UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-8503
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2144267
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
405 Water Street, Port Huron, Michigan 48060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 810-987-2200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 Par Value
--------------------------
(Title of Class)
$2.3125, Series A, Convertible
Cumulative Preferred Stock
------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock (Common Stock, $1 Par
Value) held by non-affiliates is computed at $235,043,000 based on 11,396,000
shares held by non--affiliates as of February 28, 1997 at the average of the
bid and ask prices on the closest trading date for such stock of $20.25 and
$21.00, respectively, as quoted on the National Association of Securities
Dealers Automated Quotation National Market System (NASDAQ/NMS) (which
prices may not represent actual transactions).
Number of shares outstanding of each of the Registrant's classes of Common
Stock, as of February 28, 1997: 12,411,000 shares of Common Stock, $1 Par
Value.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's definitive Proxy Statement (filed pursuant to
Regulation 14A) with respect to Registrant's April 15, 1997 Annual Meeting of
Shareholders are incorporated by reference herein in response to Part III.
<PAGE>
T A B L E O F C O N T E N T S
PAGE
CONTENTS NUMBER
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 8
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . 9
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . 40
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . 41
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
-i-
<PAGE>
GLOSSARY
Bcf . . . . . . . . . . A measure of natural gas volumes equivalent to one
billion cubic feet
Degree Day . . . . . . . A measure of coldness computed by the number of
degrees the average daily temperature falls below
65 degrees Fahrenheit
DRIP . . . . . . . . . . Dividend Reinvestment and Common Stock Purchase Plan
FASB . . . . . . . . . . Financial Accounting Standards Board
FERC . . . . . . . . . . Federal Energy Regulatory Commission
Mcf . . . . . . . . . . A measure of natural gas volumes equivalent to one
thousand cubic feet
MMcf . . . . . . . . . . A measure of natural gas volumes equivalent to one
million cubic feet
MPSC . . . . . . . . . . Michigan Public Service Commission
NGV . . . . . . . . . . Natural gas vehicle
Normal Degree Days . . . An average of degree days over the last 10 years
NASDAQ . . . . . . . . . National Association of Securities Dealers Automated
Quotations system
NYMEX . . . . . . . . . New York Mercantile Exchange
SFAS . . . . . . . . . . Statement of Financial Accounting Standards
-ii-
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
Southeastern Michigan Gas Enterprises, Inc. (the Company) was formed as a
holding company in 1977 and has four direct subsidiaries. The Company provides
professional and technical services to the consolidated group in the areas of
finance, accounting, tax, risk management, legal, human resources, and
information systems. The Company and its subsidiaries employ approximately 520
persons throughout the state of Michigan.
<TABLE>
Southeastern Michigan Gas Company (Southeastern), Battle Creek Gas Company
(Battle Creek) and Michigan Gas Company (Michigan Gas) (collectively, the
utility subsidiaries) purchase, distribute and transport natural gas to 234,000
customers in twenty-four counties in the lower and upper peninsulas of
Michigan. These operations have historically generated over 90% of
consolidated income. Set forth in the table below is sales and transportation
information for the past three years:
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gas sales revenue:
Residential.................. $138,644 63% $115,242 62% $121,066 62%
Commercial................... 65,509 30 54,763 30 59,413 30
Industrial................... 15,218 7 14,019 8 15,481 8
-------- --- -------- --- -------- ---
Total gas sales revenue.... $219,371 100% $184,024 100% $195,960 100%
======== === ======== === ======== ===
Gas transportation revenue..... $ 12,358 $ 12,448 $ 11,999
======== ======== ========
Throughput volumes (MMcf):
Gas sales volumes:
Residential.................. 26,703 61% 24,676 61% 23,437 59%
Commercial................... 13,670 31 12,738 31 12,469 32
Industrial................... 3,385 8 3,373 8 3,464 9
------ --- ------ --- ------ ---
Total gas sales volumes.... 43,758 100% 40,787 100% 39,370 100%
====== === ====== === ====== ===
Gas transportation volumes..... 20,532 23,849 21,293
====== ====== ======
</TABLE>
Residential and commercial gas sales customers use natural gas primarily
for space heating purposes. Consequently, weather has a significant impact on
sales to these customers. For the same reason, the Company's operations are
seasonal, with most gas sales revenue being earned in the first and fourth
quarters.
In the industrial markets, the utility subsidiaries principally provide
natural gas transportation service. Many larger volume users purchase their
own gas supply and rely on the utilities for transportation service. In
-1-
<PAGE>
addition to transportation, the utilities also provide natural gas storage,
backup supply and balancing services. Industrial sales and transportation
revenues are primarily dependent upon the comparative cost of alternate fuels,
economic conditions and government policies.
Other utility operations include home appliance service and repair
options and the sale of NGV equipment.
Southeastern and Michigan Gas are subject to the jurisdiction of the MPSC
as to various phases of their operations including rates, accounting, service
standards and the issuance of securities. Battle Creek is subject to the
jurisdiction of the MPSC as to various phases of its operations including
accounting, service standards and issuance of securities, but not as to rates.
Battle Creek's rates are subject to the jurisdiction of the City Commissioners
of Battle Creek, Michigan.
SEMCO Energy Services, Inc. (SEMCO) is a diversified company with
operations and investments in many segments of the natural gas industry.
SEMCO's principal operating activity is natural gas marketing. SEMCO markets
gas to approximately 245 customers located in several states. Its customers
include industrial, commercial and municipal natural gas users, natural gas
distribution companies and other marketers.
SEMCO purchases and markets natural gas to customers on a month-to-month
basis and under long-term agreements. SEMCO also arranges for transportation
of gas supplies to the customers' premises and offers storage capacity,
contract administration and a variety of risk management services.
SEMCO's activities also include operations and interests in natural gas
transmission and gathering systems and an underground gas storage system.
SEMCO, through its subsidiaries Southeastern Development Company and
Southeastern Financial Services, Inc., also manages the leasing of data
processing equipment to companies in the consolidated group and oversees the
real estate operations of the Company. SEMCO has no plans to expand its real
estate operations.
<TABLE>
Set forth below are SEMCO's gas marketing revenues, cost of gas marketed,
volumes, and earnings (loss) from equity investments for the past three years:
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Natural gas marketing operations:
Gas marketing revenues............ $311,384 $133,396 $158,284
Cost of gas marketed.............. 305,395 130,087 153,973
-------- -------- --------
Gross margin.................... $ 5,989 $ 3,309 $ 4,311
======== ======== ========
Gas volumes marketed (MMcf)....... 129,429 82,504 78,082
Earnings (loss) from equity
investments....................... $ (1,775) $ 175 $ (437)
</TABLE>
-2-
<PAGE>
See "Management's Discussion and Analysis" for a discussion relating to
competitive pressures in the gas marketing industry.
Gas Supply. The utility subsidiaries are served by four major interstate
pipelines: Panhandle Eastern Pipe Line Company, Northern Natural Gas Company,
Great Lakes Gas Transmission Company and ANR Pipeline Company.
During 1996, the utility subsidiaries purchased 60% of their natural gas
volumes from term suppliers and 40% from the spot market. Nearly 20% of the
firm supply volumes were purchased under fixed-price contracts, while the other
80% were purchased under contracts indexed to the spot market. Less than 1% of
1996 gas purchases were from interstate pipelines and intrastate suppliers.
Natural gas purchases are transported to the utility subsidiaries' systems
under various firm and interruptible transportation arrangements with
interstate and intrastate transmission companies.
The utility subsidiaries utilize on-system and leased storage capacity of
approximately 35% of annual gas sales volumes to reduce their reliance on the
interstate pipelines for peak day needs and allow for the purchase of natural
gas at lower prices.
The utility subsidiaries own underground storage facilities with a working
capacity of 4.5 Bcf. In addition, they lease 6.9 Bcf of storage from Eaton
Rapids Gas Storage System and 4.3 Bcf from non-affiliates. SEMCO Gas Storage
Company (an affiliated company) is a 50% owner of Eaton Rapids Gas Storage
System.
SEMCO obtains its gas supply from various production sources, primarily
located in Louisiana, Oklahoma and Michigan. SEMCO generally contracts for gas
supply on a monthly basis, however, it does enter into some long-term gas
purchasing arrangements. See Note 6 of "Notes to the Consolidated Financial
Statements" for a description of SEMCO's hedging activities as they relate to
SEMCO's gas supply strategy.
New Business. Since 1987 the utility subsidiaries have added
approximately 5,000 gas sales customers per year. Customer additions have been
primarily residential and commercial.
Clean air legislation and resultant pressures on industry and electric
utilities to reduce emissions from their plants continue to support interest in
natural gas as an industrial fuel. The use of natural gas as a primary vehicle
fuel is also receiving serious attention for the same environmental reasons.
-3-
<PAGE>
Rates and Regulation. Management continually reviews the adequacy of the
utility subsidiaries' rates. It is management's intention to file requests for
rate increases whenever it is deemed necessary and appropriate. Southeastern
and Michigan Gas filed a combined rate case in December 1996 seeking $5,500,000
of rate relief. See "Management's Discussion and Analysis" and Note 2 of
"Notes to the Consolidated Financial Statements" for further discussion.
Battle Creek placed new rates into effect in December 1995.
Competition. Natural gas competes with other forms of energy available to
customers, primarily on the basis of rates. These competitive forms of energy
include electricity, coal, propane and fuel oils. Changes in the availability
or price of natural gas or other forms of energy, as well as business
conditions, conservation, legislation, regulations, capability to convert to
alternate fuels and other factors may affect the demand for natural gas in
areas served by the Company's subsidiaries.
The Company's subsidiaries sell natural gas to and transport natural gas
for several large customers who have the ability to use alternate fuels.
SEMCO's natural gas marketing operations compete with other marketing
firms on the basis of price, the ability to arrange suitable transportation to
the customer's premises and the ability to provide related services such as
pipeline nominations and balancing.
Competition has increased significantly in the natural gas marketing
industry. See "Management's Discussion and Analysis" for further discussion.
ITEM 2. PROPERTIES
The properties of the Company consist of the Common Stock of Southeastern,
Michigan Gas, Battle Creek, SEMCO, and leasehold improvements and office
equipment.
SOUTHEASTERN MICHIGAN GAS COMPANY
Southeastern owns gas supply systems which, on December 31, 1996, included
approximately 112 miles of transmission pipelines and 2,092 miles of
distribution pipelines. The pipelines are located in southeastern Michigan
(centered in and around the City of Port Huron) and south-central Michigan
(centered in and around the City of Albion).
Southeastern's distribution system and service lines are, for the most
part, located on or under public streets, alleys, highways, and other public
places, or on private property not owned by Southeastern with permission or
consent, except to an inconsequential extent, of the individual owners. The
distribution system and service lines located on or under public streets,
alleys, highways, and other public places were all installed under valid rights
and consents granted by appropriate local authorities.
-4-
<PAGE>
Southeastern's underground storage system consists of six salt caverns and
a depleted gas field, located in St. Clair County, Michigan, together with
measuring, compressor and transmission facilities. The aggregate working
capacity of the system is approximately 3.4 Bcf.
Southeastern also owns meters and service lines, gas regulating and
metering stations, garages, warehouses and other buildings necessary and useful
in conducting its business. Southeastern leases its computer and
transportation equipment.
BATTLE CREEK GAS COMPANY
Battle Creek owns gas supply systems which, on December 31, 1996, included
approximately 27 miles of transmission pipelines and 693 miles of distribution
pipelines. The pipelines are located in southwestern Michigan (centered in and
around the City of Battle Creek, Michigan).
Battle Creek's distribution system and service lines are, for the most
part, located on or under public streets, alleys, highways, and other public
places, or on private property not owned by Battle Creek with permission or
consent, except to an inconsequential extent, of the individual owners. The
distribution system and service lines located on or under public streets,
alleys, highways, and other public places were all installed under valid rights
and consents granted by appropriate local authorities.
Battle Creek owns and operates underground gas storage facilities in two
depleted salt caverns and two depleted gas fields. The aggregate working
capacity of the storage system is approximately 1.6 Bcf.
Battle Creek also owns meters and service lines, gas regulating and
metering stations, garages, warehouses and other buildings necessary and useful
in conducting its business. Battle Creek leases its computer and
transportation equipment.
MICHIGAN GAS COMPANY
Michigan Gas owns gas supply systems located in the southwest portion of
Michigan's lower peninsula and the central and western areas of Michigan's
upper peninsula. The systems include 2,177 miles of distribution pipeline,
meters, service lines, gas regulating and metering stations, garages,
warehouses, and other buildings necessary and useful in conducting its
business. Michigan Gas leases its computer equipment, transportation
equipment, and certain buildings.
Michigan Gas's distribution system and service lines are for the most
part, located on or under public streets, alleys, highways, and other public
places, or on private property not owned by Michigan Gas with permission or
consent, except to an inconsequential extent, of individual owners. The
distribution system and service lines located on or under public streets,
alleys, highways, and other public places were all installed under valid rights
and consents granted by appropriate local authorities.
-5-
<PAGE>
SEMCO ENERGY SERVICES, INC.
The principal properties of SEMCO and its affiliates include interests and
operations in natural gas transmission and gathering systems and an underground
gas storage system.
<TABLE>
Set forth in the following table are the equity investments of SEMCO and
its affiliates, the total non-current asset balance of each entity, and SEMCO's
ownership percentage and equity investment at December 31, 1996:
<CAPTION>
Total SEMCO's SEMCO's
Non-current Percent Equity
Assets Ownership Investment
----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
NOARK Pipeline System................. $ 95,861 32% $ -0-
NOARK Gas Services, L.P............... 91 40 (44)
Eaton Rapids Gas Storage System....... 27,537 50 4,219
Nimrod Limited Partnership............ 1,399 29 342
Michigan Intrastate Pipeline System... 5,656 50 313
Michigan Intrastate Lateral System.... 667 50 290
-------- ------
$131,211 $5,120
======== ======
</TABLE>
SEMCO Arkansas Pipeline Company (a wholly-owned subsidiary of SEMCO) is a
32% general partner in the NOARK Pipeline System. The partnership operates a
302-mile pipeline crossing northern Arkansas which completed its first year of
service in 1993. The pipeline provides area producers access to interstate and
intrastate pipelines. In December 1996, SEMCO recorded a $21,000,000 after-tax
write-down on its investment in NOARK. See Note 8 of the "Notes to the
Consolidated Financial Statements" for further discussion of the write-down and
commitments made relating to this project.
SEMCO Gas Storage Company (a wholly-owned subsidiary of SEMCO) owns a 50%
equity interest in the Eaton Rapids Gas Storage System. This system, located
near Eaton Rapids, Michigan, became operational in March 1990 and consists of
approximately 12.8 Bcf of underground storage capacity. Of the total, 6.9 Bcf
is leased by the Company's subsidiaries.
SEMCO Pipeline also owns 50% of the Michigan Intrastate Pipeline System
and the Michigan Intrastate Lateral System partnerships. The sole purpose of
these partnerships is to hold a 10% ownership of the Saginaw Bay Pipeline
Project, a 126-mile pipeline from Michigan's Saginaw Bay area to processing
plants in Kalkaska, Michigan.
-6-
<PAGE>
<TABLE>
The following table sets forth the operations wholly or partially owned by
SEMCO and its affiliates, the total net property of the project, and SEMCO's
ownership percentage and net property at December 31, 1996:
<CAPTION>
Total SEMCO's SEMCO's
Net Percent Net
Property Ownership Property
-------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Litchfield Lateral...................... $11,055 33% $ 3,648
Greenwood Pipeline...................... 6,629 100 6,629
Iosco-Reno System....................... 3,310 40 1,324
Eaton Rapids Pipeline................... 1,126 100 1,126
------- -------
$22,120 $12,727
======= =======
</TABLE>
SEMCO Pipeline is a 33% owner in the Litchfield Lateral, a 31-mile
pipeline located in southwest Michigan. The line, which is leased entirely to
ANR Pipeline Company, links the Eaton Rapids Gas Storage System with interstate
pipeline supplies. The Litchfield Lateral began operations in February 1993.
In 1991, SEMCO Pipeline constructed an 18-mile pipeline to serve Detroit
Edison's Greenwood power plant located in Michigan's thumb area. SEMCO
Pipeline and Detroit Edison have entered into an agreement whereby Detroit
Edison has contracted for the entire capacity of the line of 240 MMcf per day.
SEMCO Pipeline is a 40% owner of the Iosco County Pipeline and Reno Gas
Processing Plant (Iosco-Reno System), which was placed in service in March
1992. The Iosco-Reno System gathers and processes wet gas in the Au Gres and
Santiago fields located in mid-Michigan for delivery to the processing plant
and ultimate delivery to the gas markets.
SEMCO Pipeline completed the 7.1-mile Eaton Rapids Pipeline in 1990,
providing direct delivery of gas from the Eaton Rapids Gas Storage System to
Battle Creek and Southeastern's Albion division.
Other properties of SEMCO consist of data processing equipment primarily
leased to affiliates, real property and related improvements held for resale,
and office properties leased to affiliates and third parties. These other
properties total $2.7 million or 1.1% of consolidated utility plant and other
property, net.
-7-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-8-
<PAGE>
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
<TABLE>
COMMON STOCK DATA
The common stock of the Company is traded on The Nasdaq Stock Market under
the symbol "SMGS." The table below shows high and low closing bid prices of
the Company's common stock in the over-the-counter market as reported by First
of Michigan Corporation, a market maker in the Company's stock, adjusted to
reflect the 5% stock dividends in May 1996 and 1995. These quotations reflect
dealer prices, without brokerage commission, and may not necessarily represent
actual transactions.
<CAPTION>
Quarters
------------------------------------------
1st 2nd 3rd 4th
------- ------- ------- ------
<S> <C> <C> <C> <C>
1996
High 17 5/8 17 1/2 17 3/4 18 3/4
Low 15 1/4 15 15 3/4 17 1/4
1995
High 17 7/8 18 9/16 18 5/16 17 1/8
Low 16 5/16 17 5/8 16 7/8 15 1/2
</TABLE>
See the cover page for a recent stock price and the number of shares
outstanding.
See "Selected Financial Data" below for the number of shareholders at year
end for the past five years.
DIVIDENDS
See Notes 4 and 10 of "Notes to the Consolidated Financial Statements" and
"Selected Financial Data."
-9-
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<CAPTION>
Years Ended December 31, 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Operating Revenue.................... $547,630 $335,538 $372,430 $288,963 $251,526
-------- -------- -------- -------- --------
Operating Expenses
Cost of gas sold.................... $151,135 $120,619 $135,669 $139,051 $121,643
Cost of gas marketed................ 305,395 130,087 153,973 67,474 52,347
Operations and maintenance.......... 40,669 36,217 35,558 34,496 33,590
Depreciation........................ 11,317 12,035 11,549 12,468 12,344
Income taxes........................ 6,371 6,188 5,204 5,598 3,899
Taxes other than income taxes....... 8,648 7,966 8,186 8,446 7,729
-------- -------- -------- -------- --------
$523,535 $313,112 $350,139 $267,533 $231,552
-------- -------- -------- -------- --------
Operating income..................... $ 24,095 $ 22,426 $ 22,291 $ 21,430 $ 19,974
Other income (expense), net.......... (21,813)<F6> (179) (1,328)<F4> (136)<F4> (339)<F4>
-------- -------- -------- -------- --------
Income before interest............... $ 2,282 $ 22,247 $ 20,963 $ 21,294 $ 19,635
Interest............................. 11,053 10,721 10,775 11,534 11,126
Dividends on preferred stock
of subsidiary and
convertible preferred............... 194 195 196 197 199
-------- -------- -------- -------- --------
Net income (loss).................... $ (8,965)<F6> $ 11,331 $ 9,992 <F4> $ 9,563 <F4> $ 8,310 <F4>
Common dividends..................... 9,670 9,230 8,656 7,419 6,875
-------- -------- -------- -------- --------
Earnings (deficit) reinvested
in the business..................... $(18,635) $ 2,101 $ 1,336 $ 2,144 $ 1,435
======== ======== ======== ======== ========
Common Stock Data
Average shares outstanding(000)<F1>.. 12,397 12,423 12,190 11,025 10,734
Earnings (loss) per share<F1>........ $ (.72)<F6> $ .91 $ .82 <F4> $ .87 <F4> $ .77 <F4>
Dividends paid per share<F1>......... $ .78 $ .74 $ .71 $ .67 $ .64
Dividend payout ratio................ (107.9%) 81.5% 86.6% 77.6% 82.7%
Book value per share<F1><F2>......... $ 7.29 $ 8.81 $ 8.66 $ 7.65 $ 7.11
Market value per share<F1><F2><F3>... $ 18.50 $ 17.14 $ 16.32 $ 19.00 $ 15.64
Number of common shareholders........ 8,509 8,334 8,149 7,261 6,892
Balance Sheet Data<F2>
Total assets......................... $478,279 $378,523 $368,498 $348,813 $319,548
======== ======== ======== ======== ========
Capitalization
Long-term debt<F5>.................. $108,112 $107,325 $104,910 $117,022 $102,728
Preferred stock..................... 3,269 3,272 3,288 3,290 3,320
Common equity....................... 90,382 109,511 107,379 85,657 77,353
-------- -------- -------- -------- --------
$201,763 $220,108 $215,577 $205,969 $183,401
======== ======== ======== ======== ========
Financial Ratios
Capitalization
Long-term debt<F5>.................. 53.6% 48.8% 48.7% 56.8% 56.0%
Preferred stock..................... 1.6% 1.5% 1.5% 1.6% 1.8%
Common equity....................... 44.8% 49.7% 49.8% 41.6% 42.2%
-------- -------- -------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
Return on average common equity....... (8.2%)<F7> 10.4% 9.5% 11.6% 11.1%
======== ======== ======== ======== ========
<FN>
<F1>
Adjusted to give effect to 5 percent stock dividends in May each year, 1992 through 1996.
<F2>
Year end.
<F3>
Based on NASDAQ closing bid price.
<F4>
Includes $1,286 (net of tax) or $.11 per share, $177 (net of tax) or $.02 per share and $901 (net of tax)
or $.08 per share in 1994, 1993 and 1992, respectively, attributable to an extraordinary item-loss on
early extinguishment of debt.
<F5>
Includes current maturities.
<F6>
Includes write-down of NOARK investment--$21,000 (net of tax) or $1.69 per share.
<F7>
Excluding the write-down of the NOARK investment, return on average common equity was 10.9%.
</FN>
</TABLE>
-10-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Net Income. For the year ended December 31, 1996, the Company recorded a net
loss of $8,965,000, or $.72 per share, which includes a $21,000,000 non-cash
after-tax write-down of the Company's investment in the NOARK Pipeline System
(NOARK). Excluding the NOARK write-down, the Company's net income was
$12,035,000, or $.97 per share, which compares to net income of $11,331,000, or
$.91 per share, in 1995.
In 1996, customer additions contributed to an 8% increase in natural gas
sales margin from the Company's natural gas distribution operations. In
addition, margins from SEMCO's marketing operation increased by 81% on
marketing revenues that more than doubled.
The Company's 1995 net income was comparable to 1994. In 1994, net income
before extraordinary item was $11,278,000, or $.93 per share. The Company
recognized an extraordinary charge of $1,286,000, or $.11 per share, for the
early extinguishment of debt in 1994.
Operating Revenues and Gross Margin
<TABLE>
Natural Gas Distribution. The Company's natural gas distribution business
involves the operations of Southeastern, Battle Creek and Michigan Gas. These
companies generate revenue mainly through the sale and transportation of
natural gas. The following table compares sales and transportation information
for the last three years:
<CAPTION>
1996 1995 1994
-------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Revenues
Gas sales revenues:
Residential $138,644 $115,242 $121,066
Commercial 65,509 54,763 59,413
Industrial 15,218 14,019 15,481
-------- -------- --------
Total gas sales revenue $219,371 $184,024 $195,960
Cost of gas sold 151,135 120,619 135,669
-------- -------- --------
Gross margin $ 68,236 $ 63,405 $ 60,291
Gas transportation revenue 12,358 12,448 11,999
-------- -------- --------
Total sales margin and
transportation revenue $ 80,594 $ 75,853 $ 72,290
======== ======== ========
</TABLE>
-11-
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(in MMcf)
<S> <C> <C> <C>
Throughput volumes
Gas sales volumes:
Residential 26,703 24,676 23,437
Commercial 13,670 12,738 12,469
Industrial 3,385 3,373 3,464
------ ------ ------
Total gas sales volumes 43,758 40,787 39,370
Gas transportation volumes 20,532 23,849 21,293
------ ------ ------
Total throughput 64,290 64,636 60,663
====== ====== ======
Degree days:
Actual 7,099 7,158 6,861
Percent of normal 104.5% 105.3% 102.4%
Average number of gas sales customers 228,802 222,303 216,082
</TABLE>
Gross margin on gas sales increased $4,831,000 (8%) in 1996 as gas sales
volumes sold increased by 7% over 1995. The addition of an average 6,499 gas
sales customers (2.9%) in 1996 was the primary reason for the increase in
margin and volumes. In addition, approximately $1,300,000 of the increased
margin was due to the impact of a Battle Creek rate increase in December 1995.
Since retiree medical benefits are now included in Battle Creek's rates,
however, the entire retiree medical cost determined under the accrual method
was expensed in 1996, resulting in a $490,000 increase in 1996 operations
expense. Overall, the effect of the rate increase was to increase 1996 net
income by approximately $500,000.
In 1995 compared to 1994, natural gas sales volumes and gross margin from
gas sales increased 1,417 MMcf (3.6%) and $3,114,000 (5%). The addition of an
average of 6,221 new gas sales customers (2.9%) in 1995 accounted for over half
the increase in margin. Also contributing to the increase was the impact of
4.3% colder temperatures on the weather-sensitive residential and commercial
customers.
Transportation volumes decreased by 3,317 MMcf (14%) in 1996, compared to
1995, while transportation revenue declined by $90,000 (.7%). The decrease in
volumes was primarily due to less transportation for customers who have
alternative fuel sources -- primarily coal. During 1996, "coal-displacement"
transportation volumes were significantly lower than the prior year.
Transportation revenues declined only slightly, despite the larger volume
declines, because coal-displacement volumes generally contribute a lower
revenue per unit.
Transportation volumes and revenue increased by 2,556 MMcf (12%) and
$449,000 (3.7%) in 1995 compared to 1994. Revenues increased by only 3.7%,
despite the 12.0% increase in volumes, because most of the increased volumes
were attributable to coal-displacement customers.
Natural Gas Marketing. In 1996, natural gas marketing revenues and volumes
increased $177,988,000 (133%) and 46,925 MMcf (57%), respectively, from the
prior year, generating a $2,680,000 (81%) increase in marketing margin, before
incentive compensation. Volumes increased significantly due to new business
generated by the Northeast and Midwest marketing units of SEMCO.
The Northeast marketing unit was established in New York in October 1995
and covers a number of northeastern states. The Midwest unit was expanded from
offices in Michigan by adding a Chicago office in November 1995. SEMCO
expanded its Chicago presence in July 1996.
-12-
<PAGE>
SEMCO recently announced the opening of two additional marketing offices
in West Virginia and Kentucky to serve markets in Maryland, Virginia and
Washington, D.C. These mid-Atlantic offices further SEMCO's development of
sales channels that deliver a full complement of wholesale and retail-oriented
products and services.
Overall gas marketing volumes and margins are subject to significant
competitive factors which generally place downward pressure on margins. The
per-unit margin on SEMCO's marketing contracts, however, also varies depending
on the price and availability of alternative fuels, seasonal patterns and the
type of customer. For example, margins on wholesale marketing contracts to gas
utilities and other gas marketers generally contribute less than half the
margin of retail marketing sales.
SEMCO's higher per-unit margin in 1996, compared to 1995, was primarily
due to higher-margin retail sales in the first and fourth quarters of
1996--most of which is attributed to higher seasonal demand.
Gas marketing margins declined $1,002,000 (23%) in 1995, when compared to
1994, even as marketing volumes increased by 4,422 MMcf (6%). The decrease in
per-unit margins between the years highlights the increased competition which
resulted from the marketing industry's adaptation to deregulation of the
interstate pipelines under FERC Order 636. With interstate pipelines no longer
able to sell "bundled" natural gas sales services with gathering,
transportation and storage services, the demand for natural gas marketing
services increased.
