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Rule 424(b)(4)
Registration Statement No. 333-41395
333-41395-01
PROSPECTUS
$180,000,000
[CMS ENERGY LOGO]
CMS ENERGY X-TRAS(SM*)
Pass-Through Trust I
PASS-THROUGH CERTIFICATES DUE JANUARY 15, 2005
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Distributions payable January 15 and July 15
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Each Pass-Through Certificate (collectively, the "Certificates") due January
15, 2005 will represent a fractional undivided beneficial interest in the CMS
Energy X-TRAS(SM) Pass-Through Trust I (the "Pass-Through Trust"), a statutory
business trust created under the Delaware Business Trust Act, formed pursuant to
a trust agreement dated as of November 21, 1997, between CMS Energy Corporation
("CMS Energy" or the "Company") and Wilmington Trust Company, as pass-through
trustee (the "Trustee") (as to be amended and restated on the date of issue of
the Certificates, the "Trust Agreement"). The sole assets of the Pass-Through
Trust from which holders of the Certificates ("Certificateholders") will receive
any distributions on the Certificates will be $180,000,000 in aggregate
principal amount of 7% Extendible Tenor Rate-Adjusted Securities due January 15,
2005 (collectively, "X-TRAS(SM)" or the "Notes") issued by the Company. The
Trustee will issue the Certificates to the Underwriters at a price equal to the
initial public offering price specified below and will use the proceeds thereof,
together with amounts payable to it under a certain ISDA Master Agreement (as
defined), to purchase the Notes from the Company at the par value thereof. The
ability of the Pass-Through Trust to make distributions under the Certificates
will depend on whether the Company meets its obligations on the Notes. Interest
paid on the Notes will be passed through to the Certificateholders on January 15
and July 15 of each year, commencing July 15, 1998, at 7% per annum and
continuing until January 15, 2005, the date on which the principal amount of the
Notes will be distributed (the "Final Distribution Date"). The Notes are
redeemable at the option of the Company, in whole or in part, at any time or
from time to time, on not less than 30 days' prior notice, at the redemption
prices determined as described herein, together with accrued interest to the
date fixed for redemption. The Trustee will distribute amounts received with
respect to the Notes pursuant to any such redemption to the Certificateholders
on a Special Distribution Date (as defined).
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THESE CERTIFICATES 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.
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<TABLE>
<CAPTION>
FINAL PRINCIPAL INTEREST PRICE TO
PASS-THROUGH CERTIFICATES DISTRIBUTION DATE AMOUNT RATE PUBLIC(1)(2)
------------------------- ----------------- --------- -------- ------------
<S> <C> <C> <C> <C>
CMS ENERGY X-TRAS(SM) Pass-Through Trust
I......................................... January 15, 2005 $180,000,000 7% 97.022%
</TABLE>
- ------------
(1) Plus accrued interest, if any, from January 13, 1998.
(2) The underwriting commission aggregates $2,944,800, which constitutes
1.636% of the principal amount of the Certificates. The underwriting
commission and certain other expenses relating to the offering estimated
at $273,250 will be paid by the Company, which will receive proceeds from
the sale of the Notes to the Trust equal to the par value thereof. The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
------------------------
The Certificates are offered, subject to prior sale, when, as and if
accepted by the Underwriters and subject to approval of certain legal matters by
Shearman & Sterling and Reid & Priest LLP, both of which are acting as counsel
for the Underwriters. It is expected that delivery of the Certificates in
book-entry form will be made on or about January 13, 1998 through the book-entry
facilities of The Depository Trust Company ("DTC"), against payment therefor in
immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
January 8, 1998
* "X-TRAS(SM)" is a servicemark of Morgan Stanley, Dean Witter, Discover & Co.
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS (THIS "PROSPECTUS") AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE CERTIFICATES DESCRIBED IN THIS PROSPECTUS OR AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
JURISDICTION TO ANY PERSONS TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE HEREUNDER DOES
NOT IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE ON WHICH SUCH INFORMATION IS GIVEN.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Incorporation of Certain Documents by Reference............. 3
Prospectus Summary.......................................... 4
The Company................................................. 10
Selected Consolidated Financial Data........................ 12
Ratio of Earnings to Fixed Charges.......................... 13
Use of Proceeds............................................. 13
Capitalization.............................................. 14
Formation of the Pass-Through Trust......................... 15
Description of Certificates................................. 15
Description of the Trust Agreement.......................... 22
Description of Notes........................................ 25
Certain Federal Income Tax Considerations................... 39
State and Local Tax Considerations.......................... 43
ERISA Considerations........................................ 43
Underwriters................................................ 46
Transfer Restrictions....................................... 47
Legal Matters............................................... 47
Experts..................................................... 48
Available Information....................................... 48
</TABLE>
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CERTIFICATES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE THE CERTIFICATES IN THE OPEN MARKET. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITERS."
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Securities and Exchange Commission
(the "Commission") by the Company (File No. 001-9513) are incorporated by
reference in this Prospectus:
(a) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(b) the Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, June 30, and September 30, 1997; and
(c) the Company's Current Reports on Form 8-K dated March 7, April 24,
May 1, June 5, June 11, July 1, August 21, and December 23, 1997.
All documents and reports filed by the Company with the Commission pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") subsequent to the date of this Prospectus and prior
to the termination of the offering of the Certificates 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 (such documents, and the documents enumerated
above, being hereinafter referred to as "Incorporated Documents").
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
Incorporated Documents, other than certain exhibits to such Documents. Requests
should be directed to CMS Energy at its principal executive offices located at
Fairlane Plaza South, Suite 1100, 330 Town Center Drive, Dearborn, Michigan
48126, Attention: Office of the Secretary, telephone: (313) 436-9200.
Any statement contained in an Incorporated Document shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent any
statement contained herein or in any subsequently filed document, which is also
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded.
Certain information contained in this Prospectus summarizes, is based upon
or refers to information and financial statements contained in one or more
Incorporated Documents; accordingly, such information contained herein is
qualified in its entirety by reference to such documents and should be read in
conjunction therewith.
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PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by reference to the detailed information appearing elsewhere
herein, including under the headings "Description of Certificates," "Description
of the Trust Agreement" and "Description of Notes." Certain capitalized terms
used herein are defined elsewhere in this Prospectus.
PASS-THROUGH TRUST............ CMS Energy X-TRAS(SM) Pass-Through Trust I (the
"Pass-Through Trust") is a statutory business
trust formed under the Delaware Business Trust
Act pursuant to (i) a trust agreement dated as
of November 21, 1997, between the Company and
Wilmington Trust Company, as pass-through
trustee (as to be amended and restated on the
date of issue of the Certificates, the "Trust
Agreement") and (ii) the filing of a
certificate of trust with the Secretary of
State of the State of Delaware on November 21,
1997.
CERTIFICATES.................. $180,000,000 in aggregate principal amount of
Pass-Through Certificates due January 15, 2005
(the "Certificates") will be issued by the
Pass-Through Trust pursuant to the Trust
Agreement. The Certificates will represent
fractional undivided beneficial interests in
the Pass-Through Trust.
PASS-THROUGH TRUST ASSETS..... The sole assets of the Pass-Through Trust from
which holders of the Certificates (the
"Certificateholders") will receive any
distributions on the Certificates will be
$180,000,000 in aggregate principal amount of
7% Extendible Tenor Rate-Adjusted Securities
due January 15, 2005 ("X-TRAS(SM)" or the
"Notes") issued by the Company. The Notes will
be issued under an Indenture (the "Indenture")
dated as of September 15, 1992, as supplemented
by a Sixth Supplemental Indenture (the
"Supplemental Indenture") dated as of January
13, 1998, between the Company and NBD Bank, as
trustee (the "Indenture Trustee"). The
Indenture and the Supplemental Indenture are
hereinafter referred to collectively as the
"Senior Debt Indenture."
The Pass-Through Trust will acquire the Notes,
which will bear interest at the rate per annum
set forth on the cover page of this Prospectus
and will mature on January 15, 2005 (the "Final
Distribution Date") unless extended as
described below. In addition, the Pass-Through
Trust will be party to an ISDA master agreement
(the "ISDA Master Agreement") with Morgan
Stanley Capital Services Inc. ("MSCS"), a
wholly owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co. Under the ISDA Master
Agreement, an amount is payable by MSCS to the
Pass-Through Trust on the date of issue of the
Certificates. Such amount will not be assigned
for the benefit of the Certificateholders, and
will be used by the Pass-Through Trust,
together with the proceeds of the offering of
the Certificates, to purchase the Notes at par
value from the Company. The amount payable, if
any, by the Pass-Through Trust to MSCS pursuant
to the ISDA Master Agreement (the "ISDA
Amount") will be payable either (i) by the
Company pursuant to the Senior Debt Indenture
or (ii) in the event of a remarketing, with the
proceeds of the remarketing. Accordingly,
Certificateholders will obtain no benefit from,
and
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will be exposed to no risk as a result of,
interest rate changes which may give rise to
payment by the Company of the ISDA Amount under
the Senior Debt Indenture, and in turn, the
payment thereof by the Trustee to MSCS pursuant
to the ISDA Master Agreement.
REGULAR DISTRIBUTION DATES.... July 15, 1998, and thereafter each January 15
and July 15.
SPECIAL DISTRIBUTION DATE..... Any Business Day.
RECORD DATE................... The first day, whether or not a Business Day,
of each January and July except that no Record
Date shall be applicable to distributions to
be made on the Final Distribution Date.
DISTRIBUTIONS................. All payments of principal of, Applicable
Premium, if any, and interest on the Notes
received by the Trustee will be distributed by
the Trustee to Certificateholders on the date
such receipt is confirmed by the Trustee,
except in certain cases where the Notes are in
default, when the Notes are redeemed in part
or when there is a Change in Control (as
defined) or an Excess Proceeds Offer (as
defined). Payments of interest on the Notes
are scheduled to be received by the Trustee on
the Regular Distribution Dates and will be
distributed to the Certificateholders on the
corresponding Regular Distribution Date.
Payments of principal of, Applicable Premium
and interest on the Notes resulting from
optional redemption, if any, of all of the
Notes and payments received by the Trustee
following an Event of Default will be
distributed on a Special Distribution Date
after not less than 20 days' notice from the
Trustee to the Certificateholders. For a
discussion of distributions upon an Event of
Default, a redemption in part or a Change in
Control or Excess Proceeds Offer, see
"Description of Certificates -- Events of
Default," "Description of Notes -- Optional
Redemption at a Premium" and "-- Purchase of
Certificates upon Change in Control or Excess
Proceeds Offer."
OPTIONAL REDEMPTION OF THE
NOTES AT A PREMIUM............ The Notes are redeemable at any time, at the
option of the Company, in whole or in part, on
not less than 30 nor more than 60 days' prior
notice by the Company, at a redemption price
equal to 100% of the principal amount of the
Notes being redeemed, interest, if any,
thereon to the redemption date, and the
Applicable Premium if such redemption occurs
on or prior to the 91st day prior to the Final
Distribution Date (the "Premium Termination
Date") plus the ISDA Amount. All payments of
principal of, Applicable Premium and interest
on the Notes paid by the Company to the
Pass-Through Trust with respect to a
redemption in whole will be distributed to the
Certificateholders on a Special Distribution
Date, which shall be the redemption date of
such Notes. The ISDA Amount will be
distributed to MSCS. If less than all of the
Notes are to be redeemed, the Trustee shall
select, in such manner as it shall deem
appropriate and fair, the particular
Certificates or portions thereof representing
beneficial ownership of the Notes to be
redeemed. Certificates representing beneficial
ownership of the Notes selected for partial
redemption will be required to be presented to
the Trustee for cancellation. Upon such
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presentation, all payments of principal of,
Applicable Premium and interest on the Notes
paid by the Company to the Pass-Through Trust
will be distributed to the holders of such
Certificates. The ISDA Amount will be
distributed to MSCS. See "Description of Notes
-- Optional Redemption at a Premium."
FINAL DISTRIBUTION DATE....... January 15, 2005.
FINAL DISTRIBUTION............ The final distribution (the "Final
Distribution") on the Certificates,
representing an amount equal to the principal
of and interest on the Notes, assuming the
Notes had been held until the Final
Distribution Date, is expected to be made on
the Final Distribution Date. If the Yield (as
defined) on the date which is 90 days prior to
the Final Distribution Date (the "Exercise
Date") is equal to or greater than the
reference U.S. Treasury Note yield of 5.80%,
the Notes will mature on the Final Distribution
Date. If the Yield on the Exercise Date is less
than such reference U.S. Treasury Note yield,
the maturity of the Notes will be extended and,
prior to the Final Distribution Date, one of
the following will occur: (a) the interest rate
borne by the Notes will be reset and the Notes
will be remarketed so as to yield net proceeds
in cash at least equal to the principal amount
of the Notes plus the ISDA Amount (the
"Remarketing Proceeds") which, together with
the amount payable by the Company representing
interest on the Notes through the Final
Distribution Date, will be sufficient to enable
the Trustee to make the Final Distribution on
the Certificates, (b) the Company will exercise
its option to redeem the Notes on the Final
Distribution Date at a purchase price equal to
the principal amount of and interest on the
Notes plus the ISDA Amount or (c) the Pass-
Through Trust will exercise its Put Option (as
defined) and require the Company to purchase
the Notes on the Final Distribution Date at a
purchase price equal to the principal amount of
and interest on the Notes. In any case, the
principal of and interest on the Notes will be
distributed by the Pass-Through Trust to the
Certificateholders on the Final Distribution
Date. The ISDA Amount (if any) will be
distributed to MSCS. See "Description of
Certificates -- Final Distribution."
"Yield" shall mean the yield-to-maturity on the
then current 7-year U.S. Treasury Note as
determined by linear interpolation of the
5-year and 10-year then current offered-side
yields for the on-the-run most recently issued
U.S. Treasury Notes, as published on Telerate
page 500 as of approximately 12:30 p.m., New
York City time, on the Exercise Date. If
Telerate 500 is unavailable, "Yield" shall be
the arithmetic mean of offered-side yields for
the then current 7-year U.S. Treasury Note as
determined by linear interpolation of the
5-year and 10-year then current offered-side
yields for the on-the-run most recently issued
U.S. Treasury Notes, without regards to highest
and lowest yields, quoted as of approximately
12:30 p.m., New York City time, on the Exercise
Date by five primary dealers in U.S. Treasury
Notes selected by MSCS.
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FINAL DISTRIBUTION UPON A
SUCCESSFUL REMARKETING........ If the maturity of the Notes is extended,
unless the Company exercises its option to
redeem the Notes (which option the Company
shall be entitled to exercise at any time
subsequent to the delivery of the Extension
Notice (as defined) and prior to the earlier of
the pricing of the remarketing and the
Remarketing Deadline (as defined)), the
interest rate borne by the Notes will be reset
in order that the Notes may be remarketed so as
to yield net proceeds in cash at least equal to
the Remarketing Proceeds which, together with
the amount payable by the Company representing
interest on the Notes through the Final
Distribution Date, will be sufficient to enable
the Trustee to make the Final Distribution to
the Certificateholders. The Pass-Through Trust
will distribute to the Certificateholders the
principal of and interest on the Notes. The
ISDA Amount will be distributed to MSCS.
FINAL DISTRIBUTION UPON
OPTIONAL REDEMPTION OF THE
NOTES WITHOUT PREMIUM...... If the maturity of the Notes is extended, the
Company may, in lieu of permitting the Notes to
be remarketed, exercise its option to redeem
all of the Notes on the Final Distribution Date
at a purchase price equal to the principal
amount of and interest on the Notes plus the
ISDA Amount, but without the Applicable
Premium. The Pass-Through Trust will distribute
to the Certificate-holders the principal of and
interest on the Notes. The ISDA Amount will be
distributed to MSCS.
FINAL DISTRIBUTION UPON
EXERCISE BY THE TRUSTEE OF PUT
OPTION..................... If the maturity of the Notes is extended and
for any reason the Trustee does not receive an
amount in cash equal to the principal amount of
and interest on the Notes by 15 days prior to
the Final Distribution Date or such earlier
date as may be mutually agreed upon by the
Company and the Trustee (the "Remarketing
Deadline"), the Pass-Through Trust will be
deemed to have exercised its option to require
the Company to repurchase (the "Put Option"),
on the Final Distribution Date, all of the
outstanding Notes at a purchase price equal to
the principal amount of and interest on the
Notes. The Pass-Through Trust will distribute
to the Certificateholders the principal of and
interest on the Notes.
REPURCHASE UPON CHANGE IN
CONTROL OR EXCESS PROCEEDS
OFFER...................... In the event of any Change in Control (as
defined) of the Company, each Certificateholder
will have the right to direct the Trustee to
require the Company to repurchase all or any
part of the Notes beneficially owned by such
Certificateholder at a repurchase price equal
to 101% of the principal amount of and interest
on such Notes plus the ISDA Amount. In the
event that the Company has Excess Proceeds (as
defined) from an Asset Sale (as defined), each
Certificateholder will have the right to direct
the Trustee to require the Company to
repurchase on a pro rata basis an aggregate
principal amount of Notes beneficially owned by
such Certificateholder on the relevant purchase
date equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the
principal amount of and interest on such Notes
plus the ISDA Amount. The
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percentage of principal of and interest on such
Notes will be distributed by the Pass-Through
Trust to the Certificateholders who directed
the Trustee to require the Company to
repurchase Notes beneficially owned by such
Certificateholders. The ISDA Amount will be
distributed to MSCS. See "Description of
Certificates -- Purchase of Certificates upon
Change in Control or Excess Proceeds Offer."
TRANSFER RESTRICTIONS......... The Certificates are subject to transfer
restrictions pursuant to Rule 3a-7 under the
Investment Company Act of 1940, as amended. See
"Transfer Restrictions."
BOOK-ENTRY; DELIVERY AND
FORM.......................... The Certificates will be represented by one or
more permanent global Certificates in
definitive, fully registered form deposited
with the Trustee as custodian for, and
registered in the name of, a nominee of The
Depository Trust Company ("DTC"). The
Certificates will be sold in minimum
denominations of $250,000. See "Description of
Certificates -- Book-Entry; Delivery and Form"
and "Transfer Restrictions."
USE OF PROCEEDS............... The proceeds of the offering of the
Certificates, together with the amount payable
by MSCS to the Pass-Through Trust on the date
of issue of the Certificates, will be used by
the Pass-Through Trust to purchase the Notes at
par value from the Company. The net proceeds to
the Company from the sale of the Notes to the
Pass-Through Trust will be used to repay
certain revolving credit and working capital
facility borrowings, some of which were
incurred in connection with a Company
subsidiary's acquisition of an ownership
interest in a Brazilian electric distribution
company.
