconforming mortgage loans through securitization or whole loan
sales and from collections on credit card receivables and franchisee lines of
credit. While BFC believes that it will be able to refinance or otherwise repay
its outstanding commercial paper in the normal course of its business, there can
be no assurance that BFC will continue to be able to access the commercial paper
markets or that other lenders will be willing to extend lines of credit to BFC
or that funds otherwise generated from operations will be sufficient to satisfy
its obligations. Future financing may involve the issuance of additional Debt
Securities.
BFC relies significantly upon securitizations and whole loan sales to
generate cash proceeds for repayment of outstanding commercial paper.
Accordingly, adverse changes in the securities markets generally, the asset
backed securities and whole loan sale markets, or the credit quality of BFC's
loan portfolio could impair BFC's ability to originate, purchase and sell loans
or other assets on a favorable or timely basis. Any such impairment could have a
material adverse effect upon BFC's business and results of operations. Any delay
in the sale of a loan or other asset pool would postpone the recognition of a
gain on such loans until their sale. Such delays could cause BFC's earnings to
fluctuate from quarter to quarter.
COMPETITION
The financial services and software businesses in which BFC engages are
highly competitive. BFC faces increasing competition as a purchaser and
originator of nonconforming mortgage loans and as an issuer of credit cards.
Certain large national finance companies, commercial banks, thrifts, credit card
originators and conforming mortgage originators, with greater capitalization and
financial resources than BFC, have adapted their origination programs and
allocated resources to the origination of nonconforming loans. The entrance of
these competitors into BFC's nonconforming mortgage or credit card markets could
have a material adverse effect on BFC's financial condition and results of
operations.
CERTAIN LEGAL RISKS
BFC's operations and origination activities are subject to extensive laws,
regulations, supervision and licensing by federal and state authorities.
Regulated matters include, without limitation, maximum interest rates and fees
which may be charged by BFC, disclosure in connection with loan originations,
credit reporting requirements, servicing requirements, federal and state
taxation, and multiple qualification and licensing requirements for doing
business in various jurisdictions. There can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future which
could make compliance more difficult or expensive.
GOVERNMENT REGULATION OF REFUND ANTICIPATION LOANS
Repayment of RALs generally depends on Internal Revenue Service ('IRS')
direct deposit procedures. A borrower of a RAL directs the IRS to deposit the
borrower's federal income tax refund directly into a special bank account
maintained at the banking institution that made the RAL. The lending institution
then collects the RAL by exercising a right of offset against the bank account.
The IRS may from time to time change its direct deposit procedures or may
determine not to make direct deposits of all or portions of a borrower's federal
income tax refund. Failure by the IRS to make direct deposits of federal income
tax refunds may impair the lender's ability to recover a RAL and result in a
loss.
Changes in government regulations applicable to RALs could adversely affect
the RAL business and thereby limit the ability of BFC to purchase participation
interests in RALs and adversely impact BFC's results of operations.
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<PAGE>
SEASONALITY OF BUSINESS
A substantial portion of BFC's revenues are received during the period from
January through April of each year since revenues from participations in RALs
and sales of tax return preparation software occur during such period.
GUARANTOR RISK FACTORS
TAX LEGISLATION
From time to time, and especially in election years, the subjects of tax
simplification, restructuring and reform ('tax reform') are discussed in the
American political environment, sometimes leading to proposed legislation to
effectuate one or more tax reform ideas. In the past few years, tax reform ideas
such as a flat tax, a consumption tax and a national sales tax have been
proposed and have received more serious attention than in the past, although
none of these tax reform ideas has materialized into effective legislation.
Historically, changes in tax laws have increased Block's tax return preparation
business because of inherent uncertainties as to the interpretation and
application of new changes and, in many cases, the increased complexity in tax
law caused by such changes. If enacted, the effect of significant tax reform
legislation on Block's business over time is uncertain and such legislation
could have a material adverse effect on Block's business and results of
operations.
REGULATION OF TAX RETURN PREPARATION, ELECTRONIC FILING AND REFUND ANTICIPATION
LOANS
The federal government regulates the preparation and electronic filing of
income tax returns and an electronic filer's involvement in RALs. States that
have adopted electronic filing programs for state income tax returns have also
enacted laws that regulate electronic filers. In addition, some states and
localities have enacted laws and adopted regulations that regulate RAL
facilitators and/or the advertisement and offering of electronic filing and
RALs. Block cannot predict the affect of the enactment of new statutes or the
adoption of new regulations pertaining to its tax return preparation business.
COMPETITION
The income tax return preparation and electronic filing businesses are
highly competitive. Block considers the individual who prepares his own tax
return to be its primary competition. The enactment of legislative proposals to
reform or simplify the tax system, discussed under 'Tax Legislation' above, may
have the effect of increasing the number of self-preparers, which could have a
material adverse effect on Block's business and results of operations. In
addition to self-preparers, there are a substantial number of tax return
preparation firms. Many of these firms, and many firms not involved in the
income tax return preparation business, are involved in providing electronic
filing and RAL services to the public. Commercial tax return preparers and
electronic filers are highly competitive with regard to price, service and
reputation for quality.
SEASONALITY OF BUSINESS
Since most Block customers file their tax returns during the period from
January through April of each year, substantially all of Block's revenues from
income tax return preparation related services and franchise royalties are
received during this period. As a result, Block operates at a loss through the
first nine months of its fiscal year.
SALE OF COMPUSERVE
The sale of Block's interest in CompuServe through a merger with a
subsidiary of WorldCom is subject to conditions the satisfaction of which cannot
be assured. If such transaction is not consummated for any reason, there can be
no assurance that Block will be able to dispose of its interest in CompuServe on
terms as favorable as those offered by WorldCom. See 'The Guarantor--
CompuServe.'
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<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
THE COMPANY
The following table sets forth the ratio of earnings to fixed charges for
the Company for the three months ended July 31, 1997 and for each of the five
years ended April 30.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JULY 31, 1997 1997 1996 1995 1994 1993
------------------- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to (a) 1.6:1 2.5:1 (b) (c) 6.9:1
Fixed Charges........ (d)
</TABLE>
NOTES TO COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges is calculated by dividing (1) pretax
earnings from continuing operations plus fixed charges by (2) fixed charges.
Fixed charges consist of interest expense and the interest component of rent
expense.
(a) Earnings were insufficient to cover fixed charges for the three months ended
July 31, 1997 by $6,330.
(b) Earnings were insufficient to cover fixed charges for the year ended April
30, 1995 by $5,788.
(c) Earnings were insufficient to cover fixed charges for the year ended April
30, 1994 by $15,644.
(d) Earnings for the year ended April 30, 1994 included a nonrecurring charge of
$25,072 for purchased research and development related to the acquisition of
MECA Software, Inc. as disclosed in the 'Acquisitions' note to the
Guarantor's consolidated financial statements for the year ended April 30,
1996. If such charges had not occurred, the ratio of earnings to fixed
charges would have been 4.2:1.
THE GUARANTOR
The following table sets forth the ratio of earnings to fixed charges for
the Guarantor on a consolidated basis for the three months ended July 31, 1997
and for each of the five years ended April 30, which ratios are based on the
historical consolidated financial statements of the Guarantor.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JULY 31, 1997 1997 1996 1995 1994 1993
------------------- ------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges........ (a) 4.8:1 5.9:1 5.0:1 5.5:1(b) 6.2:1
</TABLE>
NOTES TO COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges is calculated by dividing (1) pretax
earnings from continuing operations plus fixed charges by (2) fixed charges.
Fixed charges consist of interest expense and the interest component of rent
expense.
(a) Earnings were insufficient to cover fixed charges for the three months ended
July 31, 1997 by $55,509.
(b) Earnings for the year ended April 30, 1994 included a nonrecurring charge of
$25,072 for purchased research and development related to the acquisition of
MECA Software, Inc. as disclosed in the 'Acquisitions' note to the
Guarantor's consolidated financial statements for the year ended April 30,
1996. If such charges had not occurred, the ratio of earnings to fixed
charges would have been 6.6:1.
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<PAGE>
DESCRIPTION OF DEBT SECURITIES
The following description of the terms of the Debt Securities and
Guarantees sets forth certain general terms and provisions of the Debt
Securities to which any Prospectus Supplement may relate. The particular terms
of the Debt Securities offered by any Prospectus Supplement and the extent, if
any, to which such general provisions may apply to the Debt Securities so
offered will be described in the Prospectus Supplement relating to such Debt
Securities. Accordingly, for a description of the terms of a particular issue of
Debt Securities and Guarantees, reference must be made to both the Prospectus
Supplement relating thereto and to the following description.