The Company expects competition in the gas marketing industry will
continue to generate pressure on per-unit margins. The marketing operation's
primary focus is on growing revenues through the new marketing offices and by
expanding its product and service offerings to create value-adding
opportunities for its customers.
Other Operating Revenues. Other operating revenues consist principally of the
revenues generated by natural gas transmission and gathering activities and
miscellaneous utility operations. Also included in other operating revenues
are revenues generated by oil and gas exploration and production, equipment
leasing and real estate development.
Other operating revenues totaled $4,517,000, $5,670,000 and $6,187,000 in
1996, 1995 and 1994, respectively. The decrease in other operating revenues
reflects the Company's declining involvement in equipment leasing, real estate
development and oil and gas activities.
Operations and Maintenance. Operations and maintenance expense increased
$4,452,000 (12%) in 1996 compared to 1995 due primarily to an increase in
incentive compensation paid for higher marketing margins and the costs
associated with opening several marketing offices ($2,400,000), a change in the
classification of the Company's vehicle fleet from depreciation to operations
expense resulting from the December 1995 sale and leaseback ($1,500,000) and
higher benefits costs including pension ($750,000) and retiree medical
($490,000).
Partially offsetting these increases were savings generated from the
Company's 1995 restructuring and the Company's declining involvement in
equipment leasing, real estate development and oil and gas activities.
Operations and maintenance expense increased $659,000 (1.9%) in 1995
compared to 1994. Most of the increase relates to restructuring charges
associated with centralizing certain administration and engineering functions
previously performed in several locations throughout the State of Michigan.
-13-
<PAGE>
Depreciation Expense. Depreciation expense decreased $718,000 (6%) in 1996
compared to 1995. This decrease highlights the impact of the change in
classification of vehicle fleet expenses partially offset by increased
depreciation from utility plant additions. Depreciation expense increased
$486,000 (4.2%) in 1995 compared to 1994 primarily due to growth in utility
plant.
Taxes Other Than Income Taxes. Taxes other than income taxes were $8,648,000,
$7,966,000 and $8,186,000 for 1996, 1995 and 1994, respectively. Taxes other
than income taxes consist primarily of State of Michigan property taxes and
generally increase due to the growth in utility plant. The slight decrease in
1995, compared to 1994, resulted from Michigan legislation which lowered
property tax rates.
Interest. Other interest expense increased $439,000 (25%) in 1996, compared to
1995, due to an increase in average short-term borrowings for property
additions and higher gas costs. Other interest expense decreased slightly in
1995, compared to 1994, due primarily to decreased borrowings resulting from
lower average gas costs and lower volumes of gas in storage.
Write-Down of NOARK Investment, Net. In December 1996, the Company recorded a
non-cash write-down of $21,000,000, net of tax, on its investment in the NOARK
Pipeline System. NOARK is a 302-mile intrastate natural gas pipeline which
became operational in 1992. The Company owns a 32% general partnership
interest in NOARK through a subsidiary.
NOARK experienced significant cost overruns during construction which
resulted in higher financing costs than expected. In addition, competition
from two interstate pipelines in the Arkansas region has required NOARK to
discount its transportation charges to attract volumes to the pipeline. Even
with discounted rates, NOARK has operated at less than 65% capacity since
inception. As a result, NOARK has continued to generate losses and its
operating cash flows are insufficient to meet principal and interest payments
on its debt. Since October 1994, the Company has contributed additional
financing of $5,062,000 in connection with its loan guarantee. The Company
expects to make continued contributions to NOARK in 1997.
The write-down of the Company's investment establishes a $32,942,000
reserve, which is expected to eliminate the need for significant NOARK
operating losses being recorded in future income statements. The write-down is
expected to positively impact 1997 earnings per share by $.14 and will not
affect the Company's cash or stock dividend.
The Company will continue to explore opportunities to improve NOARK;
however, the Company is also interested in selling its interest in NOARK.
See Note 8 of Notes to the Consolidated Financial Statements for further
discussion of NOARK and the Company's guarantees related to the pipeline's
financing.
Other Income (Loss), Net. Other income (loss), net, consists primarily of
income and losses from SEMCO's equity investments but also includes
miscellaneous nonoperating income and expense items, net of tax. Other income
(loss), net, was ($813,000), ($179,000) and ($42,000) in 1996, 1995 and 1994,
respectively.
-14-
<PAGE>
Included in other income (loss), net is the Company's share of losses in
NOARK, before a 1995 litigation settlement and net of tax, totaling $1,702,000,
$1,836,000 and $1,200,000 over those same years. In 1995, the Company recorded
a gain of $1,251,000, net of tax, for its share of a settlement paid to NOARK
by Vesta Energy Company. The payment was in settlement of litigation,
termination of a firm transportation agreement with NOARK and release from all
contracts and obligations related to NOARK.
Due to the 1996 write-down of its investment in NOARK, the Company does
not expect to record losses related to the NOARK Pipeline System in 1997 and
thereafter.
Liquidity and Capital Resources
<TABLE>
Cash Flows From Investing. The Company's single largest use of cash is capital
expenditures. The following table identifies capital expenditures for the past
three years:
<CAPTION>
1996 1995 1994
------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C>
Capital Expenditures
Natural gas distribution $30,169 $26,259 $20,353
Gas transmission, gathering and storage -- 85 835
Other 340 628 616
------- ------- -------
$30,509 $26,972 $21,804
======= ======= =======
</TABLE>
Capital expenditures for natural gas distribution represent primarily new
customer additions and, to a lesser extent, plant repair and replacement.
The increases in distribution expenditures in 1996 and 1995 were due to record
customer growth for each of those years. In addition, the Company installed
approximately $2,000,000 of automated meter reading equipment in its
distribution plant in 1996.
In 1997, the Company plans to spend approximately $29,400,000 on capital
additions. Again, the Company expects to achieve record customer additions in
1997. Also, approximately $6,000,000 of the planned expenditures are for new
technology, such as automated meter reading and in-truck computer terminals.
This technology is expected to significantly increase customer service and
operational efficiency.
Cash Flows From Operations. The Company's net cash provided from operating
activities totaled $11,432,000 in 1996, $32,593,000 in 1995 and $28,262,000 in
1994. The change in operating cash flows is significantly influenced by
changes in the level and cost of gas in underground storage, changes in
accounts receivable and accrued revenue and other working capital changes. The
changes in these accounts are largely the result of the timing of receipts and
payments.
The Company uses significant amounts of short-term borrowings to finance
natural gas purchases for storage during the non-heating season. The Company
owns and leases natural gas storage facilities with available capacity
approximating 35% of annual gas sales. Generally, gas is stored during the
months of April through October and withdrawn for sale from November through
March. The carrying amount of natural gas stored underground peaked at
$38,170,000, $34,233,000 and $45,910,000 in October 1996, 1995 and 1994,
respectively.
-15-
<PAGE>
Cash Flows From Financing. In January 1995, the Company began purchasing
shares of its common stock on the open market to meet the dividend reinvestment
and optional payment requirements of the DRIP. In 1996 and 1995, therefore,
the Company substantially met the requirements of the DRIP by repurchasing
shares. In 1994, the Company received $5,755,000 from the sale of shares
through the DRIP. In addition, the Company received $14,629,000 through the
sale of 747,500 shares of common stock in January 1994.
In 1994, the Company also received $80,000,000 through the issuance of
$55,000,000, 8.00% senior notes and $25,000,000, 8.32% senior notes. The
proceeds of these financings were used principally to redeem certain
higher-rate, long-term debt instruments. Expensing the portion of the call
premiums and unamortized debt expense associated with the Company's
non-regulated operations resulted in a $1,286,000 ($.11 per share)
extraordinary charge to income in 1994.
Dividends paid to common shareholders increased from 1994 through 1996 due
to the impact of 5% stock dividends in each of those years and the issuance of
additional shares through the DRIP in 1994.
Future Financing. In general, the Company funds its capital expenditure
program and dividend payments with operating cash flows and the utilization of
short-term lines of credit. When appropriate, the Company will refinance its
short-term lines with long-term debt, common stock or other long-term financing
instruments. In 1997, the Company expects to refinance a portion of its
$91,000,000 outstanding short-term credit facilities.
During 1997, the Company expects to make contributions to the NOARK
Pipeline System in connection with its guarantees of the pipeline's debt. See
Note 8 of Notes to the Consolidated Financial Statements for discussion of the
Company's guarantees related to NOARK's financing.
Commodity Hedging. The Company's natural gas marketing subsidiary, SEMCO, has
entered into various long-term sales commitments which may extend up to 60
months into the future. SEMCO maintains a hedging program with the objective
of preserving the anticipated margin on these sales commitments. The hedges
are designed to ensure that the impact of natural gas price fluctuations on the
fair value of long-term sales commitments will be offset by gains and losses on
the hedging instrument. The most frequently used hedging instruments are
natural gas futures and options, although SEMCO may also enter into natural gas
swap agreements, contract to purchase natural gas from producers for future
delivery or inject gas into storage for later withdrawal.
Critical to the success of the hedging program is the performance by both
the party to the hedge and the marketing customer buying gas under the
long-term sales commitment. SEMCO performs extensive credit reviews on new and
existing marketing customers and only enters into hedging transactions with
reputable dealers, primarily on the NYMEX, or directly with reliable suppliers.
At December 31, 1996 and 1995, SEMCO had recorded net deferred gains
(losses) from its hedging program of approximately ($1,700,000) and $100,000,
respectively. At the same time, SEMCO had offsetting amounts of unrecorded
gains or losses pursuant to the underlying long-term sales commitments.
See Note 6 of Notes to the Consolidated Financial Statements for further
information regarding the types, underlying notional volumes, and fair values
of SEMCO's hedges at December 31, 1996 and December 31, 1995.
-16-
<PAGE>
Other Areas
In the first quarter of 1993, the Company adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The new FASB
accounting standard requires the accrual method of accounting for
postretirement benefits. Although the adoption of this standard did not have a
material impact on the Company's results of operations, it does have
significant regulatory ratemaking implications.
Pursuant to a generic order issued by the MPSC, Southeastern and Michigan
Gas are recording a liability and a corresponding regulatory asset for their
portion of retiree medical costs. The generic order provides for recovery of
this regulatory asset provided a utility files a general rate case and
demonstrates the need for a rate increase to compensate for this additional
cost. Southeastern and Michigan Gas filed a combined rate case in December
1996 in accordance with this order. The Company is seeking $5,500,000 of rate
relief through this rate case, and expects to receive a rate order from the
MPSC in the fourth quarter of 1997. The outcome of future rate cases cannot be
predicted.
Until Battle Creek received its rate increase in December 1995, the
utility was also recording a regulatory asset for its portion of retiree
medical costs. Since the costs were allowed in rates in December 1995, Battle
Creek is no longer deferring any retiree medical costs and is amortizing its
regulatory asset into expense.
See Note 7 of the Notes to the Consolidated Financial Statements for
further discussion of SFAS 106 and Note 2 of the Notes to the Consolidated
Financial Statements for further discussion of the combined rate case of
Southeastern and Michigan Gas.
Impact of Inflation
The cost of gas sold by the three distribution companies is recovered from
natural gas distribution customers on a current basis. Although inflation has
steadied in recent years, increases in other utility operating costs are
recovered through the regulatory process of filing a rate case and, therefore,
may adversely affect the results of operations in inflationary periods due to
the time lag involved in this process. The Company attempts to minimize the
impact of inflation by controlling costs, increasing productivity and filing
rate cases on a timely basis.
Industry Trends
Competition. The market prices of alternate sources of energy such as coal and
#6 fuel oil compete directly with the price the utilities charge for industrial
sales and transportation of natural gas. To lessen the impact of prices on
fuel choice by industrial customers, the Company offers additional services,
such as gas storage and balancing. However, the competition among fuels is
expected to continue to affect volumes sold and transported and associated
margins.
The natural gas marketing operations of the Company compete based on its
ability to access competitively priced natural gas and efficiently utilize the
pipeline transmission system. Price is the prominent competitive factor in
sales to wholesale customers, such as gas distribution companies and
municipalities. In retail activities, SEMCO competes based on its ability to
offer a broad range of competitively priced products and services that are
tailored to meet the needs of individual customers.
-17-
<PAGE>
Regulation. Interstate pipelines were required to comply with FERC Order 636
by the 1993-1994 heating season. Order 636 was intended to increase
competition within the gas industry. The Order requires pipelines to unbundle
their services and instead offer separate service for gas transportation,
storage and gathering.
As a result of this restructuring, natural gas distribution companies have
the ability to select and pay for only those pipeline services they require.
In addition, Order 636 allows customers on natural gas distribution systems to
purchase the same level of unbundled service directly from the interstate
pipelines. Under such circumstances, natural gas distribution companies
generally provide transportation services to those customers.
The availability of unbundled pipeline services has resulted in continued
pressure on gas distribution companies to offer similar unbundled services in
order to compete with the pipelines. This competition has resulted in pressure
to reduce natural gas transportation margins. Currently, the utility
subsidiaries are providing transportation services principally to large
industrial customers.
In addition to pressure on the transportation margins of the utility
subsidiaries, Order 636 is impacting the natural gas marketing operations of
SEMCO. Access to unbundled pipeline services has attracted new competitors to
the marketing industry and presented opportunities for marketers to offer
expanded services to their customers.
-18-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years Ended December 31, 1996 1995 1994
-------- -------- --------
(in thousands of dollars,
except per share amounts)
<S> <C> <C> <C>
Operating Revenues
Gas sales $219,371 $184,024 $195,960
Gas marketing 311,384 133,396 158,284
Transportation 12,358 12,448 11,999
Other operations 4,517 5,670 6,187
-------- -------- --------
$547,630 $335,538 $372,430
-------- -------- --------
Operating Expenses
Cost of gas sold $151,135 $120,619 $135,669
Cost of gas marketed 305,395 130,087 153,973
Operations and maintenance 40,669 36,217 35,558
Depreciation 11,317 12,035 11,549
Income taxes 6,371 6,188 5,204
Taxes other than income taxes 8,648 7,966 8,186
-------- -------- --------
$523,535 $313,112 $350,139
-------- -------- --------
Income Before Income Deductions
Operating Income $ 24,095 $ 22,426 $ 22,291
Write-down of NOARK investment,
net of income taxes of $11,308 (21,000) -- --
Other income (loss), net (813) (179) (42)
-------- -------- --------
$ 2,282 $ 22,247 $ 22,249
-------- -------- --------
Income Deductions
Interest on long-term debt $ 8,514 $ 8,546 $ 8,605
Other interest 2,166 1,727 1,788
Amortization of debt expense 373 448 382
Dividends on preferred stock of
subsidiary and convertible preferred 194 195 196
-------- -------- --------
$ 11,247 $ 10,916 $ 10,971
-------- -------- --------
Net Income (Loss)
Before extraordinary item $ (8,965) $ 11,331 $ 11,278
Extraordinary item--Loss on early
extinguishment of debt, net of
income taxes of $692 -- -- 1,286
-------- -------- --------
$ (8,965) $ 11,331 $ 9,992
======== ======== ========
Earnings (loss) per share before
extraordinary item $ (.72) $ .91 $ .93
======== ======== ========
Earnings (loss) per share $ (.72) $ .91 $ .82
======== ======== ========
Cash dividends paid per share $ .78 $ .74 $ .71
======== ======== ========
Average common shares outstanding 12,397,132 12,423,264 12,189,806
========== ========== ==========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-19-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31, 1996 1995 1994
--------- --------- ---------
(in thousands of dollars)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Cash received from customers $ 488,322 $ 320,707 $ 375,536
Cash paid for payrolls and to suppliers (457,774) (264,440) (325,671)
Interest paid (10,543) (10,283) (11,104)
Income taxes paid (3,275) (5,570) (3,379)
Taxes other than income taxes paid (8,197) (7,995) (7,966)
Other cash receipts and payments, net 2,899 174 846
--------- --------- ---------
Net Cash From Operating Activities $ 11,432 $ 32,593 $ 28,262
--------- --------- ---------
Cash Flows From Investing Activities
Natural gas distribution property additions $ (30,169) $ (26,259) $ (20,353)
Other property additions (340) (713) (1,451)
Proceeds from property sales, net of retirement costs 865 640 (313)
Proceeds from sale and leaseback of capital assets -- 3,737 --
Advances to equity investees (844) (3,312) (906)
--------- --------- ---------
Net Cash From Investing Activities $ (30,488) $ (25,907) $ (23,023)
--------- --------- ---------
Cash Flows From Financing Activities
Issuance of common stock $ 5,132 $ 6,012 $ 20,384
Repurchase of common stock (5,629) (5,998) --
Net change in notes payable to banks 39,400 1,700 (2,342)
Issuance of long-term debt -- -- 80,000
Repayment of long-term debt (15) (1,322) (94,783)
Payment of dividends (9,864) (9,425) (8,852)
--------- --------- ---------
Net Cash From Financing Activities $ 29,024 $ (9,033) $ (5,593)
--------- --------- ---------
Cash and Temporary Cash Investments
Net increase (decrease) $ 9,968 $ (2,347) $ (354)
Beginning of year 264 2,611 2,965
--------- --------- ---------
End Of Year $ 10,232 $ 264 $ 2,611
========= ========= =========
Reconciliation of Net Income (Loss) to
Net Cash From Operating Activities
Net income (loss) $ (8,965) $ 11,331 $ 9,992
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation 11,317 12,035 11,549
Extraordinary item, net -- -- 1,286
Write-down of NOARK investment, net 21,000 -- --
Deferred taxes and investment tax credits 3,958 304 (838)
Equity loss, net of distributions 3,740 990 834
Receivables (11,265) (9,513) (4,703)
Accrued revenue (37,695) (5,555) (2,021)
Materials and supplies and gas in underground storage (13,169) 12,820 (2,232)
Gas charges, recoverable from customers (7,937) 2,349 7,767
Other current assets (4,839) 6,189 (2,154)
Accounts payable 53,342 4,973 2,992
Customer advances and amounts payable to customers (1,539) (1,638) 1,711
Accrued taxes (461) (22) 1,156
Other, net 3,945 (1,670) 2,923
--------- --------- ---------
Net Cash From Operating Activities $ 11,432 $ 32,593 $ 28,262
========= ========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-20-
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
At December 31, 1996 1995
-------- --------
(in thousands of dollars)
<S> <C> <C>
ASSETS
Utility Plant
Plant in service, at cost $340,675 $313,658
Less--Accumulated depreciation 96,391 87,308
-------- --------
$244,284 $226,350
Construction work in progress 2,103 944
-------- --------
$246,387 $227,294
-------- --------
Other Property, Net $ 9,585 $ 12,883
-------- --------
Current Assets
Cash and temporary cash investments, at cost $ 10,232 $ 264
Receivables, less allowances of $1,247 and $729 43,585 32,320
Accrued revenue 76,549 38,854
Materials and supplies, at average cost 3,025 3,280
Gas in underground storage 33,596 20,172
Gas charges, recoverable from customers 13,791 5,854
Accumulated deferred income taxes 364 2,249
Other 10,040 5,827
-------- --------
$191,182 $108,820
-------- --------
Deferred Charges and Other
Unamortized debt expense $ 5,328 $ 5,702
Deferred gas charges, recoverable from customers 290 615
Advances to equity investees 5,062 4,218
Other 20,445 18,991
-------- --------
$ 31,125 $ 29,526
-------- --------
$478,279 $378,523
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock equity $ 90,382 $109,511
Cumulative convertible preferred stock 169 172
Cumulative preferred stock of subsidiary 3,100 3,100
Long-term debt, including capital lease obligations 106,468 105,858
-------- --------
$200,119 $218,641
-------- --------
Current Liabilities
Notes payable to banks $ 91,100 $ 51,700
Current portion of capital lease obligations 1,644 1,467
Accounts payable 91,360 38,018
Customer advance payments 5,612 5,764
Accrued taxes 243 704
Accrued interest 1,272 1,135
Amounts payable to customers -- 682
Other 6,998 4,851
-------- --------
$198,229 $104,321
-------- --------
Deferred Credits
Reserve for equity investment $ 32,942 $ --
Accumulated deferred income taxes 10,113 19,080
Unamortized investment tax credit 2,782 3,049
Customer advances for construction 8,621 9,326
Other 25,473 24,106
-------- --------
$ 79,931 $ 55,561
-------- --------
$478,279 $378,523
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-21-
<TABLE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
At December 31, 1996 1995
-------- --------
(in thousands of dollars)
<S> <C> <C>
Common Stock Equity
Common stock, par value $1 per share--authorized
20,000,000 shares; 12,400,331 and 11,837,075
shares outstanding $ 12,400 $ 11,837
Capital surplus 79,489 80,546
Retained earnings (deficit) (1,507) 17,128
-------- --------
$ 90,382 $109,511
-------- --------
Cumulative Convertible Preferred Stock
Convertible preferred stock, par value $1 per
share--authorized 500,000 shares issuable in
series; 6,751 and 6,885 shares outstanding $ 7 $ 7
Capital surplus 162 165
-------- --------
$ 169 $ 172
-------- --------
Cumulative Preferred Stock of Subsidiary
$100 par value (callable at option of Subsidiary)
6% series A--15,000 shares authorized and
outstanding $ 1,500 $ 1,500
5 1/2% series B--10,000 shares authorized and
outstanding 1,000 1,000
5 1/2% series C--5,000 shares authorized;
4,000 shares outstanding 400 400
5 1/2% series D--2,000 shares authorized and
outstanding 200 200
-------- --------
$ 3,100 $ 3,100
-------- --------
Long-Term Debt
Southeastern Michigan Gas Enterprises, Inc.
8.00% notes due 2004 $ 55,000 $ 55,000
8.32% notes due 2024 25,000 25,000
8.625% debentures due 2017 23,573 23,588
Long term capital lease obligations 2,895 2,270
-------- --------
$106,468 $105,858
-------- --------
$200,119 $218,641
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-22-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
<CAPTION>
Years Ended December 31, 1996 1995 1994
------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C>
Common Stock
Beginning of year $11,837 $11,261 $ 9,680
5% stock dividends May 1996, May 1995
and May 1994 590 564 525
Issuance of common stock -- -- 748
Issuance of common stock through DRIP
and other 293 326 308
Repurchase of common stock (320) (314) --
------- ------- -------
End of year $12,400 $11,837 $11,261
======= ======= =======
Common Stock Capital Surplus
Beginning of year $80,546 $81,091 $62,286
5% stock dividends May 1996, May 1995
and May 1994 (590) (564) (543)
Issuance of common stock -- -- 13,881
Issuance of common stock through DRIP
and other 4,842 5,702 5,467
Repurchase of common stock (5,309) (5,683) --
------- ------- -------
End of year $79,489 $80,546 $81,091
======= ======= =======
Retained Earnings (Deficit)
Beginning of year $17,128 $15,027 $13,691
Net income (loss) (8,965) 11,331 9,992
Cash dividends on common stock (9,670) (9,230) (8,656)
------- ------- -------
End of year $(1,507) $17,128 $15,027
======= ======= =======
Cumulative Convertible Preferred Stock
Beginning of year $ 7 $ 8 $ 8
Conversion of preferred stock -- (1) --
------- ------- -------
End of year $ 7 $ 7 $ 8
======= ======= =======
Cumulative Convertible Preferred Stock
Capital Surplus
Beginning of year $ 165 $ 180 $ 182
Conversion of preferred stock (3) (15) (2)
------- ------- -------
End of year $ 162 $ 165 $ 180
======= ======= =======
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
-23-
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Southeastern Michigan Gas Enterprises, Inc. (the Company) is an investor-owned
holding company. The Company's utility subsidiaries purchase, distribute, and
transport natural gas to 234,000 customers within the state of Michigan. The
Company is also engaged in the marketing of natural gas to approximately 245
customers located in several states.
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Southeastern, Battle
Creek, Michigan Gas and SEMCO. Investments in unconsolidated companies at
least 20% owned, but not greater than 50% owned, are reported using the equity
method of accounting. All significant intercompany transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Rate Regulation. The rates of the utility subsidiaries, Southeastern, Battle
Creek and Michigan Gas, are subject in certain respects to the requirements of
state and local regulatory bodies. The MPSC authorizes the rates charged to
customers by Southeastern and Michigan Gas. Battle Creek's rates are subject
to the jurisdiction of the City Commission of Battle Creek, Michigan.
Utility Plant, Other Property and Depreciation. Utility plant and other
property are recorded at cost. The subsidiaries provide for depreciation on a
straight-line basis over the estimated useful lives of the related property.
The ratio of depreciation to the average balance of property approximated
3.6%, 4.0% and 4.1% for the years 1996, 1995 and 1994, respectively. Certain
investments in unconsolidated companies recorded using the equity method are
reported as other property. See Note 9 for further discussion.
Receivables, Gas Sales, Transportation and Gas Marketing Revenues. Customer
receivables, gas sales and transportation revenues arise from the operations of
the utility subsidiaries. Gas marketing revenues and receivables arise from
SEMCO's marketing operations.
Revenue Recognition. Southeastern, Michigan Gas and Battle Creek bill monthly
on a cycle basis and follow the industry practice of recognizing accrued
revenue for gas services rendered to their customers but not billed at month
end. SEMCO recognizes marketing revenues, and any related hedging gains or
losses, in the same period natural gas is delivered to customers. See Note 6
for further discussion about SEMCO's hedging activities.
Gas in Underground Storage. Gas in underground storage for Southeastern and
Michigan Gas is reported at average cost. Battle Creek's gas inventory is
stated at last-in, first-out (LIFO) cost. At December 31, 1996 and 1995, the
replacement cost of Battle Creek's gas inventory exceeded LIFO cost by
$1,440,000 and $343,000, respectively. SEMCO reports gas in storage at cost.
-24-
<PAGE>
In general, commodity costs and variable transportation costs are
capitalized as gas in underground storage. Fixed costs, primarily pipeline
demand charges and storage charges, are expensed as incurred through cost of
gas.
Cost of Gas. The utility subsidiaries have gas cost recovery mechanisms which
allow for the adjustment of rates charged to customers in response to increases
and decreases in the cost of gas purchased.
Income Taxes. Investment tax credits (ITC) utilized in prior years for income
tax purposes are deferred for financial accounting purposes and are amortized
through credits to the income tax provision over the lives of the related
property. The Company and its subsidiaries file a consolidated Federal income
tax return. Income taxes are allocated to each subsidiary based on its
separate taxable income.
Statements of Cash Flows. For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash and temporary cash
investments.
The Company entered into capital lease transactions totaling $3,252,000
and $3,737,000 in 1996 and 1995, respectively. In 1996, the Company amortized
and retired capital leases totaling $2,450,000. These noncash investing and
financing activities have been excluded from the consolidated statements of
cash flows.
Impairment of Long-Lived Assets. In January 1996, the Company adopted SFAS
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of." In general, this statement requires that long-lived assets
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The need for an impairment loss is evaluated by comparing the
carrying cost of the asset to the future cash flows (undiscounted and without
interest charges) expected from the use and eventual disposition of the asset.
Measurement of the impairment loss is based on the fair value of the asset. In
addition, SFAS 121 imposes stricter criteria for the recognition of regulatory
assets by requiring that such assets be probable of future recovery at each
balance sheet date. The adoption of SFAS 121 did not have a material impact on
the Company's financial position or results of operations.
Stock-Based Compensation. In October 1995 the FASB issued SFAS 123,
"Accounting for Stock-Based Compensation." In general, SFAS 123 recommends
that all stock-based compensation given to employees in exchange for their
services be expensed based on the fair value of the stock instrument.
Companies may choose to continue accounting for these transactions under
previously existing accounting standards, however those companies must
disclose, in a footnote, net income and earnings per share as if SFAS 123
accounting had been applied.
-25-
<PAGE>
As of December 31, 1996, the Company did not have any material stock-based
compensation plans in effect. In January 1997, however, the Company's Board of
Directors adopted, subject to approval by the Company's shareholders at the
Company's 1997 annual meeting, a Long-Term Incentive Plan providing for
stock-based awards to key management personnel. Awards would take the form of
one or more of the following: stock options, restricted stock, stock
appreciation rights, performance units and other stock incentives deemed
appropriate. Up to 500,000 shares of the Company's common stock would be
available for this plan.