CERTAIN COVENANTS OF THE
COMPANY....................... The Senior Debt Indenture will contain certain
covenants which, among other things, restrict
the ability of the Company and its Restricted
Subsidiaries (as defined) to: incur or
guarantee additional indebtedness; make
restricted payments; create liens; sell assets
and consolidate, merge or sell all or
substantially all of their assets. See
"Description of Notes -- Certain Covenants."
TRUSTEE....................... Wilmington Trust Company will act as Trustee,
paying agent and registrar for the
Certificates.
INDENTURE TRUSTEE............. NBD Bank will act as Indenture Trustee.
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS............. The Pass-Through Trust will be classified as a
grantor trust and not as an association (or
publicly traded partnership) taxable as a
corporation for U.S. federal income tax
purposes. For U.S. federal income tax purposes,
while the characterization of the transaction
is not without doubt, Federal Tax Counsel (as
defined) believes that the Certificates
represent ownership of a debt instrument issued
by the Company through the Pass-Through Trust.
The debt instrument will have an absolute
maturity corresponding to the Final
Distribution Date, but will otherwise have the
characteristics of the Notes, including the
principal amount of and interest rate payable
on the Notes. Each Certificateholder will be
required to report on its federal income tax
return its pro rata share of the income from
the debt instrument, including interest income
at the
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interest rate on the debt instrument in
accordance with its method of accounting. The
debt instrument may be issued with original
issue discount. See "Certain Federal Income Tax
Considerations."
ERISA CONSIDERATIONS.......... Each purchaser of Certificates will, by its
purchase, be deemed to have directed the
Trustee to purchase the Notes and to have
approved all of the documents relating to the
Notes, and to have represented and warranted
that either (A) no part of the assets to be
used by it to purchase and hold such
Certificates constitutes the assets of any (i)
employee benefit plan (as defined in Section
3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")) subject to
Title I of ERISA, (ii) plan described in
Section 4975(e)(1) of the U.S. Internal Revenue
Code of 1986, as amended (the "Code") that is
subject to Section 4975 of the Code or (iii)
entity whose underlying assets include "plan
assets" under Department of Labor Regulation 29
C.F.R. Section 2510.3-101 (collectively,
"Plans") or (B) one or more prohibited
transaction statutory or administrative
exemptions applies such that the use of such
Plan assets to purchase and hold such
Certificates will not constitute a non-exempt
prohibited transaction under ERISA or the Code.
Any Plan fiduciary that proposes to cause a
Plan to purchase Certificates should consult
with its legal advisors with respect to the
potential applicability of ERISA and the Code
to such investment and the potential
consequences of such investment with respect to
its specific circumstances. See "ERISA
Considerations" and "Transfer Restrictions."
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THE COMPANY
The Company, incorporated in Michigan in 1987, is the parent holding
company of Consumers Energy Company ("Consumers") and CMS Enterprises Company
("Enterprises"). Consumers, a combination electric and gas utility company
serving in all 68 counties of Michigan's Lower Peninsula, is the largest
subsidiary of the Company. Consumers' customer base includes a mix of
residential, commercial and diversified industrial customers, the largest
segment of which is the automotive industry. Enterprises is engaged in several
domestic and international energy-related businesses including: (i) oil and gas
exploration and production; (ii) acquisition, development and operation of
independent power production facilities; (iii) energy marketing, risk management
and energy management to large utility, commercial and industrial customers;
(iv) transmission, storage and processing of natural gas; and (v) international
energy distribution.
The Company conducts its principal operations through the following seven
business segments: (i) electric utility operations; (ii) gas utility operations;
(iii) oil and gas exploration and production operations; (iv) independent power
production; (v) energy marketing, services and trading; (vi) natural gas
storage, transmission and processing; and (vii) international energy
distribution. Consumers or Consumers' subsidiaries are engaged in two segments:
electric operations and gas operations. Consumers' electric and gas businesses
are principally regulated utility operations.
The Company and its subsidiaries routinely evaluate, invest in, acquire and
divest energy-related assets and/or businesses both domestically and
internationally. Consideration for such transactions may involve the delivery of
cash and/or securities.
The Company's 1996 consolidated operating revenue was $4,333 million. This
consolidated operating revenue was derived from its electric utility operations
(approximately 57% or $2,446 million), its gas utility operations (approximately
30% or $1,282 million), gas transmission, storage and marketing (approximately
7% or $320 million), oil and gas exploration and production activities
(approximately 3% or $130 million) and independent power production and other
non-utility activities (approximately 3% or $155 million). Consumers'
consolidated operations in the electric and gas utility businesses account for
the majority of the Company's total assets, revenue and income. The
unconsolidated share of non-utility electric generation and distribution and gas
transmission and storage revenue for 1996 was $557 million.
Consumers is a public utility serving gas or electricity to almost six
million of Michigan's nine and one-half million residents in all of the 68
counties in Michigan's Lower Peninsula. Consumers' service area includes
automotive, metal, chemical, food and wood products industries and a diversified
group of other industries. Consumers' 1996 consolidated operating revenue of
$3,770 million was derived approximately 65% ($2,446 million) from its electric
utility business, approximately 34% ($1,282 million) from its gas utility
business and approximately 1% ($42 million) from its non-utility business.
Consumers' rates and certain other aspects of its business are subject to the
jurisdiction of the Michigan Public Service Commission and the Federal Energy
Regulatory Commission.
The foregoing information concerning the Company and its subsidiaries does
not purport to be comprehensive. For additional information concerning the
Company and its subsidiaries' businesses and affairs, including their capital
requirements and external financing plans, pending legal and regulatory
proceedings and descriptions of certain laws and regulations to which those
companies are subject, prospective purchasers should refer to the Incorporated
Documents.
RECENT DEVELOPMENTS
On November 7, 1997, the Company issued $300 million principal amount of
7 3/8% Senior Unsecured Notes due 2000 and used the net proceeds to repay $269
million of the outstanding balance under the Company's revolving credit
facility, used $24 million to repay one of the Company's line of credit, and
used the remaining amount for general corporate purposes. On November 20, 1997,
the Company issued 4.142 million shares of CMS Energy common stock, par value
$.01 per share ("CMS Energy Common Stock") and used the proceeds for general
corporate purposes, including the repayment of long-term debt.
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On December 4, 1997, the Company and a privately held Brazilian utility,
Companhia Forca e luz Cataguazes-Leopoldina (CFLCL), announced that the
Brazilian State of Sergipe selected CFLCL as the winning bidder in the
privatization of the Energipe electric distribution utility. Energipe serves
approximately 348,000 customers in Sergipe, located in northeastern Brazil.
CFLCL submitted the winning bid of US$520.3 million for 86.4% of the ownership
interest of Energipe. CMS Electric and Gas Company, a subsidiary of the Company,
has agreed to acquire a 42.6% ownership interest in the CFLCL/Energipe combined
company for a price of approximately US$180 million and to assume an active role
in advising the company on technical matters.
On December 19, 1997, the Michigan Public Service Commission issued an ex
parte order, responsive to a December 9, 1997 Consumers application, authorizing
a voluntary, experimental program that will allow up to 300,000 Michigan natural
gas customers to choose their own supplier over the next three years. The new
program will begin April 1, 1998, when 100,000 residential, commercial and
industrial retail gas sales customers of Consumers will be offered the
opportunity to participate on a first-come, first-served basis. An additional
100,000 customers will be allowed to participate in the program in each of the
following two years. During the program, Consumers' distribution service rates
for all retail gas customers will be frozen. In addition, the gas cost recovery
clause will be suspended and the gas commodity charge will be frozen at the
1996-97 rate of $2.8364 per thousand cubic feet (Mcf) for customers who remain
full-service sales customers. Finally, an earnings sharing mechanism will
provide for refunds to customers in the event that Consumer's actual gas utility
business earnings exceed certain predetermined levels.
On January 8, 1998, the Company announced that the Government of Turkey had
selected its consortium to exclusively negotiate the purchase of a concession to
acquire and operate the Bursa-Yalova region electric distribution system in a US
$165 million privatization in Turkey. The Bursa-Yalova electric distribution
system serves approximately 700,000 customers in and around the City of Bursa,
an industrial and commercial center located about 62 miles south of Istanbul.
The Company will hold a 30% ownership interest in the consortium and will also
serve as operator for the consortium. Ihlas Holding of Turkey and Howard Energy
Group of Oceanside, California will hold 55% and 15% ownership, respectively, in
the consortium.
11
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of certain financial information of the Company
and its consolidated subsidiaries and is qualified in its entirety by, and
should be read in conjunction with, the Company's consolidated financial
statements and notes thereto included in the Incorporated Documents. See
"Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
NINE
MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenue................................ $3,614 $3,890 $4,333 $3,150 $3,394
Pretax operating income.......................... 503 603 677 547 565
Operating expenses............................... 3,111 3,287 3,656 2,603 2,829
Income taxes..................................... 92 118 139 116 107
Net income....................................... $ 179 $ 204 $ 240 $ 196 $ 204
Earnings per average common share -- CMS Energy
Common Stock................................... $ 2.09 $ 2.27 $ 2.45 $ 2.02 $ 2.04
Earnings per average common share -- Class G
Common Stock................................... -- .38 1.82 1.38 1.13
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 79 $ 56 $ 56 $ 55 $ 134
Net plant and property........................... 4,814 5,074 5,280 5,177 5,415
Total assets..................................... 7,378 8,143 8,615 8,291 9,500
Long-term debt, excluding current maturities..... 2,709 2,906 2,842 2,996 3,060
Notes payable.................................... 339 341 333 341 394
Other liabilities................................ $2,867 $3,071 $3,282 $2,879 $3,581
Company-obligated mandatorily redeemable Trust
Preferred Securities of Consumers Power Company
Financing I(1)................................. -- -- 100 100 100
Company-obligated mandatorily redeemable Trust
Preferred Securities of Consumers Energy
Company Financing II(1)........................ -- -- -- -- 120
Company-obligated convertible Trust Preferred
Securities of CMS Energy Trust I(2)............ -- -- -- -- 173
Preferred stock of subsidiary.................... 356 356 356 356 238
Common stockholders' equity...................... $1,107 $1,469 $1,702 $1,619 $1,834
</TABLE>
- -------------------------
(1) The primary asset of Consumers Power Company Financing I is $103 million
principal amount of 8.36% subordinated deferrable interest notes due 2015
from Consumers. The primary asset of Consumers Energy Company Financing II
is $124 million principal amount of 8.20% subordinated deferrable interest
notes due 2027 from Consumers.
(2) The primary asset of CMS Energy Trust I is $178 million principal amount of
7.75% convertible subordinated debentures due 2027 from CMS Energy.
12
<PAGE> 13
RATIO OF EARNINGS TO FIXED CHARGES
The ratios of earnings to fixed charges for the nine months ended September
30, 1997 and for each of the years ended December 31, 1992 through 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
----------------------------------- ENDED
1992(1) 1993 1994 1995 1996 SEPTEMBER 30, 1997
------- ---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges.......... -- 1.88 2.07 1.94 2.01 2.01
</TABLE>
- -------------------------
(1) For the year ended December 31, 1992, fixed charges exceeded earnings by
$441 million. Earnings as defined include a $520 million pretax loss on the
settlement of MCV power purchases, $(15) million for potential customer
refunds and other reserves related to 1992 but recorded in 1991, and $6
million relating to CMS Generation Co.'s reduction in its investment in The
Oxford Energy Company. The ratio of earnings to fixed charges would have
been 1.33 excluding these amounts.
For the purpose of computing such ratio, earnings represent net income
before income taxes, net interest charges and estimated interest portion of
lease rentals.
USE OF PROCEEDS
The proceeds of the offering of the Certificates, together with the amount
payable by MSCS to the Pass-Through Trust on the date of issue of the
Certificates, will be used by the Pass-Through Trust to purchase the Notes at
par value from the Company.
The net proceeds to the Company from the sale of the Notes to the
Pass-Through Trust will be used to repay certain of the Company's borrowings
under its revolving credit facility and various working capital facilities as
well as for its general corporate purposes. The revolving credit facility
matures in the year 2000, and it and the working capital facilities have a
combined weighted average interest rate at December 18, 1997 of 7.22%.
Borrowings under the revolving credit facility are funding a Company
subsidiary's acquisition of an ownership interest in a Brazilian electric
distribution company. See "Recent Developments."
13
<PAGE> 14
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company at September 30, 1997, and as adjusted to reflect the sale of the
Notes to the Pass-Through Trust, the application of the estimated net proceeds
from such sale and other adjustments described below. See "Use of Proceeds." The
table is qualified in its entirety by, and should be read in conjunction with,
the Company's consolidated financial statements and notes thereto included in
the Incorporated Documents. See "Incorporation of Certain Documents by
Reference."
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
Non-current portion of capital leases....................... $ 82 $ 82
Long-Term Debt:
Other long-term debt (excluding current
maturities)(1)(2)(3)................................... 3,060 2,919
7% Extendible Tenor Rate-Adjusted Securities due
2005(4)................................................ -- 180
------ ------
Total long-term debt................................... 3,060 3,099
------ ------
Company-obligated mandatorily redeemable Trust Preferred
Securities of Consumers Power Company Financing I(5)...... 100 100
Company-obligated mandatory redeemable Trust Preferred
Securities of Consumers Energy Company Financing II(5).... 120 120
Company-obligated convertible Trust Preferred Securities of
CMS Energy Trust I (5).................................... 173 173
Total stockholders' equity:
Preferred stock of subsidiary............................. 238 238
Common stockholders' equity(2)............................ 1,834 1,986
------ ------
Total stockholders' equity............................. 2,072 2,224
------ ------
Total capitalization................................... $5,607 $5,798
====== ======
</TABLE>
- -------------------------
(1) Adjusted to reflect the issuance on November 7, 1997 of $300 million
principal amount of 7 3/8% Senior Unsecured Notes due 2000 and the
concurrent repayment of $269 million of the outstanding balance under the
Company's revolving credit facility and repayment of $24 million under one
of the Company's lines of credit with the proceeds from the issuance of such
Senior Unsecured Notes.
(2) Adjusted to reflect net proceeds of $152 million from the issuance of 4.142
million shares of CMS Energy Common Stock on November 20, 1997, which
proceeds were used for general corporate purposes including the repayment of
long-term debt.
(3) Adjusted to reflect the December 8, 1997 borrowing of $180 million under the
Company's revolving credit facility to fund a Company subsidiary's
acquisition of an ownership interest in a Brazilian electric distribution
company, and the proposed repayment of $176.1 million of such borrowing with
the proceeds of the issuance of the 7% Extendible Tenor Rate-Adjusted
Securities due 2005.
(4) Adjusted to reflect the proposed issuance of $180 million principal amount
of 7% Extendible Tenor Rate-Adjusted Securities due 2005.
(5) The primary asset of Consumers Power Company Financing I is approximately
$103 million principal amount of 8.36% subordinated deferrable interest
notes due 2015 from Consumers Energy Company. The primary asset of Consumers
Energy Company Financing II is approximately $124 million principal amount
of 8.20% subordinated deferrable interest notes due 2027 from Consumers
Energy Company. The primary asset of CMS Energy Trust I is approximately
$178 million principal amount of 7.75% convertible subordinated debentures
due 2027 from CMS Energy.
14
<PAGE> 15
FORMATION OF THE PASS-THROUGH TRUST
The Pass-Through Trust is a statutory business trust formed under the
Delaware Business Trust Act pursuant to (i) a trust agreement dated as of
November 21, 1997 as to be amended and restated on the date of issue of the
Certificates, between the Company and Wilmington Trust Company, as Trustee and
(ii) the filing of a certificate of trust with the Secretary of State of the
State of Delaware on November 21, 1997. Pursuant to the Trust Agreement, the
Pass-Through Trust will issue and sell the Certificates to the Underwriters and
enter into the ISDA Master Agreement with MSCS, a wholly owned subsidiary of
Morgan Stanley, Dean Witter, Discover & Co. Under the ISDA Master Agreement, an
amount is payable by MSCS to the Pass-Through Trust on the date of issue of the
Certificates. Such amount will not be assigned for the benefit of the
Certificateholders but will be used by the Pass-Through Trust, together with the
proceeds from the sale of the Certificates, to purchase the Notes at par value
from the Company. The Notes will be the sole assets of the Pass-Through Trust
from which Certificateholders will be entitled to receive any distributions on
the Certificates. The ISDA Amount, if any, will be payable by the Pass-Through
Trust to MSCS pursuant to the ISDA Master Agreement either (i) by the Company
pursuant to the Senior Debt Indenture or (ii) in the event of a remarketing,
with the proceeds of the remarketing. Accordingly, Certificateholders will
obtain no benefit from, and will be exposed to no risk as a result of, interest
rate changes which may give rise to payment by the Company of the ISDA Amount
under the Senior Debt Indenture and in turn, the payment thereof by the Trustee
to MSCS pursuant to the ISDA Master Agreement.
DESCRIPTION OF CERTIFICATES
The Certificates will be issued under the Trust Agreement. The following
summaries of certain provisions of the Trust Agreement do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all provisions of the Certificates and the Trust Agreement, including the
definition therein of certain terms. Wherever particular defined terms of the
Certificates and the Trust Agreement are referred to, such defined terms are
incorporated herein by reference as part of the statement made, and the
statement is qualified in its entirety by such reference. Copies of the Trust
Agreement are available from the Trustee upon request.
GENERAL
The Certificates will represent fractional undivided beneficial interests
in the Pass-Through Trust. The sole assets (the "Trust Assets") of the
Pass-Through Trust from which Certificateholders will receive any distributions
on the Certificates will be $180,000,000 in aggregate principal amount of the
Notes issued by the Company, including the interest and Applicable Premium, if
any, thereon, but not any ISDA Amount payable in respect of the ISDA Master
Agreement. The Pass-Through Trust will acquire the Notes, which will bear
interest at the rate per annum set forth on the cover page of this Prospectus
and will mature on the Final Distribution Date unless extended as described
below. Certificateholders will be entitled to receive distributions equal to
amounts paid by the Company in respect of principal of, Applicable Premium, if
any, and interest on the Notes.
