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Filed Pursuant to Rule 424(b)(3)
Registration Nos. 333-45615 & 333-45615-01
PROSPECTUS
5,400,000 Convertible Preferred Securities
CALENERGY CAPITAL TRUST III
6 1/2% Convertible Preferred Securities
(Liquidation Preference $50 per Convertible Preferred Security)
Guaranteed to the extent set forth herein by
and convertible into the Common Stock of
CALENERGY COMPANY, INC.
$50 per Convertible Preferred Security
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This Prospectus relates to the 6 1/2% Convertible Preferred Securities
(the "Convertible Preferred Securities") of CalEnergy Capital Trust III, a
statutory business trust formed under the laws of the State of Delaware (the
"Issuer" or the "Trust"), which represent undivided beneficial ownership
interests in the assets of the Trust, and the shares of the common stock, par
value $.0675 per share ("Common Stock"), of CalEnergy Company, Inc., a Delaware
corporation ("CalEnergy" or the "Company"), issuable upon conversion of the
Convertible Preferred Securities. The Convertible Preferred Securities were
issued and sold (the "Original Offering") on August 12, 1997 (the "Original
Offering Date"), to the Initial Purchasers (as defined herein) and were
simultaneously sold by the Initial Purchasers in transactions exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), in the United States to persons reasonably believed by the
Initial Purchasers to be qualified institutional buyers in reliance on Rule
144A under the Securities Act, and outside the United States to persons other
than U.S. persons in reliance upon Regulation S under the Securities Act. The
Company directly or indirectly owns all of the common securities issued by the
Issuer (the "Common Securities" and together with the Convertible Preferred
Securities, the "Trust Securities"). The Issuer was formed for the sole purpose
of issuing the Trust Securities and using the proceeds thereof to purchase from
the Company its 6 1/2% Convertible Junior Subordinated Debentures due 2027 (the
"Convertible Junior Subordinated Debentures") having the terms described
herein. The holders of Convertible Preferred Securities will have a preference
with respect to cash distributions and amounts payable upon liquidation,
redemption or otherwise over the holders of the Common Securities of the
Issuer.
The Convertible Preferred Securities, the Convertible Junior Subordinated
Debentures and the Common Stock issuable upon conversion of the Convertible
Preferred Securities (the "Offered Securities") may be offered and sold from
time to time by the holders named herein or by their transferees, pledgees,
donees or their successors (collectively, the "Selling Holders") pursuant to
this Prospectus. The Offered Securities may be sold by the Selling Holders from
time to time directly to purchasers or, under certain circumstances, through
agents, underwriters or dealers. See "Plan of Distribution" and "Selling
Holders." If required, the names of any other Selling Holders, agents or
underwriters involved in the sale of the Offered Securities and the applicable
agent's commission, dealer's purchase price or underwriter's discount, if any,
will be set forth in an accompanying supplement to this Prospectus (a
"Prospectus Supplement"). The Selling Holders will receive all of the proceeds
from the sale of the Offered Securities and will pay all underwriting discounts
and selling commissions, if any, applicable to any such sale. The Company is
responsible for payment of all other expenses incident to the offer and sale of
the Offered Securities. The Selling Holders and any broker-dealers, agents or
underwriters which participate in the distribution of the Offered Securities
may be deemed to be "underwriters" within the meaning of the Securities Act,
and any commission received by them and any profit on the resale of the Offered
Securities purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. See "Plan of Distribution" for a
description of indemnification arrangements.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
FACTORS THAT PROSPECTIVE INVESTORS SHOULD CONSIDER PRIOR TO AN INVESTMENT IN
THE CONVERTIBLE PREFERRED SECURITIES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is March 2, 1998
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(continued from front cover)
Holders of the Convertible Preferred Securities are entitled to receive
cumulative cash distributions at an annual rate of 6 1/2% of the liquidation
preference of $50 per each of the Convertible Preferred Securities, accruing
from the date of original issuance and payable quarterly in arrears on each
March 1, June 1, September 1 and December 1, commencing September 1, 1997. See
"Description of the Convertible Preferred Securities--Distributions." The
distribution payable on September 1, 1997, which was calculated at the above
rate and based on a period that is shorter than a full quarter, was in the
amount of $0.17153 per Convertible Preferred Security. The payment of
distributions and payments on liquidation of the Issuer or the redemption of
Convertible Preferred Securities, as described below (but only to the extent of
funds of the Issuer available therefor), are guaranteed by the Company to the
extent described herein (the "Guarantee"). The Company's obligations under the
Guarantee are subordinate and junior to all other liabilities of the Company,
except any liabilities that may be made pari passu expressly by their terms and
certain other guarantees, but are pari passu with the most senior preferred
stock issued, from time to time, if any, by the Company. See "Description of
the Guarantee." If the Company fails to make interest payments on the
Convertible Junior Subordinated Debentures, the Issuer will have insufficient
funds to pay distributions on the Convertible Preferred Securities. The
Guarantee does not cover payment of distributions when the Issuer does not have
sufficient funds to pay such distributions. The Guarantee, when taken together
with the Company's obligations under the Convertible Junior Subordinated
Debentures and the Indenture (as defined herein) and its obligations under the
Declaration (as defined herein), including its obligation to pay costs,
expenses, debts and other obligations of the Issuer (other than with respect to
the Trust Securities), provide a full and unconditional guarantee of amounts
due on the Convertible Preferred Securities. The obligations of the Company
under the Convertible Junior Subordinated Debentures are subordinate and junior
in right of payment to Senior Indebtedness (as defined herein) of the Company.
At September 30, 1997, Senior Indebtedness consisting of borrowed money of the
Company aggregated approximately $953.8 million (of which $200 million had a
"Recourse Amount" to the Company (as defined in the applicable indenture) of
zero). At September 30, 1997, on a pro forma basis after giving effect to the
consummation of the Company's October 1997 offering of $350 million 7.63%
Senior Notes due 2007 (the "Note Offering"), the Stock Offering, the Direct
Sale and Acquisition (each as defined herein) Senior Indebtedness consisting of
borrowed money of the Company aggregated approximately $1,308.8 million (of
which $200 million had a "Recourse Amount" to the Company (as defined in the
applicable indenture) of zero). See "Capitalization."
The holder of the outstanding Common Securities (i.e., the Company) has
the right at any time to terminate the Issuer and, after satisfaction of
liabilities to creditors of the Issuer as provided by applicable law, to cause
the Junior Subordinated Debentures to be distributed to the holders of the
Convertible Preferred Securities and Common Securities upon liquidation of the
Issuer. See "Description of Convertible Preferred Securities--Liquidation
Distribution Upon Dissolution."
The Company has the right under the Indenture to defer the interest
payments due from time to time on the Convertible Junior Subordinated
Debentures for successive periods not exceeding 20 consecutive quarters for
each such period, and, as a consequence, quarterly distributions on the
Convertible Preferred Securities would be deferred by the Issuer (but would
continue to accumulate quarterly and accrue interest) until the end of any such
interest deferral period. See "Risk Factors--Option to Extend Interest Payment
Period; Tax Consequences," "Description of the Convertible Preferred
Securities--Distributions" and "Description of the Convertible Junior
Subordinated Debentures--Option to Extend Interest Payment Period."
Each of the Convertible Preferred Shares is convertible in the manner
described herein at the option of the holder into shares of Common Stock at the
rate of 1.047 shares of the Common Stock for each of the Convertible Preferred
Securities (equivalent to a conversion price of $47.75 per share of Common
Stock), subject to adjustment in certain circumstances. See "Description of the
Convertible Preferred Securities--Conversion Rights." The last reported sale
price of the Common Stock (which is listed under the symbol "CE" on the New
York Stock Exchange) on February 25, 1998, was $25.8125 per share.
The Convertible Preferred Securities are effectively redeemable at the
option of the Company, in whole or in part, from time to time, after
September 1, 2000, at the prices set forth herein, plus accrued
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and unpaid distributions thereon to the date fixed for redemption (the
"Redemption Price"). See "Description of the Convertible Preferred Securities--
Optional Redemption." The Company therefore will be required to make thirteen
interest payments before being able to redeem any Convertible Preferred
Securities, other than under certain circumstances following a Tax Event (as
defined herein). Upon the repayment of the Convertible Junior Subordinated
Debentures at their maturity, September 1, 2027 (the "Stated Maturity"), or
upon any acceleration, earlier redemption, or otherwise, the proceeds from
such repayment will be applied to redeem the Convertible Preferred Securities
and the Common Securities on a pro rata basis. In addition, upon the occurrence
of certain events arising from a change in law or a change in legal
interpretation, the Company will (i) shorten the maturity of the Convertible
Junior Subordinated Debentures to a date not earlier than August 10, 2012, or
(ii) cause the redemption of the Convertible Preferred Securities in whole at
the liquidation preference of $50 per each Convertible Preferred Security plus
accrued and unpaid distributions. See "Description of the Convertible Preferred
Securities--Conditional Right to Shorten Maturity; Tax Event Redemption and
Investment Company Event Distribution" and "Description of the Convertible
Junior Subordinated Debentures."
In the event of the liquidation of the Issuer, the holders of the
Convertible Preferred Securities will be entitled to receive for each of the
Convertible Preferred Securities a liquidation preference of $50 plus accrued
and unpaid distributions thereon to the date of payment, unless, in connection
with such liquidation, Convertible Junior Subordinated Debentures are
distributed to the holders of the Convertible Preferred Securities. See
"Description of the Convertible Preferred Securities--Liquidation Distribution
Upon Dissolution."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy and information statements and other information filed by the
Company with the SEC can be inspected and copied at the Public Reference
Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
SEC maintains a Web site that contains reports, proxy and information
statements and other materials that are filed through the SEC's Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) system. This Web site can be
accessed at http://www.sec.gov. Such reports, proxy and information statements
and other information can also be inspected at the offices of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the SEC a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the securities offered by
this Prospectus. This Prospectus does not contain all of the information set
forth or incorporated by reference in the Registration Statement and the
exhibits and schedules related thereto, certain portions of which have been
omitted as permitted by the rules and regulations of the SEC. For further
information with respect to the Company and the securities offered by this
Prospectus, reference is made to the Registration Statement and the exhibits
filed or incorporated as a part thereof. Statements contained in this
Prospectus as to the contents of any documents referred to are not necessarily
complete and, in each such instance, are qualified in all respects by reference
to the applicable documents filed with the SEC.
This Prospectus and the periodic filings of the Company under the
Exchange Act contain forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). These
forward-looking statements express beliefs and expectations regarding the
Company's future results and performance.
Such statements are based on current expectation and involve a number of
known and unknown risks and uncertainties that could cause the actual results
and/or performance of the Company to differ
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materially from any expected future results and/or performance, expressed or
implied by the forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements and any such statement is
qualified by reference to the following cautionary statements. In connection
with the safe harbor provisions of the Reform Act, the Company's management
has identified important factors that could cause actual results to differ
materially from management's expectations, including development uncertainty,
operating uncertainty, uncertainties relating to doing business outside the
United States, uncertainties relating to geothermal resources, uncertainties
relating to domestic and international (and in particular, Indonesian)
economic conditions and uncertainties regarding the impact of regulations,
changes in government policy, industry deregulation and competition. Reference
is made to the Company's Current Report on Form 8-K dated February 25, 1997,
incorporated herein by reference. The Company is not required to publicly
release any changes to these forward-looking statements for events occurring
after the date thereof or to reflect any other unanticipated events.
No separate financial statements of the Issuer have been included herein.
The Company does not consider that such financial statements would be material
to holders of the Convertible Preferred Securities because (i) all of the
voting securities of the Issuer will be owned, directly or indirectly, by the
Company, a reporting company under the Exchange Act, (ii) the Issuer has no
independent operations but exists for the sole purpose of issuing securities
representing undivided beneficial interests in the assets of the Issuer and
investing the proceeds thereof in Convertible Junior Subordinated Debentures
issued by the Company and (iii) the obligations of the Issuer under the Trust
Securities are fully and unconditionally guaranteed by the Company to the
extent that the Issuer has funds available to meet such obligations. See
"Description of the Convertible Junior Subordinated Debentures" and
"Description of the Guarantee."
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC (File No. 1-9874) are
incorporated by reference into this Prospectus:
(i) the Company's Annual Report on Form 10-K for the year ended December
31, 1996 (as amended by the Form 10-K/A filed on April 30, 1997);
(ii) the Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended March 31, 1997, June 30, 1997 and September 30, 1997;
(iii) the Company's Current Reports on Form 8-K dated December 24, 1996
(as amended by Form 8-K/A dated February 18, 1997), February 25, 1997, February
26, 1997, March 28, 1997, May 7, 1997, May 19, 1997, July 7, 1997, July 15,
1997, July 18, 1997, August 6, 1997, August 8, 1997, August 15, 1997, August
27, 1997, September 2, 1997, September 11, 1997, September 24, 1997 (filed
September 24, 1997), September 24, 1997 (filed September 30, 1997), October 9,
1997, October 13, 1997, October 23, 1997, October 28, 1997, December 5, 1997,
December 11, 1997, December 16, 1997, January 5, 1998, January 12, 1998 and
January 29, 1998;
(iv) the description of the Company's Common Stock contained in the
Company's registration statement on Form 8-A filed under the Exchange Act and
any amendments or reports filed for the purpose of updating such description.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the filing of a post-effective amendment which indicates the
termination of this offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein, or in any other subsequently
filed document which is also incorporated herein by reference, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed to constitute a part of this Prospectus except as so modified or
superseded.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated into this Prospectus by reference,
other than exhibits to such documents. Requests for such copies should be
directed to Investor Relations, CalEnergy Company, Inc., 302 South 36th Street,
Suite 400, Omaha, Nebraska 68131, telephone number (402) 341-4500.
No person is authorized to give any information or to make any
representations, other than those contained or incorporated by reference in
this Prospectus or a Prospectus Supplement, in connection with the offering
contemplated thereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company or any underwriter, dealer or agent. This Prospectus and a Prospectus
Supplement do not constitute an offer to sell or a solicitation of an offer to
buy any Securities other than the Securities to which they relate and do not
constitute an offer to sell or a solicitation of an offer to buy any Securities
in any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus or a
Prospectus Supplement, nor any sale made thereunder, shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or thereof or that the information
contained or incorporated by reference herein or therein is correct as of any
time subsequent to such date.
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RISK FACTORS
Prospective investors should carefully consider the risk factors set
forth below, in addition to the other information appearing in or incorporated
by reference in this Prospectus. This Prospectus contains or incorporates by
reference forward-looking statements which involve risks and uncertainties. The
Company's actual results in the future could differ significantly from the
results discussed or implied in the forward-looking statements. Factors that
could cause or contribute to such a difference include, but are not limited to,
the following risk factors and risk factors described in the documents
incorporated herein by reference. The term "Company" refers to CalEnergy
Company, Inc. and its operating subsidiaries, unless the context otherwise
requires.
ACQUISITIONS. The Company's recent growth has been achieved, in part,
through strategic acquisitions in the energy industry which complement and
diversify the Company's existing business. The Company intends to continue to
pursue an aggressive acquisition strategy for the foreseeable future. The
Company has recently completed several major acquisitions, including the
acquisition of Magma Power Company ("Magma"), Falcon Seaboard Resources, Inc.
("Falcon Seaboard") and Northern Electric plc ("Northern"). The Company has
successfully integrated Magma, Falcon Seaboard and Northern. See "The Company."
The Company has also recently completed the acquisition of Kiewit Diversified
Group's ownership interest in the Company's Common Stock as well as various
international power generation projects which were jointly owned by KDG and the
Company. See "The Company -- Energy Project Joint Venture Acquisition and Stock
Repurchase; Recent Public Offerings." The Company's ability to pursue
acquisition opportunities successfully will depend on many factors, including,
among others, the Company's ability to (i) identify suitable acquisition
opportunities, (ii) consummate the acquisition, including obtaining any
necessary financing, and (iii) successfully integrate acquired businesses. The
acquisition and integration of acquired businesses entails numerous risks,
including, among others, the risk of diverting management's attention from the
day-to-day operations of the Company, the risk that the acquired businesses
will require substantial capital and financial investments and the risk that
the investments will fail to perform in accordance with expectations. There
can be no assurance that acquisition opportunities, if any, can be consummated
on favorable terms or that the Company's integration efforts will be
successful.
HOLDING COMPANY STRUCTURE. As a holding company, the Company is dependent
on the earnings and cash flows of, and dividends from, its subsidiaries and
joint ventures to generate the funds necessary to meet its obligations,
including the payment of principal, interest and premium, if any, on the
Convertible Junior Subordinated Debentures. The availability of distributions
from the Company's subsidiaries and projects is subject to the satisfaction of
various covenants and conditions contained in the applicable subsidiaries' and
joint ventures' financing documents and to certain utility regulatory
restrictions. Furthermore, the Company is structuring other project financing
arrangements containing, and anticipates that future project level financings
will contain, certain conditions and similar restrictions on the distribution
of cash to the Company.
The Company's subsidiaries, partnerships and joint ventures are separate
and distinct legal entities and have no obligation, contingent or otherwise, to
pay any amounts due pursuant to the Convertible Junior Subordinated Debentures
or to make any funds available therefor, whether by dividends, loans or other
payments, and do not guarantee the payment of interest on, premium, if any, or
principal of the Convertible Junior Subordinated Debentures. Any right of the
Company to receive any assets of any of its subsidiaries or other affiliates
upon any liquidation or reorganization of the Company (and the consequent right
of the holders of the Convertible Junior Subordinated Debentures to participate
in the distribution of, or to realize proceeds from, those assets) will be
effectively subordinated to the claims of any such subsidiary's or other
affiliate's creditors (including trade creditors and holders of debt issued by
such subsidiary or other affiliate). At September 30, 1997, the Company had
approximately $3,141.7 million of total consolidated indebtedness, which
included approximately $2,187.9 million of the Company's proportionate share of
joint venture and subsidiary debt, which would be effectively senior to the
Convertible Junior Subordinated Debentures, substantially all of which would
have been secured by the assets of such joint ventures and subsidiaries, and
$553.9 million of subordinated debt issued in connection with CalEnergy Capital
Trust's 6 1/4% Convertible Preferred Securities Term Income Deferrable Equity
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Securities (TIDES)SM (the "1996 TIDES") and CalEnergy Capital Trust II's
6 1/4% Trust Convertible Preferred Securities (the "6 1/4% Convertible
Preferred Securities," with the 1996 TIDES, the 6 1/4% Convertible Preferred
Securities and the Convertible Preferred Securities sometimes being referred
to herein as "Capital Trust Convertible Preferred Securities"). As of
September 30, 1997, on a pro forma basis, after giving effect to the
consummation of the Note Offering, the Common Stock Offering, the Direct Sale
and the Acquisition (each as defined herein), there would have been
approximately $4,094.1 million of total consolidated indebtedness, which
included approximately $2,790.3 million of the Company's proportionate share
of joint venture and subsidiary debt, which would be effectively senior to the
Convertible Junior Subordinated Debentures.
DEPENDENCE ON CONVERTIBLE JUNIOR SUBORDINATED DEBENTURE PAYMENTS;
LEVERAGE. The ability of the Issuer to pay amounts due on the Convertible
Preferred Securities is wholly dependent upon the Company making payments on
the Convertible Junior Subordinated Debentures. The Company is substantially
leveraged. At September 30, 1997, the Company's total consolidated liabilities
were $4,815.7 million (excluding deferred income), its obligations in respect
of Capital Trust Convertible Preferred Securities were $553.9 million, its
total consolidated assets were $6,385.0 million and its total stockholders'
equity was $150.4 million. As of such date, on a pro forma basis, after giving
effect to the consummation of the Note Offering, the Common Stock Offering, the
Direct Sale and the Acquisition, the Company's total consolidated liabilities
would have been $5,820.7 million (excluding deferred income), its obligations
in respect of the Capital Trust Convertible Preferred Securities would have
been $553.9 million, its total consolidated assets would have been $7,315.4
million and its stockholders' equity would have been $854.3 million. The
Company's leverage level presents the risk that the Company might not generate
sufficient cash to service the Company's indebtedness, including the
Convertible Junior Subordinated Debentures, or that its leveraged capital
structure could limit its ability to finance future acquisitions, develop
additional projects, compete effectively and operate successfully under adverse
economic conditions. If the Company were unable to make payments on the
Convertible Junior Subordinated Debentures or the Guarantee, the Issuer would
be unable to make payments on the Convertible Preferred Securities as and when
required. The Company is also a holding company which derives substantially all
of its operating income from its subsidiaries and joint ventures. Distributions
from such entities are restricted under various covenants and conditions
contained in financing documents by which they are bound and the stock or
assets of substantially all of such entities is directly or indirectly pledged,
to secure various of such financings or such entities are otherwise subject to
regulatory restrictions. See "Risk Factors--Holding Company Structure."
NORTHERN'S REGULATORY ENVIRONMENT. Northern's electricity distribution
and supply are subject to extensive regulation in the United Kingdom.
Price Regulation of Distribution. Revenue from Northern's distribution
business is controlled by a formula (the "Distribution Price Control Formula")
which determines the maximum average price per unit of electricity (expressed
in kilowatt ("kW") hours, a "unit") that a regional electricity company (a
"RE") in the United Kingdom may charge. The Distribution Price Control Formula
is expected to have a five year duration and is subject to review by the
Director General of Electricity Supply (the "Regulator") at the end of each
five-year period and at other times in the discretion of the Regulator. At each
review, the Regulator can propose adjustments to the Distribution Price Control
Formula. In July 1994, a review resulted in a 17% reduction in allowed
distribution income compared to the original formula, before allowing for
inflation, effective April 1, 1995. In July 1995, a further review of
distribution prices was concluded by the Regulator for fiscal years 1997 to
2000. As a result of this further review, Northern's allowed distribution from
income was reduced by a further 11%, before allowing for inflation, effective
April 1, 1996. There can be no assurance that any further price reviews by the
Regulator will not have a material adverse effect on the Company's results of
operations.
Competition in Supply. Northern's supply business is also subject to
price control and is being progressively opened to competition. Northern
currently has an exclusive right, subject to price cap regulation, to supply
customers in its authorized area with a maximum demand of not more than 100 kW
("Franchise Supply Customers"). The market for
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customers with a maximum demand above 1 megawatt ("MW") has been open to
competition for suppliers of electricity since privatization while the market
for customers with a maximum demand above 100 kW ("Non-Franchise Supply
Customers") became competitive in April 1994. The final stage of this process
is expected to occur in the fall of 1998, when the exclusive right to supply
Franchise Supply Customers is scheduled to end. There can be no assurance that
competition among suppliers of electricity will not have a material adverse
effect on the Company's results of operations.
Pool Purchase Price Volatility. Northern's supply business to
Non-Franchise Supply Customers generally involves entering into fixed price
contracts to supply electricity to its customers. Northern obtains the
electricity to satisfy its obligations under such contracts primarily by
purchases from the wholesale trading market for electricity in England and
Wales (the "Pool"). Because the price of electricity purchased from the Pool
can be volatile, to the extent that Northern purchases electricity from the
Pool, Northern is exposed to risk arising from differences between the fixed
price at which it sells and the fluctuating prices at which it purchases
electricity, unless it can effectively hedge such exposure. Northern's ability
to manage such risk at acceptable levels will depend, in part, on the specifics
of the supply contracts that Northern enters into, Northern's ability to
implement and manage an appropriate hedging strategy and the development of an
adequate market for hedging instruments. There can be no assurance that this
risk will be effectively mitigated.