2. REGULATORY MATTERS
Southeastern and Michigan Gas Rate Case. In December 1996, Southeastern and
Michigan Gas filed a combined general rate case with the MPSC requesting an
annual rate increase of $5,500,000. The rate case includes a request for the
recovery of certain expenses related to the change in accounting for the cost
of retiree medical benefits. In addition, the combined filing proposes a
merger of Southeastern and Michigan Gas, incorporates a declining block rate
schedule for sales customers and capacity reservation charges for
transportation, and would introduce incentive regulation, comprised of a
proposal to share excess authorized returns with ratepayers. The Company
expects an order from the MPSC in the fourth quarter of 1997. Any rate relief
granted will be based on all elements of cost of service.
State Property Tax Reductions. In June 1994, the MPSC issued Orders U-10617
and U-10618 to Michigan Gas and Southeastern, respectively. These orders
require the companies to offset deferred retiree medical costs with certain
reductions in Michigan state property taxes until the MPSC issues a final order
in the companies' general rate case. In accordance with orders U-10617 and
U-10618, Michigan Gas and Southeastern have reduced deferred retiree medical
costs by a combined total of $663,000 in 1996, $663,000 in 1995 and $437,000 in
1994.
Battle Creek Rate Increase. In November 1995, the City Commission of Battle
Creek approved a Battle Creek rate increase, effective December 1995, of
approximately $1,800,000. Battle Creek requested the increase to recover the
cost of certain accelerated main replacement projects, the cost of its retiree
medical benefits and overall increases in operating expenses.
Order 636 Transition Costs. Through the implementation of Order 636, the FERC
authorized interstate pipelines to directly bill certain transition costs to
former sales service customers. As a result, the Company incurred and recorded
Order 636 liabilities of $103,000 in 1995 and $1,223,000 in 1994. These costs
have been deferred because they are substantially recoverable from ratepayers
through gas cost recovery mechanisms. At December 31, 1996 and 1995, the
Company's recorded liabilities related to Order 636, and related deferred
assets, totaled $637,000 and $1,102,000, respectively. The Company does not
anticipate any significant additional direct billings related to Order 636.
-26-
<PAGE>
<TABLE>
Regulatory Assets and Liabilities. The Company's utility subsidiaries are
subject to the provisions of SFAS 71, "Accounting for the Effects of Certain
Types of Regulation." As a result, the actions of regulators affect when
revenues and expenses are recognized. Regulatory assets represent incurred
costs to be recovered from customers through the ratemaking process.
Regulatory liabilities represent benefits to be refunded to customers. The
following regulatory assets and liabilities were recorded on the consolidated
balance sheets as of December 31 (in thousands of dollars):
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Regulatory Assets
Deferred retiree medical benefits $13,260 $12,474
Deferred pension benefits 2,287 2,287
Unamortized loss on retirement of debt 3,353 3,598
Other 1,971 2,113
------- -------
$20,871 $20,472
======= =======
Regulatory Liabilities
Unamortized investment tax credit $ 3,417 $ 3,782
Tax benefits amortizable to customers 4,460 4,744
Other 67 --
------- -------
$ 7,944 $ 8,526
======= =======
</TABLE>
In the event the Company determines that it no longer meets the criteria
for following SFAS 71, the accounting impact would be an extraordinary,
non-cash charge to operations of an amount that could be material. Criteria
that give rise to the discontinuance of SFAS 71 include (1) increasing
competition that restricts the Company's ability to establish prices to recover
specific costs, and (2) a significant change in the manner in which rates are
set by regulators from cost-based regulation to another form of regulation.
The Company periodically reviews these criteria to ensure the continuing
application of SFAS 71 is appropriate.
3. INCOME TAXES
SFAS No. 109. The Company accounts for income taxes in accordance with SFAS
109, "Accounting For Income Taxes."
SFAS 109 requires an annual measurement of deferred tax assets and
deferred tax liabilities based upon the estimated future tax effects of
temporary differences and carry forwards. In general, the total deferred tax
expense or benefit for the year equals the difference between the beginning and
end of year balances in deferred tax assets and liabilities.
-27-
<PAGE>
<TABLE>
Provision for Income Taxes. The components of the provision for income taxes
are as follows (in thousands of dollars):
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal
Currently payable $ 3,227 $ 5,606 $ 5,849
Deferred to future periods (8,201) 812 (1,023)
Investment tax credits (267) (267) (267)
------- ------- -------
Total income taxes $(5,241) $ 6,151 $ 4,559
Less amounts included in:
Write-down of NOARK investment, net (11,308) -- --
Other income (loss), net (304) (37) 47
Extraordinary item, net -- -- (692)
------- ------- -------
Amount included in operating expenses $ 6,371 $ 6,188 $ 5,204
======= ======= =======
</TABLE>
<TABLE>
Reconciliation of Statutory Rate to Effective Rate. A reconciliation of the
difference between the Company's provision for income taxes and income taxes
computed at the statutory rate follows (in thousands of dollars):
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Net income (loss) $ (8,965) $11,331 $ 9,992
Add back:
Preferred dividends 194 195 196
Income taxes (5,241) 6,151 4,559
-------- ------- -------
Pre-tax income (loss) $(14,012) $17,677 $14,747
======== ======= =======
Computed federal income taxes $ (4,904) $ 6,187 $ 5,161
Depreciation -- (43) (184)
Amortization of deferred ITC (267) (267) (267)
Amortization of non-deductible amounts
resulting from acquisitions 216 217 216
Other (286) 57 (367)
-------- ------- -------
Total income taxes $ (5,241) $ 6,151 $ 4,559
======== ======= =======
</TABLE>
<TABLE>
Deferred Income Taxes. Deferred income taxes arise from temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements. The principal components of the Company's deferred
tax assets (liabilities) were as follows (in thousands of dollars):
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Property $(24,256) $(19,668)
Reserve for equity investment 11,530 --
Retiree medical benefit obligation 4,741 4,578
Retiree medical benefit regulatory assets (4,641) (4,549)
Gas in underground storage 2,934 2,412
ITC 1,392 1,526
Unamortized debt expense (1,197) (1,284)
Gas cost underrecovery (1,166) (641)
Other 914 795
-------- --------
Total deferred taxes $ (9,749) $(16,831)
======== ========
Gross deferred tax liabilities $(41,043) $(35,105)
Gross deferred tax assets 31,294 18,274
-------- --------
Total deferred taxes $ (9,749) $(16,831)
======== ========
</TABLE>
At December 31, 1996 and December 31, 1995 there was no valuation
allowance recorded against deferred tax assets.
-28-
<PAGE>
4. CAPITALIZATION
Common Stock Equity. The Company issued five percent stock dividends in May
1996, May 1995 and May 1994. Earnings per share of common stock, cash
dividends per share of common stock and average number of common shares
outstanding have been restated to reflect the stock dividends.
Pursuant to its DRIP, the Company issued 292,000 shares of common stock in
1996, 274,000 in 1995, and 307,000 shares in 1994. In January 1995, the
Company amended its DRIP to allow the Company to acquire common shares on the
open market to meet the dividend reinvestment and optional payment requirements
of the DRIP. During 1996 and 1995, the Company purchased a total of 320,000
and 314,000 shares, respectively, for the DRIP.
In January 1994, the Company issued 747,500 shares of common stock. Net
proceeds of approximately $14,629,000 were used to reduce notes payable to
banks incurred to finance the Company's ongoing capital expenditure program and
for general corporate purposes.
The Company has short-term credit arrangements, note agreements and
long-term debt indentures which contain restrictive financial covenants
including, among others, limits on the payment of dividends beyond certain
levels. Because of the NOARK write-down in December 1996, the Company would
not have been in compliance with certain of these covenants. However, the
Company has received waivers or amendments with respect to the affected credit
arrangements and expects no deviation from its historical dividend payment
record in 1997.
Cumulative Convertible Preferred Stock. At December 31, 1996 and 1995, 6,751
and 6,885 shares of the Company's $2.3125 cumulative convertible preferred
shares were outstanding and each share was convertible at the option of the
holder to 4.11 shares of common stock. At December 31, 1996, 27,747 shares of
common stock are reserved for issuance upon conversion to holders of the
convertible preferred stock.
Cumulative Preferred Stock of Subsidiary. The cumulative preferred stock of
Southeastern is callable at Southeastern's option at $105 per share. Payment
of dividends on Southeastern's preferred stock is fully guaranteed by the
Company.
Long-Term Debt. In 1994, the Company issued $80,000,000 of private placement
debt to complete the refinancing of certain higher cost debt. In connection
with the refinancing, the Company recorded an extraordinary charge for the
early extinguishment of debt of $1,286,000, net of tax.
There are no annual maturities or sinking fund requirements for the
Company's existing debt over the next five years.
Capital Lease Obligations. In December 1995, the Company entered into an
agreement for the sale and leaseback of vehicles and related equipment. The
resulting leases are classified as capital leases in accordance with SFAS 13,
"Accounting for Leases." The lease periods range from a few months on older
vehicles to fifty months on new vehicles. However, the Company may cancel any
lease at any time. When the leasing agent disposes of a leased vehicle, the
Company is liable for the difference between the remaining capital lease
obligation and the sales proceeds. Any gain on the sale of leased vehicles
also accrues to the Company.
-29-
<PAGE>
<TABLE>
The future minimum payments under capital leases at December 31, 1996 were
as follows (in thousands of dollars):
<S> <C>
1997 $2,008
1998 1,573
1999 1,071
2000 501
2001 1
------
Total minimum lease payments $5,154
Interest included in payments 615
------
Present value of minimum lease payments $4,539
Current portion 1,644
------
$2,895
======
</TABLE>
5. SHORT-TERM BORROWINGS
The Company maintains unsecured lines of credit at two banks. Interest on all
such lines are at variable rates, which do not exceed the banks' prime lending
rates. These arrangements are set to expire during 1997 and the Company
expects they will be renegotiated at comparable terms.
<TABLE>
Information regarding these borrowings for each of the last three years is
as follows (in thousands of dollars):
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Notes payable balance at year end $91,100 $51,700 $50,000
Unused lines of credit at year end 8,800 38,200 39,900
Average interest rate at year end 7.0% 6.4% 6.6%
Maximum borrowings at any month-end $91,100 $52,400 $55,842
Average borrowings 41,228 28,224 31,392
Weighted average cost of borrowing 6.0% 6.5% 5.2%
</TABLE>
6. FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Financial Instruments. The following methods and assumptions were used to
estimate the fair value of each significant class of financial instruments:
Cash, temporary cash investments, accounts payables, receivables, notes payable
to banks, and capital lease obligations. The carrying amount approximates fair
value.
Long-term debt. The fair values of the Company's long-term debt are estimated
based on quoted market prices for the same or similar issues or, where no
market quotes are available, based on discounted future cash flows using
current interest rates at which similar loans would be made to borrowers with
similar credit ratings and remaining maturities.
<TABLE>
The estimated fair values of the Company's long-term debt as of
December 31, 1996 and 1995 are as follows (in thousands of dollars):
<CAPTION>
1996 1995
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Long-term debt $103,573 $107,625 $103,588 $113,198
</TABLE>
-30-
<PAGE>
Hedging Activities. SEMCO enters into sales commitments which may extend up to
60 months into the future. Because of the volatility of natural gas prices,
there are significant market risks associated with these commitments. To
manage these risks, SEMCO maintains a hedging program. The primary objective
of SEMCO's hedging program is to attempt to eliminate the effect of price
fluctuations in the natural gas spot market on their extended sales
commitments.
SEMCO uses several mechanisms to hedge against this market risk. The most
frequently used hedges are natural gas futures and options. SEMCO may also
enter into natural gas swap agreements, contract to purchase natural gas from
producers for future delivery or inject gas into storage for later withdrawal.
Gains and losses on these transactions, accounted for as hedges, are included
in income in the same period natural gas is delivered to customers pursuant to
the underlying marketing contracts.
Cash or other assets are deposited with brokers at the time future or
option contracts are initiated. The change in market value of these contracts
requires adjustment of the margin account balances. The margin deposits of
$7,465,000 and $2,009,000 as of December 31, 1996 and 1995, respectively, are
included with the deferred gains and losses on future and option contracts in
other current assets. The cost of margin deposits approximates fair value.
<TABLE>
SEMCO records deferred gains and losses on future and option contracts
which will be offset by the corresponding underlying physical transaction. The
following summarizes the deferred gain (loss) on open contracts at December 31,
representing the difference between the current market value and the original
contract value (in thousands of dollars):
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Futures Contracts
Notional amount (MMcf) 8,080 5,150
Unrealized gain (loss) $ (843) $ 479
Options Contracts
Notional amount (MMcf) 148 1,790
Unrealized gain $ 176 $ 213
</TABLE>
In addition to the above balances, SEMCO recorded approximately $250,000
in net deferred gains on contracts closed prior to December 31, 1996 related to
1997 sales commitments which is also included in other current assets.
As of December 31, 1996 and 1995, SEMCO also had outstanding natural gas
swap agreements covering a notional amount of 7,476,000 Mcf and 2,292,000 Mcf,
respectively. The estimated unrealized gain of these agreements, determined by
market quotes, was $450,000 and $170,000 at December 31, 1996 and 1995,
respectively.
SEMCO also hedges certain of its sales commitments with gas held in
storage. At December 31, 1996 and 1995, SEMCO held approximately 1,868,000 Mcf
and 1,207,000 Mcf in storage with a carrying value of $7,985,000 and
$2,253,000, respectively. At December 31, 1996 and 1995, SEMCO had deferred
losses associated with this gas of $1,732,000 and $978,000, respectively.
-31-
<PAGE>
7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Pension Plans. The Company has non-contributory, defined benefit pension
plans, covering substantially all employees. Pension plan benefits are
generally based upon years of service and compensation during the final years
of employment. The Company's funding policy is to contribute amounts annually
to the plans based upon actuarial and economic assumptions designed to achieve
adequate funding of projected benefit obligations. The Company contributes at
least the minimum required by the Employee Retirement Income Security Act of
1974, as amended.
At December 31, 1996, plan assets consisted of 53.2% equity investments,
12.9% guaranteed income insurance contracts, 33.7% fixed income securities and
.2% cash equivalents.
<TABLE>
Combined net periodic pension cost for the Company's defined benefit plans
consists of the following components (in thousands of dollars):
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service cost $ 1,796 $ 1,465 $ 1,700
Interest cost on projected benefit obligation 3,803 3,495 3,246
Actual return on assets (6,290) (8,497) 287
Amortization of prior service costs 471 471 471
Amortization of unrecognized net (gain) loss 133 (329) (8)
Amortization of transition obligation 79 79 79
Asset gain (loss) deferred 2,507 5,066 (3,514)
------- ------- -------
Net periodic pension cost $ 2,499 $ 1,750 $ 2,261
======= ======= =======
</TABLE>
<TABLE>
The following table sets forth the funded status of the plans and amounts
recognized in the Company's consolidated balance sheets as of December 31, 1996
and 1995 (in thousands of dollars):
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $39,074 $38,120
Non-vested benefit obligation 2,012 2,302
------- -------
Accumulated benefit obligation $41,086 $40,422
======= =======
Projected benefit obligation $52,869 $53,588
Plan assets at fair value 49,788 44,475
------- -------
Projected benefit obligation in excess of plan assets $ 3,081 $ 9,113
Unrecognized net gain (loss) 6,316 (372)
Unrecognized prior service cost (4,106) (4,577)
Unrecognized net transition obligation at December 31 (505) (585)
------- -------
Pension liability recognized in the consolidated
balance sheet $ 4,786 $ 3,579
======= =======
</TABLE>
<TABLE>
Significant pension plan assumptions are as follow:
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Plan discount rates 7.75% 7.25% 8.25%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
Rates of increase in future compensation levels 5.00% 5.00% 5.00%
</TABLE>
-32-
<PAGE>
Other Postretirement Benefits. In addition to providing pension benefits, the
Company provides certain medical and prescription drug benefits to qualified
retired employees, their spouses and covered dependents. To qualify, a retiree
must have started employment before January 1, 1992 and have had at least ten
years of service. Retirees with less than 30 years of service are required to
contribute from 5% to 50% of the Company's coverage cost, with the percentage
depending on the retiree's age and years of service. Employees hired after
January 1, 1992 are not eligible for these benefits under the current plan.
The Company accounts for retiree medical benefits in accordance with
SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." This standard requires the full accrual of such costs during the
years that the employee renders service to the Company until the date of full
eligibility. The Company adopted SFAS 106 effective January 1, 1993.
In December 1992, the MPSC issued a generic order addressing the adoption
of SFAS 106 by utilities under their jurisdiction. The order allows Michigan
utilities to adopt SFAS 106 for accounting and ratemaking purposes, subject to
a final order in a general rate case, and requires the external funding for
amounts recovered in rates. Southeastern and Michigan Gas filed a combined
general rate case in accordance with the order during 1996. Any rate relief
granted will be based on all elements of cost of service, including this
obligation.
The City Commission of Battle Creek allowed the recovery of retiree
medical benefits in Battle Creek's December 1995 rate increase, as discussed in
Note 2.
<TABLE>
The combined net periodic retiree medical costs consisted of the following
components (in thousands of dollars):
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost $ 865 $1,443 $1,621
Interest cost 1,854 2,945 2,825
Actual return on assets (1,009) (1,116) 42
Net amortization and deferral 844 2,106 1,238
------ ------ ------
Net periodic retiree medical cost $2,554 $5,378 $5,726
====== ====== ======
</TABLE>
In 1996, 1995 and 1994, the Company expensed net retiree medical costs of
$1,395,000, $905,000 and $841,000, respectively, consisting of total costs
incurred under the pay-as-you-go method plus additional retiree medical costs
recorded by the non-utility subsidiaries and Battle Creek. In 1996, 1995 and
1994, the Company also expensed $663,000, $663,000 and $437,000, respectively,
of retiree medical costs pursuant to certain MPSC orders regarding the
reduction in Michigan state property taxes. See Note 2 for further discussion
of these MPSC orders. The Company recorded regulatory assets related to the
utility subsidiaries' retiree medical costs of $496,000, $3,810,000 and
$4,448,000 in 1996, 1995 and 1994, respectively.
The Company funds retiree medical benefits on a discretionary basis
through an Internal Revenue Code Section 401(h) account. In 1996 and 1995, the
Company made cash contributions to the 401(h) account of $744,000 and $437,000,
respectively. No contributions were made to the 401(h) account in 1994.
-33-
<PAGE>
<TABLE>
The funded status of the retiree medical benefit plans is reconciled with
the liability recorded at December 31, 1996 and 1995 as follows (in thousands
of dollars):
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Actuarial present value of estimated benefits:
Retirees $ 9,796 $ 13,006
Fully eligible active 5,252 8,772
Other active 11,477 19,487
-------- --------
Accumulated retiree medical obligation $ 26,525 $ 41,265
Plan assets at fair value 7,702 5,949
-------- --------
Accumulated retiree medical obligation in excess
of plan assets $ 18,823 $ 35,316
Unrecognized net obligation at transition (26,878) (28,558)
Unrecognized net gain 22,791 7,084
-------- --------
Recorded liability $ 14,736 $ 13,842
======== ========
</TABLE>
<TABLE>
Significant plan assumptions are as follows:
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Plan discount rate 7.75% 7.25% 8.25%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
</TABLE>
The 1996 costs were developed based on the substantive health care plan in
effect at January 1, 1996. As of December 31, 1996, the actuary assumed that
retiree medical cost increases would be 9.0% in 1996, 8.6% in 1997, and
decrease uniformly to 5.8% in 2005 and thereafter and that prescription drug
cost increases would be 13.0% in 1996, 12.1% in 1997, and decrease uniformly to
5.8% in 2005 and thereafter. The health care cost trend rate assumption
significantly affects the amounts reported. For example, a one percentage
point increase in each year would increase the accumulated retiree medical
obligation as of December 31, 1996 by $4,784,000 and the aggregate of the
service and interest cost components of net periodic retiree medical costs for
1996 by $703,000.
Employee Stock Ownership Trust. The Company has an employee stock ownership
trust (ESOT) which covers substantially all employees. Under the provisions of
this trust, the Company may contribute an annual amount at its discretion for
the benefit of eligible employees. The contribution, if any, may be made in
cash or in common shares of the Company. For the years 1995 and 1994, the
Company's contributions were $300,000 and $600,000, respectively. The Company
did not make a contribution to the ESOT in 1996.
8. COMMITMENTS AND CONTINGENCIES
Construction Program. The Company's plans for expansion and improvement of its
distribution and transmission system, as well as other operations, are under a
process of continuing review. Aggregate capital expenditures for all segments
of the Company's operations for 1997 are projected at $29,400,000. Certain
commitments have been made in connection with these expenditures.
Guarantees. SEMCO Arkansas Pipeline Company, a wholly-owned subsidiary of
SEMCO, has a 32% interest in a partnership which operates the NOARK Pipeline
System. NOARK is a 302-mile intrastate natural gas pipeline, originating in
northwest Arkansas and extending northeast across the state. The pipeline
became operational during the third quarter of 1992.
-34-
<PAGE>
The Company, SEMCO Arkansas Pipeline Company and SEMCO have guaranteed 40%
of the principal and interest payments on approximately $82,300,000 of debt
used to finance the pipeline. Of the total debt, $53,550,000 is outstanding
pursuant to a long-term arrangement requiring annual principal payments of
approximately $3,150,000 together with interest on the unpaid balance. This
arrangement matures in 2009 and has a fixed interest rate of 9.7375%. The
remaining debt is pursuant to a $30,000,000 multibank revolving line of credit
which currently matures April 26, 1998. Under the terms of the credit
agreement, NOARK may request, on an annual basis, a one-year extension of the
then-effective termination date. At December 31, 1996, NOARK had $28,750,000
outstanding under the agreement with interest payments at a variable interest
rate.
NOARK has been operating below capacity and generating losses since it was
placed in service. Operating cash flows have been insufficient to meet
principal and interest payments on the debt. The Company contributed $906,000
to NOARK in October 1994, $760,000 in January 1995, $800,000 in April 1995,
$880,000 in July 1995 and $872,000 in October 1995, in connection with its
guarantee.
In December 1995, NOARK received $6,000,000 in settlement of litigation
between Vesta Energy Company and the NOARK partners. Vesta paid the settlement
in consideration of termination of a firm transportation agreement with NOARK,
including all related contracts, and release from all obligations related to
the NOARK Pipeline System.
NOARK used the Vesta settlement to temporarily reduce outstanding
borrowings on its revolving line of credit. Therefore, the Company was not
required to make another contribution to NOARK until October 1996, when the
Company contributed $844,000. In 1997, the Company estimates its required
contributions to NOARK in the range of $3,000,000 to $3,500,000.
In December 1996, the Company recorded a one-time non-cash after-tax
charge against earnings of $21,000,000 on its investment and participation as a
general partner in NOARK. On a pre-tax basis, the charge against earnings
represents a significant portion of the Company's current investment, including
loan guarantees, in NOARK. The Company recorded this write-down due to its
inability to recover the carrying amount of its investment in NOARK, including
the loan guarantees. The Company recognized a loss in value of its NOARK
investment due to recurring losses generated by NOARK and NOARK's continued
inability to meet principal and interest payments on the partnership debt.
The Company's short-term credit arrangements, note agreements and
long-term debt indentures contain restrictive covenants requiring certain
levels of earnings and the maintenance of certain financial ratios. Because of
the NOARK write-down, the Company would have been in violation of certain of
these covenants, however the Company has received waivers or amendments for all
affected covenants.
The Company will continue to explore opportunities to improve the project,
but the write-down is expected to eliminate the need for significant NOARK
operating losses being recorded in the Company's future income statements and
will not affect the Company's cash or stock dividend.
The Company will continue to try to sell its interest in NOARK.
Environmental. Effective January 1, 1997, the Company will adopt the
provisions of Statement of Position 96-1, "Environmental Remediation
Liabilities." This Statement provides authoritative guidance for recognition,
measurement, display, and disclosure of environmental remediation liabilities
in financial statements. Upon adoption, SOP 96-1 is not expected to have a
material impact on the Company's financial position or results of operations.
-35-
<PAGE>
9. INVESTMENTS IN AFFILIATES
The equity method of accounting is used for interests the Company holds in
affiliates 20% to 50% owned or in which the Company has significant influence
over operations. These affiliate companies are generally involved in natural
gas transmission, storage, or associated operations. The Company provides
income taxes on its share of undistributed earnings of these subsidiaries at
the time the earnings are included in consolidated income. Refer to Note 8 for
a discussion of the Company's significant guarantees of affiliate debt.
<TABLE>
At December 31, 1996, the Company held the following interests in these
affiliates:
<CAPTION>
Percent
Ownership
---------
<S> <C>
Eaton Rapids Gas Storage System 50%
Michigan Intrastate Lateral System 50
Michigan Intrastate Pipeline System 50
Nimrod Limited Partnership 29
NOARK Gas Services, L.P. 40
NOARK Pipeline System, L.P. 32
</TABLE>
<TABLE>
Summarized combined financial information for the Company's investments in
affiliate companies for the years ended December 31, 1996, 1995 and 1994 is as
follows (in thousands of dollars):
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 13,866 $ 39,179 $ 20,152
Operating income $ 4,029 $ 9,958 $ 8,334
Net income (loss) $ (4,230) $ (225) $ 329
======== ======== ========
The Company's share of net loss $ (1,196) $ (258) $ (20)
======== ======== ========
Current assets $ 2,744 $ 8,988 $ 9,320
Non-current assets 131,211 138,741 140,530
-------- -------- --------
Total assets $133,955 $147,729 $149,850
======== ======== ========
Current liabilities $ 9,659 $ 12,310 $ 12,505
Non-current liabilities 114,997 118,322 113,902
Equity 9,299 17,097 23,443
-------- -------- --------
Total liabilities and equity $133,955 $147,729 $149,850
======== ======== ========
The Company's equity investment $ 5,120 $ 8,024 $ 9,754
======== ======== ========
The Company's share of undistributed
losses $ (1,733) $ (1,193) $ (903)
======== ======== ========
</TABLE>
10. QUARTERLY FINANCIAL INFORMATION (Unaudited)
In the opinion of the Company, the following quarterly information includes all
adjustments necessary for a fair statement of the results of operations for
such periods. Earnings and dividends per share of common stock are calculated
based upon the weighted average number of shares outstanding during each
quarter. Due to the seasonal nature of the Company's gas distribution
business, the results of operations reported on a quarterly basis show
substantial variations.
-36-
<PAGE>
<TABLE>
The following amounts are shown in thousands of dollars, except per share
amounts:
<CAPTION>
Quarters First Second Third Fourth
- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C>
1996
Operating revenue $176,128 $82,390 $91,082 $198,030
Operating income 11,859 2,696 34 9,506
Net income (loss) <F1> 8,742 89 (2,853) (14,943)
Earnings (loss) per
share <F1><F2><F3> .71 .01 (.23) (1.20)
Cash dividends per share <F2> .19 .19 .20 .20
1995
Operating revenue $117,305 $65,741 $50,607 $101,885
Operating income 10,659 2,960 7 8,800
Net income (loss) 7,457 295 (2,688) 6,267
Earnings (loss) per
share <F2><F3> .60 .02 (.22) .50
Cash dividends per share <F2> .18 .18 .19 .19
<FN>
<F1>
Includes the impact of a $21,000 (net of tax), or $1.69 per share,
write-down of NOARK investment in the Fourth Quarter (see note 8).
Excluding the write-down, net income was $6,057, or $.49 per share.
<F2>
Adjusted for five percent stock dividends in May 1996 and May 1995.
<F3>
Total for each year may not equal annual earnings per share due to
changes in shares outstanding.
</FN>
</TABLE>
-37-
<PAGE>
Report of Independent Public Accountants
To Southeastern Michigan Gas Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC. (a Michigan
corporation) and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' investment and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements and the schedules referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southeastern
Michigan Gas Enterprises, Inc. and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in item 14(a)2 are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audits
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 14, 1997.
-38-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-39-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the captions "Information About Directors"
in Registrant's definitive Proxy Statement (filed pursuant to Regulation 14A)
with respect to Registrant's April 15, 1997 Annual Meeting of Shareholders is
incorporated by reference herein.
The executive officers of the Company are William L. Johnson, Robert F.
Caldwell, Carl W. Porter and George C. Noble.
Mr. Johnson (age 54) has been President and Chief Executive Officer of the
Company since May 1996. From 1994 to May 1996 he was Chief Executive Officer
of Northern Pipeline Construction Company of Kansas City, Missouri, and from
1990 to 1994 he was President, Gas Service Division of Western Resources, Inc.
of Topeka, Kansas.