COLLECTIONS AND DISTRIBUTIONS
The Trust Agreement will require the Trustee to establish and maintain a
segregated account (the "Certificate Account") held in trust for the benefit of
the Certificateholders. The Trustee shall cause to be deposited in the
Certificate Account on the date of receipt thereof all amounts received with
respect to the Notes other than any ISDA Amount payable in respect of the ISDA
Master Agreement.
Payments of principal of, Applicable Premium, if any, and interest on the
Notes held in the Pass-Through Trust will be distributed by the Trustee to
Certificateholders on each Regular Distribution Date and each Special
Distribution Date as described in the following three paragraphs, except in
certain cases when the Notes are in default, when the Notes are redeemed in part
or when there is a Change in Control or an Excess Proceeds Offer. See
"Description of the Trust Agreement -- Events of Default," "Description of Notes
- --Optional Redemption at a Premium" and "-- Purchase of Certificates upon Change
in Control or Excess
15
<PAGE> 16
Proceeds Offer." Interest paid on the Notes will be passed through to the
Certificateholders on January 15 and July 15 of each year, commencing on July
15, 1998, until the Final Distribution Date for the Pass-Through Trust (each, a
"Regular Distribution Date"). Payment of principal on the Notes is scheduled to
be received by the Trustee not later than the Final Distribution Date (such
scheduled payments of the principal amount of and interest on the Notes are
herein referred to as "Scheduled Payments").
The Trustee will distribute on each Regular Distribution Date all Scheduled
Payments the receipt of which is confirmed by the Trustee on such date. Each
Certificateholder will be entitled to receive a pro rata share of any
distribution in respect of Scheduled Payments made on the Notes. Each such
distribution in respect of Scheduled Payments will be made by the Trustee to the
holders of record of the Certificates on the first day, whether or not a
Business Day, of the calendar month in which such Regular Distribution Date
occurs, except that no record date shall be applicable to distributions to be
made on the Final Distribution Date. If a Scheduled Payment is not received by
the Trustee on a Regular Distribution Date but is received within five Business
Days thereafter, it will be distributed on the date so received by the Trustee
to such holders of record. If it is received after such five day period, it will
be treated as a Special Payment and distributed as described below.
Payments of principal of, Applicable Premium and interest on the Notes
received by the Trustee on account of an optional redemption, if any, of all of
the Notes, and payments received by the Trustee following an Event of Default
("Special Payments") will be distributed on, in the case of an early redemption,
the date of such early redemption, which shall be a Business Day, and otherwise
20 days after the Trustee has confirmed receipt of the funds for such Special
Payment (or the next Business Day after such 20th day if such date is not a
Business Day) (each, a "Special Distribution Date"). The Trustee will mail
notice to the Certificateholders not less than 20 days prior to the Special
Distribution Date on which any Special Payment is scheduled to be distributed by
the Trustee stating such anticipated Special Distribution Date. Each
distribution of a Special Payment, other than the final distribution, on a
Special Distribution Date will be made by the Trustee to Certificateholders of
record on the 15th day next preceding such Special Distribution Date. See
"Description of Notes -- Optional Redemption at a Premium" and "Description of
the Trust Agreement -- Events of Default."
The Notes will be prepaid on a Special Distribution Date at a price equal
to the principal amount of, interest on, and Applicable Premium, if such
redemption occurs on or prior to the Premium Termination Date. If less than all
of the Notes are to be redeemed, the Trustee shall select, in such manner as it
shall deem appropriate and fair, the particular Certificates or portions thereof
representing beneficial ownership of the Notes to be redeemed. Upon a redemption
of less than all of the Notes, Certificates representing beneficial ownership of
the Notes selected for redemption will be required to be presented to the
Trustee for cancellation. Upon such presentation, all payments of principal of,
Applicable Premium, if any, and interest on the Notes paid by the Company to the
Pass-Through Trust will be distributed to the holders of such Certificates. The
ISDA Amount will be distributed to MSCS. See "Description of Notes -- Optional
Redemption at a Premium" for a description of the manner of computing the
Applicable Premium, if any.
FINAL DISTRIBUTION
The Final Distribution on the Certificates, representing an amount equal to
the principal of and interest on the Notes, assuming the Notes have been held
until the Final Distribution Date, is expected to be made on the Final
Distribution Date. If the Yield on the Exercise Date is equal to or greater than
the reference U.S. Treasury Note yield of 5.80%, the Notes will mature on the
Final Distribution Date. If the Yield on the Exercise Date is less than such
reference U.S. Treasury Note yield the maturity of the Notes will be extended
and, prior to the Final Distribution Date, one of the following will occur: (a)
the interest rate borne by the Notes will be reset and the Notes will be
remarketed so as to yield net proceeds in cash at least equal to the Remarketing
Proceeds which, together with the amount payable by the Company representing
interest on the Notes through the Final Distribution Date, will be sufficient to
enable the Trustee to make the Final Distribution on the Certificates, (b) the
Company will exercise its option to redeem the Notes on the Final Distribution
Date at a purchase price equal to the principal amount of and interest on the
Notes plus the ISDA Amount or (c) the Pass-Through Trust will exercise its Put
Option and require the Company to
16
<PAGE> 17
purchase the Notes on the Final Distribution Date at a purchase price equal to
the principal amount of and interest on the Notes. In any case, the principal of
and interest on the Notes will be distributed by the Pass-Through Trust to the
Certificateholders on the Final Distribution Date. The ISDA Amount (if any) will
be distributed to MSCS.
"Yield" shall mean the yield-to-maturity on the then current 7-year U.S.
Treasury Note as determined by linear interpolation of the 5-year and 10-year
then current offered-side yields for the on-the-run most recently issued U.S.
Treasury Notes, as published on Telerate page 500 as of approximately 12:30
p.m., New York City time, on the Exercise Date. If Telerate 500 is unavailable,
"Yield" shall be the arithmetic mean of offered-side yields for the then current
7-year U.S. Treasury Note as determined by linear interpolation of the 5-year
and 10-year then current offered-side yields for the on-the-run most recently
issued U.S. Treasury Notes, without regards to highest and lowest yields, quoted
as of approximately 12:30 p.m., New York City time, on the Exercise Date by five
primary dealers in U.S. Treasury Notes selected by MSCS.
MSCS will deliver notice of the extension of the maturity of the Notes (the
"Extension Notice") to both the Trustee and the Company at their respective
addresses set forth herein on or prior to the Exercise Date.
Final Distribution upon a Successful Remarketing
If the maturity of the Notes is extended, unless the Company exercises its
option to redeem the Notes (which option the Company may exercise at any time
subsequent to the delivery of the Extension Notice and prior to the earlier of
the pricing of the remarketing and the Remarketing Deadline), the interest rate
borne by the Notes will be reset in order that the Notes may be remarketed so as
to yield net proceeds in cash equal to the Remarketing Proceeds. On the Exercise
Date and once every 15 days thereafter, Morgan Stanley & Co. Incorporated (or,
subsequent to the Exercise Date, such other investment banking institution as
may be selected as the remarketing agent) will provide the Company with
non-binding indications of the interest rate and discount or premium at which it
believes it could remarket the Notes. The Company may then, on behalf of the
Pass-Through Trust, either request that Morgan Stanley & Co. Incorporated
remarket the Notes, select another investment banking institution to remarket
the Notes or exercise the option to redeem the Notes. Regardless of whether it
has been selected to act as remarketing agent, Morgan Stanley & Co. Incorporated
shall at all times be permitted to offer to purchase the Notes bearing a reset
interest rate specified by Morgan Stanley & Co. Incorporated for net proceeds in
cash at least equal to the Remarketing Proceeds, which offer the Company and the
Trustee shall be required to accept, unless (i) any other party shall have
remarketed the Notes bearing an interest rate less than or equal to that
specified by Morgan Stanley & Co. Incorporated and for net proceeds in cash at
least equal to the Remarketing Proceeds or (ii) the Company exercises its option
to redeem all of the Notes on the Final Distribution Date at a purchase price
equal to the principal amount of and interest on the Notes plus the ISDA Amount.
Upon the closing of any remarketing, the portion of the proceeds representing
principal of the Notes, together with the amount paid by the Company
representing interest on the Notes through the Final Distribution Date, will be
deposited with the Trustee for distribution to Certificateholders, and the
portion of the proceeds representing the ISDA Amount will be distributed to
MSCS.
Final Distribution upon Optional Redemption of the Notes without Premium
If the maturity of the Notes is extended, the Company may, in lieu of
permitting the Notes to be remarketed, exercise its option to redeem all of the
Notes on the Final Distribution Date at a purchase price equal to the principal
amount of and interest on the Notes plus the ISDA Amount, but without the
Applicable Premium. The Company may exercise this option at any time subsequent
to the delivery of the Extension Notice and prior to the earlier of the pricing
of the remarketing and the Remarketing Deadline. The principal of and interest
on the Notes paid by the Company to the Pass-Through Trust will be distributed
to the Certificateholders on the Final Distribution Date. The ISDA Amount will
be distributed to MSCS.
17
<PAGE> 18
Final Distribution upon Exercise by the Trustee of Put Option
If the maturity of the Notes is extended and for any reason the Trustee
does not receive an amount in cash equal to the principal amount of and interest
on the Notes by the Remarketing Deadline, the Pass-Through Trust will be deemed
to have exercised its Put Option and required the Company to purchase the Notes
on the Final Distribution Date at a purchase price equal to the principal amount
of and interest on the Notes. All payments in respect of the Notes paid by the
Company to the Pass-Through Trust upon exercise of the Put Option will be
distributed to Certificateholders on the Final Distribution Date.
PURCHASE OF CERTIFICATES UPON CHANGE IN CONTROL OR EXCESS PROCEEDS OFFER
Change in Control
In the event of any Change in Control (as defined below) (the effective
date of such change in control being the "Change in Control Date") each
Certificateholder will have the right, at such Certificateholder's option,
subject to the terms and conditions of the Trust Agreement, to direct the
Trustee to require the Company to repurchase all or any part of the Notes
beneficially owned by such Certificateholder on a date selected by the Company
that is no earlier than 60 days nor later than 90 days (the "Change in Control
Purchase Date") after the mailing of written notice by the Company of the
occurrence of such Change in Control at a repurchase price payable in cash equal
to 101% of the principal amount of such Notes, together with accrued interest to
the Change in Control Purchase Date (the "Change in Control Purchase Price"),
plus the ISDA Amount. Upon receipt of any payments on the Notes by the
Pass-Through Trust pursuant to a Change in Control, the Trustee will pay the
Change in Control Purchase Price to the Certificateholders who directed the
Trustee to require the Company to repurchase all or any part of the Notes
beneficially owned by them upon presentation for cancellation of the related
Certificates. The ISDA Amount will be distributed to MSCS.
Within 30 days after the Change in Control Date, the Company is obligated
to mail to each Certificateholder a notice regarding the Change in Control,
which notice shall state: (i) that a Change in Control has occurred and that
each such Certificateholder has the right to direct the Trustee to require the
Company to repurchase all or any part of the Notes beneficially owned by such
Certificateholder at the Change in Control Purchase Price upon presentation for
cancellation of the related Certificates; (ii) the Change in Control Purchase
Price; (iii) the Change in Control Purchase Date; (iv) the name and address of
the Paying Agent (as defined) for the Notes; and (v) the procedures that
Certificateholders must follow to cause the Notes beneficially owned by such
Certificateholder to be repurchased by the Company.
To exercise this right, a Certificateholder must deliver a written notice
(the "Change in Control Purchase Notice") to the Paying Agent at its corporate
trust office in Detroit, Michigan, or any other office of the Paying Agent
maintained for such purposes, not later than 30 days prior to the Change in
Control Purchase Date. The Change in Control Purchase Notice shall state, among
other things, (i) the portion of the principal amount of any Notes beneficially
owned by such Certificateholder to be repurchased, which must be $1,000 or an
integral multiple thereof; and (ii) that such Notes are to be repurchased by the
Company pursuant to the applicable change-in-control provisions of the Senior
Debt Indenture and the Trust Agreement.
Any Change in Control Purchase Notice may be withdrawn by the
Certificateholder by a written notice of withdrawal delivered to the Paying
Agent not later than three Business Days prior to the Change in Control Purchase
Date. The notice of withdrawal shall state the principal amount of Notes
beneficially owned by such Certificateholder and, if applicable, the certificate
numbers of the Certificates as to which the withdrawal notice relates and the
principal amount, if any, which remains subject to a Change in Control Purchase
Notice.
If a Certificate is represented by a Global Certificate, the Depositary (as
defined) or its nominee will be the holder of such Certificate and therefore
will be the only entity that may require the Company to repurchase Notes upon a
Change in Control. To obtain repayment with respect to any Note upon a Change in
Control, the beneficial owner of the Certificate evidencing beneficial ownership
of such Note must provide to the broker or other entity through which it holds
the beneficial interest in such Certificate (i) the Change in
18
<PAGE> 19
Control Purchase Notice signed by such beneficial owner, and such signature must
be guaranteed by a member firm of a registered national securities exchange or
of the National Association of Securities Dealers, Inc. ("NASD") or a commercial
bank or trust company having an office or correspondent in the United States and
(ii) instructions to such broker or other entity to notify the Depositary of
such beneficial owner's desire to cause the Company to repurchase such Notes
beneficially owned by such Certificateholder. Such broker or other entity will
provide to the Paying Agent (i) a Change in Control Purchase Notice received
from such beneficial owner and (ii) a certificate satisfactory to the Paying
Agent from such broker or other entity that it represents such beneficial owner.
Such broker or other entity will be responsible for disbursing any payments it
receives upon the repurchase of such Notes by the Company.
Payment of the Change in Control Purchase Price for Notes in respect of a
Certificate in certificated form (a "Definitive Certificate") for which a Change
in Control Purchase Notice has been delivered and not withdrawn is conditioned
upon delivery of such Definitive Certificate (together with necessary
endorsements) to the Paying Agent at its office in Detroit, Michigan, or any
other office of the Paying Agent maintained for such purpose, at any time
(whether prior to, on or after the Change in Control Purchase Date) after the
delivery of such Change in Control Purchase Notice. Payment of the Change in
Control Purchase Price for Notes in respect of such Definitive Certificate will
be made promptly following the later of the Change in Control Purchase Date or
the time of presentation for cancellation of such Definitive Certificate.
If the Paying Agent holds, in accordance with the terms of the Senior Debt
Indenture, money sufficient to pay the Change in Control Purchase Price of Notes
in respect of a Certificate on the Business Day following the Change in Control
Purchase Date for such Certificate, then, on and after such date, interest on
such Note will cease to accrue, whether or not such Certificate is delivered to
the Paying Agent, and all other rights of the Certificateholder shall terminate
(other than the right to receive the Change in Control Purchase Price upon
delivery of the Certificate).
Under the Senior Debt Indenture, a "Change in Control" means an event or
series of events by which (i) the Company ceases to beneficially own, directly
or indirectly, at least 80% of the total voting power of all classes of Capital
Stock then outstanding of Consumers (whether arising from issuance of securities
of the Company or Consumers, any direct or indirect transfer of securities by
the Company or Consumers, any merger, consolidation, liquidation or dissolution
of the Company or Consumers or otherwise); or (ii) any "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act) becomes the
"beneficial owner" (as such term is used in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person or group shall be deemed to have "beneficial
ownership" of all shares that such person or group has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 35% of the Voting Stock (as defined)
of the Company; or (iii) the Company consolidates with or merges into another
corporation or directly or indirectly conveys, transfers or leases all or
substantially all of its assets to any person, or any corporation consolidates
with or merges into the Company, in either event pursuant to a transaction in
which the outstanding Voting Stock of the Company is changed into or exchanged
for cash, securities, or other property, other than any such transaction where
(A) the outstanding Voting Stock of the Company is changed into or exchanged for
Voting Stock of the surviving corporation and (B) the holders of the Voting
Stock of the Company immediately prior to such transaction retain, directly or
indirectly, substantially proportionate ownership of the Voting Stock of the
surviving corporation immediately after such transaction.
The Trust Agreement and the Senior Debt Indenture require the Company to
comply with the provisions of Regulation 14E and any other tender offer rules
under the Exchange Act which may then be applicable in connection with any offer
by the Company to purchase Notes beneficially owned by Certificateholders at the
option of Certificateholders upon a Change in Control. The Change in Control
purchase feature of the Certificates may in certain circumstances make more
difficult or discourage a takeover of the Company and, thus, the removal of
incumbent management. The Change in Control purchase feature, however, is not
the result of management's knowledge of any specific effort to accumulate shares
of its common stock or to obtain control of the Company by means of a merger,
tender offer, solicitation or otherwise, or part of a plan by management to
adopt a series of antitakeover provisions. Instead, the Change in Control
purchase feature is a term contained in many similar debt offerings and the
terms of such feature result from negotiations between
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the Company and the Underwriters. Management has no present intention to propose
any antitakeover measures although it is possible that the Company could decide
to do so in the future.
No Note may be repurchased by the Company as a result of a Change of
Control if there has occurred and is continuing an Event of Default described
under "Description of the Trust Agreement -- Events of Default" (other than a
default in the payment of the Change in Control Purchase Price with respect to
the Notes). In addition, the Company's ability to purchase Notes may be limited
by its financial resources and its inability to raise the required funds because
of restrictions on issuance of securities contained in other contractual
arrangements.
Excess Proceeds Offer
Under the terms of the Senior Debt Indenture, so long as any of the Notes
are outstanding, the Company may not sell, transfer or otherwise dispose of any
property or assets of the Company, including Capital Stock of any Consolidated
Subsidiary, in one transaction or a series of transactions in an amount which
exceeds $50,000,000 (an "Asset Sale") unless the Company shall (i) apply an
amount equal to such excess Net Cash Proceeds to permanently repay Indebtedness
of a Consolidated Subsidiary or Indebtedness of the Company which is pari passu
with the Notes or (ii) invest an equal amount not so used in clause (i) in
property or assets of related business within 24 months after the date of the
Asset Sale (the "Application Period") or (iii) apply such excess Net Cash
Proceeds not so used in (i) or (ii) (the "Excess Proceeds") to make an offer,
within 30 days after the end of the Application Period, to purchase on a pro
rata basis an aggregate principal amount of Notes on the relevant purchase date
equal to the Excess Proceeds on such date, at a purchase price equal to 100% of
the principal amount of the Notes on the relevant purchase date and unpaid
interest, if any, to the purchase date (the "Excess Proceeds Purchase Price")
plus the ISDA Amount, if any (an "Excess Proceeds Offer"). The Company shall
only be required to make an Excess Proceeds Offer if the Excess Proceeds equal
or exceed $25,000,000 at any given time.