Change in Government Policy. In the general election held in the United
Kingdom on May 1, 1997, the Labour Party won a majority of seats in the United
Kingdom Parliament. On July 31, 1997, the United Kingdom Parliament passed the
windfall tax to be levied on privatized utilities which resulted in a third
quarter extraordinary charge to net income of the Company of $135.9 million.
See the Company's Current Report on Form 8-K dated July 7, 1997, incorporated
herein by reference. There can be no assurance that other possible changes in
tax or utility regulation by the United Kingdom government, by whichever party
it is controlled, would not have a material adverse effect on the Company's
results of operations.
DEVELOPMENT UNCERTAINTY. The Company is actively seeking to develop,
construct, own and operate new energy projects, both domestically and
internationally, the completion of any of which is subject to substantial risk.
Development can require the Company to expend significant sums for preliminary
engineering, permitting, fuel supply, resource exploration, legal and other
expenses in preparation for competitive bids which the Company may not win or
before it can be determined whether a project is feasible, economically
attractive or capable of being financed. Successful development and
construction is contingent upon, among other things, negotiation on terms
satisfactory to the Company of engineering, construction, fuel supply and power
sales contracts with other project participants, receipt of required
governmental permits and consents and timely implementation of construction.
Further, there can be no assurance that the Company, which is substantially
leveraged, will obtain access to the substantial debt and equity capital
required to continue to develop and construct electric power projects or to
refinance projects. The future growth of the Company is dependent, in large
part, upon the demand for significant amounts of additional energy and the
Company's ability to obtain contracts to supply portions of this demand.
There can be no assurance that development efforts on any particular
project, or the Company's efforts generally, will be successful. In this
regard, reference is made to certain uncertainties associated with the
Company's Casecnan Project as described in the Company's Current Reports on
Form 8-K dated May 19, 1997 and August 27, 1997, which are incorporated herein
by reference, and certain uncertainties associated with the Company's
Indonesian projects described in the Company's Current Reports on Form 8-K
dated January 12, 1998 and January 29, 1998, which are incorporated herein by
reference.
UNCERTAINTIES RELATED TO DOING BUSINESS OUTSIDE THE UNITED STATES. The
Company has various projects under construction outside the United States and a
number of projects under award outside the United States. The financing and
development of projects outside the United States entail significant political
and financial risks (including, without limitation, uncertainties associated
with privatization efforts in the countries involved, currency exchange rate
fluctuations, currency repatriation restrictions, changes in law or regulation,
change in government policy, political instability, civil unrest and
expropriation) and other structuring issues that have the potential to cause
substantial delays in respect of or material impairment of the value of the
project being developed, which the Company may not be
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capable of fully insuring against. The uncertainty of the legal environment in
certain foreign countries in which the Company is developing and may develop or
acquire projects could make it more difficult for the Company to enforce its
rights under agreements relating to such projects. In addition, the laws and
regulations of certain countries may limit the ability of the Company to hold a
majority interest in some of the projects that it may develop or acquire. The
Company's international projects may, in certain cases, be terminated by the
applicable foreign governments. Furthermore, the central bank of any such
country may have the authority in certain circumstances to suspend, restrict or
otherwise impose conditions on foreign exchange transactions or to approve
distributions to foreign investors. Although the Company may structure certain
power purchase agreements and other project revenue agreements to provide for
payments to be made in, or indexed to, United States dollars or a currency
freely convertible into United States dollars, there can be no assurance that
the Company will be able to achieve this structure in all cases or that a power
purchaser or other customer will be able to obtain sufficient dollars or other
hard currency or that available dollars will be allocated to pay such
obligations. In this regard, reference is made to certain uncertainties
associated with the Company's Indonesian projects described in the Company's
Current Reports on Form 8-K dated January 12, 1998 and January 29, 1998, which
are incorporated herein by reference.
In addition, the Company's investment in Northern and any dividends or
distributions of earnings in respect of such investment, may be significantly
affected by fluctuations in the exchange rate between the United States dollar
and the British pound. Although the Company may enter into certain transactions
to hedge risks associated with exchange rate fluctuations, there can be no
assurance that such transactions will be successful in reducing such risks.
EXPLORATION, DEVELOPMENT AND OPERATION UNCERTAINTIES OF GEOTHERMAL
RESOURCES. Geothermal exploration, development and operations are subject to
uncertainties similar to those typically associated with oil and gas
exploration and development, including dry holes and uncontrolled releases.
Because of the geological complexities of geothermal reservoirs, the geographic
area and sustainable output of geothermal reservoirs can only be estimated and
cannot be definitively established. There is, accordingly, a risk of an
unexpected decline in the capacity of geothermal wells and a risk of geothermal
reservoirs not being sufficient for sustained generation of the electrical
power capacity desired. In addition, geothermal power production poses unusual
risks of seismic activity. Accordingly, there can be no assurance that
earthquake, property damage or business interruption insurance will be adequate
to cover all potential losses sustained in the event of serious seismic
disturbances or that such insurance will be available on commercially
reasonable terms. The success of a geothermal project depends on the quality of
the geothermal resource and operational factors relating to the extraction of
the geothermal fluids involved in such project. The quality of a geothermal
resource is affected by a number of factors, including the size of the
reservoir, the temperature and pressure of the geothermal fluids in such
reservoir, the depth and capacity of the production and injection wells, the
amount of dissolved solids and noncondensible gases contained in such
geothermal fluids, and the permeability of the subsurface rock formations
containing such geothermal resource, including the presence, extent and
location of fractures in such rocks. The quality of a geothermal resource may
decline as a result of a number of factors, including the intrusion of
lower-temperature fluid into the producing zone. An incorrect estimate by the
Company of the quality of a geothermal resource, or a decline in such quality,
could have a material adverse effect on the Company's results of operations. In
addition, both the cost of operations and the operating performance of
geothermal power plants may be adversely affected by a variety of resource
operating factors. Production and injection wells can require frequent
maintenance or replacement. Corrosion caused by high-temperature and
high-salinity geothermal fluids may compel the replacement or repair of certain
equipment, vessels or pipelines. New production and injection wells may be
required for the maintenance of operating levels, thereby requiring substantial
capital expenditures.
GENERAL OPERATING UNCERTAINTIES. The operation of a power plant involves
many risks, including the breakdown or failure of power generation equipment,
pipelines, transmission lines or other equipment or processes, fuel
interruption, and performance below expected levels of output or efficiency.
Each facility may depend on a single or limited number of entities to purchase
electricity or thermal
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energy, to supply water, to supply gas, to transport gas, to dispose of wastes
or to wheel electricity. The failure of any such purchasing utility, steam
host, water or gas supplier, gas transporter, wheeling utility or other
relevant project participant to fulfill its contractual obligations could have
a material adverse impact on the Company.
FUEL SUPPLY OPERATIONS. The primary fuel source for certain of the
Company's projects is natural gas and a substantial portion of the operating
expenses of such facilities consists of the costs of obtaining natural gas
through gas supply agreements and transporting that gas to the projects under
gas transportation agreements. Although the Company believes that it has
contracted for natural gas supply and transportation in sufficient quantities
to satisfy the needs of its projects, the gas suppliers are not required in all
cases to provide dedicated reserves in support of their contractual
obligations. Unless the gas projects were able to obtain substitute volumes of
natural gas including the requisite transportation services, for such volumes
at a price not materially higher than the sum of the contract price under the
existing gas supply agreements and any damages paid by the supplier for failure
to deliver, the sustained failure of a supplier to deliver natural gas in
accordance with its contract could have a material adverse effect on the cash
flows to the Company. In addition, under certain gas supply contracts the
Company is obligated to pay for a certain minimum quantity of natural gas even
if it cannot utilize it. The Company intends to manage its requirements for
contract volumes under the gas supply agreements so as to meet the minimum take
requirements through a combination of utilization of nominated volumes in
operations and resales of the remainder of the volumes to third-party
customers, if necessary. Finally, the state, federal and Canadian regulatory
authorities that have jurisdiction over natural gas transportation have the
right to modify aspects of the rates, terms and conditions of those contracts.
It is possible that such a modification could materially increase the fuel
transportation costs of the projects or give the transporter a right to
terminate or suspend or decrease its performance under its contract.
PRESENT DEPENDENCE ON LARGE CUSTOMER; CONTRACT UNCERTAINTIES. The Company
currently relies on long-term power purchase "Standard Offer No. 4" contracts
(each, an "SO4 Agreement") with a large customer, Southern California Edison
Company ("Edison"), to generate a substantial portion of its operating
revenues. Any material failure by Edison to fulfill its contractual obligations
under such contracts is likely to have a material adverse effect on the
Company's results of operations. Each of the Company's SO4 Agreements provides
for both capacity payments and energy payments for a term of between 20 and 30
years. During the first ten years after achieving firm operation, energy
payments for each unit under each SO4 Agreement are based on a pre-set
schedule. Thereafter, while the basis for the capacity payment remains the
same, the required energy payment is Edison's then-current published avoided
cost of energy ("Avoided Cost of Energy") as determined by the California
Public Utility Commission ("CPUC"). The initial ten-year period expired in
August 1997 for the initial unit of the Navy I Project and expires in March
1999 for the initial unit of the BLM Project and January 2000 for the initial
unit of the Navy II Project, which three projects comprise the Coso Project in
California (the "Coso Project"). Such ten-year period expired in 1996 with
respect to one of the six geothermal plants in the Imperial Valley in
California operating under SO4 Agreements ("Imperial Valley Projects") and
expires in 1999 for three of its Imperial Valley Projects and in 2000 for the
remaining two Imperial Valley Projects that operate under SO4 Agreements.
Estimates of Edison's future Avoided Cost of Energy vary substantially in
any given year. The Company cannot predict the likely level of Avoided Cost of
Energy prices under its SO4 Agreements with Edison at the expiration of the
fixed-price periods. Edison's Avoided Cost of Energy as determined by the CPUC
is currently substantially below the current scheduled energy prices under the
Company's respective SO4 Agreements and is currently expected to remain so. For
the year ended December 31, 1997, the time period-weighted average of Edison's
Avoided Cost of Energy was 3.3 cents per kWh, compared to the time
period-weighted average for the year ended December 31, 1997 selling prices for
energy of approximately 11.4 cents per kWh for all of the Company's SO4
Agreements. Thus, the revenues generated by each of the Company's facilities
operating under SO4 Agreements are likely to decline significantly after the
expiration of the applicable fixed price period.
COMPETITION AND DOMESTIC DEREGULATION; INDUSTRY RESTRUCTURING. The
international power production market is characterized by numerous strong and
capable competitors, many of which have more
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extensive and more diversified developmental or operating experience (including
international experience) and greater financial resources than the Company.
Many of these competitors also compete in the domestic market.
Further, in recent years, the domestic power production industry has been
characterized by strong and increasing competition with respect to the
industry's efforts to obtain new power sales agreements, which has contributed
to a reduction in prices offered to utilities. In that regard, many utilities
often engage in "competitive bid" solicitations to satisfy new capacity
demands. In the domestic market, competition is expected to increase as the
electric utility industry becomes deregulated. In addition, recent deregulation
and industry restructuring activity may cause certain utilities or other
contract parties to attempt to renegotiate contracts or otherwise fail to
perform their contractual obligations, which in turn could adversely affect the
Company's results of operations. In particular, the state of California has
adopted a bill to restructure the electric industry by providing for a
phased-in competitive power generation industry, with a power pool and an
independent system operator, and for direct access to generation for all power
purchasers outside the power exchange under certain circumstances. Although the
bill contemplates that existing qualifying facility power sales contracts will
be honored, and all of the Company's California projects are qualifying
facilities, until the new system is fully implemented, it is impossible to
predict what impact, if any, it may have on the operations of those projects.
IMPACT OF ENVIRONMENTAL, ENERGY AND OTHER REGULATIONS. The Company is
subject to a number of environmental and other laws and regulations affecting
many aspects of its present and future operations, including the disposal of
various forms of waste, the construction or permitting of new facilities, and
the drilling and operation of new and existing wells. Such laws and regulations
generally require the Company to obtain and comply with a wide variety of
licenses, permits and other approvals. The Company also remains subject to a
number of complex and stringent laws and regulations that both public officials
and private individuals may seek to enforce. There can be no assurance that
existing regulations will not be revised or that new regulations will not be
adopted or become applicable to the Company which could have an adverse impact
on its operations. The implementation of regulatory changes imposing more
comprehensive or stringent requirements on the Company, which would result in
increased compliance costs, could have a material adverse effect on the
Company's results of operations. In addition, regulatory compliance for the
construction of new facilities is a costly and time-consuming process, and
intricate and rapidly changing environmental regulations may require major
expenditures for permitting and create the risk of expensive delays or material
impairment of project value if projects cannot function as planned due to
changing regulatory requirements or local opposition.
The Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"),
and the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), are
two of the laws (including the regulations thereunder) that affect the
Company's operations. PURPA provides to qualifying facilities ("QFs") certain
exemptions from federal and state laws and regulations, including
organizational, rate and financial regulation. PUHCA regulates public utility
holding companies and their subsidiaries. The Company is not and will not be
subject to regulation as a holding company under PUHCA as long as the domestic
power plants it owns are QFs under PURPA or are exempted as exempt wholesale
generators ("EWGs"), and so long as its foreign utility operations are exempted
as EWGs or foreign utility companies or are otherwise exempted under PUHCA. QF
status is conditioned on meeting certain criteria, and would be jeopardized,
for example, in the case of the Company's cogeneration facilities, by the loss
of a steam customer or reduction of steam purchases below the amount required
by PURPA. The Company's four cogeneration facilities have steam sales
agreements with existing industrial hosts which agreements must be maintained
in effect or replaced in order to maintain QF status. In the event the Company
were unable to avoid the loss of such status for one of its facilities, such an
event could result in termination of a given project's power sales agreement
and a default under the project subsidiary's project financing agreements.
Currently, Congress is considering proposed legislation that would amend
PURPA by eliminating the requirement that utilities purchase electricity from
qualifying facilities at prices based on Avoided Cost of Energy. The Company
does not know whether such legislation will be passed or what form it may take.
The Company believes that if any such legislation is passed, it would apply to
new projects only and thus,
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although potentially impacting the Company's ability to develop new domestic
projects, it would not affect the Company's existing qualifying facilities.
There can be no assurance, however, that any legislation passed would not
adversely impact the Company's existing domestic projects.
In addition, many states are implementing or considering regulatory
initiatives designed to increase competition in the domestic power generation
industry and increase access to electric utilities' transmission and
distribution systems for independent power producers and electricity consumers.
On September 1, 1997, the California legislature adopted an industry
restructuring bill that would provide for a phased-in competitive power
generation industry with a power pool and independent system operator and also
would permit direct access to generation for all power purchasers outside the
power exchange under certain circumstances. Under the bill, consistent with the
requirements of PURPA, existing qualifying facilities power sales agreements
would be honored. The Company cannot predict the final form or timing of the
proposed industry restructuring or the results of its operations.
The structure of such federal and state energy regulations have in the
past, and may in the future, be the subject of various challenges and
restructuring proposals by utilities and other industry participants. The
implementation of regulatory changes in response to such changes or
restructuring proposals, or otherwise imposing more comprehensive or stringent
requirements on the Company, which would result in increased compliance costs,
could have a material adverse effect on the Company's results of operations.
SUBORDINATION OF GUARANTEE AND CONVERTIBLE JUNIOR SUBORDINATED
DEBENTURES. The Company's obligations under the Guarantee are subordinate and
junior in right of payment to all other liabilities of the Company, with
certain limited exceptions. The obligations of the Company under the
Convertible Junior Subordinated Debentures are subordinate and junior in right
of payment to Senior Indebtedness (as defined herein) of the Company. No
payment of principal (including redemption payments, if any), premium, if any,
or interest on the Convertible Junior Subordinated Debentures may be made if
(i) any Senior Indebtedness has not been paid when due and any applicable grace
period with respect to such default has ended with such default not having been
cured or waived or ceasing to exist, or (ii) the maturity of any Senior
Indebtedness has been accelerated because of a default. At September 30, 1997,
on a pro forma basis, after giving effect to the consummation of the Debt
Offering, the Common Stock Offering, the Direct Sale and the Acquisition, there
would have been approximately $1,303.8 million principal amount of borrowed
money included in Senior Indebtedness (of which $200 million had a "Recourse
Amount" to the Company (as defined in the applicable indenture) of zero). See
"Capitalization." Neither the Convertible Preferred Securities, the Convertible
Junior Subordinated Debentures nor the Guarantee limit the Company's ability to
incur additional indebtedness or liabilities, including indebtedness or
liabilities that would rank senior to the Convertible Junior Subordinated
Debentures and the Guarantee. See "Description of the Guarantee--Status of the
Guarantee; Subordination" and "Description of the Convertible Junior
Subordinated Debentures--Subordination." The Convertible Junior Subordinated
Debentures are also effectively subordinate to all existing and future
liabilities, including trade payables, of the Company's subsidiaries, joint
ventures and affiliates. See "--Holding Company Structure."
RIGHTS UNDER THE GUARANTEE. The Guarantee Trustee (as defined herein)
will hold the Guarantee for the benefit of the holders of the Convertible
Preferred Securities. The Guarantee guarantees to the holders of the
Convertible Preferred Securities the payment (but not the collection) of (i)
any accrued and unpaid distributions on the Convertible Preferred Securities to
the extent the Issuer has funds available therefor, (ii) the amount payable
upon redemption, including all accrued and unpaid distributions, of the
Convertible Preferred Securities called for redemption by the Issuer, to the
extent the Issuer has funds available therefor, and (iii) upon a voluntary or
involuntary dissolution, winding up or termination of the Issuer (other than in
connection with a redemption of all of the Convertible Preferred Securities),
the lesser of (a) the aggregate of the liquidation amount and all accrued and
unpaid distributions on the Convertible Preferred Securities to the date of
payment to the extent the Issuer has funds available therefor and (b) the
amount of assets of the Issuer remaining available for distribution to holders
of the Convertible Preferred Securities upon the liquidation of the Issuer. The
holders of a majority in liquidation amount of the Convertible Preferred
Securities have the right to direct the time, method and
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place of conducting any proceeding for any remedy available to the Guarantee
Trustee or to direct the exercise of any trust or power conferred upon the
Guarantee Trustee under the Guarantee. In the event of a payment default on the
Convertible Preferred Securities, any holder of Convertible Preferred
Securities may institute a legal proceeding directly against the Company to
enforce such holder's rights in respect thereof under the Guarantee without
first instituting a legal proceeding against the Issuer, the Guarantee Trustee,
or any other person or entity. If the Company were to default on its
obligations under the Convertible Junior Subordinated Debentures, the Issuer
would lack available funds for the payment of distributions or amounts payable
on redemption of the Convertible Preferred Securities or otherwise, and in such
event, the holders of the Convertible Preferred Securities would not be able to
rely upon the Guarantee for payment of such amounts. Instead, holders of the
Convertible Preferred Securities would rely on the enforcement (1) by the
Trustee (as defined herein) of its rights, as registered holder of the
Convertible Junior Subordinated Debentures, against the Company pursuant to the
terms of the Convertible Junior Subordinated Debentures or (2) by such holder
of its right of direct action against the Company to enforce payments on the
Convertible Junior Subordinated Debentures. See "Description of the
Guarantee--Status of the Guarantee; Subordination" and "Description of the
Convertible Junior Subordinated Debentures--Subordination" herein. The
Declaration provides that each holder of Convertible Preferred Securities by
acceptance thereof agrees to the provisions of the Guarantee (including the
subordination provisions thereof) and the Indenture.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES. The Company
has the right under the Indenture to defer interest payments from time to time
on the Convertible Junior Subordinated Debentures for successive periods not
exceeding 20 consecutive quarters for each such period. Upon the termination of
any Deferral Period and the payment of all amounts then due, the Company may
select a new Deferral Period, subject to the requirements described herein. As
a consequence, during any such Deferral Period, quarterly distributions on the
Convertible Preferred Securities would be deferred (but would continue to
accrue with interest thereon) by the Issuer. In the event that the Company
exercises this right, during such period the Company (i) shall not declare or
pay dividends on, make distributions with respect to, or redeem, purchase or
acquire, or make a liquidation payment with respect to, any of its capital
stock (other than (A) purchases or acquisitions of shares of Common Stock in
connection with the satisfaction by the Company of its obligations under any
employee benefit plans, (B) as a result of a reclassification of capital stock
of the Company or the exchange or conversion of one class or series of the
Company's capital stock for another class or series of capital stock of the
Company, (C) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock of the Company or the security being converted or exchanged or (D) stock
dividends paid by the Company which consist of stock of the same class as that
on which the dividend is being paid), (ii) shall not make any payment of
interest, principal or premium, if any, on or repay, repurchase or redeem any
debt securities issued by the Company after the date of initial issuance of the
Convertible Junior Subordinated Debentures that rank pari passu with or junior
to the Convertible Junior Subordinated Debentures, and (iii) shall not make any
guarantee payments with respect to the foregoing (other than pursuant to the
Guarantee). Prior to the termination of any such Deferral Period, the Company
may further extend the Deferral Period; provided that such Deferral Period,
together with all previous and further extensions thereof, may not exceed 20
consecutive quarters and that such Deferral Period may not extend beyond the
maturity date of the Convertible Junior Subordinated Debentures or any earlier
redemption date. The Company has no current intention of exercising its right
to defer payments of interest by extending the interest payment period on the
Convertible Junior Subordinated Debentures. However, if the Company should
determine to exercise its deferral right in the future, the market price of the
Convertible Preferred Securities is likely to be adversely affected. See
"Description of the Convertible Preferred Securities--Distributions" and
"Description of the Convertible Junior Subordinated Debentures--Option to
Extend Interest Payment Period."
Should a Deferral Period occur, a holder of Convertible Preferred
Securities will continue to accrue interest income for United States federal
income tax purposes. As a result, such a holder will be required to include
such interest in gross income for United States federal income tax purposes in
advance of the receipt of cash, and such holder will not receive the cash from
the Issuer related to such income if such
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holder disposes of or converts its Convertible Preferred Securities prior to
the record date for payment of distributions. See "Description of the
Convertible Preferred Securities--Distributions" and "Description of the
Convertible Junior Subordinated Debentures--Option to Extend Interest Payment
Period."
TAX EVENT REDEMPTION AND INVESTMENT COMPANY EVENT DISTRIBUTION. Upon the
occurrence of an Investment Company Event (as defined below), the Company will,
except in certain limited circumstances, cause the Company Trustees (as defined
herein) to liquidate the Issuer and cause Convertible Junior Subordinated
Debentures to be distributed pro rata to the holders of Convertible Preferred
Securities. Upon the occurrence of a Tax Event (as defined herein) in certain
circumstances, the Company will have the right, if certain conditions are met,
(i) to shorten the maturity of the Convertible Junior Subordinated Debentures
to a date not earlier than August 10, 2012, or (ii) to redeem the Convertible
Junior Subordinated Debentures, in whole (but not in part), at 100% of the
principal amount plus accrued and unpaid interest, in which event the
Convertible Preferred Securities will be redeemed in whole at the liquidation
preference of $50 per each Convertible Preferred Security plus accrued and
unpaid distributions. In the case of a Tax Event, the Company may also elect to
cause the Convertible Preferred Securities to remain outstanding and pay
Additional Interest (as defined herein) on the Convertible Junior Subordinated
Debentures. See "Description of the Convertible Preferred
Securities--Conditional Right to Shorten Maturity; Tax Event Redemption and
Investment Company Event Distribution," and "Description of the Convertible
Junior Subordinated Debentures--General."