Mr. Caldwell (age 41) was elected Executive Vice President of the Company
in April 1993. He served as Senior Vice President of the Company from April
1991 to April 1993, Vice President from February 1989 to April 1991, Secretary
from January 1985 to February 1991, and has been with the Company or one of its
subsidiaries in other capacities since 1979.
Mr. Porter (age 47) has been Senior Vice President and Chief Operating
Officer of the Company since July 1996. He was Vice President-Gas Utilities of
Itron, Inc., Spokane, Washington, from August 1995 to July 1996. From 1992 to
1995 he was Senior Vice President of Operations of New Jersey Natural Gas,
Wall, New Jersey, and from 1990 to 1992 he was Vice President of Operations of
Western Resources, Inc., Topeka, Kansas.
Mr. Noble (age 47) was elected Vice President of Information Systems of
the Company in August 1997. He served the Company as Director of Information
Systems from 1993 to August 1997 and Manager of Information Systems from 1985
to 1993.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the captions "Compensation Committee
Interlocks and Insider Participation" and "Compensation of Directors and
Executive Officers" in Registrant's definitive Proxy Statement (filed pursuant
to Regulation 14A) with respect to Registrant's April 15, 1997 Annual Meeting
of Shareholders is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Stock Outstanding, Voting
Rights and Votes Required" in the Registrant's definitive Proxy Statement
(filed pursuant to Regulation 14A) with respect to Registrant's April 15, 1997
Annual Meeting of Shareholders, is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Employment and Related
Agreements" in the Registrant's definitive Proxy Statement (filed pursuant to
Regulation 14A) with respect to Registrant's April 15, 1997 Annual Meeting of
Shareholders, is incorporated by reference herein.
-40-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements. The following financial
statements are included in Part II, item 8 above.
Pages in 10-K
-------------
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 19
Consolidated Statements of Cash Flows for the
years ended December 31, 1996, 1995 and 1994 20
Consolidated Balance Sheets as of
December 31, 1996 and 1995 21
Consolidated Statements of Capitalization as
of December 31, 1996 and 1995 22
Consolidated Statements of Changes in
Stockholders' Investment for the years
ended December 31, 1996, 1995 and 1994 23
Notes to the Consolidated Financial Statements 24-37
Report of Independent Public Accountants 38
(a) 2. Financial Statement Schedules.
The following additional data should be read in conjunction with the
Consolidated Financial Statements in Part II, item 8 above.
Schedules not included herein have been omitted because they are not
applicable or the required information is shown in such financial
statements or notes thereto.
Schedule
Number Pages in 10-K
-------- -------------
I Condensed Financial Information of
Southeastern Michigan Gas Company 45
II Consolidated Valuation and Qualifying
Accounts for the years ended
December 31, 1996, 1995 and 1994 49
-41-
<PAGE>
(a) 3. Exhibits, including those incorporated by reference
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- ------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
3 Articles of Incorporation and Bylaws
3(a) 1--Articles of Incorporation of Southeastern
Michigan Gas Enterprises, Inc.
(Enterprises), as restated
July 11, 1989.(a) x
2--Certificate of amendment to Article III of
the Articles of Incorporation dated
May 16, 1990.(b) x
3(b) Bylaws of Enterprises--last revised
March 1, 1995.(i) x
4(a) Trust Indenture dated April 1, 1992, between
Enterprises and NBD Bank, N.A. as Trustee.(e) x
4(b) Note Agreement dated June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(g) x
9 Voting Trust Agreement. NA NA
10 Material Contracts.
10(a) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(c) x
10(b) Group A Employment Contract.(f) x
10(c) Short-Term Incentive Plan.(f) x
10(d) Deferred Compensation and Phantom Stock
Purchase Agreement (for outside
directors only).(h) x
11 Statement re computation of per share earnings. NA NA
12 Statements re computation of ratios.(d) x
13 Annual report to shareholders. NA NA
16 Letter re change in certifying accountant. NA NA
18 Letter re change in accounting principles. NA NA
21 Subsidiaries of the Registrant. x
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consent of Independent Public Accountants. x
24 Power of Attorney. x
27 Financial Data Schedule. x
28 Information from reports furnished to state
insurance regulatory authorities. NA NA
99.1 Proxy Statement dated March 7, 1997.(j) x
99.2 Stock Option Certificate and Agreement
dated October 10, 1996 between Enterprises
and William L. Johnson. x
99.3 Stock Option Certificate and Agreement
dated February 26, 1997 between Enterprises
and William L. Johnson. x
99.4 Rights Agreement dated as of April 15, 1997
between Enterprises and Continental Stock
Transfer & Trust Company, as Rights Agent. x
-42-
<PAGE>
Key to Exhibits Incorporated by Reference
(a) Filed with Enterprises' Form 10-K for 1989, dated March 29, 1990,
File No. 0-8503.
(b) Filed with Enterprises' Form 10-K for 1990, dated March 28, 1991,
File No. 0-8503.
(c) Filed with Enterprises' Registration Statement, Form S-2, No.
33-46413, filed March 16, 1992.
(d) Filed with Enterprises' Form 10-K for 1991, dated March 27, 1992,
File No. 0-8503.
(e) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1992, File No. 0-8503.
(f) Filed with Enterprises' Form 10-K for 1992, dated March 30, 1993,
File No. 0-8503.
(g) Filed with Enterprises' Form 10-Q for the quarter ended June 30,
1994, File No. 0-8503.
(h) Filed with Enterprises' Form 10-Q for the quarter ended September 30,
1994, File No. 0-8503.
(i) Filed with Enterprises' Form 10-K for 1995, dated March 28, 1995,
File No. 0-8503.
(j) Filed March 6, 1997, pursuant to Rule 14a-6 of the Exchange Act, File
No. 0-8503.
ITEM 14. (Continued)
(b) No reports on Form 8-K have been filed during the quarter ended
December 31, 1996.
(c) The Exhibits, if any, filed herewith are identified on the Exhibit Index.
(d) The financial statement schedules filed are listed under Item 14.(a).2.
above.
-43-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
Date: March 27, 1997 By William L. Johnson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
William L. Johnson President and Chief Executive March 27, 1997
Officer (Director)
Robert F. Caldwell Executive Vice President and March 27, 1997
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Frank G. Andreoni* Director March 27, 1997
Daniel A. Burkhardt* Director March 27, 1997
Edward J. Curtis* Director March 27, 1997
John T. Ferris* Director March 27, 1997
Michael O. Frazer* Director March 27, 1997
Harvey I. Klein* Director March 27, 1997
Frederick S. Moore* Director March 27, 1997
Edith A. Stotler* Director March 27, 1997
Donald W. Thomason* Director March 27, 1997
*By William L. Johnson March 27, 1997
Attorney-in-fact
-44-
<PAGE>
SCHEDULE I
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
STATEMENT OF INCOME
<CAPTION>
Years ended December 31,
---------------------------------
1996 1995 1994
------- ------- -------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUE
Gas sales $87,450 $68,321 $74,151
Transportation 3,103 3,055 3,057
Other operations 382 470 490
------- ------- -------
90,935 71,846 77,698
------- ------- -------
OPERATING EXPENSES
Cost of gas sold 57,242 40,181 47,240
Operations and maintenance 15,175 14,182 13,869
Depreciation 4,477 4,111 3,869
Income taxes 2,206 2,276 2,019
Taxes other than income taxes 3,475 3,275 3,538
------- ------- -------
82,575 64,025 70,535
------- ------- -------
OPERATING INCOME 8,360 7,821 7,163
OTHER INCOME, NET 76 239 203
------- ------- -------
INCOME BEFORE INCOME DEDUCTIONS 8,436 8,060 7,366
------- ------- -------
INCOME DEDUCTIONS
Interest on long-term debt 1,863 1,864 1,853
Other interest 971 624 516
Amortization of debt expense 117 193 169
------- ------- -------
2,951 2,681 2,538
------- ------- -------
NET INCOME 5,485 5,379 4,828
Dividends on preferred stock 178 178 178
------- ------- -------
NET INCOME AFTER DIVIDENDS
ON PREFERRED STOCK $ 5,307 $ 5,201 $ 4,650
======= ======= =======
</TABLE>
-45-
<PAGE>
SCHEDULE I
(cont.)
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
BALANCE SHEET
A S S E T S
-----------
<CAPTION>
December 31,
------------------------
1996 1995
-------- --------
(Thousands of Dollars)
<S> <C> <C>
UTILITY PLANT
Plant in service, at original cost $159,111 $142,645
Less - Accumulated depreciation 60,803 56,676
-------- --------
98,308 85,969
Construction work in progress 16 918
-------- --------
98,324 86,887
-------- --------
OTHER PROPERTY, NET 440 573
-------- --------
CURRENT ASSETS
Cash and temporary cash investments, at cost 93 163
Receivables
Affiliates 27 369
Nonaffiliates, less reserves of $476 and $128 11,796 10,155
Accrued utility revenue 6,998 6,533
Material and supplies, at average cost 1,634 1,858
Gas in underground storage, at average cost 8,518 4,261
Property taxes assessed and prepayments 1,822 1,678
Accumulated deferred income taxes -- 892
Other current assets 3,627 --
-------- --------
34,515 25,909
-------- --------
DEFERRED CHARGES
Unamortized debt expense 1,602 1,719
Other 10,508 9,689
-------- --------
12,110 11,408
-------- --------
$145,389 $124,777
======== ========
</TABLE>
-46-
<PAGE>
SCHEDULE I
(cont.)
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
BALANCE SHEET
CAPITALIZATION AND LIABILITIES
<CAPTION>
December 31,
------------------------
1996 1995
-------- --------
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION
Common stock equity $ 41,501 $ 40,594
Cumulative preferred stock 3,100 3,100
Long-term debt 23,000 23,000
Capital lease obligations 2,319 1,826
-------- --------
69,920 68,520
-------- --------
CURRENT LIABILITIES
Note payable to affiliate 29,432 17,375
Accounts payable
Affiliates 2,202 1,912
Nonaffiliates 11,083 5,402
Customer advance payments 2,889 3,023
Accrued taxes 2,078 1,603
Accumulated deferred income taxes 48 --
Amounts payable to customers 328 682
Other 2,397 1,499
-------- --------
50,457 31,496
-------- --------
COMMITMENTS AND CONTINGENCIES
DEFERRED CREDITS
Accumulated deferred income taxes 4,643 4,240
Unamortized investment tax credits 1,859 2,027
Customer advances for construction 5,853 6,405
Other 12,657 12,089
-------- --------
25,012 24,761
-------- --------
$145,389 $124,777
======== ========
</TABLE>
-47-
<PAGE>
SCHEDULE I
(cont.)
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF
SOUTHEASTERN MICHIGAN GAS COMPANY
STATEMENT OF CASH FLOWS
<CAPTION>
Years ended December 31,
---------------------------------
1996 1995 1994
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITY
Cash received from customers $ 88,606 $ 67,202 $ 81,263
Cash paid for payrolls and to suppliers (73,878) (50,046) (59,478)
Interest paid (2,951) (2,488) (2,647)
Income taxes paid (792) (1,652) (3,069)
Taxes other than income taxes paid (3,499) (3,405) (3,272)
Other cash receipts, net 445 372 11
-------- -------- --------
NET CASH FROM OPERATING ACTIVITY 7,931 9,983 12,808
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITY
Capital expenditures (15,487) (10,759) (6,371)
Proceeds from sale of property
and equipment less removal costs 7 (103) 128
-------- -------- --------
NET CASH FROM INVESTING ACTIVITY (15,480) (10,862) (6,243)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITY
Change in notes payable to affiliate 12,057 4,705 (7,270)
Issuance of long-term debt -- -- 23,000
Repayment of long-term debt -- -- (17,502)
Payment of dividends (4,578) (4,378) (4,178)
-------- -------- --------
NET CASH FROM FINANCING ACTIVITY 7,479 327 (5,950)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS (70) (552) 615
CASH AND TEMPORARY CASH INVESTMENTS
Beginning of Year 163 715 100
-------- -------- --------
End of Year $ 93 $ 163 $ 715
======== ======== ========
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING ACTIVITY
Net income available for common stock $ 5,307 $ 5,201 $ 4,650
Adjustments to reconcile net income to
net cash from operating activity
Depreciation 4,477 4,111 3,869
Deferred taxes and ITC 1,175 94 (1,349)
Accounts receivable (1,299) (2,484) 697
Accrued utility revenue (465) (2,061) 1,737
Materials and supplies and gas in
underground storage (4,033) 4,374 2,421
Property taxes assessed and
prepayments (144) (130) 271
Accounts payable 5,971 746 (1,438)
Amounts payable to customers (354) 64 102
Other, net (2,704) 68 1,848
-------- -------- --------
NET CASH FROM OPERATING ACTIVITY $ 7,931 $ 9,983 $ 12,808
======== ======== ========
</TABLE>
-48-
<PAGE>
SCHEDULE II
<TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(Thousands of Dollars)
<CAPTION>
Additions Deductions
--------- From Reserve
Balance Provision for Purpose of Balance
Beginning Charged Which the Reserve End
Description of Period to Income Was Provided of Period
- ------------------------------------------------------- --------- --------- ----------------- ---------
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------
<S> <C> <C> <C> <C>
RESERVE DEDUCTED FROM RECEIVABLES IN BALANCE SHEET -
UNCOLLECTIBLE ACCOUNTS $ 729 $ 1,209 $ 691 $ 1,247
====== ======= ====== =======
RESERVE DEDUCTED FROM OTHER PROPERTY IN BALANCE SHEET $2,401 $ -0- $ -0- $ 2,401
====== ======= ====== =======
RESERVE FOR EQUITY INVESTMENT $ -0- $32,942 $ -0- $32,942
====== ======= ====== =======
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------
<S> <C> <C> <C> <C>
RESERVE DEDUCTED FROM RECEIVABLES IN BALANCE SHEET -
UNCOLLECTIBLE ACCOUNTS $ 889 $ 608 $ 768 $ 729
====== ====== ====== ======
RESERVE DEDUCTED FROM OTHER PROPERTY IN BALANCE SHEET $1,801 $ 600 $ -0- $2,401
====== ====== ====== ======
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
------------------------------------
<S> <C> <C> <C> <C>
RESERVE DEDUCTED FROM RECEIVABLES IN BALANCE SHEET -
UNCOLLECTIBLE ACCOUNTS $1,355 $ 899 $1,365 $ 889
====== ====== ====== ======
RESERVE DEDUCTED FROM OTHER PROPERTY IN BALANCE SHEET $2,202 $ -0- $ 401 $1,801
====== ====== ====== ======
</TABLE>
-49-
<PAGE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
Exhibit Index
Form 10-K
1996
Filed
--------------------
Exhibit By
No. Description Herewith Reference
- ------- ----------- -------- ---------
2 Plan of Acquisition, etc. NA NA
3 Articles of Incorporation and Bylaws
3(a) 1--Articles of Incorporation of Southeastern
Michigan Gas Enterprises, Inc.
(Enterprises), as restated
July 11, 1989.(a) x
2--Certificate of amendment to Article III of
the Articles of Incorporation dated
May 16, 1990.(b) x
3(b) Bylaws of Enterprises--last revised
March 1, 1995.(i) x
4(a) Trust Indenture dated April 1, 1992, between
Enterprises and NBD Bank, N.A. as Trustee.(e) x
4(b) Note Agreement dated June 1, 1994,
relating to issuance of $80,000,000 of
long-term debt.(g) x
9 Voting Trust Agreement. NA NA
10 Material Contracts.
10(a) Guaranty Agreement dated October 10, 1991,
relating to financing of NOARK.(c) x
10(b) Group A Employment Contract.(f) x
10(c) Short-Term Incentive Plan.(f) x
10(d) Deferred Compensation and Phantom Stock
Purchase Agreement (for outside
directors only).(h) x
11 Statement re computation of per share earnings. NA NA
12 Statements re computation of ratios.(d) x
13 Annual report to shareholders. NA NA
16 Letter re change in certifying accountant. NA NA
18 Letter re change in accounting principles. NA NA
21 Subsidiaries of the Registrant. x
22 Published report regarding matters submitted
to a vote of security holders. NA NA
23 Consent of Independent Public Accountants. x
24 Power of Attorney. x
27 Financial Data Schedule. x
28 Information from reports furnished to state
insurance regulatory authorities. NA NA
99.1 Proxy Statement dated March 7, 1997.(j) x
99.2 Stock Option Certificate and Agreement
dated October 10, 1996 between Enterprises
and William L. Johnson. x
99.3 Stock Option Certificate and Agreement
dated February 26, 1997 between Enterprises
and William L. Johnson. x
99.4 Rights Agreement dated as of April 15, 1997
between Enterprises and Continental Stock
Transfer & Trust Company, as Rights Agent. x
<PAGE>
Key to Exhibits Incorporated by Reference
(a) Filed with Enterprises' Form 10-K for 1989, dated March 29, 1990,
File No. 0-8503.
(b) Filed with Enterprises' Form 10-K for 1990, dated March 28, 1991,
File No. 0-8503.
(c) Filed with Enterprises' Registration Statement, Form S-2, No.
33-46413, filed March 16, 1992.
(d) Filed with Enterprises' Form 10-K for 1991, dated March 27, 1992,
File No. 0-8503.
(e) Filed with Enterprises' Form 10-Q for the quarter ended March 31,
1992, File No. 0-8503.
(f) Filed with Enterprises' Form 10-K for 1992, dated March 30, 1993,
File No. 0-8503.
(g) Filed with Enterprises' Form 10-Q for the quarter ended June 30,
1994, File No. 0-8503.
(h) Filed with Enterprises' Form 10-Q for the quarter ended September 30,
1994, File No. 0-8503.
(i) Filed with Enterprises' Form 10-K for 1995, dated March 28, 1995,
File No. 0-8503.
(j) Filed March 6, 1997, pursuant to Rule 14a-6 of the Exchange Act, File
No. 0-8503.
EXHIBIT 21
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
List of Subsidiaries
Exhibit 21 to Form 10-K (1996)
The subsidiaries of Southeastern Michigan Gas Enterprises, Inc. (the
Registrant) are:
Southeastern Michigan Gas Company
Michigan Gas Company
MI-GAS PROPANE COMPANY (a subsidiary of Michigan Gas Company)
Battle Creek Gas Company
SEMCO Energy Services, Inc.
SEMCO Pipeline Company (a subsidiary of SEMCO Energy Services, Inc.)
SEMCO Gas Storage Company (a subsidiary of SEMCO Energy Services, Inc.)
SEMCO Arkansas Pipeline Company (a subsidiary of SEMCO Energy Services, Inc.)
SEMCO Gathering Company (a subsidiary of SEMCO Energy Services, Inc.)
Southeastern Financial Services, Inc. (a subsidiary of SEMCO Energy Services,
Inc.)
Southeastern Development Company (a subsidiary of SEMCO Energy Services, Inc.)
Each is incorporated in the State of Michigan and each does business only under
its respective corporate name indicated above.
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our report dated February 14, 1997, included in this Form 10-K for the year
ended December 31, 1996, into the Company's previously filed Registration
Statements No. 33-37290, 33-46413, 33-51553, 333-18927 and 333-15439.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
March 27, 1997.
EXHIBIT 24
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
POWER OF ATTORNEY
Whereas, the Board of Directors of Southeastern Michigan Gas Enterprises,
Inc., a Michigan corporation, at a meeting held on February 26, 1997,
authorized and approved the execution of Form 10-K Annual Report for 1996
pursuant to Section 13 of the Securities Exchange Act of 1934 and the filing of
said Form 10-K with the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
NOW, THEREFORE, each of the undersigned in his capacity as a Director or
officer, or both, as the case may be, of said Corporation, does hereby appoint
William L. Johnson and Robert F. Caldwell, and each of them severally, his true
and lawful attorneys or attorney to execute in his name, place and stead, in
his capacity as a Director or officer or both, as the case may be, of said
Corporation, the Form 10-K for the year ended December 31, 1996, and any and
all amendments thereto and all instruments necessary or incidental in
connection therewith, and to file the same with the Securities and Exchange
Commission. Each of said attorneys shall have full power of substitution and
resubstitution. Each of said attorneys shall have full power and authority to
do and perform in the name and on behalf of each of the undersigned, in any and
all capacities, each act whatsoever requisite or necessary to be done in the
premises, as fully and to all intents and purposes as each of the undersigned
might or could do in person, and each of the undersigned hereby ratifies and
approves the acts of said attorneys and each of them.
IN WITNESS WHEREOF, we have hereunto set our hands as of the 26th day of
February, 1997.
Frank G. Andreoni, Director William L. Johnson, President and
Chief Executive Officer and Director
Daniel A. Burkhardt, Director Harvey I. Klein, Director
Robert F. Caldwell, Executive Vice Frederick S. Moore, Director
President and Principal Financial
and Accounting Officer
Edward J. Curtis, Director Edith A. Stotler, Director
John T. Ferris, Director Donald W. Thomason, Director
Michael O. Frazer, Director
POA10K.SAM(sla)
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS, THE CONSOLIDATED BALANCE SHEETS AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 246,387
<OTHER-PROPERTY-AND-INVEST> 9,585
<TOTAL-CURRENT-ASSETS> 191,182
<TOTAL-DEFERRED-CHARGES> 31,125
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 478,279
<COMMON> 12,400
<CAPITAL-SURPLUS-PAID-IN> 79,489
<RETAINED-EARNINGS> (1,507)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 90,382
0
3,269
<LONG-TERM-DEBT-NET> 103,573
<SHORT-TERM-NOTES> 91,100
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 2,895
<LEASES-CURRENT> 1,644
<OTHER-ITEMS-CAPITAL-AND-LIAB> 185,416
<TOT-CAPITALIZATION-AND-LIAB> 478,279
<GROSS-OPERATING-REVENUE> 547,630
<INCOME-TAX-EXPENSE> 6,371
<OTHER-OPERATING-EXPENSES> 517,164
<TOTAL-OPERATING-EXPENSES> 523,535
<OPERATING-INCOME-LOSS> 24,095
<OTHER-INCOME-NET> (21,813)
<INCOME-BEFORE-INTEREST-EXPEN> 2,282
<TOTAL-INTEREST-EXPENSE> 11,231
<NET-INCOME> (8,949)
16
<EARNINGS-AVAILABLE-FOR-COMM> (8,965)
<COMMON-STOCK-DIVIDENDS> 9,670
<TOTAL-INTEREST-ON-BONDS> 8,514
<CASH-FLOW-OPERATIONS> 11,432
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
405 Water Street
P.O. Box 5026
Port Huron, Michigan 48061-5026
(810) 987-2200
October 10, 1996
PERSONAL AND CONFIDENTIAL
William L. Johnson
2645 Whitney Place
Fort Gratiot, Michigan 48059
Dear Bill,
In accordance with the terms of Paragraph 3 of my April 29, 1996
letter to you on behalf of the Board of Directors (the "Board"),
Southeastern Michigan Gas Enterprises, Inc. (the "Company") is
pleased to grant to you the option (the "Option") to purchase
shares of the Company's common stock ("Common Stock") in such
amounts and at such times and such prices as are below set forth:
ACCUMULATED
NUMBER OF PURCHASE PRICE EXERCISE EXPIRATION
SHARES PER SHARE DATE DATE
15,000 $16.50 May 1, 1999 April 30, 2006
This grant is subject to the following terms and conditions:
1. The Option. This Option is awarded as a non-qualified stock
option ("Non-Qualified Stock Option") and is not an "Incentive
Stock Option" pursuant to Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code").
2. The Option Term. Your right to exercise the Option in whole
or in part shall first accrue upon the applicable Exercise Date
above provided (the "Exercise Date"), and shall continue until
April 30, 2006 (the "Expiration Date"), unless the Option is
earlier terminated under the terms of paragraph 9 below.
3. Conditions Precedent to Exercise of Option. Your right to
exercise the Option in whole or in part is subject to
satisfaction of the conditions precedent that you shall refrain
from engaging in any activity that, in the opinion of the
Compensation Committee (the "Committee") of the Board, is
competitive with any activity of the Company or any of its
affiliate subsidiaries (except that employment at the request of
the Company with an entity in which the Company has, directly or
indirectly, a substantial ownership interest, or other employment
specifically approved by the Committee, shall not be considered
to be an activity that is competitive with any activity of the
Company or any of its affiliated subsidiaries) and from otherwise
acting, either prior to or after termination of employment, in
any matter inimical or in any way contrary to the best interests
of the Company and that you shall furnish to the Company such
information with respect to the satisfaction of these conditions
precedent as the Committee shall reasonably request.
4. Option and Related Shares Not Registered. Neither the
Option nor the shares of Common Stock that may be issued upon
exercise of the Option have been registered under the Securities
Act of 1933 (the "Act"), the Michigan Uniform Securities Act, or
any other state securities act, and may not be sold, transferred,
or otherwise disposed of in the absence of an effective
registration statement under the Act and any applicable state
securities act, unless it is shown to the satisfaction of the
Company that such registration is not required.
5. Option and Related Shares Restricted. You are the sole
party in interest with respect to the Option and any shares of
Common Stock issued upon exercise of the Option, and are
acquiring the Option, and will acquire any shares of Common Stock
issued upon exercise of the Option, as an investment and not with
a view to offer publicly or distribute all or any part of the
Option or shares of Common Stock issued upon exercise thereof.
The Company may affix the following legend to any certificates
representing shares of Common Stock that are issued upon exercise
of the Option:
"LEGEND
The stock represented by this certificate has not been registered
under the Securities Act of 1933, the Michigan Uniform Securities
Act, or the securities laws of any other state, and may not be
sold, assigned or transferred unless a Registration Statement
under the Securities Act of 1933 and any applicable state
securities act with respect to said stock shall then be in
effect, or unless the availability of an exemption from
registration shall be established to the satisfaction of the
Company."
6. Exercise of the Option. The Option will be exercisable in
whole or in part at any time after the applicable Exercise Date
and before the applicable Expiration Date. Subject to the
provisions of this Agreement, shares not purchased on the
applicable Exercise Date shall accumulate and may be purchased
at any time on or before the applicable Expiration Date. Except
as provided in paragraph 9 below, the Option may not be
exercised unless you are an employee of the Company or of a
subsidiary at the time of exercise. During your lifetime, the
Option may be exercised only by you or your guardian or legal
representative.
7. Method of Exercise. Exercise of the Option shall be by
written notice ("Notice") to the Secretary of the Committee at
405 Water Street, Port Huron, Michigan 48060. The date of
exercise of this Option shall be the date upon which the Notice
and payment are received by the Secretary of the Committee. The
Notice shall state the election to exercise the Option, the
number of shares in respect of which the Option is being
exercised and shall be signed by the person or persons so
exercising the Option. In the event the Option shall be
exercised, pursuant to paragraph 9 below, by any person or
persons other than you, the Notice shall be accompanied by
appropriate proof of the derivative right of such person or
persons to exercise the Option on your behalf.
8. Payment and Delivery. The Option price shall be payable
upon exercise of the Option (a) in cash or by personal check or
bank draft, or (b) by surrender of full shares of Common Stock
owned by you, in whole or in part (in combination with cash)
payment of the Option price. Payment by surrender of shares of
Common Stock, however, can be made only with the prior approval
of and upon conditions established by the Committee. You may not
purchase any shares under this Option by surrender of shares of
Common Stock obtained pursuant to the exercise of an "Incentive
Stock Option" unless the holding periods prescribed in Section
422(a)(1) of the Code for such shares surrendered has expired.
Further, you may not use shares acquired under any Non-Qualified
Stock Option for payment upon the exercise of this Option unless
you have held such shares for at least one year. If payment is
made in whole or in part in Common Stock, the fair market value
of the Common Stock on the date of exercise shall be credited
against the purchase price. Fair market value shall be the mean
between the highest and lowest sale prices for the Common Stock
reported on the NASDAQ National Market system for the date the
Common Stock certificate is surrendered. Surrender of the
shares of Common Stock shall be evidenced by delivery of
certificate(s) representing such shares, endorsed or accompanied
by appropriate stock powers, in the form specified by the
Committee. All shares that shall be purchased upon the exercise
of the Option as provided herein shall be fully paid and
non-assessable. The Company shall deliver a certificate or
certificates representing the shares of Common Stock as soon as
practicable after the Notice of exercise is received by the
Secretary of the Committee and payment has been tendered. The
certificate(s) for the shares of Common Stock as to which the
Option shall have been exercised shall be registered in your
name and shall be delivered to you.