The Debt Securities will be general obligations of the Company and may be
Senior Debt Securities or Subordinated Debt Securities. Senior Debt Securities
will rank equally with all other unsubordinated and unsecured indebtedness of
the Company. The Subordinated Debt Securities will be subordinate in right of
payment to 'Senior Indebtedness' (as defined below) of the Company to the extent
set forth in the Prospectus Supplement relating thereto. See 'Description of
Debt Securities--Subordination' below. The Guarantor will irrevocably and
unconditionally guarantee payments of principal, interest and premium, if any,
on the Debt Securities. Debt Securities and Guarantees will be issued under an
indenture (the 'Indenture') to be entered into between the Company, the
Guarantor and Bankers Trust Company (the 'Trustee'). A copy of the form of
Indenture has been filed as an exhibit to the Registration Statement filed with
the Commission. The following discussion of certain provisions of the Indenture
is a summary only and does not purport to be a complete description of the terms
and provisions of the Indenture. Accordingly, the following discussion is
qualified in its entirety by reference to the provisions of the Indenture,
including the definition therein of terms used below with their initial letters
capitalized.
GENERAL
The Indenture does not limit the aggregate principal amount of Debt
Securities that can be issued thereunder. The Debt Securities may be issued in
one or more series as may be authorized from time to time by the Company.
Reference is made to the applicable Prospectus Supplement for the following
terms of the Debt Securities of the series with respect to which such Prospectus
Supplement is being delivered:
(a) The title of Debt Securities of the series;
(b) Any limit on the aggregate principal amount of the Debt Securities
of the series that may be authenticated and delivered under the Indenture;
(c) The date or dates on which the principal and premium, if any, with
respect to the Debt Securities of the series are payable;
(d) The rate or rates (which may be fixed or variable) at which the
Debt Securities of the series shall bear interest (if any) or the method of
determining such rate or rates, the date or dates from which such interest
shall accrue, the interest payment dates on which such interest shall be
payable or the method by which such date will be determined, the record
dates for the determination of Holders thereof to whom such interest is
payable (in the case of Registered Securities), and the basis upon which
interest will be calculated if other than that of a 360-day year of twelve
30-day months;
(e) The Place or Places of Payment, if any, in addition to or instead
of the corporate trust office of the Trustee where the principal, premium,
if any, and interest with respect to Debt Securities of the series shall be
payable;
(f) The price or prices at which, the period or periods within which,
and the terms and conditions upon which Debt Securities of the series may
be redeemed, in whole or in part, at the option of the Company or
otherwise;
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<PAGE>
(g) The obligation, if any, of the Company to redeem, purchase, or
repay Debt Securities of the series pursuant to any sinking fund or
analogous provisions or at the option of a Holder thereof and the price or
prices at which, the period or periods within which, and the terms and
conditions upon which Debt Securities of the series shall be redeemed,
purchased, or repaid, in whole or in part, pursuant to such obligations;
(h) The terms, if any, upon which the Debt Securities of the series
may be convertible into or exchanged for other Debt Securities of the
Company and the terms and conditions upon which such conversion or exchange
shall be effected, including the initial conversion or exchange price or
rate, the conversion or exchange period and any other provision in addition
to or in lieu of those described herein;
(i) If other than denominations of $1,000 or any integral multiple
thereof, the denominations in which Debt Securities of the series shall be
issuable;
(j) If the amount of principal, premium, if any, or interest with
respect to the Debt Securities of the series may be determined with
reference to an index or pursuant to a formula, the manner in which such
amounts will be determined;
(k) If the principal amount payable at the stated maturity of Debt
Securities of the series will not be determinable as of any one or more
dates prior to such stated maturity, the amount that will be deemed to be
such principal amount as of any such date for any purpose, including the
principal amount thereof that will be due and payable upon any maturity
other than the stated maturity or that will be deemed to be outstanding as
of any such date (or, in such case, the manner in which such deemed
principal amount is to be determined), and if necessary, the manner of
determining the equivalent thereof in United States currency;
(l) Any changes or additions to the provisions of the Indenture
dealing with defeasance, including the addition of additional covenants
that may be subject to the Company's covenant defeasance option;
(m) The coin or currency or currencies or units of two or more
currencies in which payment of the principal and premium, if any, and
interest with respect to Debt Securities of the series shall be payable;
(n) If other than the principal amount thereof, the portion of the
principal amount of Debt Securities of the series which shall be payable
upon declaration of acceleration or provable in bankruptcy;
(o) The terms, if any, of the transfer, mortgage, pledge or assignment
as security for the Debt Securities of the series of any properties,
assets, moneys, proceeds, securities or other collateral, including whether
certain provisions of the Trust Indenture Act are applicable and any
corresponding changes to provisions of the Indenture as currently in
effect;
(p) Any addition to or change in the Events of Default with respect to
the Debt Securities of the series and any change in the right of the
Trustee or the holders to declare the principal of and interest on, such
Debt Securities due and payable;
(q) If the Debt Securities of the series shall be issued in whole or
in part in the form of a Global Security, the terms and conditions, if any,
upon which such Global Security may be exchanged in whole or in part for
other individual Debt Securities in definitive registered form and the
Depositary for such Global Security;
(r) Any trustees, authenticating or paying agents, transfer agents or
registrars;
(s) The applicability of, and any addition to or change in the
covenants and definitions currently set forth in the Indenture or in the
terms relating to permitted consolidations, mergers, or sales of assets,
including conditioning any merger, conveyance, transfer or lease permitted
by the
12
<PAGE>
Indenture upon the satisfaction of an Indebtedness coverage standard by the
Company and Successor Company;
(t) The terms, if any, of any Guarantee (other than the Guarantee of
the Guarantor) of the payment of principal of, and premium, if any, and
interest on, Debt Securities of the series and any corresponding changes to
the provisions of the Indenture as currently in effect;
(u) The subordination, if any, of the Debt Securities of the series
pursuant to the Indenture and any changes or additions to the provisions of
the Indenture relating to subordination;
(v) With regard to Debt Securities of the series that do not bear
interest, the dates for certain required reports to the Trustee; and
(w) Any other terms of the Debt Securities of the series (which terms
shall not be prohibited by the Indenture).
The Prospectus Supplement will also describe any material United States
federal income tax consequences or other special considerations applicable to
the series of Debt Securities to which such Prospectus Supplement relates,
including those applicable to (a) Debt Securities with respect to which payments
of principal, premium, or interest are determined with reference to an index or
formula (including changes in prices of particular securities, currencies, or
commodities), (b) Debt Securities with respect to which principal, premium, or
interest is payable in a foreign or composite currency, (c) Debt Securities that
are issued at a discount below their stated principal amount, bearing no
interest or interest at a rate that at the time of issuance is below market
rates ('Original Issue Discount Debt Securities'), and (d) variable rate Debt
Securities that are exchangeable for fixed rate Debt Securities.
Payments of interest on Debt Securities shall be made at the corporate
trust office of the Trustee or at the option of the Company by check mailed to
the registered holders thereof or, if so provided in the applicable Prospectus
Supplement, at the option of a Holder by wire transfer to an account designated
by such Holder.
Unless otherwise provided in the applicable Prospectus Supplement, Debt
Securities may be transferred or exchanged at the office of the Trustee at which
its corporate trust business is principally administered in the United States or
at the office of the Trustee or the Trustee's agent in the Borough of Manhattan,
the City and State of New York, at which its corporate agency business is
conducted, subject to the limitations provided in the Indenture, without the
payment of any service charge, other than any tax or governmental charge payable
in connection therewith.
GUARANTEES
The Guarantor will irrevocably and unconditionally guarantee to each holder
of a Debt Security the due and punctual payment of the principal of, and any
premium and interest on, such Debt Security, when and as the same shall become
due and payable, whether at maturity, upon acceleration, by call for redemption
or otherwise. The Guarantor has (a) agreed that its obligations under the
Guarantees in the event of an Event of Default will be as if it were principal
obligor and not merely surety, and will be enforceable irrespective of any
invalidity, irregularity or unenforceability of any series of the Debt
Securities or the Indenture or any supplement thereto and (b) waived its right
to require the Trustee or the Holders to pursue or exhaust its legal or
equitable remedies against the Company prior to exercising its rights under the
Guarantees.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more fully registered global securities (a 'Global Security')
that will be deposited with a depositary (the 'Depositary'), or with a nominee
for a Depositary identified in the Prospectus Supplement relating to such
series. In such case, one or more Global Securities will be issued in a
denomination or aggregate
13
<PAGE>
denomination equal to the portion of the aggregate principal amount of
outstanding registered 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 Debt Securities in definitive registered form, a Global Security may
not be transferred except as a whole by the Depositary for such Global Security
to a nominee of such Depositary or by a nominee of such Depositary to such
Depositary or another nominee of such Depositary or by such Depositary or any
such nominee to a successor of such Depositary or a nominee of such successor.
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the Prospectus Supplement relating to such series. The
Company anticipates that the following provisions will apply to all depositary
arrangements.