The procedures to be followed by the Company in making an offer to the
Trustee on behalf of Certificateholders to purchase Notes with Excess Proceeds
and to pay the Excess Proceeds Purchase Price therefor, and the directions to
the Trustee by Certificateholders to accept such offer with respect to
Certificates beneficially owned by them, shall be the same as those set forth
above in with respect to a Change in Control and payment of the Change of
Control Purchase Price.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Certificates will be issued in fully
registered form without interest coupons and will be represented by one or more
permanent global Certificates in definitive, fully registered form without
interest coupons (each, a "Global Certificate") and will be deposited with the
Trustee as custodian for, and registered in the name of, a nominee of DTC. Each
Global Certificate (and any Certificates issued in exchange therefor) will be
subject to certain restrictions on transfer set forth therein as described under
"Transfer Restrictions." Except in the limited circumstances described below,
owners of beneficial interests in a Global Certificate will not be entitled to
receive physical delivery of Definitive Certificates.
The Certificates will be sold in minimum denominations of $250,000.
Ownership of beneficial interests in a Global Certificate will be limited
to persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
Global Certificate, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the Certificates represented by such Global
Certificate for all purposes under the Trust Agreement and the Certificates. No
beneficial owner of an interest in a Global Certificate will be able to transfer
that interest except in accordance with DTC's applicable procedures, in addition
to those provided for under the Senior Debt Indenture.
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Payments of the principal amount, premium, if any, and interest on, a
Global Certificate will be made to DTC or its nominee, as the case may be, as
the registered owner thereof. Neither the Company nor the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global
Certificate or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Certificate, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global
Certificate as shown on the records of DTC or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in such
Global Certificate held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
The Company expects that DTC will take any action permitted to be taken by
a Certificateholder (including the presentation of Certificates for exchange as
described below) only at the direction of one or more participants to whose
account or accounts the DTC interests in a Global Certificate is credited and
only in respect of such portion of the aggregate principal amount of the
Certificate as to which such participant or participants has or have given such
direction. However, if there is an Event of Default under the Certificates, DTC
will exchange the applicable Global Certificate for Definitive Certificates,
which it will distribute to its participants and which may be legended as set
forth under the heading "Transfer Restrictions."
The Company understands that DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry charges in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("Indirect Participants").
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Certificate among participants of
DTC, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Company nor the Trustee will have any responsibility for the performance by DTC
or its respective participants or indirect participants of its respective
obligations under the rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY CERTIFICATES FOR DEFINITIVE CERTIFICATES
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
Pass-Through Trust will issue individual, fully registered, definitive
Certificates in exchange for the Global Certificate or Certificates representing
such Definitive Certificates. Upon the exchange of a Global Certificate for
Definitive Certificates, such Global Certificate shall be cancelled by the
Trustee and the Definitive Certificates shall be registered in such names and in
such authorized denominations as DTC, pursuant to instructions from its
Participants, any Indirect Participants or otherwise, shall instruct the
Trustee. The Trustee shall deliver such Certificates to the persons in whose
names such Certificates are so registered and shall recognize such persons as
Certificateholders.
Definitive Certificates will bear, and be subject to, the legend described
in "Transfer Restrictions" (unless the Company determines otherwise in
accordance with applicable law). The holder of a Definitive Certificate may
transfer such Certificate, subject to compliance with the provisions of such
legend, as provided herein.
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DESCRIPTION OF THE TRUST AGREEMENT
The following summaries of certain provisions of the Trust Agreement do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all provisions of the Trust Agreement, including the definition
therein of certain terms. Wherever particular defined terms of the Trust
Agreement are referred to, such defined terms are incorporated herein by
reference as part of the statement made, and the statement is qualified in its
entirety by such reference. Copies of the Trust Agreement are available from the
Trustee upon request.
GENERAL
Pursuant to the Trust Agreement, the Pass-Through Trust will issue and sell
the Certificates to the Underwriters and enter into the ISDA Master Agreement.
Under the ISDA Master Agreement, an amount is payable by MSCS to the
Pass-Through Trust on the date of issue of the Certificates. Such amount will
not be assigned for the benefit of the Certificateholders but will be used by
the Pass-Through Trust, together with the proceeds from the sale of the
Certificates, to purchase the Notes at par value from the Company. The Notes
will be the sole assets of the Pass-Through Trust from which Certificateholders
will be entitled to receive any distributions on the Certificates. The ISDA
Amount, if any, payable by the Pass-Through Trust to MSCS pursuant to the ISDA
Master Agreement will be payable either (i) by the Company pursuant to the
Senior Debt Indenture or (ii) in the event of a remarketing, with the proceeds
of the remarketing. Accordingly, Certificateholders will obtain no benefit from,
and will be exposed to no risk as a result of, interest rate changes which may
give rise to payment by the Company of the ISDA Amount under the Senior Debt
Indenture and in turn, the payment thereof by the Trustee to MSCS pursuant to
the ISDA Master Agreement.
THE TRUSTEE
Wilmington Trust Company will act as Trustee for the Certificates and the
Pass-Through Trust pursuant to the Trust Agreement. The Trustee's offices are
located at 1100 North Market Street, Wilmington, Delaware 19890-0001.
The Trust Agreement provides that the Company will, to the fullest extent
permitted by law, indemnify and hold harmless the Trustee against any loss,
damage, claim, liability, penalty or expense incurred by the Trustee arising out
of or in connection with the administration of the Trust Agreement, the
Certificates, the ISDA Master Agreement or the Underwriting Agreement (as
defined) except to the extent that such loss, liability or expense is due to
wilful misconduct, bad faith or negligence of the Trustee.
Pursuant to the Trust Agreement, as compensation for the performance of its
duties under such agreement, the Company will pay such compensation as the
Company and the Trustee shall agree in writing, and except as otherwise agreed
to, the Trustee, upon its request, shall be entitled to be reimbursed by the
Company for any reasonable expenses, except any such expenses as may be
attributable to wilful misconduct, bad faith or negligence, or as may be
incurred due to the Trustee's breach of its representations and warranties under
the Trust Agreement.
ADMINISTRATIVE PROCEDURES
The Trustee shall administer the Trust Assets for the benefit of the
Certificateholders. Except as provided in the Trust Agreement, the Trustee shall
have full power and authority to do or cause to be done any and all things in
connection with the administration of the Pass-Through Trust which it deems
necessary to comply with the terms of the Trust Agreement.
EVENTS OF DEFAULT
An event of default with respect to the Certificates shall occur upon an
event of default under the Notes (an "Event of Default"). See "Description of
Notes -- Events of Default."
If an Event of Default occurs and continues resulting in acceleration of
the Notes, then the Trustee may vote the Notes, and upon the direction of a
majority of Certificateholders, the Trustee shall vote in favor of
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directing the Indenture Trustee to declare the unpaid principal amount of the
Notes then outstanding and interest, if any, due and payable. Amounts paid by
the Company to the Pass-Through Trust in respect of (i) the principal amount of
and interest on the Notes will be distributed to the Certificateholders as a
Special Payment on a Special Distribution Date and (ii) the ISDA Amount, if any,
as of the date of the Event of Default will be distributed to MSCS. If in
connection with any such Event of Default the amounts paid by the Company to the
Pass-Through Trust in respect of the foregoing clauses (i) and (ii) are less
than the amounts due, the amounts received by the Pass-Through Trust will be
distributed on a pro rata basis to the Certificateholders, on the one hand, and
MSCS, on the other; provided that no such distribution shall effect the right of
the Trustee to demand and receive payment in full of all amounts due from the
Company.
VOTING RIGHTS
Each Certificateholder shall be entitled to direct the Trustee to vote a
principal amount of the Notes corresponding to the principal amount of the
Certificates held by such Certificateholder in the manner directed by the
Certificateholder (the "Voting Rights"). The Trust Agreement contains minimum
aggregate voting requirements for certain actions including, among other things,
actions by the Trustee, removal of the Trustee, amendment of the Trust Agreement
and commencement of claims under the Trust Agreement. Without the consent of all
Certificateholders, no amendment may be made to the Trust Agreement which
reduces the percentage of Voting Rights required to modify the Trust Agreement
in a way which adversely affects in any material respect the interests of
Certificateholders. See "-- Amendment of the Trust Agreement."
VOTING OF NOTES
The Trustee, as holder of the Notes, has the right to vote and give
consents and waivers in respect of the Notes and enforce such other rights of a
holder of the Notes except as otherwise limited by the Trust Agreement or the
Senior Debt Indenture. In the event that the Trustee, as holder of any Notes,
receives a request from the Company or, if applicable, any depositary with
respect to the Notes, for the Trustee's consent to any amendment, modification
or waiver of the Senior Debt Indenture, or any document thereunder, or relating
thereto, or receives any other solicitation for any action with respect to the
Notes, the Trustee shall within five Business Days mail a notice of such
proposed amendment, modification, waiver or solicitation to each
Certificateholder of record as of the date of such request. The Trustee shall
request instructions from the Certificateholders as to what action to take in
response to such request. Except as otherwise provided in the Trust Agreement,
the Trustee shall consent or vote, or refrain from consenting or voting, in the
same proportion as the Certificates were actually voted or not voted by the
holders thereof as of the date determined by the Trustee prior to the date such
vote or consent as a Certificateholder of Notes is required; provided, however,
that, the Trustee shall at no time, without the consent of each
Certificateholder, vote in favor of or consent to any matter (i) unless such
vote or consent would not, based on an opinion of counsel, alter the status of
the Pass-Through Trust as a grantor trust under the Code or result in an actual
or constructive sale or exchange of any Note for tax purposes, (ii) which would
alter the timing or amount of any payment on the Notes, or (iii) which would
result in the exchange or substitution of any Notes pursuant to a plan for the
refunding or refinancing of such Notes, and without the written consent of the
Company. The Trustee shall have no liability for any failure to act resulting
from the Certificateholders' late return of, or failure to return, directions
requested by the Trustee from the Certificateholders.
TERMINATION OF OBLIGATIONS UNDER THE PASS-THROUGH TRUST
The respective obligations of the Company and the Trustee under the Trust
Agreement which are for the benefit of Certificateholders shall cease upon the
completion of the Final Distribution to Certificateholders.
AMENDMENT OF THE TRUST AGREEMENT
The Trust Agreement may be amended from time to time by the Company and the
Trustee without notice to or the consent of any of the Certificateholders for
any of the following purposes: (i) to evidence the succession of another
corporation to the Company and the assumption by any such successor of the
covenants
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of the Company contained in the Trust Agreement; (ii) to add to the covenants,
restrictions or obligations of the Company or the Trustee; (iii) to add or
supplement any security for the benefit of any Certificateholders; (iv) to cure
any ambiguity or to correct or supplement any provision which may be defective
or inconsistent with any other provision in the Trust Agreement, the Senior Debt
Indenture or the ISDA Master Agreement or to make such other provisions as the
Company deems necessary or desirable with respect to matters or questions
arising under the Trust Agreement, provided that no such action materially
adversely affects the interests of any Certificateholders; (v) to modify,
eliminate or add to the provisions of the Trust Agreement to such extent as
shall be necessary to continue the qualification of the Trust Agreement under
the Trust Indenture Act, or under any similar federal statute hereafter enacted,
and to add such other provisions as expressly permitted by the Trust Indenture
Act, with certain exceptions; (vi) to evidence and provide for the acceptance of
appointment of a Trustee other than Wilmington Trust Company, and to add to or
change any of the provisions of the Trust Agreement as shall be necessary to
provide for or facilitate the administration of the Pass-Through Trust; (vii) to
provide certain information as to the Trustee as required under the Trust
Agreement; (viii) to modify or amend any provision of the Trust Agreement that
relates to the ISDA Master Agreement or the remarketing procedure so long as
such modification or amendment does not have a material adverse effect on the
Certificateholders; or (ix) to comply with any requirements imposed by the Code;
provided further that no such amendment referred to in the foregoing clauses (i)
through (ix) which has a material adverse effect on MSCS may be entered into
without the consent of MSCS, and no such amendment, as evidenced by an opinion
of counsel, shall alter the status of the Pass-Through Trust as a grantor trust
under the Code or result in an actual or constructive sale or exchange of any
Certificate for tax purposes. The Trustee is entitled to receive, and may rely
upon, an opinion of counsel with respect to any amendment.
The Trust Agreement also permits the Company and the Trustee, with the
consent of the Certificateholders of not less than a majority in aggregate
principal amount of the Certificates then Outstanding, to enter into agreements,
to add any provisions to, or change in any manner or eliminate any of the
provisions of, the Trust Agreement or modify in any manner the rights of the
Certificateholders; provided, however, that the Company and the Trustee may not,
without the consent of each Certificateholder affected thereby, enter into such
agreement (i) which would alter the timing or amount of any payment on the
Certificates or changes the place of payment where, or the coin or currency in
which, any Certificate is payable, or impairs the right to institute for the
enforcement of any such payment or distribution on or after the Regular
Distribution Date or Special Distribution Date applicable thereto, (ii) permits
the disposition of any Notes, except as permitted by the Trust Agreement, or
otherwise deprives the Certificateholder of the benefit of ownership of the
Notes in the Trust, (iii) reduces the percentage of the aggregate fractional
undivided interest in the Notes that is evidenced by a Certificate which is
required for any supplemental agreement which adversely affects in any material
respects the interests of the Certificateholders, or reduces such percentage
required for any waiver of compliance with certain provisions or certain
defaults of the Trust Agreement, (iv) modifies any of the provisions relating to
"supplemental agreements with consent of certificateholders" and "waiver of past
defaults" contained in the Trust Agreement, except to increase such percentage
or to provide that certain provisions cannot be waived or modified without
consent of the Certificateholder, or (v) which would result in the exchange or
substitution of any Certificates pursuant to a plan for the refunding or
refinancing of such Certificates; provided further that no amendment referred to
in the foregoing clauses (i) through (v) which has a material adverse effect on
MSCS may be entered into without the consent of MSCS and unless such vote or
consent would not, based on an opinion of counsel, alter the status of the
Pass-Through Trust as a grantor trust under the Code or result in an actual or
constructive sale or exchange of any Note for tax purposes.
REPORTS TO CERTIFICATEHOLDERS
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year, the Trustee shall furnish, or cause to be furnished,
to each person who at any time during such calendar year shall have been a
holder of record of Certificates and received any payment thereon, a statement
containing such information as may be required by the Code and applicable
Treasury Regulations to enable such person to prepare its federal income tax
returns.
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MODIFICATION OF OTHER AGREEMENTS
Certain provisions of the Senior Debt Indenture and the ISDA Master
Agreement may be modified, amended or supplemented by the parties thereto
without the consent of the Certificateholders or MSCS so long as such
modification, amendment or supplement does not have a material adverse effect on
the Certificateholders or MSCS, as the case may be. See "Description of Notes --
Modification of the Senior Debt Indenture."
NOTICES TO DEPOSITARY
Whenever a notice or other communication to Certificateholders whose
ownership is evidenced by one or more Global Certificates is required under the
Trust Agreement, unless and until Definitive Certificates shall have been issued
to such Certificateholders pursuant to the Trust Agreement, the Trustee shall
give all such notices and communications specified to be given to
Certificateholders to DTC or a successor depositary, and shall have no
obligation to the Certificateholders.
REPLACEMENT CERTIFICATES
If the Trustee receives evidence of the mutilation, destruction, loss or
theft of any Certificate, and there is delivered to the Trustee such security,
indemnity or bond as it may require to hold it and any Paying Agent harmless,
and the Trustee has not received notice that such Certificate has been acquired
by a bona fide purchaser, then, upon payment by the holder of any applicable
expenses, the Trustee shall execute and authenticate and deliver, in exchange
for or in lieu of any such mutilated, destroyed, lost or stolen Certificate a
new Certificate or Certificates of like tenor, form, terms and principal amount.
GOVERNING LAW
The Trust Agreement and the Certificates will be governed by, and construed
in accordance with, the laws of the State of Delaware.
DESCRIPTION OF NOTES
The Notes will be issued as a series of securities under the Indenture
dated as of September 15, 1992, as previously supplemented and as further
supplemented by a Sixth Supplemental Indenture establishing the Notes dated as
of January 13, 1998 between the Company and NBD Bank, as Trustee. The Indenture
and the Supplemental Indenture are hereinafter referred to collectively as the
"Senior Debt Indenture." The following summaries of certain provisions of the
Senior Debt Indenture do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all provisions of the Senior Debt
Indenture, including the definitions therein of certain terms. Wherever
particular defined terms of the Senior Debt Indenture are referred to, such
defined terms are incorporated herein by reference as part of the statement
made, and the statement is qualified in its entirety by such reference. Copies
of the Senior Debt Indenture are available from the Indenture Trustee upon
request.
GENERAL
The Notes will be limited in aggregate principal amount to $180,000,000.
Unless the Company redeems the Notes or the maturity of the Notes is extended
(see "Description of Certificates -- Final Distribution"), the entire principal
amount of the Notes will mature and become due and payable, together with
accrued and unpaid interest thereon, if any, on January 15, 2005.
The Senior Debt Indenture does not limit the aggregate principal amount of
debt securities that may be issued thereunder and provides that debt securities
may be issued thereunder, from time to time, in one or more series. The Notes
and all other debt securities hereafter issued under the Senior Debt Indenture
are collectively referred to herein as the "Senior Debt Securities."
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The Notes will be unsecured debt securities of the Company. As of September
30, 1997, the Company had outstanding approximately $1.984 billion aggregate
principal amount of indebtedness, none of which was secured. None of such
indebtedness would be senior to the Notes and the Notes will not be senior to
any such indebtedness, except that the Notes will be senior to certain
subordinated debentures in an aggregate principal amount of $178,000,000, issued
in connection with certain preferred securities of a subsidiary trust. The Notes
will rank pari passu in right of payment with all other unsecured and
unsubordinated indebtedness of the Company.
The Company is a holding company and its assets consist primarily of
investments in its subsidiaries. The Notes will be obligations exclusively of
the Company. The Company's ability to service its indebtedness, including the
Notes, is dependent primarily upon the earnings of its subsidiaries and the
distribution or other payment of such earnings to the Company in the form of
dividends, loans or advances, and repayment of loans and advances from the
Company. The subsidiaries are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay any amounts due pursuant to the
Notes or to make any funds available therefor, whether by dividends, loans or
other payments.