9. Exercise After Termination of Employment or Death. The
provisions covering the exercise of this Option following
termination of your employment are as follows:
(a) If your employment is terminated either for cause
or voluntarily by you without the consent of the Company, any
Option held by you shall, to the extent not exercised,
immediately terminate.
(b) If your employment shall terminate with the
consent of the Company or by retirement, to the extent that the
Option was exercisable on the date of such termination of
employment, the Option may be exercised only until the earlier of
twelve (12) months after such termination or the original
Expiration Date of the Option.
(c) If your employment shall terminate as a result of
death or disability, your Non-Qualified Stock Option shall
terminate upon the earlier of twelve (12) months from the date of
such termination of employment or the original Expiration Date of
the Option. In such circumstances, the Non-Qualified Stock
Option may be exercised, to the extent exercisable, by your legal
representative, by a properly designated beneficiary, or by you
as the case may be.
10. Change of Control. Notwithstanding any other provisions to
the contrary in this Agreement, in the event of a Change of
Control (as defined in the Change of Control Employment
Agreement between you and the Company also dated today), to the
extent this Option has not been exercised, the Option then
outstanding shall become immediately exercisable in full. If
you exercise the Option, all shares of Common Stock due to you
because of your exercise of the Option shall be distributed to
you as soon as practicable within sixty (60) days after the date
of the Change of Control. In any event, this Option will
continue and may be exercised at any time prior to the
Expiration Date of the Option following a Change of Control.
11. Adjustments. If there shall be any change in the Common
Stock underlying this Option, through merger, consolidation,
reorganization, recapitalization, stock dividend, stock split or
other change in the corporate structure, appropriate adjustments
and corrections shall be made within sixty (60) days by the
Committee (or if the Company is not the surviving corporation in
any such transaction, the Board of Directors of the surviving
corporation) in the number and kind of shares and the price per
share subject to the Option.
12. Non-Transferability. The Option shall not be subject to
execution, attachment or similar process, and may not be
assigned, transferred, pledged, or hypothecated in any way
except by will or the applicable laws of descent and
distribution. Any attempt to assign, transfer, pledge,
hypothecate or otherwise dispose of the Option contrary to the
provisions of this Agreement, or the levy of any execution,
attachment or similar process upon the Option shall be null and
void and without effect.
13. Rights as Stockholder. You shall not for any purpose be
deemed to be, or to have rights as, as stockholder of the
Company with respect to the shares covered by the Option until
you exercise the Option.
14. Consents and Compliance. The obligation of the Company to
sell and deliver shares under this Agreement is specifically
subject to (a) the obtaining of such consents and approvals as
required by public authorities, and (b) the satisfaction of the
Committee as to compliance with all other applicable legal
requirements.
15. Continued Employment. This Agreement shall not be construed
as giving you any right to be retained in the employ of the
Company or any subsidiary or restricting the right of the
Company or any subsidiary to terminate your employment.
16. Governance of Agreement and Committee. You hereby agree
that: (a) you will comply with and be bound by all of the terms
and conditions contained in this Agreement; (b) any dispute or
disagreement arising under or as a result of this Agreement
shall be determined by the Committee in the Committee's sole
discretion and judgment; and (c) any determination,
interpretation or other action taken by the Committee pursuant
to the provisions of this Agreement shall be binding and
conclusive for all purposes.
17. Governing Law. This Agreement and all determinations made
and actions taken pursuant thereto shall be governed by the laws
of the State of Michigan and construed in accordance therewith.
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
By Frank G. Andreoni
Chairman of the Board
Accepted:
William L. Johnson
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
405 Water Street
P.O. Box 5026
Port Huron, Michigan 48061-5026
(810) 987-2200
February 26, 1997
PERSONAL AND CONFIDENTIAL STOCK OPTION CERTIFICATE AND
AGREEMENT
William L. Johnson
2645 Whitney Place
Fort Gratiot, Michigan 48059
Dear Bill,
In accordance with the terms of Paragraph 3 of my April 29, 1996
letter to you on behalf of the Board of Directors (the "Board"),
Southeastern Michigan Gas Enterprises, Inc. (the "Company") is
pleased to certify the grant to you effective as of January 3,
1997 the option (the "Option") to purchase shares of the
Company's common stock ("Common Stock") in such amounts and at
such times and such prices as are below set forth:
ACCUMULATED
NUMBER OF PURCHASE PRICE EXERCISE EXPIRATION
SHARES PER SHARE DATE DATE
30,000 $18.875 January 3, 2000 January 2, 2007
This grant is subject to the following terms and conditions:
1. The Option. This Option is awarded as a non-qualified stock
option ("Non-Qualified Stock Option") and is not an "Incentive
Stock Option" pursuant to Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code").
2. The Option Term. Your right to exercise the Option in whole
or in part shall first accrue upon the applicable Exercise Date
above provided (the "Exercise Date"), and shall continue until
January 2, 2007 (the "Expiration Date"), unless the Option is
earlier terminated under the terms of paragraph 9 below.
3. Conditions Precedent to Exercise of Option. Your right to
exercise the Option in whole or in part is subject to
satisfaction of the conditions precedent that you shall refrain
from engaging in any activity that, in the opinion of the
Compensation Committee (the "Committee") of the Board, is
competitive with any activity of the Company or any of its
affiliate subsidiaries (except that employment at the request of
the Company with an entity in which the Company has, directly or
indirectly, a substantial ownership interest, or other employment
specifically approved by the Committee, shall not be considered
to be an activity that is competitive with any activity of the
Company or any of its affiliated subsidiaries) and from otherwise
acting, either prior to or after termination of employment, in
any matter inimical or in any way contrary to the best interests
of the Company and that you shall furnish to the Company such
information with respect to the satisfaction of these conditions
precedent as the Committee shall reasonably request.
4. Option and Related Shares Not Registered. Neither the
Option nor the shares of Common Stock that may be issued upon
exercise of the Option have been registered under the Securities
Act of 1933 (the "Act"), the Michigan Uniform Securities Act, or
any other state securities act, and may not be sold, transferred,
or otherwise disposed of in the absence of an effective
registration statement under the Act and any applicable state
securities act, unless it is shown to the satisfaction of the
Company that such registration is not required.
5. Option and Related Shares Restricted. You are the sole
party in interest with respect to the Option and any shares of
Common Stock issued upon exercise of the Option, and are
acquiring the Option, and will acquire any shares of Common Stock
issued upon exercise of the Option, as an investment and not with
a view to offer publicly or distribute all or any part of the
Option or shares of Common Stock issued upon exercise thereof.
The Company may affix the following legend to any certificates
representing shares of Common Stock that are issued upon exercise
of the Option:
"LEGEND
The stock represented by this certificate has not been registered
under the Securities Act of 1933, the Michigan Uniform Securities
Act, or the securities laws of any other state, and may not be
sold, assigned or transferred unless a Registration Statement
under the Securities Act of 1933 and any applicable state
securities act with respect to said stock shall then be in
effect, or unless the availability of an exemption from
registration shall be established to the satisfaction of the
Company."
6. Exercise of the Option. The Option will be exercisable in
whole or in part at any time after the applicable Exercise Date
and before the applicable Expiration Date. Subject to the
provisions of this Agreement, shares not purchased on the
applicable Exercise Date shall accumulate and may be purchased
at any time on or before the applicable Expiration Date. Except
as provided in paragraph 9 below, the Option may not be
exercised unless you are an employee of the Company or of a
subsidiary at the time of exercise. During your lifetime, the
Option may be exercised only by you or your guardian or legal
representative.
7. Method of Exercise. Exercise of the Option shall be by
written notice ("Notice") to the Secretary of the Committee at
405 Water Street, Port Huron, Michigan 48060. The date of
exercise of this Option shall be the date upon which the Notice
and payment are received by the Secretary of the Committee. The
Notice shall state the election to exercise the Option, the
number of shares in respect of which the Option is being
exercised and shall be signed by the person or persons so
exercising the Option. In the event the Option shall be
exercised, pursuant to paragraph 9 below, by any person or
persons other than you, the Notice shall be accompanied by
appropriate proof of the derivative right of such person or
persons to exercise the Option on your behalf.
8. Payment and Delivery. The Option price shall be payable
upon exercise of the Option (a) in cash or by personal check or
bank draft, or (b) by surrender of full shares of Common Stock
owned by you, in whole or in part (in combination with cash)
payment of the Option price. Payment by surrender of shares of
Common Stock, however, can be made only with the prior approval
of and upon conditions established by the Committee. You may not
purchase any shares under this Option by surrender of shares of
Common Stock obtained pursuant to the exercise of an "Incentive
Stock Option" unless the holding periods prescribed in Section
422(a)(1) of the Code for such shares surrendered has expired.
Further, you may not use shares acquired under any Non-Qualified
Stock Option for payment upon the exercise of this Option unless
you have held such shares for at least one year. If payment is
made in whole or in part in Common Stock, the fair market value
of the Common Stock on the date of exercise shall be credited
against the purchase price. Fair market value shall be the mean
between the highest and lowest sale prices for the Common Stock
reported on the NASDAQ National Market system for the date the
Common Stock certificate is surrendered. Surrender of the
shares of Common Stock shall be evidenced by delivery of
certificate(s) representing such shares, endorsed or accompanied
by appropriate stock powers, in the form specified by the
Committee. All shares that shall be purchased upon the exercise
of the Option as provided herein shall be fully paid and
non-assessable. The Company shall deliver a certificate or
certificates representing the shares of Common Stock as soon as
practicable after the Notice of exercise is received by the
Secretary of the Committee and payment has been tendered. The
certificate(s) for the shares of Common Stock as to which the
Option shall have been exercised shall be registered in your
name and shall be delivered to you.
9. Exercise After Termination of Employment or Death. The
provisions covering the exercise of this Option following
termination of your employment are as follows:
(a) If your employment is terminated either for cause
or voluntarily by you without the consent of the Company, any
Option held by you shall, to the extent not exercised,
immediately terminate.
(b) If your employment shall terminate with the
consent of the Company or by retirement, to the extent that the
Option was exercisable on the date of such termination of
employment, the Option may be exercised only until the earlier of
twelve (12) months after such termination or the original
Expiration Date of the Option.
(c) If your employment shall terminate as a result of
death or disability, your Non-Qualified Stock Option shall
terminate upon the earlier of twelve (12) months from the date of
such termination of employment or the original Expiration Date of
the Option. In such circumstances, the Non-Qualified Stock
Option may be exercised, to the extent exercisable, by your legal
representative, by a properly designated beneficiary, or by you
as the case may be.
10. Change of Control. Notwithstanding any other provisions to
the contrary in this Agreement, in the event of a Change of
Control (as defined in the Change of Control Employment
Agreement between you and the Company dated October 10, 1996),
to the extent this Option has not been exercised, the Option
then outstanding shall become immediately exercisable in full.
If you exercise the Option, all shares of Common Stock due to
you because of your exercise of the Option shall be distributed
to you as soon as practicable within sixty (60) days after the
date of the Change of Control. In any event, this Option will
continue and may be exercised at any time prior to the
Expiration Date of the Option following a Change of Control.
11. Adjustments. If there shall be any change in the Common
Stock underlying this Option, through merger, consolidation,
reorganization, recapitalization, stock dividend, stock split or
other change in the corporate structure, appropriate adjustments
and corrections shall be made within sixty (60) days by the
Committee (or if the Company is not the surviving corporation in
any such transaction, the Board of Directors of the surviving
corporation) in the number and kind of shares and the price per
share subject to the Option.
12. Non-Transferability. The Option shall not be subject to
execution, attachment or similar process, and may not be
assigned, transferred, pledged, or hypothecated in any way
except by will or the applicable laws of descent and
distribution. Any attempt to assign, transfer, pledge,
hypothecate or otherwise dispose of the Option contrary to the
provisions of this Agreement, or the levy of any execution,
attachment or similar process upon the Option shall be null and
void and without effect.
13. Rights as Stockholder. You shall not for any purpose be
deemed to be, or to have rights as, as stockholder of the
Company with respect to the shares covered by the Option until
you exercise the Option.
14. Consents and Compliance. The obligation of the Company to
sell and deliver shares under this Agreement is specifically
subject to (a) the obtaining of such consents and approvals as
required by public authorities, and (b) the satisfaction of the
Committee as to compliance with all other applicable legal
requirements.
15. Continued Employment. This Agreement shall not be construed
as giving you any right to be retained in the employ of the
Company or any subsidiary or restricting the right of the
Company or any subsidiary to terminate your employment.
16. Governance of Agreement and Committee. You hereby agree
that: (a) you will comply with and be bound by all of the terms
and conditions contained in this Agreement; (b) any dispute or
disagreement arising under or as a result of this Agreement
shall be determined by the Committee in the Committee's sole
discretion and judgment; and (c) any determination,
interpretation or other action taken by the Committee pursuant
to the provisions of this Agreement shall be binding and
conclusive for all purposes.
17. Governing Law. This Agreement and all determinations made
and actions taken pursuant thereto shall be governed by the laws
of the State of Michigan and construed in accordance therewith.
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
By Frank G. Andreoni
Chairman of the Board
Accepted:
William L. Johnson
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
and
CONTINENTAL STOCK TRANSFER & TRUST COMPANY,
as Rights Agent
Rights Agreement
Dated as of April 15, 1997
TABLE OF CONTENTS
Section Page
1. Certain Definitions
2. Appointment of Rights Agent
3. Issuance of Rights Certificates
4. Form of Rights Certificates
5. Countersignature and Registration
6. Transfer, Split Up, Combination and Exchange
of Rights Certificates; Mutilated, Destroyed,
Lost or Stolen Rights Certificates
7. Exercise of Rights; Purchase Price;
Expiration Date of Rights
8. Cancellation and Destruction of Rights
Certificates
9. Reservation and Availability of Capital Stock
10. Preference Stock Record Date
11. Adjustment of Purchase Price, Number and Kind
of Shares or Number of Rights
12. Certificate of Adjusted Purchase Price or
Number of Shares
13. Consolidation, Merger or Sale or Transfer of
Assets, Cash Flow or Earning Power
14. Fractional Rights and Fractional Shares
15. Rights of Action
16. Agreement of Rights Holders
17. Rights Certificate Holder Not Deemed a
Stockholder
18. Concerning the Rights Agent
19. Merger or Consolidation or Change of Name of
Rights Agent
20. Duties of Rights Agent
21. Change of Rights Agent
22. Issuance of New Rights Certificates
23. Redemption and Termination
24. Notice of Certain Events
25. Notices
26. Supplements and Amendments
27. Successors
28. Determinations and Actions by the Board, etc
29. Benefits of this Agreement
30. Severability
31. Governing Law
32. Counterparts
33. Descriptive Headings
EXHIBITS
Exhibit A -- Form of Certificate of Designation, Preferences
and Rights
Exhibit B -- Form of Rights Certificate
Exhibit C -- Form of Summary of Rights
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of April 15, 1997 (this
"Agreement"), between Southeastern Michigan Gas Enterprises,
Inc., a Michigan corporation (the "Company"), and Continental
Stock Transfer & Trust Company, a New York corporation, as
Rights Agent (the "Rights Agent").
W I T N E S S E T H
WHEREAS, on January 16, 1997 (the "Rights Dividend
Declaration Date"), the Board of Directors of the Company (the
"Board") authorized and declared a dividend distribution of one
Right for each share of Common Stock outstanding at the close of
business on April 15, 1997 ("the Record Date"), and has
authorized the issuance of one Right (as such number may
hereinafter be adjusted pursuant to the provisions of Section
11(p) hereof) for each share of Common Stock issued between the
Record Date (whether originally issued or delivered from the
Company's treasury) and the Distribution Date (as hereinafter
defined), each Right initially representing the right to purchase
one one-hundredth of a share of Series A Preference Stock (the
"Series A Preference Stock") having the rights, powers and
preferences set forth in the form of Certificate of Designation,
Preferences and Rights attached hereto as Exhibit A, upon the
terms and subject to the conditions hereinafter set forth (the
"Rights");
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereby agree as
follows:
Section 1. Certain Definitions. For purposes of this
Agreement, the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall
be the Beneficial Owner of fifteen percent (15%) or more of the
shares of Common Stock then outstanding, but shall not include
(i) the Company, (ii) any Subsidiary of the Company, (iii) any
employee benefit plan of the Company or of any Subsidiary of the
Company, (iv) any Person or entity organized, appointed or
established by the Company for or pursuant to the terms of any
such plan, (v) any Person who becomes the Beneficial Owner of
fifteen percent (15%) or more of the shares of Common Stock then
outstanding as a result of a reduction in the number of shares of
Common Stock outstanding due to the repurchase of shares of
Common Stock by the Company unless and until such Person, after
becoming aware that such Person has become the Beneficial Owner
of fifteen percent (15%) or more of the then outstanding shares
of Common Stock, acquires beneficial ownership of additional
shares of Common Stock representing one percent (1%) or more of
the shares of Common Stock then outstanding.
(b) "Act" shall mean the Securities Act of 1933, as
amended.
(c) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934,
as amended and in effect on the date of this Agreement (the
"Exchange Act").
(d) A Person shall be deemed the "Beneficial Owner" of, and
shall be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the right
to acquire (whether such right is exercisable immediately or only
after the passage of time) pursuant to any agreement, arrangement
or understanding (whether or not in writing) or upon the exercise
of conversion rights, exchange rights, rights, warrants or
options, or otherwise; provided, however, that a Person shall
not be deemed the "Beneficial Owner" of, or to "beneficially
own," (A) securities tendered pursuant to a tender or exchange
offer made by such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for
purchase or exchange, (B) securities issuable upon exercise of
Rights at any time prior to the occurrence of a Triggering Event
or (C) securities issuable upon exercise of Rights from and
after the occurrence of a Triggering Event which Rights were
acquired by such Person or any of such Person's Affiliates or
Associates prior to the Distribution Date or pursuant to Section
3(a) or Section 22 hereof (the "Original Rights") or pursuant to
Section 11(i) hereof in connection with an adjustment made with
respect to any Original Rights;
(ii) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the right
to vote or dispose of or has "beneficial ownership" of (as
determined pursuant to Rule 13d-3 of the General Rules and
Regulations under the Exchange Act), including pursuant to any
agreement, arrangement or understanding, whether or not in
writing; provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," any security
under this subparagraph (ii) as a result of an agreement,
arrangement or understanding to vote such security if such
agreement, arrangement or understanding: (A) arises solely from
a revocable proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the
applicable provisions of the General Rules and Regulations under
the Exchange Act, and (B) is not reportable by such Person on
Schedule 13D under the Exchange Act (or any comparable or
successor report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate
thereof) with which such Person (or any of such Person's
Affiliates or Associates) has any agreement, arrangement or
understanding (whether or not in writing), for the purpose of
acquiring, holding, voting (except pursuant to a revocable proxy
as described in the proviso to subparagraph (ii) of this
paragraph (d)) or disposing of any voting securities of the
Company;
provided, however, that nothing in this paragraph (d) shall cause
a Person engaged in business as an underwriter of securities to
be the "Beneficial Owner" of, or to "beneficially own," any
securities acquired through such Person's participation in good
faith in a firm commitment underwriting until the expiration of
forty (40) days after the date of such acquisition.
(e) "Business Day" shall mean any day other than a
Saturday, Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or executive
order to close.
(f) "Close of business" on any given date shall mean 5:00
P.M., New York time, on such date; provided, however, that if
such date is not a Business Day it shall mean 5:00 P.M., New York
time, on the next succeeding Business Day.
(g) "Common Stock" shall mean the common stock, par value
$1.00 per share, of the Company, except that "Common Stock" when
used with reference to any Person other than the Company shall
mean the capital stock of such Person with the greatest voting
power, or the equity securities or other equity interest having
power to control or direct the management, of such Person.
(h) "Common Stock Equivalents" shall have the meaning set
forth in Section 11(a)(iii) hereof.
(i) "Current Market Price" shall have the meaning set forth
in Section 11(d)(i) hereof.
(j) "Current Value" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(k) "Distribution Date" shall have the meaning set forth in
Section 3(a) hereof.
(l) "Exchange Act" shall have the meaning set forth in
Section l(c) hereof.
(m) "Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
(n) "Final Expiration Date" shall mean the close of
business on April 15, 2007.
(o) "Person" shall mean any individual, firm, corporation,
partnership or other entity.
(p) "Preference Stock" shall mean shares of Series A
Preference Stock and, to the extent that there are not a
sufficient number of shares of Series A Preference Stock
authorized to permit the full exercise of the Rights, any other
series of preference stock of the Company designated for such
purpose containing terms substantially similar to the terms of
the Series A Preference Stock.
(q) "Principal Party" shall have the meaning set forth in
Section 13(b) hereof.
(r) "Purchase Price" shall have the meaning set forth in
Section 4(a) hereof.
(s) "Record Date" shall have the meaning set forth in the
WHEREAS clause at the beginning of this Agreement.
(t) "Redemption Price" shall have the meaning set forth in
Section 23(a) hereof.
(u) "Rights" shall have the meaning set forth in the
WHEREAS clause at the beginning of the Agreement.
(v) "Rights Agent" shall have the meaning set forth in the
parties clause at the beginning of this Agreement.
(w) "Rights Certificates" shall have the meaning set forth
in Section 3(a) hereof.
(x) "Rights Dividend Declaration Date" shall have the
meaning set forth in the WHEREAS clause at the beginning of this
Agreement.
(y) "Section 11(a)(ii) Event" shall mean any event
described in Section 11(a)(ii) hereof.
(z) "Section 11(a)(ii) Trigger Date" shall have the meaning
set forth in Section 11(a)(iii) hereof.
(aa) "Section 13 Event" shall mean any event described in
clauses (x), (y), or (z) of Section 13(a) hereof.
(bb) "Spread" shall have the meaning set forth in Section
11(a)(iii) hereof.
<PAGE>
(cc) "Stock Acquisition Date" shall mean the first date of
public announcement (which, for purposes of this definition,
shall include, without limitation, a report filed or amended
pursuant to Section 13(d) under the Exchange Act) by the Company
or an Acquiring Person that an Acquiring Person has become such.
(dd) "Subsidiary" shall mean, with reference to any Person,
any corporation of which an amount of voting securities
sufficient to elect at least a majority of the directors of such
corporation is beneficially owned, directly or indirectly, by
such Person, or otherwise controlled by such Person.
(ee) "Substitution Period" shall have the meaning set forth
in Section 11(a)(iii) hereof.
(ff) "Summary of Rights" shall have the meaning set forth in
Section 3(b) hereof.
(gg) "Trading Day" shall have the meaning set forth in
Section 11(d)(i) hereof.
(hh) "Triggering Event" shall mean any Section 11(a)(ii)
Event or any Section 13 Event.
(ii) "Shareholders' Approval" shall mean approval by the
shareholders of the Company at any annual or special meeting of
amendments to the Articles of Incorporation of the Company
authorizing additional capital stock in an amount that the
Company's Board of Directors deems sufficient to fulfill the
purposes and intents of this Agreement.
Section 2. Appointment of Rights Agent. The Company hereby
appoints the Rights Agent to act as agent for the Company and the
holders of the Rights (who, in accordance with Section 3 hereof,
shall prior to the Distribution Date also be the holders of the
Common Stock) in accordance with the terms and conditions hereof,
and the Rights Agent hereby accepts such appointment. The Company
may from time to time appoint such co-rights agents as it may
deem necessary or desirable.
Section 3. Issuance of Rights Certificates.
(a) Until the earlier of (i) the close of business on the
tenth Business Day after the Stock Acquisition Date (or, if the
tenth Business Day after the Stock Acquisition Date occurs before
the Record Date, the close of business on the Record Date) or
(ii) the close of business on the tenth Business Day (or such
later date as the Board shall determine) after the date that a
tender or exchange offer by any Person (other than the Company,
any Subsidiary of the Company, or any employee benefit plan of
the Company or of any Subsidiary of the Company, or any Person or
entity organized, appointed or established by the Company for or
pursuant to the terms of any such plan) is first published or
sent or given within the meaning of Rule 14d-2(a) of the General
Rules and Regulations under the Exchange Act, if upon
consummation thereof, such Person would be the Beneficial Owner
of fifteen percent (15%) or more of the shares of Common Stock
then outstanding (the earlier of (i) and (ii) being herein
referred to as the "Distribution Date"), (x) the Rights will be
evidenced (subject to the provisions of paragraph (b) of this
Section 3) by the certificates for the Common Stock registered
in the names of the holders of the Common Stock (which
certificates for Common Stock shall be deemed also to be
certificates for Rights) and not by separate certificates and
(y) the Rights will be transferable only in connection with the
transfer of the underlying shares of Common Stock (including a
transfer to the Company). As soon as practicable after the
Distribution Date, the Rights Agent will send by first-class,
insured, postage prepaid mail, to each record holder of the
Common Stock as of the close of business on the Distribution
Date, at the address of such holder shown on the records of the
Company, one or more right certificates, in substantially the
form of Exhibit B hereto (the "Rights Certificates"), evidencing
one Right for each share of Common Stock so held, subject to
adjustment as provided herein. In the event that an adjustment
in the number of Rights per share of Common Stock has been made
pursuant to Section 11(p) hereof, at the time of distribution of
the Right Certificates, the Company shall make the necessary and
appropriate rounding adjustments (in accordance with Section
14(a) hereof) so that Rights Certificates representing only
whole numbers of Rights are distributed and cash is paid in lieu
of any fractional Rights. As of and after the Distribution
Date, the Rights will be evidenced solely by such Rights
Certificates.
(b) The Company will make available a copy of a Summary of
Rights, in substantially the form attached hereto as Exhibit C
(the "Summary of Rights"), to any holder of Rights who may so
request from time to time. With respect to certificates for the
Common Stock outstanding as of the Record Date or which were
issued subsequent to the Record Date, unless and until the
Distribution Date shall occur, the Rights will be evidenced by
such certificates for the Common Stock and the registered
holders of the Common Stock shall also be the registered holders
of the associated Rights. Until the earlier of the Distribution
Date or the Expiration Date (as hereinafter defined), the
transfer of any certificates representing shares of Common Stock
in respect of which Rights have been issued shall also
constitute the transfer of the Rights associated with such
shares of Common Stock.
(c) Rights shall be issued in respect of all shares of
Common Stock which are issued after the Record Date but prior to
the earlier of the Distribution Date or the Expiration Date.
Certificates representing such shares of Common Stock shall also
be deemed to be certificates for Rights, and shall bear the
following legend:
This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in the Rights
Agreement between Southeastern Michigan Gas
Enterprises, Inc. (the "Company") and the Rights Agent
thereunder (the "Rights Agreement"), the terms of which
are hereby incorporated herein by reference and a copy
of which is on file at the principal offices of the
Company. Under certain circumstances, as set forth in
the Rights Agreement, such Rights will be evidenced by
separate certificates and will no longer be evidenced
by this certificate. The Company will mail to the
holder of this certificate a copy of the Rights
Agreement, as in effect on the date of mailing, without
charge, promptly after receipt of a written request
therefor. Under certain circumstances set forth in the
Rights Agreement, Rights issued to, or held by, any
Person who is, was or becomes an Acquiring Person or
any Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement), whether currently
held by or on behalf of such Person or by any
subsequent holder, may become null and void.