Under current United States federal income tax law, a distribution of the
Convertible Junior Subordinated Debentures would not be a taxable event to
holders of the Convertible Preferred Securities. However, if the relevant
Special Event (as defined herein) is a Tax Event which results in the Issuer
being treated as an association taxable as a corporation, the distribution
would likely constitute a taxable event to holders of the Convertible Preferred
Securities. See "United States Taxation--Potential Extension of Interest
Payment Period and Original Issue Discount."
SHORTENING OF STATED MATURITY OF CONVERTIBLE JUNIOR SUBORDINATED
DEBENTURES. Upon the occurrence of a Tax Event, the Company in certain
circumstances will have the right to shorten the maturity of the Convertible
Junior Subordinated Debentures to a date not earlier than August 10, 2012 and
thereby cause the Convertible Preferred Securities to be redeemed on such
earlier date. See "Description of the Convertible Preferred
Securities--Conditional Right to Shorten Maturity; Tax Event Redemption and
Investment Company Event Distribution."
EXCHANGE OF CONVERTIBLE PREFERRED SECURITIES FOR CONVERTIBLE JUNIOR
SUBORDINATED DEBENTURES. The Company, which is the holder of all of the
outstanding Common Securities, will have the right at any time to terminate the
Issuer and, after satisfaction of liabilities to creditors of the Issuer as
provided by applicable law, cause the Convertible Junior Subordinated
Debentures to be distributed to the holders of the Convertible Preferred
Securities and Common Securities in liquidation of the Issuer. See "Description
of the Convertible Preferred Securities--Liquidation Distribution Upon
Dissolution."
Under current United States federal income tax law and interpretations,
and assuming, as expected, that the Issuer will not be taxable as a
corporation, a distribution of the Convertible Junior Subordinated Debentures
upon a liquidation of the Issuer will not be a taxable event to holders of the
Convertible Preferred Securities. However, if a Tax Event were to occur that
would cause the Issuer to be subject to United States federal income tax with
respect to income received or accrued on the Convertible Junior Subordinated
Debentures, a distribution of the Convertible Junior Subordinated Debentures by
the Issuer could be a taxable event to the Issuer and the holders of the
Convertible Preferred Securities. See "United States Taxation--Receipt of
Convertible Junior Subordinated Debentures or Cash Upon Liquidation of the
Issuer."
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE. Pursuant to the
Company's 1996 Stock Option Plan (the "1996 Plan") and other employee stock
options plans or programs, as of September 30, 1997, the Company had
outstanding various options to its officers, directors and employees for the
purchase of 4,786,007 shares of Common Stock. All of the shares of Common Stock
issuable upon exercise of said options have been registered pursuant to
registration statements on Form S-8, and, when fully vested, are
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available for immediate resale. Sales of substantial amounts of Common Stock or
the availability of Common Stock for sale, could have an adverse impact on the
market price of the Common Stock and on the Company's ability to raise
additional capital through the sale of Common Stock.
TRADING CHARACTERISTICS OF CONVERTIBLE PREFERRED SECURITIES. The
Convertible Preferred Securities may trade at a price that does not fully
reflect the value of accrued but unpaid distributions. A holder who disposes of
its Convertible Preferred Securities between record dates for payments of
distributions thereon will be required to include accrued but unpaid interest
on the Convertible Junior Subordinated Debentures through the date of
disposition in income as ordinary income (i.e., original issue discount), and
to add such amount to its adjusted tax basis in its pro rata share of the
underlying Convertible Junior Subordinated Debentures deemed disposed of. To
the extent the selling price is less than the holder's adjusted tax basis
(which will include, in the form of original issue discount, all accrued but
unpaid interest), a holder will recognize a capital loss. Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes. See "United States Taxation."
LACK OF PUBLIC MARKET FOR THE CONVERTIBLE PREFERRED SECURITIES. There is
no existing public trading market for the Convertible Preferred Securities and
there can be no assurance regarding the future development of a market for the
Convertible Preferred Securities, or the ability of holders of such securities
to sell their Convertible Preferred Securities or the price at which such
holders may be able to sell their Convertible Preferred Securities. If such a
market were to develop, the Convertible Preferred Securities could trade at
prices that may be higher or lower than their initial offering price depending
on many factors, including prevailing interest rates, the price of Common
Stock, the Company's operating results and the market for similar securities.
The Initial Purchasers currently make a market in the Convertible
Preferred Securities. The Initial Purchasers are not obligated to do so,
however, and any market making with respect to the Convertible Securities may
be discontinued at any time without notice. Therefore, there can be no
assurance as to the liquidity of any trading market for the Convertible
Preferred Securities or that an active public market for the Convertible
Preferred Securities will develop. The Company does not intend to apply for
listing or quotation of the Convertible Preferred Securities on any securities
exchange or stock market; however, the Convertible Preferred Securities are
eligible for trading in The PortalSM Market, a subsidiary of the Nasdaq Stock
Market, Inc.
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CALENERGY CAPITAL TRUST III
CalEnergy Capital Trust III (the "Issuer" or the "Trust") is a
statutory business trust formed under Delaware law pursuant to (i) a
declaration of trust (the "Declaration") executed by the Company, as sponsor of
the Trust, and the trustees of the Issuer (the "Issuer Trustees") and (ii) the
filing of a certificate of trust with the Secretary of State of the State of
Delaware. The Company owns, directly or indirectly, Common Securities in an
aggregate liquidation amount equal to 3% of the total capital of the Issuer.
The Common Securities rank pari passu, and payment will be made thereon pro
rata, with the Convertible Preferred Securities, except that, upon the
occurrence and during the continuance of an event of default under the
Declaration, the rights of the holders of the Common Securities to payment in
respect of distributions and payments upon liquidation, redemption and
otherwise will be subordinated to the rights of the holders of the Convertible
Preferred Securities. The assets of the Trust will consist principally of the
Convertible Junior Subordinated Debentures. The Issuer 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 Convertible Junior Subordinated Debentures and (iii)
engaging in only those other activities necessary or incidental thereto.
Pursuant to the Declaration, there are initially five Issuer Trustees.
Three of the Issuer Trustees (the "Company Trustees") are individuals who are
employees or officers of or who are affiliated with the Company. The fourth
trustee is a financial institution that is unaffiliated with the Company (the
"Trustee"). The fifth trustee is an entity which maintains its principal place
of business in the State of Delaware (the "Delaware Trustee"). Initially, The
Bank of New York, a New York banking corporation, acts as Trustee and its
affiliate, The Bank of New York (Delaware), a Delaware banking corporation,
will act as Delaware Trustee until, in each case, removed or replaced by the
holder of the Common Securities. The Bank of New York also acts as indenture
trustee under the Guarantee (the "Guarantee Trustee") and under the Indenture
(the "Indenture Trustee"). See "Description of the Guarantee" and "Description
of the Convertible Preferred Securities."
The Trustee holds title to the Convertible Junior Subordinated Debentures
for the benefit of the holders of the Trust Securities and the Trustee has the
power to exercise all rights, powers and privileges under the Indenture (as
defined herein) as the holder of the Convertible Junior Subordinated
Debentures. In addition, the Trustee maintains exclusive control of a
segregated non-interest bearing bank account (the "Property Account") to hold
all payments made in respect of the Convertible Junior Subordinated Debentures
for the benefit of the holders of the Trust Securities. The Company, as the
direct or indirect holder of all the Common Securities, has the right to
appoint, remove or replace any of the Issuer Trustees and to increase or
decrease the number of trustees, provided that the number of trustees shall be
at least three, a majority of which shall be Company Trustees. The Company pays
all fees and expenses related to the Trust and the offering of the Convertible
Preferred Securities. See "Description of the Convertible Junior Subordinated
Debentures."
The rights of the holders of the Convertible Preferred Securities,
including economic rights, rights to information and voting rights, if any, are
as set forth in the Declaration and the Delaware Business Trust Act, as amended
(the "Trust Act"). See "Description of the Convertible Preferred Securities."
The Declaration, the Indenture and the Guarantee also incorporate by reference
the terms of the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Declaration, the Indenture and the Guarantee will be qualified under
the Trust Indenture Act. The place of business and the telephone number of the
Trust are the principal executive offices and telephone number of the Company.
See "The Company."
16
<PAGE>
THE COMPANY
OVERVIEW
CalEnergy Company, Inc. is a fast-growing global power company whose goal
is to be a leading provider of low cost and reliable energy services throughout
the world as governments privatize or deregulate electricity and gas markets.
CalEnergy was founded in 1971 and, through its subsidiaries, manages and owns
interests in over 5,000 megawatts ("MW") of power generation facilities in
operation, construction and development worldwide, including 20 generating
facilities which it currently operates. In addition, through its subsidiary,
Northern Electric plc ("Northern"), the Company is engaged in the distribution
of electricity to approximately 1.5 million customers primarily in northeast
England as well as the supply of electricity and gas (together with other
related business activities) throughout England and Wales. The Company has
achieved significant growth in earnings and assets over the past five years
through: (i) acquisitions that complement and diversify the Company's existing
business, broaden the geographic locations of and fuel sources used by its
projects and enhance its competitive capabilities; (ii) enhancement of the
financial and technical performance of existing and acquired projects; and
(iii) development and construction of new plants and facilities ("greenfield
development").
The Company's management team has a proven track record of project
development, operation and acquisition integration. Since the arrival of the
current management team in 1991, the Company's operating and financial results
have improved significantly as a result of cutting costs, improving operating
efficiency at its existing plants, bringing all new greenfield projects into
operation on time and within budget and implementing an aggressive
international expansion and acquisition strategy. The senior management team
has an average of twelve years of independent power experience and owns
approximately 3% of the outstanding Common Stock of the Company on a fully
diluted basis after giving effect to the Acquisition (as defined below), the
Common Stock Offering and the Direct Sale.
The market capitalization of the Company has risen at a compound annual
rate of 27% from approximately $499 million in December 1991 to approximately
$2,146 million in September 30, 1997, the revenues of the Company have risen at
a compound annual rate of 46% from approximately $127 million in 1992 to
approximately $576 million in 1996 and net income available to common
stockholders has risen at a compound annual rate of 33% from approximately $30
million in 1992 to approximately $92 million in 1996.
On January 29, 1998, the Company reported that total revenues increased
229% to $628.0 million for the quarter ended December 31, 1997, from $191.0
million for the same period in 1996. Net income available to common
shareholders increased 61% to $34.1 million for the quarter ended December 31,
1997, or $0.43 per basic common share, compared to $21.2 million, or $0.34 per
basic common share for the same period in 1996, excluding the effects of an $87
million one-time, fourth quarter charge regarding the Company's Indonesian
projects. Including this charge, the net loss was $52.9 million for the quarter
ended December 31, 1997, or $0.67 per basic common share.
For the year ended December 31, 1997, revenues increased 294% to $2.3
billion from $576.2 million for the same period in 1996. Excluding the
extraordinary and non-recurring items, net income available to common
shareholders for the year ended December 31, 1997 increased 50% to $138.8
million, or $2.06 per basic common share, compared to $92.5 million, or $1.69
per basic common share for the same period in 1996. Including the one-time
Indonesian charge in the fourth quarter, the full year 1997 net income before
extraordinary item was $51.8 million or $0.77 per basic common share. In
addition, the year ended December 31, 1997 earnings results included an
extraordinary item in the amount of $135.9 million, or $2.02 per basic common
share. The extraordinary item reflects the so-called "windfall tax" on
Northern, acquired on December 24, 1996, assessed by the Labour Government in
the United Kingdom. Including the one-time Indonesian charge and the
extraordinary item, the net loss was $84.0 million for the year ended
December 31, 1997, or $1.25 per basic common share. See the Company's
Current Report on Form 8-K dated January 29, 1998, which is incorporated
herein by reference.
The one-time charge of $87 million for the fourth quarter of 1997
represents an asset valuation impairment under Financial Accounting Standard
No. 121 "Accounting for the Impairment of Long-
17
<PAGE>
Lived Assets" relating to CalEnergy's assets in Indonesia. The charge includes
all reasonably estimated asset valuation impairments associated with the
Company's assets in Indonesia and gives effect to the political risk insurance
on such investment. The estimate assumes there will be no tax benefits
associated with the asset valuation impairment.
During 1995 to 1997, the Company consummated several significant
acquisitions, each of which has been successfully integrated and immediately
accretive to earnings. In January 1995, the Company acquired Magma Power
Company ("Magma"), a publicly-traded United States independent power producer
with 228 MW of aggregate net operating capacity and 154 MW of aggregate net
ownership capacity, for approximately $958 million. The Magma acquisition,
combined with the Company's previously existing assets, has made the Company
the world's largest independent geothermal power producer (based on the
Company's estimate of aggregate MW of electric generating capacity in operation
and construction).
In April 1996, the Company completed the purchase for approximately $70
million of its partner's interests in four electric generating plants in
Southern California, resulting in its sole ownership of the Imperial Valley
Projects' then 228 MW of aggregate net operating capacity.
In August 1996, the Company acquired Falcon Seaboard Resources, Inc.
("Falcon Seaboard") for approximately $226 million, thereby acquiring ownership
in 520 MW of natural gas-fired electric production facilities located in New
York, Texas and Pennsylvania and a related gas transmission pipeline.
In December 1996, the Company acquired a majority of the common shares of
Northern. Northern is one of the twelve regional electricity companies (each, a
"REC") which came into existence as a result of the restructuring and
subsequent privatization of the electricity industry in the United Kingdom in
1990. Northern distributes electricity in its authorized area located in
northeast England which covers approximately 14,400 square kilometers and has a
population of approximately 3.2 million people. Northern also supplies
electricity and gas inside and outside its authorized area and owns interests
in three producing gas field operations in the North Sea.
RECENT EVENTS
On September 11, 1997, the Company announced that it had signed a
definitive agreement (the "KDG Agreement") with Kiewit Diversified Group Inc.
("KDG"), a wholly-owned subsidiary of Peter Kiewit Sons', Inc. ("PKS"), to
acquire all of KDG's ownership interest in the various international power
generation projects (the "Energy Project Joint Venture Acquisition") which are
jointly owned with the Company and managed by the Company as well as to
repurchase all of KDG's outstanding ownership interests in the Company's Common
Stock (the "Stock Repurchase," and together with the Energy Project Joint
Venture Acquisition, the "Acquisition"). Final closing of the transaction
occurred on January 2, 1998.
KDG's ownership interest in the Company consisted of 20,231,065 shares of
Common Stock (including options to acquire 1,000,000 shares of Common Stock)
which represented approximately 30% of the Company's outstanding shares (or
26%, on a fully diluted basis), in each case prior to the Common Stock Offering
and the Direct Sale, as well as the following power project interests: 45% of
the 165 net MW Mahanagdong project, 35% of the 150 net MW Casecnan project, 47%
of the 400 net MW Dieng project, 44% of the 400 net MW Patuha project, 30% of
the 400 net MW Bali project and 30% of CE Electric UK Holdings (the parent of
Northern). The Company was and continues to be the managing partner and
operator of each such project (collectively, the "Joint Venture Energy
Projects"). In addition, KDG's 50% interest in all other power project
opportunities which the Company had in development under the international
joint venture agreement with KDG were transferred to the Company. Upon
consummation of the Acquisition, the Company added over 1,000 net MW of
generating capacity in operation, construction and development to its project
portfolio (including approximately 850 net MW of operating, construction and
development projects). For projects under development and uncertainties
relating to doing business outside the United States see "Risk Factors."
18
<PAGE>
The Company paid $1,159,215,000 for the Energy Projects Joint Venture
Acquisition and the Stock Repurchase from KDG. The Company funded such
Acquisition with available cash and the net proceeds of the Note Offering, the
Common Stock Offering and the Direct Sale.
On October 17, 1997, the Company consummated a public offering of
17,100,000 shares of Common Stock at a price of $37-7/8 per share in
simultaneous United States and international offerings (the "Common Stock
Offering"). In addition, 2,000,000 shares of Common Stock were purchased from
the Company in a direct sale by a trust affiliated with Walter Scott, Jr., the
Chairman and Chief Executive Officer of PKS, contemporaneously with the closing
of the Common Stock Offering (the "Direct Sale"). The Company received
approximately $700 million in net proceeds from the Common Stock Offering and
the Direct Sale. In addition, on October 28, 1997, the Company consummated the
Note Offering, a public offering of $350,000,000 aggregate principal amount of
its 7.63% Senior Notes due 2007. See the Company's Current Reports on Form 8-K
dated October 13, 1997, October 23, 1997 and October 28, 1997, each
incorporated herein by reference.
On December 16, 1997 the Company announced that CE Electric UK Funding
Company, an indirect subsidiary of the Company ("UK Funding Company"), closed
the sale (the "UK Note Offering") of $125 million of its 6.853% Senior Notes
due 2004, and $237 million of its 6.995% Senior Notes due 2007 (collectively,
the "UK Senior Notes"), and (pound)200 million of its 7.25% Sterling Bonds due
2022 (which are guaranteed as to scheduled payments of principal and interest
pursuant to a financial guarantee insurance policy issued by AMBAC Insurance UK
Limited) (the "Sterling Bonds," and collectively with the UK Senior Notes, the
"UK Notes"). The U.K. Senior Notes were rated BBB+, Baal and A- by Standard &
Poor's, Moody's and Duff & Phelps respectively. The Sterling Bonds were rated
AAA and Aaa by Standard & Poor's and Moody's, respectively. UK Funding Company
used the net proceeds from the UK Senior Note offering to refinance in full the
term loans incurred by its wholly-owned subsidiary, CE Electric UK Holdings, to
finance the acquisition of Northern and for other general corporate purposes.
On December 11, 1997 and on February 23, 1998, the Company announced that
it had increased the authorized purchase amounts in its stock repurchase
program. With the increased authorizations, the Company is currently authorized
to purchase from time to time up to 3,000,000 shares of its Common Stock on the
open market. The Common Stock is traded on the New York, Pacific and London
Stock Exchanges.
STRATEGY
The Company's growth strategy remains focused upon taking advantage of the
investment opportunities created by the continuing deregulation and
privatization in energy sectors throughout the world. As a market evolves in
its life cycle from emerging to mature, the investment opportunities available
to the Company will evolve from generation to distribution and supply.
The Company's strategy includes:
o GROWTH THROUGH INTERNATIONAL AND DOMESTIC ACQUISITIONS. The
Company has successfully completed four acquisitions during 1995 to
1997, each of which was immediately accretive to earnings. The Company
believes several of these acquisitions provided it with specialized
skills and experience that enhance its competitive position in the
areas it has targeted for future growth. For example, the Company's
acquisition of Northern, a United Kingdom ("UK") regional electric
company engaged in electric distribution and gas distribution and
supply, is the first step in its planned expansion into those sectors
in the U.S. and elsewhere throughout the world. In addition, since
the UK is progressively deregulating its electric and gas supply
sectors, the Company believes that its Northern management team has
the knowledge and skills to compete in a competitive supply market.
Northern also possesses the sophisticated billing and information
systems that are believed by the Company to be critically important
components of the skill and technology base necessary to compete
effectively in a deregulated environment.
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<PAGE>
The Company believes that the electric industry in the United
States will also progressively deregulate over the next three to five
years and will largely follow the regulatory model established in the
UK (with incentive based rates or price caps). As currently regulated
U.S. electric distributors and electric and gas suppliers attempt to
rationalize their businesses to maintain profitability in a price
competitive market, the Company believes that opportunities will
become available to low cost and reliable providers of energy services
to gain market share in energy supply and provide additional services
to competitors (such as utility line construction and maintenance
services, metering, customer billing and information systems
services).
As a result, the Company believes that by acquiring a U.S. utility
operation and transferring the knowledge, skills and systems gained at
Northern, it can create a platform from which a U.S. energy
distribution and supply business can be profitably established and
expanded in a deregulated market. In this context, the Company sought
in 1997 to acquire a U.S. utility, New York State Electric & Gas
Corporation ("NYSEG"), through a two-step tender offer. When its
minimum tender condition was not met, the Company did not increase its
offer price and chose not to further pursue the NYSEG acquisition.
Consistent with its disciplined approach to acquisitions, the Company
will continue to evaluate other available opportunities from time to
time, but will not agree to pay prices which it believes to be
unjustified in its acquisition analysis. The Company still intends to
acquire a U.S. utility operation in the next few years, although it
currently has no specific acquisition plans.
o GROWTH THROUGH GREENFIELD DEVELOPMENT OF ENERGY PROJECTS. The
Company continues to view the international power generation sector as
an attractive market for the development of new greenfield energy
opportunities, an area in which it has demonstrated substantial
expertise. With the acquisition of Sovereign Exploration Ltd. (now
CalEnergy Gas (UK) Limited) as part of the Northern acquisition, the
Company has expanded its development strategy to include integrated
generation and upstream natural gas operations.
o PROFIT ENHANCEMENT THROUGH OPERATING EFFICIENCIES WHILE
MAINTAINING QUALITY AND RELIABILITY OF SERVICE. The Company
aggressively pursues profitability improvements through efficiency and
productivity gains at existing operations.
o CONTINUED DIVERSIFICATION OF REVENUE BASE AND FUEL SOURCES. The
Company believes that it presently has a diversified revenue base,
distributed among its net ownership of 1,689 MW in twenty-one
operating projects and its ownership of an operating electric utility.
The Company intends to seek continued diversification of its revenue
base and fuel sources through acquisitions and greenfield development.
---------------
The principal executive offices of the Company are located at 302 South
36th Street, Suite 400, Omaha, Nebraska 68131 and its telephone number is (402)
341-4500. The Company was incorporated in 1971 under the laws of the State of
Delaware.
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<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratio of earnings to fixed
charges on a historical basis for each of the five years in the period ended
December 31, 1996 and for the nine months ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
----------------------- SEPTEMBER 30,
------------
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges............ 3.2 2.8 1.7 1.5 1.6 1.7 1.7
</TABLE>
For purposes of computing historical ratios of earnings to fixed charges,
earnings are divided by fixed charges. "Earnings" represent the aggregate of
(a) the pre-tax income of the Company, including its proportionate share of the
pre-tax income of the Coso Project and excluding the equity income and loss of
non-consolidated subsidiaries, and (b) fixed charges, less capitalized
interest. "Fixed charges" represent interest (whether expensed or capitalized),
amortization of deferred financing and bank fees, and the portion of rentals
considered to be representative of the interest factor (one-third of lease
payments) and preferred stock dividend requirements of majority owned
subsidiaries.
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<PAGE>
CAPITALIZATION
The following table sets forth the historical and pro forma consolidated
capitalization of the Company at September 30, 1997. The table should be read
in conjunction with the Company's consolidated financial statements and notes
thereto incorporated herein by reference. Pro Forma consolidated capitalization
gives effect to the Common Stock Offering, the Direct Sale, the Note Offering
and the Acquisition as if each had occurred on September 30, 1997.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------
(IN THOUSANDS)
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Indebtedness:
Parent company debt
Senior discount notes........................... 529,640 529,640
Limited recourse senior secured notes (1)....... 200,000 200,000
Senior notes.................................... 224,191 224,191
7.63% Note Offering............................. -- 350,000
Subsidiary and project debt (2):
Construction loans.............................. 385,527 616,427
Project finance loans........................... 233,622 605,122
Salton Sea notes and bonds...................... 493,868 493,868
UK credit facility.............................. 653,630 653,630
Northern Electric Bonds......................... 421,260 421,260
--------- ---------
Total consolidated indebtedness................... 3,141,738 4,094,138
Deferred income................................... 28,044 28,044
Company-obligated mandatorily redeemable
convertible preferred securities of subsidiary
trusts.......................................... 553,930 553,930
Preferred securities of subsidiary................ 56,387 56,387
Minority interest................................. 125,834 2,000
Common stock and options subject to redemption 654,736 --
Stockholders' equity:
Preferred stock, no par value, 2,000 shares
authorized...................................... -- --
Common stock, $.0675 par value, 180,000 shares
authorized, 63,880 shares issued, 63,136 shares
outstanding - actual; 82,980 shares issued -
pro forma; 63,005 shares outstanding - pro forma 4,312 5,601
Additional paid-in capital........................ 561,263 1,238,581
Retained earnings................................. 266,415 266,415
Common stock and options subject to redemption.... (654,736) --
Treasury stock, 744 common shares at cost -
actual; 19,795 pro forma........................ (26,068) (659,491)
Unearned compensation - restricted stock.......... (475) (475)
Unrealized gain on investments, net............... 9,035 9,035
Cumulative effect of foreign currency translation
adjustments..................................... (9,372) (5,355)
--------- ---------
Total stockholders' equity........................ 150,374 854,311
--------- ---------
Total capitalization.............................. 4,711,043 5,588,810
========= =========
</TABLE>
- ---------
(1) The Limited Recourse Senior Secured Notes are recourse to CalEnergy
Company, Inc. only to a limited extent, which is currently $0.