A substantial portion of the consolidated liabilities of the Company have
been incurred by its subsidiaries. Therefore, the Company's rights and the
rights of its creditors, including Holders (as defined) of Notes, to participate
in the distribution of assets of any subsidiary upon the latter's liquidation or
reorganization will be subject to prior claims of the subsidiary's creditors,
including trade creditors, except to the extent that the Company may itself be a
creditor with recognized claims against the subsidiary (in which case the claims
of the Company would still be subject to the prior claims of any secured
creditor of such subsidiary and of any holder of indebtedness of such subsidiary
that is senior to that held by the Company). As of September 30, 1997, the
Company's subsidiaries had total indebtedness for borrowed money (excluding
intercompany indebtedness) of approximately $2.780 billion.
INTEREST
Interest on the Notes will accrue from January 13, 1998 and be payable in
cash on each Regular Distribution Date, commencing July 15, 1998, at the rate
per annum set forth on the cover page of this Prospectus. Such interest will be
computed on the basis of a 360-day year of twelve 30-day months.
In any case where any interest payment date, repurchase date or maturity of
any Note shall not be a Business Day (as defined) at any place of payment, then
payment of the principal amount of, premium, if any, and interest on the Notes
need not be made at such place of payment on such date, but may be made on the
next succeeding Business Day at such place of payment with the same force and
effect as if made on the interest payment date, repurchase date or at maturity;
and no interest shall accrue on the amount so payable for the period from and
after such interest payment date, redemption date, repurchase date or maturity,
as the case may be, to such Business Day.
OPTIONAL REDEMPTION AT A PREMIUM
The Notes will be redeemable at any time, at the option of the Company, in
whole or in part, on not less than 30 nor more than 60 days' prior notice by the
Company to the Indenture Trustee, the Trustee and MSCS, at a redemption price
equal to the sum of (a) 100% of the principal amount of the Notes being
redeemed, interest, if any, thereon to the redemption date, and the Applicable
Premium if such redemption occurs on or prior to the Premium Termination Date,
plus (b) the ISDA Amount. In no event will the redemption price calculated
pursuant to the foregoing clause (a) ever be less than 100% of the principal
amount of the Notes to be redeemed plus accrued interest to the redemption date.
All payments of principal of, Applicable Premium and interest on the Notes paid
by the Company to the Pass-Through Trust with respect to a redemption in whole
will be distributed to the Certificateholders on a Special Distribution Date,
which shall be the redemption date of such Notes. The ISDA Amount will be
distributed to MSCS.
If less than all of the Notes are to be redeemed, the Trustee shall select,
in such manner as it shall deem appropriate and fair, the particular
Certificates or portions thereof representing beneficial ownership of the Notes
to be redeemed. Notice of redemption shall be given by mail not less than 20 nor
more than 60 days
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prior to the date fixed for redemption to the Holders whose Notes are to be
redeemed; provided, however, that the failure to duly give such notice by mail,
or any deficit therein, shall not affect the validity of any proceedings for the
redemption of Notes as to which there shall have been no such failure or defect.
On and after the date fixed for redemption (unless the Company shall default in
the payment of the Notes or portions thereof to be redeemed at the applicable
redemption price, interest on the Notes or the portions thereof so called for
redemption shall cease to accrue. Certificates representing beneficial ownership
of the Notes selected for partial redemption will be required to be presented to
the Trustee for cancellation. Upon such presentation, all payments of principal
of, Applicable Premium, if any, and interest on the Notes paid by the Company to
the Pass-Through Trust will be distributed to the holders of such Certificates.
The ISDA Amount will be distributed to MSCS.
The following definitions are used to determine the Applicable Premium:
"Applicable Premium" means, with respect to a Note (or portion thereof)
being redeemed at any time, the excess of (A) the present value at such time of
the principal amount of such Note (or portion thereof) being redeemed plus all
interest payments due on such Note (or portion thereof) from and after the
redemption date, which present value shall be computed using a discount rate
equal to the Treasury Rate plus 50 basis points, over (B) the principal amount
of such Note (or portion thereof) being redeemed at such time. For purposes of
this definition, the present values of interest and principal payments will be
determined in accordance with generally accepted principles of financial
analysis.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) (the
"Statistical Release") which has become publicly available at least two Business
Days prior to the redemption date or, in the case of defeasance, prior to the
date of deposit (or, if such Statistical Release is no longer published, any
publicly available source of similar market data)) most nearly equal to the then
remaining average life to stated maturity of the Notes; provided, however, that
if the average life to stated maturity of the Notes is not equal to the constant
maturity of a United States Treasury security for which a weekly average yield
is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average yields
of United States Treasury securities for which such yields are given.
No sinking fund is provided for the Notes.
FINAL DISTRIBUTION
The Final Distribution on the Certificates, representing an amount equal to
the principal amount of and interest on the Notes, assuming the Notes had been
held until the Final Distribution Date, is expected to be made on the Final
Distribution Date. If the Yield on the Exercise Date is equal to or greater than
the reference U.S. Treasury Note yield of 5.80%, the Notes will mature on the
Final Distribution Date. If the Yield on the Exercise Date is less than such
reference U.S. Treasury Note yield, the maturity of the Notes will be extended
and, prior to the Final Distribution Date, one of the following will occur: (a)
the interest rate borne by the Notes will be reset and the Notes will be
remarketed so as to yield net proceeds in cash at least equal to the Remarketing
Proceeds which, together with the amount payable by the Company representing
interest on the Notes through the Final Distribution Date, will be sufficient to
enable the Trustee to make the Final Distribution on the Certificates, (b) the
Company will exercise its option to redeem the Notes on the Final Distribution
Date at a purchase price equal to the principal amount of and interest on the
Notes plus the ISDA Amount or (c) the Pass-Through Trust will exercise its Put
Option and require the Company to purchase the Notes on the Final Distribution
Date at a purchase price equal to the principal amount of and interest on the
Notes. In any case, the principal of and interest on the Notes will be
distributed by the Pass-Through Trust to the Certificateholders on the Final
Distribution Date. The ISDA Amount (if any) will be distributed to MSCS.
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Final Distribution upon a Successful Remarketing
If the maturity of the Notes is extended, unless the Company exercises its
option to redeem the Notes (which the Company may exercise at any time
subsequent to the delivery of the Extension Notice and prior to the earlier of
the pricing of the remarketing and Remarketing Deadline), the interest rate
borne by the Notes will be reset in order that the Notes may be remarketed so as
to yield net proceeds in cash equal to the Remarketing Proceeds. On the Exercise
Date and once every 15 days thereafter, Morgan Stanley & Co. Incorporated (or,
subsequent to the Exercise Date, such other investment banking institution as
may be selected as the remarketing agent) will provide the Company with
non-binding indications of the interest rate, and discount or premium at which
it believes it could remarket the Notes. The Company may then, on behalf of the
Pass-Through Trust, either request that Morgan Stanley & Co. Incorporated
remarket the Notes, select another investment banking institution to remarket
the Notes or exercise the option to redeem the Notes. Regardless of whether it
has been selected to act as remarketing agent, Morgan Stanley & Co. Incorporated
shall at all times be permitted to offer to purchase the Notes bearing a reset
interest rate specified by Morgan Stanley & Co. Incorporated for net proceeds at
least equal to the Remarketing Proceeds which offer the Company and the Trustee
shall be required to accept, unless (i) any other party shall have remarketed
the Notes bearing an interest rate less than or equal to that specified by
Morgan Stanley & Co. Incorporated and for net proceeds at least equal to the
Remarketing Proceeds or (ii) the Company exercises its option to redeem all of
the Notes on the Final Distribution Date at a purchase price equal to the
principal amount of and interest on the Notes plus the ISDA Amount. Upon the
closing of any remarketing, the portion of the proceeds representing principal
of the Notes, together with the amount paid by the Company representing interest
on the Notes through the Final Distribution Date, will be deposited with the
Trustee for distribution to Certificateholders, and the portion of the proceeds
representing the ISDA Amount will be distributed to MSCS.
Final Distribution upon Optional Redemption of the Notes without Premium
If the maturity of the Notes is extended, the Company may, in lieu of
permitting the Notes to be remarketed, exercise its option to redeem all of the
Notes on the Final Distribution Date at a purchase price equal to the principal
amount of and interest on the Notes plus the ISDA Amount, but without the
Applicable Premium. The Company may exercise this option at any time subsequent
to the delivery of the Extension Notice and prior to the earlier of the pricing
of the remarketing and Remarketing Deadline. The principal of and interest on
the Notes paid by the Company to the Pass-Through Trust will be distributed to
the Certificateholders on the Final Distribution Date. The ISDA Amount will be
distributed to MSCS.
Final Distribution upon Exercise by the Trustee of Put Option
If the maturity of the Notes is extended and for any reason the Trustee
does not receive an amount in cash equal to the principal amount of and interest
on the Notes by the Remarketing Deadline, the Pass-Through Trust will be deemed
to have exercised its Put Option and required the Company to purchase the Notes
on the Final Distribution Date at a purchase price equal to the principal amount
of and interest on the Notes. All payments in respect of the Notes paid by the
Company to the Pass-Through Trust upon exercise of the Put Option will be
distributed to Certificateholders on the Final Distribution Date.
CHANGE IN CONTROL
In the event of any Change in Control, each Holder of a Note will have the
right, at such Holders option, subject to the terms and conditions of the Senior
Debt Indenture, to require the Company to repurchase all or any part of such
Holder's Note on the Change in Control Purchase Date after the mailing of
written notice by the Company of the occurrence of such Change in Control at a
repurchase price payable in cash equal to the Change in Control Purchase Price.
For details regarding notice and procedures and the definition of a Change in
Control, see "Description of Certificates -- Purchase of Certificates upon
Change in Control or Excess Proceeds Offer -- Change in Control."
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The Senior Debt Indenture requires the Company to comply with the
provisions of Regulation 14E and any other tender offer rules under the Exchange
Act which may then be applicable in connection with any offer by the Company to
purchase Notes at the option of Holders upon a Change in Control. The Change in
Control purchase feature of the Notes may in certain circumstances make more
difficult or discourage a takeover of the Company and, thus, the removal of
incumbent management. The Change in Control purchase feature, however, is not
the result of management's knowledge of any specific effort to accumulate shares
of its common stock or to obtain control of the Company by means of a merger,
tender offer, solicitation or otherwise, or part of a plan by management to
adopt a series of antitakeover provisions. Instead, the Change in Control
purchase feature is a term contained in many similar debt offerings and the
terms of such feature result from negotiations between the Company and the
Underwriters. Management has no present intention to propose any antitakeover
measures although it is possible that the Company could decide to do so in the
future.
No Note may be repurchased by the Company as a result of a Change of
Control if there has occurred and is continuing an Event of Default described
under "Description of the Trust Agreement -- Events of Default" (other than a
default in the payment of the Change in Control Purchase Price with respect to
the Notes). In addition, the Company's ability to purchase Notes may be limited
by its financial resources and its inability to raise the required funds because
of restrictions on issuance of securities contained in other contractual
arrangements.
CERTAIN COVENANTS
The Senior Debt Indenture contains the covenants described below. Certain
capitalized terms used below are defined herein under the heading "Certain
Definitions."
Limitation on Restricted Payments
Under the terms of the Senior Debt Indenture, so long as any of the Notes
are Outstanding and until senior unsecured debt of the Company is rated BBB- or
above (or an equivalent rating) by Standard & Poor's and one Other Rating
Agency, at which time the Company will be permanently released from the
provisions of this "Limitation on Restricted Payments," the Company will not,
and will not permit any of its Restricted Subsidiaries, directly or indirectly,
to (i) declare or pay any dividend or make any distribution on the Capital Stock
of the Company to the direct or indirect holders of its Capital Stock (except
dividends or distributions payable solely in its Non-Convertible Capital Stock
or in options, warrants or other rights to purchase such Non-Convertible Capital
Stock and except dividends or distributions payable to the Company or a
Subsidiary), (ii) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company, or (iii) purchase, repurchase, redeem, defease or
otherwise acquire or retire for value, prior to scheduled maturity or scheduled
repayment thereof, any Subordinated Indebtedness (any such dividend,
distribution, purchase, redemption, repurchase, defeasing, other acquisition or
retirement being hereinafter referred to as a "Restricted Payment") if at the
time the Company or such Subsidiary makes such Restricted Payment: (1) an Event
of Default, or an event that with the lapse of time or the giving of notice or
both would constitute an Event of Default, shall have occurred and be continuing
(or would result therefrom); or (2) the aggregate amount of such Restricted
Payment and all other Restricted Payments made since May 6, 1997 would exceed
the sum of (a) $100,000,000 plus 100% of Consolidated Net Income from May 6,
1997 to the end of the most recent fiscal quarter ending at least 45 days prior
to the date of such Restricted Payment (or, in case such sum shall be a deficit,
minus 100% of the deficit) and (b) the aggregate Net Cash Proceeds received by
the Company from the issue or sale of or contribution with respect to its
Capital Stock after May 6, 1997.
The foregoing provisions will not prohibit: (i) dividends or other
distributions paid in respect of any class of Capital Stock issued by the
Company in connection with the acquisition of any business or assets by the
Company or a Restricted Subsidiary where the dividends or other distributions
with respect to such Capital Stock are payable solely from the net earnings of
such business or assets; (ii) any purchase or redemption of Capital Stock of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Redeemable Stock or
Exchangeable Stock); (iii) dividends
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paid within 60 days after the date of declaration thereof if at such date of
declaration such dividends would have complied with this covenant; or (iv)
payments pursuant to the Tax Sharing Agreement.
Limitation on Certain Liens
Under the terms of the Senior Debt Indenture, so long as any of the Notes
are outstanding, the Company shall not create, incur, assume or suffer to exist
any Lien upon or with respect to any of its property of any character, including
without limitation any shares of Capital Stock of Consumers or Enterprises,
without making effective provision whereby the Notes shall be (so long as any
such other creditor shall be so secured) equally and ratably secured. The
foregoing restrictions shall not apply to (a) Liens securing Indebtedness of the
Company, provided that on the date such Liens are created, and after giving
effect to such Indebtedness, the aggregate principal amount at maturity of all
the secured Indebtedness of the Company at such date shall not exceed 5% of
Consolidated Net Tangible Assets or (b) certain liens for taxes, pledges to
secure workman's compensation, other statutory obligations and Support
Obligations, certain materialmen's, mechanic's and similar liens and certain
purchase money liens.
Limitation on Asset Sales
Under the terms of the Senior Debt Indenture, so long as any of the Notes
are outstanding, the Company may not sell, transfer or otherwise dispose of any
property or assets of the Company, including Capital Stock of any Consolidated
Subsidiary, in one transaction or a series of transactions in an amount which
exceeds $50,000,000 unless the Company shall (i) apply an amount equal to such
excess Net Cash Proceeds to permanently repay Indebtedness of a Consolidated
Subsidiary or Indebtedness of the Company which is pari passu with the Notes or
(ii) invest an equal amount not so used in clause (i) in property or assets of
related business within the Application Period or (iii) make an Excess Proceeds
Offer. The Company shall only be required to make an Excess Proceeds Offer to
purchase Notes from Holders pursuant to subsection (iii) if the Excess Proceeds
equal or exceed $25,000,000 at any given time.
The procedures to be followed by the Company in making an Excess Proceeds
Offer, and for the acceptance of such offer by the Holders, shall be the same as
those set forth above in " Description of Certificates -- Purchase of
Certificates upon Change in Control or Excess Proceeds Offer" with respect to a
Change in Control.
Limitation on Consolidation, Merger, Sale or Conveyance of Assets
The Senior Debt Indenture provides that the Company may consolidate with or
merge into, or sell, lease or convey its property as an entirety or
substantially as an entirety to, any other corporation if such corporation
assumes the obligations of the Company under the Notes and the Senior Debt
Indenture and is organized and existing under the laws of the United States of
America, any state thereof or the District of Columbia.
The Senior Debt Indenture further provides that so long as any of the Notes
are outstanding and until senior unsecured debt of the Company is rated BBB- or
above (or an equivalent rating) by Standard & Poor's and one Other Rating Agency
(at which time the Company will be permanently released from the following
restrictions), the Company shall not consolidate with or merge into any other
Person or sell, lease or convey the property of the Company in the entirety or
substantially as an entirety, unless (i) immediately after giving effect to such
transaction the Consolidated Net Worth of the surviving entity is at least equal
to the Consolidated Net Worth of the Company immediately prior to the
transaction, and (ii) after giving effect to such transaction, the surviving
entity would be entitled to incur at least one dollar of additional Indebtedness
(other than revolving Indebtedness to banks) pursuant to the first paragraph
under "--Limitation on Consolidated Indebtedness" below. Notwithstanding the
foregoing provisions, such a transaction may constitute a Change of Control as
described in "-- Purchase of Notes upon Change in Control" above and give rise
to the right of a Holder to direct the Trustee to require the Company to
repurchase all or part of such Holder's Notes.
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Limitation on Consolidated Indebtedness
Under the terms of the Senior Debt Indenture, so long as any of the Notes
are outstanding and until senior unsecured debt of the Company is rated BBB- or
above (or an equivalent rating) by Standard & Poor's and one Other Rating
Agency, at which time the Company will be permanently released from the
provisions of this "Limitation on Consolidated Indebtedness," the Company will
not, and will not permit any of its Consolidated Subsidiaries to, issue, create,
assume, guarantee, incur or otherwise become liable for (collectively, "issue"),
directly or indirectly, any Indebtedness unless the Consolidated Coverage Ratio
of the Company and its Consolidated Subsidiaries for the four consecutive fiscal
quarters immediately preceding the issuance of such Indebtedness (as shown by a
pro forma consolidated income statement of the Company and its Consolidated
Subsidiaries for the four most recent fiscal quarters ending at least 30 days
prior to the issuance of such Indebtedness after giving effect to (i) the
issuance of such Indebtedness and (if applicable) the application of the net
proceeds thereof to refinance other Indebtedness, as if such Indebtedness was
issued at the beginning of the period, (ii) the issuance and retirement of any
other Indebtedness since the first day of the period as if such Indebtedness was
issued or retired at the beginning of the period and (iii) the acquisition of
any company or business acquired by the Company or any Subsidiary since the
first day of the period (including giving effect to the pro forma historical
earnings of such company or business), including any acquisition which will be
consummated contemporaneously with the issuance of such Indebtedness, as if in
each case such acquisition occurred at the beginning of the period) exceeds a
ratio of 1.7 to 1.0.