Upon the issuance of a Global Security, the Depositary for such Global
Security will credit, on its book-entry registration and transfer system, the
respective principal amounts of the Debt Securities represented by such Global
Security to the accounts of persons that have accounts with such Depositary
('participants'). The amounts to be credited shall be designated by any
underwriters or agents participating in the distribution of such Debt
Securities. Ownership of beneficial interests in a Global Security will be
limited to participants or persons that may hold interest through participants.
Ownership of beneficial interests in such Global Security will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by the Depositary for such Global Security (with respect to interests of
participants) or by participants or persons that hold through participants (with
respect to interests of persons other than participants). So long as the
Depositary for a Global Security, or its nominee, is the registered owner of
such Global Security, such Depositary or such nominee, as the case may be, will
be considered the sole owner or Holder of the Debt Securities represented by
such Global Security for all purposes under the Indenture. Except as set forth
below, owners of beneficial interests in a Global Security will not be entitled
to have the Debt Securities represented by such Global Security registered in
their names, will not receive or be entitled to receive physical delivery of
such Debt Securities in definitive form and will not be considered the owners or
Holders thereof under the Indenture.
Principal, premium, if any, and interest payments on Debt Securities
represented by a Global Security registered in the name of a Depositary or its
nominee will be made to such Depositary or its nominee, as the case may be, as
the registered owner of such Global Security. None of the Company, the Trustee
or any paying agent for such Debt Securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in such Global Securities or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that the Depositary for any Debt Securities represented
by a Global Security, upon receipt of any payment of principal, premium, or
interest, will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Security as shown on the records of the Depositary. The
Company also expects that payments by participants to owners of beneficial
interests in such Global Security held through such participants will be
governed by standing instructions and customary practices, as is now the case
with the securities held for the accounts of customers registered in 'street
name', and will be the responsibility of such participants.
If the Depositary for any Debt Securities represented by a Global Security
is at any time unwilling or unable to continue as Depositary and a successor
Depositary is not appointed by the Company within ninety days, the Company will
issue such Debt Securities in definitive form in exchange for such Global
Security. In addition, the Company may at any time and in its sole discretion
determine not to have any of the Debt Securities of a series represented by one
or more Global Securities and, in such event, will
14
<PAGE>
issue Debt Securities of such series in definitive form in exchange for the
Global Security or Securities representing such Debt Securities.
SUBORDINATION
Debt Securities may be subordinated ('Subordinated Debt Securities') to
senior debt to the extent set forth in the Prospectus Supplement relating
thereto.
Subordinated Debt Securities will be subordinate in right of payment, to
the extent and in the manner set forth in the Indenture and the Prospectus
Supplement relating to such Subordinated Debt Securities, to the prior payment
of all Indebtedness of the Company that is designated as 'Senior Indebtedness'
(as defined in the Indenture) with respect to such Subordinated Debt Securities.
Senior Indebtedness, with respect to any series of Subordinated Debt Securities,
will consist of (a) any and all amounts payable under or with respect to the
Company's Indebtedness to banks and (b) any other Indebtedness of the Company
that is designated in a resolution of the Company's Board of Directors or the
supplemental Indenture establishing such series as Senior Indebtedness with
respect to such series.
Upon any payment or distribution of assets of the Company to creditors or
upon a total or partial liquidation or dissolution of the Company or in a
bankruptcy, receivership, or similar proceeding relating to the Company or its
property, holders of Senior Indebtedness shall be entitled to receive payment in
full in cash of the Senior Indebtedness before holders of Subordinated Debt
Securities shall be entitled to receive any payment of principal, premium, or
interest with respect to the Subordinated Debt Securities, and until the Senior
Indebtedness is paid in full, any distribution to which holders of Subordinated
Debt Securities would otherwise be entitled shall be made to the Holders of
Senior Indebtedness (except that such Holders may receive shares of stock and
any debt securities that are subordinated to Senior Indebtedness to at least the
same extent as the Subordinated Debt Securities).
The Company may not make any payments or principal, premium, or interest
with respect to Subordinated Debt Securities, make any deposit for the purpose
of defeasance of such Subordinated Debt Securities, or repurchase, redeem, or
otherwise retire (except, in the case of Subordinated Debt Securities that
provide for a mandatory sinking fund, by the delivery of Subordinated Debt
Securities by the Company to the Trustee in satisfaction of the Company's
sinking fund obligation) any Subordinated Debt Securities if (a) any principal,
premium, if any, or interest with respect to Senior Indebtedness is not paid
within any applicable grace period (including at maturity) or (b) any other
default on Senior Indebtedness occurs and the maturity of such Senior
Indebtedness is accelerated in accordance with its terms, unless, in either
case, the default has been cured or waived and such acceleration has been
rescinded, such Senior Indebtedness has been paid in full in cash, or the
Company and the Trustee receive written notice approving such payment from the
representatives of each issue of 'Designated Senior Indebtedness' (which will
include the Bank Indebtedness and any other specified issue of Senior
Indebtedness. During the continuance of any default (other than a default
described in clause (a) or (b) above) with respect to any Senior Indebtedness
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company may
not pay the Subordinated Debt Securities for a period (the 'Payment Blockage
Period') commencing on the receipt by the Company and the Trustee of written
notice of such default from the representative of any Designated Senior
Indebtedness specifying an election to effect a Payment Blockage Period (a
'Blockage Notice'). The Payment Blockage Period may be terminated before its
expiration by written notice to the Trustee and the Company from the person who
gave the Blockage Notice, by repayment in full in cash of the Senior
Indebtedness with respect to which the Blockage Notice was given, or because the
default giving rise to the Payment Blockage Period is no longer continuing.
Unless the holders of such Senior Indebtedness shall have accelerated the
maturity thereof, the Company may resume payments on the Subordinated Debt
Securities after the expiration of the Payment Blockage Period. Not more than
one Blockage Notice may be given in any period of 360 consecutive days unless
the first
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<PAGE>
Blockage Notice within such 360-day period is given by or on behalf of holders
of Designated Senior Indebtedness other than the Bank Indebtedness, in which
case the representative of the Bank Indebtedness may give another Blockage
Notice within such period. In no event, however, may the total number of days
during which any Payment Blockage Period or Periods is in effect exceed 179 days
in the aggregate during any period of 360 consecutive days. After all Senior
Indebtedness is paid in full and until the Subordinated Debt Securities are paid
in full, Holders of the Subordinated Debt Securities shall be subrogated to the
rights of Holders of Senior Indebtedness to receive distributions applicable to
Senior Indebtedness.
All payments by the Guarantor pursuant to any Guarantees of Subordinated
Debt Securities will be subordinated in right of payment to the prior payment in
full of all Senior Indebtedness of the Guarantor.
By reason of such subordination, in the event of insolvency, creditors of
the Company or the Guarantor who are Holders of Senior Indebtedness, as well as
certain general creditors of the Company or the Guarantor, may recover more,
ratably, than the Holders of the Subordinated Debt Securities.
