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Rule 424(b)5
Registration Statement No. 333-58715
333-58715-01
PROSPECTUS SUPPLEMENT
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(TO PROSPECTUS DATED JULY 24, 1998)
$150,000,000
[SEMCO ENERGY LOGO]
MEDIUM-TERM NOTES
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE
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The Issuer: SEMCO Energy, Inc. (the "Company" or "SEMCO Energy") is a Michigan
corporation.
Terms: We plan to sell notes (the "Notes") with various terms, including the
following:
- - Ranking as senior indebtedness of the Company
- - Stated maturities of 9 months or more
- - Redemption and/or repayment provisions, if applicable, whether mandatory or at
the option of the Company or Noteholders
- - Payments in U.S. dollars
- - Minimum denominations of $1,000
- - Book-entry or certificated form
- - Interest at fixed or floating rates. The floating interest rate may be based
on one or more of the following indices plus a spread or spread multiplier:
- CD rate
- CMT rate
- Commercial paper rate
- Eleventh district cost of funds rate
- Federal funds rate
- LIBOR
- Prime rate
- Treasury rate
- - Interest payments on fixed rate Notes on each March 1st and September 1st,
unless otherwise specified
- - Interest payments on floating rate Notes on a monthly, quarterly, semiannual
or annual basis
The final terms for each Note, which may be different from the terms described
in this prospectus supplement, will be specified in the applicable pricing
supplement ("Pricing Supplement").
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
If we sell all of the Notes, we expect to receive proceeds of between
$149,812,500 and $148,875,000, after paying the Agents' discounts and
commissions of between $187,500 and $1,125,000.
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MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
A.G. EDWARDS & SONS, INC.
EDWARD D. JONES & CO., L.P.
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The date of this Prospectus Supplement is October 23, 1998.
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IN CONNECTION WITH AN OFFERING OF NOTES PURCHASED BY ONE OR MORE AGENTS AS
PRINCIPAL ON A FIXED OFFERING PRICE BASIS, SUCH AGENT(S) MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF NOTES.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE PURCHASE OF NOTES TO COVER
SHORT POSITIONS OF SUCH AGENT(S). FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"PLAN OF DISTRIBUTION."
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RECENT DEVELOPMENTS
SEMCO ENERGY GAS COMPANY
Pursuant to an order dated September 11, 1998, the Company's gas utility
subsidiary, SEMCO Energy Gas Company ("Gas Company"), received authority from
the Michigan Public Service Commission ("MPSC") to: (1) implement an
experimental residential gas customer choice program; (2) suspend its gas cost
recovery ("GCR") clause; (3) roll into its base rates and freeze for three years
a gas charge of $3.24 per thousand cubic feet (Mcf); (4) freeze distribution
rate adjustments for the same three year period, with exceptions; and (5)
suspend its current income sharing mechanism and adopt a new income sharing
mechanism for use during the 1999, 2000 and 2001 calendar years; (6) establish
gas service performance criteria. The new rates take effect in April 1999 and
generally extend through March 2002.
Under the experimental residential gas customer-choice program up to 21,000
residential customers, 11% of the Gas Company's residential customer base, will
be allowed to choose their own gas supplier by the third year of the program.
The Gas Company will deliver the customer-choice gas under a tariff similar to
its existing tariff used to provide such service to its commercial and
industrial customers. The Company anticipates that this program will not
significantly affect the Gas Company's income because the Gas Company's approved
rates for transportation service are designed to recover all costs other than
the cost of gas and provide a return in approximately the same amounts as such
costs are recovered from residential customers for whom the Gas Company is the
supplier.
Several of the changes in the MPSC order are interrelated. The $3.24 GCR
rate represents a reduction of approximately $.33 per Mfc from the Gas Company's
present rates. The suspension of the GCR clause means that the Gas Company will
not be able to recover any amounts by which its gas costs exceed a weighted
average cost of gas in excess of the $3.24 GCR for the three year period. The
Gas Company was able to offer this GCR suspension partly as a result of
agreements reached with TransCanada Gas Services Inc., under which the latter
will provide the Gas Company's natural gas requirements and manage the Gas
Company's natural gas supply, and the supply aspects of transportation and
storage operations for the three year period.
There are two exceptions to the three year distribution rate freeze: first,
the incentive sharing mechanism described in the following paragraph, and
second, rate revisions arising in response to unanticipated legislative or
accounting actions. The MPSC order is applicable only in the geographic areas
subject to the regulatory jurisdiction of the MPSC, and, therefore, does not
govern rates regulated by the City of Battle Creek, Michigan. However, the Gas
Company is voluntarily reducing its Battle Creek GCR rate to the $3.24 level to
correspond with its GCR under the MPSC order.
The new income sharing mechanism substantially matches mechanisms approved
by the MPSC for the two other major utilities in Michigan. Under the mechanism,
if the Gas Company's return on equity for its natural gas utility business
exceeds 12.75%, amounts equal to 50% of the excess return between 12.76% and
16.75%, plus amounts equal to 75% of the excess over 16.75% would be credited to
customers, i.e., would be reflected prospectively in reduced rates. Four safety
and reliability performance measures were approved to be used to reduce the
return on equity threshold used in the income sharing mechanism.
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Management believes that the overall impact of the MPSC order and the Gas
Company's agreements with TransCanada will be lower rates for its customers and
an opportunity for the Company to improve service to its customers as well as
improve profitability of the Gas Company.
The Gas Company serves a number of industrial plants on various parts of
its system, which plants are located in the vicinity of interstate natural gas
pipelines. As is the case with many local gas distribution utilities, the Gas
Company is subject to being "bypassed" by these pipelines. Several of these
plants are located in the Battle Creek, Michigan area. At the request of the
companies which own two of these plants, the Gas Company is in the process of
entering into agreements with these companies under which the Gas Company will
reduce the rates it charges for transportation of natural gas to these plants,
in return for which the plants will continue to use the Gas Company system for
all of their requirements for natural gas distribution and transportation
service, and not connect directly to the pipeline which serves the Gas Company.
The Gas Company has estimated that the effect of reducing the Gas Company's
transportation rates to these customers at the levels expected to be included in
the agreements will be to reduce the Company's after tax income by approximately
$400,000 to $500,000 annually. The Gas Company reduced its rates to another
plant in 1993, the effect of which has been reflected in the Company's results.
There can be no assurance that other industrial plants located on the Gas
Company's system and accessible to interstate pipelines will not also seek to
take advantage of by-pass opportunities.
YEAR 2000
The Company has initiated an enterprise-wide program to prepare its
computer systems and applications for the year 2000. The Company expects to
incur internal staff costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare the systems for
the year 2000. Testing and conversion of system applications is expected to cost
approximately $1,500,000 to $2,000,000 spread over the next year. A significant
portion of these costs is not likely to be incremental, but rather will
represent the redeployment of existing information technology resources. The
Company has developed, and already is implementing a detailed "YEAR 2000"
strategy which identifies each software application utilized by the Company and
the steps necessary to ensure its continued viability in the coming years. The
Company believes it has identified all significant internal systems and
applications that require attention of some form in order to be Year-2000 ready.
The Company has begun taking steps to correct the systems identified. The
Company currently plans to have all Year-2000 issues addressed by the first
quarter of 1999.
The Company has inquired of third parties, i.e. vendors, suppliers and
customers, which have a material relationship with the Company, as to the status
of their Year-2000 readiness. To date, the Company has not received sufficient
responses from these third parties that would enable it to state with reasonable
assurance the status of their readiness at the year 2000.
The Company expects that its program will be adequate to address its
computer system related Year-2000 issues and it is developing contingency plans
to improve assurance that vital functions of the Company dependent on third
parties will continue uninterrupted. Contingency plans include existence of
short-term in-house capabilities (i.e. back up electric generation) and
diversification of goods and services among multiple suppliers (i.e. pipeline
companies). However, there are functions, which cannot be duplicated, such as
the local telephone network, which remains a vulnerability to the Company. Of
course, there can be no assurance as to whether the contingency plans will
successfully address all contingencies that may arise. In the event that the
Company is unsuccessful in addressing its Year-2000 issues, there could be a
material adverse effect on the Company's liquidity, financial condition and
operations.
FORWARD LOOKING STATEMENTS
This Prospectus Supplement contains "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995 that are based on
current expectations, estimates and projections. Statements that are not
historical facts, including statements about the Company's belief and
expectations are forward-looking statements. These statements are subject to
potential risks and uncertainties and, therefore, actual results may differ
materially. The Company undertakes no obligation to update publicly any
forward-looking
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statements whether as a result of new information, future events or otherwise.
Important factors that may impact forward-looking statements include, but are
not limited to, the following: (i) the effects of weather and other natural
phenomena; (ii) the economic climate and growth in the geographical areas where
the Company does business; (iii) the capital intensive nature of the Company's
business; (iv) increased competition within the energy marketing industry as
well as from alternative forms of energy; (v) the timing and extent of changes
in commodity prices for natural gas; (vi) the effects of changes in governmental
and regulatory policies, including income taxes, environmental compliance and
authorized rates; (vii) the Company's ability to bid on and win business
contracts; (viii) the nature, availability and projected profitability of
potential investments available to the Company and (ix) the conditions of
capital markets and equity markets. Prospective investors should evaluate any
statements in light of there important factors.
USE OF PROCEEDS
SEMCO Energy intends to use the net proceeds from the sale of the Notes to
reduce short-term debt and for general corporate purposes. The proceeds may be
temporarily invested in marketable securities.
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratio of earnings to fixed
charges for the Company and its subsidiaries for the years and period indicated
(1):
<TABLE>
<CAPTION>
12 MONTHS YEAR ENDED DECEMBER 31,
ENDING --------------------------------
JUNE 30, 1998 1997 1996 1995 1994 1993
- ------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
2.07 2.38 (2) 2.21 2.17 2.07
</TABLE>
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(1) In January 1998, SEMCO Energy, through a subsidiary of SEMCO Energy
Ventures, Inc., SEMCO Arkansas Pipeline Company, sold its 32.07% partnership
interest in NOARK Pipeline System L.P. ("NOARK"). NOARK has been generating
losses since it was placed in service in 1992. Earnings reflect a share of
NOARK's operating losses and fixed charges include a share of NOARK's
interest expense equal to the Company's percentage interest in NOARK.
Pursuant to this sale, SEMCO Arkansas Pipeline Company paid the purchaser
$9.2 million in 1998 and must pay the purchaser $3.1 million and $0.8
million in 1999 and 2000, respectively. These payment obligations are
guaranteed by SEMCO Energy. Beginning in the year 2004, the purchaser will
pay SEMCO Arkansas Pipeline Company $842,000 per year for 17 years.
For purposes of calculating the ratio, "earnings" represent the sum of (a)
pretax income from continuing operations (excluding extraordinary items from
the early retirement of debt in 1993 and 1994) and (b) fixed charges. "Fixed
charges" represent the sum of (i) interest incurred by SEMCO Energy and its
subsidiaries plus their share of interest on debt to outsiders incurred by
less-than-fifty-percent-owned persons, (ii) amortization of debt expense and
(iii) the preferred stock dividend requirements of SEMCO Energy's
subsidiaries, increased to an amount representing the pretax earnings
required to cover such dividend requirements.
(2) For the year ended December 31, 1996, fixed charges exceeded earnings by
$20.2 million. Earnings as defined include a $32.3 million non-cash pretax
write-down of the NOARK investment. Excluding the NOARK write-down ratios of
earnings to fixed charges would have been 1.83.
DESCRIPTION OF NOTES
The Notes will be issued as a series of Debt Securities under an Indenture,
dated as of October 23, 1998, as amended or modified from time to time (the
"Indenture"), between the Company and NBD Bank, a Michigan banking corporation,
as trustee (the "Trustee"). The Indenture is subject to, and governed by, the
Trust Indenture Act of 1939, as amended. The following summary of certain
provisions of the Notes and the Indenture does not purport to be complete and is
qualified in its entirety by reference to the actual provisions
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of the Notes and the Indenture. Capitalized terms used but not defined herein
shall have the meanings given to them in the accompanying Prospectus, the Notes
or the Indenture, as the case may be. The following description of Notes will
apply to each Note offered hereby unless otherwise specified in the applicable
pricing supplement (each a "Pricing Supplement").
GENERAL
All Notes issued and to be issued under the Indenture will be unsecured
general obligations of the Company and will rank pari passu with all other
unsecured and unsubordinated indebtedness of the Company from time to time
outstanding. The Indenture does not limit the aggregate principal amount of
Notes that may be issued thereunder and Notes may be issued thereunder from time
to time in one or more series up to the aggregate principal amount from time to
time authorized by the Company for each series. The Company may, from time to
time, without the consent of the Holders of the Notes, provide for the issuance
of other medium term notes under the Indenture in addition to the $150,000,000
aggregate principal amount of Notes offered hereby.
The Notes are currently limited to up to $150,000,000 aggregate principal
amount. Each Note will mature on any day nine months or more from its date of
issue (the "Stated Maturity Date"), as specified in the applicable Pricing
Supplement, unless the principal thereof (or any installment of principal
thereof) becomes due and payable prior to the Stated Maturity Date, whether by
the declaration of acceleration of maturity, notice of redemption at the option
of the Company, notice of the Holder's option to elect repayment or otherwise
(the Stated Maturity Date or such prior date, as the case may be, is herein
referred to as the "Maturity Date" with respect to the principal of such Note
repayable on such date). Unless otherwise specified in the applicable Pricing
Supplement, interest-bearing Notes will either bear interest at fixed rates
("Fixed Rate Notes") or floating rates ("Floating Rate Notes"), as specified in
the applicable Pricing Supplement. The Company may also issue Discount Notes and
Amortizing Notes (as such terms are hereinafter defined).
The Notes will be denominated in, and payments of principal, premium, if
any, and/or interest, if any, in respect thereof will be made in, United States
dollars. References herein to "United States dollars", "U.S. dollars" or "$" are
to the lawful currency of the United States of America (the "United States").
Interest rates offered by the Company with respect to the Notes may differ
depending upon, among other factors, the aggregate principal amount of Notes
purchased in any single transaction. Notes with different terms other than
interest rates may also be offered concurrently to different investors. Interest
rates or formulas and other terms of Notes are subject to change by the Company
from time to time, but no such change will affect any Note previously issued or
as to which an offer to purchase has been accepted by the Company.
Each Note will be issued as a Book-Entry Note represented by one or more
fully registered Global Securities or as a fully registered Certificated Note.
The minimum denominations of each Note will be $1,000 and integral multiples
thereof, unless otherwise specified in the applicable Pricing Supplement.
Payments of principal of, and premium, if any, and interest, if any, on,
Book-Entry Notes will be made by the Company through the Trustee to the
Depositary. See "Book-Entry Notes." In the case of Certificated Notes, payment
of principal and premium, if any, due on the Maturity Date will be made in
immediately available funds upon presentation and surrender thereof (and, in the
case of any repayment on an Optional Repayment Date, upon submission of a duly
completed election form in accordance with the provisions described below) at
the office or agency maintained by the Company for such purpose in the Borough
of Manhattan, The City of New York. Currently the corporate trust office of the
Trustee is c/o First Chicago Trust Company of New York, 14 Wall Street, New
York, New York 10005, Attention: Corporate Trust Administration. Payment of
interest, if any, due on the Maturity Date of a Certificated Note will be made
to the person to whom payment of the principal thereof and premium, if any,
thereon shall be made. Payment of interest, if any, due on a Certificated Note
on any Interest Payment Date (as hereinafter defined) other than the Maturity
Date will be made by check mailed to the address of the Holder entitled thereto
as such address shall appear in the Security Register of the Company.
Notwithstanding the foregoing, a Holder of $10,000,000
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or more in aggregate principal amount of Certificated Notes (whether having
identical or different terms and provisions) will be entitled to receive
interest payments, if any, on any Interest Payment Date other than the Maturity
Date by wire transfer of immediately available funds if appropriate wire
transfer instructions have been received in writing by the Trustee not less than
15 days prior to such Interest Payment Date. Any such wire transfer instructions
received by the Trustee shall remain in effect until revoked by such Holder.
As used herein, "Business Day" means any day, other than a Saturday or
Sunday, that is neither a legal holiday nor a day on which banking institutions
are authorized or required by law, regulation or executive order to close in The
City of New York; provided, however, that, with respect to Notes as to which
LIBOR is an applicable Interest Rate Basis, such day is also a London Business
Day (as hereinafter defined). "London Business Day" means a day on which
dealings in U.S. dollars(as hereinafter defined) are transacted in the London
interbank market.
Book-Entry Notes may be transferred or exchanged only through the
Depositary. See "Book-Entry Notes." Registration of transfer or exchange of
Certificated Notes will be made at the office or agency maintained by the
Trustee for such purpose in the Borough of Manhattan, The City of New York.
Currently the corporate trust office of the Trustee is c/o First Chicago Trust
Company of New York, 14 Wall Street, New York, New York 10005, Attention:
Corporate Trust Administration. No service charge will be made by the Company or
the Trustee for any such registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection therewith (other than
exchanges pursuant to the Indenture not involving any transfer).
The defeasance and covenant defeasance provisions contained in the
Indenture shall apply to the Notes.
The Company has bank credit and private note agreements that contain
certain covenants and restrictions which limit the Company's ability to incur
additional indebtedness of the types represented by the Notes. As of September
30, 1998, under such agreements the Company may incur up to approximately
$65,000,000 of additional indebtedness of the type represented by the Notes at
an assumed interest rate of 7% per annum. The amounts of additional indebtedness
which may be issued under such covenants will vary from time to time to reflect
issuances and retirements of indebtedness by the Company and the Company's
results of operations.
REDEMPTION AT THE OPTION OF THE COMPANY
Unless otherwise specified in the applicable Pricing Supplement, the Notes
will not be subject to any sinking fund. The Notes will be redeemable at the
option of the Company prior to the Stated Maturity Date only if, and on the
terms specified in the applicable Pricing Supplement. If so specified, the Notes
will be subject to redemption at the option of the Company on any date on and
after the applicable Initial Redemption Date in whole or from time to time in
part in increments of $1,000 or any other integral multiple of an authorized
denomination specified in such Pricing Supplement (provided that any remaining
principal amount thereof shall be at least $1,000 or the minimum authorized
denomination applicable thereto), at the applicable Redemption Price (as
hereinafter defined), together with unpaid interest accrued thereon to the date
of redemption, on written notice given to the Holders thereof not more than 60
nor less than 30 calendar days prior to the date of redemption and in accordance
with the provisions of the Indenture. "Redemption Price", with respect to a
Note, means an amount equal to the Initial Redemption Percentage specified in
the applicable Pricing Supplement (as adjusted by the Annual Redemption
Percentage Reduction, if applicable) multiplied by the unpaid principal amount
to be redeemed. The Initial Redemption Percentage, if any, applicable to a Note
shall decline at each anniversary of the Initial Redemption Date by an amount
equal to the applicable Annual Redemption Percentage Reduction, if any, until
the Redemption Price is equal to 100% of the unpaid principal amount to be
redeemed. For a discussion of the redemption of Discount Notes, see "-- Discount
Notes."
REPAYMENT AT THE OPTION OF THE HOLDER
The Notes will be repayable by the Company at the option of the Holders
thereof prior to the Stated Maturity Date only if one or more Optional Repayment
Dates are specified in the applicable Pricing Supplement. If so specified, the
Notes will be subject to repayment at the option of the Holders thereof on any
Optional Repayment Date in whole or from time to time in part in increments of
$1,000 or any other integral
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multiple of an authorized denomination specified in the applicable Pricing
Supplement (provided that any remaining principal amount thereof shall be at
least $1,000 or the minimum authorized denomination applicable thereto), at a
repayment price equal to 100% of the unpaid principal amount to be repaid,
together with unpaid interest accrued thereon to the date of repayment. For any
Note to be repaid, such Note must be received, together with any required form,
as specified in the applicable Pricing Supplement, duly completed, by the
Trustee at its office maintained for such purpose in the Borough of Manhattan,
The City of New York not more than 60 nor less than 30 calendar days prior to
the date of repayment. Currently the corporate trust office of the Trustee is
c/o First Chicago Trust Company of New York, 14 Wall Street, New York, New York
10005, Attention: Corporate Trust Administration. Exercise of such repayment
option by the Holder will be irrevocable. For a discussion of the repayment of
Discount Notes, see "-- Discount Notes."
Only the Depositary may exercise a repayment option in respect of Global
Securities representing Book-Entry Notes. Accordingly, Beneficial Owners (as
hereinafter defined) of Global Securities that desire to have all or any portion
of the Book-Entry Notes represented by such Global Securities repaid must
instruct the Participant (as hereinafter defined) through which they own their
interest to direct the Depositary to exercise the repayment option on their
behalf by delivering the related Global Security and duly completed election
form to the Trustee as aforesaid. In order to ensure that such Global Security
and election form are received by the Trustee on a particular day, the
applicable Beneficial Owner must so instruct the Participant through which it
owns its interest before such Participant's deadline for accepting instructions
for that day. Different firms may have different deadlines for accepting
instructions from their customers. Accordingly, Beneficial Owners should consult
the Participants through which they own their interest for the respective
deadlines for such Participants. All instructions given to Participants from
Beneficial Owners of Global Securities relating to the option to elect repayment
shall be irrevocable. In addition, at the time such instructions are given, each
such Beneficial Owner shall cause the Participant through which it owns its
interest to transfer such Beneficial Owner's interest in the Global Security or
Securities representing the related Book-Entry Notes, on the Depositary's
records, to the Trustee. See "-- Book-Entry Notes."
If applicable, the Company will comply with the requirements of Section
14(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules promulgated thereunder, and any other securities laws or
regulations in connection with any such repayment.
The Company may at any time purchase Notes at any price or prices in the
open market or otherwise. Notes so purchased by the Company may, at the
discretion of the Company, be held, resold or surrendered to the Trustee for
cancellation.
INTEREST
General
Unless otherwise specified in the applicable Pricing Supplement, each
interest-bearing Note will bear interest from its date of issue at the rate per
annum, in the case of a Fixed Rate Note, or pursuant to the interest rate
formula, in the case of a Floating Rate Note, in each case as specified in the
applicable Pricing Supplement, until the principal thereof is paid or duly made
available for payment. Unless otherwise specified in the applicable Pricing
Supplement, interest payments in respect of Fixed Rate Notes and Floating Rate
Notes will be made in an amount equal to the interest accrued from and including
the immediately preceding Interest Payment Date in respect of which interest has
been paid or duly made available for payment (or from and including the date of
issue, if no interest has been paid or duly made available for payment) to but
excluding the applicable Interest Payment Date or the Maturity Date, as the case
may be (each, an "Interest Period").
Interest on Fixed Rate Notes and Floating Rate Notes will be payable in
arrears on each Interest Payment Date and on the Maturity Date. Unless otherwise
specified in the applicable Pricing Supplement, the first payment of interest on
any such Note originally issued between a Record Date (as hereinafter defined)
and the related Interest Payment Date will be made on the Interest Payment Date
immediately following the next succeeding Record Date to the Holder on such next
succeeding Record Date. Unless otherwise specified in the applicable Pricing
Supplement, a "Record Date" shall be the fifteenth calendar day (whether or not
a Business Day) immediately preceding the related Interest Payment Date.
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Fixed Rate Notes
Interest on Fixed Rate Notes will be payable on March 15 and September 15
of each year or on such other date(s) specified in the applicable Pricing
Supplement (each, an "Interest Payment Date" with respect to Fixed Rate Notes)
and on the Maturity Date. Unless otherwise specified in the applicable Pricing
Supplement, interest on Fixed Rate Notes will be computed on the basis of a
360-day year of twelve 30-day months.
If any Interest Payment Date or the Maturity Date of a Fixed Rate Note
falls on a day that is not a Business Day, the required payment of principal,
premium, if any, and/or interest will be made on the next succeeding Business
Day as if made on the date such payment was otherwise due, and no interest will
accrue on such payment for the period from and after such Interest Payment Date
or the Maturity Date, as the case may be, to the date of such payment on the
next succeeding Business Day.
Floating Rate Notes
Interest on Floating Rate Notes will be determined by reference to the
applicable Interest Rate Basis or Interest Rate Bases, which may, as described
below, include (i) the CD Rate, (ii) the CMT Rate, (iii) the Commercial Paper
Rate, (iv) the Eleventh District Cost of Funds Rate, (v) the Federal Funds Rate,
(vi) LIBOR, (vii) the Prime Rate, (viii) the Treasury Rate, or (ix) such other
Interest Rate Basis or interest rate formula as may be specified in the
applicable Pricing Supplement. The applicable Pricing Supplement will specify
certain terms with respect to which each Floating Rate Note is being delivered,
including: whether such Floating Rate Note is a "Regular Floating Rate Note," a
"Floating Rate/Fixed Rate Note" or an "Inverse Floating Rate Note," the Fixed
Rate Commencement Date, if applicable, Fixed Interest Rate, if applicable,
Interest Rate Basis or Bases, Initial Interest Rate, if any, Initial Interest
Reset Date, Interest Reset Dates, Interest Payment Dates, Index Maturity,
Maximum Interest Rate and/or Minimum Interest Rate, if any, and Spread and/or
Spread Multiplier, if any, as such terms are defined below. If one or more of
the applicable Interest Rate Bases is LIBOR or the CMT Rate, the applicable
Pricing Supplement will also specify the Designated LIBOR Page or the Designated
CMT Maturity Index and Designated CMT Telerate Page, respectively, as such terms
are defined below.