(2) Represents debt for which the repayment obligation is at the project or
subsidiary level.
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<PAGE>
ACCOUNTING TREATMENT
The financial statements of the Issuer will be reflected in the Company's
consolidated financial statements with the Convertible Preferred Securities
shown as Company-obligated mandatorily redeemable convertible preferred
securities of subsidiary trusts.
USE OF PROCEEDS
The Selling Holders will receive all of the proceeds from the sale of the
Offered Securities. Neither the Company nor the Issuer will receive any
proceeds from the sale of the Offered Securities.
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<PAGE>
DESCRIPTION OF THE CONVERTIBLE PREFERRED SECURITIES
The following summary of the material terms and provisions of the
Convertible Preferred Securities is subject to, and qualified in its entirety
by reference to, the Declaration. The Convertible Preferred Securities were
issued pursuant to the terms of the Declaration. The Declaration incorporates
by reference terms of the Trust Indenture Act. The Declaration will be
qualified under the Trust Indenture Act. The Bank of New York, as Trustee, acts
as indenture trustee for the Declaration for purposes of compliance with the
Trust Indenture Act. Capitalized terms not otherwise defined herein have the
meanings assigned to them in the Declaration.
GENERAL
The Convertible Preferred Securities were issued in fully registered
form without interest coupons. Bearer Convertible Preferred Securities were
not issued.
The Convertible Preferred Securities represent undivided beneficial
ownership interests in the assets of the Issuer and entitle the holders thereof
to a preference in certain circumstances with respect to distributions and
amounts payable on redemption or liquidation over the Common Securities, as
well as other benefits as described in the Declaration.
All of the Common Securities are owned, directly or indirectly, by the
Company. The Common Securities rank pari passu, and payments will be made
thereon pro rata, with the Convertible Preferred Securities except as described
under "--Subordination of Common Securities." The Convertible Junior
Subordinated Debentures are owned by the Trustee and held for the benefit of
the holders of the Trust Securities. The Declaration does not permit the
issuance by the Issuer of any securities other than the Trust Securities or the
incurrence of any indebtedness by the Issuer.
DISTRIBUTIONS
The distributions payable on each Convertible Preferred Security are
fixed at a rate per annum of 6 1/2% of the stated liquidation preference of $50
per each Convertible Preferred Security. Deferred distributions (and interest
thereon) accrue interest (compounded quarterly) at the same rate. The term
"distributions" as used herein includes any such distributions payable unless
otherwise stated. The amount of distributions payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months.
Distributions on the Convertible Preferred Securities are cumulative,
accrue from the date of initial issuance and are payable quarterly in arrears
on each March 1, June 1, September 1 and December 1, commencing September 1,
1997, when, as and if available. The distribution payable on September 1, 1997,
which was calculated at the above rate and based on a period that is shorter
than a full quarter, was in the amount of $0.17153 per each Convertible
Preferred Security. The Company has the right under the Indenture to defer
interest payments from time to time on the Convertible Junior Subordinated
Debentures for successive periods not exceeding 20 consecutive quarters for
each such period, and, as a consequence, quarterly distributions on the
Convertible Preferred Securities would be deferred by the Issuer (but would
continue to accrue with interest) during any such Deferral Period. In the event
that the Company exercises this right, during such period the Company (i) shall
not declare or pay dividends on, make distributions with respect to, or redeem,
purchase or acquire, or make a liquidation payment with respect to, any of its
capital stock (other than (A) purchases or acquisitions of shares of Common
Stock in connection with the satisfaction by the Company of its obligations
under any employee benefit plans, (B) as a result of a reclassification of
capital stock of the Company or the exchange or conversion of one class or
series of the Company's capital stock for another class or series of capital
stock of the Company, (C) the purchase of fractional interests in shares of the
Company's capital stock pursuant to the conversion or exchange provisions of
such capital stock of the Company or the security being converted or exchanged
or (D) stock dividends paid by the Company which consist of stock of the same
class as that on which the dividend is being paid), (ii) shall not make any
payment of interest, principal or premium, if any, on or repay, repurchase or
redeem any debt securities issued by the Company after the date of original
issuance of the Convertible Junior Subordinated Debentures that rank pari passu
with or junior
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<PAGE>
to the Convertible Junior Subordinated Debentures, and (iii) shall not make any
guarantee payments with respect to the foregoing (other than pursuant to the
Guarantee). Prior to the termination of any Deferral Period, the Company may
further extend such Deferral Period; provided that such Deferral Period
together with all previous and further deferrals thereof may not exceed 20
consecutive quarters. Upon the termination of any Deferral Period, the Company
is required to pay all amounts then due and, upon such payment, the Company may
select a new Deferral Period, subject to the above requirements. In no event
shall any Deferral Period extend beyond the maturity of the Convertible Junior
Subordinated Debentures or any earlier Redemption Date. See "Description of the
Convertible Junior Subordinated Debentures--Interest" and "--Option to Extend
Interest Payment Period."
Distributions on the Convertible Preferred Securities must be paid
quarterly on the dates payable to the extent of funds of the Trust available
for the payment of such distributions. Amounts available to the Trust for
distribution to the holders of the Convertible Preferred Securities are limited
to payments under the Convertible Junior Subordinated Debentures in which the
Issuer will invest the proceeds from the issuance and sale of the Trust
Securities. See "Description of the Convertible Junior Subordinated
Debentures." The payment of distributions, to the extent of funds of the Trust
available therefor, is guaranteed by the Company, as set forth under
"Description of the Guarantee."
Distributions on the Convertible Preferred Securities are payable to the
holders thereof as they appear on the books and records of the Issuer on the
relevant record dates, which will be fifteen days prior to the relevant payment
dates. Subject to any applicable laws and regulations and the provisions of the
Declaration, each such payment will be made as described under "--Payment and
Paying Agency" below. In the event that any date on which distributions are
payable on the Convertible Preferred Securities is not a Business Day, payment
of the distribution payable on such date will be made on the next succeeding
day which is a Business Day (without any distribution 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. A "Business Day" shall mean any day other than a day on which
banking institutions in The City of New York or Wilmington, Delaware are
authorized or required by law to close.
CONVERSION RIGHTS
General. The Convertible Preferred Securities are convertible at any time
beginning 60 days following the first date of original issuance of the
Convertible Preferred Securities through the close of business on September 1,
2027 (except in the case of Convertible Preferred Securities called for
redemption which shall be convertible at any time prior to the close of
business on the Business Day prior to the Redemption Date), at the option of
the holder thereof and in the manner described below, into shares of the Common
Stock at an initial conversion rate of shares of Common Stock for each
Convertible Preferred Security (equivalent to a conversion price of $47.75 per
share of Common Stock), subject to adjustment as described under "Conversion
Price Adjustments" below. The Issuer has covenanted in the Declaration not to
convert Convertible Junior Subordinated Debentures held by it except pursuant
to a notice of conversion delivered to the Conversion Agent by a holder of
Convertible Preferred Securities. A holder of Convertible Preferred Securities
wishing to exercise its conversion right shall deliver an irrevocable
conversion notice, together, if such Convertible Preferred Securities is a
Certificated Security (as defined herein), with such Certificated Security, to
the Conversion Agent which shall, on behalf of such holder, exchange such of
the Convertible Preferred Securities for a portion of the Convertible Junior
Subordinated Debentures and immediately convert such Convertible Junior
Subordinated Debentures into Common Stock. Holders may obtain copies of the
required form of the conversion notice from the Conversion Agent.
Holders of Convertible Preferred Securities at the close of business on a
distribution record date will be entitled to receive the distribution payable
on such Convertible Preferred Securities on the corresponding distribution
payment date notwithstanding the conversion of such Convertible Preferred
Securities following such distribution record date but prior to such
distribution payment date. Except as provided in the immediately preceding
sentence, neither the Issuer nor the Company will make, or be required to make,
any payment, allowance or adjustment for accumulated and unpaid distributions,
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<PAGE>
whether or not in arrears, on converted Convertible Preferred Securities. The
Company will make no payment or allowance for distributions on the shares of
Common Stock issued upon such conversion, except to the extent that such shares
of Common Stock are held of record on the record date for any such
distributions, except in certain limited circumstances. Each conversion will be
deemed to have been effected immediately prior to the close of business on the
day on which the related conversion notice was received by the Issuer.
No fractional shares of the Common Stock will be issued as a result of
conversion, but in lieu thereof such fractional interest will be paid by the
Company in cash.
Conversion Price Adjustments--General. The conversion price will be
subject to adjustment in certain events including, without duplication: (a) the
issuance of shares of Common Stock as a dividend or a distribution with respect
to Common Stock, (b) subdivisions, combinations and reclassification of Common
Stock, (c) the issuance to all holders of Common Stock of rights or warrants
entitling them (for a period not exceeding 45 days) to subscribe for shares of
Common Stock at less than the current market price, (d) the distribution to
holders of Common Stock of evidences of indebtedness of the Company, securities
or capital stock, cash or assets (including securities, but excluding those
rights, warrants, dividends and distributions referred to above and dividends
paid exclusively in cash), (e) declaration and payment of a cash dividend on
the Common Stock in a per share amount which exceeds the greater of (A) the per
share amount of the immediately preceding quarterly cash dividend on its Common
Stock and (B) 15% of the current market price of the Common Stock as of the
trading day immediately preceding the date of declaration of such dividend, and
(f) payment to holders of Common Stock in respect of a tender or exchange offer
by the Company or any subsidiary for Common Stock (other than an odd lot tender
offer) at a price in excess of 110% of the current market price of Common Stock
as of the trading day next succeeding the last date tenders or exchanges may be
made pursuant to such tender or exchange offer.
The Company from time to time may reduce the conversion price of the
Convertible Junior Subordinated Debentures (and thus the conversion price of
the Convertible Preferred Securities) by any amount selected by the Company for
any period of at least 20 days, in which case the Company shall give at least
15 days' notice of such reduction. The Company may, at its option, make such
reductions in the conversion price, in addition to those set forth above, as
the Company's Board of Directors deems advisable to avoid or diminish any
income tax to holders of Common Stock resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated as
such for income tax purposes. See "United States Taxation--Adjustment of
Conversion Price."
No adjustment of the conversion price will be made upon the issuance of
any shares of Common Stock pursuant to any present or future plan providing for
the reinvestment of dividends or interest payable on securities of the Company
and the investment of additional optional amounts in shares of Common Stock
under any such plan. No adjustment in the conversion price will be required
unless such adjustment would require a change of at least one percent (1%) in
the price then in effect; provided, however, that any adjustment that would not
be required to be made shall be carried forward and taken into account in any
subsequent adjustment. If any action would require adjustment of the conversion
price pursuant to more than one of the provisions described above, only one
adjustment shall be made and such adjustment shall be the amount of adjustment
that has the highest absolute value to the holder of the Convertible Preferred
Securities.
Conversion price adjustments or omissions in making such adjustments
may, under certain circumstances, be deemed to be distributions that could be
taxable as dividends to holders of the Convertible Preferred Securities or to
the holders of Common Stock. See "United States Taxation."
Conversion Adjustments--Merger, Consolidation or Sale of Assets of the
Company. In the event that the Company shall be a party to any transaction
(including, without limitation, and with certain exceptions), (a)
recapitalization or reclassification of the Common Stock, (b) consolidation of
the Company with, or merger of the Company into, any other Person, or any
merger of another Person into the Company, (c) any sale, transfer or lease of
all or substantially all of the assets of the Company or (d) any compulsory
share exchange) pursuant to which the Common Stock is converted into the right
to receive other securities, cash or other property (each of the foregoing
being referred to as a "Transaction"),
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then the holders of the Convertible Preferred Securities then outstanding shall
have the right to convert the Convertible Preferred Securities into the kind
and amount of securities, cash or other property receivable upon the
consummation of such Transaction by a holder of the number of shares of Common
Stock issuable upon conversion of such Convertible Preferred Securities
immediately prior to such Transaction.
In the case of a Transaction, each Convertible Preferred Security would
become convertible into the securities, cash or property receivable by a holder
of the number of shares of the Common Stock into which such Convertible
Preferred Securities was convertible immediately prior to such Transaction.
This change could substantially lessen or eliminate the value of the conversion
privilege associated with the Convertible Preferred Securities in the future.
For example, if the Company were acquired in a cash merger, each Convertible
Preferred Security would become convertible solely into cash and would no
longer be convertible into securities whose value would vary depending on the
future prospects of the Company and other factors.
OPTIONAL REDEMPTION
The Company is permitted to redeem the Convertible Junior Subordinated
Debentures as described herein under "Description of the Convertible Junior
Subordinated Debentures--Optional Redemption," in whole or in part, from time
to time, after September 1, 2000, upon not less than 20 nor more than 60 days'
notice. The Company therefore will be required to make 13 interest payments
before being able to redeem any Convertible Junior Subordinated Debentures,
other than under certain circumstances following a Tax Event. See "Description
of the Convertible Junior Subordinated Debentures--Optional Redemption." Upon
any redemption in whole or in part of the Convertible Junior Subordinated
Debentures at the option of the Company, the Issuer will, to the extent of the
proceeds of such redemption, redeem Convertible Preferred Securities and Common
Securities at the Redemption Price. In the event that fewer than all the
outstanding Convertible Preferred Securities are to be so redeemed, the
Convertible Preferred Securities to be redeemed will be selected as described
under "--Form, Denomination and Registration--Global Certificate; Book-Entry
Form" below.
In the event of any redemption in part, the Trust shall not be required
to (i) issue, register the transfer of or exchange any of the Convertible
Preferred Securities during a period beginning at the opening of business 15
days before any selection for redemption of Convertible Preferred Securities
and ending at the close of business on the earliest date in which the
relevant notice of redemption is deemed to have been given to all holders of
Convertible Preferred Securities to be so redeemed and (ii) register the
transfer of or exchange any Convertible Preferred Securities so selected for
redemption, in whole or in part, except for the unredeemed portion of any
Convertible Preferred Securities being redeemed in part. See "--Redemption
Procedures."
CONDITIONAL RIGHT TO SHORTEN MATURITY; TAX EVENT REDEMPTION AND INVESTMENT
COMPANY EVENT DISTRIBUTION
If a Tax Event (as defined herein) shall occur and be continuing and in
the opinion of counsel to the Company experienced in such matters, there would
in all cases, after effecting the termination of the Issuer and the
distribution of the Convertible Junior Subordinated Debentures to the holders
of the Convertible Preferred Securities in exchange therefor, be more than an
insubstantial risk that an Adverse Tax Consequence (as defined herein) would
continue to exist, then the Company shall have the right:
(a) to shorten the Stated Maturity of the Junior Subordinated
Debentures to the minimum extent required, but in any event to a date not
earlier than August 10, 2012 (the action referred to in this clause (a)
being referred to herein as a "Maturity Advancement"), such that, in the
opinion of counsel to the Company experienced in such matters, after
advancing the Stated Maturity, interest paid on the Junior Subordinated
Debentures will be deductible for federal income tax purposes, provided,
however, that there shall be delivered to the Trustees an opinion of
counsel (which counsel shall be satisfactory to the Trustees) that such
change in maturity will not (i) cause the Trust to fail to be classified
as a grantor trust or (ii) result in a taxable event to the holder, or
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(b) if in the opinion of counsel to the Company experienced in
such matters, there would in all cases, after effecting a Maturity
Advancement, be more than an insubstantial risk that an Adverse Tax
Consequence would continue to exist, to redeem the Junior Subordinated
Debentures, prior to September 1, 2000, in whole but not in part for
cash, upon not less than 30 nor more than 60 days' notice and within 90
days following the occurrence of the Tax Event, at 100% of the
principal amount thereof plus accrued and unpaid interest and,
following such redemption, all the Convertible Preferred Securities
will be redeemed by the Issuer at the liquidation preference of $50 per
each Convertible Preferred Security plus accrued and unpaid
distributions. See "--Mandatory Redemption."
In lieu of the foregoing options, the Company will also have the option
of causing the Convertible Preferred Securities to remain outstanding and pay
Additional Interest (as defined herein) on the Convertible Junior
Subordinated Debentures. See "Description of the Convertible Junior
Subordinated Debentures--Additional Interest."
Holders of Convertible Preferred Securities should consult their own tax
advisors regarding the tax consequences to them of a Maturity Advancement.
See "United States Taxation--Proposed Tax Legislation" for a discussion
of certain legislative proposals that, if adopted could give rise to a Tax
Event, which may permit the Company to shorten the Stated Maturity of the
Convertible Junior Subordinated Debentures or cause a redemption of the
Convertible Preferred Securities prior to September 1, 2000.
"Tax Event" means that the Company shall have obtained an opinion of
nationally recognized independent tax counsel (reasonably acceptable to the
Company Trustees) experienced in such matters to the effect that, as a result
of (a) any amendment to or change (including any announced prospective change)
in the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein or (b) any
amendment to or change in an interpretation or application of such laws or
regulations by any legislative body, court, governmental agency or regulatory
authority (including the enactment of any legislation and the publication of
any judicial decision or regulatory determination on or after the date of the
Original Offering), which amendment or change is effective, is enacted or which
interpretation or pronouncement is announced on or after the date of the
Original Offering (collectively, a "Change In Tax Law"), there is more than an
insubstantial risk that (i) the Issuer is or will be subject to United States
federal income tax with respect to interest received on the Convertible Junior
Subordinated Debentures, (ii) interest payable to the Issuer on the Convertible
Junior Subordinated Debentures is not or will not be deductible for United
States federal income tax purposes or (iii) the Issuer is or will be subject to
more than a de minimis amount of other taxes, duties, assessments or other
governmental charges of whatever nature imposed by the United States, or any
other taxing authority (each of the circumstances referred to in clauses (i),
(ii) and (iii) being referred to herein as an "Adverse Tax Consequence").
Notwithstanding anything in the previous sentence to the contrary, a Tax Event
shall not include any Change in Tax Law that requires the Company for United
States federal income tax purposes to defer taking a deduction for any original
issue discount ("OID") that accrues with respect to the Convertible Junior
Subordinated Debentures until the interest payment related to such OID is paid
by the Company in money provided that such Change in Tax Law does not create
more than an insubstantial risk that the Company will be prevented from taking
a deduction for OID accruing with respect to the Convertible Junior
Subordinated Debentures at a date that is no later than the date the interest
payment related to such OID is actually paid by the Company in money.
If an Investment Company Event (as defined herein) shall occur and be
continuing, the Company shall cause the Company Trustees to dissolve and
liquidate the Issuer and cause the Convertible Junior Subordinated Debentures,
subject to the rights of creditors under applicable law, to be distributed to
the holders of the Convertible Preferred Securities in liquidation of the
Issuer within 90 days following the occurrence of such Investment Company
Event.
The distribution by the Company of the Convertible Junior Subordinated
Debentures will effectively result in the cancellation of the Convertible
Preferred Securities.
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"Investment Company Event" means the occurrence of a change in law or
regulation or a written change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority (a "Change in 1940 Act Law") to the effect that the Issuer is or will
be considered an "investment company" which is required to be registered under
the Investment Company Act of 1940, as amended (the "1940 Act"), which Change
in 1940 Act Law becomes effective on or after the date of the Original
Offering.
A "Special Event" means either an Investment Company Event or a Tax
Event.
After the date fixed for any distribution of Convertible Junior
Subordinated Debentures (i) the Convertible Preferred Securities will no longer
be deemed to be outstanding, (ii) DTC or its nominee, as the record holder of
the Global Certificates, will receive a registered global certificate or
certificates representing the Convertible Junior Subordinated Debentures to be
delivered upon such distribution and (iii) any certificates representing
Convertible Preferred Securities not held by DTC or its nominee will be deemed
to represent Convertible Junior Subordinated Debentures having a principal
amount equal to the aggregate of the stated liquidation preference of such
Convertible Preferred Securities, with accrued and unpaid interest equal to the
amount of accrued and unpaid distributions on such Convertible Preferred
Securities, until such certificates are presented to the Company or its agent
for transfer or reissuance.
MANDATORY REDEMPTION
The Convertible Junior Subordinated Debentures will mature on September
1, 2027, and may be redeemed, in whole or in part, at any time after September
1, 2000 or at any time in certain circumstances upon the occurrence of a Tax
Event. Upon the repayment or payment of the Convertible Junior Subordinated
Debentures, whether at maturity or upon redemption or otherwise, the proceeds
from such repayment or redemption shall simultaneously be applied to redeem
Trust Securities having an aggregate liquidation amount equal to the
Convertible Junior Subordinated Debentures so repaid or redeemed at the
applicable redemption price together with accrued and unpaid distributions
through the date of redemptions provided that holders of the Trust Securities
shall be given not less than 30 nor more than 60 days' notice of such
redemption. See "--Tax Event or Investment Company Event Redemption or
Distribution" and "Description of the Convertible Junior Subordinated
Debentures--General" and "--Optional Redemption." Upon the repayment of the
Convertible Junior Subordinated Debentures at maturity or upon any
acceleration, earlier redemption or otherwise, the proceeds from such repayment
will be applied to redeem the Convertible Preferred Securities and Common
Securities, in whole, upon not less than 30 nor more than 60 days' notice.
REDEMPTION PROCEDURES
The Convertible Preferred Securities will not be redeemed unless all
accrued and unpaid distributions have been paid on all Convertible Preferred
Securities for all quarterly distribution periods terminating on or prior to
the date of redemption.
If the Issuer gives a notice of redemption in respect of Convertible
Preferred Securities (which notice will be irrevocable), then, by 12:00 noon,
New York time, on the redemption date, the Issuer will irrevocably deposit with
DTC funds sufficient to pay the amount payable on redemption and will give DTC
irrevocable instructions and authority to pay such amount in respect of
Convertible Preferred Securities represented by the Global Certificates and
will irrevocably deposit with the paying agent for the Convertible Preferred
Securities funds sufficient to pay such amount in respect of any Certificated
Securities and will give such paying agent irrevocable instructions and
authority to pay such amount to the holders of Certificated Securities upon
surrender of their certificates. Notwithstanding the foregoing, distributions
payable on or prior to the redemption date for any Convertible Preferred
Securities called for redemption shall be payable to the holders of such
Convertible Preferred Securities on the relevant record dates for the related
distribution dates. If notice of redemption shall have been given and funds are
deposited as required, then upon the date of such deposit, all rights of
holders of such Convertible Preferred Securities so called for redemption will
cease, except the right of the holders of such Convertible Preferred Securities
to receive the redemption price, but without interest on such redemption
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price. In the event that any date fixed for redemption of Convertible Preferred
Securities is not a Business Day, then payment of the amount payable on such
date will be made on the next succeeding day which is a Business Day (without
any interest or other payment in respect of any such delay), except that, if
such Business Day falls in the next calendar year, such payment will be made on
the immediately preceding Business Day. In the event that payment of the
redemption price in respect of Convertible Preferred Securities is improperly
withheld or refused, and not paid either by the Issuer or by the Company
pursuant to the Guarantee described under "Description of the Guarantee,"
distributions on such Convertible Preferred Securities will continue to accrue
at the then applicable rate, from the original redemption date to the date of
payment, in which case the actual payment date will be considered the date
fixed for redemption for purposes of calculating the amount payable upon
redemption (other than for purposes of calculating any premium).