EVENTS OF DEFAULT AND REMEDIES
The following events are defined in the Indenture as 'Events of Default'
with respect to a series of Debt Securities:
(a) Default in the payment of any installment of interest on any Debt
Securities of that series as and when the same shall become due and payable
(whether or not, in the case of Subordinated Debt Securities, such payment
shall be prohibited by reason of the subordination provision described
above) and continuance of such default for a period of 30 days;
(b) Default in the payment of principal or premium with respect to any
Debt Securities of that series as and when the same become due and payable,
whether at maturity, upon redemption, by declaration, upon required
repurchase, or otherwise (whether or not, in the case of Subordinated Debt
Securities, such payment shall be prohibited by reason of the subordination
provision described above);
(c) Default in the payment of any sinking fund payment with respect to
any Debt Securities of that series as and when the same shall become due
and payable;
(d) Failure on the part of the Company or the Guarantor to comply with
the provisions of the Indenture relating to consolidations, mergers and
sales of assets;
(e) Failure on the part of the Company or the Guarantor duly to
observe or perform any other of the covenants or agreements on the part of
the Company or the Guarantor in the Debt Securities of that series, in any
resolution of the Board of Directors of the Company authorizing the
issuance of that series of Debt Securities, in the Indenture with respect
to such series, or in any supplemental Indenture with respect to such
series (other than a covenant or agreement a default in the performance of
which is otherwise specifically dealt with) continuing for a period of 60
days after the date on which written notice specifying such failure and
requiring the Company or the Guarantor to remedy the same shall have been
given to the Company or the Guarantor by the Trustee or to the Company or
the Guarantor and the Trustee by the holders of at least 25% in aggregate
principal amount of the Debt Securities of that series at the time
outstanding;
(f) Indebtedness of the Guarantor or any Subsidiary of the Guarantor
is not paid within any applicable grace period after final maturity or is
accelerated by the Holders thereof because of a default, the total amount
of such indebtedness unpaid or accelerated exceeds $100 million or the
United States dollar equivalent thereof at the time, and such default
remains uncured or such acceleration is not rescinded for 10 days after the
date on which written notice specifying such failure and requiring the
Guarantor to remedy the same shall have been given to the Guarantor by
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<PAGE>
the Trustee or to the Guarantor and the Trustee by the Holders of at least
25% in aggregate principal amount of the Debt Securities of that series at
the time outstanding;
(g) The Company or the Guarantor or any of its Restricted Subsidiaries
shall (1) voluntarily commence any proceeding or file any petition seeking
relief under the United States Bankruptcy Code or other federal or state
bankruptcy, insolvency, or similar law, (2) consent to the institution of,
or fail to controvert within the time and in the manner prescribed by law,
any such proceeding or the filing of any such petition, (3) apply for or
consent to the appointment of a receiver, trustee, custodian, sequestrator,
or similar official for the Company or the Guarantor or any such Restricted
Subsidiary or for a substantial part of its property, (4) file an answer
admitting the material allegations of a petition filed against it in any
such proceeding, (5) make a general assignment for the benefit of
creditors, (6) admit in writing its inability or fail generally to pay its
debts as they become due, (7) take corporate action for the purpose of
effecting any of the foregoing, or (8) take any comparable action under any
foreign laws relating to insolvency;
(h) The entry of an order or decree by a court having competent
jurisdiction for (1) relief with respect to the Company or the Guarantor or
any of its Restricted Subsidiaries or a substantial part of any of their
property under the United States Bankruptcy Code or any other federal or
state bankruptcy, insolvency, or similar law, (2) the appointment of a
receiver, trustee, custodian, sequestrator, or similar official for the
Company or the Guarantor or any such Restricted Subsidiary or for a
substantial part of any of their property (except any decree or order
appointing such official of any Restricted Subsidiary pursuant to a plan
under which the assets and operations of such Restricted Subsidiary are
transferred to or combined with another Restricted Subsidiary of the
Guarantor or to the Guarantor), or (3) the winding-up or liquidation of the
Company or the Guarantor or any such Restricted Subsidiary (except any
decree or order approving or ordering the winding-up or liquidation of the
affairs of a Restricted Subsidiary pursuant to a plan under which the
assets and operations of such Restricted Subsidiary are transferred to or
combined with another Restricted Subsidiary or Subsidiaries of the
Guarantor or to the Guarantor), and such order or decree shall continue
unstayed and in effect for 60 consecutive days, or any similar relief is
granted under any foreign laws and the order or decree stays in effect for
60 consecutive days; or
(i) Any other Event of Default provided under the terms of the Debt
Securities of that series.
An Event of Default with respect to one series of Debt Securities is not
necessarily an Event of Default for another series.
If an Event of Default occurs and is continuing with respect to any series
of Debt Securities, unless the principal and interest with respect to all the
Debt Securities of such series shall have already become due and payable, either
the Trustee or the holders of not less than 25% in aggregate principal amount of
the Debt Securities of such series then outstanding may declare the principal of
(or, if Original Issue Discount Debt Securities, such portion of the principal
amount as may be specified in such series) and interest on all the Debt
Securities of such series due and payable immediately.
If an Event of Default occurs and is continuing, the Trustee shall be
entitled and empowered to institute any action or proceeding for the collection
of the sums so due and unpaid or to enforce the performance of any provision of
the Debt Securities of the affected series or the Indenture, to prosecute any
such action or proceeding to judgment or final decree, and to enforce any such
judgment or final decree against the Company or any other obligor on the Debt
Securities of such series. In addition, if there shall be pending proceedings
for the bankruptcy or reorganization of the Company or any other obligor on the
Debt Securities, or if a receiver, trustee, or similar official shall have been
appointed for its property, the Trustee shall be entitled and empowered to file
and prove a claim for the whole amount of principal, premium and interest (or,
in the case of Original Issue Discount Debt Securities, such portion of the
principal amount as may be specified in the terms of such series) owing and
unpaid with respect to the Debt Securities. No Holder of any Debt Securities of
any series shall have any right to institute any action or proceeding upon or
under or with respect to the Indenture, for the appointment of a
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receiver or trustee, or for any other remedy, unless (a) such Holder previously
shall have given to the Trustee written notice of an Event of Default with
respect to Debt Securities of that series and of the continuance thereof, (b)
the Holders of not less than 25% in aggregate principal amount of the
outstanding Debt Securities of that series shall have made written request to
the Trustee to institute such action or proceeding with respect to such Event of
Default and shall have offered to the Trustee such reasonable indemnity as it
may require against the costs, expenses, and liabilities to be incurred therein
or thereby, and (c) the Trustee, for 60 days after its receipt of such notice,
request, and offer of indemnity shall have failed to institute such action or
proceeding and no direction inconsistent with such written request shall have
been given to the Trustee pursuant to the provisions of the Indenture.
Prior to the acceleration of the maturity of the Debt Securities of any
series, the Holders of a majority in aggregate principal amount of the Debt
Securities of that series at the time outstanding may, on behalf of the Holders
of all Debt Securities of that series, waive any past default or Event of
Default and its consequences for that series, except (a) a default in the
payment of the principal, premium, or interest with respect to such Debt
Securities or (b) a default with respect to a provision of the Indenture that
cannot be amended without the consent of each Holder affected thereby. In case
of any such waiver, such default shall cease to exist, any Event of Default
arising therefrom shall be deemed to have been cured for all purposes, and the
Company, the Trustee and the Holders of the Debt Securities of that series shall
be restored to their former positions and rights under the Indenture.
The Trustee shall, within 90 days after the occurrence of a default known
to it with respect to a series of Debt Securities, give to the Holders of the
Debt Securities of such series notice of all uncured defaults with respect to
such series known to it, unless such defaults shall have been cured or waived
before the giving of such notice; provided, however, that except in the case of
default in the payment of principal, premium, or interest with respect to the
Debt Securities of such series or in the making of any sinking fund payment with
respect to the Debt Securities of such series, the Trustee shall be protected in
withholding such notice if it in good faith determines that the withholding of
such notice is in the interest of the Holders of such Debt Securities.
MODIFICATION OF THE INDENTURE
The Company, the Guarantor and the Trustee may enter into supplemental
indentures without the consent of the Holders of Debt Securities issued under
the Indenture for one or more of the following purposes:
(a) To evidence the succession of another person to the Company or the
Guarantor pursuant to the provisions of the Indenture relating to
consolidations, mergers, and sales of assets and the assumption by such
successor of the covenants, agreements, and obligations of the Company or
the Guarantor in the Indenture and in the Debt Securities;
(b) To surrender any right or power conferred upon the Company or the
Guarantor by the Indenture, to add to the covenants of the Company or the
Guarantor such further covenants, restrictions, conditions, or provisions
for the protection of the Holders of all or any series of Debt Securities
as the Board of Directors of the Company or the Guarantor shall consider to
be for the protection of the Holders of such Debt Securities, and to make
the occurrence, or the occurrence and continuance of a default in any of
such additional covenants, restrictions, conditions, or provisions, a
default or an Event of Default under the Indenture (provided, however, that
with respect to any such additional covenant, restriction, condition, or
provision, such supplemental indenture may provide for a period of grace
after default, which may be shorter or longer than that allowed in the case
of other defaults, may provide for an immediate enforcement upon such
default, may limit the remedies available to the Trustee upon such default,
or may limit the right of Holders of a majority in aggregate principal
amount of any or all series of Debt Securities to waive such default);
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(c) To cure any ambiguity or to correct or supplement any provision
contained in the Indenture, in any supplemental indenture, or in any Debt
Securities that may be defective or inconsistent with any other provision
contained therein, to convey, transfer, assign, mortgage, or pledge any
property to or with the Trustee, or to make such other provisions in regard
to matters or questions arising under the Indenture as shall not adversely
affect the interests of any Holders of Debt Securities of any series;
(d) To modify or amend the Indenture in such a manner as to permit the
qualification of the Indenture or any supplemental Indenture under the
Trust Indenture Act as then in effect;
(e) To add or change any of the provisions of the Indenture to change
or eliminate any restriction on the payment of principal or premium with
respect to Debt Securities so long as any such action does not adversely
affect the interest of the Holders of Debt Securities in any material
respect or permit or facilitate the issuance of Debt Securities of any
series in uncertificated form;
(f) To comply with the provisions of the Indenture relating to
consolidations, mergers, and sales of assets;
(g) In the case of Subordinated Debt Securities, to make any change in
the provisions of the Indenture relating to subordination that would limit
or terminate the benefits available to any Holder of Senior Indebtedness
under such provisions (but only if such Holder of Senior Indebtedness
consents to such change);
(h) To add additional Guarantees with respect to the Debt Securities
or to secure the Debt Securities;
(i) To make any change that does not adversely affect the rights of
any Holder;
(j) To add to, change, or eliminate any of the provisions of the
Indenture with respect to one or more series of Debt Securities, so long as
any such addition, change, or elimination not otherwise permitted under the
Indenture shall (1) neither apply to any Debt Securities of any series
created prior to the execution of such supplemental Indenture and entitled
to the benefit of such provision nor modify the rights of the Holders of
any such Debt Security with respect to such provision or (2) become
effective only when there is no such Debt Security outstanding;
(k) To evidence and provide for the acceptance of appointment by a
successor or separate Trustee with respect to the Debt Securities of one or
more series and add to or change any of the provisions of the Indenture as
shall be necessary to provide for or facilitate the administration of the
Indenture by more than one Trustee; and
(l) To establish the form or terms of Debt Securities of any series,
as described under 'Description of Debt Securities--General' above.