The interest rate borne by the Floating Rate Notes will be determined as
follows:
(i) Unless such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note" or an "Inverse Floating Rate Note", or as having an
Addendum attached or having "Other/Additional Provisions" apply, in each
case relating to a different interest rate formula, such Floating Rate Note
will be designated as a "Regular Floating Rate Note" and, except as
described below or in the applicable Pricing Supplement, will bear interest
at the rate determined by reference to the applicable Interest Rate Basis
or Bases (a) plus or minus the applicable Spread, if any, and/or (b)
multiplied by the applicable Spread Multiplier, if any. Commencing on the
Initial Interest Reset Date, the rate at which interest on such Regular
Floating Rate Note shall be payable shall be reset as of each Interest
Reset Date; provided, however, that the interest rate in effect for the
period, if any, from the date of issue to the Initial Interest Reset Date
will be the Initial Interest Rate.
(ii) If such Floating Rate Note is designated as a "Floating
Rate/Fixed Rate Note," then, except as described below or in the applicable
Pricing Supplement, such Floating Rate Note will bear interest at the rate
determined by reference to the applicable Interest Rate Basis or Bases (a)
plus or minus the applicable Spread, if any, and/or (b) multiplied by the
applicable Spread Multiplier, if any. Commencing on the Initial Interest
Reset Date, the rate at which interest on such Floating Rate/Fixed Rate
Note shall be payable shall be reset as of each Interest Reset Date;
provided, however, that (y) the interest rate in effect for the period, if
any, from the date of issue to the Initial Interest Reset Date will be the
Initial Interest Rate and (z) the interest rate in effect for the period
commencing on the Fixed Rate Commencement Date to the Maturity Date shall
be the Fixed Interest Rate, if such rate is specified in the applicable
Pricing Supplement or, if no such Fixed Interest Rate is specified, the
interest rate in effect thereon on the day immediately preceding the Fixed
Rate Commencement Date.
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(iii) If such Floating Rate Note is designated as an "Inverse Floating
Rate Note," then, except as described below or in the applicable Pricing
Supplement, such Floating Rate Note will bear interest at the Fixed
Interest Rate minus the rate determined by reference to the applicable
Interest Rate Basis or Bases (a) plus or minus the applicable Spread, if
any, and/or (b) multiplied by the applicable Spread Multiplier, if any;
provided, however, that, unless otherwise specified in the applicable
Pricing Supplement, the interest rate thereon will not be less than zero.
Commencing on the Initial Interest Reset Date, the rate at which interest
on such Inverse Floating Rate Note shall be payable shall be reset as of
each Interest Reset Date; provided, however, that the interest rate in
effect for the period, if any, from the date of issue to the Initial
Interest Reset Date will be the Initial Interest Rate.
The "Spread" is the number of basis points to be added to or subtracted
from the related Interest Rate Basis or Bases applicable to such Floating Rate
Note. The "Spread Multiplier" is the percentage of the related Interest Rate
Basis or Bases applicable to such Floating Rate Note by which such Interest Rate
Basis or Bases will be multiplied to determine the applicable interest rate on
such Floating Rate Note. The "Index Maturity" is the period to maturity of the
instrument or obligation with respect to which the related Interest Rate Basis
or Bases will be calculated.
Unless otherwise specified in the applicable Pricing Supplement, the
interest rate with respect to each Interest Rate Basis will be determined in
accordance with the applicable provisions below. Except as set forth above or in
the applicable Pricing Supplement, the interest rate in effect on each day shall
be (i) if such day is an Interest Reset Date, the interest rate determined as of
the Interest Determination Date (as hereinafter defined) immediately preceding
such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the
interest rate determined as of the Interest Determination Date immediately
preceding the most recent Interest Reset Date.
The applicable Pricing Supplement will specify whether the rate of interest
on the applicable Floating Rate Note will be reset daily, weekly, monthly,
quarterly, semiannually or annually or on such other specified basis (each, an
"Interest Reset Period") and the dates on which such rate of interest will be
reset (each, an "Interest Reset Date"). Unless otherwise specified in the
applicable Pricing Supplement, the Interest Reset Dates will be, in the case of
Floating Rate Notes which reset: (i) daily, each Business Day; (ii) weekly, the
Wednesday of each week (with the exception of weekly reset Floating Rate Notes
as to which the Treasury Rate is an applicable Interest Rate Basis, which will
reset the Tuesday of each week, except as described below); (iii) monthly, the
third Wednesday of each month (with the exception of monthly reset Floating Rate
Notes as to which the Eleventh District Cost of Funds Rate is an applicable
Interest Rate Basis, which will reset on the first calendar day of the month);
(iv) quarterly, the third Wednesday of March, June, September and December of
each year; (v) semiannually, the third Wednesday of the two months specified in
the applicable Pricing Supplement; and (vi) annually, the third Wednesday of the
month specified in the applicable Pricing Supplement; provided however, that,
with respect to Floating Rate/Fixed Rate Notes, the rate of interest thereon
will not reset after the applicable Fixed Rate Commencement Date. If any
Interest Reset Date for any Floating Rate Note would otherwise be a day that is
not a Business Day, such Interest Reset Date will be postponed to the next
succeeding Business Day, except that in the case of a Floating Rate Note as to
which LIBOR is an applicable Interest Rate Basis and such Business Day falls in
the next succeeding calendar month, such Interest Reset Date will be the
immediately preceding Business Day.
The interest rate applicable to each Interest Reset Period commencing on
the related Interest Reset Date will be the rate determined by the Calculation
Agent (as hereinafter defined) as of the applicable Interest Determination Date
and calculated on or prior to the Calculation Date (as hereinafter defined),
except with respect to LIBOR and the Eleventh District Cost of Funds Rate, which
will be calculated on such Interest Determination Date. The "Interest
Determination Date" with respect to the CD Rate, the CMT Rate, the Commercial
Paper Rate, the Federal Funds Rate and the Prime Rate will be the second
Business Day immediately preceding the applicable Interest Reset Date; the
"Interest Determination Date" with respect to the Eleventh District Cost of
Funds Rate will be the last working day of the month immediately preceding the
applicable Interest Reset Date on which the Federal Home Loan Bank of San
Francisco (the "FHLB of San Francisco") publishes the Index (as hereinafter
defined); and the "Interest Determination Date" with respect to LIBOR will be
the second London Business Day immediately preceding the applicable Interest
Reset Date.
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With respect to the Treasury Rate, the "Interest Determination Date" will be the
day in the week in which the applicable Interest Reset Date falls on which day
Treasury Bills (as hereinafter defined) are normally auctioned (Treasury Bills
are normally sold at an auction held on Monday of each week, unless that day is
a legal holiday, in which case the auction is normally held on the following
Tuesday, except that such auction may be held on the preceding Friday);
provided, however, that if an auction is held on the Friday of the week
preceding the applicable Interest Reset Date, the "Interest Determination Date"
will be such preceding Friday; provided, further, that if the Interest
Determination Date would otherwise fall on an Interest Reset Date, then such
Interest Reset Date will be postponed to the next succeeding Business Day. The
"Interest Determination Date" pertaining to a Floating Rate Note the interest
rate on which is determined by reference to two or more Interest Rate Bases will
be the most recent Business Day which is at least two Business Days prior to the
applicable Interest Reset Date for such Floating Rate Note on which each
Interest Rate Basis is determinable. Each Interest Rate Basis will be determined
as of such date, and the applicable interest rate will take effect on the
applicable Interest Reset Date.
Notwithstanding the foregoing, a Floating Rate Note may also have either or
both of the following: (i) a Maximum Interest Rate, or ceiling, that may accrue
during any Interest Period and (ii) a Minimum Interest Rate, or floor, that may
accrue during any Interest Period. In addition to any Maximum Interest Rate that
may apply to any Floating Rate Note, the interest rate on Floating Rate Notes
will in no event be higher than the maximum rate permitted by New York law, as
the same may be modified by United States law of general application.
Except as provided below or in the applicable Pricing Supplement, interest
will be payable, in the case of Floating Rate Notes which reset: (i) daily,
weekly or monthly, on the third Wednesday of each month or on the third
Wednesday of March, June, September and December of each year, as specified in
the applicable Pricing Supplement; (ii) quarterly, on the third Wednesday of
March, June, September and December of each year; (iii) semiannually, on the
third Wednesday of the two months of each year specified in the applicable
Pricing Supplement; and (iv) annually, on the third Wednesday of the month of
each year specified in the applicable Pricing Supplement (each, an "Interest
Payment Date" with respect to Floating Rate Notes) and, in each case, on the
Maturity Date. If any Interest Payment Date other than the Maturity Date for any
Floating Rate Note would otherwise be a day that is not a Business Day, such
Interest Payment Date will be postponed to the next succeeding Business Day,
except that in the case of a Floating Rate Note as to which LIBOR is an
applicable Interest Rate Basis and such Business Day falls in the next
succeeding calendar month, such Interest Payment Date will be the immediately
preceding Business Day. If the Maturity Date of a Floating Rate Note falls on a
day that is not a Business Day, the required payment of principal, premium, if
any, and interest will be made on the next succeeding Business Day as if made on
the date such payment was due, and no interest will accrue on such payment for
the period from and after the Maturity Date to the date of such payment on the
next succeeding Business Day.
All percentages resulting from any calculation on Floating Rate Notes will
be rounded to the nearest one hundred-thousandth of a percentage point, with
five-one millionths of a percentage point or more rounded upwards (e.g.,
9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all
amounts used in or resulting from such calculation on Floating Rate Notes will
be rounded to the nearest cent (with one-half cent or more being rounded
upwards).
With respect to each Floating Rate Note, accrued interest is calculated by
multiplying the principal amount of such note by an accrued interest factor.
Such accrued interest factor is computed by adding the interest factor
calculated for each day in the applicable Interest Period. Unless otherwise
specified in the applicable Pricing Supplement, the interest factor for each
such day will be computed by dividing the interest rate applicable to such day
by 360, in the case of Floating Rate Notes for which an applicable Interest Rate
Basis is the CD Rate, the Commercial Paper Rate, the Eleventh District Cost of
Funds Rate, the Federal Funds Rate, LIBOR or the Prime Rate, or by the actual
number of days in the year in the case of Floating Rate Notes for which an
applicable Interest Rate Basis is the CMT Rate or the Treasury Rate. Unless
otherwise specified in the applicable Pricing Supplement, the interest factor
for Floating Rate Notes for which the interest rate is calculated with reference
to two or more Interest Rate Bases will be calculated in each
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period in the same manner as if only the applicable Interest Rate Basis
specified in the applicable Pricing Supplement applied.
Unless otherwise specified in the applicable Pricing Supplement, NBD Bank
will be the "Calculation Agent." Upon request of the Holder of any Floating Rate
Note, the Calculation Agent will disclose the interest rate then in effect and,
if determined, the interest rate that will become effective as a result of a
determination made for the next succeeding Interest Reset Date with respect to
such Floating Rate Note. Unless otherwise specified in the applicable Pricing
Supplement, the "Calculation Date," if applicable, pertaining to any Interest
Determination Date will be the earlier of (i) the tenth calendar day after such
Interest Determination Date or, if such day is not a Business Day, the next
succeeding Business Day or (ii) the Business Day immediately preceding the
applicable Interest Payment Date or the Maturity Date, as the case may be.
Unless otherwise specified in the applicable Pricing Supplement, the
Calculation Agent shall determine each Interest Rate Basis in accordance with
the following provisions.
CD Rate. Unless otherwise specified in the applicable Pricing Supplement,
"CD Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CD Rate (a "CD Rate Interest Determination Date"), the rate on such date for
negotiable United States dollar certificates of deposit having the Index
Maturity specified in the applicable Pricing Supplement as published by the
Board of Governors of the Federal Reserve System in "Statistical Release
H.15(519), Selected Interest Rates" or any successor publication ("H.15(519)")
under the heading "CDs (Secondary Market)," or, if not published by 3:00 P.M.,
New York City time, on the related Calculation Date, the rate on such CD Rate
Interest Determination Date for negotiable United States dollar certificates of
deposit of the Index Maturity specified in the applicable Pricing Supplement as
published by the Federal Reserve Bank of New York in its daily statistical
release "Composite 3:30 P.M. Quotations for U.S. Government Securities" or any
successor publication ("Composite Quotations") under the heading "Certificates
of Deposit." If such rate is not yet published in either H.15(519) or Composite
Quotations by 3:00 P.M., New York City time, on the related Calculation Date,
then the CD Rate on such CD Rate Interest Determination Date will be calculated
by the Calculation Agent and will be the arithmetic mean of the secondary market
offered rates as of 10:00 A.M., New York City time, on such CD Rate Interest
Determination Date, of three leading nonbank dealers in negotiable United States
dollar certificates of deposit in The City of New York (which may include the
Agents or their affiliates) selected by the Calculation Agent for negotiable
United States dollar certificates of deposit of major United States money center
banks for negotiable certificates of deposit with a remaining maturity closest
to the Index Maturity specified in the applicable Pricing Supplement in an
amount that is representative for a single transaction in that market at that
time; provided, however, that if the dealers so selected by the Calculation
Agent are not quoting as mentioned in this sentence, the CD Rate determined as
of such CD Rate Interest Determination Date will be the CD Rate in effect on
such CD Rate Interest Determination Date.
CMT Rate. Unless otherwise specified in the applicable Pricing Supplement,
"CMT Rate" means, with respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference to
the CMT Rate (a "CMT Rate Interest Determination Date"), the rate displayed on
the Designated CMT Telerate Page (as hereinafter defined) under the caption
"...Treasury Constant Maturities...Federal Reserve Board Release H.15...Mondays
Approximately 3:45 P.M.," under the column for the Designated CMT Maturity Index
(as hereinafter defined) for (i) if the Designated CMT Telerate Page is 7055,
the rate on such CMT Rate Interest Determination Date and (ii) if the Designated
CMT Telerate Page is 7052, the weekly or monthly average, as specified in the
applicable Pricing Supplement, for the week or the month, as applicable, ended
immediately preceding the week or the month, as applicable, in which the related
CMT Rate Interest Determination Date falls. If such rate is no longer displayed
on the relevant page or is not displayed by 3:00 P.M., New York City time, on
the related Calculation Date, then the CMT Rate for such CMT Rate Interest
Determination Date will be such treasury constant maturity rate for the
Designated CMT Maturity Index as published in H.15(519). If such rate is no
longer published or is not published by 3:00 P.M., New York City time, on the
related Calculation Date, then the CMT Rate on such CMT Rate Interest
Determination Date will be such treasury constant maturity rate for the
Designated CMT
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Maturity Index (or other United States Treasury rate for the Designated CMT
Maturity Index) for the CMT Rate Interest Determination Date with respect to
such Interest Reset Date as may then be published by either the Board of
Governors of the Federal Reserve System or the United States Department of the
Treasury that the Calculation Agent determines to be comparable to the rate
formerly displayed on the Designated CMT Telerate Page and published in
H.15(519). If such information is not provided by 3:00 P.M., New York City time,
on the related Calculation Date, then the CMT Rate on the CMT Rate Interest
Determination Date will be calculated by the Calculation Agent and will be a
yield to maturity, based on the arithmetic mean of the secondary market offered
rates as of approximately 3:30 P.M., New York City time, on such CMT Rate
Interest Determination Date reported, according to their written records, by
three leading primary United States government securities dealers in The City of
New York (which may include the Agents or their affiliates) (each, a "Reference
Dealer") selected by the Calculation Agent (from five such Reference Dealers
selected by the Calculation Agent and eliminating the highest quotation (or, in
the event of equality, one of the highest) and the lowest quotation (or, in the
event of equality, one of the lowest)), for the most recently issued direct
noncallable fixed rate obligations of the United States ("Treasury Notes") with
an original maturity of approximately the Designated CMT Maturity Index and a
remaining term to maturity of not less than such Designated CMT Maturity Index
minus one year. If the Calculation Agent is unable to obtain three such Treasury
Note quotations, the CMT Rate on such CMT Rate Interest Determination Date will
be calculated by the Calculation Agent and will be a yield to maturity based on
the arithmetic mean of the secondary market offered rates as of approximately
3:30 P.M., New York City time, on such CMT Rate Interest Determination Date of
three Reference Dealers in The City of New York (from five such Reference
Dealers selected by the Calculation Agent and eliminating the highest quotation
(or, in the event of equality, one of the highest) and the lowest quotation (or,
in the event of equality, one of the lowest)), for Treasury Notes with an
original maturity of the number of years that is the next highest to the
Designated CMT Maturity Index and a remaining term to maturity closest to the
Designated CMT Maturity Index and in an amount of at least $100 million. If
three or four (and not five) of such Reference Dealers are quoting as described
above, then the CMT Rate will be based on the arithmetic mean of the offered
rates obtained and neither the highest nor the lowest of such quotes will be
eliminated; provided, however, that if fewer than three Reference Dealers so
selected by the Calculation Agent are quoting as mentioned herein, the CMT Rate
determined as of such CMT Rate Interest Determination Date will be the CMT Rate
in effect on such CMT Rate Interest Determination Date. If two Treasury Notes
with an original maturity as described in the second preceding sentence have
remaining terms to maturity equally close to the Designated CMT Maturity Index,
the Calculation Agent will obtain quotations for the Treasury Note with the
shorter remaining term to maturity.
"Designated CMT Telerate Page" means the display on the Dow Jones Markets
Limited (or any successor service) on the page specified in the applicable
Pricing Supplement (or any other page as may replace such page on such service)
for the purpose of displaying Treasury Constant Maturities as reported in
H.15(519) or, if no such page is specified in the applicable Pricing Supplement,
page 7052.
"Designated CMT Maturity Index" means the original period to maturity of
the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years)
specified in the applicable Pricing Supplement with respect to which the CMT
Rate will be calculated or, if no such maturity is specified in the applicable
Pricing Supplement, 2 years.
Commercial Paper Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Commercial Paper Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Commercial Paper Rate (a "Commercial Paper
Rate Interest Determination Date"), the Money Market Yield (as hereinafter
defined) on such date of the rate for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement as published in H.15(519) under
the caption "Commercial Paper-Nonfinancial". In the event that such rate is not
published by 3:00 P.M., New York City time, on the related Calculation Date,
then the Commercial Paper Rate on such Commercial Paper Rate Interest
Determination Date will be the Money Market Yield of the rate for commercial
paper having the Index Maturity specified in the applicable Pricing Supplement
as published in Composite Quotations under the heading "Commercial Paper" (with
an Index Maturity of one
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month or three months being deemed to be equivalent to an Index Maturity of 30
days or 90 days, respectively). If such rate is not yet published in either
H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the
related Calculation Date, then the Commercial Paper Rate on such Commercial
Paper Rate Interest Determination Date will be calculated by the Calculation
Agent and will be the Money Market Yield of the arithmetic mean of the offered
rates at approximately 11:00 A.M., New York City time, on such Commercial Paper
Rate Interest Determination Date of three leading dealers of commercial paper in
The City of New York (which may include the Agents or their affiliates) selected
by the Calculation Agent for commercial paper having the Index Maturity
specified in the applicable Pricing Supplement placed for a non-financial entity
whose bond rating is "Aa", or the equivalent, from a nationally recognized
statistical rating organization; provided, however, that if the dealers so
selected by the Calculation Agent are not quoting as mentioned in this sentence,
the Commercial Paper Rate determined as of such Commercial Paper Rate Interest
Determination Date will be the Commercial Paper Rate in effect on such
Commercial Paper Rate Interest Determination Date.
"Money Market Yield" means a yield (expressed as a percentage) calculated
in accordance with the following formula:
D X 360
Money Market Yield = ------------- X 100
360 - (D X M)
where "D" refers to the applicable per annum rate for commercial paper quoted on
a bank discount basis and expressed as a decimal, and "M" refers to the actual
number of days in the applicable Interest Reset Period.
Eleventh District Cost of Funds Rate. Unless otherwise specified in the
applicable Pricing Supplement, "Eleventh District Cost of Funds Rate" means,
with respect to any Interest Determination Date relating to a Floating Rate Note
for which the interest rate is determined with reference to the Eleventh
District Cost of Funds Rate (an "Eleventh District Cost of Funds Rate Interest
Determination Date"), the rate equal to the monthly weighted average cost of
funds for the calendar month immediately preceding the month in which such
Eleventh District Cost of Funds Rate Interest Determination Date falls, as set
forth under the caption "11th District" on Telerate Page 7058 as of 11:00 A.M.,
San Francisco time, on such Eleventh District Cost of Funds Rate Interest
Determination Date. If such rate does not appear on Telerate Page 7058 on such
Eleventh District Cost of Funds Rate Interest Determination Date, then the
Eleventh District Cost of Funds Rate on such Eleventh District Cost of Funds
Rate Interest Determination Date shall be the monthly weighted average cost of
funds paid by member institutions of the Eleventh Federal Home Loan Bank
District that was most recently announced (the "Index") by the FHLB of San
Francisco as such cost of funds for the calendar month immediately preceding
such Eleventh District Cost of Funds Rate Interest Determination Date. If the
FHLB of San Francisco fails to announce the Index on or prior to such Eleventh
District Cost of Funds Rate Interest Determination Date for the calendar month
immediately preceding such Eleventh District Cost of Funds Rate Interest
Determination Date, the Eleventh District Cost of Funds Rate determined as of
such Eleventh District Cost of Funds Rate Interest Determination Date will be
the Eleventh District Cost of Funds Rate in effect on such Eleventh District
Cost of Funds Rate Interest Determination Date.
Federal Funds Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Federal Funds Rate" means, with respect to any Interest
Determination Date relating to a Floating Rate Note for which the interest rate
is determined with reference to the Federal Funds Rate (a "Federal Funds Rate
Interest Determination Date"), the rate on such date for United States dollar
federal funds as published in H.15(519) under the heading "Federal Funds
(Effective)" or, if not published by 3:00 P.M., New York City time, on the
related Calculation Date, the rate on such Federal Funds Rate Interest
Determination Date as published in Composite Quotations under the heading
"Federal Funds/Effective Rate." If such rate is not published in either
H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the
related Calculation Date, then the Federal Funds Rate on such Federal Funds Rate
Interest Determination Date will be calculated by the Calculation Agent and will
be the arithmetic mean of the rates for the last transaction in overnight United
States dollar federal funds arranged by three leading brokers of federal funds
transactions in The City of New York (which may include the Agents or their
affiliates) selected by the Calculation Agent
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prior to 9:00 A.M., New York City time, on such Federal Funds Rate Interest
Determination Date; provided, however, that if the brokers so selected by the
Calculation Agent are not quoting as mentioned in this sentence, the Federal
Funds Rate determined as of such Federal Funds Rate Interest Determination Date
will be the Federal Funds Rate in effect on such Federal Funds Rate Interest
Determination Date.
LIBOR. Unless otherwise specified in the applicable Pricing Supplement,
"LIBOR" means the rate determined in accordance with the following provisions:
(i) With respect to any Interest Determination Date relating to a
Floating Rate Note for which the interest rate is determined with reference
to LIBOR (a "LIBOR Interest Determination Date"), LIBOR will be either: (a)
if "LIBOR Reuters" is specified in the applicable Pricing Supplement, the
arithmetic mean of the offered rates (unless the Designated LIBOR Page by
its terms provides only for a single rate, in which case such single rate
shall be used) for deposits in U.S. dollars having the Index Maturity
specified in such Pricing Supplement, commencing on the applicable Interest
Reset Date, that appear (or, if only a single rate is required as
aforesaid, appears) on the Designated LIBOR Page as of 11:00 A.M., London
time, on such LIBOR Interest Determination Date, or (b) if "LIBOR Telerate"
is specified in the applicable Pricing Supplement or if neither "LIBOR
Reuters" nor "LIBOR Telerate" is specified in the applicable Pricing
Supplement as the method for calculating LIBOR, the rate for deposits in
U.S. dollars having the Index Maturity specified in such Pricing
Supplement, commencing on such Interest Reset Date, that appears on the
Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR Interest
Determination Date. If fewer than two such offered rates so appear, or if
no such rate so appears, as applicable, LIBOR on such LIBOR Interest
Determination Date will be determined in accordance with the provisions
described in clause (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on which
fewer than two offered rates appear, or no rate appears, as the case may
be, on the Designated LIBOR Page as specified in clause (i) above, the
Calculation Agent will request the principal London offices of each of four
major reference banks (which may include affiliates of the Agents) in the
London interbank market, as selected by the Calculation Agent, to provide
the Calculation Agent with its offered quotation for deposits in U.S.
dollars for the period of the Index Maturity specified in the applicable
Pricing Supplement, commencing on the applicable Interest Reset Date, to
prime banks in the London interbank market at approximately 11:00 A.M.,
London time, on such LIBOR Interest Determination Date and in a principal
amount that is representative for a single transaction in U.S. dollars in
such market at such time. If at least two such quotations are so provided,
then LIBOR on such LIBOR Interest Determination Date will be the arithmetic
mean of such quotations. If fewer than two such quotations are so provided,
then LIBOR on such LIBOR Interest Determination Date will be the arithmetic
mean of the rates quoted at approximately 11:00 A.M. New York City time, on
such LIBOR Interest Determination Date by three major banks (which may
include affiliates of the Agents), in the City of New York, selected by the
Calculation Agent for loans in U.S. dollars to leading European banks,
having the Index Maturity specified in the applicable Pricing Supplement
and in a principal amount that is representative for a single transaction
in U.S. dollars in such market at such time; provided, however, that if the
banks so selected by the Calculation Agent are not quoting as mentioned in
this sentence, LIBOR determined as of such LIBOR Interest Determination
Date will be LIBOR in effect on such LIBOR Interest Determination Date.
"Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified in the
applicable Pricing Supplement, the display on the Reuter Monitor Money Rates
Service (or any successor service) on the page specified in such Pricing
Supplement (or any other page as may replace such page on such service) for the
purpose of displaying the London interbank rates of major banks for U.S.
dollars, or (b) if "LIBOR Telerate" is specified in the applicable Pricing
Supplement or neither "LIBOR Reuters" nor "LIBOR Telerate" is specified in the
applicable Pricing Supplement as the method for calculating LIBOR, the display
on the Dow Jones Markets Limited (or any successor service) on the page
specified in such Pricing Supplement (or any other page as may replace such page
on such service) for the purpose of displaying the London interbank rates of
major banks for U.S. dollars.
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Prime Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Prime Rate" means, with respect to any Interest Determination Date
relating to a Floating Rate Note for which the interest rate is determined with
reference to the Prime Rate (a "Prime Rate Interest Determination Date"), the
rate on such date as such rate is published in H.15(519) under the heading "Bank
Prime Loan." If such rate is not published prior to 3:00 P.M., New York City
time, on the related Calculation Date, then the Prime Rate shall be the
arithmetic mean of the rates of interest publicly announced by each bank that
appears on the Reuters Screen USPRIME1 Page (as hereinafter defined) as such
bank's prime rate or base lending rate as in effect for such Prime Rate Interest
Determination Date. If fewer than four such rates appear on the Reuters Screen
USPRIME1 Page for such Prime Rate Interest Determination Date, then the Prime
Rate shall be the arithmetic mean of the prime rates or base lending rates
quoted on the basis of the actual number of days in the year divided by a
360-day year as of the close of business on such Prime Rate Interest
Determination Date by four major money center banks (which may include
affiliates of the Agents) in The City of New York selected by the Calculation
Agent. If fewer than four such quotations are so provided, then the Prime Rate
shall be the arithmetic mean of four prime rates quoted on the basis of the
actual number of days in the year divided by a 360-day year as of the close of
business on such Prime Rate Interest Determination Date as furnished in The City
of New York by the major money center banks, if any, that have provided such
quotations and by a reasonable number of substitute banks or trust companies
(which may include affiliates of the Agents) to obtain four such prime rate
quotations, provided such substitute banks or trust companies are organized and
doing business under the laws of the United States, or any State thereof, each
having total equity capital of at least $500 million and being subject to
supervision or examination by Federal or State authority, selected by the
Calculation Agent to provide such rate or rates; provided, however, that if the
banks or trust companies so selected by the Calculation Agent are not quoting as
mentioned in this sentence, the Prime Rate determined as of such Prime Rate
Interest Determination Date will be the Prime Rate in effect on such Prime Rate
Interest Determination Date.
"Reuters Screen USPRIME1 Page" means the display on the Reuter Monitor
Money Rates Service (or any successor service) on the "USPRIME1" page (or such
other page as may replace the USPRIME1 page on such service) for the purpose of
displaying prime rates or base lending rates of major United States banks.
Treasury Rate. Unless otherwise specified in the applicable Pricing
Supplement, "Treasury Rate" means, with respect to any Interest Determination
Date relating to a Floating Rate Note for which the interest rate is determined
by reference to the Treasury Rate (a "Treasury Rate Interest Determination
Date"), the rate from the auction held on such Treasury Rate Interest
Determination Date (the "Auction") of direct obligations of the United States
("Treasury Bills") having the Index Maturity specified in the applicable Pricing
Supplement, as such rate is published in H.15(519) under the heading "Treasury
Bills-auction average (investment)" or, if not published by 3:00 P.M., New York
City time, on the related Calculation Date, the auction average rate of such
Treasury Bills (expressed as a bond equivalent on the basis of a year of 365 or
366 days, as applicable, and applied on a daily basis) as otherwise announced by
the United States Department of the Treasury. In the event that the results of
the Auction of Treasury Bills having the Index Maturity specified in the
applicable Pricing Supplement are not reported as provided by 3:00 P.M., New
York City time, on the related Calculation Date, or if no such Auction is held,
then the Treasury Rate will be calculated by the Calculation Agent and will be a
yield to maturity (expressed as a bond equivalent on the basis of a year of 365
or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean
of the secondary market bid rates, as of approximately 3:30 P.M., New York City
time, on such Treasury Rate Interest Determination Date, of three leading
primary United States government securities dealers (which may include the
Agents or their affiliates) selected by the Calculation Agent, for the issue of
Treasury Bills with a remaining maturity closest to the Index Maturity specified
in the applicable Pricing Supplement; provided, however, that if the dealers so
selected by the Calculation Agent are not quoting as mentioned in this sentence,
the Treasury Rate determined as of such Treasury Rate Interest Determination
Date will be the Treasury Rate in effect on such Treasury Rate Interest
Determination Date.
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OTHER/ADDITIONAL PROVISIONS; ADDENDUM
Any provisions with respect to the Notes, including the specification and
determination of one or more Interest Rate Bases, the calculation of the
interest rate applicable to a Floating Rate Note, the Interest Payment Dates,
the Stated Maturity Date, any redemption or repayment provisions or any other
term relating thereto, may be modified and/or supplemented as specified under
"Other/Additional Provisions" on the face thereof or in an Addendum relating
thereto, if so specified on the face thereof and described in the applicable
Pricing Supplement.
DISCOUNT NOTES
The Company may from time to time offer Notes that have an Issue Price (as
specified in the applicable Pricing Supplement) that is less than 100% of the
principal amount thereof (i.e. par) by more than a percentage equal to the
product of 0.25% and the number of full years to the Stated Maturity Date.
Discount Notes may not bear any interest currently or may bear interest at a
rate that is below market rates at the time of issuance. The difference between
the Issue Price of a Discount Note and par is referred to herein as the
"Discount." In the event of redemption, repayment or acceleration of maturity of
a Discount Note, the amount payable to the Holder of such Discount Note will be
equal to the sum of (i) the Issue Price (increased by any accruals of Discount)
and, in the event of any redemption of such Discount Note (if applicable),
multiplied by the Initial Redemption Percentage (as adjusted by the Annual
Redemption Percentage Reduction, if applicable) and (ii) any unpaid interest
accrued thereon to the date of such redemption, repayment or acceleration of
maturity, as the case may be.
Unless otherwise specified in the applicable Pricing Supplement, for
purposes of determining the amount of Discount that has accrued as of any date
on which a redemption, repayment or acceleration of maturity occurs for a
Discount Note, such Discount will be accrued using a constant yield method. The
constant yield will be calculated using a 30-day month, 360-day year convention,
a compounding period that, except for the Initial Period (as hereinafter
defined), corresponds to the shortest period between Interest Payment Dates for
the applicable Discount Note (with ratable accruals within a compounding
period), a coupon rate equal to the initial coupon rate applicable to such
Discount Note and an assumption that the maturity of such Discount Note will not
be accelerated. If the period from the date of issue to the initial Interest
Payment Date for a Discount Note (the "Initial Period") is shorter than the
compounding period for such Discount Note, a proportionate amount of the yield
for an entire compounding period will be accrued. If the Initial Period is
longer than the compounding period, then such period will be divided into a
regular compounding period and a short period with the short period being
treated as provided in the preceding sentence. The accrual of the applicable
Discount may differ from the accrual of original issue discount for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"), certain Discount
Notes may not be treated as having original issue discount within the meaning of
the Code, and Notes other than Discount Notes may be treated as issued with
original issue discount for federal income tax purposes. See "Certain United
States Federal Income Tax Considerations".
AMORTIZING NOTES
The Company may from time to time offer Notes with the amount of principal
thereof and interest thereon payable in installments over the term of such Notes
("Amortizing Notes"). Unless otherwise specified in the applicable Pricing
Supplement, interest on each Amortizing Note will be computed on the basis of a
360-day year of twelve 30-day months. Payments with respect to Amortizing Notes
will be applied first to interest due and payable thereon and then to the
reduction of the unpaid principal amount thereof. Further information concerning
additional terms and provisions of Amortizing Notes will be specified in the
applicable Pricing Supplement, including a table setting forth repayment
information for such Amortizing Notes.
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BOOK-ENTRY NOTES
The Company has established a depositary arrangement with The Depository
Trust Company with respect to the Book-Entry Notes, the terms of which are
summarized below. Any additional or differing terms of the depositary
arrangement with respect to the Book-Entry Notes will be described in the
applicable Pricing Supplement.
Upon issuance, all Book-Entry Notes of like tenor and terms will be
represented by a single Global Security. Each Global Security representing
Book-Entry Notes will be deposited with, or on behalf of, the Depositary and
will be registered in the name of the Depositary or a nominee of the Depositary.
No Global Security may be transferred except as a whole to a nominee of the
Depositary, or by a nominee of the Depositary to the Depositary or to another
nominee of the Depositary, or by the Depositary or such nominee to a successor
of the Depositary or a nominee of such successor.
So long as the Depositary or its nominee is the registered owner of a
Global Security, the Depositary or its nominee, as the case may be, will be the
sole Holder of the Book-Entry Notes represented thereby for all purposes under
the Indenture. Except as otherwise provided below, the Beneficial Owners of the
Global Security or Securities representing Book-Entry Notes will not be entitled
to receive physical delivery of Certificated Notes and will not be considered
the Holders thereof for any purpose under the Indenture, and no Global Security
representing Book-Entry Notes shall be exchangeable or transferable.
Accordingly, each Beneficial Owner must rely on the procedures of the Depositary
and, if such Beneficial Owner is not a Participant, on the procedures of the
Participant through which such Beneficial Owner owns its interest in order to
exercise any rights of a Holder under such Global Security or the Indenture. The
laws of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. Such limits and laws
may impair the ability to transfer beneficial interests in a Global Security
representing Book-Entry Notes.
Unless otherwise specified in the applicable Pricing Supplement, each
Global Security representing Book-Entry Notes will be exchangeable for
Certificated Notes of like tenor and terms and of differing authorized
denominations in a like aggregate principal amount, only if (i) the Depositary
notifies the Company that it is unwilling or unable to continue as Depositary
for the Global Securities or the Company becomes aware that the Depositary has
ceased to be a clearing agency registered under the Exchange Act and, in any
such case, the Company shall not have appointed a successor to the Depositary
within 90 calendar days after the Company receives such notice or becomes aware
of such unwillingness, inability or cessation, (ii) the Company, in its sole
discretion, determines that all of the Global Securities shall be exchangeable
for Certificated Notes or (iii) an Event of Default shall have occurred and be
continuing with respect to the Notes under the Indenture and the beneficial
owners representing a majority in principal amount of the Notes represented by
the Global Securities advise the Depositary to cease acting as depositary for
such Global Securities. Upon any such exchange, the Certificated Notes shall be
registered in the names of the Beneficial Owners of the Global Security or
Securities representing Book-Entry Notes, which names shall be provided by the
Depositary's relevant Participants (as identified by the Depositary) to the
Trustee.
The following is based on information furnished by the Depositary:
The Depositary will act as securities depository for the Book-Entry
Notes. The Book-Entry Notes will be issued as fully registered securities
registered in the name of Cede & Co. (the Depositary's partnership
nominee). One fully registered Global Security will be issued for each
issue of Book-Entry Note of like tenor and terms, each in the aggregate
principal amount of such issue, and will be deposited with the Depositary.
The Depositary is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. The Depositary holds securities that its
participants ("Participants") deposit with the Depositary. The Depositary
also facilitates the settlement among Participants of securities
transactions, such as transfers
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<PAGE> 18
and pledges, in deposited securities through electronic computerized
book-entry changes in Participants' accounts, thereby eliminating the need
for physical movement of securities certificates. Direct Participants of
the Depositary ("Direct Participants") include securities brokers and
dealers (including the Agents), banks, trust companies, clearing
corporations and certain other organizations. The Depositary is owned by a
number of its Direct Participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc., and the National Association of
Securities Dealers, Inc. Access to the Depositary's system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a
Direct Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to the Depositary and its Participants
are on file with the Securities and Exchange Commission.
Purchases of Book-Entry Notes under the Depositary's system must be
made by or through Direct Participants, which will receive a credit for
such Book-Entry Notes on the Depositary's records. The ownership interest
of each actual purchaser of each Book-Entry Note represented by a Global
Security ("Beneficial Owner") is in turn to be recorded on the records of
Direct Participants and Indirect Participants. Beneficial Owners will not
receive written confirmation from the Depositary of their purchase, but
Beneficial Owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their
holdings, from the Direct Participants or Indirect Participants through
which such Beneficial Owner entered into the transaction. Transfers of
ownership interests in a Global Security representing Book-Entry Notes are
to be accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners. Beneficial Owners of a Global Security
representing Book-Entry Notes will not receive Certificated Notes
representing their ownership interests therein, except in the event that
use of the book-entry system for such Book-Entry Notes is discontinued.
To facilitate subsequent transfers, all Global Securities representing
Book-Entry Notes which are deposited with, or on behalf of, the Depositary
are registered in the name of the Depositary's nominee, Cede & Co. The
deposit of Global Securities with, or on behalf of, the Depositary and
their registration in the name of Cede & Co. effect no change in beneficial
ownership. The Depositary has no knowledge of the actual Beneficial Owners
of the Global Securities representing the Book-Entry Notes; the
Depositary's records reflect only the identity of the Direct Participants
to whose accounts such Book-Entry Notes are credited, which may or may not
be the Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to
Direct Participants, by Direct Participants to Indirect Participants, and
by Direct Participants and Indirect Participants to Beneficial Owners will
be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Neither the Depositary nor Cede & Co. will consent or vote with
respect to the Global Securities representing the Book-Entry Notes. Under
its usual procedures, the Depositary mails an Omnibus Proxy to the Company
as soon as possible after the applicable record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Book-Entry Notes are credited on the
applicable record date (identified in a listing attached to the Omnibus
Proxy).
Principal, premium, if any, and/or interest, if any, payments on the
Global Securities representing the Book-Entry Notes will be made in
immediately available funds to the Depositary. The Depositary's practice is
to credit Direct Participants' accounts on the applicable payment date in
accordance with their respective holdings shown on the Depositary's records
unless the Depositary has reason to believe that it will not receive
payment on such date. Payments by Participants to Beneficial Owners will be
governed by standing instructions and customary practices, as is the case
with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of such
Participant and not of the Depositary, the Trustee or the Company, subject
to any statutory or regulatory requirements as may be in effect from time
to time. Payment of principal, premium, if any, and/or interest, if any, to
the Depositary is the responsibility of the Company and the Trustee,
disbursement of such payments to Direct Participants shall be the
responsibility of the Depositary, and disbursement of
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<PAGE> 19
such payments to the Beneficial Owners shall be the responsibility of
Direct Participants and Indirect Participants.
If applicable, redemption notices shall be sent to Cede & Co. If less
than all of the Book-Entry Notes of like tenor and terms are being
redeemed, the Depositary's practice is to determine by lot the amount of
the interest of each Direct Participant in such issue to be redeemed.
A Beneficial Owner shall give notice of any option to elect to have
its Book-Entry Notes repaid by the Company, through its Participant, to the
Trustee, and shall effect delivery of such Book-Entry Notes by causing the
Direct Participant to transfer the Participant's interest in the Global
Security or Securities representing such Book-Entry Notes, on the
Depositary's records, to the Trustee. The requirement for physical delivery
of Book-Entry Notes in connection with a demand for repayment will be
deemed satisfied when the ownership rights in the Global Security or
Securities representing such Book-Entry Notes are transferred by Direct
Participants on the Depositary's records.
The Depositary may discontinue providing its services as securities
depository with respect to the Book-Entry Notes at any time by giving
reasonable notice to the Company or the Trustee. Under such circumstances,
in the event that a successor securities depository is not obtained,
Certificated Notes are required to be printed and delivered.
The Company may decide to discontinue use of the system of book-entry
transfers through the Depositary (or a successor securities depository). In
that event, Certificated Notes will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's system has been obtained from sources that the Company believes to
be reliable, but neither the Company nor any Agent takes any responsibility for
the accuracy thereof.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain United States Federal income tax
consequences of the purchase, ownership and disposition of the Notes is based
upon laws, regulations, rulings and decisions now in effect, all of which are
subject to change (including changes in effective dates) or possible differing
interpretations. It deals only with Notes held as capital assets and does not
purport to deal with persons in special tax situations, such as financial
institutions, insurance companies, regulated investment companies, dealers in
securities or currencies, persons holding Notes as a hedge against currency
risks or as a position in a "straddle" for tax purposes, or persons whose
functional currency is not the United States dollar. It also does not deal with
holders other than original purchasers (except where otherwise specifically
noted). Persons considering the purchase of the Notes should consult their own
tax advisors concerning the application of United States Federal income tax laws
to their particular situations as well as any consequences of the purchase,
ownership and disposition of the Notes arising under the laws of any other
taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of a Note
that is for United States Federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations), (iii) an estate whose
income is subject to United States federal income tax regardless of its source,
(iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust, or
(v) any other person whose income or gain in respect of a Note is effectively
connected with the actual or deemed conduct of a United States trade or
business. Notwithstanding the preceding clause (iv), to the extent provided in
regulations, certain trusts in existence on August 20, 1996 and treated as
United States persons prior to such date that elect to continue to be so treated
also shall be considered U.S. Holders. As used herein, the term "non-U.S.
Holder" means a beneficial owner of a Note that is not a U.S. Holder.
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<PAGE> 20
U.S. HOLDERS
Payments of Interest. Payments of interest on a Note generally will be
taxable to a U.S. Holder as ordinary interest income at the time such payments
are accrued or are received (in accordance with the U.S. Holder's regular method
of tax accounting).
Original Issue Discount. The following summary is a general discussion of
the United States Federal income tax consequences to U.S. Holders of the
purchase, ownership and disposition of Notes issued with original issue discount
("Original Issue Discount Notes"). The following summary is based upon final
Treasury regulations (the "OID Regulations") released by the Internal Revenue
Service ("IRS") on January 27, 1994, as amended on June 11, 1996, under the
original issue discount provisions of the Code.
For United States Federal income tax purposes, original issue discount is
the excess of the stated redemption price at maturity of a Note over its issue
price, if such excess equals or exceeds a de minimis amount (generally 1/4 of 1%
of the Note's stated redemption price at maturity multiplied by the number of
complete years to its maturity from its issue date or, in the case of a Note
providing for the payment of any amount other than qualified stated interest (as
defined below) prior to maturity, multiplied by the weighted average maturity of
such Note). The issue price of each Note in an issue of Notes equals the first
price at which a substantial amount of such Notes has been sold (ignoring sales
to bond houses, brokers, or similar persons or organizations acting in the
capacity of underwriters, placement agents, or wholesalers). The stated
redemption price at maturity of a Note is the sum of all payments provided by
the Note other than "qualified stated interest" payments. The term "qualified
stated interest" generally means stated interest that is unconditionally payable
in cash or property (other than debt instruments of the issuer) at least
annually at a single fixed rate. In addition, under the OID Regulations, if a
Note bears interest for one or more accrual periods at a rate below the rate
applicable for the remaining term of such Note (e.g., Notes with teaser rates or
interest holidays), and if the greater of either the resulting foregone interest
on such Note or any "true" discount on such Note (i.e., the excess of the Note's
stated principal amount over its issue price) equals or exceeds a specified de
minimis amount, then the stated interest on the Note would be treated as
original issue discount rather than qualified stated interest.
Payments of qualified stated interest on a Note are taxable to a U.S.
Holder as ordinary interest income at the time such payments are accrued or are
received (in accordance with the U.S. Holder's regular method of tax
accounting). A U.S. Holder of an Original Issue Discount Note must include
original issue discount in income as ordinary interest for United States Federal
income tax purposes as it accrues under a constant yield method in advance of
receipt of the cash payments attributable to such income, regardless of such
U.S. Holder's regular method of tax accounting. In general, the amount of
original issue discount included in income by the initial U.S. Holder of an
Original Issue Discount Note is the sum of the daily portions of original issue
discount with respect to such Original Issue Discount Note for each day during
the taxable year (or portion of the taxable year) on which such U.S. Holder held
such Original Issue Discount Note. The "daily portion" of original issue
discount on any Original Issue Discount Note is determined by allocating to each
day in any accrual period a ratable portion of the original issue discount
allocable to that accrual period. An "accrual period" may be of any length and
the accrual periods may vary in length over the term of the Original Issue
Discount Note, provided that each accrual period is no longer than one year and
each scheduled payment of principal or interest occurs either on the final day
of an accrual period or on the first day of an accrual period. The amount of
original issue discount allocable to each accrual period is generally equal to
the difference between (i) the product of the Original Issue Discount Note's
adjusted issue price at the beginning of such accrual period and its yield to
maturity (determined on the basis of compounding at the close of each accrual
period and appropriately adjusted to take into account the length of the
particular accrual period) and (ii) the amount of any qualified stated interest
payments allocable to such accrual period. The "adjusted issue price" of an
Original Issue Discount Note at the beginning of any accrual period is the sum
of the issue price of the Original Issue Discount Note plus the amount of
original issue discount allocable to all prior accrual periods minus the amount
of any prior payments on the Original Issue Discount Note that were not
qualified stated interest payments. Under these rules, U.S. Holders of any Note
treated as an Original Issue Discount Note generally will have to include in
income increasingly greater amounts of original issue discount in successive
accrual periods.
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<PAGE> 21
A U.S. Holder who purchases an Original Issue Discount Note for an amount
that is greater than its adjusted issue price as of the purchase date and less
than or equal to the sum of all amounts payable on the Original Issue Discount
Note after the purchase date other than payments of qualified stated interest,
will be considered to have purchased the Original Issue Discount Note at an
"acquisition premium." Under the acquisition premium rules, the amount of
original issue discount which such U.S. Holder must include in its gross income
with respect to such Original Issue Discount Note for any taxable year (or
portion thereof in which the U.S. Holder holds the Original Issue Discount Note)
will be reduced (but not below zero) by the portion of the acquisition premium
properly allocable to the period.
Under the OID Regulations, Floating Rate Notes ("Variable Notes") are
subject to special rules whereby a Variable Note will qualify as a "variable
rate debt instrument" if (a) its issue price does not exceed the total
noncontingent principal payments due under the Variable Note by more than a
specified de minimis amount and (b) it provides for stated interest, paid or
compounded at least annually, at current values of (i) one or more qualified
floating rates, (ii) a single fixed rate and one or more qualified floating
rates, (iii) a single objective rate, or (iv) a single fixed rate and a single
objective rate that is a qualified inverse floating rate.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Note is denominated. Although a multiple of a qualified floating rate
will generally not itself constitute a qualified floating rate, a variable rate
equal to the product of a qualified floating rate and a fixed multiple that is
greater than .65 but not more than 1.35 will constitute a qualified floating
rate. A variable rate equal to the product of a qualified floating rate and a
fixed multiple that is greater than .65 but not more than 1.35, increased or
decreased by a fixed rate, will also constitute a qualified floating rate. In
addition, under the OID Regulations, two or more qualified floating rates that
can reasonably be expected to have approximately the same values throughout the
term of the Variable Note (e.g., two or more qualified floating rates with
values within 25 basis points of each other as determined on the Variable Note's
issue date) will be treated as a single qualified floating rate. Notwithstanding
the foregoing, a variable rate that would otherwise constitute a qualified
floating rate but which is subject to one or more restrictions such as a maximum
numerical limitation (i.e., a cap) or a minimum numerical limitation (i.e., a
floor) may, under certain circumstances, fail to be treated as a qualified
floating rate under the OID Regulations unless such cap or floor is fixed
throughout the term of the Note. An "objective rate" is a rate that is not
itself a qualified floating rate but which is determined using a single fixed
formula and that is based on objective financial or economic information. A rate
will not qualify as an objective rate if it is based on information that is
within the control of the issuer (or a related party) or that is unique to the
circumstances of the issuer (or a related party), such as dividends, profits, or
the value of the issuer's stock (although a rate does not fail to be an
objective rate merely because it is based on the credit quality of the issuer).
A "qualified inverse floating rate" is any objective rate where such rate is
equal to a fixed rate minus a qualified floating rate, as long as variations in
the rate can reasonably be expected to inversely reflect contemporaneous
variations in the qualified floating rate. The OID Regulations also provide that
if a Variable Note provides for stated interest at a fixed rate for an initial
period of one year or less followed by a variable rate that is either a
qualified floating rate or an objective rate and if the variable rate on the
Variable Note's issue date is intended to approximate the fixed rate (e.g., the
value of the variable rate on the issue date does not differ from the value of
the fixed rate by more than 25 basis points), then the fixed rate and the
variable rate together will constitute either a single qualified floating rate
or objective rate, as the case may be.
If a Variable Note that provides for stated interest at either a single
qualified floating rate or a single objective rate throughout the term thereof
qualifies as a "variable rate debt instrument" under the OID Regulations and if
the interest on such Note is unconditionally payable in cash or property (other
than debt instruments of the issuer) at least annually, then all stated interest
on the Note will constitute qualified stated interest and will be taxed
accordingly. Thus, a Variable Note that provides for stated interest at either a
single qualified floating rate or a single objective rate throughout the term
thereof and that qualifies as a "variable rate debt instrument" under the OID
Regulations will generally not be treated as having been issued with original
issue discount unless the Variable Note is issued at a "true" discount (i.e., at
a price below the Note's
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stated principal amount) in excess of a specified de minimis amount. The amount
of qualified stated interest and the amount of original issue discount, if any,
that accrues during an accrual period on such a Variable Note is determined
under the rules applicable to fixed rate debt instruments by assuming that the
variable rate is a fixed rate equal to (i) in the case of a qualified floating
rate or qualified inverse floating rate, the value, as of the issue date, of the
qualified floating rate or qualified inverse floating rate, or (ii) in the case
of an objective rate (other than a qualified inverse floating rate), a fixed
rate that reflects the yield that is reasonably expected for the Variable Note.