Subject to the foregoing and applicable law (including, without
limitation, United States federal securities laws), the Company or its
subsidiaries may at any time and from time to time purchase outstanding
Convertible Preferred Securities by tender, in the open market or by private
agreement.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the amount payable upon redemption of,
the Trust Securities, as applicable, shall be made pro rata based on the
liquidation preference of the Trust Securities; provided, however, that, if on
any distribution date or redemption date a Declaration Event of Default (as
defined below under "--Declaration Events of Default") under the Declaration
shall have occurred and be continuing, no payment of any distribution on, or
amount payable upon redemption of, any Common Security, and no other payment on
account of the redemption, liquidation or other acquisition of Common
Securities, shall be made unless payment in full in cash of accumulated and
unpaid distributions on all outstanding Convertible Preferred Securities for
all distribution periods terminating on or prior thereto, or in the case of
payment of the amount payable upon redemption of the Convertible Preferred
Securities, the full amount of such amount in respect of all outstanding
Convertible Preferred Securities, shall have been made or provided for, and all
funds available to the Trustee shall first be applied to the payment in full in
cash of all distributions on, or the amount payable upon redemption of,
Convertible Preferred Securities then due and payable.
In the case of any Declaration Event of Default, the holder of Common
Securities will be deemed to have waived any such Declaration Event of Default
until all such Declaration Events of Default with respect to the Convertible
Preferred Securities have been cured, waived or otherwise eliminated. Until any
such Declaration Events of Default with respect to the Convertible Preferred
Securities have been so cured, waived or otherwise eliminated, the Trustee
shall act solely on behalf of the holders of the Convertible Preferred
Securities and not the holder of the Common Securities, and only the holders of
the Convertible Preferred Securities will have the right to direct the Trustee
to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
The holder of all of the outstanding Common Securities (i.e., the
Company) has the right at any time to terminate the Issuer and, after
satisfaction of liabilities to creditors of the Issuer as provided by
applicable law, cause the Convertible Junior Subordinated Debentures to be
distributed to the holders of the Convertible Preferred Securities and Common
Securities in liquidation of the Issuer. Such right is subject to the Company
having received an opinion of counsel to the effect that such distribution will
not be a taxable event to holders of Convertible Preferred Securities.
In the event of any voluntary or involuntary liquidation, dissolution,
winding up or termination of the Issuer, the holders of the Convertible
Preferred Securities at the time will be entitled to receive out of the assets
of the Issuer available for distribution to holders of Trust Securities after
satisfaction of liabilities of creditors of the Trust, before any distribution
of assets is made to the holders of the Common Securities, an amount equal to
the aggregate of the stated liquidation preference of $50 per each Convertible
Preferred Security and accrued and unpaid distributions thereon to the date of
payment (the "Liquidation Distribution"),
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unless, in connection with such liquidation, dissolution, winding up or
termination, Convertible Junior Subordinated Debentures in an aggregate
principal amount equal to the Liquidation Distribution have been distributed on
a pro rata basis to the holders of the Trust Securities.
Pursuant to the Declaration, the Issuer shall be dissolved and its
affairs shall be wound up upon the earliest to occur of the following: (i)
September 1, 2037, the expiration of the term of the Issuer, (ii) the
bankruptcy of the Company, (iii) the filing of a certificate of dissolution or
its equivalent with respect to the Company or the approval of the filing of a
certificate of cancellation with respect to the Issuer, by the holders of at
least a majority in liquidation amount of the outstanding Convertible Preferred
Securities as described under "--Modification of the Declaration," or the
revocation of the Company's charter and the expiration of 90 days after the
date of notice to the Company of such revocation without a reinstatement of its
charter, (iv) upon the receipt by the Trustee of written notice from the Company
in accordance with the terms of the Declaration directing the Trustee to
terminate the Trust, (v) upon the occurrence and continuation of an Investment
Company Event, (vi) the entry of a decree of a judicial dissolution of the
Company, (vii) the redemption of all the Trust Securities or (viii) the
conversion of all outstanding Convertible Preferred Securities into Common
Stock.
MERGER, CONSOLIDATION OR AMALGAMATION OF THE ISSUER
The Issuer may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other entity or person,
except as described below. The Issuer may, without the consent of the holders
of the Convertible Preferred Securities, consolidate, amalgamate, merge with or
into, or be replaced by, a trust organized as such under the laws of any state
of the United States of America; provided that (i) if the Issuer is not the
survivor, such successor entity either (x) expressly assumes all of the
obligations of the Issuer under the Convertible Preferred Securities or (y)
substitutes for the Convertible Preferred Securities other securities having
substantially the same terms as the Convertible Preferred Securities (the
"Successor Securities") as long as the Successor Securities rank the same as
the Convertible Preferred Securities with respect to distributions, assets and
payments upon liquidation, redemption and otherwise, (ii) the Company expressly
acknowledges a trustee of the successor entity that possesses the same powers
and duties as the Trustee as the holder of the Convertible Junior Subordinated
Debentures, (iii) the Convertible Preferred Securities or any Successor
Securities are listed, or any Successor Securities will be listed upon
notification of issuance, on any national securities exchange or other
organization on which the Convertible Preferred Securities are then listed,
(iv) such merger, consolidation, amalgamation or replacement does not cause the
Convertible Preferred Securities (including any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization, (v)
such merger, consolidation, amalgamation or replacement does not adversely
affect the rights, preferences and privileges of the holders of the Convertible
Preferred Securities (including any Successor Securities) in any material
respect, (vi) such successor entity has a purpose substantially identical to
that of the Issuer, (vii) the Company has provided a guarantee to the holders
of the Successor Securities with respect to such Successor entity having
substantially the same terms as the Guarantee, and (viii) prior to such merger,
consolidation, amalgamation or replacement, the Company has received an opinion
of nationally recognized independent counsel (reasonably acceptable to the
Trustee) to the Issuer experienced in such matters to the effect that (x) such
successor entity will be treated as a grantor trust for United States federal
income tax purposes, (y) following such merger, consolidation, amalgamation or
replacement, neither the Company nor such successor entity will be required to
register as an investment company under the 1940 Act and (z) such merger,
consolidation, amalgamation or replacement will not adversely affect the
rights, preferences and privileges of the holders of the Convertible Preferred
Securities in any material respect. Notwithstanding the foregoing, the Issuer
shall not, except with the consent of holders of 100% in liquidation amount of
the Common Securities, consolidate, amalgamate, merge with or into, or be
replaced by any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it, if such consolidation,
amalgamation, merger or replacement would cause the Issuer or the Successor
Entity to be classified as other than a grantor trust for United States federal
income tax purposes.
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DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Event of Default") or a
default by the Company under the Guarantee constitutes an event of default
under the Declaration with respect to the Trust Securities (a "Declaration
Event of Default"); provided that, pursuant to the Declaration, the holder of
the Common Securities will be deemed to have waived any Declaration Event of
Default with respect to the Common Securities until all Declaration Events of
Default with respect to the Convertible Preferred Securities have been cured,
waived or otherwise eliminated. Until such Declaration Events of Default with
respect to the Convertible Preferred Securities have been so cured, waived or
otherwise eliminated, the Trustee will be deemed to be acting solely on behalf
of the holders of the Convertible Preferred Securities and only the holders of
the Convertible Preferred Securities will have the right to direct the Trustee
with respect to certain matters under the Declaration and, therefore, the
Indenture.
If a Declaration Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest or
principal on the Convertible Junior Subordinated Debentures on the date such
interest or principal is otherwise payable (or in the case of redemption, the
redemption date), then a holder of Convertible Preferred Securities may
directly institute a proceeding (a "Direct Action") for enforcement of payment
to such holder of the principal of or interest on the Convertible Junior
Subordinated Debentures having a principal amount equal to the aggregate
liquidation amount of the Convertible Preferred Securities of such holder on or
after the respective due date specified in the Convertible Junior Subordinated
Debentures. In addition, if the Trustee fails to enforce its rights under the
Convertible Junior Subordinated Debentures (other than rights arising from a
Declaration Event of Default described in the immediately preceding sentence)
after any holder of Preferred Securities shall have made a written request to
the Trustee to enforce such rights, such holder of Convertible Preferred
Securities may, to the fullest extent permitted by law, thereafter institute a
Direct Action to enforce the Trustee's rights as holder of the Convertible
Junior Subordinated Debentures, without first instituting any legal proceeding
against the Trustee or any other person. In connection with such Direct Action,
the Company will be subrogated to the rights of such holder of Convertible
Preferred Securities under the Declaration to the extent of any payment made by
the Company to such holder of Convertible Preferred Securities in such Direct
Action. The holders of Convertible Preferred Securities will not be able to
exercise directly any other remedy available to the holders of the Convertible
Junior Subordinated Debentures.
Upon the occurrence of a Declaration Event of Default, the Trustee as the
sole holder of the Convertible Junior Subordinated Debentures will have the
right under the Indenture to declare the principal of and interest on the
Convertible Junior Subordinated Debentures to be immediately due and payable.
The Company and the Trust are each required to file annually with the Property
Trustee an officer's certificate as to its compliance with all conditions and
covenants under the Declaration.
VOTING RIGHTS
Except as described herein, under the Trust Act, the Trust Indenture Act
and under "Description of the Guarantee--Amendments and Assignments," and as
otherwise required by law and the Declaration, the holders of the Convertible
Preferred Securities will have no voting rights.
Subject to the requirement of the Trustee obtaining a tax opinion in
certain circumstances set forth in the last sentence of this paragraph, the
holders of a majority in aggregate liquidation amount of the Convertible
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or direct
the exercise of any trust or power conferred upon the Trustee under
the Declaration including the right to direct the Trustee, as holder of the
Convertible Junior Subordinated Debentures, to (i) exercise the remedies
available under the Indenture with respect to the Convertible Junior
Subordinated Debentures, (ii) waive any past Event of Default that is waiveable
under the Indenture, (iii) exercise any right to rescind or annul a declaration
that the principal of all the Convertible Junior Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification, or
termination of the Indenture or the Convertible Junior Subordinated Debentures
where such consent shall be required; provided, however, that, where a consent
or action under the Indenture would require the consent or act of the holders
of more than a majority of the
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aggregate principal amount of Convertible Junior Subordinated Debentures
affected thereby, only the holders of the percentage of the aggregate stated
liquidation preference of the Convertible Preferred Securities which is at
least equal to the percentage required under the Indenture may direct the
Trustee to give such consent or take such action. If a Declaration Event of
Default has occurred and is continuing and such event is attributable to the
failure of the Company to pay interest or principal on the Convertible Junior
Subordinated Debentures on the date such interest or principal is otherwise
payable (or in the case of redemption on the redemption date), then a holder of
Convertible Preferred Securities may institute a Direct Action for enforcement
of payment to such holder of the principal of or interest on the Convertible
Junior Subordinated Debentures having a principal amount equal to the aggregate
liquidation amount of the Convertible Preferred Securities of such holder on or
after the respective due date specified in the Convertible Junior Subordinated
Debentures. In addition, if the Trustee fails to enforce its rights under the
Convertible Junior Subordinated Debentures (other than rights arising from a
Declaration Event of Default described in the immediately preceding sentence)
after any holder of Preferred Securities shall have made a written request to
the Trustee to enforce such rights, such holder of Convertible Preferred
Securities may, to the fullest extent permitted by law, thereafter institute a
Direct Action to enforce the Trustee's rights as holder of the Convertible
Junior Subordinated Debentures, without first instituting any legal proceeding
against the Trustee or any other person. The Trustee shall notify all holders
of the Convertible Preferred Securities of any notice of default received from
the Indenture Trustee with respect to the Convertible Junior Subordinated
Debentures. Such notice shall state that such Event of Default also constitutes
a Declaration Event of Default. Except with respect to directing the time,
method and place of conducting a proceeding for a remedy, the Trustee shall not
take any of the actions described in clause (i), (ii) or (iii) above unless the
Trustee has obtained an opinion of tax counsel to the effect that, as a result
of such action, the Issuer will not fail to be classified as a grantor trust
for United States federal income tax purposes.
In the event the consent of the Trustee, as the holder of the Convertible
Junior Subordinated Debentures, is required under the Indenture with respect to
any amendment, modification or termination of the Indenture, the Trustee shall
request the direction of the holders of the Trust Securities with respect to
such amendment, modification or termination and shall vote with respect to such
amendment, modification or termination as directed by a majority in liquidation
amount of the Trust Securities voting together as a single class; provided,
however, that, where a consent under the Indenture would require the consent of
the holders of more than a majority of the aggregate principal amount of the
Convertible Junior Subordinated Debentures, the Trustee may only give such
consent at the direction of the holders of at least the same proportion in
aggregate stated liquidation preference of the Trust Securities. The Trustee
shall not take any such action in accordance with the directions of the holders
of the Trust Securities unless the Trustee has obtained an opinion of tax
counsel to the effect that for the purposes of United States federal income tax
the Issuer will not be classified as other than a grantor trust.
A waiver of an Event of Default under the Indenture will constitute a
waiver of the corresponding Declaration Event of Default.
Any required approval or direction of holders of Convertible Preferred
Securities may be given at a separate meeting of holders of Convertible
Preferred Securities convened for such purpose, at a meeting of all of the
holders of Trust Securities or pursuant to written consent. The Company
Trustees will cause a notice of any meeting at which holders of Convertible
Preferred Securities are entitled to vote, or of any matter upon which action
by written consent of such holders is to be taken, to be mailed to each holder
of record of Convertible Preferred Securities. Each such notice will include a
statement setting forth the following information: (i) the date of such meeting
or the date by which such action is to be taken; (ii) a description of any
resolution proposed for adoption at such meeting on which such holders are
entitled to vote or of such matter upon which written consent is sought; and
(iii) instructions for the delivery of proxies or consents. No vote or consent
of the holders of Convertible Preferred Securities will be required for the
Issuer to redeem and cancel Convertible Preferred Securities or distribute
Convertible Junior Subordinated Debentures in accordance with the Declaration.
Notwithstanding that holders of Convertible Preferred Securities are
entitled to vote or consent under any of the circumstances described above, any
of the Convertible Preferred Securities that are
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owned at such time by the Company or any entity directly or indirectly
controlling or controlled by, or under direct or indirect common control with,
the Company, shall not be entitled to vote or consent and shall, for purposes
of such vote or consent, be treated as if such Convertible Preferred Securities
were not outstanding.
The procedures by which holders of Convertible Preferred Securities may
exercise their voting rights are described below. See "--Form, Denomination and
Registration--Global Certificate; Book-entry Form" below.
Holders of Convertible Preferred Securities will have no rights to
appoint or remove the Issuer Trustees, who may be appointed, removed or
replaced solely by the Company as the indirect or direct holder of all of the
Common Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended if approved by the Company
Trustees (and in certain circumstances the Trustee and the Delaware Trustee),
provided, that if any proposed amendment provides for, or the Company Trustees
otherwise propose to effect, (i) any action that would adversely affect the
powers, preferences or special rights of the Trust Securities, whether by way
of amendment to the Declaration or otherwise or (ii) the dissolution,
winding-up or termination of the Trust other than pursuant to the terms of the
Declaration, then the holders of the Trust Securities voting together as a
single class will be entitled to vote on such amendment or proposal and such
amendment or proposal shall not be effective except with the approval of at
least a majority in liquidation amount of the Trust Securities affected
thereby; provided, that if any amendment or proposal referred to in clause (i)
above would adversely affect only the Convertible Preferred Securities or the
Common Securities, then only the affected class will be entitled to vote on
such amendment or proposal and such amendment or proposal shall not be
effective except with the approval of at least a majority in liquidation amount
of such class of Securities.
Notwithstanding the foregoing, no amendment or modification may be made
to the Declaration if such amendment or modification would (i) cause the Trust
to be classified for purposes of United States federal income taxation as other
than a grantor trust, (ii) reduce or otherwise adversely affect the powers of
the Trustee or (iii) cause the Trust to be deemed an "investment company" which
is required to be registered under the 1940 Act.
REGISTRATION RIGHTS
In connection with the Original Offering, the Company entered into a
registration rights agreement dated August 12, 1997 (the "Registration Rights
Agreement"), with the Initial Purchasers, for the benefit of the holders of the
Convertible Preferred Securities, pursuant to which the Company would, at its
cost, (a) file within 180 days after the Closing Date a shelf Registration
Statement on Form S-3 (a "Shelf Registration Statement") covering resales of
the Convertible Preferred Securities (together with the Convertible Junior
Subordinated Debentures, the Guarantee and the related Common Stock,
collectively, the "Registrable Securities"), under the Securities Act, (b) use
its reasonable best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act within 270 days after the Closing
Date and (c) keep the Shelf Registration Statement continuously effective until
two years after its effective date or such earlier date on which all
Registrable Securities held by persons that are not affiliates of the Company
and the Trust may be resold without registration pursuant to Rule 144(k) under
the Securities Act; in each case, subject to the terms and conditions of the
Registration Rights Agreement. The Company will, in the event a Shelf
Registration Statement is filed, among other things, provide to each holder for
whom such Shelf Registration Statement was filed copies of the prospectus which
is a part of the Shelf Registration Statement, notify each such holder when the
Shelf Registration Statement has become effective and take certain other
actions as are required to permit unrestricted resales of such Securities. A
holder selling such Securities pursuant to the Shelf Registration Statement
generally would be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject
to certain of the civil liability provisions under the Securities Act in
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connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations).
If (i) within 180 days of the Closing Date the Shelf Registration
Statement has not been filed with the SEC, (ii) within 270 days of the Closing
Date the Shelf Registration Statement has not been declared effective by the
SEC, or (iii) after the Shelf Registration Statement has been declared
effective, such Registration Statement ceases to be effective or usable
(subject to certain exceptions) in connection with resales of Convertible
Preferred Securities in accordance with and during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (i)
through (iii) a "Registration Default"), additional interest ("Liquidated
Damages") will accrue on the Convertible Junior Subordinated Debentures and,
accordingly, additional distributions will accrue on the Convertible Preferred
Securities, in each case from and including the day following the Registration
Default to but excluding the day on which such Registration Default has been
cured or has been deemed to have been cured. Liquidated Damages will be paid
quarterly in arrears, with the first quarterly payment due on the first
interest or distribution date, as applicable, following the date on which such
Liquidated Damages begin to accrue, and will accrue at a rate per annum equal
to an additional 0.25% of the principal amount or liquidation amount, as
applicable, to and including the 90th day following such Registration Default
and 0.50% thereof from and after the 91st day following such Registration
Default. Following the cure of a Registration Default, Liquidated Damages will
cease to accrue with respect to such Registration Default. At all other times,
interest will accrue on the Convertible Junior Subordinated Debentures and
distributions will accrue on the Convertible Preferred Securities at a rate of
6 1/2% per annum.
The summary herein of certain provisions of the Registration Rights
Agreement is subject to, and is qualified in its entirety by reference to, all
the provisions of the Registration Rights Agreement, a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
FORM, DENOMINATION AND REGISTRATION
The Convertible Preferred Securities are issued in fully registered form,
without coupons.
Global Certificate; Book-entry Form. Except as provided below,
Convertible Preferred Securities are evidenced by one or more global
certificates representing Convertible Preferred Securities (collectively, the
"Global Certificate"), which have been deposited with the Property Trustee as
custodian for DTC and registered in the name of Cede & Co. ("Cede") as DTC's
nominee. Except as set forth below, record ownership of a Global Certificate
may be transferred, in whole or in part, only to another nominee of DTC or to a
successor of DTC or its nominee.
A "qualified institutional buyer," as defined in Rule 144A under the
Securities Act ("QIB"), may hold its interests in the Global Certificate
directly through DTC if such QIB is a participant in DTC, or indirectly through
organizations which are participants in DTC (the "Participants"). Transfers
between Participants will be effected in the ordinary way in accordance with
DTC rules and will be settled in same-day funds. The laws of some states
require that certain persons take physical delivery of securities in definitive
form. Consequently, the ability to transfer beneficial interest in the
Restricted Global Certificate to such persons may be limited.
Conveyance of notices and other communications by DTC to Participants, by
Participants to certain banks, brokers, dealers, trust companies and other
parties that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants"), and by
Participants and Indirect Participants to owners of beneficial interests in the
Global Certificate held by DTC will be governed by arrangements among them,
subject to any statutory or regulatory requirements that may be in effect from
time to time. Redemption notices shall be sent to Cede. If less than all of the
Convertible Preferred Securities are being redeemed, DTC will reduce the amount
of the interest of each Participant in such Convertible Preferred Securities in
accordance with its procedures.
Although voting with respect to the Convertible Preferred Securities is
limited, in those cases where a vote is required, neither DTC nor Cede will
itself consent or vote with respect to Convertible Preferred Securities. Under
its usual procedures, DTC would mail an Omnibus Proxy to the Trust as soon as
possible after the record date. The Omnibus Proxy assigns Cede's consenting or
voting rights to those
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Participants to whose accounts the Convertible Preferred Securities are
credited on the record date (identified in a listing attached to the Omnibus
Proxy). The Company and the Trust believe that the arrangements among DTC,
Participants and Indirect Participants, and owners of beneficial interests in
the Global Certificate held by DTC, will enable such beneficial owners to
exercise rights equivalent in substance to the rights that can be directly
exercised by a holder of a beneficial interest in the Trust.
The information in this section concerning DTC and DTC's book-entry
system has been obtained from sources that the Company and the Trust believe to
be reliable, but neither the Company nor the Trust takes responsibility for the
accuracy thereof.
Distribution payments on the Global Certificates will be made to Cede,
the nominee for DTC, as the registered owner of the Global Certificates by wire
transfer of immediately available funds. Neither the Company, the Property
Trustee nor any paying agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Certificates or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
The Company has been informed by DTC that, with respect to any
distribution payments on the Global Certificates, DTC's practice is to credit
Participants' accounts on the payment date therefor with payments in amounts
proportionate to their respective beneficial interests in the Convertible
Preferred Securities represented by a Global Certificate, as shown on the
records of DTC, unless DTC has reason to believe that it will not receive
payment on such payment date. Payments by Participants to owners of beneficial
interests in Convertible Preferred Securities represented by a Global
Certificate held through such Participants will be the responsibility of such
Participants, as is not the case with securities held for the accounts of
customers registered in "street name."
Holders who desire to convert their Convertible Preferred Securities into
Common Stock pursuant to the terms of the Convertible Preferred Securities
should contact their brokers or other Participants or Indirect Participants to
obtain information on procedures, including proper forms and cut-offs times,
for submitting such requests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in Convertible Preferred Securities represented by
a Global Certificate to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect to such
interest, may be affected by the lack of a physical certificate evidencing such
interest.
Neither the Company nor the Property Trustee (or any registrar, paying
agent or conversion agent under the Declaration) will have any responsibility
for the performance by DTC or its Participants or Indirect Participants of
their respective obligations under the rules and procedures governing their
operations. DTC has advised the Company that it will take any action permitted
to be taken by a holder of Convertible Preferred Securities (including, without
limitation, the presentation of Convertible Preferred Securities for exchange
as described below) only at the direction of one or more Participants to whose
account with DTC interests in the Global Certificate are credited and only in
respect of the number of Convertible Preferred Securities represented by the
Global Certificates as to which such Participant or Participants has or have
given such direction.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds securities that its Participants deposit
with DTC. DTC also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in Participants' accounts, thereby
eliminating the need for physical movement of securities certificates.