With the consent of the Holders of a majority in aggregate principal amount
of the outstanding Debt Securities of each series affected thereby, the Company,
the Guarantor and the Trustee may from time to time and at any time enter into a
supplemental Indenture for the purpose of adding any provisions to, changing in
any manner, or eliminating any of the provisions of the Indenture or of any
supplemental Indenture or modifying in any manner the rights of the Holder of
the Debt Securities of such series; provided, however, that without the consent
of the Holders of each Debt Security so affected, no such supplemental Indenture
shall (a) reduce the percentage in principal amount of Debt Securities of any
series whose Holders must consent to an amendment, (b) reduce the rate of or
extend the time for payment of interest on any Debt Security, (c) reduce the
principal of or extend the stated maturity of any Debt Security, (d) reduce the
premium payable upon the redemption of any Debt Security or change the time at
which any Debt Security may or shall be redeemed, (e) make any Debt Security
payable in a currency other than that stated in the Debt Security, (f) in the
case of any Subordinated Debt Security, make any change in the provisions of the
Indenture relating to subordination that adversely affects the rights of any
Holder under such provisions, (g) release any security that may have been
granted with
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respect to the Debt Securities, or (h) make any change in the provisions of the
Indenture relating to waivers of defaults or amendments that require unanimous
consent.
CERTAIN COVENANTS
Limitation on Liens. The Guarantor may not, and may not permit any of its
Subsidiaries to, directly or indirectly, create or permit to exist any Lien on
any Principal Property, whether owned on the date of issuance of the Debt
Securities or thereafter acquired, securing any obligation unless the Guarantor
contemporaneously secures the Debt Securities equally and ratably with (or prior
to) such obligation. The preceding sentence will not require the Guarantor to
secure the Debt Securities if the Lien consists of the following: (i) Permitted
Liens; or (ii) Liens securing Indebtedness if, after giving pro forma effect to
the Incurrence of such Indebtedness (and the receipt and application of the
proceeds thereof) or the securing of outstanding Indebtedness, all Indebtedness
of the Guarantor and its Subsidiaries secured by Liens on Principal Property
(other than Permitted Liens), at the time of determination does not exceed 10%
of the total consolidated stockholders' equity of the Guarantor as shown on the
audited consolidated balance sheet contained in the latest annual report to
stockholders of the Guarantor.
Ownership of the Company. The Indenture contains a covenant that, so long
as any of the Debt Securities are outstanding and subject to certain rights
described below under 'Consolidation or Merger,' the Guarantor will continue to
own, directly or indirectly, all of the outstanding voting shares of the
Company.
Certain Definitions. The following definitions, among others, are used in
the Indenture. Many of the definitions of terms used in the Indenture have been
negotiated specifically for the purposes of inclusion in the Indenture and may
not be consistent with the manner in which such terms are defined in other
contexts. Prospective purchasers of Debt Securities are encouraged to read each
of the following definitions carefully and to consider such definitions in the
context in which they are used in the Indenture. Capitalized terms used herein
but not defined have the meanings assigned thereto in the Indenture.
'Capitalized Lease Obligation' means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP; and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
'Currency Exchange Protection Agreement' means, in respect of any Person,
any foreign exchange contract, currency swap agreement, currency option or other
similar agreement or arrangement designed to protect such Person against
fluctuations in currency exchange rates.
'Disqualified Stock' of a Person means Redeemable Stock of such Person as
to which the maturity, mandatory redemption, conversion or exchange or
redemption at the option of the holder thereof occurs, or may occur, on or prior
to the first anniversary of the Stated Maturity of the Debt Securities.
'GAAP' means generally accepted accounting principles in the United States
as in effect as of the date on which the Debt Securities of the applicable
series are issued, including those set forth in the opinions and pronouncements
of the Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession. All ratios and computations
based on GAAP contained in this Indenture shall be computed in conformity with
GAAP consistently applied.
'Government Contract Lien' means any Lien required by any contract,
statute, regulation or order in order to permit the Company or any of its
Subsidiaries to perform any contract or subcontract made
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by it with or at the request of the United States or any State thereof or any
department, agency or instrumentality of either or to secure partial, progress,
advance or other payments by the Company or any of its Subsidiaries to the
United States or any State thereof or any department agency or instrumentality
of either pursuant to the provisions of any contract, statute, regulation or
order.
'Hedging Obligations' of any Person means the obligations of such Person
pursuant to any Interest Rate Protection Agreement, Currency Exchange Protection
Agreement or Commodity Price Protection Agreement or other similar agreement.
'Indebtedness' means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of Indebtedness of such Person for borrowed money;
(ii) the principal of obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments;
(iii) all Capitalized Lease Obligations of such Person;
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables);
(v) all obligations of such Person in respect of letters of credit,
banker's acceptances or other similar instruments or credit transactions
(including reimbursement obligations with respect thereto), other than
obligations with respect to letters of credit securing obligations (other
than obligations described in (i) through (iv) above) entered into in the
ordinary course of business of such Person to the extent such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing
is reimbursed no later than the third business day following receipt by
such Person of a demand for reimbursement following payment on the letter
of credit;
(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock (but
excluding, in each case, any accrued dividends);
(vii) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination
and (B) the amount of such Indebtedness of such other Persons; and
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person.
For purposes of this definition, the maximum fixed redemption, repayment or
repurchase price of any Disqualified Stock or Preferred Stock that does not have
a fixed redemption, repayment or repurchase price shall be calculated in
accordance with the terms of such Stock as if such Stock were redeemed, repaid
or repurchased on any date on which Indebtedness shall be required to be
determined pursuant to this Indenture; provided, however, that if such Stock is
not then permitted to be redeemed, repaid or repurchased, the redemption,
repayment or repurchase price shall be the book value of such Stock as reflected
in the most recent financial statements of such Person. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
'Interest Rate Protection Agreement' means, in respect of any Person, any
interest rate swap agreement, interest rate option agreement, interest rate cap
agreement, interest rate collar agreement, interest rate floor agreement or
other similar agreement or arrangement designed to protect such Person against
fluctuations in interest rates.
'Lien' means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
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'Net Amount of Rent' as to any lease for any period means the aggregate
amount of rent payable by the lessee with respect to such period after excluding
amounts required to be paid on account of maintenance and repairs, insurance,
taxes, assessments, water rates and similar charges. In the case of any lease
that is terminable by the lessee upon the payment of a penalty, such net amount
shall also include the amount of such penalty, but no rent shall be considered
as payable under such lease subsequent to the first date upon which it may be so
terminated.