The qualified stated interest allocable to an accrual period is increased (or
decreased) if the interest actually paid during an accrual period exceeds (or is
less than) the interest assumed to be paid during the accrual period pursuant to
the foregoing rules.
In general, any other Variable Note that qualifies as a "variable rate debt
instrument" will be converted into an "equivalent" fixed rate debt instrument
for purposes of determining the amount and accrual of original issue discount
and qualified stated interest on the Variable Note. The OID Regulations
generally require that such a Variable Note be converted into an "equivalent"
fixed rate debt instrument by substituting any qualified floating rate or
qualified inverse floating rate provided for under the terms of the Variable
Note with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Variable Note's
issue date. Any objective rate (other than a qualified inverse floating rate)
provided for under the terms of the Variable Note is converted into a fixed rate
that reflects the yield that is reasonably expected for the Variable Note. In
the case of a Variable Note that qualifies as a "variable rate debt instrument"
and provides for stated interest at a fixed rate in addition to either one or
more qualified floating rates or a qualified inverse floating rate, the fixed
rate is initially converted into a qualified floating rate (or a qualified
inverse floating rate, if the Variable Note provides for a qualified inverse
floating rate). Under such circumstances, the qualified floating rate or
qualified inverse floating rate that replaces the fixed rate must be such that
the fair market value of the Variable Note as of the Variable Note's issue date
is approximately the same as the fair market value of an otherwise identical
debt instrument that provides for either the qualified floating rate or
qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Variable Note is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
Once the Variable Note is converted into an "equivalent" fixed rate debt
instrument pursuant to the foregoing rules, the amount of original issue
discount and qualified stated interest, if any, are determined for the
"equivalent" fixed rate debt instrument by applying the general original issue
discount rules to the "equivalent" fixed rate debt instrument and a U.S. Holder
of the Variable Note will account for such original issue discount and qualified
stated interest as if the U.S. Holder held the "equivalent" fixed rate debt
instrument. Each accrual period appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Variable Note during the accrual period.
If a Variable Note does not qualify as a "variable rate debt instrument"
under the OID Regulations, then the Variable Note would be treated as a
contingent payment debt obligation. U.S. Holders should be aware that
regulations (the "CPDI Regulations") concerning the proper United States Federal
income tax treatment of contingent payment debt instruments apply to debt
instruments issued on or after August 13, 1996. In general, the CPDI Regulations
would cause the timing and character of income, gain or loss reported on a
contingent payment debt instrument to substantially differ from the timing and
character of income, gain or loss reported on a contingent payment debt
instrument under general principles of current United States Federal income tax
law. Specifically, the CPDI Regulations generally require a U.S. Holder of such
an instrument to include future contingent and noncontingent interest payments
in income as such interest accrues based upon a projected payment schedule.
Moreover, in general, under the CPDI Regulations, any gain recognized by a U.S.
Holder on the sale, exchange, or retirement of a contingent payment debt
instrument will be treated as ordinary income and all or a portion of any loss
realized could be treated as ordinary loss as opposed to capital loss (depending
upon the circumstances). The proper United States Federal income tax treatment
of Variable Notes that may be required to be treated as contingent payment debt
obligations under the CPDI Regulations will be more fully described in the
applicable Pricing
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<PAGE> 23
Supplement. Furthermore, any other special United States Federal income tax
considerations, not otherwise discussed herein, which are applicable to any
particular issue of Notes will be discussed in the applicable Pricing
Supplement.
Certain of the Notes (i) may be redeemable at the option of the Company
prior to their stated maturity (a "call option") and/or (ii) may be repayable at
the option of the holder prior to their stated maturity (a "put option"). Notes
containing such features may be subject to rules that differ from the general
rules discussed above. Investors intending to purchase Notes with such features
should consult their own tax advisors, since the original issue discount
consequences will depend, in part, on the particular terms and features of the
purchased Notes.
U.S. Holders may generally, upon election, include in income all interest
(including stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium) that accrues on a debt instrument by using the constant
yield method applicable to original issue discount, subject to certain
limitations and exceptions.
Short-Term Notes. Notes that have a fixed maturity of one year or less
("Short-Term Notes") will be treated as having been issued with original issue
discount. In general, an individual or other U.S. Holder utilizing the cash
method is not required to accrue such original issue discount unless such U.S.
Holder elects to do so. If such an election is not made, any gain recognized by
U.S. Holder on the sale, exchange or maturity of the Short-Term Note will be
ordinary income to the extent of the original issue discount accrued on a
straight-line basis, or upon election under the constant yield method (based on
daily compounding), through the date of sale or maturity, and a portion of the
deductions otherwise allowable to the U.S. Holder for interest on borrowings
allocable to the Short-Term Note will be deferred until a corresponding amount
of income is realized. U.S. Holders who report income for United States Federal
income tax purposes under the accrual method, and certain other holders
including banks and dealers in securities, are required to accrue original issue
discount on a Short-Term Note on a straight-line basis unless an election is
made to accrue the original issue discount under a constant yield method (based
on daily compounding).
Market Discount. If a U.S. Holder purchases a Note, other than an Original
Issue Discount or Short Term Note, for an amount that is less than its issue
price (or, in the case of a subsequent purchaser, its stated redemption price at
maturity) or, in the case of an Original Issue Discount Note, for an amount that
is less than its adjusted issue price as of the purchase date, such U.S. Holder
will be treated as having purchased such Note at a "market discount," unless
such market discount is less than a specified de minimis amount.
Under the market discount rules, a U.S. Holder will be required to treat
any partial principal payment (or, in the case of an Original Issue Discount
Note, any payment that does not constitute qualified stated interest) on, or any
gain realized on the sale, exchange, retirement or other disposition of, a Note
as ordinary income to the extent of the lesser of (i) the amount of such payment
or realized gain or (ii) the market discount which has not previously been
included in income and is treated as having accrued on such Note at the time of
such payment or disposition. Market discount will be considered to accrue
ratably during the period from the date of acquisition to the maturity date of
the Note, unless the U.S. Holder elects to accrue market discount on the basis
of semiannual compounding.
A U.S. Holder may be required to defer the deduction of all or a portion of
the interest paid or accrued on any indebtedness incurred or maintained to
purchase or carry a Note with market discount until the maturity of the Note or
certain earlier dispositions, because a current deduction is only allowed to the
extent the interest expense exceeds an allocable portion of market discount. A
U.S. Holder may elect to include market discount in income currently as it
accrues (on either a ratable or semiannual compounding basis), in which case the
rules described above regarding the treatment as ordinary income of gain upon
the disposition of the Note and upon the receipt of certain cash payments and
regarding the deferral of interest deductions will not apply. Generally, such
currently included market discount is treated as ordinary interest for United
States Federal income tax purposes. Such an election will apply to all debt
instruments acquired by the U.S. Holder on or after the first day of the first
taxable year to which such election applies and may be revoked only with the
consent of the IRS.
S-23
<PAGE> 24
Premium. If a U.S. Holder purchases a Note for an amount that is greater
than the sum of all amounts payable on the Note after the purchase date other
than payments of qualified stated interest, such U.S. Holder will be considered
to have purchased the Note with "amortizable bond premium" equal in amount to
such excess. A U.S. Holder may elect to amortize such premium using a constant
yield method over the remaining term of the Note and may offset interest
otherwise required to be included in respect of the Note during any taxable year
by the amortized amount of such excess for the taxable year. However, if the
Note may be optionally redeemed after the U.S. Holder acquires it at a price in
excess of its stated redemption price at maturity, special rules would apply
which could result in a deferral of the amortization of some bond premium until
later in the term of the Note. Any election to amortize bond premium applies to
all taxable debt instruments acquired by the U.S. Holder on or after the first
day of the first taxable year to which such election applies and may be revoked
only with the consent of the IRS.
Disposition of a Note. Except as discussed above, upon the sale, exchange
or retirement of a Note, a U.S. Holder generally will recognize taxable gain or
loss equal to the difference between the amount realized on the sale, exchange
or retirement (other than amounts representing accrued and unpaid interest) and
such U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax
basis in a Note generally will equal such U.S. Holder's initial investment in
the Note increased by any original issue discount included in income (and
accrued market discount, if any, if the U.S. Holder has included such market
discount in income) and decreased by the amount of any payments, other than
qualified stated interest payments, received and amortizable bond premium taken
with respect to such Note. Such gain or loss generally will be long-term capital
gain or loss if the Note was held for more than one year.
NON-U.S. HOLDERS
A non-U.S. Holder will not be subject to United States Federal income taxes
on payments of principal, premium (if any) or interest (including original issue
discount, if any) on a Note, unless such non-U.S. Holder is a direct or indirect
10% or greater shareholder of the Company, a controlled foreign corporation
related to the Company or a bank receiving interest described in section
881(c)(3)(A) of the Code. To qualify for the exemption from taxation, the last
United States payor in the chain of payment prior to payment to a non-U.S.
Holder (the "Withholding Agent") must have received in the year in which a
payment of interest or principal occurs, or in either of the two preceding
calendar years, a statement that (i) is signed by the beneficial owner of the
Note under penalties of perjury, (ii) certifies that such owner is not a U.S.
Holder and (iii) provides the name and address of the beneficial owner. The
statement may be made on an IRS Form W-8 or a substantially similar form, and
the beneficial owner must inform the Withholding Agent of any change in the
information on the statement within 30 days of such change. If a Note is held
through a securities clearing organization or certain other financial
institutions, the organization or institution may provide a signed statement to
the Withholding Agent. However, in such case, the signed statement must be
accompanied by a copy of the IRS Form W-8 or the substitute form provided by the
beneficial owner to the organization or institution. The Treasury Department is
considering implementation of further certification requirements aimed at
determining whether the issuer of a debt obligation is related to holders
thereof.
Final regulations dealing with withholding tax on income paid to foreign
persons and related matters (the "New Withholding Regulations") were issued by
the Treasury Department on October 6, 1997. The New Withholding Regulations will
generally be effective for payments made after December 31, 1999, subject to
certain transition rules. Prospective Non-U.S. Holders are strongly urged to
consult their own tax advisors with respect to the New Withholding Regulations.
Generally, a non-U.S. Holder will not be subject to Federal income taxes on
any amount which constitutes capital gain upon retirement or disposition of a
Note, provided the gain is not effectively connected with the conduct of a trade
or business in the United States by the non-U.S. Holder. Certain other
exceptions may be applicable, and a non-U.S. Holder should consult its tax
advisor in this regard.
The Notes will not be includible in the estate of a non-U.S. Holder unless
the individual is a direct or indirect 10% or greater shareholder of the Company
or, at the time of such individual's death, payments in
S-24
<PAGE> 25
respect of the Notes would have been effectively connected with the conduct by
such individual of a trade or business in the United States.
BACKUP WITHHOLDING
Backup withholding of United States Federal income tax at a rate of 31% may
apply to payments made in respect of the Notes to registered owners who are not
"exempt recipients" and who fail to provide certain identifying information
(such as the registered owner's taxpayer identification number) in the required
manner. Generally, individuals are not exempt recipients, whereas corporations
and certain other entities generally are exempt recipients. Payments made in
respect of the Notes to a U.S. Holder must be reported to the IRS, unless the
U.S. Holder is an exempt recipient or establishes an exemption. Compliance with
the identification procedures described in the preceding section would establish
an exemption from backup withholding for those non-U.S. Holders who are not
exempt recipients.
In addition, upon the sale of a Note to (or through) a broker, the broker
must withhold 31% of the entire purchase price, unless either (i) the broker
determines that the seller is a corporation or other exempt recipient or (ii)
the seller provides, in the required manner, certain identifying information
and, in the case of a non-U.S. Holder, certifies that such seller is a non-U.S.
Holder (and certain other conditions are met). Such a sale must also be reported
by the broker to the IRS, unless either (i) the broker determines that the
seller is an exempt recipient or (ii) the seller certifies its non-U.S. status
(and certain other conditions are met). Certification of the registered owner's
non-U.S. status would be made normally on an IRS Form W-8 under penalties of
perjury, although in certain cases it may be possible to submit other
documentary evidence.
Any amounts withheld under the backup withholding rules from a payment to a
beneficial owner would be allowed as a refund or a credit against such
beneficial owner's United States Federal income tax provided the required
information is furnished to the IRS.
PLAN OF DISTRIBUTION
AGENTS
The Notes are being offered on a continuing basis for sale by the Company
to or through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co. Incorporated, A.G. Edwards & Sons, Inc. and
Edward D. Jones & Co., L.P. (the "Agents"). The Agents, individually or in a
syndicate, may purchase Notes, as principal, from the Company from time to time
for resale to investors and other purchasers at varying prices relating to
prevailing market prices at the time of resale as determined by the applicable
Agent or, if so specified in the applicable Pricing Supplement, for resale at a
fixed offering price. If agreed to by the Company and an Agent, such Agent may
also utilize its reasonable efforts on an agency basis to solicit offers to
purchase the Notes at 100% of the principal amount thereof, unless otherwise
specified in the applicable Pricing Supplement. The Company will pay a
commission to an Agent, ranging from .125% to .750% of the principal amount of
each Note, depending upon its stated maturity, sold through such Agent as an
agent of the Company, unless otherwise specified in the applicable Pricing
Supplement. Commissions with respect to Notes with stated maturities in excess
of 30 years that are sold through an Agent as an agent of the Company will be
negotiated between the Company and such Agent at the time of such sale.
Unless otherwise specified in the applicable Pricing Supplement, any Note
sold to an Agent as principal will be purchased by such Agent at a price equal
to 100% of the principal amount thereof less a percentage of the principal
amount equal to the commission applicable to an agency sale of a Note of
identical maturity. An Agent may sell Notes it has purchased from the Company as
principal to certain dealers less a concession equal to all or any portion of
the discount received in connection with such purchase. Such Agent may allow,
and such dealers may reallow, a discount to certain other dealers. After the
initial offering of Notes, the offering price (in the case of Notes to be resold
on a fixed offering price basis), the concession and the reallowance may be
changed.
S-25
<PAGE> 26
The Company reserves the right to withdraw, cancel or modify the offer made
hereby without notice and may reject offers in whole or in part (whether placed
directly with the Company or through an Agent). Each Agent will have the right,
in its discretion reasonably exercised, to reject in whole or in part any offer
to purchase Notes received by it on an agency basis.
Unless otherwise specified in the applicable Pricing Supplement, payment of
the purchase price of the Notes will be required to be made in immediately
available funds in The City of New York on the date of settlement. See
"Description of Notes -- General."
TRADING MARKET
Upon issuance, the Notes will not have an established trading market. The
Notes will not be listed on any securities exchange. The Agents may from time to
time purchase and sell Notes in the secondary market, but the Agents are not
obligated to do so, and there can be no assurance that there will be a secondary
market for the Notes or that there will be liquidity in the secondary market if
one develops. From time to time, the Agents may make a market in the Notes, but
the Agents are not obligated to do so and may discontinue any market-making
activity at any time.
STABILIZATION
In connection with an offering of Notes purchased by one or more Agents as
principal on a fixed offering price basis, such Agent(s) will be permitted to
engage in certain transactions that stabilize the price of Notes. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of Notes. If the Agent creates or the Agents create, as
the case may be, a short position in Notes, i.e., if it sells or they sell Notes
in an aggregate principal amount exceeding that set forth in the applicable
Pricing Supplement, such Agent(s) may reduce that short position by purchasing
Notes in the open market. In general, purchases of Notes for the purpose of
stabilization or to reduce a short position could cause the price of Notes to be
higher than it might be in the absence of such purchases.
Neither the Company nor any of the Agents makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described in the immediately preceding paragraph may have on the price of Notes.
In addition, neither the Company nor any of the Agents makes any representation
that the Agents will engage in any such transactions or that such transactions,
once commenced, will not be discontinued without notice.
GENERAL
The Agents may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"). The Company has
agreed to indemnify the Agents against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments the Agents
may be required to make in respect thereof. The Company has agreed to reimburse
the Agents for certain other expenses.
In the ordinary course of its business, the Agents and their affiliates
have engaged and may in the future engage in investment and commercial banking
transactions with the Company and certain of its affiliates.
From time to time, the Company may issue and sell other securities
described in the accompanying Prospectus, and the amount of Notes offered hereby
is subject to reduction as a result of such sales as a proportion of the
aggregate initial public offering price of all offered Securities pursuant to
such Prospectus.
S-26
<PAGE> 27
PROSPECTUS
- ---------------------
$200,000,000
SEMCO ENERGY, INC.
MEDIUM TERM NOTES
SUBORDINATED DEBENTURES
COMMON STOCK
SEMCO CAPITAL TRUST
TRUST PREFERRED SECURITIES
(LIQUIDATION PREFERENCE $25 PER TRUST PREFERRED SECURITY)
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY SEMCO ENERGY, INC.
------------------------
SEMCO Energy, Inc., a Michigan corporation ("SEMCO Energy" or the "Company")
may offer, from time to time, its (i) unsecured subordinated debt securities
(the "Subordinated Debentures") to the SEMCO Capital Trust, (ii) its unsecured
debentures, notes or other evidences of indebtedness maturing nine months or
more from date of issuance (the "Medium Term Notes") (the Subordinated
Debentures and together with the Medium Term Notes, the "Debt Securities"),
and/or (iii) shares of its common stock ($1 par value per share) (the "Common
Stock") on terms to be determined at the time of sale. The Debt Securities and
the Common Stock offered hereby may be offered at prices and on terms to be
determined at the time of sale and to be set forth in a supplement to this
Prospectus (a "Prospectus Supplement"). The Debt Securities may be offered in
one or more series and will be direct unsecured obligations of the Company. The
Medium Term Notes will rank on a parity with all other unsecured and
unsubordinated indebtedness of the Company. The Subordinated Debentures will be
subordinated to all existing and future Senior Indebtedness of the Company, as
defined under "Description of Debt Securities -- Subordination".
SEMCO Capital Trust, a statutory business trust formed under the laws of the
State of Delaware (the "Trust") may offer, from time to time, its preferred
securities (the "Trust Preferred Securities") representing preferred undivided
beneficial interests in the assets of the Trust. SEMCO Energy will be the sole
owner of the undivided common beneficial interests in such assets represented by
trust common securities (the "Trust Common Securities" and, together with Trust
Preferred Securities, the "Trust Securities" of the Trust). The payment of
periodic cash distributions ("distributions") with respect to the Trust
Preferred Securities and payments on liquidation or redemption with respect to
such Trust Preferred Securities will be guaranteed by SEMCO Energy (the "Trust
Guarantee"). SEMCO Energy's obligations under the Trust Guarantee will be
subordinate and junior in right of payment to all other liabilities of SEMCO
Energy and will rank pari passu with the most senior preferred stock which may
be issued by SEMCO Energy. Concurrently with the issuance by the Trust of its
Trust Preferred Securities, the Trust will invest the proceeds thereof in
Subordinated Debentures issued by SEMCO Energy in the form of junior
subordinated deferrable interest debentures. The Subordinated Debentures will be
unsecured and subordinated indebtedness of SEMCO Energy issued under a
Subordinated Debenture Indenture to be entered into between the Company and
First Chicago Delaware Inc., as trustee (such indenture, as the same may be
supplemented or amended form time to time, herein referred to as the
"Subordinated Indenture"). The Subordinated Debentures held by the Trust will be
its sole assets, and the payments of principal of and interest on such
Subordinated Debentures will be its only revenues. The Subordinated Debentures
held by the Trust may be subsequently distributed pro rata to holders of Trust
Preferred Securities and Trust Common Securities in connection with the
dissolution of such Trust. In addition, upon the occurrence of certain events,
SEMCO Energy may redeem the Subordinated Debentures and cause the redemption of
the Trust Preferred Securities.
The specific terms of the Debt Securities, Common Stock and Trust Preferred
Securities (collectively, the "Offered Securities") in respect of which this
Prospectus is being delivered, will be set forth in the applicable Prospectus
Supplement and will include, where applicable and among other terms, (i) in the
case of Debt Securities, the specific title, aggregate principal amount,
maturity, priority, interest rate, time of payment of interest, terms of
redemption at the option of the Trust or repayment at the option of the holder
or for sinking fund payments, and the initial public offering price; (ii) in the
case of Common Stock, the initial public offering price; and (iii) in the case
of Trust Preferred Securities, the specific title, the aggregate amount, the
distribution rate (or the method for determining such rate), the stated
liquidation amount, redemption provisions and other rights, the initial public
offering price and any other special terms, as well as any planned listing on a
securities exchange or the NASDAQ National Market System of such Trust Preferred
Securities. The applicable Prospectus Supplement will also contain information,
where applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by such Prospectus Supplement.
The aggregate initial public offering price of all the Offered Securities
will be limited to $200,000,000.
------------------------
SEMCO Energy and/or the Trust may sell any of the Offered Securities,
directly, through agents or through underwriters or dealers. The names of any
agents, underwriters or dealers and any applicable purchase price, fee,
commissions and discounts will be set forth in, or calculable from the
information set forth in, the applicable Prospectus Supplement. See "Plan of
Distribution" herein.
Currently outstanding shares of SEMCO Energy Common Stock are traded on
NASDAQ under the symbol SMGS.
This Prospectus may not be used to consummate sales of Offered Securities
unless accompanied by a Prospectus Supplement describing the methods and terms
of offering of the Offered Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
------------------------
The date of this Prospectus is July 24, 1998.
<PAGE> 28
AVAILABLE INFORMATION
This Prospectus is part of a Registration Statement on Form S-3 (the
"Registration Statement") filed by SEMCO Energy and the Trust with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933 (the "Securities Act"). The Registration Statement and its exhibits
contain more information about the Company, the Trust and the Offered
Securities. Statements in this Prospectus about documents filed with the
Commission are not necessarily complete; the actual documents may contain a more
complete description of the matter involved.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and therefore files reports and other
information with the Commission. Such reports, proxy statements, and other
information can be inspected and copied at prescribed rates at the Commission's
Public Reference Room at its principal office: Judiciary Plaza, 450 Fifth
Street, NW, Room 1024, Washington, DC 20549 or at the Commission's regional
office in New York at 7 World Trade Center, Suite 1300, New York, New York 10048
and in Chicago at the Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can also be obtained by mail at
prescribed rates from the Public Reference Section of the Commission at its
principal office. The Commission maintains a Web site at http://www.sec.gov that
contains reports, proxy and other information regarding the Company.
Financial statements for SEMCO Energy are included in its Form 10-K for the
fiscal year ended December 31, 1997 and its Form 10-Q for the three months ended
March 31, 1998, which are incorporated by reference into this Prospectus as
discussed below. No separate financial statements of the Trust are included in
this Prospectus. SEMCO Energy believes that such financial statements would not
be material to holders of Trust Preferred Securities because (i) all Trust
voting securities will be owned by SEMCO Energy, a reporting company under the
Exchange Act, (ii) the Trust will not have independent operations, but exists
for the sole purpose of issuing the Trust Securities and holding the
Subordinated Debentures as trust assets, and (iii) the obligations of the Trust
under the Trust Preferred Securities, to the extent funds are available
therefore, are fully and unconditionally guaranteed to the extent set forth
herein by SEMCO Energy. See "Description of Debt Securities"; "Additional
Description of Subordinated Debentures to be Issued to Trust" and "Description
of Trust Guarantee."
This Prospectus contains and each Prospectus Supplement and each document
incorporated by reference herein may contain "forward-looking" statements, as
defined in the Private Securities Litigation Reform Act of 1995, that are based
on current expectations, estimates and projections. Statements that are not
historical facts, including statements about SEMCO Energy's beliefs and
expectations are forward-looking statements. These statements are subject to
potential risks and uncertainties and, therefore, actual results may differ
materially. SEMCO Energy undertakes no obligation to update publicly any
forward-looking statements whether as a result of new information, future events
or otherwise.
Important factors that may affect these projections or expectations
include, but are not limited to: (i) the effects of weather and other natural
phenomena; (ii) the economic climate and growth in the geographical areas where
SEMCO Energy does business; (iii) the capital intensive nature of SEMCO Energy's
business; (iv) increased competition within the energy marketing industry as
well as from alternative forms of energy; (v) the timing and extent of changes
in commodity prices for natural gas; (vi) the effects of changes in governmental
and regulatory policies, including income taxes, environmental compliance and
authorized rates; (vii) SEMCO Energy's ability to bid on and win business
contracts; (viii) the nature, availability and projected profitability of
potential investments available to SEMCO Energy and (ix) the conditions of
capital markets and equity markets. Prospective investors should evaluate any
statements in light of these important factors.
------------------------
2
<PAGE> 29
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, which have been or will be filed with the
Commission, are incorporated into this Prospectus: (a) the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997; (b) the
Company's Form 10-Q and 10-QA for the three months ended March 31, 1998; (c) the
Company's Form 8-K dated March 11, 1998 and (d) all documents later filed
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the
date of this Prospectus and prior to the termination of this offering.
The information in this Prospectus, in documents incorporated into this
Prospectus and in Prospectus Supplements may be changed by information given at
a later date. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus and the accompanying Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or the accompanying Prospectus Supplement.
SEMCO Energy will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus and any accompanying Prospectus
Supplement is delivered, upon written or oral request of such person, a copy of
any and all documents incorporated herein by reference (not including exhibits
to such documents, unless such exhibits are specifically incorporated by
reference into such documents). Requests should be directed to Edric R. Mason,
Jr., Director of Investor Relations of SEMCO Energy, Inc., 405 Water Street,
Port Huron, Michigan 48060, telephone number (810) 989-4104.