The foregoing limitation is subject to exceptions for: (i) Indebtedness of
the Company to banks not to exceed $1,000,000,000 in aggregate outstanding
principal amount at any time; (ii) Indebtedness (other than Indebtedness
described in clause (i)) outstanding on the date of the Supplemental Indenture
and certain refinancings thereof; (iii) certain refinancings and Indebtedness of
the Company to a Subsidiary or by a Subsidiary to the Company; (iv) Indebtedness
of a Consolidated Subsidiary issued to acquire, develop, improve, construct or
to provide working capital for a gas, oil or electric generation, exploration,
production, distribution, storage or transmission facility and related assets,
provided that such Indebtedness is without recourse to any assets of the
Company, Consumers, Enterprises, CMS Generation, NOMECO, CMS Electric and Gas,
CMS Gas Transmission and Storage, CMS MST or any other Designated Enterprises
Subsidiary; (v) Indebtedness of a Person existing at the time at which such
Person became a Subsidiary and not incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary; (vi) Indebtedness issued by
the Company not to exceed $150,000,000 in aggregate outstanding principal amount
at any time; and (vii) Indebtedness of a Consolidated Subsidiary in respect of
rate reduction bonds issued to recover electric restructuring transition costs
of Consumers, provided that such Indebtedness is without recourse to the assets
of Consumers.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the Senior
Debt Indenture. Reference is made to the Senior Debt Indenture for a full
definition of all terms as well as any other capitalized terms used herein and
not otherwise defined.
"Amortization Expense" means, for any period, amounts recognized during
such period as amortization of capital leases, depletion, nuclear fuel, goodwill
and assets classified as intangible assets in accordance with generally accepted
accounting principles.
"Business Day" means a day on which banking institutions in New York, New
York or Detroit, Michigan are not authorized or required by law or regulation to
close.
"Capital Lease Obligation" of a Person means any obligation that is
required to be classified and accounted for as a capital lease on the face of a
balance sheet of such Person prepared in accordance with generally accepted
accounting principles; the amount of such obligation shall be the capitalized
amount thereof, determined in accordance with generally accepted accounting
principles; the stated maturity thereof shall be the date of the last payment of
rent or any other amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty; and
such obligation shall be deemed secured by a Lien on any property or assets to
which such lease relates.
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"Capital Stock" means any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or interests in
(however designated) corporate stock, including any Preferred Stock or Letter
Stock; provided that Hybrid Preferred Securities are not considered Capital
Stock for purposes of this definition.
"CMS Electric and Gas" means CMS Electric and Gas Company, a Michigan
corporation and wholly owned subsidiary of Enterprises.
"CMS Gas Transmission and Storage" means CMS Gas Transmission and Storage
Company, a Michigan corporation and wholly owned subsidiary of Enterprises.
"CMS Generation" means CMS Generation Co., a Michigan corporation and
wholly owned subsidiary of Enterprises.
"CMS MST" means CMS Marketing, Services and Trading Company, a Michigan
corporation and wholly owned subsidiary of Enterprises.
"Consolidated Assets" means, at any date of determination, the aggregate
assets of the Company and its Consolidated Subsidiaries determined on a
consolidated basis in accordance with generally accepted accounting principles.
"Consolidated Coverage Ratio" with respect to any period means the ratio of
(i) the aggregate amount of Operating Cash Flow for such period to (ii) the
aggregate amount of Consolidated Interest Expense for such period.
"Consolidated Current Liabilities" means, for any period, the aggregate
amount of liabilities of the Company and its Consolidated Subsidiaries which may
properly be classified as current liabilities (including taxes accrued as
estimated), after (i) eliminating all inter-company items between the Company
and any Consolidated Subsidiary and (ii) deducting all current maturities of
long-term Indebtedness, all as determined in accordance with generally accepted
accounting principles.
"Consolidated Indebtedness" means, for any date of determination, the
aggregate Indebtedness of the Company and its Consolidated Subsidiaries
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that Consolidated Indebtedness shall not include
any subordinated debt owned by any Hybrid Preferred Securities Subsidiary.
"Consolidated Interest Expense" means, for any period, the total interest
expense in respect of Consolidated Indebtedness of the Company and its
Consolidated Subsidiaries, including, without duplication, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount, (iii)
capitalized interest, (iv) cash and noncash interest payments, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs under Interest Rate Protection
Agreements (including amortization of discount) and (vii) interest expense in
respect of obligations of other Persons deemed to be Indebtedness of the Company
or any Consolidated Subsidiaries under clause (v) or (vi) of the definition of
Indebtedness, provided, however, that Consolidated Interest Expense shall
exclude (a) any costs otherwise included in interest expense recognized on early
retirement of debt and (b) any interest expense in respect of any Indebtedness
of any Subsidiary of Consumers, CMS Generation, NOMECO, CMS Electric and Gas,
CMS Gas Transmission and Storage, CMS MST or any other Designated Enterprises
Subsidiary, provided that such Indebtedness is without recourse to any assets of
the Company, Consumers, Enterprises, CMS Generation, NOMECO, CMS Electric and
Gas, CMS Gas Transmission and Storage, CMS MST or any other Designated
Enterprises Subsidiary.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries determined on a consolidated basis in
accordance with generally accepted accounting principles; provided, however,
that there shall not be included in such Consolidated Net Income (i) any net
income of any Person if such Person is not a Subsidiary, except that (A) the
Company's equity in the net income of any such Person for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company or a
Consolidated Subsidiary as a dividend or other distribution and (B) the
Company's equity in a net loss of any such Person for such period
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shall be included in determining such Consolidated Net Income; (ii) any net
income of any Person acquired by the Company or a Subsidiary in a pooling of
interests transaction for any period prior to the date of such acquisition;
(iii) any gain or loss realized upon the sale or other disposition of any
property, plant or equipment of the Company or its Consolidated Subsidiaries
which is not sold or otherwise disposed of in the ordinary course of business
and any gain or loss realized upon the sale or other disposition of any Capital
Stock of any Person; and (iv) any net income of any Subsidiary of Consumers, CMS
Generation, NOMECO, CMS Electric and Gas, CMS Gas Transmission and Storage, CMS
MST or any other Designated Enterprises Subsidiary whose interest expense is
excluded from Consolidated Interest Expense, provided, however, that for
purposes of this clause (iv), any cash, dividends or distributions of any such
Subsidiary to the Company shall be included in calculating Consolidated Net
Income.
"Consolidated Net Tangible Assets" means, for any period, the total amount
of assets (less accumulated depreciation or amortization, allowances for
doubtful receivables, other applicable reserves and other properly deductible
items) as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Consolidated Subsidiaries,
determined on a consolidated basis in accordance with generally accepted
accounting principles, and after giving effect to purchase accounting and after
deducting therefrom, to the extent otherwise included, the amounts of: (i)
Consolidated Current Liabilities; (ii) minority interests in Consolidated
Subsidiaries held by Persons other than the Company or a Restricted Subsidiary;
(iii) excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors as evidenced by Board
resolutions; (iv) any revaluation or other write-up in value of assets
subsequent to December 31, 1996, as a result of a change in the method of
valuation in accordance with generally accepted accounting principles; (v)
unamortized debt discount and expenses and other unamortized deferred charges,
goodwill, patents. trademarks, service marks, trade names, copyrights, licenses,
organization or developmental expenses and other intangible items; (vi) treasury
stock; and (vii) any cash set apart and held in a sinking or other analogous
fund established for the purpose of redemption or other retirement of Capital
Stock to the extent such obligation is not reflected in Consolidated Current
Liabilities.
"Consolidated Net Worth" of any Person means the total of the amounts shown
on the consolidated balance sheet of such Person and its consolidated
subsidiaries, determined on a consolidated basis in accordance with generally
accepted accounting principles, as of any date selected by such Person not more
than 90 days prior to the taking of any action for the purpose of which the
determination is being made (and adjusted for any material events since such
date), as (i) the par or stated value of all outstanding Capital Stock plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit, (B) any
amounts attributable to Redeemable Stock and (C) any amounts attributable to
Exchangeable Stock.
"Consolidated Subsidiary" means any Subsidiary whose accounts are or are
required to be consolidated with the accounts of the Company in accordance with
generally accepted accounting principles.
"Consumers" means Consumers Energy Company, a Michigan corporation, all of
whose common stock is on the date hereof owned by the Company.
"Designated Enterprises Subsidiary" means any wholly owned subsidiary of
Enterprises formed after the date of the Supplemental Indenture which is
designated a Designated Enterprises Subsidiary by the Board of Directors.
"Enterprises" means CMS Enterprises Company, a Michigan corporation and
wholly owned subsidiary of the Company.
"Exchangeable Stock" means any Capital Stock of a corporation that is
exchangeable for or convertible into another security (other than Capital Stock
of such corporation that is neither Exchangeable Stock nor Redeemable Stock).
"Holder" means the Person in whose name a Note is registered in the
security register kept by the Company for that purpose. Initially such Holder
will be the Pass-Through Trust.
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"Hybrid Preferred Securities" means any preferred securities issued by a
Hybrid Preferred Securities Subsidiary, where such preferred securities have the
following characteristics: (i) such Hybrid Preferred Securities Subsidiary lends
substantially all of the proceeds from the issuance of such preferred securities
to the Company or Consumers in exchange for subordinated debt issued by the
Company or Consumers, respectively; (ii) such preferred securities contain terms
providing for the deferral of distributions corresponding to provisions
providing for the deferral of interest payments on such subordinated debt; and
(iii) the Company or Consumers (as the case may be) makes periodic interest
payments on such subordinated debt, which interest payments are in turn used by
the Hybrid Preferred Securities Subsidiary to make corresponding payments to the
holders of the Hybrid Preferred Securities.
"Hybrid Preferred Securities Subsidiary" means any business trust (or
similar entity) (i) all of the common equity interest of which is owned (either
directly or indirectly through one or more wholly owned Subsidiaries of the
Company or Consumers) at all times by the Company or Consumers, (ii) that has
been formed for the purpose of issuing Hybrid Preferred Securities and (iii)
substantially all of the assets of which consist at all times solely of
subordinated debt issued by the Company or Consumers (as the case may be) and
payments made from time to time on such subordinated debt.
"Indebtedness" of any Person means, without duplication, (i) the principal
of and premium (if any) in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is responsible or
liable; (ii) all Capital Lease Obligations of such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all obligations under any title retention
agreement (but excluding trade accounts payable arising in the ordinary course
of business); (iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (i) through (iii)
above) entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if and to the extent drawn
upon, such drawing is reimbursed no later than the third Business Day following
receipt by such Person of a demand for reimbursement following payment on the
letter of credit); (v) all obligations of the type referred to in clauses (i)
through (iv) of other Persons and all dividends of other Persons for the payment
of which, in either case, such Person is responsible or liable as obligor,
guarantor or otherwise; and (vi) all obligations of the type referred to in
clauses (i) through (v) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such Person),
the amount of such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured.
"Letter Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is intended to
reflect the separate performance of certain of the businesses or operations
conducted by such corporation or any of its subsidiaries.
"Lien" means any lien, mortgage, pledge, security interest, conditional
sale, title retention agreement or other charge or encumbrance of any kind.
"Net Cash Proceeds" means (a) with respect to any Asset Sale, the aggregate
proceeds of such Asset Sale including the fair market value (as determined by
the Board of Directors and net of any associated debt and of any consideration
other than Capital Stock received in return) of property other than cash,
received by the Company, net of (i) brokerage commissions and other fees and
expenses (including fees and expenses of counsel and investment bankers) related
to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes
will actually be paid or are payable) as a result of such Asset Sale without
regard to the consolidated results of operations of the Company and its
Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Company or any Restricted Subsidiary of the Company as a reserve
against any liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with generally
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accepted accounting principles and (b) with respect to any issuance or sale or
contribution in respect of Capital Stock, the aggregate proceeds of such
issuance, sale or contribution, including the fair market value (as determined
by the Board of Directors and net of any associated debt and of any
consideration other than Capital Stock received in return) of property other
than cash, received by the Company, net of attorneys' fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and brokerage,
consultant and other fees incurred in connection with such issuance or sale and
net of taxes paid or payable as a result thereof, provided, however, that if
such fair market value as determined by the Board of Directors of property other
than cash is greater than $25,000,000, the value thereof shall be based upon an
opinion from an independent nationally recognized firm experienced in the
appraisal or similar review of similar types of transactions.
"NOMECO" means CMS NOMECO Oil & Gas Co., a Michigan corporation and wholly
owned subsidiary of Enterprises.
"Non-Convertible Capital Stock" means, with respect to any corporation, any
non-convertible Capital Stock of such corporation and any Capital Stock of such
corporation convertible solely into non-convertible Capital Stock other than
Preferred Stock of such corporation; provide, however, that Non-Convertible
Capital Stock shall not include any Redeemable Stock or Exchangeable Stock.
"Operating Cash Flow" means, for any period, with respect to the Company
and its Consolidated Subsidiaries, the aggregate amount of Consolidated Net
Income after adding thereto Consolidated Interest Expense (adjusted to include
costs recognized on early retirement of debt), income taxes, depreciation
expense, Amortization Expense and any noncash amortization of debt issuance
costs, any nonrecurring, noncash charges to earnings and any negative accretion
recognition.
"Other Rating Agency" shall mean any one of Duff & Phelps Credit Rating
Co., Fitch Investors Service, L.P. or Moody's Investors Service, Inc., and any
successor to any of these organizations which is a nationally recognized
statistical rating organization.
"Paying Agent" means any person authorized by the Company to pay the
principal of, Applicable Premium, if any, or interest on any of the Notes on
behalf of the Company. Initially, the Paying Agent is the Indenture Trustee.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) that is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation; provided that Hybrid Preferred Securities are not considered
Preferred Stock for purposes of this definition.
"Redeemable Stock" means any Capital Stock that by its terms or otherwise
is required to be redeemed prior to the first anniversary of the stated maturity
of the outstanding Notes or is redeemable at the option of the Holder thereof at
any time prior to the first anniversary of the stated maturity of the
outstanding Notes.
"Restricted Subsidiary" means any Subsidiary (other than Consumers and its
subsidiaries) of the Company which, as of the date of the Company's most recent
quarterly consolidated balance sheet, constituted at least 10% of the total
Consolidated Assets of the Company and its Consolidated Subsidiaries and any
other Subsidiary which from time to time is designated a Restricted Subsidiary
by the Board of Directors; provided that no Subsidiary may be designated a
Restricted Subsidiary if, immediately after giving effect thereto, an Event of
Default or event that, with the lapse of time or giving of notice or both, would
constitute an Event of Default would exist or the Company and its Restricted
Subsidiaries could not incur at least one dollar of additional Indebtedness
pursuant to the first paragraph under "Description of the Notes -- Certain
Covenants -- Limitation on Consolidated Indebtedness," and (i) any such
Subsidiary so designated as a Restricted Subsidiary must be organized under the
laws of the United States or any state thereof,
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(ii) more than 80% of the Voting Stock of such Subsidiary must be owned of
record and beneficially by the Company or a Restricted Subsidiary and (iii) such
Restricted Subsidiary must be a Consolidated Subsidiary.
"Standard & Poor's" shall mean Standard & Poor's Ratings Group, a division
of McGraw Hill Inc., and any successor thereto which is a nationally recognized
statistical rating organization, or if such entity shall cease to rate the Notes
or shall cease to exist and there shall be no such successor thereto, any other
nationally recognized statistical rating organization selected by the Company
which is acceptable to the Indenture Trustee.
"Subordinated Indebtedness" means any Indebtedness of the Company (whether
outstanding on the date of the Supplemental Indenture or thereafter incurred)
which is contractually subordinated or junior in right of payment to the Notes.
"Subsidiary" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by the Company or by one or
more other Subsidiaries, or by the Company and one or more other Subsidiaries.
For the purposes of this definition, "voting stock" means stock which ordinarily
has voting power for the election of directors, whether at all times or only so
long as no senior class of stock has such voting power by reason of any
contingency.
"Support Obligations" means, for any Person, without duplication, any
financial obligation, contingent or otherwise, of such Person guaranteeing or
otherwise supporting any debt or other obligation of any other Person in any
manner, whether directly or indirectly, and including, without limitation, any
obligation of such Person, direct or indirect, (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such debt or to purchase
(or to advance or supply funds for the purchase of) any security for the payment
of such debt, (ii) to purchase property, securities or services for the purpose
of assuring the owner of such debt of the payment of such debt, (iii) to
maintain working capital, equity capital, available cash or other financial
statement condition of the primary obligor so as to enable the primary obligor
to pay such debt, (iv) to provide equity capital under or in respect of equity
subscription arrangements (to the extent that such obligation to provide equity
capital does not otherwise constitute debt), or (v) to perform, or arrange for
the performance of, any non-monetary obligations or non-funded debt payment
obligations of the primary obligor.
"Tax-Sharing Agreement" means the Amended and Restated Agreement for the
Allocation of Income Tax Liabilities and Benefits, dated January 1, 1994, as
amended or supplemented from time to time, by and among the Company, each of the
members of the Consolidated Group (as defined therein), and each of the
corporations that become members of the Consolidated Group.
"Voting Stock" means securities of any class or classes the holders of
which are ordinarily, in the absence of contingencies, entitled to vote for
corporate directors (or persons performing similar functions).
MODIFICATION OF THE SENIOR DEBT INDENTURE
The Senior Debt Indenture permits the Company and the Indenture Trustee to
enter into supplemental indentures thereto without the consent of the Holders of
the Notes to: (a) secure the Notes, (b) evidence the assumption by a successor
corporation of the obligations of the Company under the Senior Debt Indenture
and the Notes then outstanding, (c) add covenants for the protection of the
Holders of the Notes, (d) cure any ambiguity or correct or supplement any
provision which may be defective or inconsistent with any other provision in the
Senior Debt Indenture, the ISDA Master Agreement or the Trust Agreement or to
make such other provisions as the Company deems necessary or desirable with
respect to matters or questions arising under the Senior Debt Indenture,
provided that no such action adversely affects the interests of any Holders of
the Notes, (e) establish the form and terms of any series of securities under
the Senior Debt Indenture, (f) evidence the acceptance of appointment by a
successor Indenture Trustee and (g) to modify or amend any provision of the
Notes or the Senior Debt Indenture that (i) relates to the ISDA Master Agreement
or the remarketing procedure or (ii) that is effective only from and after the
remarketing of the Notes so long as such modification or amendment does not have
a material adverse effect on the Holders of the Notes; provided that no
supplemental indenture referred to in the foregoing clauses (a) through (g)
which has a material adverse effect on MSCS may be entered into without the
consent of MSCS.