Participants in DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. DTC is owned
by a number of its Participants and by the NYSE, the American Stock Exchange,
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Inc. and the National Association of Securities Dealers, Inc. Access to the DTC
system is also available to others such as securities brokers and dealers,
banks and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. The rules
applicable to DTC and its Participants are on file with the SEC.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Certificates among
Participants, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. If DTC is at
any time unwilling or unable to continue as depositary and a successor
depositary is not appointed by the Company within 90 days, the Company will
cause the Convertible Preferred Securities to be issued in definitive form in
exchange for the Global Certificates. None of the Company, the Property Trustee
nor any of their respective agents will have any responsibility for the
performance by DTC, its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the records
relating to, or payments made on account of, beneficial ownership interests in
the Global Certificate.
PAYMENT AND PAYING AGENCY
Payments in respect of the Convertible Preferred Securities shall be made
to DTC, which shall credit the relevant accounts at DTC on the applicable
distribution dates or, in the case of Certificated Securities, such payments
shall be made by check mailed to the address of the holder entitled thereto as
such address shall appear on the Register. The Paying Agent shall initially be
The Bank of New York. The Paying Agent shall be permitted to resign as Paying
Agent upon 30 days' written notice to the Issuer Trustees. In the event that
The Bank of New York shall no longer be the Paying Agent, the Trustee shall
appoint a successor to act as Paying Agent (which shall be a bank or trust
company).
REGISTRAR, TRANSFER AGENT AND CONVERSION AGENT
The Bank of New York acts as registrar, transfer agent and conversion
agent (the "Conversion Agent") for the Convertible Preferred Securities.
Registration of transfers of Convertible Preferred Securities will be effected
without charge by or on behalf of the Issuer, but upon payment (with the giving
of such indemnity as the Issuer or the Company may require) in respect of any
tax or other government charges which may be imposed in relation to it. The
Issuer will not be required to register or cause to be registered the transfer
of Convertible Preferred Securities after such Convertible Preferred Securities
have been called for redemption.
INFORMATION CONCERNING THE TRUSTEE
The Company and certain of its subsidiaries maintain deposit accounts and
conduct other banking transactions with the Trustee in the ordinary course of
their businesses.
MISCELLANEOUS
The Issuer Trustees are authorized and directed to conduct the affairs of
and to operate the Issuer in such a way that the Issuer will not be deemed to
be an "investment company" required to be registered under the 1940 Act or
characterized as other than a grantor trust for federal income tax purposes and
so that the Convertible Junior Subordinated Debentures will be treated as
indebtedness of the Company for United States federal income tax purposes. In
this connection, the Issuer Trustees are authorized to take any action, not
inconsistent with applicable law, the certificate of trust or the Declaration
that the Issuer Trustees determine in their discretion to be necessary or
desirable for such purposes as long as such action does not adversely affect
the interests of the holders of the Convertible Preferred Securities.
Holders of the Convertible Preferred Securities have no preemptive
rights.
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DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee
which has been executed and delivered by the Company for the benefit of the
holders from time to time of Convertible Preferred Securities. The summary is
subject in all respects to the provisions of, and is qualified in its entirety
by reference to, the Guarantee. The Guarantee incorporates by reference the
terms of the Trust Indenture Act. The Guarantee will be qualified under the
Trust Indenture Act. The Bank of New York acts as trustee under the Guarantee
for purposes of the Trust Indenture Act. The Bank of New York, as the Guarantee
Trustee, holds the Guarantee for the benefit of the holders of the Convertible
Preferred Securities.
GENERAL
Pursuant to the Guarantee, the Company irrevocably and unconditionally
agrees, to the extent set forth herein, to pay in full, to the holders of the
Convertible Preferred Securities, the Guarantee Payments (as defined below), as
and when due, regardless of any defense, right of set off or counterclaim which
the Issuer may have or assert. The following payments with respect to the
Convertible Preferred Securities, to the extent not paid by the Issuer (the
"Guarantee Payments"), are subject to the Guarantee (without duplication): (i)
any accrued and unpaid distributions which are required to be paid on the
Convertible Preferred Securities to the extent of funds of the Trust available
therefor, (ii) the amount payable upon redemption of the Convertible Preferred
Securities, payable out of funds of the Trust available therefor with respect
to any Convertible Preferred Securities called for redemption by the Issuer and
(iii) upon a voluntary or involuntary dissolution, winding-up or termination of
the Issuer, other than in connection with the distribution of Convertible
Junior Subordinated Debentures, the lesser of (a) the aggregate of the
liquidation preference and all accrued and unpaid dividends on the Convertible
Preferred Securities to the date of payment and (b) the amount of assets of the
Issuer remaining available for distribution to holders of Convertible Preferred
Securities upon the liquidation of the Issuer. The Company's obligation to make
a Guarantee Payment may be satisfied by direct payment of the required amounts
by the Company to the holders of Convertible Preferred Securities or by causing
the Issuer to pay such amounts to such holders.
If the Company fails to make interest payments on the Convertible Junior
Subordinated Debentures or pay amounts payable upon the redemption,
acceleration or maturity of the Convertible Junior Subordinated Debentures, the
Issuer will have insufficient funds to pay distributions on or to pay amounts
payable upon the redemption or repayment of the Convertible Preferred
Securities. The Guarantee does not cover payment of distributions or the amount
payable upon redemption or repayment in respect of the Convertible Preferred
Securities when the Issuer does not have sufficient funds to pay such
distributions or such amount.
In taking any action to enforce the Guarantee, holders of the Convertible
Preferred Securities may proceed directly against the Company as guarantor,
rather than having to proceed against the Issuer before attempting to collect
from the Company, and the Company waives any right or remedy to require that
any action be brought against the Issuer or any other person or entity before
proceeding against the Company. Such obligations will not be discharged except
by payment of the Guarantee Payments in full.
The Guarantee, when taken together with the Company's obligations under
the Convertible Junior Subordinated Debentures, and the Indenture and the
Declaration, including its obligations to pay costs, expenses, debts and
liabilities of the Trust (other than with respect to the Trust Securities)
provides a full and unconditional guarantee on a subordinated basis by the
Company of payments due on the Convertible Preferred Securities issued by the
Trust.
The Company has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities
(the "Common Securities Guarantee") to the same extent as the Guarantee, except
that upon the occurrence and during the continuation of a Declaration Event of
Default, holders of Convertible Preferred Securities shall have priority over
holders of Common Securities with respect to distributions and payments on
liquidation, redemption, or otherwise.
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CERTAIN COVENANTS OF THE COMPANY
In the Guarantee, the Company has covenanted that, so long as any
Convertible Preferred Securities remain outstanding, if at such time (a) the
Company has exercised its option to defer interest payments on the Convertible
Junior Subordinated Debentures and such deferral is continuing, (b) the Company
shall be in default with respect to its payment or other obligations under the
Guarantee or (c) there shall have occurred and be continuing any event that,
with the giving of notice or the lapse of time or both, would constitute an
Event of Default under the Indenture, then the Company (i) shall not declare or
pay dividends on, make distributions with respect to, or redeem, purchase or
acquire, or make a liquidation payment with respect to, any of its capital
stock (other than (A) purchases or acquisitions of shares of Common Stock in
connection with the satisfaction by the Company of its obligations under any
employee benefit plans, (B) as a result of a reclassification of capital stock
of the Company or the exchange or conversion of one class or series of the
Company's capital stock for another class or series of capital stock of the
Company, (C) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock of the Company or the security being converted or exchanged or (D) stock
dividends paid by the Company which consist of the stock of the same class as
that on which the dividend is being paid), (ii) shall not make any payment of
interest, principal or premium, if any, on or repay, repurchase or redeem any
debt securities issued by the Company after the date of original issuance of
the Convertible Junior Subordinated Debentures that rank pari passu with or
junior to the Convertible Junior Subordinated Debentures, and (iii) shall not
make any guarantee payments with respect to the foregoing (other than pursuant
to the Guarantee).
As part of the Guarantee, the Company has agreed that it will honor all
obligations described therein relating to the conversion of the Convertible
Preferred Securities into Common Stock as described in "Description of the
Convertible Preferred Securities--Conversion Rights."
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely
affect the rights of holders of Convertible Preferred Securities (in which case
no consent of holders will be required), the Guarantee may be changed only with
the prior approval of the holders of not less than a majority in aggregate
stated liquidation preference of the outstanding Convertible Preferred
Securities. The manner of obtaining any such approval of holders of the
Convertible Preferred Securities will be as set forth under "Description of the
Convertible Preferred Securities--Voting Rights." All guarantees and agreements
contained in the Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Convertible Preferred Securities then outstanding. Except in
connection with any permitted merger or consolidation of the Company with or
into another entity or any permitted sale, transfer or lease of the Company's
assets to another entity as described below under "Description of the
Convertible Junior Subordinated Debentures--Restrictions," the Company may not
assign its rights or delegate its obligations under the Guarantee without the
prior approval of the holders of at least a majority of the aggregate stated
liquidation preference of the Convertible Preferred Securities then
outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate as to each holder of Convertible Preferred
Securities and be of no further force and effect upon (a) full payment of the
applicable redemption price of such holder's Convertible Preferred Securities,
(b) the distribution of Common Stock to such holder in respect of the
conversion of such holder's Convertible Preferred Securities into Common Stock
or (c) the distribution of the Convertible Junior Subordinated Debentures to
the holders of all the Convertible Preferred Securities and will terminate
completely upon full payment of the amounts payable upon liquidation of the
Issuer. The Guarantee will continue to be effective or will be reinstated, as
the case may be, if at any time any holder of Convertible Preferred Securities
must restore payment of any sums paid under such Convertible Preferred
Securities or the Guarantee.
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STATUS OF THE GUARANTEE; SUBORDINATION
The Guarantee constitutes an unsecured obligation of the Company and will
rank (i) subordinate and junior in right of payment to all other liabilities of
the Company, except any liabilities that may be made pari passu expressly by
their terms, (ii) pari passu with the most senior preferred or preference stock
now or hereafter issued by the Company and with any guarantee now or hereafter
entered into by the Company in respect of any preferred or preference stock or
preferred securities of any affiliate of the Company and (iii) senior to Common
Stock. The Declaration provides that each holder of Convertible Preferred
Securities by acceptance thereof agrees to the subordination provisions and
other terms of the Guarantee. Upon the bankruptcy, liquidation or winding up of
the Company, its obligations under the Guarantee will rank junior to all its
other liabilities (except as aforesaid) and, therefore, funds may not be
available for payment under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default, has
undertaken to perform only such duties as are specifically set forth in the
Guarantee and, after default with respect to the Guarantee, shall exercise the
same degree of care as a prudent individual would exercise in the conduct of
his or her own affairs. Subject to such provision, the Guarantee Trustee is
under no obligation to exercise any of the powers vested in it by the Guarantee
at the request of any holder of Convertible Preferred Securities unless it is
offered reasonable indemnity against the costs, expenses and liabilities that
might be incurred thereby.
GOVERNING LAW
The Guarantee is governed by and construed in accordance with the laws of
the State of New York.
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DESCRIPTION OF THE CONVERTIBLE JUNIOR SUBORDINATED DEBENTURES
Set forth below is a description of the specific terms of the Convertible
Junior Subordinated Debentures in which the Issuer has invested the proceeds of
the issuance and sale of (i) the Convertible Preferred Securities and (ii) the
Common Securities. The following description is qualified in its entirety by
reference to the Indenture dated as of August 12, 1997 (the "Indenture"),
between the Company and The Bank of New York, as trustee (the "Indenture
Trustee"). The Indenture will be qualified under the Trust Indenture Act.
Whenever particular provisions or defined terms in the Indenture are referred
to herein, such provisions or defined terms are incorporated by reference
herein.
Under certain circumstances involving the dissolution of the Issuer
following the occurrence of a Tax Event or Investment Company Event,
Convertible Junior Subordinated Debentures may be distributed to the holders of
the Convertible Preferred Securities in liquidation of the Issuer. See
"Description of the Convertible Preferred Securities--Tax Event or Investment
Company Event Redemption or Distribution."
GENERAL
The Convertible Junior Subordinated Debentures will be issued under the
Indenture. The Convertible Junior Subordinated Debentures were limited in
aggregate principal amount to $278,350,600, such amount being the sum of the
aggregate stated liquidation preference of the Convertible Preferred Securities
and the Common Securities.
The entire principal amount of the Convertible Junior Subordinated
Debentures will become due and payable, together with any accrued and unpaid
interest thereon, including Additional Interest, if any, at the Stated
Maturity, September 1, 2027, subject to the Company's right to shorten the
maturity thereof as described under "Description of the Convertible Preferred
Securities--Conditional Right to Shorten Maturity; Tax Event Redemption and
Investment Company Event Distribution."
The Convertible Junior Subordinated Debentures, if distributed to holders
of Convertible Preferred Securities in a dissolution of the Issuer, will
initially be issued as a global security to the extent of any Global
Certificates at the time representing any Convertible Preferred Securities and
otherwise in fully registered, certificated form. In the event that Convertible
Junior Subordinated Debentures are issued in certificated form, such
Convertible Junior Subordinated Debentures will be in denominations of $50 and
integral multiples thereof and may be transferred or exchanged at the offices
described below.
Payments on Convertible Junior Subordinated Debentures issued as a global
security will be made in immediately available funds to DTC, as the depository
for the Convertible Junior Subordinated Debentures. In the event Convertible
Junior Subordinated Debentures are issued in certificated form, principal and
interest will be payable, the transfer of the Convertible Junior Subordinated
Debentures will be registrable and Convertible Junior Subordinated Debentures
will be exchangeable for Convertible Junior Subordinated Debentures of other
denominations of a like aggregate principal amount at the corporate trust
office of the Indenture Trustee in The City of New York; provided that, unless
the Convertible Junior Subordinated Debentures are held by the Issuer or any
successor permissible under "Description of the Convertible Preferred
Securities--Merger, Consolidation or Amalgamation of the Issuer," payment of
interest may be made at the option of the Company by check mailed to the
address of the persons entitled thereto.
The Indenture does not contain any provisions that afford holders of
Convertible Junior Subordinated Debentures protection in the event of a highly
leveraged transaction involving the Company. The Convertible Junior
Subordinated Debentures are not entitled to the benefit of any sinking fund.
INTEREST
Each Convertible Junior Subordinated Debenture bears interest at the rate
of 6 1/2% per annum from the original date of issuance, payable quarterly in
arrears on March 1, June 1, September 1, and December 1 (each, an "Interest
Payment Date"), commencing September 1, 1997, to the person in whose name such
Convertible Junior Subordinated Debenture is registered at the close of
business on the
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fifteenth day immediately preceding such Interest Payment Date. Interest
compounds quarterly and accrues at the annual rate of 6 1/2% on any interest
installment not paid when due.
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 Convertible Junior 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 (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.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
The Company has the right at any time during the term of the Convertible
Junior Subordinated Debentures to defer interest payments from time to time for
successive periods not exceeding 20 consecutive quarters for each such period.
At the end of each Deferral Period (subject to extensions as provided below),
the Company shall pay all interest then accrued and unpaid (together with
interest thereon at the rate specified for the Convertible Junior Subordinated
Debentures to the extent permitted by applicable law). In no event shall any
Deferral Period extend beyond the maturity of the Convertible Junior
Subordinated Debentures or any earlier Redemption Date. During any Deferral
Period, the Company (i) shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock (other than (A)
purchases or acquisitions of shares of Common Stock in connection with the
satisfaction by the Company of its obligations under any employee benefit
plans, (B) as a result of a reclassification of capital stock of the Company or
the exchange or conversion of one class or series of the Company's capital
stock for another class or series of capital stock of the Company, (C) the
purchase of fractional interests in shares of the Company's capital stock
pursuant to the conversion or exchange provisions of such capital stock of the
Company or the security being converted or exchanged or (D) stock dividends
paid by the Company which consist of the stock of the same class as that on
which the dividend is being paid), (ii) shall not make any payment of interest,
principal or premium, if any, on or repay, repurchase or redeem any debt
securities issued by the Company that rank pari passu with or junior to the
Convertible Junior Subordinated Debentures, and (iii) shall not make any
guarantee payments with respect to the foregoing (other than pursuant to the
Guarantee). Prior to the expiration of any such Deferral Period, the Company
may further extend such Deferral Period; provided that such Deferral Period
together with all previous and further extensions thereof may not exceed 20
consecutive quarters. Upon the expiration of any Deferral Period and the
payment of all amounts then due, the Company may select a new Deferral Period,
subject to the above requirements. No interest during a Deferral Period, except
at the end thereof, shall be due and payable. If the Issuer shall be the sole
holder of the Convertible Junior Subordinated Debentures, the Company shall
give the Issuer notice of its selection of such Deferral Period at least one
Business Day prior to the earlier of (i) the date the distributions on the
Convertible Preferred Securities are payable or (ii) the date the Issuer is
required to give notice to any applicable self-regulatory organization or to
holders of the Convertible Preferred Securities of the record date or the date
such distribution is payable, but in any event not less than ten Business Days
prior to such record date. The Company shall cause the Issuer to give notice of
the Company's selection of such Deferral Period to the holders of the
Convertible Preferred Securities. If the Issuer shall not be the sole holder of
the Convertible Junior Subordinated Debentures, the Company shall give the
holders of the Convertible Junior Subordinated Debentures notice of its
selection of such Deferral Period at least ten Business Days prior to the
earlier of (i) the Interest Payment Date or (ii) the date the Company is
required to give notice to any applicable self-regulatory organization or to
holders of the Convertible Junior Subordinated Debentures of the record or
payment date of such related interest payment, but in any event not less than
two Business Days prior to such record date.
ADDITIONAL INTEREST
If the Issuer would be required to pay any taxes, duties, assessments or
governmental charges of whatever nature (other than withholding, transfer or
stamp taxes) imposed by the United States, or any
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other taxing authority, then, in any such case, the Company will pay as
additional interest ("Additional Interest") such amounts as shall be required
so that the net amounts received and retained by the Issuer after paying any
such taxes, duties, assessments or governmental charges will be not less than
the amounts the Issuer would have received had no such taxes, duties,
assessments or governmental charges been imposed.
CONVERSION OF THE CONVERTIBLE JUNIOR SUBORDINATED DEBENTURES
The Convertible Junior Subordinated Debentures are convertible into
Common Stock at the option of the holders of the Convertible Junior
Subordinated Debentures at any time beginning 60 days following the first date
of original issuance of the Convertible Junior Subordinated Debentures prior to
maturity (except in the case of Convertible Preferred Securities called for
redemption which shall be convertible at any time prior to the close of
business on the Business Day prior to the redemption date) at the initial
conversion price of $47.75, subject to the conversion price adjustments
described under "Description of the Convertible Preferred
Securities--Conversion Rights." The Issuer will covenant not to convert
Convertible Junior Subordinated Debentures held by it except pursuant to a
notice of conversion delivered to the Conversion Agent by a holder of
Convertible Preferred Securities. Upon surrender of each $50 of liquidation
preference of Convertible Preferred Securities to the Conversion Agent for
conversion, the Issuer will distribute $50 principal amount of the Convertible
Junior Subordinated Debentures to the Conversion Agent on behalf of the holder
of the Convertible Preferred Securities so converted, whereupon the Conversion
Agent will convert such Convertible Junior Subordinated Debentures to Common
Stock on behalf of such holder. The Company's delivery to the holders of the
Convertible Junior Subordinated Debentures (through the Conversion Agent) of
the fixed number of shares of Common Stock into which the Convertible Junior
Subordinated Debentures are convertible (together with the cash payment, if
any, in lieu of fractional shares) will be deemed to satisfy the Company's
obligation to pay the principal amount of the Convertible Junior Subordinated
Debentures so converted, and the accrued and unpaid interest thereon
attributable to the period from the last date to which interest has been paid
or duly provided for; provided, however, that if any Convertible Junior
Subordinated Debenture is converted after a record date for payment of
interest, the interest payable on the related interest payment date with
respect to such Convertible Junior Subordinated Debenture shall be paid to the
Issuer (which will distribute such interest to the converting holder) or other
holder of Convertible Junior Subordinated Debentures, as the case may be,
despite such conversion.
OPTIONAL REDEMPTION
The Company shall have the right to redeem the Convertible Junior
Subordinated Debentures, in whole or in part, at any time or from time to time
on or after September 1, 2000, upon not less than 20 nor more than 60 days'
notice, at a redemption price equal to $51.00 per $50 principal amount of the
Convertible Junior Subordinated Debentures to be redeemed plus any accrued and
unpaid interest, including Additional Interest, if any, to the redemption date,
if redeemed before September 1, 2001; at a redemption price equal to $50.50 per
$50 principal amount of the Convertible Junior Subordinated Debentures to be
redeemed plus any accrued and unpaid interest, including Additional Interest,
if any, to the redemption date, if redeemed during the 12-month period
beginning September 1, 2001; and thereafter at $50 per $50 principal amount of
Convertible Junior Subordinated Debentures plus, in each case, accrued and
unpaid interest, including Additional Interest, if any, to the redemption date.
In the event of any redemption in part, the Company shall not be required
to (i) issue, register the transfer of or exchange any Convertible Junior
Subordinated Debenture during a period beginning at the opening of business 15
days before any selection for redemption of Convertible Junior Subordinated
Debentures and ending at the close of business on the earliest date on which
the relevant notice of redemption is deemed to have been given to all holders
of Convertible Junior Subordinated Debentures to be so redeemed and (ii)
register the transfer of or exchange any Convertible Junior Subordinated
Debentures so selected for redemption, in whole or in part, except the
unredeemed portion of any Convertible Junior Subordinated Debenture being
redeemed in part.
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SUBORDINATION
The Indenture provides that the Convertible Junior Subordinated
Debentures are subordinate and junior in right of payment to all Senior
Indebtedness of the Company as provided in the Indenture. No payment of
principal of (including redemption payments), or interest on, the Convertible
Junior Subordinated Debentures may be made (i) if any Senior Indebtedness is
not paid when due, any applicable grace period with respect to such default has
ended and such default has not been cured or waived, or (ii) if the maturity of
any Senior Indebtedness has been accelerated because of a default. Upon any
distribution of assets of the Company to creditors upon any dissolution,
winding up, liquidation or reorganization, whether voluntary or involuntary or
in bankruptcy, insolvency, receivership or other proceedings, all principal of,
and premium, if any, and interest due or to become due on, all Senior
Indebtedness must be paid in full before the holders of the Convertible Junior
Subordinated Debentures are entitled to receive or retain any payment. In the
event that, notwithstanding the foregoing, any payment or distribution of cash,
property or securities shall be received or collected by a holder of the
Convertible Junior Subordinated Debentures in contravention of the foregoing
provisions, such payment or distribution shall be held for the benefit of and
shall be paid over to the holders of Senior Indebtedness or their
representative or representatives or to the trustee or trustees under any
indenture under which any instrument evidencing Senior Indebtedness may have
been issued, as their respective interests may appear, to the extent necessary
to pay in full all Senior Indebtedness then due, after giving effect to any
concurrent payment to the holders of Senior Indebtedness. Subject to the
payment in full of all Senior Indebtedness, the rights of the holders of the
Convertible Junior Subordinated Debentures will be subrogated to the rights of
the holders of Senior Indebtedness to receive payments or distributions
applicable to Senior Indebtedness until all amounts owing on the Convertible
Junior Subordinated Debentures are paid in full.