THE COMPANY
The Company is a Michigan corporation with its principal offices at 405
Water Street, Port Huron, Michigan 48060 and its telephone number is (810)
987-2200. Prior to April 24, 1997, the Company's name was Southeastern Michigan
Gas Enterprises, Inc.
The Company is an energy-focused holding company established in 1977 and is
the parent company of three direct subsidiaries, SEMCO Energy Gas Company, SEMCO
Energy Services, Inc., and SEMCO Energy Ventures, Inc. A substantial portion of
the Company's direct subsidiaries' assets are invested in natural gas operations
regulated by various regulatory bodies including the Michigan Public Service
Commission. Weather has a significant impact on the Company's revenues.
SEMCO ENERGY GAS COMPANY
SEMCO Energy Gas Company ("Gas Company") purchases, distributes and
transports natural gas to approximately 240,000 customers in twenty-four
counties in the lower and upper peninsulas of Michigan. During the last four
years, its customer base has grown at an average rate of approximately 6,500
customers, or 3.0%, per year.
SEMCO ENERGY SERVICES, INC.
SEMCO Energy Services, Inc. ("Energy Services") is primarily a gas
marketing company. Its customers include industrial, commercial and municipal
natural gas users, natural gas distribution companies and other marketers. In
addition to its operations in Michigan, Energy Services, through independent
contractors, markets gas in approximately 19 other states.
SEMCO ENERGY VENTURES, INC.
SEMCO Energy Ventures, Inc. ("Ventures") is an asset-based company with
investments in many segments of the natural gas industry including transmission,
gathering, and underground storage.
In August 1997, Ventures, through a wholly-owned subsidiary, acquired the
assets and business of Sub-Surface Construction Co. ("Sub-Surface") for
approximately $15.6 million plus the assumption of certain
3
<PAGE> 30
liabilities. Because of this acquisition and the acquisition of Maverick
Pipeline Services Inc. (in December of 1997 for approximately $50,000 in cash
and 450,000 shares of the Company's Common Stock) and King Energy and
Construction Inc. (in May of 1998 for approximately 18,062 shares of the
Company's Common Stock), Ventures now constructs and maintains underground
natural gas pipelines and associated facilities and provides pipeline
consulting/engineering design and project management services. On March 31,
1998, Ventures, through a wholly-owned subsidiary, acquired the assets and
business of Hotflame Gas, Inc. ("Hotflame") for 352,944 shares of SEMCO Energy
Common Stock. Hotflame supplies propane gas to over 10,000 customers in Northern
Michigan and Northeast Wisconsin.
The Company, through Ventures, has identified three specific areas in which
it intends to diversify and make investments and acquisitions. They are: (1) the
gas-related construction business; (2) gas-related engineering services to
distribution and transmission companies; and (3) the propane business. If the
Company is successful in pursuing such diversified investments, the Company
anticipates that its earnings mix over the long-term would change and that an
increased part of such earnings would arise from such unregulated aspects of the
gas business.
The business of the Company and its subsidiaries, is described in the
documents incorporated into this Prospectus to which documents reference is
hereby made. See "Incorporation of Certain Information by Reference" above.
SELECTED INFORMATION
The following material, which is presented herein solely to furnish limited
introductory information regarding the Company, has been selected from, or is
based upon, the detailed information and financial statements appearing in the
documents incorporated herein by reference or elsewhere in this Prospectus, is
qualified in its entirety by reference thereto and, therefore, should be read
together therewith.
SELECTED OPERATING INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average Number of Customers of Gas Company..... 236,611 228,802 222,303 216,082 210,522
Total Gas Company Throughput (MMcf)............ 63,358 64,290 64,636 60,663 58,483
Degree Days (Percent of Normal)................ 99.4% 104.5% 105.3% 102.4% 105.0%
Volume of Gas Marketed by Energy Services
(MMcf)....................................... 199,689 129,429 82,504 78,082 31,501
</TABLE>
SELECTED FINANCIAL INFORMATION OF THE COMPANY
<TABLE>
<CAPTION>
12 MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- ---- ---- ---- ---- ----
(THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues................. $741,558 $770,272 $ 544,949 $335,538 $372,430 $288,963
Income Before Interest Charges..... 25,401 28,141(2) (1,556)(2) 22,247 20,963 21,294
Net Income After Dividends on
Preferred Stock.................. 13,482(1) 14,921(2) (12,803)(2) 11,331 9,992 9,563
</TABLE>
- -------------------------
(1) Reflects $1,784,000 net of tax effect of change in accounting for property
taxes.
(2) Reflects a $21 million expense, net of tax, in 1996 because of a reserve for
the NOARK investment. Also, reflects a gain of $5 million, net of tax, in
1997 because of an adjustment to that reserve.
4
<PAGE> 31
<TABLE>
<CAPTION>
CAPITALIZATION OF THE COMPANY
-----------------------------
(UNAUDITED AS OF
MARCH 31, 1998)
(THOUSANDS)
<S> <C>
Common Stock Equity......................................... $107,701
Cumulative Preferred Stock.................................. 165
Cumulative Preferred Stock of Subsidiary.................... 3,100
Long-Term Debt Including Capital Leases..................... 163,559
--------
Total Capitalization................................... $274,525
</TABLE>
THE TRUST
The Trust is a statutory business trust formed under Delaware law pursuant
to the filing of a certificate of trust with the Delaware Secretary of State on
July 7, 1998. The business of the Trust is set forth in a Trust Agreement,
executed by the Company, as Depositor (the "Depositor"), the Delaware Trustee
and the Administrative Trustees (each as defined below). The Trust Agreement
will be amended and restated in its entirety (as so amended and restated, the
"Trust Agreement") substantially in the form filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The Trust
Agreement will be qualified as an indenture under the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act" or "TIA"). Upon issuance of the
Trust Preferred Securities, the purchasers thereof will own all of the Trust
Preferred Securities. The Company will acquire all of the Trust Common
Securities in an aggregate liquidation amount equal to approximately 3% of the
total capital of the Trust. The Trust exists for the exclusive purpose of (i)
issuing the Trust Securities representing undivided beneficial interests in the
assets of the Trust, (ii) investing the gross proceeds of the Trust Securities
in the Subordinated Debentures and (iii) engaging in only those other activities
necessary or incidental thereto. The Trust has a term of 50 years, but may
terminate earlier as provided in the Trust Agreement.
The Trust's business and affairs will be conducted by the trustees (the
"Trustees") appointed by the Company, as holder of the Trust Common Securities.
The duties and obligations of the Trustees will be governed by the Trust
Agreement. Pursuant to the Trust Agreement, the number of Trustees will
initially be four. Two of the Trustees (the "Administrative Trustees") will be
persons who are employees or officers of or affiliated with the Company. The
third Trustee will be a corporation which maintains a principal place of
business in the State of Delaware that will serve for the sole purpose of
complying with certain Delaware laws (the "Delaware Trustee"). The fourth
Trustee will be a financial institution unaffiliated with the Company which will
serve as property trustee under the Trust Agreement and as indenture trustee for
purposes of the Trust Indenture Act (the "Property Trustee"). First Chicago
Delaware Inc. will act as the Delaware Trustee and NBD Bank as the Property
Trustee, in each case until removed or replaced by the holder of the Trust
Common Securities. The Property Trustee will also act as indenture trustee under
the Trust Guarantee (the "Guarantee Trustee"). See "Description of the Trust
Guarantee."
The Property Trustee, acting in such capacity, will hold title to the
Subordinated Debentures acquired by the Trust for the benefit of the holders of
the Trust Securities issued by the Trust and will have the power to exercise all
rights, powers and privileges under the Subordinated Indenture, as defined
herein, as the holder of such Subordinated Debentures. In addition, the Property
Trustee will maintain exclusive control of a segregated non-interest bearing
bank account for the Trust (the "Payment Account") to hold all payments made in
respect of the Subordinated Debentures held by the Trust for the benefit of the
holders of the Trust Securities. The Property Trustee will make payments of
distributions and payments on liquidation, redemption and otherwise to the
holders of the Trust Securities issued by the Trust out of funds from the
Payment Account of the Trust. The Guarantee Trustee will hold the Trust
Guarantee for the benefit of the holders of the Trust Preferred Securities. The
Company as the holder of all the Trust Common Securities, will have the right to
appoint, remove or replace any Trustee and to increase the number of Trustees,
provided that the number of Trustees will be at least three, two of which will
be Administrative Trustees. The Company will pay all fees and expenses related
to the Trust, the offering of the Trust Preferred Securities and the issuance of
the Subordinated Debentures.
5
<PAGE> 32
The rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, are as set forth in
the Trust Agreement for the Trust, the Delaware Business Trust Act, as amended
(the "Trust Act"), and the Trust Indenture Act. See "Description of Trust
Preferred Securities."
The principal place of business of the Trust shall be c/o SEMCO Energy,
Inc., 405 Water Street, Port Huron, Michigan 48060 (telephone number
810-987-2200).
USE OF PROCEEDS
The Trust will use all proceeds from the sale of Trust Securities to
purchase Subordinated Debentures. Unless otherwise indicated in the applicable
Prospectus Supplement, SEMCO Energy intends to use the net proceeds from the
sale of Subordinated Debentures, Medium Term Notes and Common Stock to fund its
subsidiaries, repay debt, fund acquisitions and fund general corporate purposes
in amounts which are currently undetermined. The proceeds may be temporarily
invested in marketable securities.
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratios of earnings to fixed
charges and earnings to fixed charges and preferred dividends for SEMCO Energy
and its subsidiaries for the years and period indicated:
<TABLE>
<CAPTION>
12 MONTHS
ENDING YEARS ENDED DECEMBER 31,
MARCH 31, ------------------------------------
1998 1997 1996 1995 1994 1993
--------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to:
Fixed Charges(1)................................... 2.35 2.38 (2) 2.21 2.17 2.07
Fixed Charges and Preferred Dividends (1).......... 2.35 2.38 (2) 2.20 2.16 2.06
</TABLE>
- -------------------------
(1) In January 1998, SEMCO Energy, through a subsidiary of Ventures, SEMCO
Arkansas Pipeline Company, sold its 32.07% partnership interest in NOARK
Pipeline System L.P. ("NOARK"). NOARK had been generating losses since it
was placed in service in 1992. Earnings reflect a share of NOARK's operating
losses and fixed charges include a share of NOARK's interest expense equal
to the Company's percentage interest in NOARK. Pursuant to this sale, SEMCO
Arkansas Pipeline Company paid the purchaser $9.2 million in 1998 and must
pay the purchaser $3.1 million and $0.8 million in 1999 and 2000,
respectively. These payment obligations are guaranteed by SEMCO Energy.
Beginning in the year 2004, the purchaser will pay SEMCO Arkansas Pipeline
Company $842,000 per year for 17 years.
For purposes of calculating the ratios, "earnings" represent the sum of (a)
pretax income from continuing operations (excluding extraordinary items from
the early retirement of debt in 1993 and 1994) and (b) fixed charges. "Fixed
charges" represent the sum of (i) interest incurred by SEMCO Energy and its
subsidiaries plus their share of interest on debt to outsiders incurred by
less-than-fifty-percent-owned persons, (ii) amortization of debt expense and
(iii) the preferred stock dividend requirements of SEMCO Energy's
subsidiaries, increased to an amount representing the pretax earnings
required to cover such dividend requirements. "Preferred Dividends"
represents dividends on the Company's Convertible Preferred Stock.
(2) For the year ended December 31, 1996, fixed charges exceeded earnings by
$20.2 million and fixed charges and preferred dividends exceeded earnings by
$20.2 million. Earnings as defined include a $32.3 million non-cash pretax
write-down of the NOARK (1) investment. Excluding the NOARK write-down the
ratios of earnings to fixed charges and earnings to fixed charges and
preferred dividends would have been 1.83 and 1.83, respectively.
6
<PAGE> 33
DESCRIPTION OF DEBT SECURITIES
GENERAL
The Medium Term Notes will be issued under an indenture, as supplemented
from time to time (the "Note Indenture") between the Company and NBD Bank, as
trustee (the "Note Indenture Trustee"), and the Subordinated Debentures will be
issued under an indenture (the "Subordinated Indenture"), between the Company
and NBD Bank, as trustee (the "Subordinated Indenture Trustee"). The term
"Indenture Trustee," as used herein, shall refer to the Note Indenture Trustee
or the Subordinated Indenture Trustee, as appropriate. The form of Note
Indenture and the form of the Subordinated Indenture being sometimes referred to
herein collectively as the "Indentures" and individually as an "Indenture" are
filed, along with the form of Supplemental Indenture in the case of the
Subordinated Indenture, as exhibits to the Registration Statement to which this
Prospectus is a part and, upon execution and delivery, will be available for
inspection at the corporate trust offices of the Note Indenture Trustee and the
Subordinated Indenture Trustee, or as described under "Available Information."
The Indentures are subject to and governed by the TIA. The following statements
relating to the Debt Securities and the Indentures are summaries of the
provisions thereof and do not purport to be complete and are qualified in their
entirety by reference to the Indentures and the Debt Securities. All Section
references herein are to sections of the Indentures, and capitalized terms used
but not defined herein shall have the respective meanings set forth in the
Indentures and the Debt Securities. The Subordinated Debentures are further
described under "Additional Description of Subordinated Debentures to be Issued
to Trust" below.
TERMS
The Debt Securities will be direct, unsecured obligations of the Company.
The indebtedness represented by the Medium Term Notes will rank on a parity with
all other unsecured and unsubordinated indebtedness of the Company. The
indebtedness represented by the Subordinated Debentures will be subordinated in
right of payment to the prior payment in full of all existing and future Senior
Indebtedness of the Company, as described below under "Subordination." Each
Indenture provides that the Debt Securities may be issued without limit as to
aggregate principal amount, in one or more series, in each case as established
from time to time by the Board of Directors of the Company or as established in
one or more indentures supplemental to such Indenture. Debt Securities may be
issued with terms different from those of Debt Securities previously issued. All
Debt Securities of one series need not be issued at the same time and, unless
otherwise provided, a series may be reopened, without the consent of the holders
of the Debt Securities of such series, for issuances of additional Debt
Securities of such series (Section 301 of each Indenture).
Each Indenture provides that there may be more than one Indenture Trustee
thereunder, each with respect to one or more series of Debt Securities. Any
Indenture Trustee under either Indenture may resign or be removed with respect
to one or more series of Debt Securities, and a successor Indenture Trustee may
be appointed to act with respect to such series (Section 608 of each Indenture).
In the event that two or more persons are acting as Indenture Trustee with
respect to different series of Debt Securities, each such Indenture Trustee
shall be an Indenture Trustee of a trust under the applicable Indenture separate
and apart from the trust administered by any other Indenture Trustee (Section
609 of each Indenture), and, except as otherwise indicated herein, any action
described herein to be taken by an Indenture Trustee may be taken by each such
Indenture Trustee with respect to, and only with respect to, the one or more
series of Debt Securities of which it is Indenture Trustee under the applicable
Indenture.
The Prospectus Supplement relating to the series of Debt Securities being
offered will contain the specific terms thereof, including, without limitation:
(1) The title and any series of such Debt Securities and whether such
Debt Securities are Medium Term Notes or Subordinated Debentures;
(2) The aggregate principal amount of such Debt Securities and any
limit on such principal amount;
7
<PAGE> 34
(3) The percentage of the principal amount at which such Debt
Securities will be issued and, if other than the principal amount thereof,
the portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof;
(4) The date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable and
the amount of principal payable thereon;
(5) The rate or rates (which may be fixed or variable) at which such
Debt Securities will bear interest, if any, or the method by which such
rate or rates shall be determined, the date or dates, or the method for
determining such date or dates, from which any such interest will accrue,
the dates on which any such interest will be payable, the record dates for
such interest payment dates, or the method by which such dates shall be
determined, the persons to whom such interest shall be payable, and the
basis upon which interest shall be calculated if other than that of a
360-day year of twelve 30-day months;
(6) The place or places where the principal of (and premium, if any)
and interest, if any, on such Debt Securities will be payable, where such
Debt Securities may be surrendered for registration of transfer or exchange
and where notices or demands to or upon the Company in respect of such Debt
Securities and the applicable Indenture may be served;
(7) If applicable, whether the interest payment periods may be
extended by the Company and, if so, the terms of any such extension;
(8) The period or periods within which, the price or prices at which,
and other terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the option of the Company, if the
Company is to have such an option;
(9) The obligation, if any, of the Company to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof, and the period or periods
within which or the date or dates on which, the price or prices at which,
and other terms and conditions upon which such Debt Securities will be
redeemed, repaid or purchased, as a whole or in part, pursuant to such
obligation;
(10) Whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method and the manner in which such
amounts shall be determined;
(11) Provisions, if any, granting special rights to the holders of
such Debt Securities upon the occurrence of such events as may be
specified;
(12) Any deletions from, modifications of or additions to the Events
of Default or covenants of the Company with respect to such Debt
Securities, whether or not such Events of Default or covenants are
consistent with the Events of Default or covenants set forth in the
applicable Indenture;
(13) Whether such Debt Securities will be issued in certificated or
book-entry form;
(14) Whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(15) The applicability if any, of the defeasance and covenant
defeasance provisions described herein, or any modification thereof;
(16) Whether and under what circumstances the Company will pay any
Additional Amounts as defined and contemplated in the applicable Indenture
on such Debt Securities in respect of any tax, assessment or governmental
charge and, if so, whether the Company will have the option to redeem such
Debt Securities in lieu of making such payment; and
(17) Any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture (Section 301 of each Indenture).
8
<PAGE> 35
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). Special U.S. federal income tax,
accounting and other considerations applicable to Original Issue Discount
Securities will be described in the applicable Prospectus Supplement.
Except as set forth below under "Certain Covenants" and as may be set forth
in any Prospectus Supplement, the Indentures will not contain any provisions
that would limit the ability of the Company to incur indebtedness or that would
afford holders of Debt Securities protection in the event of a highly leveraged
or similar transaction involving the Company or in the event of a change of
control. Reference is made to the applicable Prospectus Supplement for
information with respect to any deletions from, modifications of, or additions
to the events of default or covenants of the Company that are described below,
including any addition of a covenant or other provision providing event risk or
similar protection.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series issued in registered form will be issuable in
denominations of $1,000 and integral multiples thereof. Unless otherwise
specified in the applicable Prospectus Supplement, the Debt Securities of any
series issued in bearer form will be issuable in denominations of $5,000
(Section 302 of each Indenture).
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and premium if any) and interest on any series of Medium Term
Notes will be payable at the corporate trust office of the Note Indenture
Trustee, and the principal of (and premium, if any) and interest on any series
of Subordinated Debentures will be payable at the corporate trust office of the
Subordinated Indenture Trustee; provided that, at the option of the Company,
payment of interest on any series of Debt Securities may be made by check mailed
to the address of the Person entitled thereto as it appears in the applicable
register for such Debt Securities or by wire transfer of funds to such person at
an account maintained within the United States (Sections 301, 307 and 1002 of
each Indenture).
Any interest not punctually paid or duly provided for on any interest
payment date with respect to a Debt Security ("Defaulted Interest") will
forthwith cease to be payable to the holder on the applicable Regular Record
Date and may either be paid to the Person in whose name such Debt Security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
Indenture Trustee, notice whereof shall be given to the holder of such Debt
Security not less than 10 days prior to such Special Record Date, or may be paid
at any time in any other lawful manner, all as more completely described in the
applicable Indenture (Section 307 of each Indenture).
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the applicable Indenture
Trustee referred to above. In addition, subject to certain limitations imposed
upon Debt Securities issued in book-entry form, the Debt Securities of any
series may be surrendered for registration of transfer or exchange thereof at
the corporate trust office of the applicable Indenture Trustee. Every Debt
Security surrendered for registration of transfer or exchange must be duly
endorsed or accompanied by a written instrument of transfer. No service charge
will be made for any registration of transfer or exchange of any Debt
Securities, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith (Section 305 of
each Indenture). If the applicable Prospectus Supplement refers to any transfer
agent (in addition to the applicable Indenture Trustee) initially designated by
the Company with respect to any series of Debt Securities, the Company may at
any time rescind the designation of any such transfer agent or approve a change
in the location through which any such transfer agent acts, except that the
trust will be required to maintain a transfer agent in each place of payment for
such series. The Company may at any time designate additional transfer agents
with respect to any series of Debt Securities (Section 1002 of each Indenture).
Neither the Company nor any Indenture Trustee shall be required to (i)
issue, register the transfer of or exchange Debt Securities of any series during
a period beginning at the opening of business 15 days before any
9
<PAGE> 36
selection of Debt Securities of that series to be redeemed and ending at the
close of business on the day of mailing of the relevant notice of redemption;
(ii) register the transfer of or exchange any Debt Security or portion thereof,
called for redemption, except the unredeemed portion of any Debt Security being
redeemed in part; or (iii) issue, register the transfer of or exchange any Debt
Security that has been surrendered for repayment at the option of the holder,
except the portion, if any, of such Debt Security not to be so repaid (Section
305 of each Indenture).
MERGER, CONSOLIDATION OR SALE
The Note Indenture provides that the Company will be permitted to
consolidate with, or sell, lease or convey all or substantially all of its
assets to, or merge with or into, any other entity provided that (a) either the
Company shall be the continuing entity, or the successor entity (if other than
the Company) formed by or resulting from any such consolidation or merger or
which shall have received the transfer of such assets shall expressly assume
payment of the principal of (and premium, if any) and interest on all of the
Medium Term Notes and the due and punctual performance and observance of all of
the covenants and conditions contained in the Note Indenture; (b) immediately
after giving effect to such transaction and treating any indebtedness that
becomes an obligation of the Company or any Subsidiary as a result thereof as
having been incurred by the Company or such Subsidiary at the time of such
transaction, no Event of Default under the Note Indenture, and no event which,
after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officer's certificate
and legal opinion covering such conditions shall be delivered to the Indenture
Trustee (Sections 801 and 803 of the Note Indenture). The provisions of the
Subordinated Indenture regarding merger, consolidation and sale are discussed in
"Additional Description of Subordinated Debentures to be Issued to Trust --
Consolidation, Merger and Sale" below.
CERTAIN COVENANTS
Limitations on Liens. The Indentures provide that the Company shall not,
and shall not cause or permit any Subsidiary to, issue, assume or guarantee any
Debt secured by a Lien upon any property or assets (other than cash) of the
Company or such Subsidiary, as applicable, without effectively providing that
the outstanding Debt Securities (together with, if the Company so determines,
any other indebtedness or obligation then existing or thereafter created ranking
equally with such Debt Securities) shall be secured equally and ratably with (or
prior to) such Debt so long as such Debt shall be so secured. The foregoing
restriction on Liens will not, however, apply to:
(a) Liens in existence on the date of original issue of such Debt
Securities;
(b) (i) any Lien created or arising over any property which is
acquired, constructed or created by the Company, or any of its
Subsidiaries, but only if (A) such Lien secures only principal amounts (not
exceeding the cost of such acquisition, construction or creation) raised
for the purposes of such acquisition, construction or creation, together
with any costs, expenses, interest and fees incurred in relation thereto or
a guarantee given in respect thereof, (B) such Lien is created or arises on
or before 90 days after the completion of such acquisition, construction or
creation and (C) such Lien is confined solely to the property so acquired,
constructed or created; or (ii) any Lien to secure Debt of the Company or a
Subsidiary incurred in connection with a specifically identifiable project
where the Lien relates to and is confined to a property or properties
(including, without limitation, shares or other rights of ownership in the
entities which own such property or project) involved in such project and
acquired by the Company or a Subsidiary after the date of original issue of
the Debt Securities of any series and the recourse of the creditors in
respect of such Debt is limited to any or all of such project and property
(including as aforesaid);
(c) any Lien securing amounts not more than 90 days overdue or
otherwise being contested in good faith;
(d) (i) rights of financial institutions to offset credit balances in
connection with the operation of cash management programs established for
the benefit of the Company or a Subsidiary or in connection
10
<PAGE> 37
with the issuance of letters of credit for the benefit of the Company or a
Subsidiary; (ii) any Lien securing Debt of the Company or a Subsidiary
incurred in connection with the financing of accounts receivable; (iii) any
Lien incurred or deposits made in the ordinary course of business,
including, but not limited to, (A) any mechanics', materialmens',
carriers', workmens', vendors' or other like Liens and (B) any Liens
securing amounts in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) any Lien upon specific
items of inventory or other goods and proceeds of the Company or a
Subsidiary securing obligations of the Company or a Subsidiary in respect
of bankers' acceptances issued or created for the account of such person to
facilitate the purchase, shipment or storage of such inventory or other
goods; (v) any Lien incurred or deposits made securing the performance of
tenders, bids, leases, trade contracts (other than for borrowed money),
statutory obligations, surety bonds, appeal bonds, government contracts,
performance bonds, return-of-money bonds and other obligations of like
nature incurred in the ordinary course of business; (vi) any Lien
constituted by a right of set off or right over a margin call account or
any form of cash or cash collateral or any similar arrangement for
obligations incurred in respect of the hedging or management of risks under
transactions involving any currency or interest rate swap, cap or collar
arrangements, forward exchange transaction, option, warrant, forward rate
agreement, futures contract or other derivative instrument of any kind;
(vii) any Lien arising out of title retention or like provisions in
connection with the purchase of goods and equipment in the ordinary course
of business; and (viii) any Lien securing reimbursement obligations under
letters of credit, guaranties and other forms of credit enhancement given
in connection with the purchase of goods and equipment in the ordinary
course of business;
(e) Liens in favor of the Company or a Subsidiary;
(f) (i) Liens on any property or assets acquired from a corporation
which is merged with or into the Company or a Subsidiary, or any Liens on
the property or assets of any corporation or other entity existing at the
time such corporation or other entity becomes a Subsidiary of the Company
and, in either such case, is not created in anticipation of any such
transaction (unless such Lien is created to secure or provide for the
payment of any part of the purchase price of such corporation); (ii) any
Lien on any property or assets existing at the time of acquisition thereof
and which is not created in anticipation of such acquisition (unless such
Lien was created to secure or provide for the payment of any part of the
purchase price of such property or assets); and (iii) any Lien created or
outstanding on or over any asset of any Person which becomes a Subsidiary
on or after the date of the issuance of such Debt Securities when such Lien
is created prior to the date on which such Person becomes a Subsidiary;
(g) (i) Liens required by any contract or statute in order to permit
the Company or a Subsidiary to perform any contract or subcontract made by
it with or at the request of a governmental entity or any department,
agency or instrumentality thereof, or to secure partial, progress, advance
or any other payments by the Company or a Subsidiary to such governmental
unit pursuant to the provisions of any contract or statute; (ii) any Lien
securing industrial revenue, development or similar bonds issued by or for
the benefit of the Company or a Subsidiary, provided that such industrial
revenue, development or similar bonds are nonrecourse to the Company or
such Subsidiary; and (iii) any Lien securing taxes or assessments or other
applicable governmental charges or levies;
(h) (i) any Lien which arises pursuant to any order of attachment,
distrait or similar legal process arising in connection with court
proceedings and any Lien which secures the reimbursement obligation for any
bond obtained in connection with an appeal taken in any court proceeding,
so long as the execution or other enforcement of such Lien arising pursuant
to such legal process is effectively stayed and the claims secured thereby
are being contested in good faith and, if appropriate, by appropriate legal
proceedings, or any Lien in favor of a plaintiff or defendant in any action
before a court or tribunal as security for costs and/or other expenses; or
(ii) any Lien arising by operation of law or by order of a court or
tribunal or any Lien arising by an agreement of similar effect, including,
without limitation, judgment liens; or
(i) any extension, renewal or replacement (or successive extensions,
renewals or replacements), as a whole or in part, or any Liens referred to
in the foregoing clauses, for amounts not exceeding the
11
<PAGE> 38
principal amount of the Debt secured by the Lien so extended, renewed or
replaced, provided that such extension, renewal or replacement Lien is
limited to all or a part of the same property or assets that were covered
by the Lien extended, renewed or replaced (plus improvements on such
property or assets) (Section 1011 of each Indenture).