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The Senior Debt Indenture also permits the Company and the Indenture
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the Senior Debt Securities of all series then
outstanding and affected (voting as one class), to enter into supplemental
indentures, to add any provisions to, or change in any manner or eliminate any
of the provisions of, the Senior Debt Indenture or modify in any manner the
rights of the holders of the Senior Debt Securities of each such affected
series; provided, however, that the Company and the Indenture Trustee may not,
without the consent of the holder of each Senior Debt Security then outstanding
and affected thereby, enter into any supplemental indenture to: (a) change the
time of payment of the principal (or any installment of principal) of any Senior
Debt Security, or reduce the principal amount thereof, or reduce the rate or
change the time of payment of interest thereon, or impair the right to institute
suit for the enforcement of any payment on any Senior Debt Security when due; or
(b) reduce the percentage in principal amount of Senior Debt Securities of the
affected series, the consent of whose holders is required for any such
modification or for any waiver provided for in the Senior Debt Indenture;
provided further that no supplemental indenture referred to in the foregoing
clauses (a) and (b) which has a material adverse effect on MSCS may be entered
into without the consent of MSCS.
Prior to the acceleration of the maturity of any Senior Debt Security, the
holders of a majority in aggregate principal amount of the Senior Debt
Securities of all series at the time outstanding with respect to which a default
or Event of Default has occurred and is continuing (voting as one class) may on
behalf of the holders of any all such affected Senior Debt Securities waive any
past default or Event of Default and its consequences, except a default or an
Event of Default (i) in the payment of the principal of or interest, if any, on
any Senior Debt Security, or (ii) in respect of a covenant or provision of the
Senior Debt Indenture which cannot be modified or amended without the consent of
the holder of each Senior Debt Security affected or MSCS, as the case may be.
DEFEASANCE, COVENANT DEFEASANCE AND DISCHARGE
The Senior Debt Indenture provides that, at the option of the Company: (a)
the Company will be discharged from any and all obligations in respect of the
Notes (except for certain obligations to register the transfer of or exchange of
the Notes, to replace stolen, lost or mutilated Notes, to maintain paying
agencies and to maintain the trust described below), or (b) the Company need not
comply with certain restrictive covenants of the Senior Debt Indenture
(including those described under "Limitation on Consolidation, Merger, Sale or
Conveyance of Assets"), in each case if the Company (i) irrevocably deposits in
trust with the Trustee money, and/or securities backed by the full faith and
credit of the United States which, through the payment of the principal thereof
and interest thereon in accordance with their terms, will provide money in an
amount sufficient to pay all the principal of and Applicable Premium, if any,
and interest on the Notes on the Final Distribution Date and (ii) pays the ISDA
Amount, if any, to MSCS. To exercise such option, the Company is required, among
other things, to deliver to the Indenture Trustee an opinion of independent
counsel to the effect that the exercise of such option would not cause the
Holders of the Notes to recognize income, gain or loss for United States federal
income tax purposes as a result of such defeasance, and such Holders of Notes
will be subject to United States federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such defeasance
had not occurred, and, in the case of a discharge as described in clause (a) of
the preceding sentence, such opinion is to be accompanied by a private letter
ruling to the same effect received from the Internal Revenue Service, a revenue
ruling to such effect pertaining to a comparable form of transaction published
by the Internal Revenue Service or appropriate evidence that since the date of
the Senior Debt Indenture there has been a change in the applicable federal
income tax law.
In the event the Company exercises its option to effect a covenant
defeasance with respect to the Notes as described in the preceding paragraph and
the Notes are thereafter declared due and payable because of the occurrence of
any Event of Default other than an Event of Default caused by failing to comply
with the covenants which are defeased, and the amount of money and securities on
deposit with the Indenture Trustee would be insufficient to pay amounts due on
the Notes at the time of the acceleration resulting from such Event of Default,
the Company would remain liable for such amounts.
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The Company may also obtain a discharge of the Senior Debt Indenture with
respect to all Senior Debt Securities then outstanding by (a) irrevocably
depositing in trust with the Trustee money, and/or securities backed by the full
faith and credit of the United States which, through the payment of the
principal amount thereof and interest thereon in accordance with their terms,
will provide money in an amount sufficient to pay the principal amount of and
interest on the Senior Debt Securities on the stated maturities thereof
(including one or more redemption dates), provided that such Senior Debt
Securities are by their terms due and payable, within one year and (b) paying
the ISDA Amount, if any, as of the date of such deposit, to MSCS. See "Certain
Federal Income Tax Considerations -- Income of Holders -- Disposition or
Retirement of the Debt Instrument."
EVENTS OF DEFAULT
The occurrence of any of the following events with respect to the Notes
will constitute an "Event of Default": (a) default for 30 days in the payment of
any interest on any of the Notes; (b) default in the payment when due of any of
the principal amount of or Applicable Premium, if any, on any of the Notes,
whether at maturity, upon redemption, acceleration, purchase by the Company at
the option of the Holders, of the Notes; (c) default in the payment when due of
the ISDA Amount, if any, whether on the Final Distribution Date, upon
redemption, acceleration or purchase by the Company, at the option of the
Holders or otherwise; (d) default for 60 days by the Company in the observance
or performance of any other covenant or agreement contained in the Senior Debt
Indenture after written notice thereof as provided in the Senior Debt Indenture;
(e) certain events of bankruptcy, insolvency or reorganization relating to the
Company or Consumers; (f) entry of final judgments against the Company or
Consumers aggregating in excess of $25,000,000 which remain undischarged or
unbonded for 60 days; or (g) a default resulting in the acceleration of
indebtedness of the Company or Consumers in excess of $25,000,000, which
acceleration has not been rescinded or annulled within 10 days after written
notice of such default as provided in the Senior Debt Indenture.
If an Event of Default shall have occurred and be continuing, either the
Indenture Trustee or the Holders of not less than 25% in aggregate principal
amount of the Notes then outstanding may declare the principal amount of the
Notes and interest thereon to be due and payable immediately.
Upon certain conditions, any such declaration may be rescinded and annulled
if all Events of Default, other than the nonpayment of accelerated principal,
with respect to the Senior Debt Securities of all such affected series then
outstanding shall have been cured or waived as provided in the Senior Debt
Indenture by the holders of a majority in aggregate principal amount of the
Senior Debt Securities of the affected series then outstanding.
The Senior Debt Indenture provides that the Indenture Trustee will be under
no obligation to exercise any of its rights or powers under the Senior Debt
Indenture at the request, order or direction of the Holders of the Notes, unless
such Holders shall have offered to the Indenture Trustee reasonable indemnity.
Subject to such provisions for indemnity and certain other limitations contained
in the Senior Debt Indenture, the Holders of a majority in aggregate principal
amount of the Senior Debt Securities of each affected series then outstanding
(voting as one class) 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, with
respect to the Senior Debt Securities of such affected series.
The Senior Debt Indenture provides that no holder of Senior Debt
Securities, including any Holder of Notes, may institute any action against the
Company under the Senior Debt Indenture (except actions for payment of overdue
principal, Applicable Premium or interest) unless such holder previously shall
have given to the Indenture Trustee written notice of default and continuance
thereof and unless the holders of not less than 25% in aggregate principal
amount of Senior Debt Securities of each affected series then outstanding
(voting as one class) shall have requested the Indenture Trustee to institute
such action and shall have offered the Indenture Trustee reasonable indemnity,
the Indenture Trustee shall not have instituted such action within 60 days of
such request and the Indenture Trustee shall not have received direction
inconsistent with such
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request by the Holders of a majority in aggregate principal amount of the Senior
Debt Securities of each affected series then outstanding (voting as one class).
The Senior Debt Indenture requires the Company to furnish to the Indenture
Trustee annually a statement as to the Company's compliance with all conditions
and covenants under the Senior Debt Indenture. The Senior Debt Indenture
provides that the Indenture Trustee may withhold notice to the Holders of the
Notes of any default (except defaults as to payment of principal premium or
interest on the Notes) if it considers such withholding to be in the best
interests of the Holders thereof.
Governing Law
The Senior Debt Indenture will be governed by, and construed in accordance
with, the laws of the State of Michigan.
Concerning the Indenture Trustee
NBD Bank, the Indenture Trustee under the Senior Debt Indenture, is one of
a number of banks with which the Company and its subsidiaries maintain ordinary
banking relationships, including credit facilities.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This summary is based on the Internal Revenue Code of 1986, as amended to
the date hereof, revenue rulings, judicial decisions and existing and proposed
Treasury regulations, including final regulations concerning the tax treatment
of debt instruments issued with original issue discount (the "OID Regulations"),
changes to any of which subsequent to the date of the Prospectus may affect the
tax consequences described herein.
This summary discusses only Certificates held by Certificateholders as
capital assets within the meaning of Section 1221 of the Code. It does not
discuss all of the tax consequences that may be relevant to a Certificateholder
in light of its particular circumstances or to Certificateholders subject to
special rules, such as certain financial institutions, insurance companies,
dealers or Certificateholders holding the Certificates as part of a hedging
transaction or straddle. In all cases, prospective investors are advised to
consult their own tax advisors regarding the federal tax consequences to them of
holding, owning and disposing of Certificates, including the advisability of
making any of the elections described below, as well as any tax consequences
arising under the law of any other taxing jurisdiction. The Pass-Through Trust
will be provided with an opinion of Shearman & Sterling, special federal income
tax counsel to the Pass-Through Trust ("Federal Tax Counsel") regarding certain
federal income tax matters discussed below. An opinion of counsel, however, is
not binding on the IRS or the courts. The Pass-Through Trust has not sought, nor
does it intend to seek, a ruling from the IRS that its positions, as reflected
in the discussion below, will be accepted by the IRS. Moreover, there are no
cases or IRS rulings on similar transactions and, as a result, there can be no
assurance that the IRS will agree with the conclusions and discussion below.
For purposes of this discussion "U.S. Person" means an individual who, for
federal income tax purposes, is a citizen or resident of the United States or a
corporation, partnership or other entity created or organized in or under the
laws of the United States, or any state thereof (other than a partnership that
is not treated as a United States Person under any applicable Treasury
regulations), an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust if a court within the United States is able
to exercise primary supervision of the administration of the trust and one or
more U.S. Persons have the authority to control all substantial decisions of the
trust. Notwithstanding the preceding sentence, to the extent provided in
Treasury regulations, certain trusts in existence on August 20, 1996, and
treated as U.S. Persons prior to such date, that elect to continue to be treated
as U.S. Persons, also will be a U.S. Person. "U.S. Owner" means a
Certificateholder that is a U.S. Person and "Non-U.S. Owner" means a
Certificateholder that is not a U.S. Person.
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CLASSIFICATION OF INVESTMENT ARRANGEMENT
The Pass-Through Trust will be classified as a grantor trust and not as an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes.
INCOME OF HOLDERS
In General
For U.S. federal income tax purposes, while the characterization of the
transaction is not without doubt, Federal Tax Counsel believes that the
Certificates represent ownership of a debt instrument issued by the Company
through the Pass-Through Trust (the "Debt Instrument"). The Debt Instrument will
have an absolute maturity corresponding to the Final Distribution Date, but will
otherwise have the characteristics of the Notes, including the principal amount
of and interest rate payable on the Notes. The Debt Instrument will not contain
any of the rights associated with the ISDA Master Agreement because the
Certificateholders will have no interest in the ISDA Master Agreement. The
Certificateholders will agree by their purchase of the Certificates to treat the
Certificates as described in this paragraph.
U.S. Owners
Each U.S. Owner will be required to report on its federal income tax return
its pro rata share of the income from the Debt Instrument, including interest
income at the interest rate on the Debt Instrument, in accordance with its
method of accounting.
Original Issue Discount. The initial Certificateholders will purchase the
Debt Instrument at a discount below its principal amount. As provided in the
Code and the OID Regulations, the excess of the "stated redemption price" of the
Debt Instrument (i.e., its principal amount) over its "issue price" (defined as
the initial offering price to the public, excluding bond houses and brokers, at
which a substantial amount of the offering is sold) will be original issue
discount if such excess equals or exceeds a de minimis amount (i.e., one-quarter
of one percent of such Debt Instrument's stated redemption price multiplied by
the number of complete years to its maturity). A Debt Instrument having more
than a de minimis amount of original issue discount is referred to herein as an
"OID Debt Instrument." A U.S. Owner of a Debt Instrument with a de minimis
amount of original issue discount will include any de minimis original issue
discount in income, as capital gain, when the principal payment is made on the
Debt Instrument.
U.S. Owners are required to include original issue discount in income as it
accrues, which may be before the receipt of the cash attributable to such
income, based on a compounding of interest at a constant rate (using the
original yield to maturity of the Debt Instrument). Under these rules, U.S.
Owners generally must include in income increasingly greater amounts of original
issue discount in successive accrual periods. The OID Regulations permit U.S.
Owners to use accrual periods of any length up to one year (including daily
accrual periods) to compute accruals of original issue discount, provided each
scheduled payment of principal or interest occurs either on the first or the
last day of an accrual period.
Acquisition Premium and Market Discount. In the event that a U.S. Owner
purchases an OID Debt Instrument at an acquisition premium (i.e., at a price in
excess of its "adjusted issue price" but less than its stated redemption price),
the amount includible in income in each taxable year as original issue discount
is reduced by that portion of the excess properly allocable to such year. The
adjusted issue price is defined as the sum of the issue price of the Debt
Instrument and the aggregate amount of previously accrued original issue
discount, less any prior payments of amounts included in its stated redemption
price. Acquisition premium is allocated on a pro rata basis to each accrual of
original issue discount, so that the U.S. Owner is allowed to reduce each
accrual of original issue discount by a constant fraction.
A U.S. Owner that purchases at a "market discount" (i.e., at a price less
than the stated redemption price or, in the case of an OID Debt Instrument, the
adjusted issue price) will be required (unless such difference is less than a de
minimis amount) to treat any principal payments on, or any gain realized upon
the disposition or retirement of, the Debt Instrument as interest income to the
extent of the market discount that accrued while such U.S. Owner held such Debt
Instrument, unless the U.S. Owner elects to include such market discount in
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income on a current basis. Market discount is considered to be de minimis if it
is less than one-quarter of one percent of such Debt Instrument's stated
redemption price multiplied by the number of complete years to maturity after
the U.S. Owner acquired the Certificate. If the Debt Instrument has more than a
de minimis amount of market discount and is disposed of in a nontaxable
transaction (other than a nonrecognition transaction described in Section
1276(d) of the Code), accrued market discount will be includible as ordinary
income to the U.S. Owner as if such U.S. Owner had sold the Debt Instrument at
its then fair market value. A U.S. Owner that acquired at a market discount and
that does not elect to include market discount in income on a current basis also
may be required to defer the deduction for a portion of the interest expense on
any indebtedness incurred or continued to purchase or carry the Debt Instrument
until the deferred income is realized.
Premium. A U.S. Owner that purchases for an amount in excess of the
principal amount will be treated as having premium with respect to the Debt
Instrument in the amount of such excess. A U.S. Owner that purchases an OID Debt
Instrument at a premium is not required to include in income any original issue
discount with respect to such Debt Instrument. If a U.S. Owner makes an election
under Section 171 of the Code to treat such premium as "amortizable bond
premium," the amount of interest that must be included in such U.S. Owner's
income for such accrual period will be reduced by the portion of the premium
allocable to such period based on the Debt Instrument's yield to maturity. The
U.S. Owner may not assume that the call will be exercised and must amortize
premium to the maturity date. If the Debt Instrument is in fact called, any
unamortized premium may be deducted in the year of the call. If a U.S. Owner
makes the election under Section 171, the election also shall apply to all bonds
the interest on which is not excludible from gross income ("Fully Taxable
Bonds") held by the U.S. Owner at the beginning of the first taxable year to
which the election applies and to all such Fully Taxable Bonds thereafter
acquired by it, and is irrevocable without the consent of the IRS. If such an
election is not made, such a U.S. Owner must include the full amount of each
interest payment in income in accordance with its regular method of accounting
and will receive a tax benefit from the premium only in computing its gain or
loss upon the sale or other disposition or retirement of the Debt Instrument.
Accrual Method Election. Under the OID Regulations, a U.S. Owner is
permitted to elect to include in gross income its entire return on the Debt
Instrument (i.e., the excess of all remaining payments to be received on the
Debt Instrument over the amount paid for the Debt Instrument by such U.S. Owner)
based on the compounding of interest at a constant rate. Such an election for a
Debt Instrument with amortizable bond premium (or market discount) will result
in a deemed election for all of the U.S. Owner's debt instruments with
amortizable bond premium (or market discount) and may be revoked only with
permission of the IRS.
Disposition or Retirement of the Debt Instrument. Upon the sale, exchange
or other disposition of the Debt Instrument, or upon the retirement of the Debt
Instrument, a U.S. Owner will recognize gain or loss equal to the difference, if
any, between the amount realized upon the disposition or retirement (including
any call premium) and the U.S. Owner's tax basis in the Debt Instrument. A U.S.
Owner's tax basis for determining gain or loss on the disposition or retirement
of the Debt Instrument will be the cost of the Debt Instrument to such U.S.
Owner, increased by the amount of original issue discount and any market
discount includible in such U.S. Owner's gross income with respect to the Debt
Instrument, and decreased by the amount of any payments under the Debt
Instrument that are part of its stated redemption price and by the portion of
any premium applied to reduce interest payments as described above.
Gain or loss upon the disposition or retirement of the Debt Instrument will
be capital gain or loss, except to the extent the gain represents accrued stated
interest, original issue discount or market discount on the Debt Instrument not
previously included in gross income, to which extent such gain or loss would be
treated as ordinary income. Any capital gain or loss will be long-term capital
gain or loss if at the time of disposition or retirement the Debt Instrument has
been held for more than one year.
Depending on the circumstances, it is possible that a modification of the
terms of the Debt Instrument, including a substitution of other assets for the
Debt Instrument following a default on the Debt Instrument, would be a taxable
event to Certificateholders on which they would recognize gain or loss.
Moreover, a
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defeasance or discharge of the Company's obligation as a result of a deposit of
money or securities with the Indenture Trustee would be treated as an exchange
of the Debt Instrument for other property. Accordingly, Certificateholders may
be required to recognize gain or loss for federal income tax purposes upon such
exchange. In addition, such Certificateholders thereafter may be required to
recognize income from such property which could be different from the amount
that would be includible in the absence of such deposit.