The term "Senior Indebtedness" shall mean in respect of the Company (i)
the principal, premium, if any, and interest in respect of (A) indebtedness of
such obligor for money borrowed and (B) indebtedness evidenced by securities,
convertible preferred securities, bonds or other similar instruments issued by
such obligor, (ii) all capital lease obligations of such obligor, (iii) all
obligations of such obligor issued or assumed as the deferred purchase price of
property, all conditional sale obligations of such obligor and all obligations
of such obligor under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business), (iv) all
obligations of such obligor for the reimbursement 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 for the payment of which such obligor is responsible or liable
as obligor, guarantor or otherwise, and (vi) all obligations of the type
referred to in clauses (i) through (v) above of other persons secured by any
lien on any property or asset of such obligor (whether or not such obligation
is assumed by such obligor), except for (1) any such indebtedness issued after
the date of original issuance of the Convertible Junior Subordinated Debentures
that is by its terms subordinated to or pari passu with the Convertible Junior
Subordinated Debentures and (2) any indebtedness (including all other debt
securities and guarantees in respect of those debt securities) initially issued
to any other trust, or a trustee of such trust, partnership or other entity
affiliated with the Company that is, directly or indirectly, a financing
vehicle of the Company (a "Financing Entity") in connection with the issuance
by such Financing Entity of preferred securities or other similar securities.
Such Senior Indebtedness shall continue to be Senior Indebtedness and entitled
to the benefits of the subordination provisions irrespective of any amendment,
modification or waiver of any term of such Senior Indebtedness.
The Indenture does not limit the aggregate amount of Senior Indebtedness
the Company may issue. At September 30, 1997, Senior Indebtedness consisting of
borrowed money of CalEnergy Company, Inc. aggregated approximately $953.8
million. See "Capitalization." At September 30, 1997, on a pro forma basis
after giving effect to the consummation of the Note Offering, the Common Stock
Offering, the Direct Sale and the Acquisition, Senior Indebtedness consisting
of borrowed money of CalEnergy Company, Inc. aggregated approximately $1,303.8
million.
CERTAIN COVENANTS
If (a) there shall have occurred any event that would constitute an Event
of Default, (b) the Company shall be in default with respect to its payment of
any obligations under the Guarantee, or (c) the Company
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shall have given notice of its election to defer payments of interest on the
Convertible Junior Subordinated Debentures by extending the interest payment
period as provided in the Indenture and such period, or any extension thereof,
shall be continuing, then the Company (i) shall not declare or pay dividends
on, make distributions with respect to, or redeem, purchase or acquire, or make
a liquidation payment with respect to, any of its capital stock (other than (A)
purchases or acquisitions of shares of Common Stock in connection with the
satisfaction by the Company of its obligations under any employee benefit
plans, (B) as a result of a reclassification of capital stock of the Company or
the exchange or conversion of one class or series of the Company's capital
stock for another class or series of capital stock of the Company, (C) the
purchase of fractional interests in shares of the Company's capital stock
pursuant to the conversion or exchange provisions of such capital stock of the
Company or the security being converted or exchanged or (D) stock dividends
paid by the Company which consist of stock of the same class as that on which
the dividend is being paid), (ii) shall not make any payment of interest,
principal or premium, if any, on or repay, repurchase or redeem any debt
securities issued by the Company after the date of original issuance of the
Convertible Junior Subordinated Debentures that rank pari passu with or junior
to the Convertible Junior Subordinated Debentures, and (iii) shall not make any
guarantee payments with respect to the foregoing (other than pursuant to the
Guarantee).
The Company has covenanted (a) to directly or indirectly maintain 100%
ownership of the Common Securities of the Trust; provided, however, that any
permitted successor of the Company under the Indenture may succeed to the
Company's ownership of such Common Securities and (b) to use its reasonable
efforts to cause the Trust (x) to remain a statutory business trust, except in
connection with the distribution of Convertible Junior Subordinated Debentures
to the holders of Trust Securities in liquidation of the Trust, the redemption
of all of the Trust Securities of the Trust, or certain mergers, consolidations
or amalgamations, each as permitted by the Declaration, and (y) to otherwise
continue to be classified as a grantor trust for United States federal income
tax purposes.
RESTRICTIONS
The Indenture provides that the Company shall not consolidate with or
merge with or into any other corporation, or, directly or indirectly, convey,
sell, transfer or lease all or substantially all of the properties and assets
of the Company on a consolidated basis to any Person, unless either the Company
is the continuing corporation or such corporation or Person assumes by
supplemental indenture all the obligations of the Company under the Indenture
and the Convertible Junior Subordinated Debentures, no default or Event of
Default shall exist immediately after the transaction, and the surviving
corporation or such Person is a corporation, partnership or trust organized and
validly existing under the laws of the United States of America, any state
thereof or the District of Columbia.
EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Event of Default"
with respect to the Convertible Junior Subordinated Debentures: (i) failure for
30 days to pay interest on the Convertible Junior Subordinated Debentures,
including any Additional Interest in respect thereof, when due; or (ii) failure
to pay principal of or premium, if any, on the Convertible Junior Subordinated
Debentures when due whether at maturity, upon redemption, by declaration or
otherwise; or (iii) failure by the Company to deliver shares of Common Stock
upon an election by a holder of Convertible Preferred Securities to convert
such Convertible Preferred Securities; or (iv) failure to observe or perform
any other covenant contained in the Indenture for 90 days after notice; or (v)
the dissolution, winding up or termination of the Issuer, except in connection
with the distribution of Convertible Junior Subordinated Debentures to the
holders of Convertible Preferred Securities in liquidation of the Issuer and in
connection with certain mergers, consolidations or amalgamations permitted by
the Declaration; or (vi) certain events in bankruptcy, insolvency or
reorganization of the Company.
The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Convertible Junior Subordinated Debentures
may declare the principal of and interest (including any Additional Interest)
on the Convertible Junior Subordinated Debentures due and payable immedi-
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ately on the occurrence of an Event of Default; provided, however, that, after
such acceleration, but before a judgment or decree based on acceleration, the
holders of a majority in aggregate principal amount of outstanding Convertible
Junior Subordinated Debentures may, under certain circumstances, rescind and
annul such acceleration if all Events of Default, other than the nonpayment of
accelerated principal, have been cured or waived as provided in the Indenture.
For information as to waiver of defaults, see "--Modification of the
Indenture."
Notwithstanding the foregoing, if an Event of Default has occurred and is
continuing and such event is attributable to the failure of the Company to pay
interest or principal on the Convertible Junior Subordinated Debentures on the
date such interest or principal is otherwise payable (or in the case of any
redemption, the redemption date), a holder of Convertible Preferred Securities
may institute a Direct Action for payment on or after the respective due date
(or redemption date) specified in the Convertible Junior Subordinated
Debentures. The Company may not amend the Indenture to remove the foregoing
right to bring a Direct Action without the prior written consent of all the
holders of Convertible Preferred Securities. Notwithstanding any payment made
to such holder of Convertible Preferred Securities by the Company in connection
with a Direct Action, the Company shall remain obligated to pay the principal
of or interest on the Convertible Junior Subordinated Debentures held by the
Issuer or the Trustee of the Issuer and the Company shall be subrogated to the
rights of the holder of such Convertible Preferred Securities with respect to
payments on the Convertible Preferred Securities to the extent of any payments
made by the Company to such holder in any Direct Action. The holders of
Convertible Preferred Securities will not be able to exercise directly any
other remedy available to the holders of the Convertible Junior Subordinated
Debentures.
The Trustee is the initial holder of the Convertible Junior Subordinated
Debentures. However, while the Convertible Preferred Securities are
outstanding, the Trustee has agreed not to waive an Event of Default with
respect to the Convertible Junior Subordinated Debentures without the consent
of holders of a majority in aggregate liquidation preference of the Convertible
Preferred Securities then outstanding.
A default under any other indebtedness of the Company or any of its
subsidiaries or joint ventures or the Issuer would not constitute an Event of
Default under the Convertible Junior Subordinated Debentures.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee in case an Event of Default shall occur and be continuing,
the Indenture Trustee will be under no obligation to exercise any of its rights
or powers under the Indenture at the request or direction of any holders of
Convertible Junior Subordinated Debentures, unless such holders shall have
offered to the Indenture Trustee reasonable indemnity. Subject to such
provisions for the indemnification of the Indenture Trustee, the holders of a
majority in aggregate principal amount of the Convertible Junior Subordinated
Debentures then outstanding will have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee, or exercising any trust or power conferred on the Indenture Trustee.
No holder of any Convertible Junior Subordinated Debenture will have any
right to institute any proceeding with respect to the Indenture or for any
remedy thereunder, unless such holder shall have previously given to the
Indenture Trustee written notice of a continuing Event of Default and, if the
Issuer is not the sole holder of Convertible Junior Subordinated Debentures,
unless the holders of at least 25% in aggregate principal amount of the
Convertible Junior Subordinated Debentures then outstanding shall also have
made written request, and offered reasonable indemnity, to the Indenture
Trustee to institute such proceeding as Indenture Trustee, and the Indenture
Trustee shall not have received from the holders of a majority in aggregate
principal amount of the outstanding Convertible Junior Subordinated Debentures
a direction inconsistent with such request and shall have failed to institute
such proceeding within 60 days. However, such limitations do not apply to a
suit instituted by a holder of a Convertible Junior Subordinated Debenture for
enforcement of payment of the principal of or interest on such Convertible
Junior Subordinated Debenture on or after the respective due dates expressed in
such Convertible Junior Subordinated Debenture.
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The holders of a majority in aggregate outstanding principal amount of
all series of the Convertible Junior Subordinated Debentures affected thereby
may, on behalf of the holders of all the Convertible Junior Subordinated
Debentures of such series, waive any past default, except a default in the
payment of principal, premium, if any, or interest. The Company is required to
file annually with the Indenture Trustee and the Trustee a certificate as to
whether or not the Company is in compliance with all the conditions and
covenants under the Indenture.
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Company and the
Indenture Trustee, with the consent of the holders of not less than a majority
in principal amount of the Convertible Junior Subordinated Debentures, to
modify the Indenture or any supplemental indenture, provided that no such
modification may, without the consent of the holder of each outstanding
Convertible Junior Subordinated Debenture affected thereby, (i) extend the
fixed maturity of any Convertible Junior Subordinated Debentures of any series,
or reduce the principal amount thereof, or reduce the rate or extend the time
of payment of interest thereon, or reduce any premium payable upon the
redemption thereof, or adversely affect the right to convert Convertible Junior
Subordinated Debentures, without the consent of the holder of each Convertible
Junior Subordinated Debenture so affected, or (ii) reduce the percentage of
Convertible Junior Subordinated Debentures, the holders of which are required
to consent to any such supplemental indenture, without the consent of the
holders of each Convertible Junior Subordinated Debenture then outstanding and
affected thereby.
In addition, the Company and the Indenture Trustee may execute, without
the consent of any holder of Convertible Junior Subordinated Debentures, any
supplemental indenture to cure any ambiguities, comply with the Trust Indenture
Act and for certain other customary purposes.
SETOFF
Notwithstanding anything contained to the contrary in the Indenture, the
Company has the right to set off any payment with respect to the Convertible
Junior Subordinated Debentures it is otherwise required to make thereunder with
and to the extent the Company has theretofore made, or is concurrently on the
date of such payment making, a payment under the Guarantee.
GOVERNING LAW
The Indenture and the Convertible Junior Subordinated Debentures are
governed by, and construed in accordance with, the laws of the State of New
York.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee, prior to default, has undertaken to perform only
such duties as are specifically set forth in the Indenture and, after default,
shall exercise the same degree of care as a prudent individual would exercise
in the conduct of his or her own affairs. Subject to such provision, the
Indenture Trustee is under no obligation to exercise any of the powers vested
in it by the Indenture at the request of any holder of Convertible Junior
Subordinated Debentures, unless offered reasonable indemnity by such holder
against the costs, expenses and liabilities which might be incurred thereby.
The 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 Indenture Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
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EFFECT OF OBLIGATIONS UNDER THE CONVERTIBLE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of the Issuer is to
issue the Trust Securities and use the proceeds thereof to purchase from the
Company the Convertible Junior Subordinated Debentures.
As long as payments of interest and other payments are made when due on
the Convertible Junior Subordinated Debentures, such payments will be
sufficient to cover distributions and payments due on the Convertible Preferred
Securities primarily because (i) the aggregate principal amount of Convertible
Junior Subordinated Debentures will be equal to the sum of the aggregate stated
liquidation preference of the Convertible Preferred Securities and the Common
Securities; (ii) the interest rate and interest and other payment dates on the
Convertible Junior Subordinated Debentures will match the distribution rate and
distribution and other payment dates for the Convertible Preferred Securities;
(iii) the Indenture provides that the Company, as originator, shall pay for
all, and the Issuer shall not be obligated to pay, directly or indirectly any
costs and expenses of the Issuer; and (iv) the Declaration provides that the
holders of Common Securities and the Issuer Trustees shall not cause or permit
the Issuer to, among other things, engage in any activity that is not
consistent with the purposes of the Issuer.
If an Event of Default has occurred and is continuing and such event is
attributable to the failure of the Company to pay interest or principal on the
Convertible Junior Subordinated Debentures on the date such interest or
principal is otherwise payable (or in the case of redemption, on the redemption
date), then a holder of Convertible Preferred Securities may institute a Direct
Action against the Company for payment on or after the respective due date for
payment (or redemption date). In addition, if the Trustee fails to enforce its
rights under the Convertible Junior Subordinated Debentures (other than rights
arising from a Declaration Event of Default described in the immediately
preceding sentence) after any holder of Preferred Securities shall have made a
written request to the Trustee to enforce such rights, such holder of
Convertible Preferred Securities may, to the fullest extent permitted by law,
thereafter institute a Direct Action to enforce the Trustee's rights as holder
of the Convertible Junior Subordinated Debentures, without first instituting
any legal proceeding against the Trustee or any other person.
Payments of distributions and other payments due on the Convertible
Preferred Securities out of moneys held by the Issuer are guaranteed by the
Company to the extent set forth under "Description of the Guarantee." If the
Company fails to make payments under the Guarantee, a holder of any of the
Convertible Preferred Securities may institute a Direct Action against the
Company to enforce its rights under the Guarantee.
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UNITED STATES TAXATION
GENERAL
The following is a summary of certain of the material United States
federal income tax consequences of the purchase, ownership, disposition and
conversion of Convertible Preferred Securities. Unless otherwise stated, this
summary deals only with Convertible Preferred Securities held as capital assets
by holders who purchase the Convertible Preferred Securities upon original
issuance. It also does not deal with special classes of holders such as banks,
thrifts, real estate investment trusts, regulated investment companies,
insurance companies, dealers in securities or currencies, tax-exempt investors,
United States Alien Holders (as defined herein) engaged in a trade or business
within the United States, persons that will hold the Convertible Preferred
Securities as a position in a "straddle," as part of a "synthetic security" or
"hedge," or as part of a "conversion transaction" or other integrated
investment, or persons that will hold the Convertible Preferred Securities as
other than a capital asset. This summary also does not address the tax
consequences to persons that have a functional currency other than the U.S.
Dollar or the tax consequences to shareholders, partners or beneficiaries of a
holder of Convertible Preferred Securities. Further, it does not include any
description of any alternative minimum tax consequences or the tax laws of any
state or local government or of any foreign government that may be applicable
to the Convertible Preferred Securities. This summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury regulations thereunder
and administrative and judicial interpretations thereof, as of the date hereof,
all of which are subject to change, possibly on a retroactive basis.
TREATMENT BY THE COMPANY
The Company intends to treat the Convertible Junior Subordinated
Debentures as debt for United States federal income tax purposes and each
holder of Convertible Preferred Securities as the owner of an undivided
interest in the Convertible Junior Subordinated Debentures, and by acceptance
of Convertible Preferred Securities, each holder covenants to treat the
Convertible Junior Subordinated Debentures as indebtedness and the Convertible
Preferred Securities as evidence of an indirect beneficial ownership interest
in the Convertible Junior Subordinated Debentures. The Company and the Trust
will therefore report any payments on the Convertible Junior Subordinated
Debentures to the Internal Revenue Service in a manner consistent with such
characterization. No assurance can be given, however, that such position of the
Company will not be challenged by the Internal Revenue Service or, if
challenged, that such a challenge will not be successful. If the Convertible
Junior Subordinated Debentures were treated as equity, the interest thereon
would be classified as dividends, and, among other things, payment to United
States Alien Holders would be subject to United States federal withholding tax
at a 30% (or lower treaty) rate.
The remainder of this discussion assumes that the Convertible Junior
Subordinated Debentures will be classified as debt for United States federal
income tax purposes.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Convertible Preferred Securities,
Willkie Farr & Gallagher, special counsel to the Company and the Trust, will
render its opinion generally to the effect that, under then current law and
assuming full compliance with the terms of the Declaration and the Convertible
Junior Subordinated Debenture Indenture (and certain other documents), and
based on certain facts and assumptions contained in such opinion, the Trust
will be classified for United States federal income tax purposes as a grantor
trust and not as an association taxable as a corporation. Accordingly, for
United States Federal income tax purposes, each holder of Convertible Preferred
Securities generally will be considered the owner of an undivided interest in
the Convertible Junior Subordinated Debentures, and each holder will be
required to include in its gross income any original issue discount ("OID")
accrued with respect to its allocable share of those Convertible Junior
Subordinated Debentures.
POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
Because the Company has the option, under the terms of the Convertible
Junior Subordinated Debentures, to defer payments of interest by extending
interest payment periods for up to 20 quarters, all
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of the stated interest payments on the Convertible Junior Subordinated
Debentures will be treated as "OID." Holders of debt instruments issued with
OID must include that discount in income on an economic accrual basis before
the receipt of cash attributable to the interest, regardless of their method of
tax accounting. Generally, all of a holder's taxable interest income with
respect to the Convertible Junior Subordinated Debentures will be accounted for
as OID. Actual payments and distributions of stated interest will not, however,
be separately reported as taxable income. The amount of OID that accrues in any
quarter will approximately equal the amount of the interest that accrues on the
Convertible Junior Subordinated Debentures in that quarter at the stated
interest rate. In the event that the interest payment period is extended,
holders will continue to accrue OID approximately equal to the amount of the
interest payment due at the end of the extended interest payment period on an
economic accrual basis over the length of the extended interest payment period.
Because income on the Convertible Preferred Securities will constitute
OID, corporate holders of Convertible Preferred Securities will not be entitled
to a dividends-received deduction with respect to any income recognized with
respect to the Convertible Preferred Securities.
MARKET DISCOUNT AND BOND PREMIUM
Holders of Convertible Preferred Securities other than a holder who
purchased the Convertible Preferred Securities upon original issuance may be
considered to have acquired their undivided interests in the Convertible Junior
Subordinated Debentures with market discount or acquisition premium as such
phrases are defined for United States federal income tax purposes. Such holders
are advised to consult their tax advisors as to the income tax consequences of
the acquisition, ownership and disposition of the Convertible Preferred
Securities.
RECEIPT OF CONVERTIBLE JUNIOR SUBORDINATED DEBENTURES OR CASH UPON
LIQUIDATION OF THE ISSUER
Under certain circumstances, as described under the caption "Description
of the Convertible Preferred Securities--Tax Event or Investment Company Event
Redemption or Distribution," Convertible Junior Subordinated Debentures may be
distributed to holders in exchange for the Convertible Preferred Securities and
in liquidation of the Trust. Under current law, such a distribution to holders,
for United States federal income tax purposes, would be treated as a nontaxable
event to each holder, and each holder would receive an aggregate tax basis in
the Convertible Junior Subordinated Debentures equal to such holder's aggregate
tax basis in its Convertible Preferred Securities. A holder's holding period in
the Convertible Junior Subordinated Debentures so received in liquidation of
the Trust would include the period during which the Convertible Preferred
Securities were held by such holder.
Under certain circumstances described herein (see "Description of the
Convertible Preferred Securities"), the Convertible Junior Subordinated
Debentures may be redeemed for cash and the proceeds of such redemption
distributed to holders in redemption of their Convertible Preferred Securities.
Under current law, such a redemption would, for United States federal income
tax purposes, constitute a taxable disposition of the redeemed Convertible
Preferred Securities, and a holder would recognize gain or loss as if it sold
such redeemed Convertible Preferred Securities for cash. See "--Disposition of
Convertible Preferred Securities."
DISPOSITION OF CONVERTIBLE PREFERRED SECURITIES
A holder that sells Convertible Preferred Securities will recognize gain
or loss equal to the difference between the amount realized on the sale of the
Convertible Preferred Securities and the holder's adjusted tax basis in such
Convertible Preferred Securities. A holder's adjusted tax basis in the
Convertible Preferred Securities generally will be its initial purchase price
increased by OID previously includable in such holder's gross income to the
date of disposition and decreased by payments received on the Convertible
Preferred Securities to the date of disposition. Such gain or loss will be a
capital gain or loss.
The Convertible Preferred Securities may trade at a price that does not
accurately reflect the value of accrued but unpaid interest with respect to the
underlying Convertible Junior Subordinated Debentures. A holder who disposes of
or converts his Convertible Preferred Securities between record
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dates for payments of distributions thereon will be required to include in
income the OID on the Convertible Junior Subordinated Debentures through the
date of disposition, and to add such amount to his adjusted tax basis in his
pro rata share of the underlying Convertible Junior Subordinated Debentures
deemed disposed of. To the extent the selling price is less than the holder's
adjusted tax basis (which basis will include, in the form of OID, all accrued
but unpaid interest), a holder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes.
CONVERSION OF CONVERTIBLE PREFERRED SECURITIES INTO COMMON STOCK
A holder of Convertible Preferred Securities will not recognize gain or
loss upon the exchange, through the Conversion Agent, of Convertible Preferred
Securities for a proportionate share of the Convertible Junior Subordinated
Debentures held by the Issuer.
A holder of Convertible Preferred Securities will not recognize income,
gain or loss upon the conversion, through the Conversion Agent, of Convertible
Junior Subordinated Debentures into the Common Stock. A holder of Convertible
Preferred Securities will, however, recognize gain upon the receipt of cash in
lieu of a fractional share of the Common Stock equal to the amount of cash
received less such holder's tax basis in such fractional share. A holder of
Convertible Preferred Securities' tax basis in the Common Stock received upon
exchange and conversion should generally be equal to such holder's tax basis
(including any OID for which the holder does not receive payment) in the
Convertible Preferred Securities delivered to the Conversion Agent for exchange
less the basis allocated to any fractional share for which cash is received and
a holder of Convertible Preferred Securities' holding period in the Common
Stock received upon exchange and conversion should generally begin on the date
such holder acquired the Convertible Preferred Securities delivered to the
Conversion Agent for exchange.
ADJUSTMENT OF CONVERSION PRICE
Treasury Regulations promulgated under Section 305 of the Code would
treat holders of Convertible Preferred Securities as having received a
constructive distribution from the Company in the event the conversion ratio of
the Convertible Junior Subordinated Debentures were adjusted if (i) as a result
of such adjustment, the proportionate interest (measured by the quantum of
Common Stock into or for which the Convertible Junior Subordinated Debentures
are convertible or exchangeable) of the holders of the Convertible Preferred
Securities in the assets or earnings and profits of the Company were increased,
and (ii) the adjustment was not made pursuant to a bona fide, reasonable
antidilution formula. An adjustment in the conversion ratio would not be
considered made pursuant to such a formula if the adjustment was made to
compensate for certain taxable distributions with respect to the Common Stock.