Limitations on Sale and Leaseback Transactions. The Indentures also provide
that the Company will not, and will not permit any Subsidiary to, enter into any
arrangement with any Person (other than the Company or a Subsidiary), providing
for the leasing to the Company or a Subsidiary of any assets which have been or
are to be sold or transferred by the Company or such Subsidiary to such Person
(a "Sale and Lease-Back Transaction") unless: (a) such transaction involves a
lease for a temporary period not to exceed three years; (b) such transaction is
between the Company or a Subsidiary and an affiliate of the Company; (c) the
Company would be entitled to incur debt secured by a Lien on the assets or
property involved in such transaction at least equal in amount to the
Attributable Debt with respect to such Sale and Lease-Back Transaction, without
equally and ratably securing the Debt Securities, pursuant to the limitation on
Liens described above; (d) such transaction is entered into within 90 days after
the initial acquisition by the Company of the assets or property subject to such
transaction; (e) after giving effect thereto, the aggregate amount of all
Attributable Debt with respect to all such Sale and Lease-Back Transactions does
not exceed 10% of Consolidated Net Tangible Assets; or (f) the Company or a
Subsidiary within the twelve months preceding the sale or transfer or the twelve
months following the sale or transfer, regardless of whether such sale or
transfer may have been made by the Company or such Subsidiary, applies in the
case of a sale or transfer for cash, an amount equal to the net proceeds thereof
and, in the case of a sale or transfer otherwise than for cash, an amount equal
to the fair value of the assets so leased at the time of entering into such
arrangement (as determined by the Board of Directors of the Company or such
Subsidiary), (i) to the retirement of debt, incurred or assumed by the Company
or a Subsidiary, which by its terms matures at, or is extendible or renewable at
the option of the obligor to, a date more than twelve months after the date of
incurring, assuming or guaranteeing such debt or (ii) to investment in any
assets of the Company or any Subsidiary (Section 1012 of each Indenture).
Existence. Except as permitted under "Merger, Consolidation or Sale," the
Company will be required to do or cause to be done all things necessary to
preserve and keep in full force and effect its existence, rights and franchises;
provided, however, that the Company shall not be required to preserve an right
or franchise if it determines that the preservation thereof is no longer
desirable in the conduct of its business (Section 1004 of each Indenture).
Maintenance of Properties. The Company will be required to cause all of its
material properties used or useful in the conduct of its business or the
business of any Subsidiary to be maintained and kept in good condition, repair
and working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times (Section 1005 of each Indenture).
Insurance. The Company will be required to, and will be required to cause
each of its Subsidiaries to, keep all of its insurable properties insured
against loss or damage at least equal to their then full insurable value with
insurers of recognized responsibility and, if described in the applicable
Prospectus Supplement, having a specified rating from a recognized insurance
rating service (Section 1006 of each Indenture).
Payment of Taxes and Other Claims. The Company will be required to pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all taxes, assessments and governmental charges levied or
imposed upon it or any Subsidiary or upon the income, profits or property of the
Company or, any Subsidiary, and (ii) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a material lien upon the property
of the Company or any Subsidiary; PROVIDED, HOWEVER, that the Company shall not
be required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith (Section 1007 of each Indenture).
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Provision of Financial Information. Whether or not the Company is subject
to Section 13 or 15(d) of the Exchange Act, the Company will be required, within
15 days of each of the respective dates by which the Company would have been
required to file annual reports, quarterly reports and other documents with the
Commission if the Company were so subject, to (i) transmit by mail to all
holders of Debt Securities, as their names and addresses appear in the
applicable register for such Debt Securities, without cost to such holders,
copies of the annual reports, quarterly reports and other documents that the
Company would have been required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act if the Company were subject to such sections,
(ii) file with the applicable Indenture Trustee copies of the annual reports,
quarterly reports and other documents that the Company would have been required
to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act
if the Company were subject to such Sections, and (iii) promptly upon written
request and payment of the reasonable cost of duplication and delivery, supply
copies of such documents to any prospective holder (Section 1008 of each
Indenture).
Additional Covenants. Any additional covenants of the Company with respect
to any series of Debt Securities will be set forth in the Prospectus Supplement
relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Each Indenture will provide that the following events are "Events of
Default" with respect to any series of Debt Securities issued thereunder: (a)
default for 30 days in the payment of any installment of interest or Additional
Amounts, or Additional Interest, as applicable, payable on any Debt Security of
such series; (b) default in the payment of principal of (or premium, if any, on)
any Debt Security of such series at its maturity; (c) default in making any
sinking fund payment as required for any Debt Security of such series; (d)
default in the performance or breach of any other covenant or warranty of the
Company contained in the Indenture (other than a covenant added to the Indenture
solely for the benefit of a series of Debt Securities issued thereunder other
than such series), continued for 60 days after written notice as provided in the
Indenture; (e) a default under any bond, debenture, note or other evidence of
indebtedness for money borrowed by the Company (including obligations under
leases required to be capitalized on the balance sheet of the lessee under
generally accepted accounting principles but not including any indebtedness or
obligations for which recourse is limited to property purchased) in an aggregate
principal amount in excess of $5,000,000 or under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any indebtedness for money borrowed by the Company (including such
leases, but not including such indebtedness or obligations for which recourse is
limited to property purchased) in an aggregate principal amount in excess of
$5,000,000, whether such indebtedness now exists or shall hereafter be created
which default shall have resulted in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise have
become due and payable or such obligations being accelerated, without such
acceleration having been rescinded or annulled; (f) certain events of
bankruptcy, insolvency or reorganization, or court appointment of a receiver,
liquidator or trustee of the Company or any Significant Subsidiary of the
Company; and (g) any other event of default provided with respect to a
particular series of Debt Securities (Section 501 of each Indenture). The term
"Significant Subsidiary" means each significant subsidiary (as defined in
Regulation S-X promulgated under the Securities Act) of the Company.
If an Event of Default under either Indenture with respect to Debt
Securities of any series at the time outstanding occurs and is continuing, then
in every such case the Indenture Trustee or the holders of not less than 25% in
principal amount of the outstanding Debt Securities of that series will have the
right to declare the principal amount (or, if the Debt Securities of that series
are Original Issue Discount Securities, such portion of the principal amount as
may be specified in the terms thereof) of, and premium, if any, on all of the
Debt Securities of that series to be due and payable immediately by written
notice thereof to the Company (and to the Indenture Trustee if given by the
holders). However, at any time after such a declaration of acceleration with
respect to Debt Securities of such series (or of all Debt Securities then
outstanding under the applicable Indenture, as the case may be) has been made,
but before a judgment or decree for payment of the money due has been obtained
by the Indenture Trustee, the holders of not less than a majority in principal
amount of outstanding Debt Securities of such series (or of all Debt Securities
then outstanding under the
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applicable Indenture, as the case may be) may rescind and annul such declaration
and its consequences if (a) the Company shall have deposited with the applicable
Indenture Trustee all required payments of the principal of (and premium, if
any) and interest, and any Additional Amounts, on the Debt Securities of such
series (or of all Debt Securities then outstanding under the applicable
Indenture, as the case may be), plus certain fees, expenses, disbursements and
advances of such Indenture Trustee and (b) all Events of Default, other than the
non-payment of accelerated principal (or specified portion thereof and the
premium, if any) or interest, with respect to Debt Securities of such series (or
of all Debt Securities then outstanding under the applicable Indenture, as the
case may be) have been cured or waived as provided in the applicable Indenture
(Section 502 of each Indenture). Each Indenture also provides that the holders
of not less than a majority in principal amount of the outstanding Debt
Securities of any series (or of all Debt Securities then outstanding under the
applicable Indenture, as the case may be) may waive any past default with
respect to such series and its consequences, except a default (x) in the payment
of the principal of (or premium, if any) or interest or Additional Amounts, or
Additional Interest, as applicable, payable on any Debt Security of such series
or (y) in respect of a covenant or provision contained in the applicable
Indenture that cannot be modified or amended without the consent of the holder
of each outstanding Debt Security affected thereby (Section 513 of each
Indenture).
Each Indenture Trustee will be required to give notice to the holders of
Debt Securities within 90 days of a default under the applicable Indenture
unless such default shall have been cured or waived; PROVIDED, HOWEVER, that
such Indenture Trustee may withhold notice to the holders of any series of Debt
Securities of any default with respect to such series (except a default in the
payment of the principal of (or premium, if any) or interest or Additional
Amounts, or Additional Interest, as applicable, payable on any Debt Security of
such series or in the payment of any sinking fund installment in respect of any
Security of such series) if specified responsible officers of such Indenture
Trustee consider such withholding to be in the interest of such holders (Section
601 of each Indenture).
Each Indenture will provide that no holders of Debt Securities of any
series may institute any proceedings, judicial or otherwise, with respect to
such Indenture or for any remedy thereunder, except in the cases of failure of
the Indenture Trustee, for 60 days, to act after it has received a written
request to institute proceedings in respect of an event of default from the
holders of not less than 25% in principal amount of the outstanding Debt
Securities of such series, as well as an offer of indemnity reasonably
satisfactory to it (Section 507 of each Indenture). This provision will not
prevent, however, any holder of Debt Securities from instituting suit for the
enforcement of payment of the principal of (and premium, if any), interest on
and Additional Amounts, or Additional Interest, as applicable, payable with
respect to, such Debt Securities at the respective due dates thereof.
Subject to provisions in each Indenture relating to its duties in case of
default, each Indenture Trustee will not be under any obligation to exercise any
of its rights or powers under the applicable Indenture at the request or
direction of any holders of any series of Debt Securities then outstanding under
such Indenture, unless such holders shall have offered to the Indenture Trustee
thereunder reasonable security or indemnity (Section 602 of each Indenture). The
holders of not less than a majority in principal amount of the outstanding Debt
Securities of any series (or of all Debt Securities then outstanding under the
applicable Indenture, as the case may be) shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Indenture Trustee, or of exercising any trust or power conferred upon such
Indenture Trustee. However, an Indenture Trustee may refuse to follow any
direction which is in conflict with any law or the Indenture, which may involve
the Indenture Trustee in personal liability or which may be unduly prejudicial
to the holders of Debt Securities of such series not joining therein (Section
512 of each Indenture).
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to each Indenture Trustee a certificate, signed by one of
several specified officers of the Company, stating whether or not such officer
has knowledge of any default under the applicable Indenture and, if so,
specifying each such default and the nature and status thereof (Section 1009 of
each Indenture).
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Additional provisions of the Subordinated Indenture regarding Events of
Default are discussed in "Additional Description of Subordinated Debentures to
be Issued to Trust -- Subordinated Indenture Additional Events of Default"
below.
MODIFICATION OF THE INDENTURES
Modifications and amendments of either Indenture will be permitted to be
made only with the consent of the holders of not less than a majority in
principal amount of all outstanding Debt Securities issued under each Indenture
which are affected by such modification or amendment; PROVIDED, HOWEVER, that no
such modification or amendment may, without the consent of the holder of each
such Debt Security affected thereby, (a) change the stated maturity of the
principal of (or premium, if any), or any installment of principal of or
interest payable on, any such Debt Security; (b) reduce the principal amount of,
or the rate or amount of interest on, or any premium payable on redemption of,
or Additional Amounts, or Additional Interest, as applicable, payable with
respect to, any such Debt Security, or reduce the amount of principal of an
Original Issue Discount Security that would be due and payable upon declaration
of acceleration of the maturity thereof or would be provable in bankruptcy, or
adversely affect any right of repayment of the holder of any such Debt Security;
(c) change the place of payment, or currency, for payment of principal of (and
premium, if any), or interest on, or any Additional Amounts, or Additional
Interest, as applicable, payable with respect to, any such Debt Security; (d)
impair the right to institute suit for the enforcement of any payment on or with
respect to any such Debt Security; (e) reduce the above-stated percentage of
outstanding Debt Securities of any series necessary to modify or amend the
applicable Indenture, to waive compliance with certain provisions thereof or
certain defaults and consequences thereunder or to reduce the quorum or voting
requirements set forth in the Indenture; or (f) modify any of the foregoing
provisions or any of the provisions relating to the waiver of certain past
defaults or certain covenants, except to increase the required percentage to
effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the holder of such Debt Security
(Section 902 of each Indenture).
The holders of not less than a majority in principal amount of outstanding
Debt Securities issued under either Indenture will have the right to waive
compliance by the Company with certain covenants in such Indenture (Section 1013
of each Indenture).
Modifications and amendments of each Indenture will be permitted to be made
by the Company and the applicable Indenture Trustee thereunder without the
consent of any holder of Debt Securities for any of the following purposes: (i)
to evidence the succession of another person to the Company as obligor under the
applicable Indenture; (ii) to add to the covenants of the Company for the
benefit of the holders of all or any series of Debt Securities or to surrender a
right or power conferred upon the Company in the applicable Indenture; (iii) to
add events of default for the benefit of the holders of all or any series of
Debt Securities; (iv) to add or change any provisions of the applicable
Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt
Securities in bearer form, or to permit or facilitate the issuance of Debt
Securities in uncertificated form, PROVIDED that such action shall not adversely
affect the interests of the holders of the Debt Securities of any series in any
material aspect; (v) to change or eliminate any provisions of the applicable
Indenture, PROVIDED that any such change or elimination shall become effective
only when there are no Debt Securities outstanding of any series created prior
thereto which are entitled to the benefit of such provision; (vi) to secure the
Debt Securities; (vii) to establish the form or terms of Debt Securities of any
series; (viii) to provide for the acceptance of appointment by a successor
Indenture Trustee or facilitate the administration of the trusts imposed under
the applicable Indenture by more than one Indenture Trustee; (ix) to cure any
ambiguity, defect or inconsistency in the applicable Indenture, PROVIDED that
such action shall not adversely affect the interests of holders of Debt
Securities of any series issued under such Indenture in any material respect; or
(x) to supplement any of the provisions of such Indenture to the extent
necessary to permit or facilitate defeasance and discharge of any series of such
Debt Securities, PROVIDED that such action shall not adversely affect the
interests of the holders of the Debt Securities of any series in any material
respect (Section 901 of each Indenture).
Each Indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice,
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consent or waiver thereunder or whether a quorum is present at a meeting of
holders of Debt Securities, (i) the principal amount of an Original Issue
Discount Security that shall be deemed to be outstanding shall be the amount of
the principal thereof that would be due and payable as of the date of such
determination upon declaration of acceleration of the maturity thereof, and (ii)
Debt Securities owned by the Company or any other obligor upon the Debt
Securities or any affiliate of the Company or of such other obligor shall be
disregarded (Section 104 of each Indenture).
Each Indenture will contain provisions for convening meetings of the
holders of Debt Securities of a series (Section 1501 of each Indenture). A
meeting will be permitted to be called at any time by the applicable Indenture
Trustee, and also, upon request, by the Company or the holders of at least 10%
in principal amount of the outstanding Debt Securities of such series, in any
such case upon notice given as provided in the applicable Indenture (Section
1502 of each Indenture). Except for any consent that must be given by the holder
of each Debt Security affected by certain modifications and amendments of the
applicable Indenture, any resolution presented at a meeting or adjourned meeting
duly reconvened at which a quorum is present may be adopted by the affirmative
vote of the holders of a majority in principal amount of the outstanding Debt
Securities of that series; PROVIDED, HOWEVER, that, except as referred to above,
any resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
holders of a specified percentage, which is less than a majority, in principal
amount of the outstanding Debt Securities of a series may be adopted at a
meeting or adjourned meeting or adjourned meeting duly reconvened at which a
quorum is present by the affirmative vote of the holders of such specified
percentage in principal amount of the outstanding Debt Securities of that
series. Any resolution passed or decision taken at any meeting of holders of
Debt Securities of any series duly held in accordance with the applicable
Indenture will be binding on all holders of Debt Securities of that series. The
quorum at any meeting called to adopt a resolution, and at an reconvened
meeting, will be persons holding or representing a majority in principal amount
of the outstanding Debt Securities of a series; PROVIDED, HOWEVER, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the holders of not less than a specified percentage in principal
amount of the outstanding Debt Securities of a series, the persons holding or
representing such specified percentage in principal amount of the outstanding
Debt Securities of such series will constitute a quorum (Section 1504 of each
Indenture).
Notwithstanding the foregoing provisions, each Indenture will provide that
if any action is to be taken at a meeting of holders of Debt Securities of any
series with respect to any request, demand, authorization, direction, notice,
consent, waiver and other action that the Indenture expressly provides may be
made, given or taken by the holders of a specified percentage in principal
amount of all outstanding Debt Securities affected thereby, or of the holders of
such series and one or more additional series: (i) there shall be no minimum
quorum requirement for such meeting, and (ii) the principal amount of the
outstanding Debt Securities of such series that vote in favor of such request,
demand, authorization, direction, notice, consent, waiver or other action shall
be taken into account in determining whether such request, demand,
authorization, direction, notice, consent, waiver or other action has been made,
given or taken under the Indenture (Section 1504 of each Indenture).
SUBORDINATION
Upon any distribution to creditors of the Company in a liquidation,
dissolution or reorganization, the payment of the principal of and interest on
the Subordinated Debentures will be subordinated to the extent provided in the
Subordinated Indenture in right of payment to the prior payment in full of all
Senior Indebtedness defined below (Sections 1601 and 1602 of the Subordinated
Indenture), but the obligation of the Company to make payment of the principal
and interest on the Subordinated Debentures will not otherwise be affected
(Section 1606 of the Subordinated Indenture). No payment of principal or
interest may be made on the Subordinated Debentures at any time if (i) any
Senior Indebtedness is not paid when due and any applicable grace period has
ended or such default has not been waived; (ii) a default on Senior Indebtedness
exists that permits the holders of such Senior Indebtedness to accelerate its
maturity or (iii) notice has been given of the exercise of an option to require
repayment or prepayment of Senior Indebtedness (Section 1603 of the Subordinated
Indenture). After all Senior Indebtedness is paid in full and
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until the Subordinated Debentures are paid in full, holders will be subrogated
to the rights of holders of Senior Indebtedness to the extent that distributions
otherwise payable to holders have been applied to the payment of Senior
Indebtedness (Section 1605 of the Subordinated Indenture). By reason of such
subordination, in the event of a distribution of assets upon insolvency, certain
general creditors of the Company may recover more, ratably, than holders of the
Subordinated Debentures.
Senior Indebtedness is defined in the Subordinated Indenture as, (i) any
payment due in respect of indebtedness of a Person, whether outstanding at the
date of execution of the Subordinated Indenture or thereafter incurred, created
or assumed, (a) in respect of money borrowed (including any financial
derivative, hedging or futures contract or similar instrument) and (b) evidenced
by securities, debentures, bonds, notes or other similar instruments issued by
such Person which, by their terms, are senior or senior subordinated debt
securities including, without limitation, all obligations under its indentures
with various trustees; (ii) all capital lease obligations; (iii) all obligations
issued or assumed as the deferred purchase price of property, all conditional
sale obligations and all obligations of such Person under any title retention
agreement (but excluding trade accounts payable arising in the ordinary course
of business and long-term purchase obligations); (iv) all obligations for the
reimbursement of any letter of credit, banker's acceptance, security purchase
facility or similar credit transaction; (v) all obligations of the type referred
to in clauses (i) through (iv) above of other Persons the payment of which such
Person is responsible or liable as obligor, guarantor or otherwise; and (vi) all
obligations of the type referred to in clauses (i) through (v) above of other
Persons secured by any lien on any property or asset of such Person (whether or
not such obligation is assumed by such Person), except for (1) any such
indebtedness that is by its terms subordinated to or pari passu with the
Subordinated Debentures and (2) any unsecured indebtedness between or among such
Person or its Affiliates. At March 31, 1998, Senior Indebtedness aggregated
approximately $195,359,000. There are no restrictions in the Subordinated
Indenture upon the creation of additional Senior Indebtedness.
Upon payment in full of all amounts due on the Senior Indebtedness then
outstanding, the rights of the holders of the Subordinated Debentures will be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions applicable to such Senior Indebtedness until all
amounts owing on the Subordinated Debentures are paid in full.
In addition, because SEMCO Energy is a holding company the right of SEMCO
Energy, and hence the right of the creditors of SEMCO Energy (including any
holder of Subordinated Debentures), to participate in any distribution of the
assets of any subsidiary upon its liquidation or recognition or otherwise is
necessarily subject to the prior claims of creditors of such subsidiary, except
to the extent that claims of SEMCO Energy as a creditor of such subsidiary may
be recognized. There is no restriction in the Subordinated Indenture against
subsidiaries of SEMCO Energy incurring secured or unsecured indebtedness or
issuing secured or unsecured securities. The ability of SEMCO Energy to make
payments of principal and interest on the Subordinated Debentures will be
dependent upon the payment to it by its subsidiaries of dividends, loans or
advances.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Under each Indenture, the Company may discharge certain obligations to
holders of any series of Debt Securities issued thereunder that have not already
been delivered to the applicable Indenture Trustee for cancellation and that
either have become due and payable or will become due and payable within one
year (or scheduled for redemption within one year) by irrevocably depositing
with the applicable Indenture Trustee, in trust, funds in an amount sufficient
to pay the entire indebtedness on such Debt Securities in respect of principal
(and premium, if any) and interest and any Additional Amounts, or Additional
Interest, as applicable, payable to the date of such deposit (if such Debt
Securities have become due and payable) or to the stated maturity or redemption
date, as the case may be (Section 401 of each Indenture).
Each Indenture will provide that, if the provisions of Article Fourteen
thereof are made applicable to the Debt Securities of or within any series
pursuant to Section 301 of such Indenture, the Company may elect either (a) to
defease and be discharged from any and all obligations with respect to such Debt
Securities (except for the obligations to pay Additional Amounts, or Additional
Interest, as applicable, if any, upon the
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occurrence of certain events of tax, assessment or governmental charge with
respect to payments on such Debt Securities and the obligations to register the
transfer or exchange of such Debt Securities, to replace temporary or mutilated,
destroyed, lost or stolen Debt Securities, to maintain an office or agency in
respect of such Debt Securities and to hold moneys for payment in trust)
("defeasance") (Section 1402 of each Indenture) or (b) to be released from its
obligations with respect to such Debt Securities under Sections 1004 to 1008,
inclusive, and Sections 1011 and 1012 under such Indenture (being the
restrictions described under "Certain Covenants") or, if provided pursuant to
such Indenture, its obligations with respect to any other covenant, and any
omission to comply with such obligations shall not constitute an event of
default with respect to such Debt Securities ("covenant defeasance") (Section
1403 of each Indenture), in either case upon the irrevocable deposit by the
Company with the applicable Indenture Trustee, in trust, of an amount of money,
or Government Obligations (as defined below), or both, applicable to such Debt
Securities which through the scheduled payment of principal and interest in
accordance with their terms will provide money in an amount sufficient to pay
the principal of (and premium, if any) and interest on such Debt Securities, and
any mandatory sinking fund or analogous payments thereon, on the scheduled due
dates therefor (Section 1404 of each Indenture).