Alternative Characterizations. Although Federal Tax Counsel believes that
such treatment would be inappropriate, under one possible characterization, the
Company would be treated as issuing a contingent payment debt instrument to the
Pass-Through Trust with the following terms: (i) a principal amount equal to the
principal amount of the Notes, (ii) noncontingent interest payments at the rate
of interest payable on the Notes and a contingent interest payment in an amount
equal to the amount due under the ISDA Master Agreement and (iii) an absolute
maturity corresponding to the Final Distribution Date. Under this
characterization, the Certificateholders would be treated as owning the
noncontingent portion of such debt instrument, which portion would be treated as
a "stripped" debt instrument under Section 1286 of the Code. The
Certificateholders would not be taxed on the contingent portion of the debt
instrument corresponding to the amount due under the ISDA Master Agreement,
which would be owned by and taxed to MSCS. In the case of an initial
Certificateholder, characterization of the Certificates as ownership of a
stripped debt instrument generally would not alter the tax consequences set
forth above. A subsequent Certificateholder would be treated under this
characterization as purchasing a newly-issued debt instrument, rather than as
purchasing an existing debt instrument. Consequently, any discount that would be
treated as market discount with respect to an existing debt instrument for a
subsequent Certificateholder would instead be treated as original issue
discount. As described under "Original Issue Discount" and "Acquisition Premium
and Market Discount" above, a Certificateholder must accrue original issue
discount currently, whereas market discount is accrued currently only at the
election of the Certificateholder. There may also be other differences in the
tax treatment of Certificates to a subsequent Certificateholder under this
characterization.
Under another alternative characterization, although contrary to the form
of the transaction, the Company could be treated as issuing a contingent payment
debt instrument maturing on January 15, 2012, to the Pass-Through Trust, in
which case the Certificateholders would be treated as owning such debt
instrument and as having written a call option on such debt instrument to MSCS.
Pursuant to the call option, MSCS would be considered to have the right to
purchase the contingent payment debt instrument from the Pass-Through Trust at
100% of its principal amount on the Final Distribution Date. The contingent
payment debt instrument under this characterization would be treated as having a
principal amount equal to the principal amount of the Notes and as bearing
interest at the rate of interest payable on the Notes from the issue date
through the Final Distribution Date and at a different fixed rate of interest,
determined based on circumstances as of the Final Distribution Date, from the
Final Distribution Date through January 15, 2012. The debt instrument also would
be treated as containing a put option that provides the Pass-Through Trust with
the right to require the Company to retire the debt instrument at 100% of its
principal amount on the Final Distribution Date. The Trustee would be deemed to
exercise the put option if MSCS does not exercise the call option. Under this
characterization, each Certificateholder would be required to allocate its
purchase price between, and separately account for, the call option and the
contingent payment debt instrument. In this regard, the income from the debt
instrument would be determined in accordance with a projected payment schedule
determined under certain Treasury regulations governing contingent payment debt
instruments. Federal Tax Counsel does not believe the characterization described
in this paragraph is an appropriate characterization of the transaction,
however, and therefore will not provide the Certificateholders with a projected
payment schedule.
Investors should consult their tax advisors regarding the alternative
characterizations set forth above.
Non-U.S. Owners
Interest. Interest (including original issue discount) on a Debt Instrument
of a Non-U.S. Owner will be subject to a 30 percent federal income and
withholding tax, unless an exemption is established. Under such certification
requirements, the Certificateholder must certify, under penalties of perjury,
that it is not a "United States person" and is the beneficial owner of the
Certificates, and must provide its name and address.
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Disposition or Retirement of the Debt Instrument. A Non-U.S. Owner that
does not have certain present or former connections with the United States
(e.g., holding such Non-U.S. Owner's Debt Instrument in connection with the
conduct of a trade or business within the United States or being present in the
United States for 183 days or more during a taxable year) generally will not be
subject to federal income tax, and no withholding of such tax will be required,
with respect to any gain realized upon the disposition or retirement of the Debt
Instrument.
Backup Withholding
Payments made on the Debt Instrument and proceeds from the sale of the Debt
Instrument will not be subject to a "backup" withholding tax of 31 percent
unless, in general, the Certificateholder fails to comply with certain reporting
procedures and is not an exempt recipient under applicable provisions of the
Code.
New Withholding Regulations
The Treasury Department has issued new regulations which make certain
modifications to the withholding, backup withholding and information reporting
rules. The new regulations generally are effective for payments made after
December 31, 1998. Investors should consult their tax advisors regarding such
regulations.
THE FEDERAL TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A CERTIFICATEHOLDER'S
PARTICULAR SITUATION. CERTIFICATEHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF
THE CERTIFICATES, INCLUDING THE TAX CONSEQUENCES UNDER THE TAX LAWS OF THE
UNITED STATES, STATES, LOCALITIES, COUNTRIES OTHER THAN THE UNITED STATES AND
ANY OTHER TAXING JURISDICTIONS AND THE POSSIBLE EFFECTS OF CHANGES IN SUCH TAX
LAWS.
STATE AND LOCAL TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Considerations," potential investors should consider the
state and local income tax consequences of the acquisition, ownership and
disposition of the Certificates. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended, and the
Code, impose certain restrictions on (a) employee benefit plans (as defined in
Section 3(3) of ERISA) that are subject to Title I of ERISA, (b) plans described
in Section 4975(e)(1) of the Code that are subject to Section 4975 of the Code,
including individual retirement accounts or Keogh plans, (c) any entities whose
underlying assets include "plan assets" under the Plan Asset Regulation (as
defined below) (each a "Plan") and (d) persons who have certain specified
relationships to such Plans ("Parties-in-Interest" under ERISA and "Disqualified
Persons" under the Code). Moreover, based on the reasoning of the United States
Supreme Court in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114
S. Ct. 517 (1993), an insurance company's general account may be deemed to
include assets of the Plans investing in the general account (e.g.,through the
purchase of an annuity contract). ERISA also imposes certain duties on persons
who are fiduciaries of Plans subject to ERISA, and ERISA and Section 4975 of the
Code prohibit certain transactions between a Plan and Parties-in-Interest or
Disqualified Persons with respect to such Plan.
The Department of Labor has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the "Plan Asset Regulation"). The Plan Asset Regulation
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<PAGE> 44
provides that, as a general rule, the underlying assets and properties of
corporations, partnerships, trusts and certain other entities in which a Plan
purchases an "equity interest" will be deemed for purposes of ERISA and Section
4975 of the Code to be assets of the investing Plan unless certain exceptions
apply. It is likely that the Certificates offered hereby would be treated as
"equity interests" for purposes of the Plan Asset Regulation. In addition, there
can be no assurance that any of the exceptions set forth in the Plan Asset
Regulation will apply to the purchase of the Certificates.
Under the terms of the Plan Asset Regulation, if the Pass-Through Trust
were deemed to hold Plan assets by reason of a Plan's investment in a
Certificate, such Plan assets would include an undivided interest in the Notes
and any other assets of the Trust that relate to such Certificate. In such
event, the persons providing services, or exercising any discretionary authority
or control, with respect to such assets may be subject to the fiduciary
responsibility provisions of Title I of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to transactions
involving such assets. In order to avoid certain prohibited transactions that
might otherwise arise in connection with the Pass-Through trust assets, each
investing Plan, by its purchase of Certificates, will be deemed to have directed
the Trustee to purchase the Notes and to have approved all of the documents
relating to the Notes. Moreover, the Certificateholders will have the right to
direct the Trustee as to the exercise of remedies in connection with any Event
of Default.
In addition, the Company, the Trustee and the Underwriter, because of their
activities or the activities of their respective affiliates, may be considered
to be Parties-in-Interest or Disqualified Persons with respect to certain Plans.
If the Certificates are acquired by a Plan with respect to which the Company,
the Trustee or the Underwriter is a Party-in-Interest or Disqualified Person,
such transaction could be deemed to be a direct or indirect violation of the
prohibited transaction rules of ERISA and Section 4975 of the Code unless such
transaction were subject to one or more statutory or administrative exemptions
such as Prohibited Transaction Class Exemption ("PTCE") 90-1, which exempts
certain transactions involving insurance company pooled separate accounts; PTCE
91-38, which exempts certain transactions involving bank collective investment
funds; PTCE 84-14, which exempts certain transactions effected on behalf of a
Plan by a "qualified professional asset manager"; PTCE 95-60, which exempts
certain transactions involving insurance company general accounts; or PTCE
96-23, which exempts certain transactions effected on behalf of Plan by an "in-
house asset manager." Even if the conditions specified in one or more of these
exemptions are met, the scope of relief provided may not necessarily cover all
acts that might be construed as prohibited transactions.
Accordingly, each purchaser of Certificates will, by its purchase, be
deemed to have represented and warranted that either (i) no part of the assets
to be used by it to purchase and hold such Certificates constitutes the assets
of any Plan, or (ii) one or more prohibited transaction statutory or
administrative exemptions applies such that the use of such Plan assets to
purchase and hold such Certificates will not constitute a non-exempt prohibited
transaction within the meaning of Section 406 of ERISA or Section 4975 of the
Code. See "Transfer Restrictions."
It should also be noted that the Small Business Job Protection Act of 1996
added new Section 401(c) of ERISA relating to the status of the assets of
insurance company general accounts under ERISA and Section 4975 of the Code.
Pursuant to Section 401(c), the Department of Labor is required to issue final
regulations (the "General Account Regulations") not later than December 31, 1997
with respect to insurance policies issued on or before December 31, 1998 that
are supported by an insurer's general account. The General Account Regulations
are to provide guidance on which assets held by the insurer constitute "plan
assets" for purposes of the fiduciary responsibility provisions of ERISA and
Section 4975 of the Code. Section 401(c) also provides that, except in the case
of avoidance of the General Account Regulation and actions brought by the
Secretary of Labor relating to certain breaches of fiduciary duties that also
constitute breaches of state or federal criminal law, until the date that is 18
months after the General Account Regulations become final, no liability under
the fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 of the Code may result on the basis of a claim that the assets of
the general account of an insurance company constitute the assets of any such
Plan. The Plan asset status of insurance company separate accounts is unaffected
by new Section 401(c) of ERISA, and separate account assets continue to
generally be treated as the assets of any such Plan invested in such separate
account.
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<PAGE> 45
Prior to making an investment in the Certificates, prospective Plan
investors should consult with their legal advisers concerning the impact of
ERISA and the Code and the potential consequences of such investment with
respect to their specific circumstances. Moreover, each Plan fiduciary should
take into account, among other considerations, whether the fiduciary has the
authority to make the investment; whether the investment would constitute a
direct or indirect transaction with a Party-in-Interest or Disqualified Person;
and whether under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
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<PAGE> 46
UNDERWRITERS
Subject to the terms and conditions contained in an Underwriting Agreement
dated January 8, 1998 (the "Underwriting Agreement"), the Underwriters named
below (the "Underwriters") have severally agreed to purchase from the
Pass-Through Trust the respective principal amounts of the Certificates set
forth opposite their names below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
NAME CERTIFICATES
---- ------------
<S> <C>
Morgan Stanley & Co. Incorporated........................... $104,994,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 25,002,000
Goldman, Sachs & Co. ....................................... 25,002,000
Salomon Brothers Inc ....................................... 25,002,000
------------
Total..................................................... $180,000,000
============
</TABLE>
The Underwriters will earn a commission of $2,944,800, which constitutes
1.636% of the principal amount of the Certificates.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Certificates is subject to approval of
certain legal matters by their counsel and to certain other conditions. The
Underwriters are obligated to take and pay for all of the Certificates if any
are taken.
The Underwriting Agreement provides that the Company and the Underwriters
will indemnify each other against certain liabilities, including liabilities
under the Securities Act, and will contribute to payments the other may be
required to make in respect thereof. Subject to certain conditions, the Company
has also agreed to indemnify the Trustee against certain civil liabilities.
The Underwriters have advised the Pass-Through Trust and the Company that
they intend to offer part of the Certificates at the offering price set forth on
the cover page of this Prospectus directly to Qualified Institutional Buyers and
to Accredited Institutional Investors and part to certain dealers at prices that
represent concessions not to exceed 0.250% of the principal amount of the
Certificates. The Underwriters may allow, and such dealers may reallow,
concessions not to exceed 0.125% of the principal amount of the Certificates to
certain other dealers. After the initial offering of the Certificates, the
offering price and other selling terms may from time to time be varied by the
Underwriters.
In order to facilitate the offering of the Certificates, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Certificates. Specifically, the Underwriters may overallot in
connection with the Offering, creating a short position in the Certificates for
their own account. In addition, to cover overallotments or to stabilize the
price of the Certificates, the Underwriters may bid for, and purchase, the
Certificates in the open market. Finally, the Underwriters may reclaim selling
concessions allowed to an agent or a dealer for distributing the Certificates in
the Offering if the Underwriters repurchase previously distributed Certificates
in transactions to cover the short positions, in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market price of
the Certificates above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
Each of Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Goldman, Sachs & Co. and Salomon Brothers Inc and
certain of their respective affiliates have provided, and may continue to
provide, investment banking services to the Company. MSCS is a wholly owned
subsidiary of Morgan Stanley, Dean Witter, Discover & Co. and an affiliate of
Morgan Stanley & Co. Incorporated.
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<PAGE> 47
TRANSFER RESTRICTIONS
In order to qualify for the exemption from the Investment Company Act of
1940, as amended, afforded by Rule 3a-7 of the Commission thereunder, the
Certificates are being offered and sold, and may be resold, in minimum
denominations of $250,000 only (i) to "qualified institutional buyers" (as
defined in Rule 144A under the Securities Act) and (ii) to a limited number of
other institutional "accredited investors" (as defined in Rule 501(a)(1), (2),
(3) or (7) under the Securities Act) ("Institutional Accredited Investors"). In
addition, as a further measure to ensure that resales will be made subject to
such limitations, the Company and the Trustee have sent to DTC "special
instructions" which they have asked DTC to attach to a DTC "important notice"
which DTC will make available to each of its participants, to the effect that
sales and resales of Certificates may only be made to Qualified Institutional
Buyers and Institutional Accredited Investors.
Accordingly, by its purchase of Certificates, each purchaser of
Certificates will be deemed to:
1. represent that it is purchasing the Certificates for its own
account or an account with respect to which it exercises sole investment
discretion and that it and any such account is (i) a Qualified
Institutional Buyer or (ii) an Institutional Accredited Investor;
2. agree that, if it should resell or otherwise transfer any of the
Certificates, it will do so only (i) to the Company, (ii) to a Qualified
Institutional Buyer or (iii) to an Institutional Accredited Investor;
3. agree that it will deliver to each person to whom it transfers
Certificates notice of the restrictions on transfer of such Certificates;
4. understand that the Certificates will bear a legend to the
following effect unless otherwise agreed by the Company and the Holder
hereof:
THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE
FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE CERTIFICATEHOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
RULE 144A UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT")) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE
SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR"), (2) AGREES THAT
IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS CERTIFICATE EXCEPT (A) TO THE
COMPANY, (B) TO A QUALIFIED INSTITUTIONAL BUYER, OR (C) TO AN INSTITUTIONAL
ACCREDITED INVESTOR, AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO
WHOM THIS CERTIFICATE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND;
5. agree that if it should resell or otherwise transfer any of the
Certificates, it will do so only in minimum denominations of $250,000; and
6. represent that either (i) no part of the assets to be used by it to
purchase and hold the Certificates constitutes the assets of any Plan or
(ii) one or more prohibited transaction statutory or administrative
exemptions applies such that the use of such Plan assets to purchase and
hold such Certificates will not constitute a non-exempt prohibited
transaction within the meaning of Section 406 of ERISA or Section 4975 of
the Code.
LEGAL MATTERS
Certain legal matters with respect to the Certificates and the Notes will
be passed upon for CMS Energy by Michael D. VanHemert, Assistant General Counsel
for CMS Energy. Certain other legal matters will be passed upon by Shearman &
Sterling and by Reid & Priest LLP, both of which are acting as counsel for the
Underwriters. Certain matters of Delaware law relating to the validity of the
Certificates offered hereby will be passed upon for the Pass-Through Trust by
Richards, Layton & Finger, special Delaware counsel to the
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<PAGE> 48
Pass-Through Trust. Michael D. VanHemert and Shearman & Sterling will rely on
the opinion of Richards, Layton & Finger as to matters relating to the validity
of the Certificates under the Trust Agreement. Reid & Priest LLP provides legal
services to an affiliate of CMS Energy and has, from time to time, provided
legal services to CMS Energy.
EXPERTS
The consolidated financial statements and schedules of CMS Energy as of
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996 incorporated by reference in this Prospectus, have been
audited by Arthur Andersen LLP (formerly Arthur Andersen & Co.), independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
With respect to the unaudited interim consolidated financial information
for the periods ended March 31, June 30, and September 30, 1996 and 1997, Arthur
Andersen LLP has applied limited procedures in accordance with professional
standards for a review of such information. However, their separate reports
thereon state that they did not audit and they did not express an opinion on
that interim consolidated financial information. Accordingly, the degree of
reliance on their reports on that information should be restricted in light of
the limited nature of the review procedures applied. In addition, the
accountants are not subject to the liability provisions of Section 11 of the
Securities Act of 1933, as amended ("Securities Act"), for their reports on the
unaudited interim consolidated financial information because these reports are
not "reports" or "part" of the registration statement prepared or certified by
the accountants within the meaning of Sections 7 and 11 of the Securities Act.
Future consolidated financial statements of CMS Energy and the reports
thereon of Arthur Andersen LLP also will be incorporated by reference in this
Prospectus in reliance upon the authority of that firm as experts in giving
those reports to the extent that said firm has audited said consolidated
financial statements and consented to the use of their reports thereon.
AVAILABLE INFORMATION
The Pass-Through Trust has not been, and it is expected that it will not
be, required to file reports with the Commission or to deliver an annual report
to Certificateholders pursuant to the Exchange Act.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other information
filed by the Company with the Commission pursuant to the informational
requirements of the Exchange Act may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048; and
Citicorp Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661;
and copies of such material may be obtained from the Public Reference Section of
the Commission, Washington, D.C. 20549, at prescribed rates, or through the
World Wide Web (http://www.sec.gov). The outstanding shares of CMS Energy common
stock are listed on the New York Stock Exchange, and reports, proxy statements
and other information concerning CMS Energy may also be inspected and copied at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
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