'Permitted Liens' means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws, social security laws or similar legislation, or good faith deposits in
connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or bonds to
secure performance, surety or appeal bonds to which such Person is a party or
which are otherwise required of such Person, or deposits as security for
contested taxes or import duties or for the payment of rent or other obligations
of like nature, in each case incurred in the ordinary course of business; (b)
Liens imposed by law, such as carriers', warehousemen's, laborers',
materialmen's, landlords', vendors', workmen's, operators', factors and
mechanics liens, in each case for sums not yet due or being contested in good
faith by appropriate proceedings; (c) Liens for taxes, assessments and other
governmental charges or levies not yet delinquent or which are being contested
in good faith by appropriate proceedings; (d) survey exceptions, encumbrances,
easements or reservations of or with respect to, or rights of others for or with
respect to, licenses, rights-of-way, sewers, electric and other utility lines
and usages, telegraph and telephone lines, pipelines, surface use, operation of
equipment, permits, servitudes and other similar matters, or zoning or other
restrictions as to the use of real property or Liens incidental to the conduct
of the business of such Person or to the ownership of its properties which were
not incurred in connection with Indebtedness and which do not in the aggregate
materially adversely affect the value of said properties or materially impair
their use in the operation of the business of such Person; (e) Liens existing on
or provided for under the terms of agreements existing on the Issue Date
(including, without limitation, under the Credit Agreement); (f) Liens on
property at the time the Company or any of its Subsidiaries acquired the
property or the entity owning such property, including any acquisition by means
of a merger or consolidation with or into the Guarantor; provided, however, that
any such Lien may not extend to any other property owned by the Guarantor or any
of its Subsidiaries; (g) Liens on any Principal Property, or any shares of stock
or Indebtedness of any Subsidiary, acquired (including by way of merger or
consolidation) after the date of the Indenture by the Company or any Subsidiary
which are created contemporaneously with such acquisition, or within 24 months
thereafter, to secure or provide for the payment or financing of any part of the
purchase price thereof; (h) Liens on any property of CompuServe Corporation or
any of its Subsidiaries, including any shares of stock or Indebtedness of any
such Subsidiaries; (i) Liens arising in connection with the securitization of
any mortgage loans owned by the Company or any of its Subsidiaries; (j) Liens
arising in connection with the sale of any credit card receivables owned by the
Company or any of its Subsidiaries; (k) Liens securing a Hedging Obligation so
long as such Hedging Obligation is of the type customarily entered into for the
purpose of limiting risk; (l) Purchase Money Liens; (m) Liens securing only
Indebtedness of a Subsidiary of the Guarantor to the Guarantor or one or more
wholly owned Subsidiaries of the Guarantor; (n) Liens on any property to secure
Indebtedness Incurred in connection with the construction, installation or
financing of pollution control or abatement facilities or other forms of
industrial revenue bond financing or Indebtedness issued or Guaranteed by the
United States, any state or any department, agency or instrumentality thereof;
(o) Government Contract Liens; (p) Liens securing Indebtedness of joint ventures
in which the Guarantor or a Subsidiary has an interest to the extent such Liens
are on property or assets of, such joint ventures; (q) Liens resulting from the
deposit of funds or evidences of Indebtedness in trust for the purpose of
defeasing Indebtedness of the Guarantor or any of its Subsidiaries; (r) legal or
equitable encumbrances deemed to exist by reason of negative pledges or the
existence of any litigation or other legal proceeding and any related lis
pendens filing (excluding any attachment prior to judgment lien or attachment
lien in aid of execution on a judgment); (s) any
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attachment Lien being contested in good faith and by proceedings promptly
initiated and diligently conducted, unless the attachment giving rise thereto
will not, within 60 days after the entry thereof, have been discharged or fully
bonded or will not have been discharged within 60 days after the termination of
any such bond; (t) any judgment Lien, unless the judgment it secures will not,
within 60 days after the entry thereof, have been discharged or execution
thereof stayed pending appeal, or will not have been discharged within 60 days
after the expiration of any such stay; (u) Liens to banks arising from the
issuance of letters of credit issued by such banks ('issuing banks') on the
following: (i) any and all shipping documents, warehouse receipts, policies or
certificates of insurance and other document accompanying or relative to drafts
drawn under any credit, and any draft drawn thereunder (whether or not such
documents, goods or other property be released to or upon the order of the
Guarantor or any Subsidiary under a security agreement or trust or bailee
receipt or otherwise), and the proceeds of each and all of the foregoing; (ii)
the balance of every deposit account, now or at the time hereafter existing, of
the Guarantor or any Subsidiary with the issuing banks, and any other claims of
the Guarantor or any Subsidiary against the issuing banks; and all property
claims and demands and all rights and interests therein of the Guarantor or any
Subsidiary and all evidences thereof and all proceeds thereof which have been or
at any time will be delivered to or otherwise come into any issuing bank's
possession, custody or control, or into the possession, custody or control of
any bailee for the issuing bank or of any of its agents or correspondents for
the account of the issuing bank, for any purpose, whether or not the express
purpose of being used by the issuing bank as collateral security or for the
safekeeping or for any other of different purpose, the issuing bank being deemed
to have possession or control of all of such property actually in transit to or
from or set apart for the issuing bank, any bailee for the issuing bank or any
of its correspondents acting in its behalf, it being understood that the receipt
at any time by the issuing bank, or any of its bailees, agents or
correspondents, of other security, of whatever nature, including cash, will not
be deemed a waiver of any of the issuing bank's rights or power hereunder; (iii)
all property shipped under or pursuant to or in connection with any credit or
drafts drawn thereunder or in any way related thereto, and all proceeds thereof;
(iv) all additions to and substitutions for any of the property enumerated above
in this subsection; (v) rights of a common owner of any interest in property
held by such Person; (w) any defects, irregularities or deficiencies in title to
easements, rights-of-way or other properties which do not in the aggregate
materially adversely affect the value of such properties or materially impair
their use in the operation of the business of such Person; and (x) Liens to
secure any refinancing, refunding, extension, renewal or replacement (or
successive refinancings, refundings, extensions, renewals or replacements), as a
whole, or in part, of any Indebtedness secured by any Lien referred to in the
foregoing clauses (e) through (p); provided, however, that (i) such new Lien
shall be limited to all or part of the same property that secured the original
Lien (plus improvements on such property) and (ii) the Indebtedness secured by
such Lien at such time is not increased to any amount greater than the sum of
(A) the outstanding principal amount or, if greater, committed amount of the
Indebtedness described under clauses (e) through (l) at the time the original
Lien became a Permitted Lien under this Indenture and (B) an amount necessary to
pay any fees and expenses, including premiums, related to such refinancing,
refunding, extension, renewal or replacement.
'Person' means any individual, corporation, partnership, joint venture,
association, limited liability company, joint stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
'Principal Property' means, as of any date of determination, any property
or assets owned by the Company or any Subsidiary other than any property which,
in the good faith opinion of the Board of Directors of the Company, is not of
material importance to the business conducted by the Company and its
Subsidiaries taken as a whole.
'Purchase Money Lien' means a Lien on property securing Indebtedness
Incurred by the Guarantor or any of its Subsidiaries to provide funds for all or
any portion of the cost of acquiring, constructing, altering, expanding,
improving or repairing such property or assets used in connection with such
property.
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'Redeemable Stock' means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
of for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness (other than Preferred
Stock) or Disqualified Stock or (iii) is redeemable at the option of the holder
thereof, in whole or in part.
'Subsidiary' of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
CONSOLIDATION, MERGER, AND SALE OF ASSETS
Neither the Guarantor nor the Company may consolidate with or merge with or
into any person, or convey, transfer, or lease all or substantially all of its
assets, unless the following conditions have been satisfied:
(a) Either (1) the Guarantor shall be the continuing person in the
case of a merger or (2) the resulting, surviving, or transferee person, if
other than the Guarantor (the 'Successor Company'), shall be a corporation
organized and existing under the laws of the United States, any State, or
the District of Columbia and shall expressly assume all of the obligations
of the Company and the Guarantor under the Debt Securities and the
Indenture;
(b) Immediately after giving effect to such transaction (and treating
any Indebtedness that becomes an obligation of the Successor Company or any
subsidiary of the Guarantor as a result of such transaction as having been
incurred by the Successor Company or such subsidiary at the time of such
transaction), no Default or Event of Default would occur or be continuing;
and
(c) The Guarantor shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that such
consolidation, merger, or transfer complies with the Indenture.
A disposition by the Guarantor of its ownership interest in CompuServe
Corporation shall not be deemed a transfer or conveyance of substantially all of
the Company's assets.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Indenture shall generally cease to be of any further effect with
respect to a series of Debt Securities if (a) the Company has delivered to the
Trustee for cancellation all Debt Securities of such series (with certain
limited exceptions) or (b) all Debt Securities of such series not theretofore
delivered to the Trustee for cancellation shall have become due and payable, or
are by their terms to become due and payable within one year or are to be called
for redemption within one year, and the Company shall have deposited with the
Trustee as trust funds the entire amount in the currency in which the Debt
Securities are denominated sufficient to pay at maturity or upon redemption all
such Debt Securities (and if, in either case, the Company shall also pay or
cause to be paid all other sums payable under the Indenture by the Company).
In addition, the Company shall have a 'legal defeasance option' (pursuant
to which it may terminate, with respect to the Debt Securities of the particular
series, all of its obligations under such Debt Securities and the Indenture with
respect to such Debt Securities) and 'covenant defeasance option' (pursuant to
which it may terminate, with respect to the Debt Securities of a particular
series, its obligations with respect to such Debt Securities under certain
specified covenants contained in the Indenture). If the Company exercises its
legal defeasance option with respect to a series of Debt Securities, payment of
such Debt Securities may not be accelerated because of an Event of Default If
the Company exercises its covenant defeasance option with respect to a series of
Debt Securities,
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payment of such Debt Securities may not be accelerated because of an Event of
Default related to the specified covenants.
The Company may exercise its legal defeasance option or its covenant
defeasance option with respect to the Debt Securities of a series only if (a)
the Company irrevocably deposits in trust with the Trustee cash or U.S.