Such a trust will only be permitted to be established if, among other
things, the Company has delivered to the applicable Indenture Trustee an opinion
of counsel (as specified in each Indenture) to the effect that the holders of
such Debt Securities will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such defeasance or covenant defeasance and
will be subject to U.S. federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such defeasance or
covenant defeasance had not occurred, and such opinion of counsel, in the case
of defeasance, will be required to refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable United States federal income
tax law occurring after the date of such Indenture (Section 1404 of each
Indenture).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or (ii) obligations of a person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America, the payment of which is unconditionally guarantee as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of any such Government Obligation held by such custodian for the
account of the holder of a depository receipt, PROVIDED that (except as required
by law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount receiving by
the custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt (Section 101 of each Indenture).
In the event the Company effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any Event of Default other than the Event of Default described
in clause (d) under "Events of Default, Notice and Waiver" with respect to
Sections 1004 to 1008, inclusive, and Sections 1011 and 1012 of either Indenture
(which sections would no longer be applicable to such Debt Securities) or
described in clause (g) under "Events of Default, Notice and Waiver" with
respect to any other covenant as to which there has been covenant defeasance,
the amount in which such Debt Securities are payable, and Government Obligations
on deposit with the applicable Indenture Trustee, will be sufficient to pay
amounts due on such Debt Securities at the time of their stated maturity but may
not be sufficient to pay amounts due on such Debt Securities at the time of the
acceleration resulting from such Event of Default. However, the Company would
remain liable to make payment of such amounts due at the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
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GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities (the "Global Securities") that will be
deposited with, or on behalf of, a depositary identified in the applicable
Prospectus Supplement relating to such series. Global Securities may be issued
in either registered or bearer form and in either temporary or permanent form.
The specific terms of the depositary arrangement with respect to a series of
Debt Securities will be described in the applicable Prospectus Supplement
relating to such series.
GOVERNING LAW
The Indentures, each Supplemental Indenture thereto, the Medium Term Notes,
and the Subordinated Debentures will be governed by the laws of the State of New
York.
DESCRIPTION OF TRUST PREFERRED SECURITIES
The Trust will issue only one series of Trust Preferred Securities. The
Trust Agreement will be qualified as an indenture under the Trust Indenture Act
and will contain the terms of Trust Preferred Securities.
The Property Trustee will act as indenture trustee for purposes of the
Trust Indenture Act. The Trust Preferred Securities will have such terms,
including distributions, redemption, voting, liquidation rights and such other
preferred, deferred or other special rights or such restrictions as will be set
forth in the Trust Agreement or made part of the Trust Agreement by the Trust
Indenture Act and which will correspond to the terms of the Subordinated
Debentures held by the Trust and described in the Prospectus Supplement relating
thereto. Reference is made to the Prospectus Supplement relating to the Trust
Preferred Securities for specific terms, including (i) the distinctive
designation of the Trust Preferred Securities; (ii) the number of Trust
Preferred Securities issuable by the Trust; (iii) the annual distribution rate
(or method of determining such rate) for Trust Preferred Securities and the date
or dates upon which such distributions will be payable; (iv) whether
distributions on Trust Preferred Securities will be cumulative, and, in the case
of Trust Preferred Securities having such cumulative distribution rights, the
date or dates or method of determining the date or dates from which
distributions on Trust Preferred Securities will be cumulative; (v) the amount
or amounts which will be paid out of the assets of the Trust to the holders of
Trust Preferred Securities upon voluntary or involuntary dissolution, winding-up
or termination of the Trust; (vi) the obligation, if any, of the Trust to
purchase or redeem Trust Preferred Securities and the price or prices at which,
the period or periods within which, and the terms and conditions upon which
Trust Preferred Securities will be purchased or redeemed, in whole or in part,
pursuant to such obligation; (vii) the voting rights, if any, of holders of
Trust Preferred Securities in addition to those required by law, including the
number of votes per Trust Preferred Security and any requirement for approval by
the holders of such Trust Preferred Securities, as a condition to specified
action or amendments to the Trust Agreement; (viii) the terms and conditions, if
any, upon which the Subordinated Debentures owned by the Trust may be
distributed to holders of Trust Preferred Securities; (ix) if applicable, any
securities exchange upon which the Trust Preferred Securities will be listed;
and (x) any other relevant rights, preferences, privileges, limitations or
restrictions of Trust Preferred Securities not inconsistent with the Trust
Agreement or with applicable law.
SEMCO Energy will guarantee distributions on Trust Preferred Securities to
the extent set forth below under "Description of the Trust Guarantee." Certain
United States federal income tax considerations applicable to Trust Preferred
Securities will be described in a Prospectus Supplement relating to the Trust
Preferred Securities.
The Trust will issue the series of Trust Common Securities in connection
with the issuance of Trust Preferred Securities. Except for voting rights, the
terms of Trust Common Securities will be substantially identical to the terms of
Trust Preferred Securities. Trust Common Securities will rank pari passu with
Trust Preferred Securities except that, upon an event of default under the Trust
Agreement, the rights of holders of Trust Common Securities to payments will be
subordinated to the rights of holders of Trust Preferred
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Securities. The Trust Common Securities will also carry the right to vote to
appoint, remove or replace any Trustee of the Trust. All of the Trust Common
Securities will be owned by SEMCO Energy.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If an Event of Default as defined and provided in the Trust Agreement
occurs and is continuing, then the holders of Trust Preferred Securities would
rely on the enforcement by the Property Trustee of its rights as a holder of the
applicable series of Subordinated Debentures against SEMCO Energy. In addition,
the holders of a majority in aggregate liquidation amount of Trust Preferred
Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Property Trustee or to
direct the exercise of any trust or power conferred upon the Property Trustee
under the Trust Agreement, including the right to direct such Property Trustee
to exercise the remedies available to it as a holder of Subordinated Debentures
provided that such direction shall not be in conflict with any rule of law or
with the Trust Agreement, and could not involve the Property Trustee in personal
liability in circumstances where reasonable indemnity would not be adequate. If
the Property Trustee fails to enforce its rights under the Subordinated
Debentures held by the Trust, a holder of Trust Preferred Securities may, to the
extent permitted by law, institute a legal proceeding directly against SEMCO
Energy to enforce the Property Trustee's rights under the Trust Agreement
without first instituting any legal proceeding against the Property Trustee or
any other entity or person, including the Trust; it being understood and
intended that no one or more of such holders shall have any right in any manner
whatsoever by virtue of, or by availing of, any provision of the Trust Agreement
to affect, disturb or prejudice the rights of any other of such holders or to
obtain or to seek to obtain priority or preference over any other of such
holders or to enforce any right under this Trust Agreement, except in the manner
herein provided and for the equal and ratable benefit of all such holders.
Notwithstanding the foregoing, a holder of Trust Preferred Securities may
institute a proceeding directly against SEMCO Energy without first instituting a
legal proceeding against or requesting that action be taken by the Property
Trustee or any other Person for enforcement of payment to such holder of the
principal of or interest on the Subordinated Debentures having a principal
amount equal to the aggregate stated liquidation amount of the Trust Preferred
Securities of such holder (a "Direct Action") on or after the due dates
specified or provided for in the Subordinated Debentures. In connection with
such Direct Action, SEMCO Energy will be subrogated to the rights of such holder
of Trust Preferred Securities under the Trust Agreement to the extent of any
payment made by SEMCO Energy to such holder of Trust Preferred Securities in
such Direct Action.
DESCRIPTION OF TRUST GUARANTEE
Set forth below is a summary of the Trust Guarantee which will be executed
by SEMCO Energy for the benefit of holders of Trust Preferred Securities. The
Trust Guarantee will be qualified as an indenture under the Trust Indenture Act.
A Prospectus Supplement with respect to the Trust Preferred Securities will
identify the indenture trustee for purposes of the Trust Indenture Act (the
"Trust Guarantee Trustee"). The following summary does not purport to be
complete and is subject in all respects to the provisions of, and is qualified
by its entirety by reference to the form of Trust Guarantee, which is filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
The Trust Guarantee will be held by the Property Trustee for the benefit of
holders of Trust Preferred Securities.
GENERAL
To the extent set forth in the Trust Guarantee, SEMCO Energy will agree to
pay in full the Guarantee Payments (as defined herein), without duplication of
amounts theretofore paid by or on behalf of the Trust, as and when due
regardless of defense, right of set off or counter-claim which SEMCO Energy may
have. The following payments or distributions to the extent not paid or made
(the "Guarantee Payments") will be subject to the Trust Guarantee: (i) any
accrued and unpaid distributions on Trust Preferred Securities, to the extent
the Trust has funds legally and immediately available therefor; (ii) the
redemption price (the "Redemption Price"), to the extent the Trust has funds
legally and immediately available therefor with respect to Trust Preferred
Securities called for redemption; and (iii) upon voluntary or involuntary
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termination, dissolution or winding up of the Trust (other than in connection
with the distribution of Subordinated Debentures to holders of Trust Preferred
Securities or the redemption of all Trust Preferred Securities), the lesser of
(a) the aggregate of the liquidation amount and all accrued and unpaid
distributions on Trust Preferred Securities to the date of payment, to the
extent the Trust has funds legally and immediately available therefor and (b)
the amount of assets of the Trust remaining available for distribution to
holders of Trust Preferred Securities in liquidation of the Trust. The
redemption price and liquidation amount will be fixed at the time the Trust
Preferred Securities are issued. SEMCO Energy's obligation to make a Guarantee
Payment may be satisfied by direct payment of the required amounts by SEMCO
Energy to the holders of Trust Preferred Securities or by causing the Trust to
pay such amounts to such holders.
The Trust Guarantee will not apply to any payment or distribution except to
the extent the Trust has funds legally available therefor. If SEMCO Energy does
not make interest payments on Subordinated Debentures, the Trust will not pay
distributions on Trust Preferred Securities and will not have funds legally
available therefor. The Trust Guarantee, when taken together with SEMCO Energy's
obligations under the Subordinated Debentures, the Subordinated Indenture and
the Trust Agreement, including its obligation to pay costs, expenses, debt, and
liabilities of the Trust (other than with respect to the Trust Securities), will
be a full and unconditional guarantee, on a subordinated basis, by SEMCO Energy
of payments due on the Trust Preferred Securities from the time of issuance, but
will not apply to the payment of distributions and other payments on the Trust
Preferred Securities when the Property Trustee does not have sufficient funds in
the Property Account of the Trust to make such distributions or other payments.
If SEMCO Energy does not make interest payments on the Subordinated Debentures
held by the Property Trustee, the Trust will not make distributions on the Trust
Preferred Securities and will not have funds available therefor. See "Additional
Description of the Subordinated Debentures to be Issued to Trust -- Certain
Covenants."
AMENDMENT OF TRUST GUARANTEE; ASSIGNMENT
Except for changes which do not materially adversely affect the rights of
holders of Trust Preferred Securities, the Trust Guarantee may be amended only
with the approval of not less than 66 2/3% in liquidation amount of Trust
Preferred Securities. The manner of obtaining any such approval will be as set
forth in Article Six of the Trust Agreement. The Trust Guarantee will bind the
successors, assigns receivers, trustees and representatives of SEMCO Energy and
continue to benefit the Trust Guarantee Trustee and holders of Trust Preferred
Securities. Except in connection with a consolidation, merger, conveyance,
transfer or lease involving SEMCO Energy, permitted under Article Eight of the
Subordinated Indenture, SEMCO Energy may not assign its rights or delegate its
obligations under the Trust Guarantee.
TERMINATION OF THE TRUST GUARANTEE
The Trust Guarantee will terminate (a) upon full payment of the Redemption
Price of all Trust Preferred Securities, (b) upon distribution of Subordinated
Debentures held by the Trust to the holders of and in exchange for Trust
Preferred Securities or (c) upon full payment of amounts payable in accordance
with the Trust Agreement upon liquidation of the Trust. See "Status of the Trust
Guarantee" and "Additional Description of Subordinated Debentures to be Issued
to Trust -- Subordinated Indenture Additional Events of Default" for a
description of the events of default and enforcement rights of the holders of
Subordinated Debentures. The Trust Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of Trust
Preferred Securities must repay any sums paid to them under the Trust Preferred
Securities or Trust Guarantee.
EVENTS OF DEFAULT
An event of default under the Trust Guarantee will occur if SEMCO Energy
fails to make the payments required by the Trust Guarantee.
The holders of a majority in liquidation amount of Trust Preferred
Securities have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trust Guarantee Trustee or to direct
the exercise of any trust or power conferred upon the Trust Guarantee Trustee
under the Trust
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Guarantee. If the Trust Guarantee Trustee fails to enforce the Trust Guarantee,
any holder of record of Trust Preferred Securities may institute a legal
proceeding directly against SEMCO Energy to enforce the Trust Guarantee
Trustee's rights, without first instituting any other legal proceeding.
STATUS OF TRUST GUARANTEE
The Trust Guarantee will constitute an unsecured obligation of SEMCO Energy
and will rank (i) subordinate and junior in right of payment to all other
liabilities of SEMCO Energy, including the Subordinated Debentures, except those
made pari passu or subordinate by their terms, (ii) pari passu with the most
senior preferred or preference stock which may now or hereafter be issued or
guaranteed by SEMCO Energy; and (iii) senior to SEMCO Energy's Common Stock. The
terms of the Trust Preferred Securities provide that each holder of Trust
Preferred Securities, by acceptance thereof, agrees to the subordination
provisions and other terms of the Trust Guarantee relating thereto. The Trust
Guarantee will constitute a guarantee of payment and not of collection (i.e.,
the guaranteed party may institute a legal proceeding directly against the
guarantor to enforce its rights under such Trust Guarantee without instituting a
legal proceeding against any other person or entity). The Trust Guarantee will
be deposited with the Guarantee Trustee to be held for the benefit of the
holders of the Trust Preferred Securities. Except as otherwise noted herein, the
Guarantee Trustee has the right to enforce the Trust Guarantee on behalf of the
holders of the related Trust Preferred Securities. Except as described under
"Termination of the Trust Guarantee" above, the Trust Guarantee will not be
discharged except by payment of the Guarantee Payments in full (without
duplication of amounts theretofore paid by the Trust).
INFORMATION CONCERNING TRUST GUARANTEE TRUSTEE
The Trust Guarantee Trustee, prior to the occurrence of a default with
respect to the Trust Guarantee and after the curing of all such defaults that
may have occurred, undertakes to perform only such duties as are specifically
set forth in the Trust Guarantee and, during the continuance of any default,
will exercise the same degree of care as a prudent individual would exercise in
the conduct of such individual's own affairs. Subject to such provisions, the
Trust Guarantee Trustee is under no obligation to exercise any of the powers
vested in it by the Trust Guarantee at the request of any holder of Trust
Preferred Securities, unless offered reasonable indemnity against the costs,
expenses and liabilities which might be incurred thereby; but the foregoing
shall not relieve the Trust Guarantee Trustee, upon the occurrence of an Event
of Default under such Trust Guarantee, from exercising the rights and powers
vested in it by such Trust Guarantee. The Trust Guarantee Trustee also serves as
Property Trustee. SEMCO Energy and its officers and directors have no material
relationship with the initial Trust Guarantee Trustee other than normal banking
relationships.
GOVERNING LAW
The Trust Guarantee will be governed by the laws of the State of New York.
THE AGREEMENT AS TO EXPENSES AND LIABILITIES
Pursuant to an Agreement as to Expenses and Liabilities to be entered into
by the Company under the Trust Agreement, the Company will irrevocably and
unconditionally guarantee to each person or entity to whom the Trust becomes
indebted or liable the full payment of any indebtedness, expenses or liabilities
of the Trust other than obligations of the Trust to pay to the holders of the
related Trust Securities or other similar interests in the Trust the amounts due
such holders pursuant to the terms of such Trust Securities or such other
similar interests, as the case may be.
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ADDITIONAL DESCRIPTION OF SUBORDINATED DEBENTURES
TO BE ISSUED TO TRUST
Set forth below is a description of the terms of the Subordinated
Debentures which the Trust will hold as trust assets. The general provisions of
the Subordinated Debentures are set forth under "Description of Debt Securities"
above. The following description does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the Subordinated Indenture
(as defined in "Description of Debt Securities" above), as supplemented by the
Supplemental Indenture creating the Subordinated Debentures. The Subordinated
Indenture and the form of Supplemental Indenture are filed as exhibits to the
Registration Statement of which this Prospectus forms a part. The terms of the
Subordinated Debentures will include those stated in the Subordinated Indenture
and the related Supplemental Indenture and those made a part of the Subordinated
Indenture by reference to the Trust Indenture Act.
Upon a dissolution of the Trust, Subordinated Debentures held by the Trust
may be distributed to the holders of Trust Securities in liquidation of the
Trust. See "Description of Trust Preferred Securities -- Dissolution;
Distribution of Subordinated Debentures" in the applicable Prospectus
Supplement.
If any Subordinated Debentures are distributed to holders of Trust
Preferred Securities, SEMCO Energy will use its best efforts to have such
Subordinated Debentures traded on the same stock exchange as the related Trust
Preferred Securities are traded.
GENERAL
Subordinated Debentures will be issued in a principal amount equal to the
aggregate stated Liquidation Amount of Trust Preferred Securities plus SEMCO
Energy's investment in Trust Common Securities.
The entire principal amount of the Subordinated Debentures held by the
Trust will mature and become due and payable, together with any accrued and
unpaid interest thereon, including Additional Interest (as defined herein), if
any, on the date set forth in the applicable Prospectus Supplement.
The covenants contained in the Subordinated Debenture Indenture would not
necessarily afford protection to holders of the Subordinated Debentures in the
event of a decline in credit quality resulting from takeovers, recapitalizations
or similar restructurings of SEMCO Energy.
If Subordinated Debentures held by the Trust are distributed to holders of
the Trust Preferred Securities in liquidation of such holders' interests in the
Trust, such Subordinated Debentures will initially be issued as a Global
Security. To the extent described under "Description of the Subordinated
Debentures -- Book Entry and Issuance" in the applicable Prospectus Supplement,
under certain limited circumstances, Subordinated Debentures may be issued in
certificated form in exchange for a Global Security. In the event Subordinated
Debentures are issued in certificated form, such Subordinated Debentures will be
in denominations as specified in the applicable Prospectus Supplement and
integral multiples thereof and may be transferred or exchanged at the offices
described therein. Payments on Subordinated Debentures issued as a Global
Security will be made to the Depositary for the Subordinated Debentures. In the
event Subordinated Debentures are issued in certificated form, principal and
interest will be payable, the transfer of the Subordinated Debentures will be
registrable and Subordinated Debentures will be exchangeable for Subordinated
Debentures of other denominations of a like aggregate principal amount at the
corporate trust office of the Debt Trustee in New York, New York; provided, that
payment of interest may be made at the option of SEMCO Energy by check mailed to
the address of the persons entitled thereto.
The Indenture does not contain provisions that afford holders of the
Subordinated Debentures protection in the event of a highly leveraged
transaction involving SEMCO Energy.
CERTAIN COVENANTS
If (i) there has occurred any event that would constitute an Indenture
Event of Default or (ii) SEMCO Energy is in default with respect to its payment
of any obligations under the Trust Guarantee, then (a) SEMCO Energy may not
declare or pay any dividend on, make any distributions with respect to, or
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redeem, purchase or make a liquidation payment with respect to, any of its
capital stock (other than (i) purchases or acquisitions of shares of SEMCO
Energy common stock in connection with the satisfaction by SEMCO Energy of its
obligations under any employee benefit plans or any other contractual obligation
of SEMCO Energy (other than a contractual obligation ranking pari passu with or
junior to the Subordinated Debentures), (ii) as a result of a reclassification
of SEMCO Energy capital stock or the exchange or conversion of one class or
series of SEMCO Energy capital stock for another class or series of SEMCO Energy
capital stock, or (iii) the purchase of fractional interests in shares of SEMCO
Energy capital stock pursuant to the conversion or exchange provisions of such
SEMCO Energy capital stock or the security being converted or exchanged), (b)
SEMCO Energy may not make any payment of interest, principal or premium, if any,
on or repay, repurchase or redeem any debt securities (including guarantees)
issued by SEMCO Energy which rank pari passu with or junior to the Subordinated
Debentures, and (c) SEMCO Energy may not make any guarantee payments with
respect to the foregoing (other than pursuant to the Trust Guarantee).
SEMCO Energy will covenant, as long as Trust Preferred Securities remain
outstanding, (i) to maintain 100% ownership of Trust Common Securities, (ii) to
not cause the Trust to terminate, except in connection with a distribution of
Subordinated Debentures and (iii) to use its reasonable efforts to cause the
Trust (a) to remain a statutory business trust, except in connection with the
distribution of Subordinated Debentures to the holders of Trust Securities in
liquidation of the Trust, the redemption of all Trust Securities, or certain
mergers, consolidations or amalgamations, each as permitted by the Trust
Agreement, and (b) to otherwise continue to be classified as a grantor trust for
United States federal income tax purposes.
OPTIONAL REDEMPTION
SEMCO Energy will have the right to redeem the Subordinated Debentures, in
whole or in part, from time to time, without premium or penalty, on or after the
date set forth in the applicable Prospectus Supplement, upon not less than
thirty (30) or more than sixty (60) days' notice, at a redemption price equal to
a percentage of the principal amount to be redeemed plus any accrued and unpaid
interest, including Additional Interest (as defined herein), if any, to the
Redemption Date, as specified in the applicable Prospectus Supplement. If a
partial redemption of the Trust Preferred Securities resulting from a partial
redemption of the Subordinated Debentures held by the Trust would result in the
delisting of the Trust Preferred Securities, SEMCO Energy may only redeem such
Subordinated Debentures in whole. In addition, upon the occurrence of a Special
Event, SEMCO Energy may, upon not less than thirty (30) or more than (60) days
notice, within ninety (90) days following the occurrence thereof and subject to
the terms and conditions of the Subordinated Indenture, redeem the Subordinated
Debentures, in whole, at a price equal to 100% of the principal amount to be
redeemed plus any accrued but unpaid interest (including Additional Interest, if
any) to the Redemption Date. In the event of redemption of the Subordinated
Debentures in part only, new Subordinated Debentures for the unredeemed portion
shall be issued in the name or names of the holders thereof upon the surrender
thereof.
INTEREST
Each Subordinated Debenture will bear interest at the rate set forth in the
applicable Prospectus Supplement from the original date of issuance, payable
quarterly in arrears on dates which will be specified in the Prospectus
Supplement (each, an "Interest Payment Date"), to the person in whose name such
Subordinated Debenture is registered, subject to certain exceptions, on the
record date specified in the applicable Prospectus Supplement.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Subordinated Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day which is a Business Day (and without any interest or other payment in
respect of any such delay), except that, if such Business Day is in the next
succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date.
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OPTION TO EXTEND INTEREST PAYMENT PERIOD
Except to the extent set forth in the applicable Prospectus Supplement,
SEMCO Energy will have the right at any time to defer payments of interest on
Subordinated Debentures by extending the interest payment period for up to 20
consecutive quarters. At the end of such an Extension Period, SEMCO Energy will
pay all interest then accrued and unpaid (including any Additional Interest,
together with interest thereon at the rate specified and to the extent permitted
by applicable law). SEMCO Energy covenants in the Supplemental Indenture for the
benefit of the holders of a series of Subordinated Debentures, that, subject to
the next succeeding sentence, (a) SEMCO Energy shall not declare or pay any
dividend on, or make any distributions with respect to, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of its capital stock,
and (b) SEMCO Energy shall not make any payment of interest, principal or
premium, if any, on or repay, repurchase or redeem any debt securities
(including guarantees other than the Trust Guarantee) issued by SEMCO Energy
which rank pari passu with or junior to said series of Subordinated Debentures
(i) if at such time SEMCO Energy shall have given notice of its election to
extend an interest payment period for a series of Subordinated Debentures and
such extension shall be continuing or (ii) if at such time an Event of Default
with respect to a series of Subordinated Debentures shall have occurred and be
continuing. The preceding sentence, however, shall not restrict (A) any of the
actions described in the preceding sentence resulting from any reclassification
of SEMCO Energy's capital stock or the exchange or conversion of one class or
series of SEMCO Energy's capital stock for another class or series of SEMCO
Energy's capital stock, (B) repurchases, redemptions or other acquisitions of
shares of SEMCO Energy's capital stock in connection with any employment
contract, benefit plan or other similar arrangement with or for the benefit of
employees, officers or directors or a stock purchase and dividend reinvestment
plan, and (C) dividends or distributions in capital stock of SEMCO Energy, or
(D) the purchase of fractional interests in shares of SEMCO Energy's capital
stock pursuant to the conversion or exchange provisions of such capital stock or
the security being converted or exchanged.
Prior to the termination of any such Extension Period for a series of
Subordinated Debentures, SEMCO Energy may further defer payments of interest on
such Subordinated Debentures, by extending the interest payment period, provided
that such Extension Period together with all such previous and further
extensions thereof for such series of Subordinated Debentures may not exceed 20
consecutive quarters or extend beyond the maturity of such series of
Subordinated Debentures.
Upon the termination of any Extension Period for a series of Subordinated
Debentures, and the payment of all accrued and unpaid interest on the
Subordinated Debentures then due, SEMCO Energy may select a new Extension Period
for such series of Subordinated Debentures, as if no Extension Period had
previously been declared, subject to the above requirements. No interest on a
series of Subordinated Debentures during an Extension Period, except at the end
thereof, will be due and payable on such series of Subordinated Debentures.