With respect to such certificates containing the foregoing
legend, until the earlier of (i) the Distribution Date or (ii)
the Expiration Date, the Rights associated with the Common Stock
represented by such certificates shall be evidenced by such
certificates alone and registered holders of Common Stock shall
also be the registered holders of the associated Rights, and the
transfer of any of such certificates shall also constitute the
transfer of the Rights associated with the Common Stock
represented by such certificates.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to
purchase and of assignment to be printed on the reverse thereof)
shall each be substantially in the form set forth in Exhibit B
hereto and may have such marks of identification or designation
and such legends, summaries or endorsements printed thereon as
the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation
made pursuant thereto or with any rule or regulation of any
stock exchange on which the Rights may from time to time be
listed, or to conform to usage. Subject to the provisions of
Section 11 and Section 22 hereof, the Rights Certificates,
whenever distributed, shall be dated as of the Record Date and
on their face shall entitle the holders thereof to purchase such
number of one one-hundredth of a share of Preference Stock as
shall be set forth therein at the price set forth therein (such
exercise price per one one-hundredth of a share, the "Purchase
Price"), but the amount and type of securities purchasable upon
the exercise of each Right and the Purchase Price thereof shall
be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a),
Section 11(i) or Section 22 hereof that represents Rights
beneficially owned by: (i) an Acquiring Person or any Associate
or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person becomes such or
(iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or
concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether
or not for consideration) from the Acquiring Person to holders
of equity interests in such Acquiring Person or to any Person
with whom such Acquiring Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or
(B) a transfer which the Board has determined is part of a plan,
arrangement or understanding which has as a primary purpose or
effect avoidance of Section 7(e) hereof, and any Rights
Certificate issued pursuant to Section 6 or Section 11 hereof
upon transfer, exchange, replacement or adjustment of any other
Rights Certificate referred to in this sentence, shall contain
(to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are
or were beneficially owned by a Person who was or
became an Acquiring Person or an Affiliate or Associate
of an Acquiring Person (as such terms are defined in
the Rights Agreement). Accordingly, this Rights
Certificate and the Rights represented hereby may
become null and void in the circumstances specified in
Section 7(e) of the Rights Agreement.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of
the Company by its Chairman of the Board, its President or any
Vice President, either manually or by facsimile signature, and
shall have affixed thereto the Company's seal or a facsimile
thereof which shall be attested by the Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer of the
Company, either manually or by facsimile signature. The Rights
Certificates shall be manually countersigned by the Rights Agent
and shall not be valid for any purpose unless so countersigned.
In case any officer of the Company who shall have signed any of
the Rights Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance
and delivery by the Company, such Rights Certificates,
nevertheless, may be countersigned by the Rights Agent and
issued and delivered by the Company with the same force and
effect as though the person who signed such Rights Certificates
had not ceased to be such officer of the Company; and any Rights
Certificates may be signed on behalf of the Company by any
person who, at the actual date of the execution of such Rights
Certificate, shall be a proper officer of the Company to sign
such Rights Certificate, although at the date of the execution
of this Rights Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will
keep or cause to be kept, at its principal office or offices
designated as the appropriate place for surrender of Rights
Certificates upon exercise or transfer, books for registration
and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective
holders of the Rights Certificates, the number of Rights
evidenced on its face by each of the Rights Certificates and the
date of each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights
Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e)
and Section 14 hereof, at any time after the close of business on
the Distribution Date, and at or prior to the close of business
on the Expiration Date, any Rights Certificate or Certificates
may be transferred, split up, combined or exchanged for another
Rights Certificate or Certificates, entitling the registered
holder to purchase a like number of one one-hundredth of a share
of Preference Stock (or, following a Triggering Event, Common
Stock, other securities, cash or other assets, as the case may
be) as the Rights Certificate or Certificates surrendered then
entitles such holder (or former holder in the case of a
transfer) to purchase. Any registered holder desiring to
transfer, split up, combine or exchange any Rights Certificate
or Certificates shall make such request in writing delivered to
the Rights Agent, and shall surrender the Rights Certificate or
Certificates to be transferred, split up, combined or exchanged
at the principal office or offices of the Rights Agent
designated for such purpose. Neither the Rights Agent nor the
Company shall be obligated to take any action whatsoever with
respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and
signed the certificate contained in the form of assignment on
the reverse side of such Rights Certificate and shall have
provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
Thereupon the Rights Agent shall, subject to Section 4(b),
Section 7(e) and Section 14 hereof, countersign and deliver to
the Person entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. The Company
may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Rights
Certificates.
(b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft,
destruction or mutilation of a Rights Certificate, and, in case
of loss, theft or destruction, of indemnity or security
reasonably satisfactory to them, and reimbursement to the
Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and
cancellation of the Rights Certificate if mutilated, the Company
will execute and deliver a new Rights Certificate of like tenor
to the Rights Agent for countersignature and delivery to the
registered owner in lieu of the Rights Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration
Date of Rights.
(a) Subject to Section 7(e) hereof, the registered holder
of any Rights Certificate may exercise the Rights evidenced
thereby (except as otherwise provided herein including, without
limitation, the restrictions on exercisability set forth in
Section 9(c), Section 11(a)(iii) and Section 23(a) hereof) in
whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election
to purchase and the certificate on the reverse side thereof duly
executed, to the Rights Agent at the principal office or offices
of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price with respect to the
total number of one one-hundredths of a share of Preference
Stock (or other securities, cash or other assets, as the case
may be) as to which such surrendered Rights are then
exercisable, at or prior to the earlier of (i) the close of
business on April 15, 2007 (the "Final Expiration Date"), or
(ii) the time at which the Rights are redeemed as provided in
Section 23 hereof (the earlier of (i) and (ii) being herein
referred to as the "Expiration Date").
(b) The Purchase Price for each one one-hundredth of a
share of Preference Stock pursuant to the exercise of a Right
shall initially be $74.88, and shall be subject to adjustment
from time to time as provided in Section 11 and Section 13(a)
hereof and shall be payable in accordance with paragraph (c)
below.
(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase and the
certificate duly executed, accompanied by payment, with respect
to each Right so exercised, of the Purchase Price per one
one-hundredth of a share of Preference Stock (or other shares,
securities, cash or other assets, as the case may be) to be
purchased as set forth below and an amount equal to any
applicable transfer tax, the Rights Agent shall, subject to
Section 20(k) hereof, thereupon promptly (i) (A) requisition
from any transfer agent of the shares of Preference Stock (or
make available, if the Rights Agent is the transfer agent for
such shares) certificates for the total number of one
one-hundredths of a share of Preference Stock to be purchased
and the Company hereby irrevocably authorizes its transfer agent
to comply with all such requests, or (B) if the Company shall
have elected to deposit the total number of shares of Preference
Stock issuable upon exercise of the Rights hereunder with a
depositary agent, requisition from the depository agent
depository receipts representing such number of one
one-hundredths of a share of Preference Stock as are to be
purchased (in which case certificates for the shares of
Preference Stock represented by such receipts shall be deposited
by the transfer agent with the depositary agent) and the Company
will direct the depositary agent to comply with such request,
(ii) requisition from the Company the amount of cash, if any, to
be paid in lieu of fractional shares in accordance with Section
14 hereof, (iii) after receipt of such certificates or
depositary receipts, cause the same to be delivered to or, upon
the order of the registered holder of such Rights Certificate,
registered in such name or names as may be designated by such
holder, and (iv) after receipt thereof, deliver such cash, if
any, to or upon the order of the registered holder of such
Rights Certificate. The payment of the Purchase Price (as such
amount may be reduced pursuant to Section 11(a)(iii) hereof)
shall be made in cash or by certified bank check or bank draft
payable to the order of the Company. In the event that the
Company is obligated to issue other securities (including Common
Stock) of the Company, pay cash and/or distribute other property
pursuant to Section 11(a) hereof, the Company will make all
arrangements necessary so that such other securities, cash
and/or other property are available for distribution by the
Rights Agent, if and when appropriate. The Company reserves the
right to require prior to the occurrence of a Triggering Event
that, upon any exercise of Rights, a number of Rights be
exercised so that only whole shares of Preference Stock would be
issued.
(d) In case the registered holder of any Rights Certificate
shall exercise less than all the Rights evidenced thereby, a new
Rights Certificate evidencing Rights equivalent to the Rights
remaining unexercised shall be issued by the Rights Agent and
delivered to, or upon the order of, the registered holder of
such Rights Certificate, registered in such name or names as may
be designated by such holder, subject to the provisions of
Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section
11(a)(ii) Event, any Rights beneficially owned by (i) an
Acquiring Person or an Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the
Acquiring Person becomes such, or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring
Person or to any Person with whom the Acquiring Person has any
continuing agreement, arrangement or understanding regarding the
transferred Rights or (B) a transfer which the Board has
determined is part of a plan, arrangement or understanding which
has as a primary purpose or effect the avoidance of this Section
7(e), shall become null and void without any further action and
no holder of such Rights shall have any rights whatsoever with
respect to such Rights, whether under any provision of this
Agreement or otherwise. The Company shall use all reasonable
efforts to insure that the provisions of this Section 7(e) and
Section 4(b) hereof are complied with, but shall have no
liability to any holder of Rights Certificates or other Person
as a result of its failure to make any determinations with
respect to an Acquiring Person or its Affiliates, Associates or
transferees hereunder.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be
obligated to undertake any action with respect to a registered
holder upon the occurrence of any purported exercise as set forth
in this Section 7 unless such registered holder shall have (i)
completed and signed the certificate contained in the form of
election to purchase set forth on the reverse side of the Rights
Certificate surrendered for such exercise, and (ii) provided such
additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) or Affiliates or Associates thereof as
the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights
Certificates. All Rights Certificates surrendered for the
purpose of exercise, transfer, split up, combination or exchange
shall, if surrendered to the Company or any of its agents, be
delivered to the Rights Agent for cancellation or in cancelled
form, or, if surrendered to the Rights Agent, shall be cancelled
by it, and no Rights Certificates shall be issued in lieu
thereof except as expressly permitted by any of the provisions
of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent
shall so cancel and retire, any other Rights Certificate
purchased or acquired by the Company otherwise than upon the
exercise thereof. The Rights Agent shall deliver all cancelled
Rights Certificates to the Company, or shall, at the written
request of the Company, destroy such cancelled Rights
Certificates, and in such case shall deliver a certificate of
destruction thereof to the Company.
Section 9. Reservation and Availability of Capital Stock.
(a) The Company covenants and agrees that effective
promptly after the Shareholders' Approval it will cause to be
reserved and kept available out of its authorized and unissued
shares of Preference Stock (and, following the occurrence of a
Triggering Event, out of its authorized and unissued shares of
Common Stock and/or other securities) the number of shares of
Preference Stock (and, following the occurrence of a Triggering
Event, Common Stock and/or other securities) that, as provided in
this Agreement including Section 11(a)(iii) hereof, will be
sufficient to permit the exercise in full of all outstanding
Rights.
(b) So long as the shares of Preference Stock (and,
following the occurrence of a Triggering Event, Common Stock
and/or other securities) issuable and deliverable upon the
exercise of the Rights may be listed on any national securities
exchange or if such shares are not so listed, traded in the
over-the-counter market as reported by the National Association
of Securities Dealers, Inc. Automated Quotation System or such
other system then in use ("NASDAQ"), the Company shall use its
best efforts to cause, from and after such time as the Rights
become exercisable, all shares reserved for such issuance to be
listed on such exchange or quoted on NASDAQ upon official notice
of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as
soon as practicable following the earliest date after the first
occurrence of a Section 11(a)(ii) Event on which the
consideration to be delivered by the Company upon exercise of
the Rights has been determined in accordance with Section
11(a)(iii) hereof, a registration statement under the Act, with
respect to the securities purchasable upon exercise of the
Rights on an appropriate form, (ii) cause such registration
statement to become effective as soon as practicable after such
filing and (iii) cause such registration statement to remain
effective (with a prospectus at all times meeting the
requirements of the Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities
and (B) the date of the expiration of the Rights. The Company
will also take such action as may be appropriate under, or to
ensure compliance with, the securities or "blue sky" laws of the
various states in connection with the exercisability of the
Rights. The Company may temporarily suspend, for a period of
time not to exceed ninety (90) days after the date set forth in
clause (i) of the first sentence of this Section 9(c), the
exercisability of the Rights in order to prepare and file such
registration statement and permit it to become effective. Upon
any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has
been temporarily suspended, as well as a public announcement at
such time as the suspension is no longer in effect. In
addition, if the Company shall determine that a registration
statement is required following the Distribution Date, the
Company may temporarily suspend the exercisability of the Rights
until such time as a registration statement has been declared
effective. Notwithstanding any provision of this Agreement to
the contrary, the Rights shall not be exercisable in any
jurisdiction if the requisite qualification in such jurisdiction
has not been obtained, the exercise thereof is not permitted
under applicable law or a registration statement has not been
declared effective.
(d) The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all one
one-hundredths of a share of Preference Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other
securities) delivered upon exercise of Rights shall, at the time
of delivery of the certificates for such shares (subject to
payment of the Purchase Price), be duly and validly authorized
and issued and fully paid and nonassessable.
(e) The Company further covenants and agrees that it will
pay when due and payable any and all federal and state transfer
taxes and charges which may be payable in respect of the issuance
or delivery of the Rights Certificates and of any certificates
for a number of one one-hundredths of a share of Preference Stock
(or Common Stock and/or other securities, as the case may be)
upon the exercise of Rights. The Company shall not, however, be
required to pay any transfer tax which may be payable in respect
of any transfer or delivery of Rights Certificates to a Person
other than, or the issuance or delivery of a number of one
one-hundredths of a share of Preference Stock (or Common Stock
and/or other securities, as the case may be) in respect of a name
other than that of, the registered holder of the Rights
Certificates evidencing Rights surrendered for exercise or to
issue or deliver any certificates for a number of one
one-hundredths of a share of Preference Stock (or Common Stock
and/or other securities, as the case may be) in a name other than
that of the registered holder upon the exercise of any Rights
until such tax shall have been paid (any such tax being payable
by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
Section 10. Preference Stock Record Date. Each person in
whose name any certificate for a number of one one-hundredths of
a share of Preference Stock (or Common Stock and/or other
securities, as the case may be) is issued upon the exercise of
Rights shall for all purposes be deemed to have become the
holder of record of such fractional shares of Preference Stock
(or Common Stock and/or other securities, as the case may be)
represented thereby on, and such certificate shall be dated the
date upon which the Rights Certificate evidencing such Rights
was duly surrendered and payment of the Purchase Price (and all
applicable transfer taxes) was made; provided, however, that if
the date of such surrender and payment is a date upon which the
Preference Stock (or Common Stock and/or other securities, as
the case may be) transfer books of the Company are closed, such
Person shall be deemed to have become the record holder of such
shares (fractional or otherwise) on, and such certificate shall
be dated, the next succeeding Business Day on which the
Preference Stock (or Common Stock and/or other securities, as
the case may be) transfer books of the Company are open. Prior
to the exercise of the Rights evidenced thereby, the holder of a
Rights Certificate shall not be entitled to any rights of a
stockholder of the Company with respect to shares for which the
Rights shall be exercisable, including, without limitation, the
right to vote, to receive dividends or other distributions or to
exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceedings of the Company, except as
provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind
of Shares or Number of Rights. The Purchase Price, the number
and kind of shares covered by each Right and the number of Rights
outstanding are subject to adjustment from time to time as
provided in this Section 11.
(a)(i) In the event the Company shall at any time
after the date of this Agreement (A) declare a dividend
on the Preference Stock payable in shares of Preference
Stock, (B) subdivide the outstanding Preference Stock,
(C) combine the outstanding Preference Stock into a
smaller number of shares or (D) issue any shares of its
capital stock in a reclassification of the Preference
Stock (including any such reclassification in
connection with a consolidation or merger in which the
Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a) and
Section 7(e) hereof, the Purchase Price in effect at
the time of the record date for such dividend or of the
effective date of such subdivision, combination or
reclassification, and the number and kind of shares of
Preference Stock or capital stock, as the case may be,
issuable on such date, shall be proportionately
adjusted so that the holder of any Right exercised
after such time shall be entitled to receive, upon
payment of the Purchase Price then in effect, the
aggregate number and kind of shares of Preference Stock
or capital stock, as the case may be, which, if such
Right had been exercised immediately prior to such date
and at a time when the Preference Stock transfer books
of the Company were open, such holder would have owned
upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination or
reclassification. If an event occurs which would
require an adjustment under both this Section 11(a)(i)
and Section 11(a)(ii) hereof, the adjustment provided
for in this Section 11(a)(i) shall be in addition to,
and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii) hereof.
(ii) In the event any Person, alone or together
with its Affiliates and Associates, shall, at any time
after the Rights Dividend Declaration Date, becomes an
Acquiring Person, unless the event causing such Person
to become an Acquiring Person is a transaction set
forth in Section 13(a) hereof, or is an acquisition of
shares of Common Stock pursuant to a tender offer or an
exchange offer for all outstanding shares of Common
Stock at a price and on terms determined by at least a
majority of the members of the Board who are not
officers of the Company and who are not
representatives, nominees, Affiliates or Associates of
an Acquiring Person, after receiving advice from one or
more investment banking firms, to be (a) at a price
that is fair to stockholders (taking into account all
factors that such members of the Board deem relevant
including, without limitation, prices that could
reasonably be achieved if the Company or its assets
were sold on an orderly basis designed to realize
maximum value) and (b) otherwise in the best interests
of the Company and its stockholders, then, promptly
following the occurrence of such event, proper
provision shall be made so that each holder of a Right
(except as provided below and in Section 7(e) hereof)
shall thereafter have the right to receive, upon
exercise thereof at the then current Purchase Price in
accordance with the terms of this Agreement, in lieu of
a number of one one-hundredths of a share of Preference
Stock, such number of shares of Common Stock of the
Company as shall equal the result obtained by (x)
multiplying the then current Purchase Price by the then
number of one one-hundredths of a share of Preference
Stock for which a Right was exercisable immediately
prior to the first occurrence of a Section 11(a)(ii)
Event, and (y) dividing that product (which, following
such first occurrence, shall thereafter be referred to
as the "Purchase Price" for each Right and for all
purposes of this Agreement) by fifty percent (50%) of
the Current Market Price (determined pursuant to
Section 11(d) hereof) per share of Common Stock on the
date of such first occurrence (such number of shares,
the "Adjustment Shares").
(iii) In the event that the number of shares of
Common Stock that are authorized by the Company's
Articles of Incorporation but not outstanding or
reserved for issuance for purposes other than upon
exercise of the Rights are not sufficient to permit the
exercise in full of the Rights in accordance with the
foregoing subparagraph (ii) of this Section 11(a), the
Company shall (A) determine the value of the Adjustment
Shares issuable upon the exercise of a Right (the
"Current Value"), and (B) with respect to each Right
(subject to Section 7(e) hereof), make adequate
provision to substitute for the Adjustment Shares, upon
the exercise of a Right and payment of the applicable
Purchase Price, (1) cash, (2) a reduction in the
Purchase Price, (3) Common Stock or other equity
securities of the Company (including, without
limitation, shares, or units of shares, of preference
stock, such as the Preference Stock, which the Board
has deemed to have essentially the same value or
economic rights as shares of Common Stock (such shares
of preference stock being referred to as "Common Stock
Equivalents")), (4) debt securities of the Company, (5)
other assets or (6) any combination of the foregoing,
having an aggregate value equal to the Current Value
(less the amount of any reduction in the Purchase
Price), where such aggregate value has been determined
by the Board based upon the advice of a nationally
recognized investment banking firm selected by the
Board; provided, however, that if the Company shall not
have made adequate provision to deliver value pursuant
to clause (B) above within thirty (30) days following
the later of (x) the first occurrence of a Section
11(a)(ii) Event and (y) the date on which the Company's
right of redemption pursuant to Section 23(a) expires
(the later of (x) and (y) being referred to herein as
the "Section 11(a)(ii) Trigger Date"), then the Company
shall be obligated to deliver, upon the surrender for
exercise of a Right and without requiring payment of
the Purchase Price, shares of Common Stock (to the
extent available) and then, if necessary, cash, which
shares and/or cash have an aggregate value equal to the
Spread. For purposes of the preceding sentence, the
term "Spread" shall mean the excess of (i) the Current
Value over (ii) the Purchase Price. If the Board
determines in good faith that it is likely that
sufficient additional shares of Common Stock could be
authorized for issuance upon exercise in full of the
Rights, the thirty (30) day period set forth above may
be extended to the extent necessary, but not more than
ninety (90) days after the Section 11(a)(ii) Trigger
Date, in order that the Company may seek stockholder
approval for the authorization of such additional
shares (such thirty (30) day period, as it may be
extended, is herein called the "Substitution Period").
To the extent that action is to be taken pursuant to
the first and/or third sentences of this Section
11(a)(iii), the Company (1) shall provide, subject to
Section 7(e) hereof, that such action shall apply
uniformly to all outstanding Rights and (2) may suspend
the exercisability of the Rights until the expiration
of the Substitution Period in order to seek such
stockholder approval for such authorization of
additional shares and/or to decide the appropriate form
of distribution to be made pursuant to such first
sentence and to determine the value thereof. In the
event of any such suspension, the Company shall issue a
public announcement stating that the exercisabiiity of
the Rights has been temporarily suspended, as well as a
public announcement at such time as the suspension is
no longer in effect. For purposes of this Section
11(a)(iii), the value of each Adjustment Share shall be
the current market price per share of the Common Stock
on the Section 11(a)(ii) Trigger Date and the per share
or per unit value of any Common Stock Equivalent shall
be deemed to equal the current market price per share
of the Common Stock on such date.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of
Preference Stock entitling them to subscribe for or purchase (for
a period expiring within forty-five (45) calendar days after such
record date) Preference Stock (or shares having the same rights,
privileges and preferences as the shares of Preference Stock
("Equivalent Preference Stock")) or securities convertible into
Preference Stock or Equivalent Preference Stock at a price per
share of Preference Stock or per share of Equivalent Preference
Stock (or having a conversion price per share, if a security
convertible into Preference Stock or Equivalent Preference Stock)
less than the Current Market Price (as determined pursuant to
Section 11(d) hereof) per share of Preference Stock on such
record date, the Purchase Price to be in effect after such record
date shall be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of shares of Preference
Stock outstanding on such record date, plus the number of shares
of Preference Stock that the aggregate offering price of the
total number of shares of Preference Stock and/or Equivalent
Preference Stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered)
would purchase at such Current Market Price, and the denominator
of which shall be the number of shares of Preference Stock
outstanding on such record date, plus the number of additional
shares of Preference Stock and/or Equivalent Preference Stock to
be offered for subscription or purchase (or into which the
convertible securities so to be offered are initially
convertible). In case such subscription price may be paid by
delivery of consideration part or all of which may be in a form
other than cash, the value of such consideration shall be as
determined in good faith by the Board, whose determination shall
be described in a statement filed with the Rights Agent and shall
be binding on the Rights Agent and the holders of the Rights.
Shares of Preference Stock owned by or held for the account of
the Company shall not be deemed outstanding for the purpose of
any such computation. Such adjustment shall be made successively
whenever such a record date is fixed, and in the event that such
rights or warrants are not so issued, the Purchase Price shall be
adjusted to be the Purchase Price that would then be in effect if
such record date had not been fixed.
(c) In case the Company shall fix a record date for a
distribution to all holders of Preference Stock (including any
such distribution made in connection with a consolidation or
merger in which the Company is the continuing corporation), of
evidences of indebtedness, cash (other than a regular quarterly
cash dividend out of the earnings or retained earnings of the
Company), assets (other than a dividend payable in Preference
Stock, but including any dividend payable in stock other than
Preference Stock) or subscription rights or warrants (excluding
those referred to in Section 11(b) hereof), the Purchase Price
to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to
such record date by a fraction, the numerator of which shall be
the Current Market Price (as determined pursuant to Section
11(d) hereof) per share of Preference Stock on such record date,
less the fair market value (as determined in good faith by the
Board, whose determination shall be described in a statement
filed with the Rights Agent) of the portion of the cash, assets
or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to a share of
Preference Stock and the denominator of which shall be such
Current Market Price (as determined pursuant to Section 11(d)
hereof) per share of Preference Stock. Such adjustments shall
be made successively whenever such a record date is fixed, and
in the event that such distribution is not so made, the Purchase
Price shall be adjusted to be the Purchase Price which would
have been in effect if such record date had not been fixed.
(d)(i) For the purpose of any computation
hereunder, other than computations made pursuant to
Section 11(a)(iii) hereof, the "Current Market Price"
per share of Common Stock on any date shall be deemed
to be the average of the daily closing prices per share
of such Common Stock for the thirty (30) consecutive
Trading Days (as hereinafter defined) immediately prior
to such date, and for purposes of computations made
pursuant to Section 11(a)(iii) hereof, the Current
Market Price per share of Common Stock on any date
shall be deemed to be the average of the daily closing
prices per share of such Common Stock for the ten (10)
consecutive Trading Days immediately following such
date; provided, however, that in the event that the
Current Market Price per share of the Common Stock is
determined during a period following the announcement
by the issuer of such Common Stock of (A) a dividend or
distribution on such Common Stock payable in shares of
such Common Stock or securities convertible into shares
of such Common Stock (other than the Rights), or (B)
any subdivision, combination or reclassification of
such Common Stock, and the ex-dividend date for such
dividend or distribution, or the record date for such
subdivision, combination or reclassification shall not
have occurred prior to the commencement of the
requisite thirty (30) Trading Day or ten (10) Trading
Day period, as set forth above, then, and in each such
case, the Current Market Price shall be properly
adjusted to take into account ex-dividend trading. The
closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported
in the principal consolidated transaction reporting
system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the
shares of Common Stock are not listed or admitted to
trading on the New York Stock Exchange, as reported in
the principal consolidated transaction reporting system
with respect to securities listed on the principal
national securities exchange on which the shares of
Common Stock are listed or admitted to trading or, if
the shares of Common Stock are not listed or admitted
to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of
the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ, or, if
on any such date the shares of Common Stock are not
quoted by any such organization, the average of the
closing bid and asked prices as furnished by a
professional market maker making a market in the Common
Stock selected by the Board. If on any such date no
market maker is making a market in the Common Stock,
the fair value of such shares on such date as
determined in good faith by the Board shall be used.
The term "Trading Day" shall mean a day on which the
principal national securities exchange on which the
shares of Common Stock are listed or admitted to
trading is open for the transaction of business or, if
the shares of Common Stock are not listed or admitted
to trading on any national securities exchange, a
Business Day. If the Common Stock is not publicly held
or not so listed or traded, Current Market Price per
share shall mean the fair value per share as determined
in good faith by the Board, whose determination shall
be described in a statement filed with the Rights Agent
and shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder,
the Current Market Price per share of Preference Stock
shall be determined in the same manner as set forth
above for the Common Stock in clause (i) of this
Section 11(d) (other than the last sentence thereof).
If the Current Market Price per share of Preference
Stock cannot be determined in the manner provided above
or if the Preference Stock is not publicly held or
listed or traded in a manner described in clause (i) of
this Section 11(d), the Current Market Price per share
of Preference Stock shall be conclusively deemed to be
an amount equal to 100 (as such number may be
appropriately adjusted for such events as stock splits,
stock dividends and recapitalizations with respect to
the Common Stock occurring after the date of this
Agreement) multiplied by the Current Market Price per
share of the Common Stock. If neither the Common Stock
nor the Preference Stock is publicly held or so listed
or traded, Current Market Price per share of the
Preference Stock shall mean the fair value per share as
determined in good faith by the Board, whose
determination shall be described in a statement filed
with the Rights Agent and shall be conclusive for all
purposes.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least one
percent (1%) in the Purchase Price; provided, however, that any
adjustments which by reason of this Section 11(e) are not
required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under
this Section 11 shall be made to the nearest cent or to the
nearest ten-thousandth of a share of Common Stock or other share
or one-millionth of a share of Preference Stock, as the case may
be. Notwithstanding the first sentence of this Section 11(e),
any adjustment required by this Section 11 shall be made no
later than the earlier of (i) three (3) years from the date of
the transaction that mandates such adjustment or (ii) the
Expiration Date.
(f) If as a result of an adjustment made pursuant to
Section 11(a)(ii) or Section 13(a) hereof, the holder of any
Right thereafter exercised shall become entitled to receive any
shares of capital stock other than Preference Stock, thereafter
the number of such other shares so receivable upon exercise of
any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the
Preference Stock contained in Sections 11(a), (b), (c), (e),
(g), (h), (i), (j), (k) and (m), and the provisions of Sections
7, 9, 10, 13 and 14 hereof with respect to the Preference Stock
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent
to any adjustment made to the Purchase Price hereunder shall
evidence the right to purchase, at the adjusted Purchase Price,
the number of one one-hundredths of a share of Preference Stock
purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase
Price as a result of the calculations made in Sections 11(b) and
(c), each Right outstanding immediately prior to the making of
such adjustment shall thereafter evidence the right to purchase,
at the adjusted Purchase Price, that number of one one-hundredths
of a share of Preference Stock (calculated to the nearest
one-millionth) obtained by (i) multiplying (x) the number of one
one-hundredths of a share covered by a Right immediately prior to
this adjustment, by (y) the Purchase Price in effect immediately
prior to such adjustment of the Purchase Price, and (ii) dividing
the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights,
in lieu of any adjustment in the number of one one-hundredths of
a share of Preference Stock purchasable upon the exercise of a
Right. Each of the Rights outstanding after the adjustment in
the number of Rights shall be exercisable for the number of one
one-hundredths of a share of Preference Stock for which a Right
was exercisable immediately prior to such adjustment. Each
Right held of record prior to such adjustment of the number of
Rights shall become that number of Rights (calculated to the
nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase
Price by the Purchase Price in effect immediately after
adjustment of the Purchase Price. The Company shall make a
public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made.