Government Obligations (as defined in the Indenture) for the payment of
principal, premium, and interest with respect to such Debt Securities to
maturity or redemption, as the case may be, (b) the Company delivers to the
Trustee a certificate from a nationally recognized firm of independent
accountants expressing their opinion that the payment of principal and interest
when due and without reinvestment on the deposited U.S. Government Obligations
plus any deposited money without investment will provide cash at such times and
in such amounts as will be sufficient to pay the principal, premium, and
interest when due with respect to all the Debt Securities of such series to
maturity or redemption, as the case may be, (c) 91 days after the deposit is
made and during the 91-day period no default described in clause (g) or (h)
under 'Description of Debt Securities Events of Default and Remedies' above with
respect to the Company or the Guarantor occurs that is continuing at the end of
such period, (d) no Default has occurred and is continuing on the date of such
deposit and after giving effect thereto, (e) the deposit does not constitute a
default under any other agreement binding on the Company or the Guarantor, and,
in the case of Subordinated Debt Securities, is not prohibited by the provisions
of the Indenture relating to subordination, (f) the Company delivers to the
Trustee an opinion of counsel to the effect that the trust resulting from the
deposit does not constitute, or is qualified as, a regulated investment company
under the Investment Company Act of 1940, (g) the Company shall have delivered
to the Trustee an opinion of counsel addressing certain federal income tax
matters relating to the defeasance, and (h) the Company delivers to the Trustee
an officer's certificate and an opinion of counsel, each stating that all
conditions precedent to the defeasance and discharge of the Debt Securities of
such series as contemplated by the Indenture have been complied with.
The Trustee shall hold in trust cash or U.S. Government Obligations
deposited with it as described above and shall apply the deposited cash and the
proceeds from deposited U.S. Government Obligations to the payment of principal,
premium, and interest with respect to the Debt Securities of the defeased
series. In the case of Subordinated Debt Securities, the money and U.S.
Government Obligations so held in trust will not be subject to the subordination
provisions of the Indenture.
THE TRUSTEE
The Company may maintain banking and other commercial relationships with
the Trustee and its affiliates in the ordinary course of business and the
Trustee may own Debt Securities.
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PLAN OF DISTRIBUTION
The Company may sell the Debt Securities in or outside the United States
through underwriters, through or to dealers, directly to one or more purchasers,
or through agents. Each Prospectus Supplement with respect to the Debt
Securities offered hereby will set forth the terms of the offering of applicable
Debt Securities, including the name or names of any underwriters, dealers or
agents, the purchase price of the Debt Securities and the proceeds to the
Company from such sale, any delayed delivery arrangements, any underwriting
discounts and other items constituting underwriters' compensation, the initial
public offering price, any discounts or concessions allowed or re-allowed or
paid to dealers and any securities exchanges on which the Debt Securities may be
listed.
If underwriters are used in the sale, the Debt Securities will be acquired
by the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The Debt
Securities may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more
firms acting as underwriters. The underwriter or underwriters with respect to a
particular underwritten offering of Debt Securities will be named in the
Prospectus Supplement relating to such offering, and if an underwriting
syndicate is used, the managing underwriter or underwriters will be set forth on
the cover of such Prospectus Supplement. Unless otherwise set forth in the
Prospectus Supplement relating thereto, the obligations of the underwriters or
agents to purchase the Debt Securities will be subject to conditions precedent
and the underwriters will be obligated to purchase all the Debt Securities if
any are purchased. The initial public offering price and any discounts or
concessions allowed or re-allowed or paid to dealers may be changed from time to
time.
If dealers are used in the sale of Debt Securities with respect to which
this Prospectus is delivered, the Company will sell such Debt Securities to the
dealers as principals. The dealers may then resell such Debt Securities to the
public at varying prices to be determined by such dealers at the time of resale.
The names of the dealers and the terms of the transaction will be set forth in
the Prospectus Supplement relating thereto.
Debt Securities may be sold directly by the Company or through agents
designated by the Company from time to time at fixed prices, which may be
changed, or at varying prices determined at the time of sale. Any agent involved
in the offer or sale of the Debt Securities with respect to which this
Prospectus is delivered will be named, and any commissions payable by the
Company to such agent will be set forth in the Prospectus Supplement relating
thereto. Unless otherwise indicated in the Prospectus Supplement, any such agent
will be acting on a best efforts basis for the period of its appointment.
In connection with the sale of the Debt Securities, underwriters or agents
may receive compensation from the Company or from purchasers of Debt Securities
for whom they may act as agents in the form of discounts, concessions, or
commissions. Underwriters, agents and dealers participating in the distribution
of the Debt Securities may be deemed to be underwriters, and any discounts or
commissions received by them from the Company and any profit on the resale of
the Debt Securities by them may be deemed to be underwriting discounts or
commissions under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters, or dealers to solicit offers from certain types of
institutions to purchase Debt Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to delayed delivery
contracts providing for payment and delivery on a specified date in the future.
Such contracts will be subject only to those conditions set forth in such
Prospectus Supplement, and the Prospectus Supplement will set forth the
commission payable for solicitation of such contracts.
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Agents, dealers, and underwriters may be entitled under agreements entered
into with the Company and Block to indemnification by the Company and Block
against certain civil liabilities, including liabilities under the Securities
Act, or to contribution with respect to payments that such agents, dealers, or
underwriters may be required to make with respect thereto. Agents, dealers, and
underwriters may be customers of, engage in transactions with, or perform
services for the Company and Block in the ordinary course of business.
The Debt Securities may or may not be listed on a national securities
exchange. No assurances can be given that there will be a market for the Debt
Securities.
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURE
When so provided in the Prospectus Supplement, investors in the Global
Securities representing any of the Securities issued hereunder may hold a
beneficial interest in such Global Securities through DTC, CEDEL or Euroclear
(as defined below) or through participants. The Global Securities may be traded
as home market instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle as set forth in the
applicable Prospectus Supplement.
Cedel S.A. ('CEDEL') is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations and facilitates the clearance and settlement of securities
transactions between CEDEL participants through electronic book-entry changes in
accounts of CEDEL participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. CEDEL interfaces with domestic markets in several countries. As a
professional depository, CEDEL is subject to regulation by the Luxembourg
Monetary Institute. CEDEL participants are recognized financial institutions
around the world, including underwriters, securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations and may
include the underwriters. Indirect access to CEDEL is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a CEDEL participant, either directly or
indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System and to clear and settle transactions
between Euroclear participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing, and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC. The Euroclear System is operated by Morgan Guaranty Trust
Company of New York, Brussels, Belgium office (the 'Euroclear Operator' or
'Euroclear'), under contract with Euroclear Clearance System S.C., a Belgian
cooperative corporation (the 'Cooperative'). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for the Euroclear System on
behalf of Euroclear participants. Euroclear participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries and may include the underwriters. Indirect access to
the Euroclear System is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
The Euroclear Operator is the Belgian branch of Morgan Guaranty Trust
Company of New York ('Morgan') which is a member bank of the Federal Reserve
System. As such, it is regulated and examined by the Federal Reserve Board and
the New York State Banking Department, as well as the Belgian Banking
Commission.
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Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian law
(collectively, the 'Terms and Conditions'). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear participants, and has no record
of or relationship with persons holding through Euroclear participants.
Principal, premium, if any, and interest payments with respect to
Securities held through CEDEL or Euroclear will be credited to the cash accounts
of CEDEL participants or Euroclear participants in accordance with the relevant
system's rules and procedures, to the extent received by its depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations as described below. The CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a holder under the relevant Indenture on behalf of a CEDEL
participant or Euroclear participant only in accordance with its relevant rules
and procedures and subject to its depositary's ability to effect such actions on
its behalf through the depositary.
INITIAL SETTLEMENT
All Global Securities will be registered in the name of Cede & Co. as
nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in the depository. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective
depositories, Citibank and Morgan, which in turn will hold such positions in
accounts as participants of DTC.
Global Securities held through DTC will follow the settlement practices
described above. Investor securities custody accounts will be credited with
their holdings against payment on the settlement date. Global Securities held
through CEDEL or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no 'lock-up' or restricted period. Global Securities will be
credited to the securities custody accounts on the settlement date against
payment.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures described above. See
'Description of Debt Securities--Book-Entry Debt Securities.'
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL participants and/or Euroclear participants will be settled
using the procedures applicable to conventional eurobonds.
Trading between DTC Seller and CEDEL or Euroclear Purchaser. When
beneficial interests in the Global Securities are to be transferred from the
account of a DTC participant to the account of a CEDEL participant or a
Euroclear participant, the purchaser will send instructions to CEDEL or
Euroclear through a participant at least one business day prior to settlement.