If the Property Trustee is the sole holder of the Subordinated Debentures,
SEMCO Energy will give the Regular Trustees and the Property Trustee notice of
its selection of such Extension Period for such series of Subordinated
Debentures one Business Day prior to the earlier of (i) the next succeeding date
on which distributions on the related Trust Preferred Securities are payable or
(ii) the date the Trust is required to give notice to the NASDAQ or other
applicable self-regulatory organization or to holders of such Trust Preferred
Securities on the record date or the date such distribution is payable, but in
any event not less than one Business Day prior to such record date. The Regular
Trustees shall give notice of SEMCO Energy's selection of such Extension Period
to the holders of such Trust Preferred Securities. If the Property Trustee is
not the sole holder of a series of Subordinated Debentures, SEMCO Energy will
give the holders of such Subordinated Debentures notice of its selection of such
Extension Period ten Business Days prior to the earlier of (i) the Interest
Payment Date or (ii) the date SEMCO Energy is required to give notice to the
NASDAQ or other applicable self-regulatory organization or to holders of such
Subordinated Debentures, but in any event at least two Business Days before such
record date.
SEMCO Energy has no present intention to defer interest payments.
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ADDITIONAL INTEREST
If the Trust is required to pay any taxes, duties, assessments or other
governmental charges (other than withholding taxes) imposed by the United
States, or any other taxing authority, SEMCO Energy will pay as additional
interest ("Additional Interest") such additional amounts as shall be required so
that the net amounts received and retained by the Trust after paying any such
charges will be equal to the amount the Trust would have received had no such
charge been imposed.
SUBORDINATED INDENTURE ADDITIONAL EVENTS OF DEFAULT
In addition to the Events of Default described under "Description of Debt
Securities -- Events of Default," the following will be an additional Event of
Default:
(a) the voluntary or involuntary dissolution, winding up or
termination of the Trust except in connection with
(i) the distribution of Subordinated Debentures to holders of
Trust Securities in liquidation of the Trust,
(ii) the redemption of all outstanding Trust Securities, or
(iii) certain mergers or consolidations permitted by the Trust
Agreement.
The holders of not less than a majority in aggregate principal amount of
Subordinated Debentures may waive any past default, except (i) a default in
payment of principal, premium, interest or Additional Interest (unless such
default has been cured and a sum sufficient to pay all installments due
otherwise than by acceleration has been deposited with the Subordinated
Debenture Trustee) or (ii) a default in a covenant or provision which under
Article Nine of the Subordinated Indenture may not be modified or amended
without the consent or each holder of a Subordinate Debenture. The holders of
Trust Preferred Securities in certain circumstances have the right to direct the
Property Trustee to exercise its rights as holder of Subordinated Debentures.
PAYMENT AND PAYING AGENTS
Payment of principal and premium (if any) on Subordinated Debentures will
be made only if the holder of Subordinated Debentures surrenders them to the
Paying Agent of the Subordinated Debentures.
Principal of and any premium and interest, if any, on Subordinated
Debentures will be payable, subject to any applicable laws and regulations, at
the office of such Paying Agent or Paying Agents as SEMCO Energy may designate
from time to time pursuant to the Subordinated Debenture Indenture. Payment of
interest on the Subordinated Debentures on any Interest Payment Date will be
made to the person in whose name the Subordinated Debenture (or predecessor
security) is registered at the close of business on the Regular Record Date for
such interest payment.
The Subordinated Indenture Trustee will act as Paying Agent with respect to
the Subordinated Debentures. SEMCO Energy may at any time designate additional
Paying Agents or rescind the designation of any Paying Agent or approve a change
in the office through which any Paying Agent acts, except that SEMCO Energy will
be required to maintain a Paying Agent at the place of payment.
CONSOLIDATION, MERGER AND SALE
The Subordinated Indenture provides that the Company will be permitted to
consolidate with, or sell, lease or convey all or substantially all of its
assets to, or merge with or into, any other entity provided that (a) either the
Company shall be the continuing entity, or the successor entity (if other than
the Company) formed by or resulting from any such consolidation or merger or
which shall have received the transfer of such assets shall expressly assume the
Company's obligations under the Trust Guarantee and the payment of the principal
of (and premium, if any) and interest on all of the Subordinated Debentures and
the due and punctual performance and observance of all of the covenants and
conditions contained in the Subordinated
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Indenture; (b) immediately after giving effect to such transaction and treating
any indebtedness that becomes an obligation of the Company or any Subsidiary as
a result thereof as having been incurred by the Company or such Subsidiary at
the time of such transaction, no Event of Default under the Subordinated
Indenture or the Trust Guarantee, and no event which, after notice or the lapse
of time, or both, would become such an Event of Default, shall have occurred and
be continuing; and (c) an officer's certificate and legal opinion covering such
conditions shall be delivered to the Indenture Trustee (Sections 801 and 803 of
the Subordinated Indenture).
INFORMATION CONCERNING SUBORDINATED DEBENTURE TRUSTEE
The Subordinated Indenture Trustee, prior to default and after the curing
of all defaults, if any, undertakes to perform only such duties as are
specifically set forth in the Subordinated Indenture and, after a default (that
has not been cured or waived), will exercise the same degree of care as a
prudent individual would exercise in the conduct of his or her own affairs.
Subject to such provision, the Subordinated Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Subordinated
Indenture at the request of any holder of Subordinated Indentures, unless
offered reasonable indemnity by such holder against the costs, expenses and
liabilities which might be incurred thereby; but the foregoing will not relieve
the Subordinated Indenture Trustee, upon the occurrence of an Indenture Event of
Default, from exercising the rights and powers vested in it by the Subordinated
Indenture. The Subordinated Indenture Trustee is not required to expend or risk
its own funds or otherwise incur personal financial liability in the performance
of its duties if the Subordinated Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
MISCELLANEOUS
SEMCO Energy will have the right at all times to assign any of its rights
or obligations under the Subordinated Indenture to a direct or indirect
wholly-owned subsidiary of SEMCO Energy; provided that, in the event of any such
assignment, SEMCO Energy will remain liable for all of such obligations. Subject
to the foregoing, the Subordinated Indenture will be binding upon and inure to
the benefit of the parties thereto and their respective successors and assigns.
The Subordinated Indenture provides that it may not otherwise be assigned by the
parties thereto.
EFFECT OF OBLIGATIONS UNDER SUBORDINATED DEBENTURES
AND TRUST PREFERRED SECURITIES GUARANTEE
As long as payments are made when due on Subordinated Debentures, the Trust
will have sufficient funds to be able to make all appropriate payments on Trust
Securities. This is primarily because (i) the aggregate principal amount of the
Subordinated Debentures will be equal to the sum of the aggregate stated
liquidation amount of such Trust Securities; (ii) the interest rate and interest
and other payment dates on the Subordinated Debentures will match the
distribution rate and distribution and other payment dates for the Trust
Securities; (iii) SEMCO Energy will pay for all costs and expenses of each
Trust; and (iv) the Trust Agreement provides that the Trustees may not cause or
permit the Trust to, among other things, engage in any activity that is not
consistent with the purposes of the Trust.
Payments of distributions and other payments due on the Trust Preferred
Securities (to the extent funds are available therefor) are guaranteed by SEMCO
Energy to the extent set forth under "Description of the Trust Guarantee." If
SEMCO Energy does not make interest payments on Subordinated Debentures, it is
expected that the Trust will not have sufficient funds to pay distributions on
its Trust Preferred Securities. The Trust Guarantee is a full and unconditional
guarantee, but does not apply to any payment unless the Trust has sufficient
funds for such payment.
If SEMCO Energy fails to make payments on Subordinated Debentures when due
(taking into account any Extension Period), the Trust Agreement will provide a
mechanism whereby holders of Trust Preferred Securities may direct the Property
Trustee to enforce its rights, including proceeding directly against SEMCO
Energy. If the Property Trustee fails to enforce its rights, a holder of Trust
Preferred Securities may sue
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<PAGE> 54
SEMCO Energy directly to enforce those rights, without first instituting legal
proceedings against the Trust, the Property Trustee or any other person or
entity.
If SEMCO Energy fails to make payments under the Trust Guarantee, the Trust
Guarantee provides a mechanism whereby the holders of Trust Preferred Securities
may direct the Trust Guarantee Trustee to enforce its rights. If the Trust
Guarantee Trustee fails to enforce its rights, any holder of Trust Preferred
Securities may institute a legal proceeding against SEMCO Energy directly to
enforce those rights without first instituting legal proceedings against the
Trust, the Trust Guarantee Trustee or any other person or entity.
Pursuant to an Agreement as to Expenses and Liabilities to be entered into
by the Company under the Trust Agreement, the Company will irrevocably and
unconditionally guarantee to each person or entity to whom the Trust becomes
indebted or liable the full payment of any indebtedness, expenses or liabilities
of the Trust other than obligations of the Trust to pay to the holders of the
related Trust Securities or other similar interests in the Trust the amounts due
such holders pursuant to the terms of such Trust Securities or such other
similar interests, as the case may be.
The above mechanisms and obligations, taken together, are equivalent to a
full and unconditional guarantee by SEMCO Energy of payments due on Trust
Preferred Securities to the extent of funds available to the Trust.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 20,000,000 shares of
Common Stock, 500,000 shares of Cumulative Preferred Stock, par value $1.00
("Preferred Stock"), and 3,000,000 shares of Preference Stock, par value $1.00
("Preference Stock"). At March 31, 1998, there were outstanding 13,644,875
shares of Common Stock and 6,751 shares of Series A Convertible Cumulative
Preferred Stock, a series of the Preferred Stock (the "Series A Preferred
Stock"). Each share of the Series A Preferred Stock outstanding is currently
convertible into 4.11 shares of Common Stock or an aggregate of approximately
27,747 shares of Common Stock. 2,000,000 shares of the Preference Stock are
reserved for issuance pursuant to a Shareholder Rights Plan described below; no
Preference Stock is outstanding.
A copy of the Company's Articles of Incorporation is filed as an Exhibit to
the Registration Statement. The following summary does not purport to be
complete and is subject in all respects to the provisions of such Articles of
Incorporation and does not relate to or give effect to the provisions of the
statutory or common law of the State of Michigan. The summary given below is
qualified in its entirety by reference to such Articles of Incorporation and the
laws of the State of Michigan.
COMMON STOCK
Dividend Rights. The holders of Common Stock are entitled to dividends
when, as and if, declared by the Company's Board of Directors out of the surplus
of the Company after full cumulative dividends on the Preferred Stock and
Preference Stock shall have been paid or set apart for payment and any sinking
fund obligations with respect to the Preferred Stock and Preference Stock have
been satisfied.
The Company has long-term debt agreements which contain restrictive
financial covenants including, among others, limits on the payment of dividends
beyond certain levels. The Company is currently in compliance with all of the
covenants in these agreements. With respect to the payment of dividends or any
other distributions in respect of its capital stock, such agreements provide
that the Company may not declare and pay any dividends (except dividends or
other distributions payable in shares of its capital stock), redeem or retire
its capital stock (or any warrants, rights, or options to purchase or acquire
its capital stock), or make other distributions with respect to its capital
stock (such declarations or payments of dividends, purchases, redemptions or
retirements of capital stock and warrants, rights or options and all such other
payments or distributions being collectively referred to as "Restricted
Payments") if, after giving effect thereto, (i) any event of default under such
agreements exist; (ii) the aggregate amount of Restrictive Payments since
January 1, 1994 would exceed the Company's consolidated net income for the same
period plus an adjustment factor of $14,171,000; or (iii) would cause the
consolidated net worth of the Company to be less than $80,000,000.
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<PAGE> 55
After December 31, 1999, the adjustment factor of $14,171,000 is reduced each
quarter by $625,000 until the adjustment factor equals $11,000,000. Under the
most restrictive terms, as of March 31, 1998, $12,381,000 is available for
dividends.
Voting Rights. The holders of Common Stock are entitled to one vote for
each share on all matters voted upon by the Company's shareholders and, subject
to any voting rights of the holders of the Cumulative Preferred Stock and
Preference Stock described below, the holders of such shares currently possess
all voting power. The Company's Articles of Incorporation provide for cumulative
voting for the election of directors of the Company.
Preemptive Rights. No holder of Common Stock has any preemptive right to
subscribe to any additional securities which may be issued by the Company.
Liquidation Rights. Subject to the preferential rights of holders of the
Preferred Stock and Preference Stock, the holders of the Common Stock are
entitled to share on a pro rata basis in the net assets of the Company which
remain after satisfaction of all liabilities.
PREFERRED STOCK
The Board of Directors of the Company is authorized, without further action
by shareholders, to issue Preferred Stock, in one or more series, from time to
time, with such rights and preferences as may be provided in a resolution
adopted by the Board of Directors. The authority of the Board includes, but is
not limited to, the determination or fixing of the following with respect to
shares of such class or any series thereof: (i) the rate of dividends and the
extent of further participation in dividend distribution, if any; (ii) the price
at and the terms and conditions on which the shares are redeemable; (iii) the
amount payable upon shares in event of voluntary or involuntary liquidation;
(iv) sinking fund provisions for the redemption or purchase of shares; and (v)
the terms and conditions on which shares are convertible.
In the event of the liquidation or dissolution of the Company, the holders
of Preferred Stock are entitled to receive a fixed amount for each series before
any distribution is made to the holders of Common Stock. As long as any
Preferred Stock remains outstanding, the Company may not purchase any shares of
its Common Stock or redeem any Preference Stock.
As long as any Preferred Stock remains outstanding, the Company may not
without the consent of the holders of at least two-thirds of the outstanding
Preferred Stock authorize any class of stock having a priority or preference
over or ranking on a parity with the Preferred Stock as to dividends or
distribution of assets.
If at any time the Company shall fail to declare and pay or set apart for
payment in full eight quarterly dividends (whether or not consecutive) on all of
the outstanding Preferred Stock, then the holders of the outstanding Preferred
Stock shall, thereupon, have the right, voting as a single class irrespective of
series, to elect such number of directors of the Company as shall constitute one
less than the smallest number of directors necessary to constitute a majority of
the full Board of Directors, and such right shall continue (and may be exercised
at any annual or other meeting of shareholders for the election of directors)
until the Company shall have paid or declared and set apart for payment all
accrued dividends on the Preferred Stock for all past quarterly dividend
periods.
SERIES A PREFERRED STOCK
The Series A Preferred Stock carries a dividend of $2.3125 per share per
annum which accrued from the date of original issue. Upon redemption, the
holders of such shares are entitled to receive $25 per share plus all dividends
accrued or in arrears thereon. The preferential amount payable upon the shares
of this series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company or reduction of capital resulting in
the distribution of assets to the shareholders, is $25 per share together with
an amount equal to dividends accrued or in arrears thereon. The holders of
shares of this series shall have the right, at their option, to convert such
shares into shares of Common Stock of the Company at any time at a current
conversion price of 4.11 shares of Common Stock for each share of Series A
Preferred Stock. The conversion
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<PAGE> 56
price is subject to adjustment as a result of certain events. The holders of
Series A Preferred Stock have the voting rights described above under Preferred
Stock.
PREFERENCE STOCK
The Board of Directors has the authority to divide the shares of Preference
Stock into series and, within the limitations set forth in the laws of the State
of Michigan and in the Articles of Incorporation, to fix and determine the
relative rights and preferences of the shares of any series so established. The
Preference Stock ranks junior to all series of Preferred Stock as to the payment
of dividends and the distribution of assets, except to the extent that a
specific series of Preferred Stock provides otherwise.
SERIES A PREFERENCE STOCK
In January, 1997, the Board of Directors created a series of Preference
Stock designated as Series A Preference Stock with the number of shares
constituting such series set at 2,000,000. No shares of Preference Stock are
outstanding.
If Series A Preference Stock was outstanding, dividends would accrue and be
cumulative in an amount per share per quarter equal to the greater of (i) $10.00
or (ii) the Adjustment Number (as defined below) 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 or such Series A
Preference Stock. Upon any liquidation or dissolution of the Company the holders
of Series A Preference Stock are entitled to receive $100 per share plus all
accrued and unpaid dividends. The Series A Preference Stock is not redeemable
and 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 provides
otherwise. If Series A Preference Stock was outstanding, a holder of Series A
Preference Stock would be entitled to the number of votes equal to the
Adjustment Number times the number of votes to which a holder of Common Stock is
entitled. Except as otherwise provided below or by law, Series A Preference
Stock and Common Stock shall vote together as one class on all matters submitted
to a vote of the holders of Common Stock. If any dividends on Series A
Preference Stock shall be in arrears for six 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 directors.
This vote shall be as a class for all series of Preference Stock entitled to
vote.
The Articles of Incorporation initially set the Adjustment Number at 100.
If the Company 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.
DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN
The Company sponsors a direct stock purchase and dividend reinvestment plan
(the "Reinvestment Plan") under which investors may purchase shares of Common
Stock without paying brokerage fees and other expenses. Under the Reinvestment
Plan, Common Stock may be purchased at the average of the over-the-counter
closing ask prices for the three trading days prior to the fifth day of each
month as quoted in the NASDAQ System. The Company initially reserved 2,000,000
shares of its Common Stock for issuance under the Reinvestment Plan. As of May
15, 1998, 1,848,943 shares were available for issuance under the Reinvestment
Plan.
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<PAGE> 57
OTHER PROVISIONS
Articles of Incorporation. The following provisions of the Company's
Articles of Incorporation may delay, defer or prevent a person from acquiring
the Company or changing control of the Company's Board of Directors. The
Company's Articles of Incorporation divide the Board into three classes with
staggered terms; each director is elected for a three year term. Approximately
one-third of the Board positions are filled by a shareholder vote each year.
Directors may be removed but only for cause, at an annual meeting of
shareholders and by the affirmative vote of a majority of the shares then
entitled to vote for the election of directors. In addition to requirements
imposed under Section 7A of the Michigan Business Corporation Act (the "MBCA"),
the Company's Articles of Incorporation provide that a business combination
cannot occur unless a written opinion is obtained from an independent investment
banker that the consideration to be paid to the shareholders of the Company is
fair and reasonable; provided, however, the directors may waive this
requirement. The Company's Articles of Incorporation also contain provisions
limiting the personal liability of directors.
Anti-Takeover Statutes. The Company is subject to Chapter 7A of the MBCA,
which provides that business combinations subject to Chapter 7A between a
Michigan corporation and a beneficial owner of shares entitled to 10% or more of
the voting power of such corporation generally require the affirmative vote of
90% of the votes of each class of stock entitled to vote, and not less than 2/3
of each class of stock entitled to vote (excluding voting shares owned by such
10% owner), voting as a separate class. Such requirements do not apply if (i)
the corporation's board of directors approves the transaction prior to the time
the 10% owner becomes such or (ii) the transaction satisfies certain fairness
standards, certain other conditions are met and the 10% owner has been such for
at least five years.
The Company is subject to Chapter 7B of the MBCA which provides that,
unless a corporation's articles of incorporation or bylaws provide that Chapter
7B does not apply, "control shares" of a corporation acquired in a control share
acquisition have no voting rights except as granted by the stockholders of the
corporation. "Control shares" are shares which, when added to shares previously
owned by a stockholder, increase such stockholder's ownership of voting stock to
more than 20% but less than 33 1/3%, more than 33 1/3% but less than a majority,
or more than a majority, of the votes to which all of the capital stock of the
corporation is entitled. Voting rights of control shares must be approved by the
affirmative vote of a majority of all shares entitled to vote excluding voting
shares owned by the acquirer and certain officers and directors. However, no
such approval is required for gifts or other transactions not involving
consideration, for a merger to which the corporation is a party or certain other
transactions described in Chapter 7B.
Rights to Purchase Preference Stock. In January 1997, the Company adopted a
Shareholder's Rights Plan (the "Shareholders Rights Plan") pursuant to which
2,000,000 shares of Series A Preference Stock are reserved under the
Shareholders Rights Plan for sale to holders of Common Stock. The Common Stock
currently trades with a right (the "Right") to purchase such Series A Preference
Stock. The Right is intended to protect shareholders in the event of an
unsolicited attempt to acquire the Company and becomes exercisable upon the
occurrence of certain triggering events. The Right is transferred automatically
with the transfer of the Common Stock until separate rights certificates are
distributed upon the occurrence of certain events. The Right could have the
effect of delaying, deferring or preventing a person from acquiring the Company
or accomplishing a change in control of the Company's board of directors.
Registration Rights. In connection with the Company's acquisition of
Hotflame (See "The Company -- SEMCO Ventures, Inc."), the Company has agreed,
among other things, to file with the Commission a registration statement for the
352,944 shares of Common Stock received by the selling shareholders of Hotflame
and use its best efforts to keep the registration statement effective until the
earlier of (i) the time all the Common Stock received by the selling
shareholders of Hotflame has been sold or (ii) one year. The Company intends to
file a Registration Statement on Form S-3 with respect to these shares of Common
Stock.
Transfer Agent. The Company is its own transfer agent and registrar for its
Common Stock.
The Common Stock is traded in the over-the-counter market and is quoted on
the NASDAQ National Market System under the symbol SMGS.
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PLAN OF DISTRIBUTION
SEMCO Energy may sell Medium Term Notes or Common Stock and the Trust may
sell Trust Preferred Securities in any of the following ways: (i) directly to
purchasers, (ii) through agents, (iii) to or through underwriters or (iv)
through dealers.
Offers to purchase these securities may be solicited directly by SEMCO
Energy and/or the Trust, or by their agents. The applicable Prospectus
Supplement will set forth the terms of the offering of the Offered Securities,
including the names of any underwriters, dealers or agents, the purchase price
of such Offered Securities, the proceeds to the Company, any underwriting
discounts or other compensation any initial public offering providing any
discounts or concessions or paid to dealers or any security exchange on which
such Offered Securities may be listed.
If underwriters or dealers are used, securities will be acquired by them
for their own account and may be resold in one or more transactions at fixed or
varying prices determined at the time of sale. Each underwriter and dealer will
be named in the applicable Prospectus Supplement. Underwriters and dealers may
receive discounts or commissions from SEMCO Energy and may also receive
commissions from purchasers.
Agents, underwriters, and dealers may be entitled under the relevant
agreements to indemnification by SEMCO Energy and/or the Trust against certain
liabilities, including liabilities under the Securities Act or to contribution
with respect to payments the underwriters, dealers or agents may be required to
make in respect thereof.
Certain of the underwriters, agents and their controlling persons may
engage in transactions with or perform services for SEMCO Energy or its
affiliates in the ordinary course of business.
All Debt Securities and all Trust Preferred Securities will be new issues
of securities with no established trading market. Any underwriters to whom such
securities are sold for public offering and sale may make a market in such
securities, but such underwriters will not be obligated to so do and may
discontinue any market making at any time without notice. No assurance can be
given concerning liquidity of the trading market for any such securities.
LEGAL MATTERS
The validity of the securities offered here and certain related matters
will be passed upon for SEMCO Energy, and certain United Stated federal income
taxation matters will be passed upon for SEMCO Energy and the Trust by Dickinson
Wright PLLC, Detroit, Michigan. Certain matters of Delaware law relating to the
validity of the Trust Preferred Securities will be passed upon on behalf of the
Trust by Richards, Layton & Finger, P.A., Wilmington, Delaware. Certain legal
matters will be passed upon for the Underwriters by Dewey Ballantine LLP, New
York, New York.
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EXPERTS
The Financial Statements and schedule included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, which are incorporated
by reference in this Prospectus, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are incorporated herein by reference in reliance upon the authority
of said firm as experts in giving said report.
With respect to the unaudited interim consolidated financial information in
the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1998,
Arthur Andersen LLP has applied limited procedures in accordance with
professional standards for a review of such information. However, their separate
report thereon states that they did not audit and they did not express an
opinion on that interim consolidated financial information. Accordingly, the
degree of reliance on their report on that information should be restricted in
light of the limited nature of the review procedures applied. In addition, the
accountants are not subject to the liability provisions of Section 11 of the
Securities Act of 1933, as amended ("Securities Act"), for their report on the
unaudited interim consolidated financial information because that report is not
a "report" or "part" of the registration statement prepared or certified by the
accountants within the meaning of Sections 7 and 11 of the Securities Act.
Future Financial Statements of the Company and the reports thereon of
Arthur Andersen LLP also will be incorporated by reference in this Prospectus in
reliance upon the authority of that firm as experts in giving those reports to
the extent that said firm has audited said Financial Statements and consented to
the use of their reports thereon.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN CONTAINED OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT, THE APPLICABLE PRICING SUPPLEMENT OR
THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT,
THE APPLICABLE PRICING SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE AGENTS. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT, THE APPLICABLE PRICING SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE
MADE HEREUNDER AND THEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THEREOF. THIS PROSPECTUS SUPPLEMENT, THE APPLICABLE PRICING SUPPLEMENT
AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Recent Developments....................... S-2
Use of Proceeds........................... S-4
Consolidated Ratio of Earnings to Fixed
Charges................................. S-4
Description of Notes...................... S-4
Certain United States Federal Income Tax
Considerations.......................... S-19
Plan of Distribution...................... S-25
PROSPECTUS
Available Information..................... 2
Incorporation of Certain Documents By
Reference............................... 3
The Company............................... 3
The Trust................................. 5
Use of Proceeds........................... 6
Consolidated Ratios of Earnings to Fixed
Charges................................. 6
Description of Debt Securities............ 7
Description of Trust Preferred
Securities.............................. 19
Description of Trust Guarantee............ 20
The Agreement as to Expenses and
Liabilities............................. 22
Additional Description of Subordinated
Debentures To Be Issued To Trust........ 23
Effect of Obligations Under Subordinated
Debentures and Trust Preferred
Securities Guarantees................... 27
Description of Common Stock............... 28
Plan of Distribution...................... 32
Legal Matters............................. 32
Experts................................... 33
</TABLE>
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$150,000,000
(LOGO)
MEDIUM-TERM NOTES
DUE NINE MONTHS OR MORE
FROM DATE OF ISSUE
---------------------------
PROSPECTUS SUPPLEMENT
---------------------------
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
A.G. EDWARDS & SONS, INC.
EDWARD D. JONES & CO., L.P.
OCTOBER 23, 1998
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