Thus, under certain circumstances, a reduction in the conversion price for the
holders may result in a deemed distribution. The fair market value of such
distribution will be taxable as dividend income to holders to the extent of the
current or accumulated earnings and profits of the Company. Holders of the
Convertible Preferred Securities would be required to include their allocable
share of such deemed dividend income in gross income but will not receive any
cash related thereto.
PROPOSED TAX LEGISLATION
On February 6, 1997, as part of President Clinton's Budget Proposal for
Fiscal Year 1998, the Treasury Department proposed legislation (the "Proposed
Legislation") which, among other things, would generally treat as equity for
United States federal income tax purposes instruments with a maximum term of
more than 15 years and that are not shown as indebtedness on the separate
balance sheet of the issuer. The Proposed Legislation was not included in the
tax legislation signed into law by President Clinton on August 5, 1997. There
can be no assurances, however, that legislation enacted in the future will not
contain provisions similar to the Proposed Legislation. Any such legislation
could be made applicable to the Convertible Junior Subordinated Debentures. If
legislation is enacted that adversely affects the tax treatment of the
Convertible Junior Subordinated Debentures, such legislation could result in
the distribution of the Convertible Junior Subordinated Debentures to holders
of the Convertible
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Preferred Securities or, in certain limited circumstances, the redemption of
such securities by the Company and the distribution of the resulting cash in
redemption of the Convertible Preferred Securities. See "Description of the
Convertible Preferred Securities--Tax Event or Investment Company Event
Redemption or Distribution."
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
holder that is not a U.S. Holder for United States federal income tax purposes.
A "U.S. Holder" is a holder of Convertible Preferred Securities who or which is
a citizen or an individual resident (or is treated as a citizen or individual
resident) of the United States for federal income tax purposes, a corporation
or partnership created or organized (or treated as created or organized for
federal income tax purposes) in or under the laws of the United States or any
political subdivision thereof, or a trust or estate the income of which is
includable in its gross income for federal income tax purposes without regard
to its source. A trust is a U.S. Holder for federal income tax purposes if, and
only if, (i) a court within the United States is able to exercise primary
supervision over the administration of the trust and (ii) one or more United
States trustees have the authority to control all substantial decisions of the
trust.
Under present United States federal income tax law, (i) payments by the
Trust or any of its paying agents to any holder of Convertible Preferred
Securities who or which is a United States Alien Holder will not be subject to
withholding of United States federal income tax; provided that, (a) the
beneficial owner of the Convertible Preferred Securities does not actually or
constructively (including by virtue of its interest in the underlying
Convertible Junior Subordinated Debentures) own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote,
(b) the beneficial owner of the Convertible Preferred Securities is not a
controlled foreign corporation that is related to the Company through stock
ownership, and (c) either (A) the beneficial owner of the Convertible Preferred
Securities certifies to the Trust or its agent, under penalties of perjury,
that it is not a United States holder and provides its name and address or (B)
a securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business (a
"Financial Institution"), and holds the Convertible Preferred Securities in
such capacity, that certifies to the Trust or its agent, under penalties of
perjury, that such statement has been received from the beneficial owner by it
or by a Financial Institution between it and the beneficial owner and furnishes
the Trust or its agent with a copy thereof; and (ii) a United States Alien
Holder of Convertible Preferred Securities will not be subject to withholding
of United States federal income tax on any gain realized upon the sale or other
disposition of the Convertible Preferred Securities.
If a United States Alien Holder is treated as receiving a deemed dividend
as a result of an adjustment of the conversion price of the Convertible
Preferred Securities, as described above under "Adjustment of Conversion
Price," such deemed dividend will be subject to United States federal
withholding tax at a 30% (or lower treaty) rate.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Subject to the qualifications discussed below, income on the Convertible
Preferred Securities will be reported to holders on Forms 1099, which forms
should be mailed to holders of Convertible Preferred Securities by February 28
following each calendar year.
The Trust will be obligated to report annually to Cede & Co., as holder
of record of the Convertible Preferred Securities, the OID related to the
Convertible Preferred Securities that accrued during the year. The Trust
currently intends to report such information on Form 1099 prior to February 28
following each calendar year even though the Trust is not legally required to
report to record holders until April 15 following each calendar year. The
Placing Agents have indicated to the Trust that, to the extent that they hold
Convertible Preferred Securities as nominees for beneficial holders, they
currently expect to report to such beneficial holders on Forms 1099 by February
28 following each calendar year. Under current law, holders of Convertible
Preferred Securities who hold as nominees for beneficial holders will
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not have any obligation to report information regarding the beneficial holders
to the Trust. The Trust, moreover, will not have any obligation to report to
beneficial holders who are not also record holders. Thus, beneficial holders of
Convertible Preferred Securities who hold their Convertible Preferred
Securities through the Initial Purchasers will receive Forms 1099 reflecting
the income on their Convertible Preferred Securities from such nominee holders
rather than the Trust.
Payments made on, and proceeds from the sale of, the Convertible
Preferred Securities may be subject to a "backup" withholding tax of 31% unless
the holder complies with certain identification requirements. Any withheld
amounts will be allowed as a credit against the holder's United States federal
income tax, provided the required information is provided to the Internal
Revenue Service.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON
A HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CONVERTIBLE PREFERRED SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to the Employee
Retirement Income Security Act of 1974 ("ERISA"), or Section 4975 of the Code
("Plans"), may purchase Convertible Preferred Securities, subject to the
investing fiduciary's determination that the investment in Convertible
Preferred Securities satisfies ERISA's fiduciary standards and other
requirements applicable to investments by the Plan.
In any case, the Company and/or any of its affiliates may be considered a
"party in interest" (within the meaning of ERISA) or a "disqualified person"
(within the meaning of Section 4975 of the Code) with respect to certain plans
(generally, Plans maintained or sponsored by, or contributed to by, any such
persons). The acquisition and ownership of Convertible Preferred Securities by
a Plan (or by an individual retirement arrangement or other Plans described in
Section 4975(e)(i) of the Code) with respect to which the Company or any of its
affiliates is considered a party in interest or a disqualified person, may
constitute or result in a prohibited transaction under ERISA or Section 4975 of
the Code, unless such Convertible Preferred Securities are acquired pursuant to
and in accordance with an applicable exemption.
Pursuant to an exception contained in a regulation issued by the U.S.
Department of Labor, the assets of the Trust would not be deemed to be "plan
assets" of investing Plans if, immediately after the most recent acquisition of
any equity interest in the Trust, less than 25% of the value of each class of
equity interests in the Trust were held by Plans, other employee benefit plans
not subject to ERISA or Section 4975 of the Code (such as governmental, church
and foreign plans), and entities holding assets deemed to be "plan assets" of
any Plan (collectively, "Benefit Plan Investors"). No monitoring or other
measures will be taken with respect to limiting the value of the Convertible
Preferred Securities held by Benefit Plan Investors to less than 25% of the
total value of such Convertible Preferred Securities at the completion of the
initial offering or thereafter. Thus, the conditions of the exception may not
be satisfied. All of the Common Securities will be purchased and initially held
by the Company.
As a result, Plans with respect to which the Company or any of its
affiliates is a party in interest or a disqualified person should not acquire
Convertible Preferred Securities. Any other Plans or other entities whose
assets include Plan assets subject to ERISA proposing to acquire Convertible
Preferred Securities should consult with their own ERISA counsel.
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SELLING HOLDERS
The Convertible Preferred Securities were originally issued by the Trust
and sold by Credit Suisse First Boston Corporation and Lehman Brothers Inc.
(the "Initial Purchasers"), in a transaction exempt from the registration
requirements of the Securities Act, to persons reasonably believed by such
Initial Purchasers to be "qualified institutional buyers" (as defined in Rule
144A under the Securities Act) and outside the United States to persons other
than U.S. persons in reliance upon Regulation S under the Securities Act. The
Selling Holders may from time to time offer and sell pursuant to this
Prospectus any or all of the Convertible Preferred Securities, any Convertible
Junior Subordinated Debentures and Common Stock issued upon conversion of the
Convertible Preferred Securities. The term Selling Holder includes, without
duplication, the holders listed below and the beneficial owners of the
Convertible Preferred Securities and their transferees, pledgees, donees or
other successors.
The following table sets forth information with respect to the Selling
Holders of the Convertible Preferred Securities as of February 10, 1998, and
has been provided to the Trust and the Company by such Selling Holders.
NUMBER OF
CONVERTIBLE
PREFERRED
SELLING HOLDER SECURITIES
- -------------- ----------
Merrill Lynch Pierce Fenner & Smith, Inc............................. 498,100
Lipper Convertibles, L.P............................................. 430,000
Argent Classic Convertible Arbitrage Fund (Bermuda L.P.) (1)......... 325,000
Toronto Dominion (New York), Inc..................................... 306,000
Natwest Securities Limited........................................... 270,000
Credit Suisse First Boston Corporation............................... 215,000
HSBC Securities Inc.................................................. 200,600
Security Insurance Company of Hartford............................... 200,000
Swiss Bank Corp.-London Branch (2)................................... 175,000
Sogen International Fund (3)......................................... 165,000
AIM Charter Fund..................................................... 150,000
MFS Series Trust V-MFS Total Return Fund (4)......................... 139,500
BNP Arbitrage, SNC (5)............................................... 112,850
Van Kampen American Capital Harbor Fund (6).......................... 100,000
Surfboard and Co. (7)................................................ 100,000
The Northwestern Mutual Life Insurance Company (8)................... 100,000
SBC Warburg Dillon Read Inc.......................................... 90,000
Allstate Insurance Company........................................... 78,000
Tennessee Consolidated Retirement System............................. 75,000
Lutheran Brotherhood................................................. 75,000
Lehman Brothers Inc. ................................................ 71,000
LB Series Fund, Inc. High Yield Portfolio (9)........................ 60,000
The Travelers Indemnity Co........................................... 58,300
Pitney Bowes, Inc. Retirement Fund (10).............................. 55,000
Black Diamond Partners, L.P. (11).................................... 51,350
Black Diamond Ltd. (11).............................................. 49,640
The Retail Clerks Pension Plan....................................... 40,000
Lutheran High Yield Fund (12)........................................ 40,000
The Travelers Insurance Co........................................... 37,500
AIM Blue Chip Fund................................................... 35,800
Bear Stearns & Co. Inc. ............................................. 30,000
Bank of America Pension Plan (13).................................... 30,000
MLPFS Safekeeping (14)............................................... 30,000
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NUMBER OF
CONVERTIBLE
PREFERRED
SELLING HOLDER SECURITIES
- -------------- ----------
KA Management Limited ............................................... 29,071
Forest Fulcrum Fund LP............................................... 26,900
AIM V.I. Growth & Income............................................. 25,000
Pacific Life Insurance Co............................................ 25,000
Deeprock & Co. (13).................................................. 25,000
Duck Bill & Co. (13)................................................. 25,000
MFS Series Trust IV-MFS Utilities Fund (5)........................... 24,900
KA Trading LP........................................................ 21,929
General Motors Employees Domestic Group Pension Trust................ 20,000
McMahan Securities Co. L.P........................................... 19,700
Forest Global Convertible Fund Series A-5 ........................... 18,900
Commonwealth Life Insurance Company-(Camden-Teamsters
Non-Enhanced)(13).................................................. 15,000
Morehead Equity Fiduciary Trust Co. (15)............................. 15,000
MFS/Sunlife Series Trust-Utilities Series (5)........................ 11,600
Merrill Lynch World Income Fund, Inc. ............................... 10,000
Century National Insurance Company................................... 10,000
United National Insurance Company.................................... 10,000
Deutsche Bank New York Custody Services.............................. 10,000
The Class IC Company, Ltd. .......................................... 10,000
Socgen International SICAV (3)....................................... 7,500
FMC Master Retirement Fund (3)....................................... 7,000
Worldwide Transactions Limited (16).................................. 5,380
Guaranty National Insurance Company.................................. 5,000
Double Black Diamond, L.P. (11)...................................... 4,435
Highbridge Capital Corp. (11)........................................ 4,430
The Travelers Life and Annuity Co.................................... 4,200
MFS Variable Insurance Trust-MFS Utilities Series (5)................ 3,000
First Montauk Securities ............................................ 3,000
Shepherd Investment International Ltd. (17).......................... 3,000
Stark International (17)............................................. 3,000
Deutsche Morgan Grenfell Inc......................................... 3,000
Forest Global Convertible Fund Series B-2 ........................... 2,700
Gersec Trust Reg..................................................... 2,000
LLT Limited (18)..................................................... 1,500
LDG Limited (19)..................................................... 1,200
MFS Series Trust I-MFS Convertible Securities Fund (5)............... 100
Other Holders........................................................ 592,915
-------
Total............................................ 5,400,000
- --------------
(1) Argent Financial Group (Bermuda) Ltd. may also be deemed beneficial
owner of these Convertible Preferred Securities.
(2) SBC Warburg Dillon Read Inc. may also be deemed beneficial owner of
these Convertible Preferred Securities.
(3) Societe Generale Asset Management Corp. may also be deemed beneficial
owner of these Convertible Preferred Securities.
(4) MFS Advisors may also be deemed beneficial owner of these Convertible
Preferred Securities.
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<PAGE>
(5) BNP/Cooper Neff Advisors, Inc. may also be deemed beneficial owner of
these Convertible Preferred Securities.
(6) Van Kampen American Capital Asset Management, Inc. may also be deemed
beneficial owner of these Convertible Preferred Securities.
(7) California Public Employees' Retirement System may also be deemed
beneficial owner of these Convertible Preferred Securities.
(8) Northwestern Mutual Life Insurance Company Group Annuity Separate Account
may also be deemed beneficial owner of 20,000 of these Convertible
Preferred Securities.
(9) Lutheran Brotherhood may also be deemed beneficial owner of these
Convertible Preferred Securities.
(10) GEM Capital Management, Inc. may also be deemed beneficial owner of
these Convertible Preferred Securities.
(11) Carlson Capital, L.P. may also be deemed beneficial owner of these
Convertible Preferred Securities.
(12) Lutheran Brotherhood Research Corp. may also be deemed beneficial owner
of these Convertible Preferred Securities.
(13) Camden Asset Management LP may also be deemed beneficial owner of these
Convertible Preferred Securities.
(14) Merrill Lynch Pierce Fenner & Smith, Inc. may also be deemed beneficial
owner of these Convertible Preferred Securities.
(15) Fiduciary Trust Company International may also be deemed beneficial owner
of these Convertible Preferred Securities.
(16) Carlson Offshore Advisors, L.P. may also be deemed beneficial owner of
these Convertible Preferred Securities.
(17) Staro Asset Management may also be deemed beneficial owner of these
Convertible Preferred Securities.
(18) Forest Investment Management, L.P. may also be deemed beneficial owner
of these Convertible Preferred Securities.
(19) TQA Investor, LLC may also be deemed beneficial owner of these Convertible
Preferred Securities.
None of the Selling Holders has, or within the past three years has had,
any position, office or other material relationship with the Trust or the
Company or any of their predecessors or affiliates, except that Credit Suisse
First Boston Corporation acted as an Initial Purchaser in the Original Offering
and Credit Suisse First Boston Corporation, Merrill Lynch Pierce Fenner &
Smith, Inc., Bear, Stearns & Co. Inc., Lehman Brothers Inc. or their respective
affiliates have provided, and may continue to provide investment banking or
financial advisory services to the Company. Because the Selling Holders may,
pursuant to this Prospectus, offer all or some portion of the Convertible
Preferred Securities, the Convertible Junior Subordinated Debentures or the
Common Stock issuable upon conversion of the Convertible Preferred Securities,
no estimate can be given as to the amount of the Convertible Preferred
Securities, the Convertible Junior Subordinated Debentures or the Common Stock
issuable upon conversion of the Convertible Preferred Securities that will be
held by the Selling Holders upon termination of any such sales. In addition,
the Selling Holders identified above may have sold, transferred or otherwise
disposed of all or a portion of their Convertible Preferred Securities since
the date on which they provided the information regarding their Convertible
Preferred Securities pursuant to transactions exempt from the registration
requirements of the Securities Act.
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<PAGE>
PLAN OF DISTRIBUTION
The Offered Securities may be sold from time to time to purchasers
directly by the Selling Holders. Alternatively, the Selling Holders may from
time to time offer the Offered Securities to or through underwriters,
broker/dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling Holders or
the purchasers of such securities for whom they may act as agents. The Selling
Holders and any underwriters, broker/dealers or agents that participate in the
distribution of Offered Securities may be deemed to be "underwriters" within
the meaning of the Securities Act and any profit on the sale of such securities
and any discounts, commissions, concessions or other compensation received by
any such underwriter, broker/dealer or agent may be deemed to be underwriting
discounts and commissions under the Securities Act.
The Offered Securities may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. The
sale of the Offered Securities may be effected in transactions (which may
involve crosses or block transactions) (i) on any national securities exchange
or quotation service on which the Offered Securities may be listed or quoted at
the time of sale, (ii) in the over-the-counter market, (iii) in transactions
otherwise than on such exchanges or in the over-the-counter market or (iv)
through the writing of options. At the time a particular offering of the
Offered Securities is made, a Prospectus Supplement, if required, will be
distributed which will set forth the aggregate amount and type of Offered
Securities being offered and the terms of the offering, including the name or
names of any underwriters, broker/dealers or agents, any discounts, commissions
and other terms constituting compensation from the Selling Holders and any
discounts, commissions or concessions allowed or reallowed or paid to
broker/dealers.
Pursuant to the Registration Rights Agreement, the Company is required to
use its reasonable best efforts to keep the Registration Statement continuously
effective for a period of two years from its effective date or such shorter
period that will terminate upon the earlier of the date on which the Offered
Securities shall have been sold pursuant to the Registration Statement or the
date on which the Offered Securities are permitted to be freely sold or
distributed to the public pursuant to any exemption from the registration
requirements of the Securities Act (including in reliance on Rule 144(k) but
excluding in reliance on Rule 144A under the Securities Act). Notwithstanding
the foregoing obligations, the Company may, under certain circumstances,
postpone or suspend the filing or the effectiveness of the Registration
Statement (or any amendments or supplements thereto) or the sale of Offered
Securities thereto.
To comply with the securities laws of certain jurisdictions, if
applicable, the Offered Securities will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain jurisdictions the Offered Securities may not be offered or
sold unless they have been registered or qualified for sale in such
jurisdictions or any exemption from registration or qualification is available
and is complied with.
The Selling Holders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the Offered Securities by the
Selling Holders. The foregoing may affect the marketability of such securities.
Pursuant to the Registration Rights Agreement, all expenses of the
registration of the Offered Securities will be paid by the Company, including,
without limitation, SEC filing fees and expenses of compliance with state
securities or "blue sky" laws; provided, however, that the Selling Holders will
pay all underwriting discounts and selling commissions, if any. The Selling
Holders will be indemnified by the Company and the Trust, jointly and severally
against certain civil liabilities, including certain liabilities under the
Securities Act, or will be entitled to contribution in connection therewith.
The Company and the Trust will be indemnified by the Selling Holders severally
against certain civil liabilities, including certain liabilities under the
Securities Act, or will be entitled to contribution in connection therewith.
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LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the
Convertible Preferred Securities will be passed upon for the Issuer by Morris,
Nichols, Arsht & Tunnell. The validity of the Convertible Junior Subordinated
Debentures, the Guarantee and any Common Stock issuable upon conversion of such
Convertible Junior Subordinated Debentures will be passed upon for the Company
and the Issuer by Steven A. McArthur, Senior Vice President and General Counsel
of the Company, and by Willkie Farr & Gallagher. As of January 31, 1998, Mr.
McArthur beneficially owned 162,309 shares of Common Stock.
EXPERTS
The financial statements and the related financial statement schedules of
the Company and its subsidiaries incorporated in this Registration Statement by
reference to the Company's 1996 Form 10-K, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports which are
incorporated herein by reference, and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
With respect to the Company's unaudited interim financial information for
the three, six and nine month periods ended March 31, 1997 and 1996, June 30,
1997 and 1996, and September 30, 1997 and 1996, incorporated herein by
reference, Deloitte & Touche LLP have applied limited procedures in accordance
with professional standards for a review of such information. However, as
stated in their report included in the Company's Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997,
and incorporated by reference herein, they did not audit and they do not
express an opinion on that interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in
light of the limited nature of the review procedures applied. Deloitte & Touche
LLP are not subject to the liability provisions of Section 11 of the Securities
Act for their reports on the unaudited interim financial information because
those reports are not "reports" or a "part" of a registration statement
prepared or certified by an accountant within the meaning of Sections 7 and 11
of the Securities Act.
The consolidated financial statements of Northern Electric plc as of
March 31, 1996 and 1995 and for each of the three years in the period ended
March 31, 1996, appearing in the Company's Form 8-K/A dated February 18, 1997,
have been audited by Ernst & Young, chartered accountants, as stated in their
report which is included therein and incorporated herein by reference. Such
financial statements have been incorporated herein by reference in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
With respect to Northern's unaudited condensed consolidated financial
statements at September 30, 1996 and for the six months ended September 30,
1996 and 1995 incorporated by reference in this Prospectus, Ernst & Young
chartered accountants have reported that they have applied limited procedures
in accordance with professional standards for a review of such information.
However, their separate report, included in the Company's Current Report on
Form 8-K/A dated February 18, 1997, and incorporated herein by reference,
states that they did not audit and they do not express an opinion on that
interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted considering the limited nature
of the review procedures applied. Ernst & Young are not subject to the
liability provisions of Section 11 of the Securities Act for their report on
the unaudited interim financial information because that report is not a
"report" or a "part" of the Registration Statement prepared or certified by
them within the meaning of Sections 7 and 11 of the Securities Act.
The consolidated statements of operations, changes in stockholders'
equity, and cash flows of Magma Power Company, and subsidiaries for the year
ended December 31, 1994, incorporated by reference in this Prospectus, have
been incorporated herein in reliance on the reports of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as experts
in accounting and auditing.
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===============================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE ISSUER OR ANY OF THEIR
AGENTS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE
ISSUER SINCE SUCH DATE.
---------------------------
TABLE OF CONTENTS
Page
AVAILABLE INFORMATION.................................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ......................... 5
RISK FACTORS............................................................. 6
CALENERGY CAPITAL TRUST III.............................................. 16
THE COMPANY.............................................................. 17
RATIO OF EARNINGS TO FIXED CHARGES....................................... 21
CAPITALIZATION........................................................... 22
ACCOUNTING TREATMENT..................................................... 23
USE OF PROCEEDS.......................................................... 23
DESCRIPTION OF THE CONVERTIBLE PREFERRED SECURITIES ..................... 24
DESCRIPTION OF THE GUARANTEE............................................. 38
DESCRIPTION OF THE CONVERTIBLE JUNIOR SUBORDINATED DEBENTURES ........... 41
EFFECT OF OBLIGATIONS UNDER THE CONVERTIBLE JUNIOR SUBORDINATED
DEBENTURES AND THE GUARANTEE........................................... 48
UNITED STATES TAXATION................................................... 49
ERISA CONSIDERATIONS..................................................... 53
SELLING HOLDERS.......................................................... 54
PLAN OF DISTRIBUTION..................................................... 57
LEGAL MATTERS............................................................ 58
EXPERTS.................................................................. 58
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5,400,000 Convertible
Preferred Securities
CALENERGY CAPITAL TRUST III
6 1/2% Convertible
Preferred Securities
Guaranteed to the extent
set forth herein by
and convertible into
Common Stock of
[LOGO]
CALENERGY COMPANY, INC.
Liquidation Preference
$50 per
Convertible
Preferred Security
----------------
PROSPECTUS
----------------
===============================================================================