This record date may be the date on which the Purchase Price is
adjusted or any day thereafter, but, if the Rights Certificates
have been issued, shall be at least ten (10) days later than the
date of the public announcement. If Rights Certificates have
been issued, upon each adjustment of the number of Rights
pursuant to this Section 11(i), the Company shall, as promptly
as practicable, cause to be distributed to holders of record of
Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights
to which such holders shall be entitled as a result of such
adjustment, or, at the option of the Company, shall cause to be
distributed to such holders of record in substitution and
replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if
required by the Company, new Rights Certificates evidencing all
the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be
issued, executed and countersigned in the manner provided for
herein (and may bear, at the option of the Company, the adjusted
Purchase Price) and shall be registered in the names of the
holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the
Purchase Price or the number of one one-hundredths of a share of
Preference Stock issuable upon the exercise of the Rights, the
Rights Certificates theretofore and thereafter issued may
continue to express the Purchase Price per one one-hundredth of
a share and the number of one one-hundredths of a share that
were expressed in the initial Rights Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then stated value, if any,
of the number of one one-hundredths of a share of Preference
Stock issuable upon exercise of the Rights, the Company shall
take any corporate action that may, in the opinion of its
counsel, be necessary in order that the Company may validly and
legally issue fully paid and nonassessable such number of one
one-hundredths of a share of Preference Stock at such adjusted
Purchase Price.
(l) In any case in which this Section 11 shall require that
an adjustment in the Purchase Price be made effective as of a
record date for a specified event, the Company may elect to defer
until the occurrence of such event the issuance to the holder of
any Right exercised after such record date of the number of one
one-hundredths of a share of Preference Stock and other capital
stock or securities of the Company, if any, issuable upon such
exercise over and above the number of one one-hundredths of a
share of Preference Stock and other capital stock or securities
of the Company, if any, issuable upon such exercise on the basis
of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder
a due bill or other appropriate instrument evidencing such
holder's right to receive such additional shares (fractional or
otherwise) or securities upon the occurrence of the event
requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such
reductions in the Purchase Price, in addition to those
adjustments expressly required by this Section 11, as and to the
extent that in their good faith judgment the Board shall
determine to be advisable in order that any (i) consolidation or
subdivision of the Preference Stock, (ii) issuance wholly for
cash of any shares of Preference Stock at less than the Current
Market Price, (iii) issuance wholly for cash of shares of
Preference Stock or securities which by their terms are
convertible into or exchangeable for shares of Preference Stock,
(iv) stock dividends or (v) issuance of rights, options or
warrants referred to in this Section 11, hereafter made by the
Company to holders of its Preference Stock shall not be taxable
to such stockholders.
(n) The Company covenants and agrees that it shall not, at
any time after the Distribution Date, (i) consolidate with any
other Person (other than a Subsidiary of the Company in a
transaction that complies with Section 11(o) hereof), (ii) merge
with or into any other Person (other than a Subsidiary of the
Company in a transaction which complies with Section 11(o)
hereof), or (iii) sell or transfer (or permit any Subsidiary to
sell or transfer), in one transaction, or a series of related
transactions, assets, cash flow or earning power aggregating more
than fifty percent (50%) of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other
Person or Persons (other than the Company and/or any of its
Subsidiaries in one or more transactions each of which complies
with Section 11(o) hereof), if (x) at the time of or immediately
after such consolidation, merger or sale there are any rights,
warrants or other instruments or securities outstanding or
agreements in effect which would substantially diminish or
otherwise eliminate the benefits intended to be afforded by the
Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the stockholders of the
Person who constitutes, or would constitute, the "Principal
Party" for purposes of Section 13(a) hereof shall have received
a distribution of Rights previously owned by such Person or any
of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23
or Section 26 hereof, take (or permit any Subsidiary to take) any
action if at the time such action is taken it is reasonably
foreseeable that such action will diminish substantially or
otherwise eliminate the benefits intended to be afforded by the
Rights.
(p) Anything in this Agreement to the contrary
notwithstanding, in the event that the Company shall at any time
after the Rights Dividend Declaration Date and prior to the
Distribution Date (i) declare a dividend on the outstanding
shares of Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock or (iii) combine
the outstanding shares of Common Stock into a smaller number of
shares, the number of Rights associated with each share of Common
Stock then outstanding, or issued or delivered thereafter but
prior to the Distribution Date, shall be proportionately adjusted
so that the number of Rights thereafter associated with each
share of Common Stock following any such event shall equal the
result obtained by multiplying the number of Rights associated
with each share of Common Stock immediately prior to such event
by a fraction the numerator which shall be the total number of
shares of Common Stock outstanding immediately prior to the
occurrence of the event and the denominator of which shall be the
total number of shares of Common Stock outstanding immediately
following the occurrence of such event.
Section 12. Certificate of Adjusted Purchase Price or
Number of Shares. Whenever an adjustment is made as provided in
Section 11 and Section 13 hereof, the Company shall (a) promptly
prepare a certificate setting forth such adjustment and a brief
statement of the facts accounting for such adjustment, (b)
promptly file with the Rights Agent, and with each transfer
agent for the Preference Stock and the Common Stock, a copy of
such certificate and (c) if a Distribution Date has occurred,
mail a brief summary thereof to each holder of a Rights
Certificate in accordance with Section 26 hereof. The Rights
Agent shall be fully protected in relying on any such
certificate and on any adjustment therein contained.
Section 13. Consolidation, Merger or Sale or Transfer of
Assets, Cash Flow or Earning Power.
(a) In the event that, following the Stock Acquisition
Date, directly or indirectly, (x) the Company shall consolidate
with, or merge with and into, any other Person (other than a
Subsidiary of the Company in a transaction which complies with
Section 11(o) hereof), and the Company shall not be the
continuing or surviving corporation of such consolidation or
merger, (y) any Person (other than a Subsidiary of the Company
in a transaction which complies with Section 11(o) hereof) shall
consolidate with, or merge with or into, the Company, and the
Company shall be the continuing or surviving corporation of such
consolidation or merger and, in connection with such
consolidation or merger, all or part of the outstanding shares
of Common Stock shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other
property, or (z) the Company shall sell or otherwise transfer
(or one or more of its Subsidiaries shall sell or otherwise
transfer), in one transaction or a series of related
transactions, assets, cash flow or earning power aggregating
more than fifty percent (50%) of the assets, cash flow or
earning power of the Company and its Subsidiaries (taken as a
whole) to any Person or Persons (other than the Company or any
Subsidiary of the Company in one or more transactions each of
which complies with Section 11(o) hereof), then, and in each
such case (except as may be contemplated by Section 13(d)
hereof), proper provision shall be made so that: (i) each holder
of a Right, except as provided in Section 7(e) hereof, shall
thereafter have the right to receive, upon the exercise thereof
at the then current Purchase Price in accordance with the terms
of this Agreement, such number of validly authorized and issued,
fully paid, non-assessable and freely tradeable shares of Common
Stock of the Principal Party (as such term is hereinafter
defined), not subject to any liens, encumbrances, rights of
first refusal or other adverse claims, as shall be equal to the
result obtained by (1) multiplying the then current Purchase
Price by the number of one one-hundredths of a share of
Preference Stock for which a Right is exercisable immediately
prior to the first occurrence of a Section 13 Event (or, if a
Section 11(a)(ii) Event has occurred prior to the first
occurrence of a Section 13 Event, multiplying the number of such
one one-hundredths of a share for which a Right was exercisable
immediately prior to the first occurrence of a Section 11(a)(ii)
Event by the Purchase Price in effect immediately prior to such
first occurrence), and dividing that product (which, following
the first occurrence of a Section 13 Event, shall be referred to
as the "Purchase Price" for each Right and for all purposes of
this Agreement) by (2) fifty percent (50%) of the Current Market
Price (determined pursuant to Section 11(d)(i) hereof) per share
of the Common Stock of such Principal Party on the date of
consummation of such Section 13 Event; (ii) such Principal Party
shall thereafter be liable for, and shall assume, by virtue of
such Section 13 Event, all the obligations and duties of the
Company pursuant to this Agreement; (iii) the term "Company"
shall thereafter be deemed to refer to such Principal Party, it
being specifically intended that the provisions of Section 11
hereof shall apply only to such Principal Party following the
first occurrence of a Section 13 Event; (iv) such Principal
Party shall take such steps (including, but not limited to, the
reservation of a sufficient number of shares of its Common
Stock) in connection with the consummation of any such
transaction as may be necessary to assure that the provisions
hereof shall thereafter be applicable, as nearly as reasonably
may be, in relation to its shares of Common Stock thereafter
deliverable upon the exercise of the Rights; and (v) the
provisions of Section 11(a)(ii) hereof shall be of no effect
following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in
clause (x) or (y) of the first sentence of Section
13(a), the Person that is the issuer of any securities
into which shares of Common Stock of the Company are
converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other
party to such merger or consolidation; and
(ii) in the case of any transaction described in
clause (z) of the first sentence of Section 13(a), the
Person that is the party receiving the greatest portion
of the assets, cash flow or earning power transferred
pursuant to such transaction or transactions;
provided, however, that in any such case, (1) if the Common Stock
of such Person is not at such time and has not been continuously
over the preceding twelve (12) month period registered under
Section 12 of the Exchange Act, and such Person is a direct or
indirect Subsidiary of another Person the Common Stock of which
is and has been so registered, "Principal Party" shall refer to
such other Person; and (2) in case such Person is a Subsidiary,
directly or indirectly, of more than one Person, the Common
Stocks of two or more of which are and have been so registered,
"Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market
value.
(c) The Company shall not consummate any such
consolidation, merger, sale or transfer unless the Principal
Party shall have a sufficient number of authorized shares of its
Common Stock which have not been issued or reserved for issuance
to permit the exercise in full of the Rights in accordance with
this Section 13 and unless prior thereto the Company and such
Principal Party shall have executed and delivered to the Rights
Agent a supplemental agreement providing for the terms set forth
in paragraphs (a) and (b) of this Section 13 and further
providing that, as soon as practicable after the date of any
consolidation, merger or sale of assets mentioned in paragraph
(a) of this Section 13, the Principal Party will:
(i) prepare and file a registration statement
under the Act, with respect to the Rights and the
securities purchasable upon exercise of the Rights on
an appropriate form, and will use its best efforts to
cause such registration statement to (A) become
effective as soon as practicable after such filing and
(B) remain effective (with a prospectus at all times
meeting the requirements of the Act) until the
Expiration Date; and
(ii) will deliver to holders of the Rights
historical financial statements for the Principal Party
and each of its Affiliates which comply in all respects
with the requirements for registration on Form 10 under
the Exchange Act.
The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers.
In the event that a Section 13 Event shall occur at any time
after the occurrence of a Section 11(a)(ii) Event, the Rights
which have not theretofore been exercised shall thereafter become
exercisable in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the
contrary, Section 13 shall not be applicable to a transaction
described in subparagraphs (x) and (y) of Section 13(a) if (i)
such transaction is consummated with a Person or Persons who
acquired shares of Common Stock pursuant to a tender offer or
exchange offer for all outstanding shares of Common Stock which
complies with the provisions of Section 11(a)(ii) hereof (or a
wholly owned subsidiary of any such Person or Persons), (ii) the
price per share of Common Stock offered in such transaction is
not less than the price per share of Common Stock paid to all
holders of shares of Common Stock whose shares were purchased
pursuant to such tender offer or exchange offer and (iii) the
form of consideration being offered to the remaining holders of
shares of Common Stock pursuant to such transaction is the same
as the form of consideration paid pursuant to such tender offer
or exchange offer. Upon consummation of any such transaction
contemplated by this Section 13(d), all Rights hereunder shall
expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of
Rights, except prior to the Distribution Date as provided in
Section 11(p) hereof, or to distribute Rights Certificates which
evidence fractional Rights. In lieu of such fractional Rights,
there shall be paid to the registered holders of the Rights
Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same
fraction of the current market value of a whole Right. For
purposes of this Section 14(a), the current market value of a
whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable. The
closing price of the Rights for any day shall be the last sale
price, regular way, or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed
or admitted to trading on the New York Stock Exchange or, if the
Rights are not listed or admitted to trading on the New York
Stock Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed
on the principal national securities exchange on which the
Rights are listed or admitted to trading, or if the Rights are
not listed or admitted to trading on any national securities
exchange, the last quoted price or, if not so quoted, the
average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other
system then in use or, if on any such date the Rights are not
quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker
making a market in the Rights selected by the Board. If on any
such date no such market maker is making a market in the Rights
the fair value of the Rights on such date as determined in good
faith by the Board shall be used.
(b) The Company shall not be required to issue fractions of
shares of Preference Stock (other than fractions that are
integral multiples of one one-hundredth of a share of Preference
Stock) upon exercise of the Rights or to distribute certificates
which evidence fractional shares of Preference Stock (other than
fractions that are integral multiples of one one-hundredth of a
share of Preference Stock). In lieu of fractional shares of
Preference Stock that are not integral multiples of one
one-hundredth of a share of Preference Stock, the Company may
pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash
equal to the same fraction of the current market value of one
one-hundredth of a share of Preference Stock. For purposes of
this Section 14(b), the current market value of one
one-hundredth of a share of Preference Stock shall be one
one-hundredth of the closing price of a share of Preference
Stock (as determined pursuant to Section 11(d)(ii) hereof) for
the Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the
Company shall not be required to issue fractions of shares of
Common Stock upon exercise of the Rights or to distribute
certificates which evidence fractional shares of Common Stock.
In lieu of fractional shares of Common Stock, the Company may pay
to the registered holders of Rights Certificates at the time such
Rights are exercised as herein provided an amount in cash equal
to the same fraction of the current market value of one (1)
share of Common Stock. For purposes of this Section 14(c), the
current market value of one share of Common Stock shall be the
closing price of one share of Common Stock (as determined
pursuant to Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or
any fractional shares upon exercise of a Right, except as
permitted by this Section 14.
Section 15. Rights of Action. All rights of action in
respect of this Agreement are vested in the respective registered
holders of the Rights Certificates (and, prior to the
Distribution Date, the registered holders of the Common Stock);
and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Stock), without the
consent of the Rights Agent or of the holder of any other Rights
Certificate (or, prior to the Distribution Date, of the Common
Stock), may, in his own behalf and for his own benefit, enforce,
and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of,
his right to exercise the Rights evidenced by such Rights
Certificate in the manner provided in such Rights Certificate
and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an
adequate remedy at law for any breach of this Agreement and
shall be entitled to specific performance of the obligations
hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to
this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a
Right by accepting the same consents and agrees with the Company
and the Rights Agent and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Common
Stock;
(b) after the Distribution Date, the Rights Certificates
are transferable only on the registry books of the Rights Agent
if surrendered at the principal office or offices of the Rights
Agent designated for such purposes, duly endorsed or accompanied
by a proper instrument of transfer and with the appropriate
forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the
Company and the Rights Agent may deem and treat the person in
whose name a Rights Certificate (or, prior to the Distribution
Date, the associated Common Stock certificate) is registered as
the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Stock certificate
made by anyone other than the Company or the Rights Agent) for
all purposes whatsoever, and neither the Company nor the Rights
Agent, subject to the last sentence of Section 7(e) hereof,
shall be required to be affected by any notice to the contrary;
and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any
liability to any holder of a Right or other Person as a result of
its inability to perform any of its obligations under this
Agreement by reason of any preliminary or permanent injunction
or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative
agency or commission, or any statute, rule, regulation or
executive order promulgated or enacted by any governmental
authority, prohibiting or otherwise restraining performance of
such obligation; provided, however, the Company must use its
best efforts to have any such order, decree or ruling lifted or
otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a
Stockholder. No holder, as such, of any Rights Certificate shall
be entitled to vote, receive dividends or be deemed for any
purpose the holder of the number of one one-hundredths of a share
of Preference Stock or any other securities of the Company that
may at any time be issuable on the exercise of the Rights
represented thereby, nor shall anything contained herein or in
any Rights Certificate be construed to confer upon the holder of
any Rights Certificate, as such, any of the rights of a
stockholder of the Company or any right to vote for the election
of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate
action, or to receive notice of meetings or other actions
affecting stockholders (except as provided in Section 24
hereof), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by such Rights
Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent
reasonable compensation for all services rendered by it hereunder
and, from time to time, on demand of the Rights Agent, its
reasonable expenses and counsel fees and disbursements and other
disbursements incurred in the administration and execution of
this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights
Agent for, and to hold it harmless against, any loss, liability,
or expense, incurred without negligence, bad faith or willful
misconduct on the part of the Rights Agent, for anything done or
omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and
expenses of defending against any claim of liability in the
premises.
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or
omitted by it in connection with its administration of this
Agreement in reliance upon any Rights Certificate or certificate
for Common Stock or for other securities of the Company,
instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by
it to be genuine and to be signed, executed and, where
necessary, verified or acknowledged, by the proper Person or
Persons.
Section 19. Merger or Consolidation or Change of Name of
Rights Agent.
(a) Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be
consolidated, or any corporation resulting from any merger or
consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the
corporate trust or stock transfer business of the Rights Agent
or any successor Rights Agent, shall be the successor to the
Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the
parties hereto; provided, however, that such corporation would
be eligible for appointment as a successor Rights Agent under
the provisions of Section 21 hereof. In case at the time such
successor Rights Agent shall succeed to the agency created by
this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent
may adopt the countersignature of a predecessor Rights Agent and
deliver such Rights Certificates so countersigned; and in case
at that time any of the Rights Certificates shall not have been
countersigned, any successor Rights Agent may countersign such
Rights Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in
the Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall
be changed and at such time any of the Rights Certificates shall
have been countersigned but not delivered, the Rights Agent may
adopt the countersignature under its prior name and deliver
Rights Certificates so countersigned; and in case at that time
any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights
Certificates either in its prior name or in its changed name;
and in all such cases such Rights Certificates shall have the
full force provided in the Rights Certificates and in this
Agreement.
Section 20. Duties of Rights Agent. The Rights Agent
undertakes the duties and obligations imposed by this Agreement
upon the following terms and conditions, by all of which the
Company and the holders of Rights Certificates, by their
acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who
may be legal counsel for the Company), and the opinion of such
counsel shall be full and complete authorization and protection
to the Rights Agent as to any action taken or omitted by it in
good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable
that any fact or matter (including, without limitation, the
identity of any Acquiring Person and the determination of
Current Market Price) be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or
matter (unless other evidence in respect thereof be herein
specifically prescribed) may be deemed to be conclusively proved
and established by a certificate signed by the Chairman of the
Board, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary of
the Company and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for
any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its
own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason
of any of the statements of fact or recitals contained in this
Agreement or in the Rights Certificates or be required to verify
the same (except as to its countersignature on such Rights
Certificates), but all such statements and recitals are and
shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility
in respect of the validity of this Agreement or the execution and
delivery hereof (except the due execution hereof by the Rights
Agent) or in respect of the validity or execution of any Rights
Certificate (except its countersignature thereof); nor shall it
be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights
Certificate; nor shall it be responsible for any adjustment
required under the provisions of Section 11 or Section 13 hereof
or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that
would require any such adjustment (except with respect to the
exercise of Rights evidenced by Rights Certificates after actual
notice of any such adjustment); nor shall it by any act
hereunder be deemed to make any representation or warranty as to
the authorization or reservation of any shares of Common Stock
or Preference Stock to be issued pursuant to this Agreement or
any Rights Certificate or as to whether any shares of Common
Stock or Preference Stock will, when so issued, be validly
authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed,
acknowledged and delivered all such further and other acts,
instruments and assurances as may reasonably be required by the
Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties
hereunder from the Chairman of the Board, the President, any Vice
President, the Secretary, any Assistant Secretary, the Treasurer
or any Assistant Treasurer of the Company, and to apply to such
officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or
suffered to be taken by it in good faith in accordance with
instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer
or employee of the Rights Agent may buy, sell or deal in any of
the Rights or other securities of the Company or become pecuniary
interested in any transaction in which the Company may be
interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights
Agent under this Agreement. Nothing herein shall preclude the
Rights Agent from acting in any other capacity for the Company
or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty
hereunder either itself or by or through its attorneys or agents,
and the Rights Agent shall not be answerable or accountable for
any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such
act, default, neglect or misconduct; provided, however,
reasonable care was exercised in the selection and continued
employment thereof.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties
hereunder or in the exercise of its rights if there shall be
reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered
to the Rights Agent for exercise or transfer, the certificate
attached to the form of assignment or form of election to
purchase, as the case may be, has either not been completed or
indicates an affirmative response to clause 1 and/or 2 thereof,
the Rights Agent shall not take any further action with respect
to such requested exercise or transfer without first consulting
with the Company.
Section 21. Change of Rights Agent. The Rights Agent or
any successor Rights Agent may resign and be discharged from its
duties under this Agreement upon thirty (30) days' notice in
writing mailed to the Company, and to each transfer agent of the
Common Stock and Preference Stock, by registered or certified
mail, and to the holders of the Rights Certificates by
first-class mail. The Company may remove the Rights Agent or
any successor Rights Agent upon thirty (30) days' notice in
writing, mailed to the Rights Agent or successor Rights Agent,
as the case may be, and to each transfer agent of the Common
Stock and Preference Stock, by registered or certified mail, and
to the holders of the Rights Certificates by first-class mail.
If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to
make such appointment within a period of thirty (30) days after
giving notice of such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Rights
Certificate (who shall, with such notice, submit his Rights
Certificate for inspection by the Company), then any registered
holder of any Rights Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights
Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be (a) a legal business entity
organized and doing business under the laws of the United States
or of any State thereof, in good standing, which is authorized
under such laws to exercise corporate trust or stock transfer
powers and is subject to supervision or examination by federal
or state authority and which has at the time of its appointment
as Rights Agent a combined capital and surplus of at least
$25,000,000 or (b) an affiliate of a legal business entity
described in clause (a) of this sentence. After appointment,
the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the
successor Rights Agent any property at the time held by it
hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company
shall file notice thereof in writing with the predecessor Rights
Agent and each transfer agent of the Common Stock and the
Preference Stock, and mail a notice thereof in writing to the
registered holders of the Rights Certificates. Failure to give
any notice provided for in this Section 21, however, or any
defect therein, shall not affect the legality or validity of the
resignation or removal of the Rights Agent or the appointment of
the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates.
Notwithstanding any of the provisions of this Agreement or of the
Rights to the contrary, the Company may, at its option, issue new
Rights Certificates evidencing Rights in such form as may be
approved by the Board to reflect any adjustment or change in the
Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates
made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of shares of
Common Stock following the Distribution Date and prior to the
redemption or expiration of the Rights, the Company (a) shall,
with respect to shares of Common Stock so issued or sold pursuant
to the exercise of stock options or under any employee plan or
arrangement, granted or awarded as of the Distribution Date, or
upon the exercise, conversion or exchange of securities
hereinafter issued by the Company, and (b) may, in any other
case, if deemed necessary or appropriate by the Board, issue
Rights Certificates representing the appropriate number of Rights
in connection with such issuance or sale; provided, however, that
(i) no such Rights Certificate shall be issued if, and to the
extent that, the Company shall be advised by counsel that such
issuance would create a significant risk of material adverse tax
consequences to the Company or the Person to whom such Rights
Certificate would be issued, and (ii) no such Rights Certificate
shall be issued if, and to the extent that, appropriate
adjustment shall otherwise have been made in lieu of the issuance
thereof.
Section 23. Redemption and Termination.
(a) The Board may, at its option, at any time prior to the
earlier of (i) the close of business on the tenth Business Day
following the Stock Acquisition Date (or, if the Stock
Acquisition Date shall have occurred prior to the Record Date,
the close of business on the tenth Business Day following the
Record Date), or (ii) the Final Expiration Date, redeem all but
not less than all the then outstanding Rights at a redemption
price of $.01 per Right, as such amount may be appropriately
adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such redemption
price being hereinafter referred to as the "Redemption Price").
Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable after the first
occurrence of a Section 11(a)(ii) Event until such time as the
Company's right of redemption hereunder has expired. The
Company may, at its option, pay the Redemption Price in cash,
shares of Common Stock (based on the Current Market Price, as
defined in Section 11(d)(i) hereof, of the Common Stock at the
time of redemption) or any other form of consideration deemed
appropriate by the Board.
(b) Immediately upon the action of the Board ordering the
redemption of the Rights, evidence of which shall have been filed
with the Rights Agent and without any further action and without
any notice, the right to exercise the Rights will terminate and
the only right thereafter of the holders of Rights shall be to
receive the Redemption Price for each Right so held. Promptly
after the action of the Board ordering the redemption of the
Rights, the Company shall give notice of such redemption to the
Rights Agent and the holders of the then outstanding Rights by
mailing such notice to all such holders at each holder's last
address as it appears upon the registry books of the Rights Agent
or, prior to the Distribution Date, on the registry books of the
transfer agent for the Common Stock. Any notice which is mailed
in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the
Redemption Price will be made.
(c) Notwithstanding the provisions of Section 23(a) hereof,
in the event that a majority of the Board is elected by
stockholder action by written consent, or is comprised of persons
elected at a meeting of stockholders who were not nominated by
the Board in office immediately prior to such meeting, then for a
period of one hundred and eighty (180) days following the
effectiveness of such election the Rights shall not be redeemed
if such redemption is reasonably likely to have the purpose or
effect of allowing any Person to become an Acquiring Person or
otherwise facilitating the occurrence of a Triggering Event or a
transaction with an Acquiring Person.
Section 24. Notice of Certain Events.
(a) In case the Company shall propose, at any time after
the Distribution Date, (i) to pay any dividend payable in stock
of any class to the holders of Preference Stock or to make any
other distribution to the holders of Preference Stock (other than
a regular quarterly cash dividend out of earnings or retained
earnings of the Company), or (ii) to offer to the holders of
Preference Stock rights or warrants to subscribe for or to
purchase any additional shares of Preference Stock or shares of
stock of any class or any other securities, rights or options, or
(iii) to effect any reclassification of its Preference Stock
(other than a reclassification involving only the subdivision of
outstanding shares of Preference Stock), or (iv) to effect any
consolidation or merger into or with any other Person (other than
a Subsidiary of the Company in a transaction which complies with
Section 11(o) hereof), or to effect any sale or other transfer
(or to permit one or more of its Subsidiaries to effect any sale
or other transfer), in one transaction or a series of related
transactions, of more than fifty percent (50%) of the assets,
cash flow or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof),
or (v) to effect the liquidation, dissolution or winding up of
the Company, then, in each such case, the Company shall give to
each holder of a Rights Certificate, to the extent feasible and
in accordance with Section 25 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of
such stock dividend, distribution of rights or warrants, or the
date on which such reclassification, consolidation, merger, sale,
transfer, liquidation, dissolution, or winding up is to take
place and the date of participation therein by the holders of the
shares of Preference Stock, if any such date is to be fixed, and
such notice shall be so given in the case of any action covered
by clause (i) or (ii) above at least twenty (20) days prior to
the record date for determining holders of the shares of
Preference Stock for purposes of such action, and in the case of
any such other action, at least twenty (20) days prior to the
date of the taking of such proposed action or the date of
participation therein by the holders of the shares of Preference
Stock whichever shall be the earlier.
(b) In case any of the events set forth in Section
11(a)(ii) hereof shall occur, then, in any such case, (i) the
Company shall as soon as practicable thereafter give to each
holder of a Rights Certificate, to the extent feasible and in
accordance with Section 26 hereof, a notice of the occurrence of
such event, which shall specify the event and the consequences of
the event to holders of Rights under Section 11(a)(ii) hereof,
and (ii) all references in the preceding paragraph to Preference
Stock shall be deemed thereafter to refer to Common Stock and/or,
if appropriate, other securities.