CEDEL or Euroclear will instruct Citibank or Morgan, respectively, as the case
may be, to receive a beneficial interest in the Global Securities against
payment. Unless otherwise set forth in the Prospectus Supplement, payment will
include interest accrued on the beneficial interest in the Global Securities so
transferred from and
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including the last coupon payment date to and excluding the settlement date, on
the basis on which interest is calculated on the Debt Securities. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by Citibank or Morgan to the DTC participant's account against delivery
of the beneficial interest in the Global Securities. After settlement has been
completed, the beneficial interest in the Global Securities will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the CEDEL or Euroclear participant's account. The
securities credit will appear the next day (European time) and the cash debit
will be back-valued to, and the interest on the beneficial interest in Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (that is, the trade fails), the CEDEL or Euroclear cash
debit will be valued instead as of the actual settlement date.
CEDEL participants and Euroclear participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL, or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, participants can elect not to preposition funds and allow that credit line
to be drawn upon to finance settlement. Under this procedure, CEDEL participants
or Euroclear participants purchasing beneficial interest in Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the beneficial interests in the Global Securities were credited to their
accounts. However, interest on the beneficial interests in the Global Securities
would accrue from the value date. Therefore, in many cases the investment income
on the Global Securities earned during that one-day period may substantially
reduce or offset the amount of such overdraft charges, although this result will
depend on each participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending a beneficial interest
in Global Securities to Citibank or Morgan for the benefit of CEDEL participants
or Euroclear participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC participant a cross-market transaction
will settle no differently than a trade between two DTC participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL and Euroclear participants may employ
their customary procedures to transactions in which the beneficial interest in
the Global Securities is to be transferred by the respective clearing system,
through Citibank or Morgan, to a DTC participant. The seller will send
instructions to CEDEL or Euroclear through a participant at least one business
day prior to settlement. In these cases, CEDEL or Euroclear will instruct
Citibank or Morgan, as appropriate, to deliver the beneficial interest in the
Global Securities to the DTC participant's account against payment. Payment will
include interest accrued on the beneficial interests in the Global Securities
from and including the last coupon payment date to and excluding the settlement
date on the basis on which interest is calculated on the Global Securities. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the CEDEL or Euroclear participant the
following day, and receipt of the cash proceeds in the CEDEL or Euroclear
participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the CEDEL or
Euroclear participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft charges incurred over
that one-day period. If settlement is not completed on the intended value date
(that is, the trade fails), receipt of the cash
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<PAGE>
proceeds in the CEDEL or Euroclear participant's account would instead be valued
as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
beneficial interests in Global Securities from DTC participants for credit to
CEDEL participants or Euroclear participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(1) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(2) borrowing beneficial interests in the Global Securities in the
U.S. from a DTC participant no later than one day prior to settlement,
which would give beneficial interests in the Global Securities sufficient
time to be reflected in the appropriate CEDEL or Euroclear account in order
to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the CEDEL participant
or Euroclear participant.
Although the DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of beneficial interests in Global
Securities among participants of the DTC, CEDEL and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities, directly or
indirectly, through CEDEL or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. persons, unless (i) each clearing system, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements, and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. persons (Form W-8). Non-U.S. persons that are
beneficial owners (other than a beneficial owner that owns actually or
constructively 10% or more of the total combined voting power of all
classes of stock of the Company entitled to vote or a controlled foreign
corporation that is related to the Company through stock ownership) can
obtain a complete exemption from the withholding tax by filing a properly
completed Form W-8 (Certificate of Foreign Status).
Exemption for non-U.S. persons with effectively connected income (Form
4224). A non-U.S. person, including a non-U.S. corporation or bank with a
U.S. branch, that is a beneficial owner and for which the interest income
is effectively connected with its conduct of a trade or business in the
United States, can obtain an exemption from the withholding tax by filing a
properly completed Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. persons resident in treaty
countries (Form 1001). Non-U.S. persons that are beneficial owners that are
entitled to the benefits of an income tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing a properly completed Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
tax will be imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by the beneficial owner or the beneficial
owner's agent.
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Exemption for U.S. Persons (Form W-9). U.S. persons can obtain a
complete exemption from the withholding tax by filing a properly completed
Form W-9 (Request for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING, PROCEDURE
The beneficial owner of the Global Security or, in the case of a Form 1001
or a Form 4224 filer, his agent, files by submitting the appropriate form to the
entity through whom it directly holds the Global Security. For example, if the
beneficial owner is listed directly on the books of Euroclear or CEDEL as the
holder of the Debt Security, the IRS Form must be provided to Euroclear or
CEDEL, as the case may be. Each person through which a Debt Security is held
must submit, on behalf of the beneficial owner, the IRS Form (or in certain
cases a copy thereof) under applicable procedures to the person through which it
holds the Debt Security, until the IRS Form is received by the U.S. person who
would otherwise be required to withhold U.S. federal income tax from interest on
the Debt Security. For example, in the case of Debt Securities held through
Euroclear or CEDEL, the IRS Form (or a copy thereof) must be received by the
U.S. depositary of such clearing agency. Applicable procedures include, if a
beneficial owner of the Debt Security provides an IRS Form W-8 to a securities
clearing organization, bank or other financial institution (a 'financial
institution') that holds the Debt Security in the ordinary course of its trade
or business on the owner's behalf, that such financial institution certify to
the person otherwise required to withhold U.S. federal income tax from such
interest, 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 that it furnish the payor with a copy thereof.
As used in this section on tax documentation requirements, the term 'U.S.
person' means (i) a citizen or resident of the United States, (ii) a corporation
or partnership organized in or under the laws of the United States or any State
thereof or (iii) an estate or trust the income of which is includable in gross
income for U.S. tax purposes, regardless of its source.
This summary does not deal with all aspects of U.S. income tax and
withholding that may be relevant to foreign beneficial owners of the Global
Securities, including special categories of foreign investors who may not be
eligible for exemptions from U.S. withholding tax. Investors are advised to
consult their own tax advisors for specific tax advice concerning their holding
and disposing of beneficial interests in the Global Securities. Any additional
requirements, if applicable, will be set forth in the Prospectus Supplement.
LEGAL MATTERS
Certain legal matters in connection with the Debt Securities and the
Guarantee will be passed upon for the Company and for the Guarantor by Bryan
Cave LLP, Kansas City, Missouri. Certain matters will be passed upon for any
underwriters or agents by a firm named in the Prospectus Supplement relating to
a particular issue of Debt Securities.
EXPERTS
The consolidated financial statements and financial statement schedule
incorporated in this Prospectus by reference from the Guarantor's Annual Report
on Form 10-K/A for the year ended April 30, 1997, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports, which are
incorporated by reference, and have been so incorporated in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Option One Mortgage Corporation as of December
31, 1996 and 1995 and for the year ended December 31, 1996 and for the period
March 3, 1995 to December 31, 1995 (Successor period) and from January 1, 1995
to March 2, 1995 (Predecessor period) have been incorporated by reference herein
from the Guarantor's Current Report on Form 8-K/A dated July 2, 1997 (filed on
August 14, 1997) in reliance upon the report of KPMG Peat Marwick LLP,
independent certified
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public accountants, incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements of
Option One Mortgage Corporation as of December 31, 1996 and 1995 and for the
year ended December 31, 1996 and for the period March 3, 1995 to December 31,
1995 (Successor period) and from January 1, 1995 to March 2, 1995 (Predecessor
period) contains an explanatory paragraph that states that effective March 3,
1995, Fleet National Bank, Rhode Island acquired all of the outstanding stock of
Option One Mortgage Corporation in a business combination accounted for as a
purchase. As a result of the acquisition, the financial information for the
periods after the acquisition is presented on a different cost basis than that
for the periods before the acquisition and, therefore, is not comparable.
Effective September 27, 1995, Fleet National Bank, Rhode Island transferred its
investment in the Company to one of its wholly owned subsidiaries, Fleet Holding
Corporation.
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE GUARANTOR OR ANY OF
THE UNDERWRITERS. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING
PROSPECTUS CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DO THEY CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Pricing Supplement............................. S-3
Description of the Notes....................... S-3
Currency Risks................................. S-19
Certain United States Federal Income Tax
Considerations............................... S-22
Plan of Distribution........................... S-30
Legal Opinions................................. S-31
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
Cautionary Statement Regarding
Forward-Looking Statements................... 3
The Company.................................... 3
The Guarantor.................................. 5
Use of Proceeds................................ 6
Risk Factors................................... 7
Ratio of Earnings to Fixed Charges............. 10
Description of Debt Securities................. 11
Plan of Distribution........................... 26
Global Clearance, Settlement and
Tax Documentation Procedure.................. 27
Legal Matters.................................. 31
Experts........................................ 31
$750,000,000
BLOCK FINANCIAL
CORPORATION
MEDIUM TERM NOTES
FULLY AND UNCONDITIONALLY
GUARANTEED BY
H&R BLOCK, INC.
[LOGO]
SALOMON SMITH BARNEY
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
PROSPECTUS SUPPLEMENT
DATED JANUARY 9, 1998