Section 25. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the
holder of any Rights Certificate to or on the Company shall be
sufficiently given or made if sent by first-class mail, postage
prepaid, addressed (until another address is filed in writing
with the Rights Agent) as follows:
Southeastern Michigan Gas Enterprises, Inc.
Attention: Corporate Secretary
405 Water Street
Port Huron, Michigan 48060
Subject to the provisions of Section 21, any notice or
demand authorized by this Agreement to be given or made by the
Company or by the holder of any Rights Certificate to or on the
Rights Agent shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Company) as follows:
Continental Stock Transfer & Trust Company
Attention: Compliance Department
2 Broadway 19th Floor
New York, NY 10004
Notices or demands authorized by this Agreement to be given
or made by the Company or the Rights Agent to the holder of any
Rights Certificate (or, if prior to the Distribution Date, to the
holder of certificates representing shares of Common Stock) shall
be sufficiently given or made if sent by first-class mail,
postage prepaid, addressed to such holder at the address of such
holder as shown on the registry books of the Company.
Section 26. Supplements and Amendments. Prior to the
Distribution Date, the Company and the Rights Agent shall, if the
Company so directs, supplement or amend any provision of this
Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the
Distribution Date, the Company and the Rights Agent shall, if the
Company so directs, supplement or amend this Agreement without
the approval of any holders of Rights Certificates in order (i)
to cure any ambiguity, (ii) to correct or supplement any
provision contained herein which may be defective or inconsistent
with any other provisions herein, (iii) to shorten or lengthen
any time period hereunder or (iv) to change or supplement the
provisions hereunder in any manner which the Company may deem
necessary or desirable and which shall not adversely affect the
interests of the holders of Rights Certificates; provided, from
and after the Distribution Date, this Agreement may not be
supplemented or amended to lengthen any time period hereunder,
pursuant to clause (iii) of this sentence unless such lengthening
is for the purpose of protecting, enhancing or clarifying the
rights of, and/or the benefits to, the holders of Rights. Upon
the delivery of a certificate from an appropriate officer of the
Company which states that the proposed supplement or amendment is
in compliance with the terms of this Section 26, the Rights Agent
shall execute such supplement or amendment. Prior to the
Distribution Date, the interests of the holders of Rights shall
be deemed coincident with the interests of the holders of Common
Stock. Notwithstanding anything contained herein to the
contrary, this Agreement may not be amended at a time when the
Rights are not redeemable.
Section 27. Successors. All the covenants and provisions
of this Agreement by or for the benefit of the Company or the
Rights Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.
Section 28. Determinations and Actions by the Board, etc.
For all purposes of this Agreement, any calculation of the number
of shares of Common Stock outstanding at any particular time,
including for purposes of determining the particular percentage
of such outstanding shares of Common Stock of which any Person
is the Beneficial Owner, shall be made in accordance with the
last sentence of Rule 13d-3(d)(1)(i) of the General Rules and
Regulations under the Exchange Act. The Board shall have the
exclusive power and authority to administer this Agreement and
to exercise all rights and powers specifically granted to the
Board or to the Company, or as may be necessary or advisable in
the administration of this Agreement, including, without
limitation, the right and power to (i) interpret the provisions
of this Agreement, and (ii) make all determinations deemed
necessary or advisable for the administration of this Agreement
(including a determination to redeem or not redeem the Rights or
to amend the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of
clause (y) below, all omissions with respect to the foregoing)
which are done or made by the Board in good faith, shall (x) be
final, conclusive and binding on the Company, the Rights Agent,
the holders of the Rights and all other parties, and (y) not
subject the Board to any liability to the holders of the Rights.
Section 29. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any Person other than the
Company, the Rights Agent and the registered holders of the
Rights Certificates (and, prior to the Distribution Date,
registered holders of the Common Stock) any legal or equitable
right, remedy or claim under this Agreement; but this Agreement
shall be for the sole and exclusive benefit of the Company, the
Rights Agent and the registered holders of the Rights
Certificates (and, prior to the Distribution Date, registered
holders of the Common Stock).
Section 30. Severability. If any term, provision, covenant
or restriction of this Agreement is held by a court of competent
jurisdiction or other authority to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants
and restrictions of this Agreement shall remain in full force
and effect and shall in no way be affected, impaired or
invalidated; provided, however, that notwithstanding anything in
this Agreement to the contrary, if any such term, provision,
covenant or restriction is held by such court or authority to be
invalid, void or unenforceable and the Board determines in its
good faith judgment that severing the invalid language from this
Agreement would adversely affect the purpose or effect of this
Agreement, the right of redemption set forth in Section 23
hereof shall be reinstated and shall not expire until the close
of business on the tenth day following the date of such
determination by the Board.
Section 31. Governing Law. This Agreement, each Right and
each Rights Certificate issued hereunder shall be deemed to be a
contract made under the laws of the State of Michigan and for
all purposes shall be governed by and construed in accordance
with the laws of such State applicable to contracts made and to
be performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed
in any number of counterparts and each of such counterparts shall
for all purposes be deemed to be an original, and all such
counterparts shall together constitute but one and the same
instrument.
Section 33. Descriptive Headings. Descriptive headings of
the several Sections of this Agreement are inserted for
convenience only and shall not control or affect the meaning or
construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and their respective corporate
seals to be hereunto affixed and attested, all as of the day and
year first above written.
Attest: SOUTHEASTERN MICHIGAN GAS
ENTERPRISES, INC.
By: Sherry L. Abbott By: William L. Johnson
Name: Sherry L. Abbott Name: William L. Johnson
Title: Corporate Secretary Title: President and CEO
Attest: CONTINENTAL STOCK
TRANSFER & TRUST
COMPANY
By: WILLIAM F. SEEGRABER By: THOMAS JENNINGS
Name: WILLIAM F. SEEGRABER Name: THOMAS JENNINGS
Title: VICE PRESIDENT Title: ASSISTANT SECRETARY
<PAGE>
Exhibit A
FORM OF
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES A PREFERENCE STOCK
OF
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
Pursuant to Section 302 of the Business Corporation Act
of the State of Michigan
We, _______________, Chairman of the Board, and
______________, Secretary of Southeastern Michigan Gas
Enterprises, Inc., a Michigan corporation (the "Corporation"), in
accordance with the provisions of Section 302 of the Michigan
Business Corporation Act, DO HEREBY CERTIFY:
That on January 16,1997, the Board of Directors approved
adoption of the following resolution creating a series of
Preference Stock designated as Series A Preference Stock:
RESOLVED that, immediately following shareholder approval of
an amendment to the Articles providing for a new class of
Preference Stock, a series of Preference Stock be created, with
the following characteristics:
Section 1. Designation and Amount. The shares of such
series shall be designated as "Series A Preference Stock" and the
number of shares constituting such series shall initially be
2,000,000.
Section 2. Dividends and Distributions.
(A) Preference Stock is entitled to receive dividends on
the fifteenth day of March, June, September and December each
year (each a "Quarterly Dividend Payment Date") in an amount per
share (rounded to the nearest cent) equal to the greater of (a)
$10.00 or (b) the Adjustment Number times the per share amount
of all cash dividends, and the Adjustment Number times the per
share amount (payable in kind) of all non-cash dividends or
other distributions (other than a dividend payable in shares of
Common Stock or a subdivision of the shares of Common Stock),
declared on the Common Stock since the preceding Quarterly
Dividend Payment Date, or, if later, since the issuance of such
Series A Preference Stock.
(B) The Corporation shall declare any dividend required by
Paragraph (A) immediately after it declares the triggering
dividend or distribution on the Common Stock.
(C) Dividends shall accrue and be cumulative on Series A
Preference Stock from the Quarterly Dividend Payment Date next
preceding the date of issue. If the date of issue is prior to
the first Quarterly Dividend Payment Date, dividends shall
accrue from the date of issue. However, if the date of issue is
after a record date and before a Quarterly Dividend Payment
Date, dividends shall accrue from such Quarterly Dividend
Payment Date. Unpaid dividends shall not bear interest.
Dividends less than the total amount payable shall be allocated
pro rata. The Board may fix a record date no more than 30 days
prior to the date fixed for the payment of dividends.
Section 3. Voting Rights. Series A Preference Stock has the
following voting rights:
(A) Series A Preference Stock are entitled to a number of
votes equal to the Adjustment Number times the number of votes to
which Common Stock is entitled.
(B) Except as otherwise provided herein or by law, Series A
Preference Stock and Common Stock shall vote together as one
class on all matters submitted to a vote of Common Stockholders.
(C) (i) If dividends on Series A Preference Stock shall be
in arrears by six (6) or more quarterly dividends, a "default
period" shall begin. The default period shall end when all
accrued dividends shall have been paid or set apart for payment.
During a default period, Series A Preference Stock shall have the
right to elect two (2) Directors. This vote shall be as a class
for all series of Preference Stock entitled to vote.
(ii) During any default period, such voting right may
be exercised initially at a special meeting or at any annual
meeting of stockholders, and thereafter at annual meetings of
stockholders. Such voting shall not occur unless ten percent
(10%) of Preference Stock entitled to vote is present in person
or by proxy. A quorum for Common Stock votes need not be
present. At any special meeting, Preference stockholders shall
have the right to increase the number of Directors to permit
their election of two Directors. In any default period, the
number of Directors shall not otherwise be changed except
pursuant to the rights of any securities ranking senior to or
equal with the Series A Preference Stock.
(iii) The Board of Directors may order, or any
stockholders owning not less than ten percent (10%) of the
Preference Stock entitled to vote may request, the calling of a
special meeting. The meeting shall thereupon be called by the
President, a Vice-President or the Secretary. Notice of any
meeting at which Preference Stock is entitled to vote shall be
given to each holder of record of Preference Stock by mail. Such
meeting shall be called not earlier than 20 days and not later
than 60 days after such order or request. In default of the
timely calling of such meeting, such meeting may be called on
similar notice by stockholders owning not less than ten percent
(10%) of the Preference Stock entitled to vote. No special
meeting shall be called less than 60 days preceding the date
fixed for the next annual meeting of Common Stockholders.
(iv) In any default period, other classes of stock
shall continue to be entitled to elect the whole number of
Directors if the holders of Preference Stock do not exercise
their right to elect two (2) Directors. Directors elected by
Preference Stock shall continue in office until their successors
are elected or until the expiration of the default period.
Otherwise, any vacancy in the Board may be filled by a majority
of the remaining Directors elected by the class of stock which
elected the Director whose office is vacant.
(v) Upon the expiration of a default period, (x) the
right of Preference Stock to elect Directors shall cease, (y) the
term of Directors elected by Preference Stock shall terminate,
and (z) the number of Directors shall be unaffected by any
increase made pursuant to Paragraph (C)(ii) of this Section 3.
Any vacancies in the Board effected by clauses (y) and (z) may be
filled by a majority of the remaining Directors.
(D) Except as set forth herein or provided by law, Series A
Preference Stock shall have no voting rights or consent
requirement for any corporate action.
Section 4. Certain Restrictions.
(A) Whenever dividends on Series A Preference Stock are in
arrears, the Corporation shall not
(i) make any distributions on, or acquire for
consideration, any stock ranking junior (either as to dividends
or assets) to the Series A Preference Stock;
(ii) make any distributions on stock ranking on a
parity (either as to dividends or assets) with the Series A
Preference Stock, except dividends paid ratably on all such
parity stock;
(iii) acquire for consideration any stock ranking on a
parity (either as to dividends or assets) with the Series A
Preference Stock, provided that the Corporation may acquire stock
in exchange for stock ranking junior (as to dividends and assets)
to the Series A Preference Stock; or
(iv) acquire for consideration Series A Preference
Stock, or any stock ranking on a parity with the Series A
Preference Stock, except in accordance with a purchase offer made
in writing to all holders of such shares upon such terms as the
Board, after consideration of the respective dividend rates and
other relative rights and preferences, shall determine in good
faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary to
acquire stock unless the Corporation could, under Paragraph (A)
so acquire such stock.
Section 5. Reacquired Shares. Series A Preference Stock
acquired by the Corporation in any manner shall be retired and
canceled promptly after its acquisition. All such shares shall
be authorized but unissued shares and may be reissued as part of
any series of Preference Stock.
Section 6. Liquidation, Dissolution or Winding Up. (A) Upon
any liquidation, dissolution or winding up, no distribution shall
be made for shares ranking junior (either as to dividends or
assets) to the Series A Preference Stock unless, prior thereto,
the Series A Preference Stockholders shall receive $100 per
share, plus an amount equal to accrued and unpaid dividends to
the date of such payment (the "Series A Liquidation Preference").
No additional distributions shall be made for Series A Preference
Stock unless, prior thereto, Common Stockholders shall have
received an amount per share (the "Common Adjustment") equal to
the quotient obtained by dividing (i) the Series A Liquidation
Preference by (ii) the Adjustment Number. Series A Preference
Stockholders and Common Stockholders shall receive their ratable
share of the remaining assets to be distributed in the ratio of
the Adjustment Number to 1.
(B) If there are not sufficient assets available to permit
payment in full of the liquidation preferences of all series of
Preference Stock ranking on a parity, remaining assets shall be
distributed ratably in proportion to respective liquidation
preferences. If there are not sufficient assets available to
permit payment in full of the Common Adjustment, then remaining
assets shall be distributed ratably to Common Stockholders.
Section 7. Consolidation, Merger, etc. If the Corporation
shall enter into any transaction in which the shares of Common
Stock are exchanged for, or changed into, any other property,
Series A Preference Stock shall at the same time be similarly
exchanged, or changed, in an amount per share equal to the
Adjustment Number times the amount of property into which, or
for which, each share of Common Stock is changed or exchanged.
Section 8. No Redemption. Series A Preference Stock is not
redeemable.
Section 9. Ranking. The Series A Preference Stock ranks
junior to all series of Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of
any series shall provide otherwise.
Section 10. Amendment. The Articles of Incorporation shall
not be amended in any manner which would materially adversely
affect the powers, preferences or special rights of the Series A
Preference Stock without the affirmative vote of a majority of
the Series A Preference Stock.
Section 11. Fractional Shares. Series A Preference Stock
may be issued in fractions of a share.
Section 12. Adjustment Number. The Adjustment Number shall
be 100 initially. If the Corporation shall, (i) pay any dividend
on Common Stock in shares of Common Stock, (ii) subdivide the
Common Stock, or (iii) combine the Common Stock into a smaller
number of shares, the Adjustment Number shall be modified by
multiplying it by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares
of Common Stock outstanding immediately prior to such event.
IN WITNESS WHEREOF, we have executed this Certificate and do
affirm the foregoing as true this day of _________, 1997.
________________________________
Chairman of the Board
Attest:
______________________________
Secretary
<PAGE>
Exhibit B
[Form of Rights Certificate]
Certificate No. R-Rights
NOT EXERCISABLE AFTER APRIL 15, 2007 OR EARLIER IF REDEEMED BY
THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION
OF THE COMPANY, AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE
RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS
BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS
DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF
SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY
THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A
PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR
ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN
THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND
THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE
CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH AGREEMENT.]*
Rights Certificate
SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.
This certifies that ___________________________, or
registered assigns, is the registered owner of the number of
Rights set forth above, each of which entitles the owner thereof,
subject to the terms, provisions and conditions of the Rights
Agreement, dated as of April 15, 1997 (the "Rights Agreement"),
between Southeastern Michigan Gas Enterprises, Inc. a Michigan
corporation (the "Company"), and Continental Stock Transfer &
Trust Company, (the "Rights Agent"), to purchase from the
Company at any time prior to 5:00 P.M. (New York time) on April
15, 2007 at the office or offices of the Rights Agent designated
for such purpose, or its successors as Rights Agent, one
one-hundredth of a fully paid, non-assessable share of Series A
Preference Stock (the "Preference Stock") of the Company, at a
purchase price of $74.88 per one one-hundredth of a share (the
"Purchase Price"), upon presentation and surrender of this
Rights Certificate with the Form of Election to Purchase and
related Certificate duly executed. The number of Rights
evidenced by this Rights Certificate (and the number of shares
which may be purchased upon exercise thereof) set forth above,
and the Purchase Price per share set forth above, are the number
and Purchase Price as of April 15, 1997, based on the Preference
Stock as constituted at such date. The Company reserves the
right to require prior to the occurrence Company reserves the
________________
* The portion of the legend in brackets shall be inserted only
if applicable and shall replace the preceding sentence.
<PAGE>
right to require prior to the occurrence of a Triggering Event
(as such term is defined in the Rights Agreement) that a number
of Rights be exercised so that only whole shares of Preference
Stock will be issued.
Upon the occurrence of a Section 11(a)(ii) Event (as such
term is defined in the Rights Agreement), if the Rights evidenced
by this Rights Certificate are beneficially owned by (i) an
Acquiring Person or an Affiliate or Associate of any such
Acquiring Person (as such terms are defined in the Rights
Agreement), (ii) a transferee of any such Acquiring Person,
Associate or Affiliate or (iii) under certain circumstances
specified in the Rights Agreement, a transferee of a person who,
after such transfer, became an Acquiring Person, or an Affiliate
or Associate of an Acquiring Person, such Rights shall become
null and void and no holder hereof shall have any right with
respect to such Rights from and after the occurrence of such
Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and
the number and kind of shares of Preference Stock or other
securities, which may be purchased upon the exercise of the
Rights evidenced by this Rights Certificate are subject to
modification and adjustment upon the happening of certain
events, including Triggering Events.
This Rights Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms,
provisions and conditions are hereby incorporated herein by
reference and made a part hereof and to which Rights Agreement
reference is hereby made for a full description of the rights,
limitations of rights obligations, duties and immunities
hereunder of the Rights Agent, the Company and the holders of
the Rights Certificates, which limitations of rights include the
temporary suspension of the exercisability of such Rights under
the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the
above-mentioned office of the Rights Agent and are also
available upon written request to the Company.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the principal office or offices
of the Rights Agent designated for such purpose, may be
exchanged for another Rights Certificate or Rights Certificates
of like tenor and date evidencing Rights entitling the holder to
purchase a like aggregate number of one one-hundredths of a
share of Preference Stock as the Rights evidenced by the Rights
Certificate or Rights Certificates surrendered shall have
entitled such holder to purchase. If this Rights Certificate
shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Rights Certificate or
Rights Certificates for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the
Rights evidenced by this Certificate may be redeemed by the
Company at its option at a redemption price of $.01 per Right at
any time prior to the earlier of the close of business on (i) the
tenth business day following the Stock Acquisition Date (as such
time period may be extended pursuant to the Rights Agreement) and
(ii) the Final Expiration Date. The foregoing notwithstanding,
the Rights generally may not be redeemed for one hundred eighty
(180) days following a change in a majority of the Board as a
result of a proxy contest.
No fractional shares of Preference Stock will be issued upon
the exercise of any Right or Rights evidenced hereby (other than,
except that the possible requirement that prior to the occurrence
of a Triggering Event only whole shares of Preference Stock be
issued, fractions which are integral multiples of one
one-hundredth of a share of Preference Stock, which may, at the
election of the Company, be evidenced by depositary receipts),
but in lieu thereof a cash payment will be made, as provided in
the Rights Agreement.
No holder of this Rights Certificate shall be entitled to
vote or receive dividends or be deemed for any purpose the holder
of shares of Preference Stock or of any other securities of the
Company which may at any time be issuable on the exercise hereof,
nor shall anything contained in the Rights Agreement or herein be
construed to confer upon the holder hereof, as such, any of the
rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold
consent to any corporate action, or, to receive notice of
meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or
subscription rights, or otherwise, until the Right or Rights
evidenced by this Rights Certificate shall have been exercised
as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Rights
Agent.
WITNESS the facsimile signature of the proper officers of
the Company and its corporate seal.
Dated as of _____________________
ATTEST: SOUTHEASTERN MICHIGAN GAS
ENTERPRISES, INC.
_____________________________ By______________________________
Secretary Title:__________________________
Countersigned:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
By____________________________________
Authorized Officer
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED _____________________________________
_______hereby sells, assigns and transfers to________________
_____________________________________________________________
(Please print name and address of transferee)
this Rights Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute and
appoint ____________________________ Attorney, to transfer this
Rights Certificate on the books of the Company, with full power
of substitution.
Dated:__________________
________________________________
Signature
________________________________
Signature
Signature Guaranteed:
<PAGE>
CERTIFICATE
The undersigned transferor hereby certifies by checking the
appropriate boxes that:
(a) this Rights Certificate [ ] is [ ] is not
being sold, assigned and transferred by or on behalf of a Person
who is or was an Acquiring Person or an Affiliate or Associate of
any such Acquiring Person (as such terms are defined pursuant to
the Rights Agreement);
(b) after due inquiry and to the best of my (our)
knowledge, I (we) [ ] did [ ] did not
acquire the Rights evidenced by this Rights Certificate from any
Person who is, was or subsequently became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person.
Dated:_______________
________________________________
Signature
________________________________
Signature
Signature Guaranteed:
NOTICE
The signature(s) to the foregoing Assignment and Certificate
must correspond to the name(s) as written upon the face of this
Rights Certificate in every particular, without alteration or
enlargement or any change whatsoever.
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights
represented by the Rights Certificate.)
To: SOUTHEASTERN MICHIGAN GAS ENTERPRISES, INC.:
The undersigned hereby irrevocably elects to exercise
_________________ Rights represented by this Rights Certificate
to purchase the shares of Preference Stock issuable upon the
exercise of the Rights (or such other securities of the Company
or of any other person which may be issuable upon the exercise
of the Rights) and requests that certificates for such
securities be issued in the name of and delivered to:
_____________________________________________________________
(name)
_____________________________________________________________
(street address)
_____________________________________________________________
(city, state, zip)
_____________________________________________________________
(social security or other identifying number)
If such number of Rights shall not be all the Rights
evidenced by this Rights Certificate, a new Rights Certificate
for the balance of such Rights shall be registered in the name of
and delivered to:
_____________________________________________________________
(name)
_____________________________________________________________
(street address)
_____________________________________________________________
(city, state, zip)
_____________________________________________________________
(social security or other identifying number)
Dated:_______________________
________________________________
Signature
________________________________
Signature
Signature Guaranteed:
<PAGE>
CERTIFICATE
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) the Rights evidenced by this Rights Certificate
[ ] are [ ] are not being exercised by or on behalf of a
Person who is or was an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined
pursuant to the Rights Agreement);
(2) after due inquiry and to my (our) best knowledge, I
(we) [ ] did [ ] did not acquire the Rights
evidenced by this Rights Certificate from any Person who is, was
or became an Acquiring Person or an Affiliate or Associate of an
Acquiring Person.
Dated:___________________
_________________________________
Signature
_________________________________
Signature
Signature Guaranteed:
NOTICE
The signature(s) to the foregoing Election to Purchase and
Certificate must correspond to the name(s) as written upon the
face of this Rights Certificate in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
Exhibit C
SUMMARY OF RIGHTS TO PURCHASE
PREFERENCE STOCK
On January 16, 1997, the Board of Directors of Southeastern
Michigan Gas Enterprises, Inc. (the "Company") declared a
dividend distribution of one Right for each outstanding share of
Common Stock to stockholders of record at the close of business
April 15, 1997 (the "Record Date"). Each Right entitles the
registered holder to purchase from the Company one one-hundredth
of a share of Series A Preference Stock, per share (the
"Preference Stock"), at a Purchase Price of $74.88, subject to
adjustment. The description and terms of the Rights are set
forth in a Rights Agreement (the "Rights Agreement") between the
Company and Continental Stock Transfer & Trust Company, as
Rights Agent.
Initially, the Rights will be attached to all Common Stock
certificates representing shares then outstanding, and no
separate Rights Certificates will be distributed. The Rights
will separate from the Common Stock and a Distribution Date will
occur upon the earlier of (i) ten (10) business days following a
public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of fifteen
percent (15%) or more of the outstanding shares of Common Stock
(the "Stock Acquisition Date"), other than as a result of
repurchases of stock by the Company or certain inadvertent
actions by institutional or certain other stockholders, or (ii)
ten (10) business days (or such later date as the Board shall
determine) following the commencement of a tender offer or
exchange offer that would result in a person or group
beneficially owning fifteen percent (15%) or more of such
outstanding shares of Common Stock. Until the Distribution
Date, (i) the Rights will be evidenced by the Common Stock
certificates and will be transferred with and only with such
Common Stock certificates, (ii) new Common Stock certificates
issued after the Record Date will contain a notation
incorporating the Rights Agreement by reference and (iii) the
surrender for transfer of any certificates for Common Stock
outstanding will also constitute the transfer of the Rights
associated with the Common Stock represented by such
certificate. Pursuant to the Rights Agreement, the Company
reserves the right to require prior to the occurrence of a
Triggering Event (as defined below) that, upon any exercise of
Rights, a number of Rights be exercised so that only whole
shares of Preference Stock will be issued.
The Rights are not exercisable until the Distribution Date
and will expire at the close of business on April 15, 2007 unless
earlier redeemed by the Company as described below.
As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of the Common
Stock as of the close of business on the Distribution Date and,
thereafter, the separate Rights Certificates alone will
represent the Rights. Except as otherwise determined by the
Board, only shares of Common Stock issued prior to the
Distribution Date will be issued with Rights.
In the event that a Person becomes the beneficial owner of
more than fifteen percent (15%) of the then outstanding shares of
Common Stock (except pursuant to an offer for all outstanding
shares of Common Stock that the Board of Directors determines to
be fair to and otherwise in the best interests of the Company
and its stockholders), each holder of a Right will thereafter
have the right to receive, upon exercise, Common Stock (or, in
certain circumstances, cash, property or other securities of the
Company) having a value equal to two times the exercise price of
the Right. Notwithstanding any of the foregoing, following the
occurrence of the event set forth in this paragraph, all Rights
that are, or (under certain circumstances specified in the
Rights Agreement) were, beneficially owned by any Acquiring
Person will be null and void. However, Rights are not
exercisable following the occurrence of the event set forth
above until such time as the Rights are no longer redeemable by
the Company as set forth below.
For example, at an exercise price of $150 per Right, each
Right not owned by an Acquiring Person (or by certain related
parties) following an event set forth in the preceding paragraph
would entitle its holder to purchase $300 worth of Common Stock
(or other consideration, as noted above) for $150. Assuming that
the Common Stock had a per share value of $50 at such time, the
holder of each valid Right would be entitled to purchase 6
shares of Common Stock for a total of $150.
In the event that, at any time following the Stock
Acquisition Date, (i) the Company is acquired in a merger or
other business combination transaction in which the Company is
not the surviving corporation (other than a merger which follows
an offer described in the second preceding paragraph), or (ii)
fifty percent (50%) or more of the Company's assets, cash flow or
earning power is sold or transferred, each holder of a Right
(except Rights which previously have been voided as set forth
above) shall thereafter have the right to receive, upon
exercise, common stock of the acquiring company having a value
equal to two times the exercise price of the Right. The events
set forth in this paragraph and in the second preceding
paragraph are referred to as the "Triggering Events."
At any time until ten (10) business days following the Stock
Acquisition Date, the Company may redeem the Rights in whole, but
not in part, at a price of $.01 per Right (payable in cash,
Common Stock or other consideration deemed appropriate by the
Board). Immediately upon the action of the Board ordering
<PAGE>
redemption of the Rights, the Rights will terminate and the only
right of the holders of Rights will be to receive the $.01
redemption price. The foregoing notwithstanding, the Rights
generally may not be redeemed for one hundred eighty (180) days
following a change in a majority of the Board as a result of a
proxy contest.
Until a Right is exercised, the holder thereof, as such,
will have no rights as a stockholder of the Company, including,
without limitation, the right to vote or to receive dividends.
While the distribution of the Rights will not be taxable to
stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that
the Rights become exercisable for Common Stock (or other
consideration) of the Company or for common stock of the
acquiring company as set forth above.
Any of the provisions of the Rights Agreement may be amended
by the Board prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be
amended by the Board in order to cure any ambiguity, to make
changes which do not adversely affect the interests of holders
of Rights, or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment may be
made at such time as the Rights are not redeemable.
A copy of the Rights Agreement has been filed with the
Securities and Exchange Commission. A copy of the Rights
Agreement is available free of charge from the Company. This
summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the
Rights Agreement, which is incorporated herein by reference.
SHRTSPLN.SAM
